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, 2000.
[ ] 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 NASDAQ National Market on September
15, 2000, was $63,850,963. 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, 2000, there were issued and outstanding 3,755,939
shares of the registrant's common stock, of which directors and executive
officers held 460,283 shares and more than 5% beneficial owners held 211,503
shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 2000 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Item 1--Business," "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other sections of this report that are not statements of
historical fact constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
forward-looking statements may be made in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of the Company. Forward-looking
statements include, but are not limited to: (1) projections of revenues, income
or loss, earnings or loss per share, capital structure and other financial
items; (2) statements of plans and objectives of the Company or its management
or Board of Directors; (3) statements regarding future events, actions or
economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"plans," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from those indicated by such
statements. Some of the events or circumstances that could cause actual results
to differ from those indicated by forward-looking statements include, but are
not limited to, changes in economic conditions in the markets served by the
Corporation, in Kentucky and the surrounding region, or in the nation as a
whole; changes in interest rates; the impact of legislation and regulation; the
Corporation's ability to offer competitive banking products and services;
competition from other providers of financial services, the continued growth of
the markets in which the Corporation operates; and the Corporation's ability to
expand into new markets and to maintain profit margins in the face of pricing
pressure. All of these events and circumstances are difficult to predict and
many of them are beyond the Corporation's control.
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 subsidiaries offers
insurance products and brokerage services to its customers and makes qualified
VA and FHA loans for sale to investors on the secondary market. 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 ("FHLB") 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.
2
<PAGE>
The Bank is a member of the 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") and 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.
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,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real Estate:
Mortgage $311,756 64.55% $300,326 72.92% $285,528 77.27% $269,031 79.34% $256,510 81.10%
Construction 15,257 3.16 18,104 4.39 15,689 4.25 15,444 4.55 15,766 4.98
Commercial 65,244 13.51 32,729 7.85 22,169 5.99 17,141 5.05 13,321 4.21
Consumer and
home equity 59,744 12.37 48,281 11.72 45,136 12.21 35,528 10.48 28,892 9.15
Indirect consumer 15,186 3.14 762 .28 - - - - - -
Commercial,
other 15,769 3.27 11,692 2.84 1,020 .28 1,953 .58 1,785 .56
-------- ------ -------- ------ -------- ------- -------- ------- -------- ------
Total loans $482,956 100.00% $411,894 100.00% $369,542 100.00% $339,097 100.00% $316,274 100.00%
======== ======= ======== ====== ======== ======= ======== ======= ======== =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
June 30, 2000, regarding the dollar amount of loans maturing in the Bank's loan
portfolio based on their contractual terms to maturity.
<TABLE>
<CAPTION>
Due after
Due during 1 through Due after 5
the year ended 5 years after years after
June 30, June 30, June 30, Total
2001 2000 2000 Loans
---- ---- ---- -----
<S> <C> <C> <C> <C>
(Dollars in thousands)
Real estate mortgage $ 1,695 $ 13,019 $297,042 $311,756
Real estate construction (1) 14,741 516 0 15,257
Consumer 7,726 64,317 2,887 74,930
Commercial, financial and
Agricultural 11,752 33,622 35,639 81,013
------ ------ ------ ------
Total $35,914 $111,474 $335,568 $482,956
======= ======== ======== ========
</TABLE>
(1) These loans will become permanent real estate loans upon completion
of construction.
3
<PAGE>
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 $226,229 $83,832 $310,061
Real estate construction 516 0 516
Consumer 63,874 3,330 67,204
Commercial, financial and
Agricultural 61,104 8,157 69,261
------- ------- --------
Total $351,723 $95,319 $447,042
======== ======= ========
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.
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, 2000, approximately
19% 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 $8.2 million of the
loan portfolio at June 30, 2000. 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.
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, 2000, the Bank had $15.3 million in outstanding
interim construction loans and $65.2 million outstanding in commercial real
estate loans. The security for commercial real estate loans includes retail
businesses, warehouses, churches, apartment buildings and motels. The largest
commercial real estate loan originated during the June 30, 2000, fiscal year had
a balance of $2.1 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; preconstruction sale and leasing information; and cash flow
projections of the borrower.
4
<PAGE>
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. In 1999,the Bank developed a dealer loan program in our Meade County
banking center that would serve all areas of operation for the Bank. The program
is producing a large volume of consumer loans at higher yields than our mortgage
portfolio. At June 30,2000, total loans under the dealer loan program totaled
$15.2 million. As of June 30, 2000, consumer loans outstanding were $74.9
million or approximately 15.5% 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.
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, 2000, these loans totaled $19.3
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. Commercial
business loans outstanding at June 30, 2000 totaled $15.8 million. 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, 2000, these loans totaled approximately $7.4 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. The
President must approve consumer loans in excess of $100,000. 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, radio and periodical
advertising, 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. The Bank has not purchased any
loans in the past five fiscal years. For information regarding loans sold in the
secondary market, see "Subsidiary Activities" on page 13.
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, 2000, was approximately $5.1 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.
5
<PAGE>
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
loans 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.
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,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans on non-accrual status (1)(2) $1,562 $2,529 $2,128 $1,550 $1,252
------ ------ ------ ------ ------
Total non-performing
loans 1,562 2,529 2,128 1,550 1,252
Real estate acquired
through foreclosure - 109 134 184 375
------ ------ ------ ----- ------
Total non-performing
assets $1,562 $2,638 $2,262 $1,734 $1,627
====== ====== ====== ====== ======
Ratios: Non-performing
loans to loans .33% .63% .60% .47% .41%
Non-performing
assets to total assets .28% .54% .55% .46% .46%
-------------------------------------------
(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, 2000. 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,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $2,108 $1,853 $1,715 $1,613 $1,662
------ ------ ------ ------ ------
Loans charged-off:
Real estate mortgage 36 42 16 17 0
Consumer 147 248 132 114 50
Commercial 82 0 0 0 24
---- ---- ---- ---- ----
Total charge-offs 265 290 148 131 74
---- ---- ---- ---- ----
Recoveries:
Real estate mortgage 1 5 0 0 1
Consumer 8 21 21 33 1
Commercial 0 0 0 0 23
---- ---- ---- ---- ----
Total recoveries 9 26 21 33 25
---- ---- ---- ---- ----
Net loans charged-off 256 264 127 98 49
---- ----- ----- ---- ----
Acquired reserves 0 205 0 0 0
Provision for loan losses 400 314 265 200 0
------ ------ ------ ------ ------
Balance at end of period $2,252 $2,108 $1,853 $1,715 $1,613
------ ------ ------ ------ ------
Net charge-offs to average
loans outstanding .058% .068% .037% .031% .017%
Allowance for loan losses to
total non-performing assets 144% 80% 85% 99% 99%
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,
-------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
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 $1,411 63% $1,546 73% $1,340 72%
Consumer 603 27 472 22 451 24
Commercial 238 10 90 5 62 4
------ ------- ------ ------- ------ -------
Total $2,252 100.00% $2,108 100.00% $1,853 100.00%
====== ======= ====== ======= ====== =======
</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.
7
<PAGE>
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
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, 2000, on the basis of management's review of the Bank's
loan portfolio, the Bank had $1.6 million of assets classified substandard, no
assets classified as doubtful and $97,000 of assets classified as loss.
INVESTMENT SECURITIES
Interest on securities provides the largest source of income for First
Federal after interest on loans, constituting 8.4% of the total interest income
for fiscal year 2000. 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, 2000, First Federal's liquidity ratio
(liquid assets as a percentage of deposits and short-term borrowings) was 6.01%.
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 following table sets forth the carrying value of the Bank's
securities portfolio at the dates indicated. At June 30, 2000, the market value
of the Bank's securities portfolio was $43.2 million.
At June 30,
-----------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Securities available-for-sale:
Equity securities $ 1,105 $ 1,948 $ 1,934
Obligations of states and political
subdivisions 943 988 -
------- ------- -------
Total available-for-sale $ 2,048 $ 2,936 $ 1,934
======= ======= =======
Securities held-to-maturity:
U.S. Treasury and agencies $41,860 $42,814 $22,693
Mortgage-backed securities 1,274 1,590 1,946
------- ------- -------
Total held-to-maturity $43,134 $44,404 $24,639
======= ======= =======
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, 2000.
