SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended June 30, 1999.
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______to_______
Commission File Number: 0-18832
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Kentucky 61-1168311
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2323 Ring Road, Elizabethtown, Kentucky 42701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 765-2131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ninety days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant, based on the closing sales price of the
Registrant's Common Stock as quoted on the National Association of Securities
Dealers, Inc. Automated Quotation National Market System on September 15, 1999,
was $97,368,912. Solely for purposes of this calculation, the shares held by
directors and executive officers of the registrant and by any stockholder
beneficially owning more than 5% of the registrant's outstanding common stock
are deemed to be shares held by affiliates.
As of September 15, 1999, there were issued and outstanding 4,057,038
shares of the registrant's common stock, of which directors and executive
officers held 458,358 shares and more than 5% beneficial owners held 225,889
shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
The Corporation
First Federal Financial Corporation of Kentucky (the "Corporation") was
incorporated in August 1989 under the laws of the Commonwealth of Kentucky for
the purpose of becoming the holding company for First Federal Savings Bank of
Elizabethtown ("First Federal" or the "Bank") pursuant to the Bank's
reorganization into the holding company form of ownership, which was consummated
on June 1, 1990. Prior to its acquisition of all the outstanding stock of the
Bank in connection with the Bank's holding company reorganization, the
Corporation had no assets or liabilities and engaged in no business activities.
Since its acquisition of First Federal, the Corporation has engaged in no
significant activity other than holding the stock of First Federal and operating
the business of a savings bank through First Federal. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to First Federal and its subsidiary.
The Bank
First Federal is a federally-chartered savings bank headquartered in
Elizabethtown, Kentucky. The business of First Federal consists primarily of
attracting deposits from the general public and originating mortgage loans on
single family residences, and to a lesser extent on multi-family housing and
commercial property. First Federal also makes home improvement loans, consumer
loans and commercial business loans and through its subsidiary offers insurance
products and brokerage services to its customers. In April 1993 the Bank
established a full service trust department to serve the fiduciary needs of its
customers. The principal sources of funds for First Federal's lending activities
include deposits received from the general public, borrowings from the Federal
Home Loan Bank of Cincinnati, principal amortization and prepayment of loans.
First Federal's primary sources of income are interest and origination fees on
loans and interest on investments. First Federal also invests in various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations. First Federal's principal expenses are interest
paid on deposit accounts and operating expenses.
First Federal was originally founded in 1923 as a state-chartered
institution and became federally-chartered in 1940. In 1987, the Bank converted
to a federally-chartered savings bank and converted from mutual to stock form.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati and is subject to regulation, examination and supervision by the
Office of Thrift Supervision ("OTS"). The Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation("FDIC").
LENDING ACTIVITIES
GENERAL. The principal lending activity of First Federal is the
origination of conventional first mortgage loans secured by residential
property. Residential mortgage loans are generally underwritten according to
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) guidelines. To a lesser extent the Bank engages in
commercial real estate, consumer and commercial business lending. Residential
mortgage loans made by First Federal are secured primarily by single family
homes and include construction loans. The majority of First Federal's mortgage
loan portfolio is secured by real estate located in Hardin, Nelson, Hart, Meade,
LaRue, and Bullitt counties in the state of Kentucky.
2
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The following table presents a summary of the Bank's loan portfolio by
category for each of the last five years. The Bank has no foreign loans in its
portfolio and other than the categories noted, there is no concentration of
loans in any industry exceeding 10% of total loans.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real Estate:
Mortgage $325,099 78.93% $304,443 82.38% $283,926 83.73% $267,425 84.55% $254,406 87.07%
Construction 18,104 4.39 15,689 4.25 15,444 4.55 15,766 4.98 8,159 2.79
Commercial 7,956 1.93 3,254 .88 2,246 .66 2,406 .76 2,004 .69
Consumer and
home equity 49,043 11.91 45,136 12.21 35,528 10.48 28,892 9.15 26,485 9.06
Commercial,
other 11,692 2.84 1,020 .28 1,953 .58 1,785 .56 1,138 .39
-------- ------ -------- ------- -------- ------ ------- ------- -------- -------
Total loans $411,894 100.00% $369,542 100.00% $339,097 100.00% $316,274 100.00% $292,192 100.00%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
June 30, 1999, regarding the dollar amount of loans maturing in the Bank's loan
portfolio based on their contractual terms to maturity.
Due after
Due during 1 through Due after 5
The year ended 5 years after Years after
June 30, June 30, June 30, Total
2000 1999 1999 Loans
---- ---- ---- -----
(Dollars in thousands)
Real estate mortgage $ 1,060 $10,485 $313,554 $325,099
Real estate construction (1) 0 0 18,104 18,104
Consumer 7,278 40,169 1,596 49,043
Commercial, financial and
agricultural 5,018 9,978 4,652 19,648
----- ------ ------ ------
Total $13,356 $60,632 $337,906 $411,894
======= ======= ======== ========
- ----------------------------
(1) These loans will become permanent real estate loans upon completion of
construction.
The following table reflects a breakdown of loans maturing after one
year, by fixed and adjustable rates.
Floating or
Fixed Rates Adjustable Rates Total
(Dollars in thousands)
Real estate mortgage $241,227 $ 82,812 $324,039
Real estate construction 16,329 1,775 18,104
Consumer 4,537 37,228 41,765
Commercial, financial and
Agricultural 3,477 11,153 14,630
------ ------ ------
Total $265,570 $132,968 $398,538
======== ======== ========
RESIDENTIAL REAL ESTATE LENDING. The Bank's primary lending activity is
the origination of loans on single family residences, which consist of
one-to-four individual dwelling units. Fixed rate residential real estate loans
originated by the Bank have terms ranging from ten to thirty years. Interest
rates are competitively priced within the primary geographic lending market, and
vary according to the term for which they are fixed.
3
<PAGE>
In recent years, the Bank has emphasized the origination of
adjustable-rate mortgage loans ("ARMs"). The Bank offers an ARM with an annual
adjustment which is tied to various national indeces with a maximum adjustment
of 2% annually and a lifetime cap of 15%. As of June 30, 1999, approximately 26%
of the Bank's real estate loans were adjustable rate loans with adjustment
periods ranging from one to five years and balloon loans of seven years or less.
The origination of these mortgage loans can be more difficult in a low interest
rate environment where there is a significant demand for fixed rate mortgages.
The Bank limits the maximum loan-to-value ratio on one-to-four-family
residential first mortgages to 80% of the appraised value and 95% on certain
mortgages, with the requirement that private mortgage insurance be obtained for
loans with loan-to-value ratios in excess of 80%. The Bank generally limits the
loan-to-value ratio to 80% on second mortgages on one-to-four-family dwellings.
First Federal's residential lending activities also include loans
secured by multi-family residential property, consisting of properties with more
than four separate dwelling units. These loans amounted to $4.8 million of the
loan portfolio at June 30, 1999. First Federal generally does not lend above 75%
of the appraised values of multi-family residences on first mortgage loans. The
mortgage loans First Federal currently offers on multi-family dwellings are
generally one or five year ARMs with maturities of 25 years or less.
The Bank maintains a secondary mortgage operation designed to make
qualified VA and FHA loans for sale to investors, thereby providing necessary
liquidity to the Bank and needed loan products to the Bank's customers. During
fiscal 1999, the Bank's secondary mortgage operations originated $43.4 million
in loans and sold $42 million to investors. Conventional mortgage loans
originated by the Bank do not meet certain guidelines, therefore, they do not
qualify for sale on the secondary market.
CONSTRUCTION AND COMMERCIAL REAL ESTATE LENDING. First Federal
originates loans secured by existing commercial properties and construction
loans primarily on residential real estate. The loans are secured by real estate
located in Kentucky. Substantially all of the commercial real estate loans
originated by First Federal have adjustable interest rates with maturities of 25
years or less or are loans with fixed interest rates and maturities of five
years or less. At June 30, 1999, the Bank had $18.1 million in outstanding
interim construction loans. The security for commercial real estate loans
includes retail businesses, warehouses and motels. Commercial real estate loans
originated by the Bank range in size from $40,000 to $1.9 million.
Commercial real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers and may also involve higher loan
principal amount to security property appraisal value ratios as compared to
loans secured by residential real estate. In addition, the payment experience of
loans secured by income producing properties is typically dependent on the
successful operation of the related real estate project and thus may be more
vulnerable to adverse conditions in the real estate market or in the economy
generally. Construction loans involve additional risks as a result of the fact
that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, and related
loan-to-value ratios. The analysis of prospective construction loan projects
thus requires an expertise that varies in significant respects from that which
is required for residential mortgage lending.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing or a takeout commitment to
the borrower; the reputation of the borrower and his or her financial condition;
the amount of the borrower's equity in the project; independent appraisals and
cost estimates; pre-construction sale and leasing information; and cash flow
projections of the borrower.
CONSUMER LOANS. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans of up to 35% of their
assets. This limit may be exceeded for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and loans secured by
savings accounts. The consumer loans granted by the Bank have included loans on
automobiles, boats, recreational vehicles and other consumer goods, as well as
loans secured by savings accounts, home improvement loans, and unsecured lines
of credit. As of June 30, 1999, consumer loans outstanding were $28.3 million or
approximately 6.9% of the Bank's total gross loan portfolio. These loans
involved a higher risk of default than loans secured by one-to-four-family
residential loans. The Bank believes, however, that the shorter term and the
normally higher interest rates available on various types of consumer loans have
been helpful in maintaining a profitable spread between the Bank's average loan
yield and its cost of funds.
4
<PAGE>
In view of the riskier nature of consumer lending, the Bank has
developed what management believes are conservative underwriting standards. In
applying these standards, the Bank obtains detailed financial information and
credit bureau reports concerning each applicant. In addition, the relationship
of the loans to the value of the collateral is considered. The Bank offers a
home equity line of credit, which is a revolving line of credit secured by the
equity in a customer's home. As of June 30, 1999, these loans totaled $14.1
million.
COMMERCIAL BUSINESS LENDING. The Bank is permitted to make secured and
unsecured loans for commercial, corporate, business, and agricultural purposes,
including issuing letters of credit and engaging in inventory financing and
commercial leasing activities. Commercial loans generally are made to
small-to-medium size businesses located within the Bank's defined market area.
Commercial loans are considered to involve a higher degree of risk than
residential real estate loans. However, commercial loans generally carry a
higher yield and are made for a shorter term than real estate loans. The Bank
offers a commercial line of credit, which is a revolving line of credit secured
by the equity in the property, primarily real estate, of a business. As of June
30, 1999, these loans totaled approximately $7 million.
LOAN UNDERWRITING POLICIES. During the loan approval process, First
Federal assesses both the borrower's ability to repay the loan and the adequacy
of the underlying security. Potential residential borrowers complete an
application which is submitted to a salaried loan officer. As part of the loan
application process, qualified fee appraisers inspect and appraise the property
which is offered to secure the loan. The Bank also obtains information
concerning the income, financial condition, employment and credit history of the
applicant. First Federal's loan committee, consisting of certain officers of the
Bank, analyzes the loan application and the property to be used as collateral
and subsequently approves or denies the loan request. If the mortgage loan
amount is less than $250,000, it must be approved by a loan committee consisting
of certain members of management. The Board of Directors must approve all
mortgage loans in excess of $250,000. All consumer loans under $25,000 may be
approved by authorized loan officers under Board approved lines of authority and
all loans under $100,000 may be approved by an officer loan committee. Consumer
loans in excess of $100,000 must be approved by the President. In connection
with the origination of single family residential adjustable rate mortgage
loans, borrowers are qualified at a rate of interest equal to the fully accrued
index rate. It is the policy of management to make loans to borrowers who not
only qualify at the low initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
ORIGINATION, PURCHASES AND SALES. Historically, all residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations are generally attributable
to referrals from real estate brokers and builders, depositors and walk-in
customers. Commercial real estate and construction loan origination have been
obtained by direct solicitation, and consumer loan origination by walk-in
customers in response to the Bank's advertising, as well as by direct
solicitation.
LOAN COMMITMENTS. Conventional loan commitments by the Bank are granted
for periods of 30 days. The total amount of the Bank's outstanding commitments
to originate real estate loans at June 30, 1999, was approximately $19.6
million. It has been the Bank's experience that few commitments expire unfunded.
LOAN FEES. In addition to interest earned on loans, certain fees are
received for committing to and ultimately originating loans. The Bank also
receives other fees and charges relating to existing loans, which include
prepayment penalties, late charges and fees for loan modifications. Management
believes that these fees and charges do not materially affect operating results.
NON-PERFORMING ASSETS. Non-performing assets consist of loans on which
interest is no longer accrued and real estate acquired through foreclosure. The
Bank does not have any loans greater than 90 days past due still on accrual. All
loans considered impaired under SFAS 114 are included in non-performing loans.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future 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 is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require
increase, such increase is reported in the provision for loan losses. Loans are
reviewed on a regular basis and normal collection procedures are implemented
when a borrower fails to make a required payment on a loan. If the delinquency
on a mortgage loan exceeds 90 days and is not cured through normal collection
procedures or an acceptable arrangement is not worked out with the borrower, the
Bank institutes measures to remedy the default, including commencing a
foreclosure action. Consumer loans generally are charged off when a loan is
deemed uncollectible by management and any available collateral has been
disposed of. Commercial business and real estate loan delinquencies are handled
on an individual basis by management with the advice of the Bank's legal
counsel. The Bank anticipates that the increase in non-performing real estate
loans will continue due to the growth of the Bank's loan portfolio.
5
<PAGE>
Interest income on loans is recognized on the accrual basis except for
those loans in a nonaccrual of income status. The accrual of interest on
impaired loans is discontinued when management believes, after consideration of
economic and business conditions and collection efforts, that the borrowers'
financial condition is such that collection of interest is doubtful. When
interest accrual is discontinued, interest income is subsequently recognized
only to the extent cash payments are received.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired it is recorded at the lower of the
unpaid principal balance of the related loan or its fair market value. Any
write-down of the property is charged to the allowance for loan losses.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
At June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Loans on non-accrual status (1)(2) $2,529 $2,057 $1,550 $1,252 $1,161
------ ------ ------ ------ ------
Total non-performing loans 2,529 2,057 1,550 1,252 1,161
Real estate acquired
through foreclosure 109 134 184 375 260
Total non-performing assets $2,638 $2,191 $1,734 $1,627 $1,421
====== ====== ====== ====== ======
Ratios: Non-performing
loans to loans .63% .58% .47% .41% .41%
Non-performing
assets to total assets .54% .53% .46% .46% .43%
- -------------------------------------------
(1) Loans on non-accrual status include impaired loans
(2) The interest income that would have been earned and
received on non-accrual loans was not material.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The allowance for loan losses is
regularly evaluated by management and maintained at a level believed to be
adequate to absorb loan losses in the Bank's lending portfolios. Periodic
provisions to the allowance are made as needed. The amount of the provision for
loan losses necessary to maintain an adequate allowance is based upon an
assessment of current economic conditions, analysis of periodic internal loan
reviews, delinquency trends and ratios, changes in the mixture and levels of the
various categories of loans, historical charge-offs, recoveries, and other
information. Management believes, based on information presently available, that
it has adequately provided for loan losses at June 30, 1999. Although management
believes it uses the best information available to make allowance provisions,
future adjustments which could be material may be necessary if management's
assumptions differ significantly from the loan portfolio's actual performance.
6
<PAGE>
The following table sets forth an analysis of the Bank's loan loss
experience for the periods indicated.
