SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-K
FOR ALL ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------
Commission File No. 0-26360
FRANKFORT FIRST BANCORP, INC.
-----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1271129
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NO.)
216 W. MAIN STREET, FRANKFORT, KENTUCKY 40601
---------------------------------------- -------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (502) 223-1638
--------------
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
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]
As of September 15, 2000, the aggregate market value of the 837,183 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $11.7 million based on the closing sales price of
$14.00 per share of the registrant's Common Stock on September 15, 2000 as
reported on the Nasdaq National Market. For purposes of this calculation, it is
assumed that directors, officers and beneficial owners of more than 5% of the
registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of September 15, 2000: 1,261,108
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the
Form 10-K into which the document is incorporated:
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 2000. (Parts I and II)
2. Portions of Proxy Statement for the 2000 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
-----------------
GENERAL
THE COMPANY. Frankfort First Bancorp, Inc. (the "Company") was incorporated
under the laws of the State of Delaware in August 1994 at the direction of the
Board of Directors of First Federal Savings Bank of Frankfort ("First Federal"
or the "Bank") for the purpose of serving as a savings institution holding
company of First Federal upon the acquisition of all of the capital stock issued
by First Federal upon its conversion from mutual to stock form (the
"Conversion"). The Conversion was completed July 7, 1995, with the Company
issuing 1,725,000 (as adjusted) shares of its common stock, par value $.01 per
share (the "Common Stock") to the public, and the Bank issuing all of its issued
and outstanding common stock to the Company. Prior to and since the Conversion,
the Company had not engaged in any material operations. The Company has no
significant assets other than the outstanding capital stock of First Federal.
The Company's principal business is the business of First Federal. At June 30,
2000, the Company had total assets of $145.5 million, deposits of $82.5 million
and shareholder's equity of $18.8 million.
THE BANK. First Federal was originally chartered in 1934 as a
Kentucky-chartered building and loan association known as "Greater Frankfort
Building and Loan Association" and was rechartered in 1938 as First Federal
Savings and Loan Association of Frankfort. First Federal has been a member of
the Federal Home Loan Bank ("FHLB") of Cincinnati and its deposits have been
federally insured since 1938. In 1989, First Federal became a federal mutual
savings bank and adopted its current name. First Federal currently operates
through three banking offices located in Frankfort, Kentucky.
First Federal is primarily engaged in the business of attracting deposits
from the general public and originating loans secured by first mortgages on one-
to four-family residences in First Federal's market area. First Federal also
originates, to a lesser extent, church loans, home equity loans and other loans.
As a federally chartered savings institution, First Federal is subject to
extensive regulation by the Office of Thrift Supervision ("OTS"). The lending
activities and other investments of First Federal must comply with various
federal regulatory requirements, and the OTS periodically examines First Federal
for compliance with various regulatory requirements. The FDIC also has the
authority to conduct special examinations. First Federal must file reports with
the OTS describing its activities and financial condition and is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. For
additional information, see " -- Regulation of the Bank."
Both the Company's and First Federal's executive offices are located at 216
W. Main Street, Frankfort, Kentucky 40601, and their main telephone number is
(502) 223-1638.
LENDING ACTIVITIES
General. First Federal's principal lending activity consists of the
origination of loans secured by first mortgages on owner occupied one- to
four-family residences in the Bank's lending area, which is limited to the
Kentucky Counties of Franklin, Anderson, Scott, Shelby and Woodford. First
Federal also originates loans secured by nonowner occupied one- to four-family
homes, loans secured by churches, home equity lines of credit, second mortgages
and share loans. Additionally, First Federal offers financing for the
construction of single family, owner occupied homes. Such financing is available
only for, and made directly to, the homeowners.
Beginning in the early 1980s management of the Bank has sought to build a
rate sensitive loan portfolio and to manage First Federal's interest rate risk
by emphasizing the origination of adjustable rate mortgage loans with an initial
fixed term of one, three or five years. The Bank also offers fixed-rate
financing, but generally funds all or part of such loans with long-term,
fixed-rate advances from the FHLB of Cincinnati.