Weighted
Amortized Fair Average
Cost Value Yield*
---- ----- ------
(Dollars in thousands)
Securities available-for-sale:
Due after one year through five years $ 75 $ 71 4.20
Due after five years through ten years 821 771 4.41
Due after ten years 114 101 4.55
Equity securities 365 1,105 3.87
------ -------
Total available-for-sale $1,375 $ 2,048
====== =======
Securities held-to-maturity:
Due after one year through five years $19,878 $19,394 6.43
Due after five years through ten years 20,982 19,630 6.41
Due after ten years 1,000 912 6.75
Mortgage-backed securities 1,274 1,258 6.96
------ -------
Total held-to-maturity $43,134 $41,195
======= =======
*The weighted average yields are calculated on historical cost on a
non tax-equivalent basis.
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 statement and passbook savings accounts, NOW accounts, money market
accounts and fixed and variable 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, 2000, approximately 31.9% 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.
9
<PAGE>
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. 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 disinter mediation (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.
The following table sets forth the amount of deposits as of June 30,
2000 by various interest rate categories.
Weighted
Average Percent
Interest of
Rate Category Balances (1) Deposits
---- -------- ------------ --------
- % Non-interest bearing demand accounts $ 16,822 3.98%
1.57 NOW demand accounts 55,949 13.20
2.90 Savings accounts 36,484 8.61
4.06 Money market deposit accounts 25,894 6.11
5.41 Certificates of deposit 256,265 60.47
4.76 Individual Retirement Accounts 32,345 7.63
-------- ------
$423,759 100.00%
======== =======
(1) Dollars in thousands.
The following table indicates at June 30, 2000 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 $13,570
Three through six months 22,456
Six through twelve months 17,213
Over twelve months 34,702
------
Total $87,941
=======
The following table sets forth the average balances and interest rates
based on month-end balances for various deposit categories during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand accounts $16,896 - % $ 14,651 - % $ 12,289 - %
Demand deposit and
money market accounts 78,222 2.39 72,224 2.11 53,595 2.03
Savings deposits 36,115 2.90 38,494 2.56 30,696 2.64
Certificates of deposit 279,941 5.41 266,575 5.50 07,333 5.78
</TABLE>
10
<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, 2000 First Federal had $80.3 million in
advances outstanding from the FHLB and the capacity to increase its borrowings
an additional $200 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,
-------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Average balance outstanding $52,419 $23,560 $41,990
Maximum amount outstanding at
any month-end during the period 80,339 25,894 43,441
Year end balance 80,339 25,894 43,249
Weighted average interest rate:
At end of year 6.85% 5.25% 5.39%
During the year 5.34% 5.52% 5.68%
11
<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. Dividing income or expense by the
average monthly balance of assets or liabilities, respectively, derives such
yields and costs for the periods presented
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
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 $ 1,432 $ 43 2.99% $ 2,109 $ 28 1.33% $ 2,492 $ 73 2.93%
State and political subdivision
securities (1) 960 67 7.03 992 68 6.85 - - -
U.S. Treasury and agencies 41,507 2,711 6.53 40,506 2,730 6.74 16,475 1,058 6.42
Mortgage-backed securities 1,403 93 6.61 1,786 124 6.94 2,090 147 7.03
Loans receivable (2) (3) 437,640 35,317 8.07 386,132 31,896 8.26 343,822 29,339 8.53
FHLB stock 3,354 237 7.08 3,082 216 7.01 2,875 207 7.20
Interest bearing deposits 3,221 97 3.02 8,635 457 5.29 6,689 358 5.35
------- ------ ----- ------ ------ ----- ------- ------ -----
Total interest earning assets 489,517 38,565 7.88 443,242 35,519 8.01 374,443 31,182 8.33
Less: Allowance for loan losses (2,221) (2,071) (1,725)
Non-interest earning assets 36,383 37,636 21,284
------ ------ -------
Total assets $523,679 $478,807 $394,002
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $36,115 $ 1,047 2.90% $38,494 $ 984 2.56% $30,696 $ 809 2.64%
NOW and money market
Accounts 78,222 1,871 2.39 72,224 1,522 2.11 43,595 887 2.03
Certificates of deposit and
other time deposits 279,941 15,155 5.41 266,575 14,674 5.50 207,333 11,980 5.78
FHLB Advances 52,419 2,800 5.34 23,560 1,301 5.52 41,990 2,383 5.68
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest bearing 446,697 20,873 4.67 400,853 18,481 4.61 323,614 16,059 4.96
liabilities
Non-interest bearing liabilities:
Non-interest bearing deposits 16,896 14,651 12,289
Other liabilities 6,231 6,542 4,697
----- ----- -----
Total liabilities 469,824 422,046 340,600
Stockholders' equity 53,855 56,761 53,402
------ ------ --------
Total liabilities and
stockholders' equity $523,679 $478,807 $394,002
======== ======== ========
Net interest income $17,692 $17,038 $15,123
======= ======= =======
Net interest spread 3.21% 3.40% 3.37%
===== ===== =====
Net interest margin 3.61% 3.84% 4.04%
===== ===== =====
Ratio of average interest earning
assets to average interest bearing
liabilities 109.59% 110.57% 115.71%
======= ======= =======
</TABLE>
------------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax
rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
(3) Calculations include non-accruing loans in the average loan amounts
outstanding.
12
<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,
--------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998 1998 vs. 1997
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 $(713) $4,134 $3,421 $(885) $3,442 $2,557 $159 $2,288 $2,447
Equity securities 20 (5) 15 (35) (10) (45) (104) (135) (239)
State and political subdivision
securities 4 (5) (1) 34 34 68 - - -
U.S. Treasury and agencies (92) 73 (19) 55 1,617 1,672 (5) 87 82
Mortgage-backed securities (6) (25) (31) (2) (21) (23) (1) (31) (32)
FHLB stock 2 19 21 (5) 14 9 5 14 19
Interest bearing deposits (146) (214) (360) (4) 103 99 45 78 123
----- ------ ------ ----- ------ ------ --- ------ ------
Total interest earning assets $(922) $4,014 $3,092 $(842) $5,179 $4,337 $99 $2,301 $2,400
===== ====== ====== ===== ====== ====== === ====== ======
Interest expense:
Savings accounts $ 118 $ (55) $ 63 $ (24) $199 $ 175 $7 $ (14) $ (7)
NOW and money market accounts 215 134 349 36 599 635 (77) 48 (29)
Certificates of deposit and other
time deposits (233) 714 481 (550) 3,244 2,694 503 1,136 1,639
FHLB advances (41) 1,540 1,499 (65) (1,017) (1,082) 52 29 81
---- ----- ----- ---- ------ ------ --- ----- -----
Total interest bearing $ 59 $2,333 $2,392 $(603) $3,025 $2,422 $485 $1,199 $1,684
liabilities ==== ====== ====== ===== ====== ====== ==== ====== ======
</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, 2000, the Bank was authorized to invest up to approximately $16.8 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, 2000, the Bank's
investment in and loans to subsidiaries was approximately $428,000 consisting of
investments 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 five full-time employees to perform these services.
This investment function operates under licenses held by First Service. The net
earnings of First Service were $95,000 during fiscal year 2000.
13
<PAGE>
In July 1999, the Bank formed First Heartland Mortgage Company of
Elizabethtown ("First Heartland") through which the secondary market lending
department makes 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. After a full year of operation, the new subsidiary has been
moderately successful in assisting other banks that for whatever reason do not
have access to the secondary mortgage loan market. The Bank has continued to
experience good growth in the level of mortgages being processed by First
Heartland. As of June 30, 2000, First Heartland originated $23.6 million in
loans and sold $22.9 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.
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 corporation are not permissible for national
banks. Accordingly, on June 30, 2000, 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 substantially greater than First
Federal. These competitors attempt to gain market share through their financial
products mix, pricing strategies and banking center locations. 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. It is anticipated that
competition from both bank and non-bank entities will continue to remain strong
in the near future.
EMPLOYEES
As of June 30, 2000, the Bank had 178 employees of which 161 were
full-time and 17 part-time. None of the Bank's employees are subject to a
collective bargaining agreement and the Bank 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. 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, 2000, of $4.1 million.
14
<PAGE>
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, 2000, First
Federal had $80.3 million in advances outstanding from the FHLB. See "Business -
Sources of Funds - Borrowings."
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. The OTS may
change this liquidity requirement, which is currently 4%, from time to time 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 2000 was 6.01%, which exceeded the applicable liquidity
requirements.
QUALIFIED THRIFT LENDER TEST. The Bank is currently subject to OTS
regulations, which use the qualified thrift lender ("QTL") test 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 goodwill and other intangibles, property used by a savings
association in its business and liquidity investments in an amount not exceeding
20% of total 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, 2000, approximately
93.97% 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, 2000, 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, 2000, the Bank's actual capital
percentages for Tier 1 leverage of 7.7%, Tier 1 capital of 10.8%, and current
risk-based capital of 11.4%, 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.