Year Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $1,853 $1,715 $1,613 $1,662 $1,406
------ ------ ------ ------ ------
Loans charged-off:
Real estate mortgage 42 16 17 0 14
Consumer 248 132 114 50 21
Commercial 0 0 0 24 16
--- --- --- --- ---
Total charge-offs 290 148 131 74 51
--- --- --- --- ---
Recoveries:
Real estate mortgage 5 0 0 1 0
Consumer 21 21 33 1 6
Commercial 0 0 0 23 16
--- --- --- --- ---
Total recoveries 26 21 33 25 22
--- --- --- --- ---
Net loans charged-off 264 127 98 49 29
--- --- --- --- ---
Acquired reserves 205 0 0 0 185
Provision for loan losses 314 265 200 0 100
--- --- --- --- ---
Balance at end of period $2,108 $1,853 $1,715 $1,613 $1,662
------ ------ ----- ------ ------
Net charge-offs to average
loans outstanding
.068% .037% .031% .017% .010%
Allowance for loan losses to
total non-performing assets
80% 85% 99% 99% 117%
The following table is management's allocation of the allowance for loan
losses by loan type. Allowance funding and allocation is based on management's
current evaluation of risk in each category, economic conditions, past loss
experience, loan volume, past due history and other factors. Since these factors
are subject to change, the allocation is not necessarily predictive of future
portfolio performance.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total loans Amount Total loans Amount Total loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage $1,546 73% $1,340 72% $1,267 74%
Consumer 472 22 451 24 391 23
Commercial 90 5 62 4 57 3
----- ------ ------- ------- ------ ------
Total $2,108 100.00% $1,853 100.00% $1,715 100.00%
====== ======= ======= ======= ====== =======
</TABLE>
There were no material changes in estimation methods or assumptions
affecting allowance allocation. Any reallocation to the allowance is primarily
indicative of changes in loan portfolio mix, not changes in loan concentrations
or terms.
Federal regulations require insured institutions to classify their own
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, classify them. The regulations provide for three
classifications of asset categories -- substandard, doubtful and loss. The
regulations also contain a special mention category, defined as assets which do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
7
<PAGE>
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specified allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or charge off
such amount.
At June 30, 1999, on the basis of management's review of the Bank's loan
portfolio, the Bank had $2.6 million of assets classified substandard, no assets
classified as doubtful and $53,000 of assets classified as loss.
SECURITIES
Interest on securities provides the largest source of income for First
Federal after interest on loans, constituting 10% of the total interest income
for fiscal year 1999. First Federal maintains its liquid assets above the
minimum requirements imposed by regulation at a level believed adequate to meet
requirements of normal banking activities and potential savings outflows. Cash
flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of June 30, 1999, First Federal's liquidity ratio
(liquid assets as a percentage of deposits and short-term borrowings) was 8.85%.
First Federal has the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, certificates of deposit at insured savings and
loans and banks, bankers' acceptances, and federal funds. The Bank may also
invest a portion of its assets in certain commercial paper and corporate debt
securities. First Federal is also authorized to invest in mutual funds and
stocks whose assets conform to the investments that First Federal is authorized
to make directly. See Note 3 of Notes to Consolidated Financial Statements for
further information concerning the Bank's investment portfolio.
As a member of the Federal Home Loan Bank System, First Federal must
maintain minimum levels of liquid assets specified by the OTS which vary from
time to time. See "Regulation Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to return on loans.
The table on the following page sets forth the carrying value of the
Bank's securities portfolio at the dates indicated. At June 30, 1999, the market
value of the Bank's securities portfolio was $46.5 million.
At June 30,
-----------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Securities available-for-sale:
Equity securities $ 1,948 $ 1,934 $ 5,192
Obligations of states and political
subdivisions 988 - -
------ ------ ------
Total available-for-sale $ 2,936 $ 1,934 $ 5,192
======= ======= =======
Securities held-to-maturity:
U.S. Treasury and agencies $42,814 $22,693 $15,335
Mortgage-backed securities 1,590 1,946 2,149
------ ------ ------
Total held-to-maturity $44,404 $24,639 $17,484
======= ======= =======
8
<PAGE>
The following table sets forth the scheduled maturities, amortized
cost, fair value and weighted average yields for the Bank's securities at
June 30, 1999.
Weighted
Amortized Fair Average
Cost Value Yield
(Dollars in thousands)
Securities available-for-sale:
Due in one year or less $ - $ - - %
Due after one year through five years - - -
Due after five years through ten years 785 772 4.33
Due after ten years 225 216 4.60
Equity securities 262 1,948 1.39
---- ------
Total available-for-sale $1,272 $2,936
====== ======
Securities held-to-maturity:
Due in one year or less $ 1,000 $ 1,001 6.00%
Due after one year through five years 6,834 6,933 6.43
Due after five years through ten years 33,980 33,029 6.34
Due after ten years 1,000 951 6.75
Mortgage-backed securities 1,590 1,611 6.50
Total held-to-maturity $44,404 $43,525
======= =======
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposit accounts, the Bank derives
funds from loan repayments, FHLB advances, other borrowings and operations.
Borrowings may be used on a short-term basis to compensate for reductions in
deposits or deposit inflows at less than projected levels and may be used on a
longer term basis to support expanded lending activities.
DEPOSITS. First Federal attracts both short-term and long-term deposits
from the general public by offering a wide range of deposit accounts and
interest rates. In recent years the Bank has been required by market conditions
to rely increasingly on short-term certificate accounts and other deposit
alternatives that are more responsive to market interest rates. First Federal
offers regular savings accounts, NOW accounts, money market accounts and
fixed-interest-rate certificates with varying maturities. First Federal also
offers tax-deferred individual retirement accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in interest
rates and competition. The Bank relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits.
As of June 30, 1999, approximately 32.9% of First Federal's deposits
consisted of various savings and demand deposit accounts from which customers
are permitted to withdraw funds at any time without penalty.
Interest earned on savings accounts is paid from the date of deposit to
the date of withdrawal and compounded quarterly. Interest earned on NOW accounts
is paid from the date of deposit to the date of withdrawal, compounded and
credited monthly. Interest rates paid, maturity terms, service fees and
withdrawal penalties are established by First Federal's management on a periodic
basis.
First Federal also makes available to its depositors a number of
certificates of deposit with various terms and interest rates to be competitive
in its market area. These certificates have minimum deposit requirements as
well.
9
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
Balance Balance Balance Balance
June 30, % of Increase June 30, % of Increase June 30, % of Increase June 30, % of
1999 Deposits (Decrease) 1998 Deposits (Decrease) 1997 Deposits (Decrease) 1996 Deposits
---- -------- -------- ---- -------- -------- ------ -------- --------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand accounts $38,257 9.58% $ 8,075 $12,743 4.15% $ (617) $ 9,813 3.49% $ 833 $ 8,980 3.39%
NOW demand accounts 15,223 3.81 6,027 33,468 10.92 3,875 33,140 11.78 2,702 30,438 11.49
Savings accounts 54,896 13.74 17,881 30,182 9.84 (1,004) 31,186 11.08 (112) 31,298 11.81
Money marketdeposit
accounts 22,984 5.75 13,128 9,856 3.21 (604) 10,460 3.72 191 10,269 3.88
Certificate accounts:
3 month CD's 1,398 .35 473 925 .30 (108) 1,033 .37 (64) 1,097 .41
6 month CD's 24,898 6.23 (798) 25,696 8.38 13,297 12,399 4.41 (5,132) 17,531 6.62
12 month CD's 80,617 20.18 37,162 43,455 14.17 (13,377) 56,832 20.20 3,935 52,897 19.96
18 month CD's 9,097 2.28 (29,041) 38,138 12.43 2,635 35,503 12.62 27,905 7,598 2.87
24 month CD's 76,536 19.16 22,852 53,684 17.50 28,699 24,985 8.88 (8,673) 33,658 12.70
30 month CD's 1,788 .45 (307) 2,095 .68 (1,075) 3,170 1.13 (605) 3,775 1.42
36 month CD's 10,987 2.75 2,786 8,201 2.67 (3,501) 11,702 4.16 (26) 11,728 4.43
48 month CD's 16,238 4.07 3,883 12,355 4.04 4,469 16,824 5.98 5,509 22,333 8.43
6 to 8 year CD's 14,743 3.69 3,276 11,467 3.74 218 11,249 3.99 (291) 11,540 4.36
IRA accounts 31,781 7.69 7,343 24,438 7.97 1,392 23,046 8.19 1,242 21,804 8.23
-------- ------- ------- -------- ------- ------- ------- ------- ------- -------- -------
Total $399,443 100.00% $92,740 $306,703 100.00% $25,361 $281,342 100.00% $16,396 $264,946 100.00%
======== ======= ======= ======== ======= ======= ======== ======= ======= ======== =======
</TABLE>
The variety of deposit accounts by First Federal has permitted it to be
more competitive in obtaining funds and has allowed it to respond with more
flexibility to disintermediation (the flow of funds away from depository
institutions such as savings institutions into direct investment vehicles such
as government and corporate securities). However, the ability of the Bank to
attract and maintain deposits and its cost of funds have been, and will continue
to be, significantly affected by money market conditions.
10
<PAGE>
The following table sets forth the amount of deposits as of June 30,
1999 by various interest rate categories.
<TABLE>
<CAPTION>
Weighted
Average Percent
Interest Minimum of
Rate Category Amount Balances(1) Deposits
<S> <C> <C> <C> <C>
- % Non-interest bearing demand accounts $1,000 $ 15,223 3.81%
1.53 NOW demand accounts 1,000 54,896 13.74
2.56 Savings accounts 100 38,257 9.58
3.67 Money market deposit accounts 1,000 22,984 5.75
3.18 3 month certificate 1,000 1,398 .35
4.27 6 month certificate 1,000 24,898 6.23
5.03 12 month certificate 1,000 80,617 20.18
4.68 18 month certificate 1,000 9,097 2.28
5.54 24 month certificate 1,000 76,536 19.16
5.65 30 month certificate 1,000 1,788 .45
5.46 36 month certificate 1,000 10,987 2.75
5.75 48 month certificate 1,000 16,238 4.07
6.02 Other certificates 1,000 14,743 3.69
5.64 IRA accounts 1,000 31,781 7.96
-------- ------
$399,443 100.00%
(1) Dollars in thousands. ======== =======
</TABLE>
The following table indicates at June 30, 1999 the amount of the Bank's
certificates of deposit of $100,000 or more by time remaining until maturity.
Certificates
Maturity Period of Deposit
--------------- ------------
(In Thousands)
Three months or less $12,100
Three through six months 10,651
Six through twelve months 22,747
Over twelve months 29,514
-------
Total $75,012
=======
The following table sets forth the average balances and interest rates
based on month-end balances for various deposit categories during the periods
indicated.
Year Ended June 30,
------------------------------------------------------
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
Non-interest bearing
demand accounts $ 14,651 - % $ 12,289 - % $ 9,104 - %
Demand deposit accounts 51,174 1.53 34,171 1.52 32,056 1.57
Savings deposits 38,494 2.56 30,696 2.64 31,259 2.62
Money market accounts 21,050 3.67 9,424 3.31 10,287 3.38
Certificates of deposit 266,575 5.50 207,333 5.78 187,974 5.52
11
<PAGE>
BORROWINGS. Deposits are the primary source of funds for First Federal's
lending and investment activities and for its general business purposes. The
Bank can also use advances (borrowings) from the FHLB of Cincinnati to
supplement its supply of lendable funds, meet deposit withdrawal requirements
and to extend the term of its liabilities. Advances from the FHLB are typically
secured by the Bank's stock in the FHLB and a portion of the Bank's first
mortgage loans. At June 30, 1999 First Federal had $25.9 million in advances
outstanding from the FHLB and the capacity to increase its borrowings an
additional $167 million.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings banks and certain other member financial institutions. As a
member, First Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to credit-worthiness have been met.
The following table sets forth certain information regarding the Bank's
FHLB advances during the periods indicated.
At June 30,
-------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Average balance outstanding $23,560 $41,990 $41,482
Maximum amount outstanding at
any month-end during the period 25,894 43,441 47,716
Year end balance 25,894 43,249 41,514
Weighted average interest rate:
At end of year 5.25% 5.39% 5.62%
During the year 5.52% 5.68% 5.61%
12
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Equity securities $ 2,109 $ 28 1.33% $ 2,492 $ 73 2.93% $ 4,856 $ 228 4.70%
State and political
subdivision securities 992 45 4.54 - - - - - -
U.S. Treasury and agencies 40,506 2,730 6.74 16,475 1,058 6.42 15,133 976 6.45
Mortgage-backed securities 1,786 124 6.94 2,090 147 7.03 2,514 178 7.08
Loans receivable (1) (2) 386,132 31,896 8.26 343,822 29,339 8.53 319,187 26,945 8.44
FHLB stock 3,082 216 7.01 2,875 207 7.20 2,674 188 7.03
Interest bearing deposits 8,635 457 5.29 6,689 358 5.35 4,895 267 5.45
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest earning assets 443,242 35,496 8.01 374,443 31,182 8.33 349,259 28,782 8.24
Less: Allowance for loan
losses (2,071) (1,725) (1,622)
Non-interest earning assets 37,636 21,284 18,892
-------- -------- --------
TOTAL ASSETS $478,807 $394,002 $366,529
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings accounts $38,494 $ 984 2.56% $30,696 $ 809 2.64% $31,259 $ 818 2.62%
NOW and money market
accounts 72,224 1,522 2.11 43,595 887 2.03 42,343 875 2.07
Certificates of deposit and
other time deposits 266,575 14,674 5.50 207,333 11,980 5.78 187,974 10,376 5.52
FHLB Advances 23,560 1,301 5.52 41,990 2,383 5.68 41,482 2,306 5.56
------- ------ ---- ------- ------ ---- ------- ------
Total interest bearing
liabilities 400,853 18,481 4.61 323,614 16,059 4.96 303,058 14,375 4.74
Non-interest bearing
liabilities:
Non-interest bearing
deposits 14,651 12,289 9,104
Other liabilities 6,542 4,697 3,879
------- ------- -------
Total liabilities 422,046 340,600 316,041
Stockholders' equity 56,761 53,402 50,488
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $478,807 $394,002 $366,529
======== ======== ========
NET INTEREST INCOME $17,015 $15,123 $14,407
======= ======= =======
NET INTEREST SPREAD 3.40% 3.37% 3.50%
===== ===== =====
NET INTEREST MARGIN 3.84% 4.04% 4.13%
===== ===== =====
Ratio of average interest
earning assets to average
interest bearing liabilities 110.57% 115.71% 115.24%
======= ======= =======
- ------------------------------------------------------
(1) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
(2) Calculations include non-accruing loans in the average loan amounts
outstanding.
</TABLE>
13
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by old volume); (2) changes in volume (change in volume
multiplied by old rate); and (3) changes in rate-volume (change in rate
multiplied by change in volume). Changes in rate-volume are proportionately
allocated between rate and volume variance.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
Increase (decrease) Increase (decrease) Increase (decrease)
Due to change in Due to change in Due to change in
Net Net Net
Rate Volume Change Rate Volume Change Rate Volume Change
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $(885) $3,442 $2,557 $159 $2,288 $2,447 $(89) $2,038 $1,949
Equity securities (35) (10) (45) (104) (135) (239) (15) 12 (3)
State and political
subdivision securities 13 32 45 - - - - - -
U.S. Treasury and agencies 55 1,617 1,672 (5) 87 82 (11) 460 449
Mortgage-backed securities (2) (21) (23) (1) (31) (32) (7) (39) (46)
FHLB stock (5) 14 9 5 14 19 2 12 14
Interest bearing deposits (4) 103 99 45 78 123 (57) (450) (507)
----- ------ ------ --- ------ ------ ------ ------ ------
Total interest earning assets $(863) $5,177 $4,314 $99 $2,301 $2,400 $(177) $2,033 $1,856
===== ====== ====== === ====== ====== ====== ====== ======
INTEREST EXPENSE:
Savings accounts $(24) $199 $175 $7 $(14) $(7) $(9) $(15) $(24)
NOW and money market
accounts 36 599 635 (77) 48 (29) 16 100 116
Certificates of deposit
and other time deposits (550) 3,244 2,694 503 1,136 1,639 (4) 105 101
FHLB advances (65) (1,017) (1,082) 52 29 81 (32) 538 506
----- ------ ------ ---- ------ ------ ---- ---- ----
Total interest bearing
liabilities $(603) $3,025 $2,422 $485 $1,199 $1,684 $(29) $728 $699
====== ====== ====== ==== ====== ====== ==== ==== ====
</TABLE>
SUBSIDIARY ACTIVITIES
As a federally-chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
intercity, and community development purposes. Under such limitations, on June
30, 1999, the Bank was authorized to invest up to approximately $14.6 million in
the stock of or loans to subsidiaries. In addition, institutions meeting
regulatory capital requirements, which the Bank does, may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock. As of June 30, 1999, the Bank's
investment in and loans to its subsidiary was approximately $1.4 million
consisting of investment in common stock and earnings.