2
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth selected data
relating to the composition of First Federal's loan portfolio by type of loan at
the dates indicated. At June 30, 2000, First Federal had no concentrations of
loans exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
------------
Real estate loans --
Construction loans........................ $ 878 0.63% $ 808 0.61% $ 1,270 1.00%
One- to four-family residential........... 130,880 94.42 124,081 93.74 118,899 93.47
Multi-family residential.................. 76 0.05 78 0.06 80 0.06
Other loans (1)........................... 1,555 1.12 1,756 1.33 1,704 1.34
Consumer loans --
Savings account loans..................... 520 0.38 935 0.71 545 0.43
Home equity lines of credit............... 4,706 3.40 4,705 3.55 4,713 3.70
--------- ------- ---------- ------ --------- ------
138,615 100.00% 132,363 100.00% 127,211 100.00%
====== ====== ======
Less:
Loans in process.......................... 375 246 572
Discounts, deferred loan fees and other... 347 378 211
Loan loss reserve......................... 101 100 100
--------- ---------- ---------
Total.................................. $ 137,792 $ 131,639 $ 126,328
========= ========== =========
<CAPTION>
At June 30,
--------------------------------------------
1997 1996
--------------------- ------------------
Amount % Amount %
------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
------------
Real estate loans --
Construction loans........................ $ 1,060 0.87% $ 672 0.6%
One- to four-family residential........... 113,549 93.14 103,944 93.7
Multi-family residential.................. 58 0.05 123 0.1
Other loans (1)........................... 1,830 1.50 1,450 1.3
Consumer loans --
Savings account loans..................... 672 0.55 547 0.5
Home equity lines of credit............... 4,742 3.89 4,182 3.8
---------- ------ --------- ------
121,911 100.00% 110,918 100.00%
====== ======
Less:
Loans in process.......................... 824 392
Discounts, deferred loan fees and other... 99 100
Loan loss reserve......................... 100 95
---------- ---------
Total.................................. $ 120,888 $ 110,331
========== =========
<FN>
________
(1) Represents primarily church loans.
</FN>
</TABLE>
3
<PAGE>
The following table sets forth certain information at June 30, 2000
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less.
<TABLE>
<CAPTION>
Due After
Due Within 1 Through Due After
One Year After 5 Years After 5 Years After
June 30, 2000 June 30, 2000 June 30, 2000 Total
------------- ------------- ------------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Construction loans............. $ 878 $ -- $ -- $ 878
One- to four-family............ 4,188 18,755 107,937 130,880
Multi-family residential....... 3 11 62 76
Other loans...................... 50 223 1,282 1,555
Consumer loans:
Savings account loans.......... 520 -- -- 520
Home equity lines of credit.... 712 291 3,703 4,706
-------- --------- ---------- --------
Total........................ $ 6,351 $ 19,280 $ 112,984 $138,615
======== ========= ========== ========
</TABLE>
The following table sets forth at June 30, 2000, the dollar amount of all
loans due more than one year after June 30, 2000 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------------ ----------------
(In thousands)
<S> <C> <C>
Real estate loans:
One- to four-family residential................ $ 40,541 $ 86,151
Multi-family residential....................... -- 73
Other loans.................................... 378 1,127
Consumer loans:
Home equity lines of credit.................... -- 3,994
Savings account loans.......................... -- --
----------- -----------
Total....................................... $ 40,919 $ 91,345
=========== ===========
</TABLE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and tends to
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
4
<PAGE>
Originations of Loans. The following table sets forth certain information
with respect to First Federal's loan originations during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Originations
Real estate loans:
One- to four-family........................................ $ 28,309 $ 35,353 $ 31,786
Multi-family............................................... -- 64 82
Other...................................................... 305 20 161
Construction loans......................................... 836 1,363 1,445
Consumer loans:
Home equity line of credit................................. 2,852 3,181 2,702
Savings account loans...................................... 269 912 406
--------- --------- ---------
Total..................................................... $ 32,571 $ 40,893 $ 36,582
========= ========= =========
</TABLE>
Other than two loan participations purchased for purposes of community
investment and having a balance totaling $73,000 at June 30, 2000, the Bank has
not in recent years purchased or sold any loans. The Bank does not expect to
make any purchases or sales of loans in the foreseeable future, although it may
continue to purchase loan participations.
One- to Four-Family Residential Lending and Second Mortgage Loans. The Bank
historically has been and continues to be an originator of loans secured by
owner occupied, one- to four-family residential properties located in its market
area. At June 30, 2000, approximately $130.9 million, or 94.4%, of the Bank's
loan portfolio consisted of loans secured by one- to four-family residential
properties which were primarily owner-occupied, single family residences.