15
<PAGE>
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.
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, 2000, 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
$414,000. Accordingly, on June 30, 2000, 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.
16
<PAGE>
The OTS will calculate the sensitivity of a savings institution's net
portfolio value ("NPV") 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.
Presented below as of June 30, 2000 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, 2000
Net Portfolio Value NPV as % of PV of Assets
------------------ ------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
+300 bp 23,235 (31,124) (57) 4.42 (527 bp)
+200 bp 33,476 (20,883) (38) 6.23 (346 bp)
+100 bp 44,042 (10,317) (19) 8.02 (167 bp)
0 bp 54,359 9.70
-100 bp 63,215 8,856 16 11.08 138 bp
-200 bp 69,322 14,963 28 11.99 230 bp
-300 bp 75,348 20,989 39 12.88 318 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
17
<PAGE>
institution") may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
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.
18
<PAGE>
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
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.
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,
2000, 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.
19
<PAGE>
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 "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
20
<PAGE>
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.
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.
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 Federals 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.
21
<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
Federals banking centers are located in Kentucky. The location of the 13 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
315 North Third Street Owned 1,271
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, 2000, the net book value of office properties and
equipment owned or leased by the Bank and its subsidiary was $11.7 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 subsidiaries 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, 2000.
22
<PAGE>
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 National Market under the
symbol "FFKY." The registered number of stockholders as of September 15, 2000,
was 777. 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
QUARTER ENDED MONTHS ENDED
Fiscal 2000: 9/30 12/31 3/31 6/30 8/31/00
---- ----- ---- ---- -------
High $24.88 $24.50 $24.38 $20.50 $17.50
Low 22.50 21.75 17.25 15.25 15.25
Cash dividends 0.18 0.18 0.18 0.18
Fiscal 1999: 9/30 12/31 3/31 6/30
---- ----- ---- ----
High $28.50 $29.75 $28.50 $24.94
Low 23.13 23.36 23.25 19.88
Cash dividends 0.15 0.15 0.15 0.18
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial 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,
----------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets $560,785 $488,304 $409,651 $377,380 $352,671
Net loans outstanding 471,231 400,360 354,935 327,502 301,987
Investments 45,182 47,340 26,574 22,677 16,742
Deposits 423,759 399,443 306,703 281,342 264,946
Borrowings 80,339 25,894 43,249 41,514 34,979
Stockholders' equity 51,681 57,862 54,688 51,665 49,946
Number of:
Real estate loans outstanding 7,154 6,968 6,709 6,380 5,914
Deposit accounts 47,238 45,425 37,764 36,378 35,140
Offices 13 12 8 8 8
</TABLE>
23
<PAGE>
YEAR ENDED JUNE 30,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
OPERATIONS DATA: (Dollars in thousands)
Interest income $38.542 $35,496 $31,182 $28,782 $26,926
Interest expense 20,873 18,481 16,059 14,375 13,676
Net interest income 17,669 17,015 15,123 14,407 13,250
Provision for loan losses 400 314 265 200 0
Non-interest income 3,877 3,954 2,860 2,468 2,648
Non-interest expense (1) 12,691 11,706 8,082 9,472 7,547
Income tax expense 2,792 2,970 3,302 2,429 2,864
Net income 5,663 5,979 6,334 4,774 5,487
Earnings per share: **
Basic 1.45 1.45 1.53 1.14 1.30
Diluted 1.44 1.44 1.52 1.13 1.29
Book value per share** 13.76 14.04 13.24 12.39 11.87
Dividends paid per share** 0.72 0.63 0.56 0.50 0.46
Dividend payout ratio 49% 43% 37% 44% 35%
Return on average assets 1.08% 1.25% 1.60% 1.30% 1.60%
Average equity to average
assets 10.28% 11.85% 13.55% 13.77% 14.27%
Return on average equity 10.52% 10.53% 11.81% 9.46% 11.22%
(1) Non-interest expense in 1997 includes the non-recurring special assessment
paid to the FDIC in the amount of $1.7 million, pretax. Non-interest expense in
1999 includes 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 2000: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $9,100 $9,423 $9,744 $10,275
Total interest expense 4,633 4,992 5,368 5,880
Net interest income 4,467 4,431 4,376 4,395
Provision for loan losses 90 90 90 130
Net income 1,573 1,464 1,403 1,223
Earnings per share:
Basic 0.39 0.37 0.36 0.33
Diluted 0.38 0.37 0.36 0.33
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
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Corporation conducts its banking business through its wholly owned
subsidiary, the Bank. The Bank has operations in the Kentucky communities of
Elizabethtown, Radcliff, Bardstown, Munfordville, Shepherdsville, Mt.
Washington, Brandenburg, Flaherty, and Hillview. The Bank's activities include
the acceptance of deposits for checking, savings and time deposit accounts,
making secured and unsecured loans, investing in securities and trust services.
The Bank's lending services include the origination of real estate, commercial
and consumer loans. Operating revenues are derived primarily from interest and
fees on domestic real estate, commercial and consumer loans, and from interest
on securities of the United States Government and Agencies, states, and
municipalities. The primary regulator for First Federal is the OTS.
The following discussion and analysis covers the primary factors affecting the
Corporation's performance and financial condition. It should be read in
conjunction with the accompanying audited consolidated financial statements
included in this report.
All dollar amounts (except per share data) are presented in thousands unless
otherwise noted.
ACQUISITION
On July 24, 1998, the Bank completed its acquisition of three bank branches
located in Meade County, Kentucky from Bank One, Kentucky, N.A. Two of the
branches are located in Brandenburg, Kentucky and the third branch 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 $11.0 million of loans
and $72.0 million of deposits. The net deposits assumed exceeded the cash
received by $8.7 million. Any ratios or analysis comparing years before
acquisition may not be comparable.
STOCK REPURCHASE PLAN
In October 1999 the Corporation's Board of Directors authorized the
establishment of an additional stock repurchase program pursuant to which 10% of
the Corporation's outstanding stock may be repurchased from time to time in the
open market. The programs, which began in 1995, have repurchased a total of
611,681 shares. The Board will continue to evaluate earnings per share and
monitor the success of the repurchase plan to maintain an attractive return to
stockholders. The current plan expires in April 2001, when the Board will
analyze the Bank's capital position and future earnings potential.
RESULTS OF OPERATIONS
Net income was $5.7 million or $1.44 per share diluted in 2000 compared with
$6.0 million or $1.44 per share diluted in 1999. 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, during the 1999 period, 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 $831 ($630, net of tax) in 2000 from $781 ($597, net
of tax) in 1999. The table on the following page, in millions except per share
data, illustrates the net of tax impact of these expenses on earnings and
diluted earnings per share:
25
<PAGE>
June 30, 2000 June 30, 1999
Amount Per share Amount Per share
------ --------- ------ ---------
Income before amortization of intangibles,
acquisition and conversion expenses $ 6.2 $ 1.58 $ 7.1 $ 1.71
Amortization of intangibles (0.6) (0.14) (0.6) (0.15)
Acquisition expenses - - (0.2) (0.05)
Conversion expenses - - (0.3) (0.07)
----- ------ ----- -----
Net Income $ 5.6 $ 1.44 $ 6.0 $ 1.44
===== ====== ===== ======
Net Interest Income - Net interest income increased by $654 during 2000 to $17.7
million as compared to $17.0 million in 1999 in spite of a declining net
interest margin. The Bank's net interest margin declined to 3.61% for the year
ended June 30, 2000 compared to 3.84% for the 1999 period. This decline in net
interest margin can be largely attributed to the rise in certificate of deposit
rates on specials offered by the Bank over the past eight months. To maintain a
customer base in the midst of fierce rate competition, the Bank offered both
short and long term certificate specials to retain maturing accounts renewing at
much lower rates.
These promotions were also necessary to assist in funding the loan growth in
the Bank driven by the transition to a sales culture for retail associates. Home
equity lines of credit at low introductory rates were also a focus of the retail
promotions for increasing loan relationships with our home mortgage portfolio
customers. For the short term, these introductory rates contributed to the
margin declines. If interest rates continue to increase, the Bank's margin may
continue to narrow. Maintaining a growth in net interest margin will only be
achieved by increasing the current lending practices of focusing on commercial
and consumer lending.