In 1978, the Bank formed First Service Corporation of Elizabethtown
("First Service"). First Service acts as a broker for the purpose of selling
mortgage life, credit life and accident and disability insurance to the Bank's
customers. In March, 1998 First Service entered into a contract with Robert
Thomas Securities, Inc. to provide investment services to the Bank's customers
in the area of tax deferred annuities, government securities and stocks and
bonds. First Service employs three full-time employees to perform these
services. This investment function operates under licenses held by First
Service. The net earnings of First Service was $209,000 during fiscal year 1999.
14
<PAGE>
Savings associations, in determining compliance with capital
requirements, are required to deduct from capital an increasing percentage of
their debt and equity investments in, and extensions of credit to, service
corporations in activities not permissible for a national bank. Certain
activities of the Bank's service corporations are not permissible for national
banks. Accordingly, on June 30, 1999, the Bank deducted 100% of its investment
in its service corporation from its core and tangible capital. See
"Regulation--Regulatory Capital Requirements." Because the Bank's investment in
its subsidiary is insignificant, management does not believe that the required
deductions from capital will have a material effect on the Bank's regulatory
capital position.
COMPETITION
First Federal experiences substantial competition both in attracting and
retaining deposits and in the making of mortgage and other loans. Direct
competition for deposits comes from other savings institutions, commercial
banks, and credit unions located in north-central Kentucky. Additional
significant competition for deposits comes from money market mutual funds and
corporate and government debt securities.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from other savings institutions, commercial banks, mortgage bankers, mortgage
brokers, and insurance companies. First Federal is able to compete effectively
in its primary market area.
First Federal has offices in nine cities in six contiguous counties. In
addition to the financial institutions which have offices in these counties,
First Federal competes with several commercial banks and savings institutions in
surrounding counties, many of which have assets which are substantially larger
than First Federal's. In addition, Kentucky's interstate banking statute, which
permits banks in all states to enter the Kentucky market if they have reciprocal
interstate banking statutes, has further increased competition for the Bank.
EMPLOYEES
The Corporation and its subsidiary had 143 full-time employees and 23
part-time employees as of June 30, 1999. None of these employees are represented
by a collective bargaining agreement and the Corporation believes that it enjoys
good relations with its personnel.
REGULATION
GENERAL. As a federally chartered savings association, First Federal is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. The OTS periodically examines the Bank for compliance with various
regulatory requirements and the FDIC also has the authority to conduct special
examinations of institutions insured by the SAIF. The Bank must file reports
with the OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of depositors. As a savings
and loan holding company, the Corporation is subject to the OTS' regulation,
examination, supervision and reporting requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of 12 regional Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHLB"). The Federal Home Loan
Banks provide a Central Credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of capital
stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. First Federal was in compliance with this
requirement with investment in the FHLB stock at June 30, 1999, of $3.2 million.
The FHLB serves as a reserve or central bank for its member institutions
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB. As of June 30, 1999, First Federal had $25.9
million in advances outstanding from the FHLB. See "Business Sources of Funds -
Borrowings."
15
LIQUIDITY REQUIREMENTS. As a member of the FHLB System, the Bank has
been required to maintain average daily balances of liquid assets (cash,
deposits maintained pursuant to Federal Reserve Board requirements, time and
savings deposits in certain institutions, obligations of states and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt, and mortgage loans and mortgage-related
securities with less than one year to maturity or subject to purchase within one
year) equal to the monthly average of not less than a specified percentage of
its net withdrawable savings deposits plus short-term borrowings. This liquidity
requirement, which is currently 4%, may be changed from time to time by the OTS
to any amount within the range of 4% to 10% depending upon economic conditions
and the savings flows of member institutions. Member institutions have also been
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of their net withdrawable
savings accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet liquidity requirements. The Bank's average
liquidity ratio for June 1999 was 8.85% which exceeded the applicable liquidity
requirements. The Bank's average liquidity ratio for June 1999 was 8.85% which
exceeded the applicable liquidity requirement. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
QUALIFIED THRIFT LENDER TEST. The Bank is currently subject to OTS
regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for Federal Home Loan Bank advances and for certain other
purposes. To qualify as a QTL, a savings association must maintain at least 65%
of its "portfolio" assets in qualified thrift investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings association
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified thrift investments consist of: (i) loans, equity positions, or
securities related to domestic, residential real estate or manufactured housing,
credit card and education loans; (ii) property used by the savings association
in the conduct of its business; and (iii) stock in a Federal Home Loan Bank or
the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. Qualified thrift investments may also include liquidity investments
and 50% of the dollar amount of residential mortgage loans subject to sale under
certain conditions. To qualify as a QTL, a savings association must maintain its
status as a QTL on a monthly basis in nine out of every 12 months. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the Federal Home Loan Bank System. Upon
failure to qualify as a QTL for two years, a savings association must convert to
a commercial bank. At June 30, 1999, approximately 93.44% of the Bank's assets
were invested in qualified thrift investments.
LENDING LIMITS. Under regulations of the OTS, loans and extensions of
credit to a person outstanding at one time and not fully secured shall not
exceed 15% of the unimpaired capital, surplus and the loan loss allowance of the
savings association. Loans and extensions of credit fully secured by readily
marketable collateral (as defined) may comprise an additional 10% of unimpaired
capital and surplus. At June 30, 1999, the Bank complied with its regulatory
lending limits.
The aggregate amount of loans which a federally chartered savings
association may make on the security of liens on non-residential real property
may not exceed 400% of the institution's capital, though the Director of OTS has
the authority to permit savings associations to exceed the 400% of capital limit
in certain circumstances.
REGULATORY CAPITAL REQUIREMENTS. OTS regulations require savings
associations to satisfy three different capital requirements. Specifically,
savings associations must maintain a 3% Tier 1 leverage ratio, a 4% Tier 1
capital ratio and an 8% risk-based capital standard. OTS regulations impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). As of June 30, 1999, the Bank's actual capital
percentages for Tier 1 leverage of 9.0%, Tier 1 capital of 13.9%, and current
risk-based capital of 14.6%, significantly exceed the regulatory requirement for
each category. For additional information See Note 9 of the Notes to
Consolidated Financial Statements in the Annual Report.
For purposes of the OTS's regulatory capital regulations, core capital
is defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill held by an eligible savings
association.
16
<PAGE>
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts, and increased by a pro rata portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments against capital, as
well as a pro rata portion of the assets of other subsidiaries for which netting
is not fully required under the phase-in rules. Adjusted total assets are
reduced by the amount of assets that have been deducted from capital, the
portion of savings association's investments in subsidiaries that must be netted
against capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both Tier 1 capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's Tier 1 capital. Supplementary capital is defined to
include certain preferred stock issues, nonwithdrawable accounts and pledged
deposits that do not qualify as Tier 1 capital, certain approved subordinated
debt, certain other capital instruments and a portion of the savings
association's general loss allowances. Total Tier 1 and supplementary capital
are reduced by an amount equal to the savings association's high loan-to-value
ratio land loans and non-residential construction loans and the amount of
capital instruments held by other depository institutions pursuant to reciprocal
arrangements as well as by an increasing percentage of the savings association's
equity investments.
The risk-based capital requirement is measured against risk-weighted
assets which equals the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighted system, one-to four-family first mortgages not more
than 90 days past due with loan-to-value ratios under 80% are assigned a risk
weight of 50%. Consumer loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. The risk-based capital requirement is 8% of
risk-weighted assets.
In determining compliance with capital standards, all of a savings
association's investments in, and extensions of credit to, any subsidiary
engaged in activities not permissible for a national bank are also to be
deducted from the savings association's capital. Certain subsidiaries are
exempted from this treatment, including any subsidiary engaged in impermissible
activities solely as agent for its customers (unless the FDIC determined
otherwise), subsidiaries engaged solely in mortgage banking, and depository
institution subsidiaries acquired prior to May 1, 1989. In addition, the capital
deduction is not applied to federal savings associations existing as of August
9, 1989 that were either chartered as a state savings bank or state cooperative
bank prior to October 10, 1982 or that acquired their principal assets from such
an association. The required reduction of capital for this purpose is being
phased in over a period of approximately five years. At June 30, 1999, the
Bank's investment in First Service, a wholly owned subsidiary of the Bank
engaged in activities which are not permitted for a national bank, amounted to
$1.4 million. Accordingly, on June 30, 1999, the Bank deducted 100% of this
investment from its core and tangible capital.
The OTS risk-based capital requirements require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS will calculate the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, for any quarter is based on the institution's Thrift Financial Report filed
three quarters earlier. The Bank does not have more than a normal level of
interest rate risk under the new rule and is not required to increase its total
capital as a result of the rule.
17
<PAGE>
Presented below as of June 30, 1999 is an analysis of the Bank's
interest rate risk ("IRR") as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates.
As of June 30, 1999
Net Portfolio Value NPV as % of PV of Assets
Change ------------------- ------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
+300 bp 35,951 (23,286) (39) 7.85 (430 bp)
+200 bp 44,082 (15,155) (26) 9.41 (273 bp)
+100 bp 52,123 (7,114) (12) 10.90 (125 bp)
0 bp 59,237 12.15
-100 bp 64,333 5,096 9 12.99 84 bp
-200 bp 68,072 8,835 15 13.57 142 bp
-300 bp 71,824 12,587 21 14.12 198 bp
While the Bank complies with its currently applicable capital
requirements and expects to continue to comply with the requirements, any
failure to comply with the capital requirements in the future would result in
severe penalties. In addition to requiring generally applicable capital
standards for savings associations, applicable regulations authorize the
Director of OTS to establish the minimum level of capital for a savings
institution at such amount or at such ratio of capital-to-assets as the Director
determines to be necessary or appropriate for such institution in light of the
particular circumstances of the institution. The Director of OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
The OTS staff policies specify that savings institutions failing any one
of their minimum regulatory capital requirements may not increase their total
assets during any quarter in excess of an amount equal to net interest credited
during the quarter. Under these policies, institutions that have submitted
capital plans that are rejected by the District Director or that have had
capital plans approved but do not meet the targets or requirements of the
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will only be granted
when the proposed loan or investment is reasonable in the context of the
institution's operations and does not significantly increase the risk profile of
the savings institution.
The Director of OTS must restrict the asset growth of savings
associations not in regulatory capital compliance, subject to a limited
exception for growth not exceeding interest credited. In addition, savings
associations not in full compliance with applicable capital standards are
subject to a capital directive which may include such restrictions, including
restrictions on the payment of dividends and on compensation, as deemed
appropriate by the Director of OTS. The Director of OTS is directed to treat as
an unsafe and unsound practice any material failure by a savings association to
comply with a capital plan or capital directive. The sanctions and penalties
that could be imposed range from restrictions on branching or on the activities
of the institution, to restrictions on the ability to obtain FHLB advances, to
termination of insurance of accounts following appropriate proceedings, to the
appointment of a conservator or receiver.
PROMPT CORRECTIVE REGULATORY ACTION
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action if an insured depository institution fails to satisfy certain
minimum capital requirements. All institutions, regardless of their capital
levels, are restricted from making any capital distribution or paying any
management fees if the institution would thereafter fail to satisfy the minimum
levels for any of its capital requirements. An institution that fails to meet
the minimum level for any relevant capital measure (an "undercapitalized
institution") may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
18
<PAGE>
restoration plan within 45 days; (iii) subject to asset growth limits; and (iv)
required to obtain prior regulatory approval for acquisitions, branching and new
lines of businesses. The capital restoration plan must include a guarantee by
the institution's holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters, under which the holding company would be liable up to the lesser of 5%
of the institution's total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to comply with its
capital restoration plan. A "significantly undercapitalized" institution, as
well as any undercapitalized institution that did not submit an acceptable
capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution could also be required
to divest the institution or the institution could also be required to divest
subsidiaries. The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective action provisions. If an institution's
ratio of tangible capital to total assets falls below a "critical capital
level," the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized. If a savings association is in compliance with an approved
capital plan on the date of enactment of FDICIA, however, it will not be
required to submit a capital restoration plan if it is undercapitalized or
become subject to the statutory prompt corrective action provisions applicable
to significantly and critically undercapitalized institutions prior to July 1,
1995.
Under FDICIA, regulations implementing the prompt corrective action
provisions of a depository institution's capital adequacy is measured on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
association that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1
risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" savings association is a savings
association that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or
greater (or 3.0% or greater if the savings association has a composite of 1
MACRO rating). An "undercapitalized institution" is a savings association that
has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the association has a composite 1 MACRO rating). A
"significantly undercapitalized" institution is defined as a savings association
that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier
1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less
than 3.0%. A "critically undercapitalized" savings association defined as a
savings association that has a ratio of core capital to total assets of less
than 2.0%. The OTS may reclassify a well capitalized savings association as
adequately capitalized and may require an adequately capitalized or
undercapitalized association to comply with the supervisory actions applicable
to associations in the next lower opportunity for a hearing, that the savings
association is in an unsafe or unsound condition or that the association has
received and not corrected a less-than-satisfactory rating for any MACRO rating
category. First Federal is classified as "well capitalized" under the new
regulations.
DEPOSIT INSURANCE
Under FDICIA, the FDIC has established a risk-based assessment system
for insured depository institutions. Under the system, the assessment rate for
an insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC which will be determined by the
institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups; well capitalized, adequately
capitalized or undercapitalized, based on the data reported to regulators for
date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well capitalized institutions are institutions satisfying the
following capital ratio standards; (i) total risk-based capital ratio of 10.0%
or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well capitalized
institutions but which satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Undercapitalized institutions consist of institutions that do not qualify as
either "well capitalized" or "adequately capitalized." Within each capital
group, institutions are assigned to one of the three subgroups on the basis of
19
<PAGE>
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The Bank insures its customers' deposits through the Savings Association
Insurance Fund ("SAIF"). On September 30, 1996, Federal Deposit Insurance
Corporation ("FDIC") legislation was signed into law to recapitalize the SAIF
due to a substantial disparity that existed between the premiums assessed by the
SAIF as compared to premiums assessed to commercial banks. All SAIF-insured
savings institutions were required to pay a one-time special assessment of $.657
for every $100 of customer deposits held as of March 31, 1995. This has resulted
in a charge to earnings of $1,095,000, net of tax, during the first quarter of
fiscal 1997. On January 1, 1997, the Bank began paying insurance premiums of
$.064 per $100 of deposits as compared to a previous premium of $.23 per $100 of
deposits.
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3% on the first $51.9
million of transaction accounts, plus 10% on the remainder. This percentage is
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. As of June 30,
1999, the Bank met its reserve requirements.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS. The Corporation is a
savings and loan holding company within the meaning of the Home Owners' Loan
Act, as amended. As such, it is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, First Federal is subject to
certain restrictions in its dealings with the Corporation and affiliates
thereof.