First Federal began originating adjustable-rate residential mortgage loans
in the early 1980s. Since that time, most one- to four-family mortgage loans
originated by the Bank have been adjustable-rate loans with an initial fixed
term of one, three, or five years. After the initial term, the rate adjustments
on the Bank's adjustable-rate loans are indexed to the National Average Contract
Interest Rate for Major Lenders on the Purchase of Previously Occupied Homes
("NACR"). The interest rates on these mortgages are adjusted once a year, with
limitations on adjustments of one percentage point per adjustment period, and a
lifetime cap of five percentage points.
At June 30, 2000, the Bank's loan portfolio included $89.0 million in
adjustable-rate one- to four-family residential mortgage loans, or 68.0% of the
Bank's one- to four-family residential mortgage loan portfolio.
The retention of adjustable-rate loans in First Federal's portfolio helps
reduce First Federal's exposure to increases in prevailing market interest
rates. However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, although adjustable-rate
loans allow First Federal to increase the sensitivity of its interest-earning
assets to changes in interest rates, the extent of this interest sensitivity is
limited by the initial fixed rate period before the first adjustment and the
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on First Federal's adjustable-rate loans will
fully adjust to compensate for increases in First Federal's cost of funds.
Finally, adjustable rate loans increase First Federal's exposure to decreases in
prevailing market interest rates, although decreases in First Federal's cost of
funds may offset this effect.
In general, First Federal originates residential mortgage loans with
loan-to-value ratios of up to 95%, with private mortgage insurance required for
loans with loan-to-value ratios greater than 80%.
5
<PAGE>
The Bank also originates second mortgage loans if the Bank holds the first
mortgage on the property. Although these loans are secured by a lien on the
borrower's primary residence, they differ from the Bank's traditional first
mortgage loans in that the terms of these loans are substantially shorter than
25 years (generally 120 months or less). All of such loans are underwritten to a
maximum of 80% loan-to-value ratio and all are fully amortizing. The Bank has
been offering second mortgages up to an overall 90% loan-to-value ratio at a
premium rate to qualified borrowers. These loans have a term of seven years and
are not covered by private mortgage insurance. At June 30, 2000, the outstanding
balance of these loans totaled $224,000.
Church and Other Nonresidential Real Estate Lending. First Federal has also
been active in originating loans secured by churches located in the Bank's
primary market area. These loans have a maximum loan-to-value ratio of 75%, and
are originated under the same terms as the Bank's one- to four-family real
estate mortgage loans. At June 30, 2000, the Bank had 16 church loans
aggregating approximately $1.5 million. In the past the Bank offered small
commercial loans secured by property located in its market area. The Bank has
been inactive in this type of lending in recent years.
Construction Lending. The Bank offers single family residential
construction loans to qualified borrowers for construction of single-family
owner occupied residences in Franklin County. At June 30, 2000, single-family
residential construction loans constituted $878,000, or 0.6%, of First Federal's
total loans. First Federal limits its construction lending to loans to
individuals building their primary residences. These loans generally have rates
that are fixed for six months and are underwritten in accordance with the same
standards as First Federal's mortgages on existing properties, except the loans
generally provide for disbursement in stages during a construction period of up
to six months, during which period the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance. Construction loans
have a maximum loan-to-value ratio of 80%. Borrowers must satisfy all credit
requirements which would apply to First Federal's permanent mortgage loan
financing for the subject property. The Bank's construction loans may be
refinanced into permanent loans upon completion of the construction.
Construction financing is considered to involve a higher degree of risk of
loss than long-term financing on improved, occupied real estate. Risk of loss on
a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) thereof. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, First Federal may be required to
advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, First Federal may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment. First Federal has sought
to minimize this risk by limiting construction lending to qualified borrowers in
Franklin County and by limiting the number of outstanding construction loans.
Consumer Lending. The consumer loans originated by the Bank include home
equity lines of credit, and loans secured by savings deposits.
At June 30, 2000, the Bank's consumer loan balance totaled $5.2 million, or
3.8% of its total loan portfolio. Of the consumer loan balance at June 30, 2000,
90.0% were home equity loans and 10.0% were loans secured by savings deposits at
the Bank.