In order to offset the narrowing margin, the Bank developed a dealer loan
program in our Meade County banking center that would serve all the areas of
operation for the Bank. The program is producing a large volume of consumer
loans at higher yields than our mortgage portfolio. At June 30, 2000, total
loans under the dealer loan program totaled $15.2 million. A commercial loan
program composed of shorter-term fixed and variable rate loans is responsible
for much of the Bank's loan growth and enables management to more effectively
manage rate risk during the rising rate environment. Realizing that both these
programs represent products with added credit risk, the Bank has in place loan
processing review procedures to monitor loan underwriting and documentation. A
formal process of application presentation to the Executive Loan Committee has
been developed to insure compliance with lending policies. Monthly reporting
requirements and internal auditing practices have been developed to provide
additional control over delinquencies and foreclosures, which to date have
continued to be minimal.
Average interest earning assets increased by $46.3 million from $443.2 million
for the 1999 period to $489.5 million for the 2000 period due to the growth of
the Bank's loan portfolio. Average loans, which comprise 89% of the total
interest earning assets, were $51.5 million higher and averaged $437.6 million
during 2000, while the average yield on loans decreased by 19 basis points to
8.07%.
Average interest-bearing liabilities increased by $45.8 million to an average
balance of $446.7 million for 2000. Customer deposits averaged $394.3 million
during 2000, a $17.0 million increase from the 1999 average balance of $377.3
million. Average Federal Home Loan Bank advances increased $28.8 million for the
2000 period to fund the Bank's increased lending activity that exceeded its
deposit growth. This same lending growth will impact the level of future Bank
investments that will be decreasing in balance in the near future, given the
need for all deposit dollars to fund lending activity. The Bank's cost of funds
averaged 4.67% during 2000 which was an increase of 6 basis points from the 1999
average cost of funds of 4.61% due to higher rates paid on short-term customer
deposits.
26
<PAGE>
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 $400 for 2000 as compared to $314 for 1999. Net charge-offs were $256 during
2000 as compared to $264 during 1999. The Bank's allowance for loan losses was
$2.3 million or .48% of loans outstanding at June 30, 2000 compared to $2.1
million or .52% of loans outstanding at June 30, 1999. Non-performing loans
represented .33% of the loans outstanding at June 30, 2000. As demonstrated in
the summary table below, 63% of the Bank's non-performing assets are
collateralized by one-to-four family residential mortgages on real estate
located in central Kentucky.
Year Ended June 30,
------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Allowance for loan losses:
Balance, July 1 $ 2,108 $ 1,853 $ 1,715
Provision for loan losses 400 314 265
Acquired - 205 -
Charge-offs (265) (290) (148)
Recoveries 9 26 21
-------- -------- --------
Balance, June 30 $ 2,252 $ 2,108 $ 1,853
======== ======== ========
Loans outstanding at year end $473,483 $402,468 $356,788
Non-performing loans at year end:
Collateralized by one-to-four family homes $ 977 $ 1,633 $ 1,487
Other non-performing loans 585 896 641
------- -------- --------
Total non-performing loans 1,562 2,529 2,128
Real estate acquired through foreclosure - 109 134
------- ------- -------
Total non-performing assets $ 1,562 $ 2,638 $ 2,262
======== ======= =======
Ratios: Non-performing loans to loans .33% .63% .60%
Allowance for loan losses to
non-performing loans 144% 83% 87%
Allowance for loan losses to net loans .48% .52% .52%
Non-performing assets to total assets .28% .54% .55%
Non-Interest Income and Expense - Non-interest income was $3.9 million in 2000,
a decrease of $77 or 2% over 1999. Gains on investment sales were $457 in 2000
compared to $352 for 1999, an increase of $105. Fee income from secondary market
lending operations decreased by $284 or 45% during the fiscal year due to rising
mortgage rates that slowed the new originations and refinancing activity in home
loans. Customer service fees charged on deposit accounts increased by $237 or
14% during 2000 due to growth in customer accounts. 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 were $6 for 2000 compared to gains
of $255 for 1999. Three commercial lots in an office park currently under
development were sold in 1999.
Non-interest expense (excluding the one-time acquisition related charges and
information technology upgrades in 1999) increased by $1.8 million or 15% during
2000 as compared to 1999. Factors contributing to the increase are expenses
relating to the Bank's transition to a sales and service culture, the re-opening
of a banking center located in Bardstown, Kentucky and a full year of operating
expenses related to the Hillview Wal-Mart banking center.
27
<PAGE>
Compensation and employee benefits, the largest component of non-interest
expense, increased by $1.1 million or 25% in 2000 compared to 1999. The increase
includes salary increases and reflects increases in the number of full time
equivalent employees from 155 at June 30, 1999, to 170 at June 30, 2000. The
increased staffing is a result of the Bank adopting a strategic plan to develop
a sales and service culture to promote retail growth which added an additional
seven employees and the opening of the new Hillview and Bardstown banking
centers which also added seven new full time employees.
Beyond compensation and benefits, office occupancy and equipment expenses
increased by $88 in 2000 compared to 1999 due to the opening of an additional
in-store facility, remodeling an existing office, and installing three new ATM
machines. All other expenses increased by $549 in 2000 compared to 1999
including postage, telephone, data processing, supplies and customer account
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum specific levels of liquid assets as
defined by the Office of Thrift Supervision's regulations. This requirement is
based on a percentage of cash and eligible investments to deposits and
short-term borrowings and is currently 4%. At June 30, 2000, the Bank's liquid
assets were 6.01% of its liquidity base. 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, 2000,
as net loans increased from $400.4 million at June 30, 1999, to $471.2 million
at June 30, 2000, an 18% growth rate. The increase in lending was primarily
attributable to a newly developed dealer loan program, which totaled $15.2
million at June 30, 2000 and an increase in the Bank's commercial loan
portfolio, which increased by $36.6 million for 2000.
The Bank intends to continue to fund loan growth (outstanding loan commitments
were $5.1 million at June 30, 2000) with customer deposits and additional
advances from the FHLB. At June 30, 2000, the Bank had an unused approved line
of credit in the amount of $28.0 million and sufficient collateral to borrow an
additional $200 million in advances from the FHLB.
The Office of Thrift Supervision's capital regulations require savings
institutions to meet three capital standards: a 4% Tier I leverage ratio; a 4%
Tier I capital ratio; and an 8% risk-based capital standard. As of June 30,
2000, the Bank's actual capital percentages for Tier I leverage of 7.8%, Tier I
capital of 10.8%, and current risk-based capital of 11.4%, 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.
COMPARISON OF FISCAL 1999 TO 1998
Net income for the fiscal year ended June 30, 1999, was $6.0 million or $1.44
per share diluted as compared to net income of $6.3 million or $1.52 per share
diluted for the same period 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
28
<PAGE>
$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 $7.1 million or
$1.71 per share diluted for the fiscal year ended June 30, 1999 from $6.6
million or $1.57 per share diluted for the fiscal year ending June 30, 1998.
Total interest income increased by $4.3 million from fiscal 1998 to 1999 due to
the strong growth of the Bank's loan portfolio and the interest-earning assets
acquired from the three Meade County banking centers. Interest income on loans
accounts for the majority of the Bank's interest income as average loan
balances, which comprise 88% of the total interest earning assets, were $386.1
million during 1999 as compared to $343.8 million during 1998, or an increase of
$42.3 million. The average yield on loans decreased by 27 basis points to 8.26%
during 1999 as compared to 8.53% during 1998.
Total interest expense increased by $2.4 million from fiscal 1998 to 1999. The
weighted average interest rate paid on customer deposits averaged 4.38% during
1999, which was a decrease of 28 basis points from the 1998 average cost of
funds of 4.66%. The decrease was attributable to lower rates paid on short-term
customer deposits. Customer deposit balances averaged $377.3 million during
1999, a $95.7 million increase from the 1998 average balance of $281.6 million.
The acquisition contributed approximately $72.0 million to the total deposit
growth.
As a result of the foregoing discussion, net interest income increased by $1.9
million to $17.0 million in 1999 from $15.1 million 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 $1.1 million to the total increase in net
interest income for the 1999 period.
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. During fiscal 1999, the Bank's provision for loan losses was
$314 as compared to $265 for 1998. The allowance for loan losses was $1.9
million or .52% of loans outstanding at June 30, 1999, compared to $2.1 million
or .52% of loans outstanding at June 30, 1998. Net loan charge-offs have been
$264 and $127 for fiscal 1999 and 1998, respectively.
Non-interest income was $4.0 million in 1999, an increase of $1.1 million 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.