The Home Owners' Loan Act, as amended, generally prohibits a savings and
loan holding company, without prior approval of the Director of OTS, from (i)
acquiring control of any other savings institution or savings and loan holding
company or controlling the assets thereof or (ii) acquiring or retaining more
than 5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Additionally, under certain circumstances, a savings
and loan holding company is permitted to acquire, with the approval of the
Director of OTS, up to 15% of previously unissued voting shares of an
under-capitalized savings association for cash without that savings association
being deemed controlled by the holding company. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution or any other savings and loan holding company.
The Bank Holding Company Act of 1956 specifically authorizes the Federal
Reserve Board and the Director of the OTS to approve an application by a bank
holding company to acquire control of any savings institution. Pursuant to rules
promulgated by the Federal Reserve Board, owning, controlling or operating a
savings institution is a permissible activity for bank holding companies, if the
savings institution engages only in deposit-taking activities and lending and
other activities that are permissible for the bank holding companies. In
approving such as application, the Federal Reserve Board may not impose any
restriction on transaction between the savings institution and its holding
company affiliates except as required by Sections 23A and 23B of the Federal
Reserve Act.
A bank holding company that controls a savings institution may merge or
consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
Transactions between savings associations and any affiliate are governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
association is any company or entity which controls, is controlled by or is
under common control with the savings association. In a holding company context,
the parent holding company of a savings association (such as the Corporation)
and any companies which are controlled by such parent holding company are
affiliates of the savings association. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries may engage in
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<PAGE>
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. Additionally, in addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association.
Savings associations are also subject to the restrictions contained in
Section 22 (h) of the Federal Reserve Act on loans to executive officers,
directors and principal shareholders. Under Section 22 (h), loans to an
executive officer and to a greater than 10% shareholder of a savings association
(18% in the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed together
with all other outstanding loans to such person and affiliated entities the
association's loan to one borrower limit as established by FIRREA (generally
equal to 15% of the institution's unimpaired capital and surplus, for loans
fully secured by certain readily marketable collateral, an additional 10% of the
institution's unimpaired capital and surplus). Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% shareholders of savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal shareholders be made on terms
substantially the same as offered in comparable transactions to other persons.
The Board of Directors of the Corporation presently intends to operate
the Corporation as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
company. However, if the director of OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the Director of OTS may impose
such restrictions as deemed necessary to address such risk and limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet (in three out to every four
quarters and two out of every three years) the QTL test, see "Qualified Thrift
Lender Test" above, then such unitary holding company shall also become subject
to the activities restrictions applicable to multiple holding companies
(additional restrictions on securing advances from the FHLB also apply).
If the Corporation were to acquire control of another savings
institution other than through merger or other business combinations with First
Federal, the Corporation would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, the activities of the Corporation and any of its
subsidiaries (other than First Federal or other subsidiary savings institutions)
would thereafter be subject to further restrictions. The Home Owners' Loan Act,
as amended, provides that, among other things, no multiple savings and loan
holding company or subsidiary thereof which is not a savings institution shall
commence or continue for more than a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
FSLIC by regulations as of March 5, 1987 to be engaged in by multiple holding
companies or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the Director of OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of OTS prior to being engaged in by a multiple holding company.
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The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state, if the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office in the state of the institution to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institution to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The Director of OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings institutions
in more than one state in the case of certain emergency thrift acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of OTS 30 day advance notice of such declaration and
payment. Any dividend declared during such period or without the giving of such
notice shall be invalid.
FEDERAL AND STATE TAXATION
The Corporation and the Bank currently file consolidated federal income
tax returns based on a fiscal year ending June 30.
The Small Business Job Protection Act passed by Congress in August 1996
included a provision that repealed the percentage of taxable income bad debt
deduction for federal income tax purposes. The Bank used this method to
determine its bad debt deduction when computing federal taxes in applicable
years. This new legislation also requires recapture of the excess of bad debt
reserves over the base year reserve as of December 31, 1987. For years
subsequent to the base year, deferred taxes have been recorded; thus, no
additional tax provision is required as a result of this legislation. Under the
new legislation, the Bank is required to use the specific charge-off method to
calculate the bad debt deduction for federal income tax purposes. The new
legislation is effective for tax years beginning after December 31, 1995.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction will not be allowable for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), without payment of federal income taxes on such dividends or
distributions by the Bank at the then current tax rates on the amount deemed
removed to the Bank would include not only the amount actually distributed, but
would also be increased (subject to certain limitations) by the amount of the
tax payable by reason of such distribution.
The Commonwealth of Kentucky imposes no income tax on savings
institutions. Nonetheless, First Federal must pay a Kentucky ad valorem tax.
This tax is 1/10th of 1% of First Federal's total savings accounts, common
stock, capital and retained income with certain deductions for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. The Bank's subsidiary must pay a state income tax, as well as a
tax on capital. The tax on income is 4% for the first $25,000 of taxable income,
5% for the next $25,000, 6% for the next $50,000, 7% for the next $150,000 and
8.25% for all income over $250,000. The tax on capital is .0021 times the
capital employed with a credit of .0014 times the first $350,000 of capital for
those corporations with gross income of under $500,000.
For information regarding federal income taxes, see Note 8 of the Notes
to Consolidated Financial Statements in the Annual Report.
22
<PAGE>
ITEM 2. PROPERTIES
The Corporation's executive offices, principal support and operational
functions are located at 2323 Ring Road in Elizabethtown, Kentucky. All of First
Federal's banking centers are located in Kentucky. The location of the 12
banking centers, their form of occupancy and their respective approximate square
footage is set forth in the following table.
Approximate
Square
Banking Centers Owned or Leased Footage
--------------- --------------- -----------
ELIZABETHTOWN
2323 Ring Road Owned 55,000
325 West Dixie Avenue Owned 1,764
101 Wal-Mart Drive Leased 984
RADCLIFF, 475 West Lincoln Trail Owned 2,728
BARDSTOWN, 401 East John Rowan Blvd. Leased 4,500
MUNFORDVILLE, 925 Main Street Owned 2,928
SHEPHERDSVILLE, 395 N. Buckman Street Owned 7,600
MT. WASHINGTON, 279 Bardstown Road Owned 2,500
BRANDENBURG
416 East Broadway Leased 4,395
50 Old Mill Road Leased 575
FLAHERTY, 4055 Flaherty Road Leased 1,216
LOUISVILLE, 11901 Standiford Plaza Drive Leased 650
As of June 30, 1999, the net book value of office properties and
equipment owned or leased by the Bank and its subsidiary was $11.6 million. For
further information, see Note 5 of the Notes to Consolidated Financial
Statements in the Annual Report.
The Bank utilizes the services of an outside data processing center for
most of its savings and loan operations. All accounting and internal record
keeping functions are handled by the Bank's in-house computer system.
ITEM 3. LEGAL PROCEEDINGS
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material pending
legal proceedings to which the Corporation, the Bank, or its subsidiary is a
party, or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of First Federal Financial Corporation of Kentucky is
traded over the counter and quoted on the NASDAQ system under the symbol "FFKY."
The stock began trading on July 20, 1987. The registered number of stockholders
as of September 15, 1999, was 808. It is currently the policy of the
Corporation's Board of Directors to continue to pay quarterly dividends, but any
future dividends are subject to the Board's discretion based on its
consideration of the Corporation's operating results, financial condition,
capital, income tax considerations, regulatory restrictions and other factors.
QUARTERLY STOCK PRICES TWO
MONTHS ENDED
QUARTER ENDED
FISCAL 1999: 9/30 12/31 3/31 6/30 8/31/99
High $ 28.50 $ 29.75 $ 28.50 $24.94 $25.00
Low 23.13 23.36 23.25 19.88 22.50
Cash dividends 0.15 0.15 0.15 0.18
FISCAL 1998: 9/30 12/31 3/31 6/30
High $ 23.25 $ 22.75 $ 23.00 $ 28.75
Low 21.00 22.00 20.50 21.50
Cash dividends 0.14 0.14 0.14 0.14
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated fianancial and other data of
the Corporation. This financial data is derived in part from, and should be read
in conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets $488,304 $409,651 $377,380 $352,671 $331,375
Interest bearing deposits 1,634 4,157 481 7,753 6,601
Net loans outstanding 400,360 354,935 327,502 301,987 282,399
Investments 47,340 26,574 22,677 16,742 17,068
Deposits 399,443 306,703 281,342 264,946 260,503
Borrowings 25,894 43,249 41,514 34,979 21,238
Stockholders' equity 57,862 54,688 51,665 49,946 47,310
Number of:
Real estate loans outstanding 6,968 6,709 6,380 5,914 5,858
Deposit accounts 45,425 37,764 36,378 35,140 35,933
Offices 12 8 8 8 7
</TABLE>
24
<PAGE>
YEAR ENDED JUNE 30,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATIONS DATA: (Dollars in thousands)
Interest income $35,496 $31,182 $28,782 $26,926 $22,635
Interest expense (18,481) (16,059) (14,375) (13,676) (10,515)
Net interest income 17,015 15,123 14,407 13,250 12,120
Provision for loan losses (314) (265) (200) 0 (100)
Other income 3,954 2,860 2,468 2,648 2,464
General and administrative
expense (1) (11,706) (8,082) (9,472) (7,547) (6,428)
Income tax expense (2,970) (3,302) (2,429) (2,864) (2,626)
Net income 5,979 6,334 4,774 5,487 5,430
Earnings per share:**
Basic 1.45 1.53 1.14 1.30 1.24
Diluted 1.44 1.52 1.13 1.29 1.23
Book value per share** 14.04 13.24 12.39 11.87 11.17
Dividends paid per share** 0.63 0.56 0.50 0.46 0.41
Dividend payout ratio 43% 37% 44% 35% 33%
Return on average assets 1.25% 1.60% 1.30% 1.60% 1.85%
Average equity to average
assets 11.85% 13.55% 13.77% 14.27% 16.37%
Return on average equity 10.53% 11.81% 9.46% 11.22% 11.30%
- --------------------------------------------
(1) 1997 general and administrative expenses include the non-recurring
special assessment paid to the FDIC in the amount of $1.7 million, pretax.
1999 general and administrative expenses include one time acquisition
and conversion costs in the amount of $789,000, pretax.
** All per share information has been adjusted for a 2-for-1 stock split which
was effective June 10, 1996.
QUARTERLY FINANCIAL DATA
(Unaudited) (Dollars in thousands except per share data)
FISCAL 1999: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $8,711 $8,964 $8,967 $8,854
Total interest expense 4,626 4,791 4,556 4,508
Net interest income 4,085 4,173 4,411 4,346
Provision for loan losses 60 60 60 134
Net income 1,373 1,538 1,476 1,592
Earnings per share:
Basic 0.33 0.37 0.36 0.39
Diluted 0.33 0.37 0.36 0.38
FISCAL 1998: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $7,522 $7,693 $7,889 $8,078
Total interest expense 3,829 3,993 4,047 4,190
Net interest income 3,693 3,700 3,842 3,888
Provision for loan losses 60 30 30 145
Net income 1,604 1,452 1,650 1,628
Earnings per share:
Basic 0.39 0.35 0.40 0.39
Diluted 0.39 0.35 0.40 0.38
25
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis covers the primary factors affecting First
Federal Financial Corporation of Kentucky's (the "Corporation") performance and
financial condition. It should be read in conjunction with the accompanying
audited consolidated financial statements included in this report. The
Corporation is the parent to its wholly owned subsidiary, First Federal Savings
Bank of Elizabethtown (the "Bank"). All dollar amounts (except per share data)
are presented in thousands unless otherwise noted.
FORWARD - LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. The important factors include, but are not
limited to, fluctuations in the economy; changes in interest rates; government
legislation and regulation; the Corporation's success in assimilating acquired
branches and operations into its existing operations; the Corporation's ability
to offer competitive banking products and services; the continued growth of the
markets in which the Corporation operates; the Corporation's ability to expand
into new markets and to maintain profit margins in the face of pricing pressure,
all of which are difficult to predict and many of which are beyond the
Corporation's control.
ACQUISITION
On July 24, 1998, the Bank completed its acquisition of three bank branches
located in Meade County, Kentucky from Bank One Corporation. Two of the banking
centers are located in Brandenburg, Kentucky and the third banking center is in
Flaherty, Kentucky.
In the transaction, the Bank acquired certain assets and assumed certain
liabilities associated with the acquisition of the Meade County banking centers.
The transaction resulted in recording of approximately $11,000 of loans and
$72,000 of deposits. The net deposits assumed exceeded the cash received by
$8,670. Any ratios or analysis comparing years before acquisition will not be
comparable.
BRANCH EXPANSION
On April 26, 1999, the Bank opened a new banking center within the Hillview
Wal-Mart Supercenter. The cost of construction for the 650 square feet was
approximately $212. This new banking center is open 58 hours per week and adds
extended hours for our new and existing customers. In addition, our associates
are allowed to utilize the Wal-Mart's customers to create new sales
opportunities. Since opening in April, the new banking center has attracted
approximately $240 in new deposits from customers.
RESULTS OF OPERATIONS
Net income was $5,979 or $1.44 per share diluted in 1999 compared with $6,334 or
$1.52 per share diluted in 1998. Acquisition-related costs in connection with
the purchase of three banking centers during the quarter ended September 30,
1998, in the amount of $292 ($193, net of tax) were charged against earnings.
Also, the Corporation incurred data and computer conversion costs of $497 ($328,
net of tax) relating to its conversion to a new data processor. In addition to
these expenses, amortization of intangibles increased to $781 ($597, net of tax)
in 1999 from $240 ($240, net of tax) in 1998. Excluding these acquisition and
conversion costs and amortization of intangibles, net earnings for the 1999
period would have increased approximately $523 to $7,097 or $1.71 per share
diluted for the fiscal year ended June 30, 1999 from $6,574 or $1.57 per share
diluted for the fiscal year ending June 30, 1998.
26
<PAGE>
Including acquisition and Excluding acquisition and
conversion costs and conversion costs and
amortization of amortization of
intangibles intangibles
1999 1998 1999 1998
---- ---- ---- ----
Net Income $5,978,801 $6,334,217 $7,097,011 $6,574,288
Diluted earnings per share 1.44 1.52 1.71 1.57
NET INTEREST INCOME - Net interest income increased by $1,892 during 1999 to
$17,015 as compared to $15,123 in 1998 in spite of the declining net interest
margin. The Bank's net interest margin declined to 3.86% for the year ended June
30, 1999 compared to 4.04% for the 1998 period. The acquisition contributed
approximately $1,137 to the total increase in net interest income for the 1999
period.
Average interest-earning assets increased by $70 million from $371 million for
the 1998 period to $441 million for the 1999 period due to the normal growth of
the Bank and interest-earning assets acquired from the three Meade County
banking centers. Average loans were $42 million higher and averaged $386 million
during 1999, while the average yield on loans decreased by 27 basis points to
8.26%. The acquisition contributed approximately $10 million to the total loan
growth.
Average interest-bearing liabilities increased by $80 million to an average
balance of $416 million for 1999. Customer deposits averaged $392 million during
1999, a $98 million increase from the 1998 average balance of $294 million. The
acquisition contributed approximately $72 million to the total deposit growth.
The cost of funds on these deposits averaged 4.38% during 1999 which was a
decrease of 28 basis points from the 1998 average cost of funds of 4.66%. This
decrease is attributable to lower rates paid on short-term customer deposits.
PROVISION FOR LOAN LOSSES - Management periodically evaluates the adequacy of
the allowance for loan losses based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay and other factors.
The provision for loan losses was $314 for 1999. Net charge-offs were $264
during 1999 as compared to $127 during 1998. The Bank's allowance for loan
losses was $2.1 million or .52% of loans outstanding at June 30, 1999 compared
to $1.9 million or .52% of loans outstanding at June 30, 1998. Non-performing
loans represented .63% of the loans outstanding at June 30, 1999. As
demonstrated in the summary table below, 62% of the Bank's non-performing assets
are collateralized by one-to-four family residential mortgages on real estate
located in central Kentucky.
27
<PAGE>
YEAR ENDED JUNE 30,
1999 1998 1997
(Dollars in thousands)
Allowance for loan losses:
Balance, July 1 $ 1,853 $ 1,715 $ 1,613
Provision for loan losses 314 265 200
Acquired 205 - -
Charge-offs (290) (148) (131)
Recoveries 26 21 33
------- ------- -------
Balance, June 30 $ 2,108 $ 1,853 $ 1,715
======= ======= =======
Loans outstanding at year end $402,468 $356,788 $329,217
Non-performing loans at year end:
Collateralized by one-to-four family homes $ 1,633 $ 1,487 $ 1,172
Other non-performing loans 896 566 378
----- ----- -----
Total non-performing loans 2,529 2,053 1,550
Real estate acquired through foreclosure 109 134 184
----- ----- -----
Total non-performing assets 2,638 2,187 1,734
===== ===== =====
Ratios: Non-performing loans to loans .63% .58% .47%
Allowance for loan losses to
non-performing loans 83% 90% 111%
Allowance for loan losses to
net loans .52% .52% .52%
Non-performing assets to total
assets .54% .53% .46%
NON-INTEREST INCOME AND EXPENSE - Non-interest income was $3,954 in 1999, an
increase of $1,094 or 38% over 1998. The 23% growth in deposits resulting from
the acquisition was the largest contributing factor to the increase in other
income. Fee income in connection with loans originated for the secondary market
increased by $153 or 31% during the fiscal year due to a better market
penetration, as opposed to higher refinancing activity. Fee income from trust,
brokerage and other services also increased due to growth in deposit
relationships with existing customers. Through a subsidiary of the Bank, gains
on sales of real estate held for development of $255 were reported due to the
sale of commercial lots in an office park currently under development.
Non-interest expense (excluding the one-time acquisition related charges and
information technology upgrades) increased by $2.8 million or 35% during 1999 as
compared to 1998. The largest contributing factor to higher expenses was the
operating costs of the three acquired branches coupled with a $541 amortization
charge on the intangible assets associated with the acquisition. Other
contributing factors are expenses resulting from higher loan originations and
the opening of a new banking center located in the Wal-Mart Supercenter in
Hillview, Kentucky.
Compensation and employee benefits, the largest component of non-interest
expense, increased by $801 or 22% in 1999 compared to 1998. The increase
includes salary increases and reflects increases in the number of full time
equivalent employees from 110 at June 30, 1998, to 155 at June 30, 1999, due to
acquisitions and expansion of the Bank's business activity.
Occupancy and equipment expense increased by $339 or 36% in 1999 as compared to
1998 primarily due to the expansion in the number of banking locations from 8 at
June 30, 1998, to 12 at June 30, 1999.
Marketing and advertising expense increased by $150 or 40% in 1999 compared to
1998 due to the increase in marketing activities associated with the expansion
in the number of banking centers and the development of new products and
services.
28
<PAGE>
All other non-interest expenses increased by $1,004 or 36% in 1999 compared to
1998. This increase includes the acquisition of the Meade County banking centers
and their respective operating expenses. The increase is also a result of asset
growth, new services provided by the Bank and general inflation.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain levels of liquid assets as defined by the
Office of Thrift Supervision regulations. This requirement is based on a
percentage of deposits and short-term borrowings and is currently 4%. The Bank's
liquidity ratio was 8.85% at June 30, 1999. The Bank's primary source of funds
for meeting its liquidity needs are customer deposits, borrowings from the
Federal Home Loan Bank, principal and interest payments from loans and
mortgage-backed securities, and earnings from operations retained by the Bank.
Loan demand continued to be strong during the fiscal year ended June 30, 1999,
as net loans increased from $355 million at June 30, 1998, to $400 million at
June 30, 1999. The acquisition of the Meade County banking centers contributed
$11 million to the total loan growth of $45 million, while the Bank achieved a
10% growth rate in its existing loan customer base, or $34 million in net new
loans. The Meade County acquisition also contributed $72 million in new customer
deposits. The acquisition coupled with a $20 million growth in the Bank's
customer deposits resulted in a total deposit increase of $92 million during the
fiscal year ended June 30, 1999.
The Bank intends to continue to fund loan growth (outstanding loan commitments
were $19.6 million at June 30, 1999) and any declines in customer deposits
through additional advances from the FHLB. At June 30, 1999, the Bank has an
unused approved line of credit in the amount of $21 million and sufficient
collateral to borrow an additional $167 million in advances from the FHLB.
The Office of Thrift Supervision's capital regulations require savings
institutions to meet three capital standards: a 3% Tier I leverage ratio; a 4%
Tier I capital ratio; and an 8% risk-based capital standard. As of June 30,
1999, the Bank's actual capital percentages for Tier I leverage of 9.0%, Tier I
capital of 13.9%, and current risk-based capital of 14.6%, significantly exceed
the regulatory requirement for each category.
IMPACT OF INFLATION & CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in historical dollars
without considering changes in the relative purchasing power of money over time
due to inflation.
The Bank has an asset and liability structure that is essentially monetary in
nature. As a result interest rates have a more significant impact on the Bank's
performance than the effects of general levels of inflation. Periods of high
inflation are often accompanied by relatively higher interest rates and periods
of low inflation are accompanied by relatively lower interest rates. As market
interest rates rise or fall in relation to the rates earned on the Bank's loans
and investments, the value of these assets decreases or increases respectively.
REGULATORY MATTERS
The Bank insures its customers' deposits through the Savings Association
Insurance Fund ("SAIF"). On September 30, 1996, Federal Deposit Insurance
Corporation ("FDIC") legislation was signed into law to recapitalize the SAIF.
As was anticipated, all SAIF- insured savings institutions were required to pay
a one-time special assessment of $.657 for every $100 of customer deposits. This
resulted in a charge to earnings of $1,095, net of tax, during the first quarter
of 1997. On January 1, 1997, the Bank began paying insurance premiums of $.064
per $100 of deposits as compared to a previous premium of $.23 per $100 of
deposits.
29
<PAGE>
YEAR 2000
As always, you can be proud of the banking industry, which has been consistently
rated by experts as one of the foremost industries in addressing the Year 2000
date change.
What is the Year 2000 problem? Simply put, the Year 2000 problem is a result of
cost-cutting effort. The computer programmers in the 1960's and 1970's used a
year's last two-digits instead of the whole four digit to identify dates. Memory
was a premium commodity in computer programming at that time and programmers
could save space by deleting the first two digits of a year. The concern now is
that date sensitive automated systems could malfunction or stop functioning
completely come January 1, 2000 because they would read "00" as the year 1900
instead of 2000.
Status
First Federal Savings Bank's Board of Directors and senior management is
committed to be Year 2000 ready. Therefore, management created a Year 2000 team
in April 1997 to study the issue and to guide the Bank through the Year 2000
process. The first steps involved an evaluation of the effects Year 2000 could
have on our information systems and other important aspects of our business. A
formal Year 2000 Plan was then established and filed with the bank's federal
regulators, the Office of Thrift Supervision. The Plan is continuously updated
with the primary focus on achieving compliance within established time frames.
The Bank's plan has five phases: awareness, assessment, renovation, validation,
and implementation. All phases of the Bank's Year 2000 plan were substantially
completed as of June 30, 1999.
Efforts for the remaining portion of the year will be customer awareness,
liquidity needs and contingency planning. First Federal Savings Bank has
developed a business resumption or contingency plan, which the Bank will
implement in the event certain critical systems failed despite affirmative
representations from vendors and favorable test results. These plans will be
updated regularly and should enable the Bank to function at a level sufficient
to serve the majority of our customer's needs until any Year 2000 problems are
resolved. The Plan will be validated in the fall of 1999.
Cost
Capital outlays for becoming Year 2000 compliant through June 30, 1999 totaled
$497 ($328, net of tax) all of which was expensed as incurred. As the Bank's
initiatives are substantially complete, management anticipates future costs to
be minimal and expensed as incurred.
Risk
First Federal Savings Bank relies upon numerous third-party vendors and
infrastructures to provide complete service to our customers, and failure on
their part to not become Year 2000 compliant could have a material adverse
effect on the Bank. Monitoring of the mission critical vendors will continue
through the remaining half of the calendar year.
COMPARISON OF FISCAL 1998 TO 1997
Net income for the fiscal year ended June 30, 1998, was $6,334 or $1.52 per
share diluted as compared to net income of $4,774 or $1.13 per share diluted for
the same period in 1997. During the quarter ended September 30, 1996, net income
was affected by a one-time special assessment of $1.7 million ($1.1 million, net
of tax) paid to the FDIC to recapitalize the Savings Association Insurance Fund
("SAIF"). Net earnings for the 1997 period would have been approximately $5.87
million or $1.39 per share diluted had it not been for the special assessment.
See further discussion under "Regulatory Matters."
In addition to the higher net income, the 9% increase in net income per share
was also attributable to the Corporation's stock repurchase plans which have
reduced the weighted average number of shares outstanding from 4,182,060 for the
30
<PAGE>
1997 period to 4,145,039 for 1998. Total interest income increased by $2,400
from fiscal 1997 to 1998 due to the strong growth of the Bank's loan portfolio.
Interest income on loans accounts for the majority of the Bank's interest income
as average loan balances, which comprise 93% of the total interest-earning
assets, were $344 million during 1998 as compared to $318 million during 1997,
or an increase of $26 million. The average yield on loans increased by 5 basis
points to 8.53% during 1998 as compared to 8.48% during 1997.
Total interest expense increased by $1,683 from fiscal 1997 to 1998. The
weighted average interest rate paid on customer deposits averaged 4.66% during
1998, which was an increase of 20 basis points from the 1997 average cost of
funds of 4.46%. The increase was attributable to higher rates paid on short-term
customer deposits. Customer deposit balances averaged $294 million during 1998,
a $23 million increase from the 1997 average balance of $271 million. Interest
expense paid on deposits increased by $1,607 while interest expense paid on
Federal Home Loan Bank advances increased by $76.
As a result of the foregoing discussion, net interest income increased by $716
to $15,123 in 1998 form $14,407 in 1997.
Management periodically evaluates the adequacy of the reserve for loan losses
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to repay
and other factors. During fiscal 1998, the Bank's provision for loan losses was
$265. The allowance for loan losses was $1.9 million or .52% of loans
outstanding at June 30, 1998, compared to $1.7 million or .52% of loans
outstanding at June 30, 1997. Net loan charge-offs have been $127 and $98 for
fiscal 1998 and 1997, respectively.
Other income was $2,860 in 1998, an increase of $392 over 1997. Customer service
fees increased by $43 during the 1998 period due to a growth in customer
checking accounts. Gains reported from investment sales were $375 in 1998 as
compared to $317 reported in the 1997 period. Fees associated with loans
originated for the secondary market increased by $172 from $314 in 1997 to $486
in 1998 due to a growth in VA and FHA originations. Other sources of
miscellaneous income such as brokerage commissions, loan fees and other customer
transaction fees increased by $119 due to growth in deposit relationships with
existing customers.
Other expense was $8,082 in 1998, compared to $9,472 in 1997. If it had not been
for the SAIF special assessment of $1.7 million recorded in the first quarter of
1997 (See "Regulatory Matters"), other expense would have been approximately
$7,787 for the 1997 period. Associate compensation and benefits increased by
$184 or 5.2% in 1998 as compared to 1997 due to the addition of new associates
required to offer expanded services to the Bank's customers. Office occupancy
and equipment expenses increased by $36 or 4% in 1998 as compared to 1997 due to
inflationary increases in other occupancy and equipment related expenses. All
other expenses increased by $285 in 1998 as compared to 1997. Expenses directly
related to customer checking accounts increased due to a higher volume of
accounts. Expenses directly related to postage, telephone, data processing
costs, marketing and supplies increased due to asset growth, new service
provided by the Bank and general inflation.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
To minimize the volatility of net interest income and exposure to
economic loss that may result from fluctuating interest rates, the Bank manages
its exposure to adverse changes in interest rates through asset and liability
management activities within guidelines established by its Asset Liability
Committee ("ALOC"). The ALCO, which includes senior management representatives,
has the responsibility for approving and ensuring compliance with
asset/liability management policies of the Corporation, which include managing
the sensitivity repricing characteristics of the balance sheet components
consistent with maintaining acceptable levels of changes in net portfolio value
("NPV") and net interest income. A primary purpose of the Corporation's ALCO is
to manage interest rate risk to effectively invest the Corporation's capital and
to preserve the value created by its core business operations. As such, certain
management monitoring processes are designed to minimize the impact of sudden
and sustained changes in interest rates on NPV and net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least
a quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
31
<PAGE>
Corporation's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. The table,
presented on page 18, under Item 1 "Regulatory Capital Requirements", presents
the Corporation's projected change in NPV for the various rate shock levels as
of June 30, 1999. All market risk sensitive instruments presented in this table
are held to maturity or available for sale. The Corporation has no trading
securities.
NPV is calculated by the Corporation pursuant to guidelines estimated by
the OTS. The calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent broker quotations and other public sources
as of June 30, 1998, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate. Computation of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan prepayments, and deposits decay, and
should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions the ALCO could undertake in response
to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV. Certain assets, such as adjustable rate loans, which
represent one of the Corporation's primary loan products, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. In addition, the proportion of adjustable rate loans in the
Corporation's portfolio could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
NPV. Finally, the ability of many borrowers to repay their adjustable-rate
mortgage loans may decrease in the event of interest rate increases.
Another tool of evaluating the institution's sensitivity to net interest
income to changes in interest rates is to examine the extent to which its assets
and liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
The following interest rate sensitivity table sets forth the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1999, which
are anticipated to reprice or mature in each of the future time periods shown.