29
<PAGE>
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.
All other non-interest expenses increased by $1.0 million 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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 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 17, under Item 1 "Regulatory Capital Requirements", presents
the Corporation's projected change in NPV for the various rate shock levels as
of June 30, 2000. 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, 2000, 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 that
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, 2000, which
are anticipated to reprice or mature in each of the future time periods shown.
30
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity (Gap Analysis)
As of June 30, 2000
(Dollars in thousands)
0-3 4-12 1-5 Over 5
Months Months Years Years Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans $ 66,914 $121,661 $185,552 $101,981 $476,108
Securities 24,896 7,118 13,562 6,549 52,125
------- -------- -------- -------- --------
Total rate sensitive assets 91,810 128,779 199,114 108,530 528,233
------- -------- -------- -------- --------
Interest bearing liabilities:
NOW, money market and
savings 19,856 59,568 38,499 16,824 134,747
Time deposits 45,128 158,102 86,614 1,270 291,114
Borrowed funds 79,018 54 328 941 80,341
------- -------- -------- ------- ---------
Total rate sensitive liabilities 144,002 217,724 125,441 19,035 506,202
------- -------- -------- ------- ---------
Interest sensitivity gap $(52,192) $ (88,945) $ 73,673 $ 89,495 $ 22,031
======== ========= ======== ======= =========
Cumulative interest sensitivity gap $(52,192) $(141,137) $ (67,464) $ 22,031
======== ======== ========= =======
Cumulative interest sensitivity gap
as a percentage of total assets (9.31)% (25.17)% (12.03)% 3.93%
===== ====== ====== =====
</TABLE>
As the preceding table indicates, the Bank has a negative cumulative
gap for assets and liabilities maturing or repricing within one year in the
amount of ($141,137) million or 25.17% 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.
31
<PAGE>
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 33
Report of Independent Auditors-Whelan, Doerr & Company PSC 34
Consolidated Statements of Financial Condition 35
Consolidated Statements of Income 36
Consolidated Statements of Comprehensive Income 37
Consolidated Statements of Changes in Stockholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40-55
32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
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 as of June 30, 2000 and 1999,
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity and cash flows for the years 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 audits. The consolidated financial statements of First Federal Financial
Corporation of Kentucky for the year ended June 30, 1998 were audited by other
auditors whose report dated August 17, 1998 expressed an unqualified opinion on
those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Federal
Financial Corporation of Kentucky as of June 30, 2000 and 1999, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
July 28, 2000
33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Federal Financial Corporation of Kentucky
Elizabethtown, Kentucky
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows for First Federal Financial Corporation of
Kentucky and Subsidiaries for the year 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 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 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 the results of
its operations and its cash flows for the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
Whelan, Doerr & Company PSC
Elizabethtown, Kentucky
August 17, 1998
34
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
ASSETS 2000 1999
---- ----
<S> <C> <C>
Cash and due from banks $ 11,310,438 $ 10,257,162
Interest bearing deposits 3,668,498 1,634,475
---------- ----------
Total cash and cash equivalents 14,978,936 11,891,637
Securities available-for-sale 2,047,642 2,935,979
Securities held-to-maturity (fair value of $41,194,541
and $43,524,986 at June 30, 2000 and 1999) 43,133,967 44,404,392
Loans receivable, less allowance for loan losses
of $2,252,062 (2000) and $2,107,994 (1999) 471,231,319 400,360,402
Federal Home Loan Bank stock 4,080,800 3,200,000
Premises and equipment 11,709,268 11,594,369
Real estate owned:
Acquired through foreclosure - 108,610
Held for development 445,683 445,683
Excess of cost over net assets acquired 10,047,173 10,878,972
Accrued interest receivable 2,031,877 1,603,514
Other assets 1,078,157 880,216
----------- -----------
TOTAL ASSETS $560,784,822 $488,303,774
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 16,821,604 $ 15,223,267
Interest bearing 406,937,351 384,220,172
----------- -----------
Total Deposits 423,758,955 399,443,439
Advances from Federal Home Loan Bank 80,338,550 25,894,127
Accrued interest payable 1,128,790 868,840
Accounts payable and other liabilities 1,962,543 2,336,503
Deferred income taxes 1,914,903 1,898,703
----------- -----------
TOTAL LIABILITIES 509,103,741 430,441,612
----------- -----------
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, 3,755,761 shares in 2000 and
4,121,112 shares in 1999 3,755,761 4,121,112
Additional paid-in capital - 3,055,644
Retained earnings 47,481,149 49,587,422
Accumulated other comprehensive
income, net of tax 444,171 1,097,984
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 51,681,081 57,862,162
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $560,784,822 $488,303,774
============ ============
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $35,316,819 $31,895,805 $29,338,526
Interest and dividends on investments and deposits 3,225,633 3,600,283 1,843,413
----------- ---------- ----------
Total interest income 38,542,452 35,496,088 31,181,939
----------- ---------- ----------
Interest Expense:
Deposits 18,073,392 17,180,146 13,676,525
Federal Home Loan Bank advances 2,800,076 1,301,096 2,382,084
----------- ---------- ----------
Total interest expense 20,873,468 18,481,242 16,058,609
----------- ---------- ----------
Net interest income 17,668,984 17,014,846 15,123,330
Provision for loan losses 399,500 314,000 265,000
----------- ---------- ----------
Net interest income after provision for loan losses 17,269,484 16,700,846 14,858,330
----------- ---------- ----------
Non-interest Income:
Customer service fees on deposit accounts 1,957,445 1,720,542 1,274,298
Secondary mortgage market closing fees 354,391 638,877 485,564
Gain on sale of investments 456,926 351,753 375,356
Brokerage and insurance commissions 464,388 394,070 402,986
Gain on sale of real estate held for development 6,194 254,688 -
Other income 637,779 594,364 322,166
----------- ---------- ---------
Total non-interest income 3,877,123 3,954,294 2,860,370
----------- ---------- ---------
Non-interest Expense:
Employee compensation and benefits 5,644,270 4,506,758 3,706,255
Office occupancy expense and equipment 1,362,424 1,274,885 935,972
FDIC insurance premiums 158,117 207,298 178,476
Marketing and advertising 524,349 527,110 377,135
Outside services and data processing 1,259,148 1,001,612 663,667
State franchise tax 403,869 357,776 308,691
Acquisition related expense - 291,869 -
Data and equipment conversion expense - 497,368 -
Amortization of intangibles 831,799 781,347 240,071
Other expense 2,506,928 2,260,025 1,672,219
--------- ---------- ---------
Total non-interest expense 12,690,904 11,706,048 8,082,486
---------- ---------- ---------
Income before income taxes 8,455,703 8,949,092 9,636,214
Income taxes 2,792,361 2,970,291 3,301,997
---------- ---------- ---------
Net Income $5,663,342 $5,978,801 $6,334,217
========== ========== ==========
Earnings per share:
Basic $ 1.45 $ 1.45 $ 1.53
Diluted $ 1.44 $ 1.44 $ 1.52
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Income $5,663,342 $5,978,801 $6,334,217
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities (352,242) 233,837 373,449
Reclassification of realized amount (301,571) (232,157) (247,735)
-------- --------- ----------
Net unrealized gain (loss) recognized in
comprehensive income (653,813) 1,680 125,714
-------- --------- ----------
Comprehensive Income $5,009,529 $5,980,481 $6,459,931
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Changes in Stockholders' Equity
Years Ending June 30, 2000, 1999, and 1998
<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, 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
($.63 per share) - - - (2,600,186) - (2,600,186)
Stock repurchased (8,500) (8,500) (198,020) - - (206,520)
--------- --------- --------- ---------- --------- ----------
Balance, June 30, 1999 4,121,112 4,121,112 3,055,644 49,587,422 1,097,984 57,862,162
Net income - - - 5,663,342 - 5,663,342
Exercise of stock
options 4,834 4,834 68,150 - - 72,984
Stock tendered as
payment for options
exercised (3,281) (3,281) (63,941) - - (67,222)
Net change in unrealized
gains (losses) on
securities available- -
for-sale, net of tax - - - (653,813) (653,813)
Cash dividends declared
($.72 per share) - - - (2,802,833) - (2,802,833)
Stock repurchased (366,904) (366,904) (3,059,853) (4,966,782) - (8,393,539)
-------- ----------- ----------- ------------ ----------- ------------
Balance, June 30, 2000 3,755,761 $ 3,755,761 $ - $ 47,481,149 $ 444,171 $ 51,681,081
========= =========== =========== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $5,663,342 $5,978,801 $6,334,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 399,500 314,000 265,000
Depreciation of premises and equipment 1,022,327 825,483 605,955