Interest Rate Sensitivity (Gap Analysis)
As of June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
0-3 4-12 1-5 Over 5
Months Months Years Years Total
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 69,054 $143,873 $158,697 $31,563 $403,187
Securities 41,124 2,251 5,776 1,482 50,633
------- ------- ------- ------ -------
Total rate sensitive assets 110,178 146,124 164,473 33,045 453,820
------- ------- ------- ------ -------
Interest bearing liabilities:
NOW, money market and
savings 23,971 72,173 25,329 8,572 130,045
Time deposits 70,800 142,170 50,721 6,203 269,894
Borrowed funds 5,015 57 366 22,451 27,889
------ ------- ------ ------ -------
Total rate sensitive liabilities 99,786 214,400 76,416 37,226 427,828
------ ------- ------ ------ -------
Interest sensitivity gap $10,392 $ (68,276) $ 88,057 $ (4,181) $ 25,992
======= ======== ======== ======= =======
Cumulative interest sensitivity gap $10,392 $ (57,884) $ 30,173 $ 25,992
======= ======= ======= =======
Cumulative interest sensitivity gap
as a percentage of total assets 2.13% (11.85%) 6.18% 5.32%
===== ======= ===== =====
</TABLE>
32
<PAGE>
As the preceding table indicates, the Bank has a moderate negative
cumulative gap for assets and liabilities maturing or repricing within one year
in the amount of ($57,884) million or 11.85% of total assets. Thus, decreases in
interest rates during this time period would generally increase net interest
income, while increases in interest rates would generally decrease net interest
income. However, even though the periodic gap analysis provides management with
a method of measuring current interest rate risk, it only measures rate
sensitivity at a specific point in time. Gap analysis does not take into
consideration that assets and liabilities with similar repricing characteristics
may not reprice at the same time or to the same degree and, therefore, does not
necessarily predict the impact of changes in general levels of interest rates on
net interest income. Additionally, certain assets such as adjustable rate
mortgage loans have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of
changes in interest rates, prepayment and decay rates may deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to afford the payments on their adjustable rate mortgage loans may
decrease in the event of an interest rate increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
TABLE OF CONTENTS
Page
Audited Consolidated Financial Statements:
Report of Independent Auditors-Crowe, Chizek and Company LLP 34
Report of Independent Auditors-Whelan, Doerr & Company PSC 35
Consolidated Statement of Financial Condition 36
Consolidated Statement of Income 37
Consolidated Statement of Comprehensive Income 38
Consolidated Statement of Changes in Stockholders' Equity 39
Consolidated Statement of Cash Flows 40
Notes to Consolidated Financial Statements 41-57
33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
First Federal Financial Corporation of Kentucky
Elizabethtown, Kentucky
We have audited the accompanying consolidated statement of financial condition
of First Federal Financial Corporation of Kentucky and subsidiary as of June 30,
1999, and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of First Federal Financial
Corporation of Kentucky and subsidiary as of June 30, 1998 and 1997 were audited
by other auditors whose report dated August 17, 1998 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Federal
Financial Corporation of Kentucky and subsidiary as of June 30, 1999 and the
results of their operations and their cash flows for the year ended June 30,
1999, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
August 20, 1999
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Federal Financial Corporation of Kentucky
Elizabethtown, Kentucky
We have audited the accompanying consolidated statements of financial condition
of First Federal Financial Corporation of Kentucky and Subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the two years in the period
ended June 30,1998. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Financial
Corporation of Kentucky and Subsidiaries as of June 30, 1998 and 1997, and the
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
Whelan, Doerr & Company PSC
Elizabethtown, Kentucky
August 17, 1998
35
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
ASSETS 1999 1998
---- ----
Cash and due from banks $ 10,257,162 $ 4,992,588
Interest bearing deposits 1,634,475 4,157,124
---------- ---------
Total cash and cash equivalents 11,891,637 9,149,712
Securities available-for-sale 2,935,979 1,934,412
Securities held-to-maturity 44,404,392 24,639,484
Loans receivable, less allowance for loan losses
of $2,107,994 (1999) and $1,852,576 (1998) 400,360,402 354,934,659
Federal Home Loan Bank stock 3,200,000 2,983,800
Premises and equipment 11,594,369 10,747,145
Real estate owned:
Acquired through foreclosure 108,610 133,584
Held for development 445,683 642,491
Excess of cost over net assets acquired 10,878,972 2,784,409
Accrued interest 1,603,514 834,052
Other assets 880,216 867,521
----------- -----------
TOTAL ASSETS $488,303,774 $409,651,269
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 15,223,267 $ 12,742,723
Interest bearing 384,220,172 293,959,926
----------- -----------
Total Deposits 399,443,439 306,702,649
Advances from Federal Home Loan Bank 25,894,127 43,248,855
Accrued interest payable 868,840 553,148
Accounts payable and other liabilities 2,336,503 2,382,126
Deferred income taxes 1,898,703 2,076,104
----------- -----------
TOTAL LIABILITIES 430,441,612 354,962,882
----------- -----------
STOCKHOLDERS' EQUITY:
Serial preferred stock, 5,000,000 shares
authorized and unissued - -
Common stock, $1 par value per share;
authorized 10,000,000 shares; issued and
outstanding, 4,121,112 shares in 1999 and
4,129,612 shares in 1998 4,121,112 4,129,612
Additional paid-in capital 3,055,644 3,253,664
Retained earnings 49,587,422 46,208,807
Accumulated other comprehensive
income, net of tax 1,097,984 1,096,304
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 57,862,162 54,688,387
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $488,303,774 $409,651,269
============ ============
See notes to consolidated financial statements.
36
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $31,895,805 $29,338,526 $26,944,715
Interest and dividends on investments and deposits 3,600,283 1,843,413 1,837,661
---------- ---------- ----------
Total interest income 35,496,088 31,181,939 28,782,376
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 17,180,146 13,676,525 12,069,782
Federal Home Loan Bank advances 1,301,096 2,382,084 2,305,725
---------- ---------- ----------
Total interest expense 18,481,242 16,058,609 14,375,507
---------- ---------- ----------
Net interest income 17,014,846 15,123,330 14,406,869
Provision for loan losses 314,000 265,000 200,000
---------- ---------- ----------
Net interest income after provision for loan losses 16,700,846 14,858,330 14,206,869
---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees on deposit accounts 1,720,542 1,274,298 1,231,149
Secondary mortgage market closing fees 638,877 485,564 313,795
Gain on sale of investments 351,753 375,356 316,927
Brokerage and insurance commissions 394,070 402,986 353,764
Gain on sale of real estate held for development 254,688 - -
Other income 594,364 322,166 252,384
--------- --------- ---------
Total other noninterest income 3,954,294 2,860,370 2,468,019
--------- --------- ---------
NONINTEREST EXPENSE:
Employee compensation and benefits 4,506,758 3,706,255 3,522,340
Office occupancy expense and equipment 1,274,885 935,972 899,855
FDIC insurance premiums 207,298 178,476 2,014,218
Marketing and advertising 527,110 377,135 373,117
Outside services and data processing 1,001,612 663,667 600,367
State franchise tax 357,776 308,691 292,880
Acquisition related expense 291,869 - -
Data and equipment conversion expense 497,368 - -
Amortization of intangibles 781,347 240,071 240,072
Other expense 2,260,025 1,672,219 1,529,085
---------- --------- ---------
Total other noninterest expense 11,706,048 8,082,486 9,471,934
---------- --------- ---------
Income before income taxes 8,949,092 9,636,214 7,202,954
Income taxes 2,970,291 3,301,997 2,428,892
---------- --------- ---------
NET INCOME $ 5,978,801 $6,334,217 $4,774,062
=========== ========== ==========
Earnings per share:
Basic $ 1.45 $ 1.53 $ 1.14
Diluted $ 1.44 $ 1.52 $ 1.13
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME $5,978,801 $6,334,217 $4,774,062
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities 233,837 373,449 417,696
Reclassification of realized amount (232,157) (247,735) (209,172)
--------- ---------- ----------
Net unrealized gain recognized in
comprehensive income 1,680 125,714 208,524
--------- ---------- ----------
COMPREHENSIVE INCOME $5,980,481 $6,459,931 $4,982,586
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDING JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON STOCK PAID - IN RETAINED INCOME,
SHARES AMOUNT CAPITAL EARNINGS NET OF TAX TOTAL
------ ------ --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1996 4,208,490 $4,208,490 $5,466,700 $39,509,189 $762,066 $49,946,445
Net income - - - 4,774,062 - 4,774,062
Exercise of stock
options 26,930 26,930 92,576 - - 119,506
Stock tendered as
payment for options
exercised (3,018) (3,018) (55,937) - - (58,955)
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - 208,524 208,524
Cash dividends declared
($.50 per share) - - - (2,089,642) - (2,089,642)
Stock repurchased (62,399) (62,399) (1,172,791) - - (1,235,190)
--------- --------- ---------- ----------- -------- ----------
BALANCE, JUNE 30, 1997 4,170,003 4,170,003 4,330,548 42,193,609 970,590 51,664,750
Net income - - - 6,334,217 - 6,334,217
Exercise of stock
options 21,000 21,000 220,875 - - 241,875
Stock tendered as
payment for options
exercised (10,994) (10,994) (230,841) - - (241,835)
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - 125,714 125,714
Cash dividends declared
($.56 per share) - - - (2,319,019) - (2,319,019)
Stock repurchased (50,397) (50,397) (1,066,918) - - (1,117,315)
--------- --------- ---------- ---------- --------- ----------
BALANCE, JUNE 30, 1998 4,129,612 4,129,612 3,253,664 46,208,807 1,096,304 54,688,387
Net income - - - 5,978,801 - 5,978,801
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - 1,680 1,680
Cash dividends declared
($.63 per share) - - - (2,600,186) - (2,600,186)
Stock repurchased (8,500) (8,500) (198,020) - - (206,520)
--------- ---------- ---------- ----------- ---------- -----------
BALANCE, JUNE 30, 1999 4,121,112 $4,121,112 $3,055,644 $49,587,422 $1,097,984 $57,862,162
========= ========== ========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,978,801 $6,334,217 $4,774,062
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 314,000 265,000 200,000
Depreciation of premises and equipment 825,483 605,955 550,488
Net change in deferred loan fees and costs 238,711 195,066 178,756
Federal Home Loan Bank stock dividends (216,200) (206,600) (187,300)
Amortization of acquired intangible assets 781,347 240,071 240,072
Amortization and accretion on securities (137,369) (147,972) (151,218)
Gain on sale of investments available-for-sale (351,753) (375,356) (316,927)
Gain on sale of real estate held for development (254,688) - -
Interest receivable (769,462) (198,960) (84,330)
Other assets 3,293 (370,482) 314,278
Interest payable (328,249) 350,166 (15,302)
Accounts payable and other liabilities (286,766) 1,675,234 (392,401)
Deferred taxes (178,266) 126,743 466,891
--------- --------- ---------
Net cash provided by operating activities 5,618,882 8,493,082 5,577,069
--------- --------- ---------
INVESTING ACTIVITIES:
Sales of securities available-for-sale 362,459 3,808,207 455,831
Purchases of securities available-for-sale 1,010,000) (36,082) (221,543)
Purchases of securities held-to-maturity (49,855,000) (14,000,000) (5,993,995)
Maturities of securities held-to-maturity 30,227,733 6,979,771 654,582
Net increase in loans (34,934,161) (27,853,848) (25,839,533)
Net purchases of premises and equipment (1,545,933) (1,131,872) (1,087,549)
Purchases of real estate held for development - - (182,000)
Sales of real estate held for development 451,496 44,770 -
Net cash received in acquisition 52,456,754 - -
---------- ----------- -----------
Net cash used in investing activities (3,846,652) (32,189,054) (32,214,207)
---------- ----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 21,131,129 25,360,475 16,396,430
Net advances from (repayments to) FHLB (17,354,728) 1,734,661 6,535,115
Proceeds from stock options exercised - 40 60,551
Dividends paid (2,600,186) (2,319,019) (2,089,642)
Common stock repurchased (206,520) (1,117,315) (1,235,190)
Collection on advance to ESOP - 11,129 -
Advance to ESOP - - (14,685)
---------- ---------- ----------
Net cash provided by financing activities 969,695 23,669,971 19,652,579
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,741,925 (26,001) (6,984,559)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,149,712 9,175,713 16,160,272
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $11,891,637 $ 9,149,712 $ 9,175,713
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
which First Federal Financial Corporation of Kentucky follows in
preparing and presenting its consolidated financial statements:
PRINCIPLES OF CONSOLIDATION AND BUSINESS - The consolidated
financial statements include the accounts of First Federal
Financial Corporation of Kentucky (the Corporation) and its
wholly-owned subsidiary, First Federal Savings Bank of
Elizabethtown (the Bank), and its wholly-owned subsidiary, First
Service Corp. of Elizabethtown. All significant intercompany
transactions and balances have been eliminated.
The business of the Bank consists primarily of attracting
deposits from the general public and originating mortgage loans
on single family residences. To a lesser extent, the Bank also
originates loans on multi-family housing and commercial property.
The Bank's primary lending area is a region within North Central
Kentucky. The economy within this region is based on agriculture,
a variety of manufacturing industries and Ft. Knox, a military
installation.
The principal sources of funds for the Bank's lending and
investment activities are deposits, repayment of loans and
Federal Home Loan Bank advances. The Bank's principal source of
income is interest on loans. In addition, other income is derived
from loan origination fees, service charges, returns on
investment securities, and trust department and brokerage
services.
ESTIMATES AND ASSUMPTIONS - The preparation of consolidated
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The
allowance for loan losses and the fair value of financial
instruments are particularly subject to change.
CASH FLOWS - For purposes of the statement of cash flows, the
Corporation considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents. Cash and cash equivalents include cash on hand,
amounts due from banks, and interest bearing deposits. Net cash
flows are reported for loans, interest bearing deposits, and
deposits.
SECURITIES - The Corporation classifies its investments into
held-to-maturity and available-for-sale. Based upon a periodic
review of the investment portfolio, debt securities in which the
Corporation has a positive intent and ability to hold are
classified as held-to-maturity and are carried at cost adjusted
for the amortization of premiums and discounts using the interest
method over the terms of the securities.
Debt and equity securities which do not fall into this category,
nor held for the purpose of selling in the near term are
classified as available-for-sale. Unrealized holding gains and
losses, net of income tax, on available-for-sale securities are
reported as a net amount in a separate component of stockholders'
equity until realized.
LOANS RECEIVABLE - Loans receivable are stated at unpaid
principal balances, less undistributed construction loans, net
deferred loan origination fees and allowance for loan losses. The
Bank defers loan origination fees and discounts net of certain
direct origination costs. These net deferred fees are amortized
using the level yield method on a loan-by-loan basis over the
lives of the underlying loans. Unearned discounts on consumer
loans are recognized over the lives of the loans using methods
that approximate the interest method.
41
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBISIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - (CONTINUED)
LOANS RECEIVABLE - (CONTINUED) -The allowance for loan losses is
increased by charges to income and decreased by charge-offs (net
of recoveries). Management's periodic evaluation of the adequacy
of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current
economic conditions.
Loans are considered impaired if full principal or interest
payments are not anticipated in accordance with the contractual
loan terms. Impaired loans are carried at the present value of
expected future 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 is allocated to impaired loans if the value of such loans
is less than the unpaid balance. If these allocations cause the
allowance for loan losses to require increase, such increase is
reported in the provision for loan losses.
Interest income on loans is recognized on the accrual basis
except for those loans in a nonaccrual of income status. The
accrual of interest on impaired loans is discontinued when
management believes, after consideration of economic and business
conditions and collection efforts, that the borrowers' financial
condition is such that collection of interest is doubtful. When
interest accrual is discontinued, interest income is subsequently
recognized only to the extent cash payments are received.
PREMISES AND EQUIPMENT - Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed by
the straight-line method for buildings and improvements and
furniture and fixtures, over the estimated useful lives of the
related assets.
REAL ESTATE OWNED - Real estate properties acquired through
foreclosure and in settlement of loans are stated at lower of
cost or fair value less estimated selling costs at the date of
foreclosure. The excess of cost over fair value less the
estimated costs to sell at the time of foreclosure is charged to
the allowance for loan losses. Costs relating to development and
improvement of property are capitalized, whereas costs relating
to holding property are not capitalized and are charged against
operations in the current period.
Real estate properties held for development and sale are carried
at the lower of cost, including cost of development and
improvement subsequent to acquisition, or fair value less
estimated selling costs. The portion of interest costs relating
to the development of real estate is capitalized.
GOODWILL - The unamortized costs in excess of the fair value of
acquired net tangible assets are included in goodwill. Goodwill
is amortized on a straight-line basis over 15 years.
STOCK OPTION PLANS - Although the Corporation applies APB No. 25,
SFAS No. 123, "Accounting for Stock Based Compensation" requires
proforma disclosure of net income and earnings per share as if
the Corporation had accounted for its employee stock options
under that Statement. The fair value of each option grant was
estimated on the grant date using an option-pricing model. Under
SFAS No. 123, compensation cost is recognized in the amount of
the estimated fair value of the options and amortized to expense
over the options' vesting period.
42
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES - Deferred income tax assets and liabilities are
determined using the liability method. Under this method, the net
deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax basis of the
various balance sheet assets and liabilities.
EARNINGS PER COMMON SHARE - Basic earnings per common share is
net income divided by the weighted average number of common
shares outstanding during the period. Diluted earnings per common
share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits through the date of
issuance of the financial statements.
COMPREHENSIVE INCOME - Comprehensive income consists of net
income and other comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities available for
sale which are also recognized as a separate component of equity.
The accounting standard that requires reporting comprehensive
income first applies for the year ending June 30, 1999, with
prior information restated to be comparable.
NEW ACCOUNTING PRONOUNCEMENTS - Beginning July 1, 2000, a new
accounting standard will require all derivatives to be recorded
at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is
not expected to have a material effect on the Corporation's
financial statements, but the effect will depend on derivative
holdings when this standard applies.
INDUSTRY SEGMENTS - All of the Corporation's operations are
considered by management to be aggregated into one reportable
operating segment.
RECLASSIFICATIONS - Certain amounts for 1998 and 1997 have been
reclassified to conform to the presentation for 1999.
2. BRANCH ACQUISITIONS
On July 24, 1998, the Bank completed its acquisition of three
Bank One banking centers. Included in the purchase was
approximately $11,000,000 of loans and $72,000,000 of deposits.
The net deposits assumed exceeded the cash received by
$8,670,000.
43
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SECURITIES
The amortized cost basis and fair values of securities at June 30 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Securities available-for-sale:
June 30, 1999:
Equity securities $ 262,281 $ 1,723,650 $ (37,569) $ 1,948,362
Obligation of states and
political subdivisions 1,010,082 - (22,465) 987,617
---------- ---------- --------- -----------
Total available-for-sale $1,272,363 $ 1,723,650 $ (60,034) $ 2,935,979
========== ========== ========= ===========
June 30, 1998:
Equity securities $ 273,341 $ 1,688,883 $ (27,812) $ 1,934,412
--------- ---------- --------- ----------
Total available-for-sale $ 273,341 $ 1,688,883 $ (27,812) $ 1,934,412
========= ========== ========= ==========
Securities held-to-maturity:
June 30, 1999:
U.S. Treasury and agencies $42,814,330 $ - $(900,080) $41,914,250
Mortgage-backed securities 1,590,062 20,674 - 1,610,736
----------- -------- --------- -----------
Total held-to-maturity $44,404,392 $ 20,674 $(900,080) $43,524,986
=========== ======== ========= ===========
June 30, 1998:
U.S. Treasury and agencies $22,693,407 $ 229,673 $ - $22,923,080
Mortgage-backed securities 1,946,077 66,004 - 2,012,081
----------- --------- --------- -----------
Total held-to-maturity $24,639,484 $ 295,677 $ - $24,935,161
=========== ========= ========= ===========
</TABLE>
The amortized cost and fair value of securities at June 30, 1999, by
contractual maturity, are shown below.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 999,666 $ 1,001,410
Due after one year through five years - - 6,834,400 6,932,570
Due after five years through ten years 785,000 771,312 33,980,264 33,029,490
Due after ten years 225,000 216,305 1,000,000 950,780
Mortgage-backed securities - - 1,590,062 1,610,736
Equity securities 262,281 1,948,362 - -
--------- --------- ----------- -----------
$1,272,363 $2,935,979 $44,404,392 $43,524,986
========== ========== =========== ===========
</TABLE>
44
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. SECURITIES - (CONTINUED)
The following schedule sets forth the proceeds from sales of
available-for-sale securities and the gross realized gains on those
sales for the fiscal years ended June 30:
1999 1998 1997
---- ---- ----
Proceeds from sales $362,459 $3,808,207 $455,831
Gross realized gains $351,753 $ 375,356 $316,927
Realized gains, net of tax $232,157 $ 247,735 $209,172
Investment securities having an amortized cost of $26,707,468 and fair
value of $26,355,925 at June 30, 1999 were pledged to secure public
deposits.
4. LOANS RECEIVABLE:
Loans receivable at June 30 are summarized as follows:
1999 1998
---- ----
Commercial $ 19,647,672 $ 4,274,499
Real estate construction 18,104,220 15,689,170
Real estate mortgage 325,099,433 304,443,021
Consumer and home equity 49,042,678 45,135,754
----------- -----------
411,894,003 369,542,444
Less: ----------- -----------
Undisbursed construction loans (6,674,224) (9,728,902)
Net deferred loan origination fees (2,751,383) (3,026,307)
Allowance for loan losses (2,107,994) (1,852,576)
---------- ----------
(11,533,601) (14,607,785)
----------- -----------
$400,360,402 $354,934,659
=========== ===========
The Bank did not materially participate in the servicing of loans for
others on any of the dates presented in these financial statements.
The allowance for losses on loans is summarized as follows:
Year Ended June 30,
----------------------------------------
1999 1998 1997
---- ---- ----
Balance, beginning of year $1,852,576 $1,714,512 $1,612,627
Provision for loan losses 314,000 265,000 200,000
Acquired 205,400 - -
Charge-offs (290,049) (147,985) (131,132)
Recoveries 26,067 21,049 33,017
---------- ---------- ----------
Balance, end of year $2,107,994 $1,852,576 $1,714,512
========== ========== ==========
45
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LOANS RECEIVABLE - (CONTINUED)
Investment in impaired loans is summarized as follows:
June 30,
---------------------------
1999 1998
---- ----
Year-end impaired loans with no related
allowances $2,500,000 $2,128,000
Year-end impaired loans with related
allowances - -
---------- ----------
Total impaired loans $2,500,000 $2,128,000
========== ==========
June 30,
--------------------------------------
1999 1998 1997
---- ---- ----
Average impaired loans outstanding $2,382,000 $1,934,000 $1,983,000
Interest income recognized 197,000 157,000 163,000
Interest income received 197,000 157,000 163,000
The Bank has no loans greater than 90 days past due and still accruing
as of June 30, 1999, 1998 and 1997.
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
June 30,
------------------------------
1999 1998
---- ----
Land $ 816,265 $ 816,265
Buildings 9,391,174 8,805,669
Furniture, fixtures and equipment 5,180,745 4,680,069
--------- ---------
15,388,184 14,302,003
Less accumulated depreciation (3,793,815) (3,554,858)
---------- ---------
$11,594,369 $10,747,145
========== ==========
Certain premises are leased under various operating leases. Rental
expense was $233,318, $63,200 and $64,458 for the years ended June 30,
1999, 1998 and 1997, respectively. Future minimum commitments under
these leases are:
Year Ended
June 30
2000 $ 256,000
2001 256,000
2002 198,067
2003 195,633
2004 198,833
Thereafter 1,562,817
----------
$2,667,350
==========
46
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DEPOSITS
Time Deposits of $100,000 or more were $75,012,000 and $54,332,000 at
June 30, 1999 and 1998, respectively.
At June 30, 1999, scheduled maturities of time deposits are as follows:
Amount
-------
2000 $203,444,760
2001 33,500,855
2002 7,106,942
2003 3,232,288
Thereafter 20,798,394
------------
$268,083,239
============
7. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati are
collateralized by Federal Home Loan Bank stock and a blanket pledge of
one-to-four family residential mortgage loans equivalent to 150 percent
of the outstanding advances. The Bank has available collateral to borrow
an additional $167 million from the Federal Home Loan Bank.
<TABLE>
<CAPTION>
June 30,
1999 1998
------------------------- -----------------------
Weighted- Weighted-
Average Average
Rate Amount Rate Amount
<S> <C> <C> <C> <C>
Federal Home Loan Bank:
Variable rate advances 5.19% $25,000,000 5.59% $20,000,000
Federal Home Loan Bank:
Mortgage matched advances
payable monthly through
May, 2009 with interest
rates from 5.30% to 7.80% 6.59% 894,127 6.72% 1,248,855
Other fixed rate advances - 5.09% 22,000,000
Lines of credit in the amount
of $21 million (1999) and $12
million (1998) maturing in 2003
through 2005 8.40% - 8.43% -
----------- -----------
Total borrowings $25,894,127 $43,248,855
=========== ===========
</TABLE>
The aggregate minimum annual repayments of long-term borrowings as of
June 30, 1999 is as follows:
2000 $ 3,078,126
2001 83,499
2002 89,248
2003 95,407
2004 101,992
Thereafter 22,445,855
-----------
$25,894,127
===========
47
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income
tax return and income tax is apportioned among all companies based on
their taxable income or loss.
Provision for income taxes for the years ended June 30, are as follows:
1999 1998 1997
---- ---- ----
Current $3,148,557 $3,175,254 $1,962,001
Deferred (178,266) 126,743 466,891
--------- --------- ----------
Total income tax expense $2,970,291 $3,301,997 $2,428,892
========== ========== ==========
The provision for income taxes differs from the amount computed at the
statutory rates as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Tax-exempt interest income (.2) (.2) (.8)
Purchase Accounting .9 1.4 1.4
Other (1.5) (.9) (.9)
Effective rate 33.2% 34.3% 33.7%
===== ===== =====
Temporary differences between the financial statements carrying amounts
and tax bases of assets and liabilities that give rise to significant
portions of deferred income taxes at June 30, relate to the following:
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $ 261,200 $ 22,806
Loan fees 114,839 229,679
Investment securities 127,481 149,937
Accrued liabilities and other 216,048 108,612
------- -------
719,568 511,034
Deferred tax liabilities: ------- -------
Depreciation 837,234 762,591
Net unrealized gain on securities
available-for-sale 565,632 564,767
Federal Home Loan Bank stock 633,473 559,965
Other 581,932 699,815
------- -------
2,618,271 2,587,138
--------- ---------
Net deferred tax liability $1,898,703 $2,076,104
========== ==========
48
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES - (CONTINUED)
Federal income tax laws provided savings banks with additional bad debt
deductions through 1987, totaling $9.3 million for the Bank. Accounting
standards do not require a deferred tax liability to be recorded on this
amount, which liability otherwise would total $3.2 million at June 30,
1999 and 1998. If the Bank was liquidated or otherwise ceased to be a
bank or if tax laws were to change, the $3.2 million would be recorded
as expense.
9. STOCKHOLDERS' EQUITY
(a) LIQUIDATION ACCOUNT - In connection with the Bank's conversion
from mutual to stock form of ownership during 1987, the Bank
established a "liquidation account", currently in the amount of
$1,222,000 for the purpose of granting to eligible savings
account holders a priority in the event of future liquidation.
Only in such an event, an eligible account holder who continues
to maintain a savings account will be entitled to receive a
distribution from the liquidation account. The total amount of
the liquidation account decreases in an amount proportionately
corresponding to decreases in the savings account balances of the
eligible account holders.
(b) REGULATORY CAPITAL REQUIREMENTS - The Bank is subject to various
regulatory capital requirements administered by the OTS. Failure
to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by the
OTS that, if undertaken, could have a direct material effect on
the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, a bank must meet specific capital guidelines that involve
quantitative measures of a bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The amounts and classification of a bank's
capital are also subject to qualitative judgements by the OTS
about components, risk weightings, and other factors. Qualitative
measures established by regulation to ensure capital adequacy and
to be classified as "well capitalized" require the Bank to
maintain minimum amounts and ratios of Total and Tier I capital
to risk-weighted assets, Tier I capital to adjusted total assets,
and Tier I capital to average assets as set forth in the
following table. In their evaluation of capital adequacy, the
regulators assess exposure to declines in the economic value of
the Bank's capital, as well as exposure to declines in the
economic value of capital due to changes in interest rates. As of
June 30, 1999, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. There are no conditions
or events since that notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
AS OF JUNE 30, 1999: Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (to
risk- weighted assets) $44,678,000 14.6% $24,562,000 8.0% $30,703,000 10.0%
Tier I capital (to
risk-weighted assets) $42,570,000 13.9% $12,281,000 4.0% $18,422,000 6.0%
Tier I capital (to adjusted
total assets) $42,570,000 9.0% $14,266,000 3.0% N/A N/A
Tier I capital (to average $42,570,000 8.9% $19,152,000 4.0% $23,940,000 5.0%
assets)
</TABLE>
49
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. STOCKHOLDERS' EQUITY - (CONTINUED)
<TABLE>
<CAPTION>
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1998
Total risk-based capital (to
risk-weighted assets) $50,096,000 18.5% $21,658,000 8.0% $27,073,000 10.0%
Tier I capital (to
risk-weighted assets) $48,243,000 17.8% $10,829,000 4.0% $16,244,000 6.0%
Tier I capital (to adjusted
total assets) $48,243,000 11.9% $12,162,000 3.0% N/A N/A
Tier I capital (to average $48,243,000 12.2% $15,670,000 4.0% $19,700,000 5.0%
assets)
</TABLE>
(c) DIVIDEND RESTRICTIONS - Regulations of the Office of Thrift
Supervision limit the dividends that may be paid without prior approval
of the Office of Thrift Supervision. The Bank is currently a
"well-capitalized" Tier 1 institution and can make distributions during
a year of 100% of its net income to date during the year plus one-half
its "surplus capital ratio" (the excess over its capital requirements)
at the beginning of the calendar year. Accordingly, at June 30, 1999,
approximately $12.2 million of the Bank's retained earnings is available
for distribution.
10. EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the
basic and diluted EPS is as follows:
Year Ended June 30,
-------------------------------------------
1999 1998 1997
---- ---- ----
Net income available to common
Shareholders $5,978,801 $6,334,217 $4,774,062
========== ========== ==========
Basic EPS:
Weighted average common shares 4,127,804 4,145,039 4,182,060
========= ========= =========
Diluted EPS:
Weighted average common shares 4,127,804 4,145,039 4,182,060
Dilutive effect of stock options 20,419 29,114 46,456
--------- --------- ---------
Weighted average common and
Incremental shares 4,148,223 4,174,153 4,228,516
========= ========= =========
Earnings Per Share:
Basic $1.45 $1.53 $1.14
========= ========= =========
Diluted $1.44 $1.52 $1.13
========= ========= =========
50
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. EMPLOYEE BENEFIT PLANS:
(a) PENSION PLANS - The Bank is a participant in the Financial
Institutions Retirement Fund, a multiple-employer defined benefit
pension plan covering substantially all employees. Employees are
100% vested at the completion of five years of participation in
the plan. The Bank's policy is to contribute annually the minimum
funding amounts. Employer contributions and administrative
expenses charged to operations for 1999, 1998, 1997 totaled
$4,486, $4,438, and $56,475, respectively.
The Bank has a contributory thrift plan which covers
substantially all of the employees. Under the terms of the plan,
voluntary employee contributions are matched by up to 6% of the
employee base pay and employees are immediately vested. Employer
contributions charged to operations for 1999, 1998 and 1997 were
$142,465, $116,367, and $114,939, respectively.
(b) EMPLOYEE STOCK OWNERSHIP PLAN - The Corporation has a
non-contributory employee stock ownership plan (ESOP) in which
employees are eligible to participate upon completion of one year
of service. Employees are vested in accordance with a schedule
which provides for 100% vesting upon completion of seven years of
service.
Shares of the Corporation's common stock are acquired in a
non-leveraged transaction. At the time of purchase, the shares
are released and allocated to eligible employees determined by a
formula specified in the plan agreement. Shares in the plan at
June 30 and contributions charged to compensation expense during
the year were as follows:
1999 1998 1997
---- ---- ----
Allocated ESOP shares 225,889 230,213 307,595
Contributions to ESOP $50,000 $30,000 $30,000
(c) STOCK OPTION PLAN - Under the 1987 Stock Option and Incentive
Plan, the Corporation may grant either incentive or non-qualified
stock options to key employees for an aggregate of 423,200 shares
of the Corporation's common stock at not less than fair market
value at the date such options are granted. The option to
purchase shares expires ten years after the date of grant. A
summary of option transactions is as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 42,564 $12.88 71,314 $12.77 98,244 $10.49
Granted during year 12,500 24.50 - - - -
Forfeited during year - - (7,750) 15.60 - -
Exercised during the year - - (21,000) 11.52 (26,930) 4.44
------- ------- -------
Outstanding, end of year 55,064 15.52 42,564 12.88 71,314 12.77
======= ======= =======
Eligible for exercise at year
end 26,564 26,564 42,564
Weighted average fair value of
options granted during the $ 8.79 $ - $ -
year
</TABLE>
51
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. EMPLOYEE BENEFIT PLANS - (CONTINUED)
The following table summarizes information about stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.88 5,564 2.4 years $ 6.88 5,564 $ 6.88
$12.50 25,000 4.7 $12.50 20,000 $12.50
$16.00 to $17.13 12,000 5.4 $16.45 1,000 $17.13
$24.50 12,500 9.6 $24.50 -
------ ------
55,064 5.3 $15.52 26,564 $11.50
====== ======
</TABLE>
The pro forma effect on net income and earnings per share is as follows:
Year Ended
June 30,
1999 1998 1997
---- ---- ----
Net income: As reported $5,978,801 $6,334,217 $4,774,062
Pro-forma $5,968,780 $6,332,502 $4,762,347
Earnings per share:
Basic As reported $ 1.45 $ 1.53 $ 1.14
Pro-forma $ 1.45 $ 1.53 $ 1.14
Diluted As reported $ 1.44 $ 1.52 $ 1.13
Pro-forma $ 1.44 $ 1.52 $ 1.13
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions for grants in 1999: 1) expected dividend
yields at 2.6%, 2) risk-free interest rates at 5.75%, 3) expected
volatility at 22%, and 4) expected life of options at 10 years.