Net change in deferred loan fees and costs 226,177 238,711 195,066
Federal Home Loan Bank stock dividends (237,300) (216,200) (206,600)
Amortization of acquired intangible assets 831,799 781,347 240,071
Amortization and accretion on securities (61,435) (137,369) (147,972)
Gain on sale of investments available-for-sale (456,926) (351,753) (375,356)
Gain on sale of real estate held for development (6,194) (254,688) -
Deferred taxes 353,014 (178,266) 126,743
Changes in:
Interest receivable (428,363) (769,462) (198,960)
Other assets (197,941) 3,293 (370,482)
Interest payable 259,950 (328,249) 350,166
Accounts payable and other liabilities (367,766) (286,766) 1,675,234
--------- --------- ----------
Net cash provided by operating activities 7,000,184 5,618,882 8,493,082
--------- --------- ----------
Investing Activities:
Sales of securities available-for-sale 461,782 362,459 3,808,207
Purchases of securities available-for-sale (107,300) (1,010,000) (36,082)
Purchases of securities held-to-maturity (5,000,000) (49,855,000) (14,000,000)
Maturities of securities held-to-maturity 6,332,014 30,227,733 6,979,771
Net increase in loans (71,387,984) (34,934,161) (27,853,848)
Purchase of Federal Home Loan Bank stock (643,500) - -
Net purchases of premises and equipment (1,137,226) (1,545,933) (1,131,872)
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 (71,482,214) (3,846,652) (32,189,054)
----------- ----------- -----------
Financing Activities:
Net increase in deposits 24,315,516 21,131,129 25,360,475
Advances from Federal Home Loan Bank 79,647,360 5,000,000 2,000,000
Repayments to Federal Home Loan Bank (25,202,937) (22,354,728) (265,339)
Proceeds from stock options exercised 5,762 - 40
Dividends paid (2,802,833) (2,600,186) (2,319,019)
Common stock repurchased (8,393,539) (206,520) (1,117,315)
Collection on advance to ESOP - - 11,129
---------- ---------- ----------
Net cash provided by financing activities 67,569,329 969,695 23,669,971
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 3,087,299 2,741,925 (26,001)
Cash and cash equivalents, beginning of year 11,891,637 9,149,712 9,175,713
---------- ----------- ----------
Cash and cash equivalents, end of year $14,978,936 $11,891,637 $9,149,712
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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 subsidiaries,
First Service Corp. of Elizabethtown and First Heartland
Mortgage. 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 also makes home improvement
loans, consumer loans and commercial business loans. 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 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 tax, on available-for-sale securities
are reported as a net amount in a separate component of
stockholders' equity until realized.
40
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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.
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 an 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.
41
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Stock Option Plans - Although the Corporation applies APB No.
25, SFAS No. 123, "Accounting for Stock Based Compensation"
requires pro-forma 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.
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 include 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.
New Accounting Pronouncements - On July 1, 2000, the
Corporation adopted a new accounting standard that 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. The
adoption of this new standard did not have a material effect
on the Corporation's financial statements.
Industry Segments - All of the Corporation's operations are
considered by management to be aggregated into one reportable
operating segment.
Reclassifications - Certain amounts for 1999 and 1998 have
been reclassified to conform to the presentation for 2000.
2. BRANCH ACQUISITIONS
On July 24, 1998, the Bank completed its acquisition of three
Bank One banking centers. Included in the purchase were
approximately $11,000,000 of loans and $72,000,000 of
deposits. The net deposits assumed exceeded the cash received
by $8,670,000.
42
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
--------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
June 30, 2000:
Equity securities $ 364,725 $ 807,396 $ (67,187) $1,104,934
Obligation of states and political
subdivisions 1,009,928 - (67,220) 942,708
---------- --------- --------- ----------
Total available-for-sale $1,374,653 $ 807,396 $(134,407) $2,047,642
========== ========= ========= ==========
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
========== ========== ========= ==========
Securities held-to-maturity:
June 30, 2000:
U.S. Treasury and agencies $41,860,127 $ 65,220 $(1,989,224) $39,936,123
Mortgage-backed securities 1,273,840 7,493 (22,915) 1,258,418
----------- ---------- ----------- -----------
Total held-to-maturity
securities $43,133,967 $ 72,713 $(2,012,139) $41,194,541
=========== ========== =========== ===========
June 30, 1999:
U.S. Treasury and agencies $42,814,330 $ 106,164 $(1,006,244) $41,914,250
Mortgage-backed securities 1,590,062 22,979 (2,305) 1,610,736
---------- ---------- ----------- -----------
Total held-to-maturity
securities $44,404,392 $ 129,143 $(1,008,549) $43,524,986
=========== ========== =========== ===========
</TABLE>
The amortized cost and fair value of securities at June 30, 2000, 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 after one year through five years $ 75,000 $ 71,016 $19,877,600 $19,394,233
Due after five years through ten years 820,911 770,514 20,982,527 19,630,020
Due after ten years 114,017 101,178 1,000,000 911,870
Mortgage-backed securities - - 1,273,840 1,258,418
Equity securities 364,725 1,104,934 - -
---------- ---------- ----------- -----------
$1,374,653 $2,047,642 $43,133,967 $41,194,541
========== ========== =========== ===========
</TABLE>
43
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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:
2000 1999 1998
---- ---- ----
Proceeds from sales $461,782 $362,459 $3,808,207
Gross realized gains 456,926 351,753 375,356
Realized gains, net of tax 301,571 232,157 247,735
Investment securities having an amortized cost of $33,544,733 and fair
value of $31,973,783 at June 30, 2000 were pledged to secure public
deposits.
4. LOANS RECEIVABLE:
-----------------
Loans receivable at June 30 are summarized as follows:
2000 1999
---- ----
Commercial $ 15,768,738 $ 11,691,672
Real estate commercial 65,244,183 32,729,756
Real estate construction 15,257,396 18,104,220
Real estate mortgage 311,756,211 300,325,677
Consumer and home equity 59,744,028 48,280,723
Indirect consumer 15,185,698 761,955
----------- -----------
482,956,254 411,894,003
Less:
Undisbursed construction loans (6,889,437) (6,674,224)
Net deferred loan origination fees (2,583,436) (2,751,383)
Allowance for loan losses (2,252,062) (2,107,994)
------------ ------------
(11,724,935) (11,533,601)
------------ ------------
$471,231,319 $400,360,402
============ ============
The Bank did not service 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,
-----------------------------------------
2000 1999 1998
---- ---- ----
Balance, beginning of year $2,107,994 $1,852,576 $1,714,512
Provision for loan losses 399,500 314,000 265,000
Acquired - 205,400 -
Charge-offs (265,302) (290,049) (147,985)
Recoveries 9,870 26,067 21,049
---------- ---------- ----------
Balance, end of year $2,252,062 $2,107,994 $1,852,576
========== ========== ==========
44
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS RECEIVABLE - (Continued)
Investment in impaired loans is summarized below. There were no
impaired loans for the periods presented without an allowance
allocation.
June 30,
--------------------------------------
2000 1999 1998
---- ---- ----
Year-end impaired loans $1,562,000 $ 2,529,000 $2,128,000
Amount of allowance for loan
loss allocated 117,000 135,000 128,000
Average impaired loans outstanding 2,764,000 2,382,000 1,934,000
Interest income recognized 223,000 197,000 157,000
Interest income received 223,000 197,000 157,000
Non-performing loans, including impaired loans, are as follows:
June 30,
------------------------------------
2000 1999 1998
---- ---- ----
Past due 90 days still on accrual $ - $ - $ -
Nonaccrual 1,307,000 2,381,000 2,057,000
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
June 30,
----------------------------
2000 1999
---- ----
Land $ 816,265 $ 816,265
Buildings 9,962,447 9,391,174
Furniture, fixtures and equipment 5,746,366 5,180,745
---------- ----------
16,525,078 15,388,184
Less accumulated depreciation (4,815,810) (3,793,815)
---------- ----------
$11,709,268 $11,594,369
=========== ===========
Certain premises are leased under various operating leases. Rental
expense was $259,600, $233,318 and $63,200 for the years ended June 30,
2000, 1999, and 1998, respectively. Future minimum commitments under
these leases are:
Year Ended
June 30,
----------
2001 $ 256,000
2002 198,067
2003 195,633
2004 198,833
Thereafter 1,562,817
---------
$2,411,350
==========
45
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. DEPOSITS
Time Deposits of $100,000 or more were $87,941,000 and $75,012,000 at
June 30, 2000 and 1999, respectively. At June 30, 2000, scheduled
maturities of time deposits are as follows:
Amount
------
2001 $181,636,792
2002 85,517,574
2003 11,547,531
2004 6,832,770
Thereafter 5,578,228
------------
$291,112,895
============
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. At June 30, 2000, the Bank has available
collateral to borrow an additional $200 million from the Federal Home
Loan Bank.