12. CASH FLOW ACTIVITIES
The following information is presented as supplemental
disclosures to the statement of cash flows.
(a) Cash paid during the year ended June 30 for:
1999 1998 1997
---- ---- ----
Interest expense $18,165,549 $15,903,156 $14,390,809
=========== =========== ===========
Income taxes $ 2,946,000 $ 1,461,000 $ 2,482,000
=========== =========== ===========
52
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. CASH FLOW ACTIVITIES - (CONTINUED)
(b) Supplemental disclosure of non-cash activities:
1999 1998 1997
---- ---- ----
Loans to facilitate sales of
real estate owned $320,688 $716,448 $698,405
======== ======== ========
Transfers from loans to real
estate acquired through
foreclosure $295,714 $666,463 $505,579
======== ======== ========
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statements summarize the financial position,
operating results and cash flows of First Federal Financial Corporation
of Kentucky (Parent Company only).
CONDENSED STATEMENTS OF FINANCIAL CONDITION
June 30,
------------------------------
1999 1998
--- ----
ASSETS
Cash and interest bearing deposits $ 595,638 $ 92,006
Investment in subsidiary 55,255,823 52,978,174
Securities available-for-sale 199,894 209,995
Receivable from Bank 1,787,705 1,393,810
Other assets 23,102 14,402
----------- -----------
$57,862,162 $54,688,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ - $ -
Stockholders' equity 57,862,162 54,688,387
---------- ----------
$57,862,162 $54,688,387
=========== ===========
CONDENSED STATEMENTS OF INCOME
Year Ended June 30,
---------------------------------------
1999 1998 1997
---- ---- ----
Dividend from subsidiary $4,000,000 $4,000,000 $3,000,000
Interest income 34,681 35,188 57,162
Gain on sale of investments - 51,620 25,344
Other expenses (547,656) (65,329) (47,044)
--------- --------- ---------
Net income before income tax benefit 3,487,025 4,021,479 3,035,462
Income tax benefit 222,473 56,535 39,635
--------- --------- ---------
Income before equity in undistributed
net income of subsidiary 3,709,498 4,078,014 3,075,097
Equity in undistributed net income of
subsidiaries 2,269,303 2,256,203 1,698,965
----------- ----------- -----------
Net income $5,978,801 $6,334,217 $4,774,062
========== ========== ==========
53
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $5,978,801 $ 6,334,217 $4,774,062
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed net income
from subsidiary (2,269,303) (2,256,203) (1,698,965)
Gain on sale of investments
available-for-sale - (51,620) (25,344)
Decrease (increase) in other assets (5,265) 150,908 (70,990)
(Decrease) increase in other
liabilities - (51,620) (57,080)
--------- --------- ---------
Net cash provided by operating activities 3,704,233 4,125,682 2,921,683
--------- --------- ---------
Investing Activities:
Sale of securities available-for-sale - - 152,064
Purchases of securities
available-for-sale - - (17,463)
Net change in receivable from Bank (393,895) (778,172) 152,301
-------- -------- -------
Net cash provided (used) by investing
activities (393,895) (778,172) 286,902
-------- -------- -------
Financing Activities:
Proceeds from stock options exercised - 40 60,551
Dividends paid (2,600,186) (2,319,019) (2,089,642)
Common stock repurchases (206,520) (1,117,315) (1,235,190)
Collection on advance to ESOP - 11,129 -
Advance to ESOP - - (14,685)
---------- ---------- ----------
Net cash used by financing activities (2,806,706) (3,425,165) (3,278,966)
---------- ---------- ----------
Net increase (decrease) in cash 503,632 (77,655) (70,381)
Cash and interest bearing deposits,
beginning of year 92,006 169,661 240,042
---------- ---------- ----------
Cash and interest bearing deposits,
end of year $ 595,638 $ 92,006 $ 169,661
========= ========= =========
</TABLE>
54
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 11,891,637 $ 11,892,000 $ 9,149,712 $ 9,149,000
Investment securities:
Securities available-for-sale 2,935,979 2,936,000 1,934,412 1,934,000
Securities held-to-maturity 44,404,392 43,525,000 24,639,484 24,935,000
Loans, net 400,360,402 397,967,000 355,306,342 352,805,000
Federal Home Loan Bank stock 3,200,000 3,200,000 2,983,800 2,983,800
Financial liabilities:
Deposits (399,443,439) (398,444,000) (306,702,649) (309,326,000)
Advances from Federal
Home Loan Bank (25,894,127) (24,239,000) (43,248,855) (42,317,000)
</TABLE>
The methods and assumptions used by the Corporation in estimating its
fair value disclosures for financial instruments are presented below:
CASH AND INTEREST BEARING DEPOSITS - The carrying amounts for cash and
interest bearing deposits approximate their fair values.
INVESTMENT SECURITIES - Fair values for investment securities are based
upon quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
LOANS, NET - For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values of other types of loans are estimated by
discounting the future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit quality and
for the same remaining maturities.
FEDERAL HOME LOAN BANK STOCK - The carrying amounts for Federal Home
Loan Bank stock approximates fair value.
DEPOSITS - The fair values for demand deposits, savings accounts and
certain money market deposits are the amounts payable on demand at the
reporting date. The carrying amounts for variable-rate money market
accounts and certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
ADVANCES FROM FEDERAL HOME LOAN BANK - The fair values for long-term
debt are estimated using discounted cash flow analyses, based on the
Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
55
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - The fair
values of commitments to extend credit is estimated using fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the customer. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the
committed rates. The fair values of standby letters of credit are based
on fees currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counter parties at the reporting date. The value of these financial
instruments was not material at June 30, 1999 and 1998.
15. CONTINGENCIES
In the normal course of business, there are various outstanding legal
proceedings and claims. In the opinion of management, after consultation
with legal counsel, the disposition of such legal proceedings and claims
will not materially affect the Corporation's consolidated financial
position, results of operations or liquidity.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments
reflect the extent of the Bank's involvement in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness. The
amount of collateral obtained, if it is deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of
the counterpart.
Commitments to make loans, excluding undisbursed portions of loans in
process, at June 30 were as follows:
1999 1998
------------------------ ------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
Commitments to make loans $16,146,055 $ 3,455,856 $4,182,800 $ 2,403,269
Unused lines of credit - 21,090,958 - 12,389,690
Standby letters of credit - 2,694,940 - 694,640
----------- ----------- ---------- ----------
$16,146,055 $27,241,754 $4,182,800 $15,487,599
=========== =========== ========== ===========
56
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (CONTINUED)
Fixed rate loan commitments at June 30, 1999 were at current rates
ranging from 6.75% to 9.50%.
Variable rate loan commitments at June 30, 1999 were at current rates
ranging from 6.50% to 9.25% for loan commitments, 6.99% to 10.50% for
unused lines of credit and primarily at the national prime rate of
interest plus 50 to 200 basis points for standby letters of credit.
17. RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Company, including associates of such persons, are loan customers. A
summary of the related party loan activity, for loans aggregating
$60,000 or more to any one related party, is as follows:
June 30,
------------------------------
1999 1998
---- ----
Beginning of year $1,112,789 $ 970,896
New loans 182,000 472,000
Repayments (294,770) (214,415)
Other changes 668,611 (115,692)
------- --------
End of year $1,668,630 $1,112,789
========== ==========
Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period. These loans
were made in the ordinary course of business at market interest rates
and normal credit terms.
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Information required by this item is incorporated herin by reference to
the Corporation's Form 8-K filed April 20,1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the Board of Directors of the Corporation,
the information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1999 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders Thereof"
in the Proxy Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change of
control of the Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" in the
Proxy Statement.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Financial Statements Filed
(a)(1) Report of Independent Auditors
(a)(2) Report of Independent Auditors
(b) Consolidated Statement of Financial Condition at June 30,
1999 and 1998.
(c) Consolidated Statement of Income for the years ended June
30, 1999, 1998, and 1997.
(d) Consolidated Statement of Comprehensive Income for the
years ended June 30, 1999, 1998, and 1997.
(e) Consolidated Statement of Changes in Stockholders' Equity
for the years ended June 30, 1999, 1998, and 1997.
(f) Consolidated Statement of Cash Flows for the years ended
June 30, 1999, 1998, and 1997.
(g) Notes to Consolidated Financial Statements
2. All financial statement schedules have been omitted as the
required information is either inapplicable or included in the
financial statements or related notes.
3. Exhibits
(3)(a) Articles of Incorporation *
(3)(b) Bylaws *
10 (b) First Federal Savings Bank of Elizabethtown Stock
Option and Incentive Plan, as amended**
(16) Letter re Change in Auditor***
(21) Subsidiaries of the Registrant
(99) Undertakings
(23)(a) Consent of Crowe, Chizek and Company LLP, Certified
Public Accountants
(23)(b) Consent of Whelan, Doerr & Company PSC, Certified
Public Accountants
(27) Financial Data Schedule
4. The Corporation filed a Form 8-K on April 20, 1999 regarding a
change in the registrant's certifying accountant.
- -----------------------------------
* Incorporated by reference to the Corporation's Form S-4 Registration
Statement (No. 33-30582)
** Incorporated by reference to Exhibit 10(b) of the Corporation's 1998
definitive proxy statement.
*** Incorporated by reference to the Corporation's Form 8-K filed
April 20, 1999.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY
Date: 9/28/99 By: /s/ B. Keith Johnson
--------------------
B. Keith Johnson
President and Chief Executive Officer
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ B. Keith Johnson By: /s/ Irene B. Lewis
--------------------- ------------------
B. Keith Johnson Irene B. Lewis
Principal Executive Officer Director
and Director
Date: 9/28/99 Date: 9/28/99
By: /s/ Wreno M. Hall By: /s/ Bob Brown
------------------ --------------
Wreno M. Hall Bob Brown
Director Director
Date: 9/28/99 Date: 9/28/99
By: /s/ J. Alton Rider By: /s/ Kennard Peden
--------------------- -----------------
J. Alton Rider Kennard Peden
Director Director
Date: 9/28/99 Date: 9/28/99
By: /s/ Burlyn Pike By: /s/ Walter D. Huddleston
----------------- -------------------------
Burlyn Pike Walter D. Huddleston
Director Director
Date: 9/28/99 Date: 9/28/99
By: /s/ Stephen Mouser By: /s/ Richard L. Muse
------------------- --------------------
Stephen Mouser Richard L. Muse
Director Comptroller
Date: 9/28/99 Date: 9/28/99
By: /s/ Michael Thomas
---------------------
Michael Thomas, DVM
Director
Date: 9/28/99
60
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(3) (a) Articles of Incorporation *
(3) (b) Bylaws*
(10)(b) First Federal Savings Bank of Elizabethtown Stock Option
and Incentive Plan, as amended **
(16) Letter re Change in Auditor***
(21) Subsidiaries of the Registrant
(99) Undertakings
(23)(a) Consent of Crowe, Chizek and Company LLP, Certified Public
Accountants
(23)(b) Consent of Whelan, Doerr & Company PSC, Certified Public
Accountants
(27) Financial Data Schedule
- ------------------------------------------------
* Incorporated by reference to the Corporation's Form S-4 Registration
Statement (No. 33-30582)
** Incorporated by reference to Exhibit 10(b) of the Corporation's 1998
definitive proxy statement.
***Incorporated by reference to the Corporation's Form 8-K filed April 20, 1999.
61
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- -------
First Federal Financial Corporation of Kentucky
State of Percentage
Subsidiaries Incorporation Owned
- ------------ ------------- ----------
First Federal Savings Bank United States 100%
of Elizabethtown
First Service Corporation Kentucky 100%
of Elizabethtown (a)
- -----------------------------------
(a) Wholly-owned subsidiary of First Federal Savings Bank of Elizabethtown.
62
<PAGE>
EXHIBIT 99 - UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to its Form S-8 registration
statement No. 33-30582
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represents a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statements;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's Annual Report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange of 1934) that is
incorporated by reference in the registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
63
<PAGE>
EXHIBIT 23(A) - CONSENT OF CROWE, CHIZEK & COMPANY LLP
We hereby consent to the inclusion of our report dated August 20, 1999 in the
annual report on Form 10-K of First Federal Financial Corporation of Kentucky as
of June 30, 1999.
/s/ Crowe, Chizek & Company LLP
-------------------------------
Crowe, Chizek & Company LLP
64
<PAGE>
EXHIBIT 23(B) - CONSENT OF WHELAN, DOERR & COMPANY PSC
We consent to incorporation by reference in the Registration Statement No.
33-30582 on Form S-8 of First Federal Financial Corporation of Kentucky of our
report dated August 17, 1998, relating to the consolidated balance sheets of
First Federal Financial Corporation of Kentucky and Subsidiary as of June 30,
1998 and 1997, and related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the two year
period ended June 30, 1999, which reports appear in the June 30, 1998 annual
report on Form 10-K of First Federal Financial Corporations of Kentucky.
/s/ Whelan, Doerr & Company PSC
-------------------------------
Whelan, Doerr & Company PSC
65
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<CIK> 0000854395
<NAME> FIRST FEDERAL FINANCIAL CORPORATION
<MULTIPLIER> 1,000
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<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998 JUN-30-1997
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<PERIOD-END> JUN-30-1999 JUN-30-1998 JUN-30-1997
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<CASH> 10,257,162 4,992,588 8,694,283
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<DEPOSITS> 399,443,439 306,702,649 281,342,174
<SHORT-TERM> 25,894,127 43,248,855 41,514,194
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0 0 0
0 0 0
<COMMON> 4,121,112 4,129,612 4,170,003
<OTHER-SE> 53,741,050 50,558,775 47,494,747
<TOTAL-LIABILITIES-AND-EQUITY> 488,303,774 409,651,269 377,380,353
<INTEREST-LOAN> 31,895,805 29,338,526 26,944,715
<INTEREST-INVEST> 3,600,283 1,843,413 1,837,661
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<INTEREST-TOTAL> 35,496,088 31,181,939 28,782,376
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<INTEREST-INCOME-NET> 17,014,846 15,123,330 14,406,869
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<INCOME-PRETAX> 8,949,092 9,636,214 7,202,954
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<NET-INCOME> 5,978,801 6,334,217 4,774,062
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<EPS-DILUTED> 1.44 1.52 1.13
<YIELD-ACTUAL> 8.26 8.53 8.44
<LOANS-NON> 2,529,000 2,057,000 1,550,000
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 2,676,000 2,128,000 1,739,000
<ALLOWANCE-OPEN> 1,853,000 1,715,000 1,613,000
<CHARGE-OFFS> 290,000 148,000 131,000
<RECOVERIES> 26,000 21,000 33,000
<ALLOWANCE-CLOSE> 2,108,000 1,853,000 1,715,000
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 2,108,000 1,853,000 1,715,000
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