<TABLE>
<CAPTION>
June 30,
2000 1999
---- ----
---------------------------------------------------
Weighted- Weighted-
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Variable rate advances - % $ - 5.19% $25,000,000
Fixed rate advances:
Mortgage matched advances
payable monthly through
May, 2009 with interest
rates from 5.30% to 7.80% 6.54% 691,190 6.59% 894,127
Overnight repo advance 7.20% 44,000,000 - -
One month repo advance 6.55% 35,000,000 - -
Other fixed rate advances 7.53% 647,360 - -
Lines of credit in the amount
of $28 million (2000) and $21
million (1999) maturing in 2004
through 2006 8.69% - 8.40% -
----------- -----------
Total borrowings $80,338,550 $25,894,127
=========== ===========
</TABLE>
The aggregate minimum annual repayments of borrowings as of June 30,
2000 is as follows:
2001 $79,091,645
2002 96,468
2003 101,625
2004 107,140
2005 113,039
Thereafter 828,633
-----------
$80,338,550
===========
46
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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:
2000 1999 1998
---- ---- ----
Current $2,439,347 $3,148,557 $3,175,254
Deferred 353,014 (178,266) 126,743
---------- ---------- ----------
Total income tax expense $2,792,361 $2,970,291 $3,301,997
========== ========== ==========
The provision for income taxes differs from the amount computed at the
statutory rates as follows:
2000 1999 1998
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Tax-exempt interest income (.2) (.2) (.2)
Purchase Accounting 1.0 .9 1.4
Dividends to ESOP (.6) (.5) (.5)
Other (1.2) (1.0) (.4)
---- ---- ----
Effective rate 33.0% 33.2% 34.3%
===== ===== =====
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:
2000 1999
---- ----
Deferred tax assets:
Allowance for loan losses $ 158,344 $ 261,200
Loan fees - 114,839
Investment securities 107,426 127,481
Accrued liabilities and other 211,400 216,048
------- -------
477,170 719,568
------- -------
Deferred tax liabilities:
Depreciation 890,335 837,234
Net unrealized gain on securities
available-for-sale 228,818 565,632
Federal Home Loan Bank stock 714,155 633,473
Other 558,765 581,932
------- ---------
2,392,073 2,618,271
--------- ---------
Net deferred tax liability $1,914,903 $1,898,703
========== ==========
47
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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, 2000 and 1999. 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 $650,000 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 - Savings institutions insured
by the FDIC must meet various regulatory capital requirements.
If a requirement is not met, regulatory authorities may take
legal or administrative actions, including restrictions on
growth or operations or, in extreme cases, seizure.
As of June 30, 2000, the Bank was categorized as well
capitalized. The Bank's actual and required capital amounts
and ratios are presented below:
<TABLE>
<CAPTION>
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------
As of June 30, 2000: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (to risk-
weighted assets) $44,606,000 11.4% $31,262,000 8.0% $39,078,000 10.0%
Tier I capital (to risk-weighted
assets) 42,354,000 10.8 15,631,000 4.0 23,447,000 6.0
Tier I capital (to average assets) 42,354,000 7.8 21,865,000 4.0 27,331,000 5.0
As of June 30, 1999
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 average assets) 42,570,000 8.9 19,152,000 4.0 23,940,000 5.0
</TABLE>
(c) Dividend Restrictions - Under OTS regulations, limitations
have been imposed on all "capital distributions" by savings
institutions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the
greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination
ratings by the OTS.For example, a thrift which is given one of
48
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY - (Continued)
the two highest examination ratings and has "capital" equal to
its fully phased-in regulatory capital requirements (a "tier 1
institution") could, if a subsidiary of a holding company,
after prior notice but without the prior approval of the OTS,
make capital distributions in any year to the extent not in
excess of its net income for the calendar year-to-date plus
retained net income for the previous two calendar years (less
any dividends previously paid), provided that the thrift
remains adequately capitalized following the distribution.
Other thrifts would be subject to more stringent procedural
and substantive requirements, the most restrictive being prior
OTS approval of any capital distribution. The Bank is a tier
one institution. Under the most restrictive of the dividend
limitations described above, at June 30, 2000, the Bank was
able to declare $8.4 million in additional dividends to the
holding company without obtaining the prior approval of the
OTS.
(d) Qualified Thrift Lender - The Qualified Thrift Lender ("QTL")
test requires that approximately 65% of assets be maintained
in housing-related finance and other specified areas. If the
QTL test is not met, limits are placed on growth, branching,
new investments, FHLB advances and dividends, or the Bank must
convert to a commercial bank charter. Management believes that
the QTL test has been meet.
10. EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the
basic and diluted EPS is as follows:
Year Ended June 30,
2000 1999 1998
---- ---- ----
Net income available to common
shareholders $5,663,342 $5,978,801 $6,334,217
========== ========== ==========
Basic EPS:
Weighted average common shares 3,906,197 4,127,804 4,145,039
========= ========= =========
Diluted EPS:
Weighted average common shares 3,906,197 4,127,804 4,145,039
Dilutive effect of stock options 16,766 20,419 29,114
--------- --------- ---------
Weighted average common and
incremental shares 3,922,963 4,148,223 4,174,153
========= ========= =========
Earnings Per Share:
Basic $1.45 $1.45 $1.53
===== ===== =====
$1.44 $1.44 $1.52
===== ===== =====
Stock options for 65,000 shares of common stock were not
included in the 2000 computation of diluted earning per share
because their impact was anti-dilutive.
49
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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 2000,
1999 and 1998 totaled $5,418, $4,486, and $4,438,
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 2000, 1999
and 1998 were $166,577, $142,465, and $116,367, 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 were 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:
2000 1999 1998
---- ---- ----
Allocated ESOP shares 211,503 225,889 230,213
Contributions to ESOP $66,000 $50,000 $30,000
(c) Stock Option Plan - Under the 1998 Stock Option and Incentive
Plan, the Corporation may grant either incentive or
non-qualified stock options to key employees for an aggregate
of 166,000 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,
------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 55,064 $15.52 42,564 $12.88 71,314 $12.77
Granted during year 52,500 22.53 12,500 24.50 - -
Forfeited during year (500) 17.13 - - (7,750) 15.60
Exercised during the year (4,834) 15.10 - - (21,000) 11.52
------- ------ -------
Outstanding, end of year 102,230 19.13 55,064 15.52 42,564 12.88
======= ====== ======
Eligible for exercise at year end 32,230 26,564 26,564
Weighted average fair value of
options granted during the year $ 7.06 $ 8.79 $ -
</TABLE>
50
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. EMPLOYEE BENEFIT PLANS - (Continued)
The following table summarizes information about stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Weighted Average Average Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
------ ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 6.88 4,730 1.4 years $ 6.88 4,730 $ 6.88
$12.50 25,000 3.7 12.50 20,000 12.50
$16.00 to $16.63 7,500 4.8 16.21 - -
$22.38 to $24.50 65,000 9.4 22.91 7,500 23.25
------ -----
102,230 7.3 $19.13 32,230 $14.18
======= ======
</TABLE>
The pro-forma effect on net income and earnings per share is
as follows:
Year Ended
June 30,
2000 1999 1998
---- ---- ----
Net income: As reported $5,663,342 $5,978,801 $6,334,217
Pro-forma 5,600,975 5,968,780 6,332,502
Earnings per share:
Basic As reported $ 1.45 $ 1.45 $ 1.53
Pro-forma 1.43 1.45 1.53
Diluted As reported $ 1.44 $ 1.44 $ 1.52
Pro-forma 1.43 1.44 1.52
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 2000: 1) expected
dividend yields at 3.2%, 2) risk-free interest rates at 6.20%,
3) expected volatility at 27%, and 4) expected life of options
at 10 years. Future pro-forma net income will be negatively
impacted to the extent more options are granted.
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:
2000 1999 1998
---- ---- ----
Interest expense $20,613,518 $18,165,549 $15,903,156
=========== =========== ===========
Income taxes $ 2,973,347 $ 2,946,000 $ 1,461,000
========== =========== ===========
51
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. CASH FLOW ACTIVITIES - (Continued)
(b) Supplemental disclosure of non-cash activities:
2000 1999 1998
---- ---- ----
Loans to facilitate sales of
real estate owned $783,075 $320,688 $716,448
======== ======== ========
Transfers from loans to real
estate acquired through
foreclosure $674,465 $295,714 $666,463
======== ======== ========
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,
----------------------------
2000 1999
---- ----
Assets
Cash and interest bearing deposits $ 211,100 $ 595,638
Investment in subsidiary 53,302,018 55,255,823
Securities available-for-sale 279,301 199,894
Receivable from Bank - 1,787,705
Other assets 10,241 23,102
----------- -----------
$53,802,660 $57,862,162
=========== ===========
Liabilities and Stockholders' Equity
Payable to Bank $ 1,985,835 $ -
Other liabilities 135,744 -
Stockholders' equity 51,681,081 57,862,162
---------- ----------
$53,802,660 $57,862,162
=========== ===========
Condensed Statements of Income
Year Ended June 30,
------------------------------------
2000 1999 1998
---- ---- ----
Dividend from subsidiary $7,000,000 $4,000,000 $4,000,000
Interest income 52,695 34,681 35,188
Gain on sale of investments - - 51,620
Other expenses (164,893) (547,656) (65,329)
---------- --------- ---------
Income before income tax benefit 6,887,802 3,487,025 4,021,479
Income tax benefit 93,942 222,473 56,535
---------- --------- ---------
Income before equity in undistributed
net income of subsidiary 6,981,744 3,709,498 4,078,014
Equity in undistributed net income of
subsidiaries (distributions in excess
of net income) (1,318,402) 2,269,303 2,256,203
---------- ---------- ----------
Net income $5,663,342 $5,978,801 $6,334,217
========== ========== ==========
52
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $5,663,342 $5,978,801 $6,334,217
Adjustments to reconcile net income to
cash provided by operating activities:
(Equity in undistributed net income
from subsidiary) distributions in
excess of net income 1,318,402 (2,269,303) (2,256,203)
Gain on sale of investments available
for-sale - - (51,620)
Decrease (increase) in other assets 22,344 (5,265) 150,908
(Decrease) increase in other
liabilities 135,744 - (51,620)
--------- --------- ---------
Net cash provided by operating activities 7,139,832 3,704,233 4,125,682
--------- --------- ---------
Investing Activities:
Purchases of securities available-for-sale (107,300) - -
Net change in receivable from Bank 1,787,705 (393,895) (778,172)
--------- --------- ----------
Net cash provided (used) by investing
activities 1,680,405 (393,895) (778,172)
--------- --------- ----------
Financing Activities:
Proceeds from stock options exercised 5,762 - 40
Dividends paid (2,802,833) (2,600,186) (2,319,019)
Common stock repurchases (8,393,539) (206,520) (1,117,315)
Collection on advance to ESOP - - 11,129
Net change in payable to Bank 1,985,835 - -
---------- ---------- ----------
Net cash used by financing activities (9,204,775) (2,806,706) (3,425,165)
---------- ---------- ----------
Net increase (decrease) in cash (384,538) 503,632 (77,655)
Cash and interest bearing deposits,
beginning of year 595,638 92,006 169,661
---------- ---------- ----------
Cash and interest bearing deposits,
end of year $ 211,100 $ 595,638 $ 92,006
========== ========== ==========
</TABLE>
53
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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, 2000 June 30, 1999
------------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,978,936 $ 14,979,000 $ 11,891,637 $ 11,892,000
Investment securities:
Securities available-for-sale 2,047,642 2,048,000 2,935,979 2,936,000
Securities held-to-maturity 43,133,967 41,195,000 44,404,392 43,525,000
Loans, net 471,231,319 463,191,000 400,360,402 397,967,000
Federal Home Loan Bank stock 4,080,800 4,080,800 3,200,000 3,200,000
Accrued interest receivable 2,031,877 2,032,000 1,603,514 1,604,000
Financial liabilities:
Deposits (423,758,955) (422,696,000) (399,443,439) (398,444,000)
Advances from Federal
Home Loan Bank (80,338,550) (79,992,000) (25,894,127) (24,239,000)
Accrued interest payable (1,128,790) (1,129,000) (868,840) (869,000)
</TABLE>
The methods and assumptions used by the Corporation in estimating its
fair value disclosures for financial instruments are presented below:
Carrying amount is the estimated fair value for cash and cash
equivalents, Federal Home Loan Bank stock, accrued interest receivable
and payable, demand deposits, and variable rate loans or deposits that
reprice frequently and fully. Security fair values are based on market
prices or dealer quotes, and if no such information is available, on
the rate and term of the security and information about the issuer. For
fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the
estimated life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral
values. Fair values of advances from Federal Home Loan Bank is based on
current rates for similar financing. The fair value of
off-balance-sheet items is based on the current fees or cost that would
be charged to enter into or terminate such arrangements.
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.
54
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (Continued)
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 counterparty.
Commitments to make loans, excluding undisbursed portions of loans in
process, at June 30 were as follows:
2000 1999
------------------------- -------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
Commitments to make loans $ 3,218,720 $ 1,859,590 $16,146,055 $ 3,455,856
Unused lines of credit - 28,020,618 - 21,090,958
Standby letters of credit - 3,240,860 - 2,694,940
----------- ----------- ----------- -----------
$ 3,218,720 $33,121,068 $16,146,055 $27,241,754
=========== =========== =========== ===========
Fixed rate loan commitments at June 30, 2000 were at current rates
ranging from 7.13% to 9.50%.
Variable rate loan commitments at June 30, 2000 were at current rates
ranging from 8.00% to 9.13% 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,
--------------------------
2000 1999
---- ----
Beginning of year $1,668,630 $1,112,789
New loans - 182,000
Repayments (246,857) (294,770)
Other changes (138,346) 668,611
---------- ----------
End of year $1,283,427 $1,668,630
========== ==========
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.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Information required by this item is herein incorporated 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
2000 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.
56
<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-Crowe, Chizek and
Company LLP
(a) (2) Report of Independent Auditors-Whelan, Doerr &
Company PSC
(b) Consolidated Statements of Financial Condition at
June 30, 2000 and 1999.
(c) Consolidated Statements of Income for the years ended
June 30, 2000, 1999, and 1998.
(d) Consolidated Statements of Comprehensive Income for
the years ended June 30, 2000, 1999, and 1998.
(e) Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 2000, 1999, and
1998.
(f) Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999, and 1998.
(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 Registrant has filed no reports on Form 8-K for the quarter
ending June 30, 2000.
* 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.
57
<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: 9/19/00 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: 9/19/00 Date: 9/19/00
By: /s/ Wreno M. Hall By: /s/ Bob Brown
------------------- ----------------
Wreno M. Hall Bob Brown
Director Director
Date: 9/19/00 Date: 9/19/00
By: /s/ J. Alton Rider By: /s/ Kennard Peden
-------------------- --------------------
J. Alton Rider Kennard Peden
Director Director
Date: 9/19/00 Date: 9/19/00
By: /s/ Burlyn Pike By: /s/ Walter D. Huddleston
--------------------- -------------------------
Burlyn Pike Walter D. Huddleston
Director Director
Date: 9/19/00 Date: 9/19/00
By: /s/ Stephen Mouser By: /s/ Charles Chaney
--------------------- ---------------------
Stephen Mouser Charles Chaney
Director Chief Operating Officer
Date: 9/19/00 Date: 9/19/00
By: /s/ Michael Thomas
-------------------
Michael Thomas, DVM
Director
Date: 9/19/00
58
<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.
59
<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)
First Heartland Mortgage Kentucky 100%
of Elizabethtown (a)
(a) Wholly-owned subsidiaries of First Federal Savings Bank of Elizabethtown.
60
<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.
61
<PAGE>
EXHIBIT 23(a) - CONSENT OF CROWE, CHIZEK & COMPANY LLP
We hereby consent to the inclusion of our report dated July 28, 2000 in the
annual report on Form 10-K of First Federal Financial Corporation of Kentucky as
of June 30, 2000.
/s/ Crowe, Chizek & Company LLP
-------------------------------
Crowe, Chizek & Company LLP
62
<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 to our
report dated August 17, 1998, relating to the consolidated financial statements
of First Federal Financial Corporation of Kentucky for the year ended June 30,
1998.
/s/ Whelan, Doerr & Company PSC
-------------------------------
Whelan, Doerr & Company PSC
63