The Bank's home equity loans are made on the security of residential real
estate which have terms of up to 10 years. Most of the Bank's home equity loans
do not exceed 80% of the estimated value of the property, less the outstanding
principal of the first mortgage. The Bank does offer home equity loans up to 90%
of the value, less the balance of the first mortgage. The amount of the
principal of the loan above 80% of the estimated value of the property is not
insured by private mortgage insurance. The Bank's home equity loans require the
monthly payment of 2% of the unpaid principal until maturity, when the remaining
unpaid principal, if any, is due. The Bank's home equity loans bear variable
rates of interest indexed to the prime rate for loans with 80% or less
loan-to-value ratio, and 2% above the prime rate for loans with a loan-to-value
ratio in excess of 80%. Interest rates on these loans can
6
<PAGE>
be adjusted monthly. At June 30, 2000, the total outstanding home equity loans
amounted to $4.7 million, or 3.4%, of the Bank's total loan portfolio.
The Bank makes savings account loans for up to 90% of the depositor's
savings account balance. The interest rate is normally two percentage points
above the rate paid on the savings account, and the account must be pledged as
collateral to secure the loan. At June 30, 2000, loans on savings accounts
totaled $520,000, or 0.4%, of the Bank's total loan portfolio.
Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by rapidly depreciable assets. However, these risks are considerably reduced in
the case of First Federal, since all of the Bank's consumer loans are home
equity lines of credit or savings account loans.
Loan Solicitation and Processing. First Federal's loan originations are
derived from a number of sources, including referrals by real estate agents,
depositors and borrowers, as well as walk-in customers. First Federal's
solicitation programs consist of advertisements in local media, in addition to
occasional participation in home buying seminars and open house events sponsored
by local real estate agents. Real estate loans are originated by First Federal's
salaried staff loan officers.
Upon receipt of a loan application from a prospective borrower, a credit
report and documentation is requested to verify specific information relating to
the loan applicant's employment, income credit standing and any deposit to be
used for a down payment. It is First Federal's policy to obtain an appraisal of
the real estate intended to secure a proposed mortgage loan from an independent
fee appraiser approved by First Federal. Appraisals are generally required on
all purchase loans, all loans to refinance another lender, all loans to
refinance First Federal's loans when the existing appraisal is more than five
years old and the loan amount does not exceed regulatory limits, and other loans
at the loan committee's discretion. A panel of qualified appraisers are approved
by the Board annually, and management selects appraisers for specific jobs.
Certain Bank employees perform inspections for construction financing and for
transactions that do not require a full appraisal. Except when First Federal
becomes aware of a particular risk of environmental contamination, First Federal
generally does not obtain a formal environmental report on the real estate at
the time a loan is made.
The Bank makes a 30-day loan commitment for each loan approved. For
adjustable-rate loans, the rate is guaranteed for the period of 14 days
following approval. The Bank will make a similar guarantee for fixed-rate loans
for a fee. If the borrower desires a longer commitment, the commitment may be
extended at a cost of 0.1% of the loan balance per month for up to three months.
The rate is subject to change during this extended commitment. In the case of
construction loans, a commitment is also made for the permanent financing to be
funded no later than 182 days from the date of the closing of the construction
loan. The interest rate on permanent financing is not guaranteed until closing
of the permanent loan.
The Bank's loan committee analyzes a completed application and may approve
or deny the loan if the loan is $250,000 or less and the property is a one- to
four-family dwelling, the loan is $150,000 or less and the property is a church,
or a home equity line of credit of $100,000 or less. Loans that do not conform
to these criteria must be submitted to the Board of Directors for approval.
It is First Federal's policy to record a lien on the real estate securing a
loan. The Bank does not require title insurance unless the attorney who provides
the title opinion cannot or will not certify the title as clear and marketable.
The Bank requires fire and casualty insurance on all security properties and
flood insurance when the collateral property is located in a designated flood
hazard area. The Bank also requires an earthquake provision in all policies for
new loans. A Bank employee is designated to constantly review and update
insurance files.
Loans to One Borrower. Under applicable law, with certain limited
exceptions, loans and extensions of credit by a savings institution to a person
outstanding at one time shall not exceed 15% of the institution's unimpaired
capital and surplus. Loans and extensions of credit fully secured by readily
marketable collateral may
7
<PAGE>
comprise an additional 10% of unimpaired capital and surplus. Applicable law
additionally authorizes savings institutions to make loans to one borrower, for
any purpose, in an amount not to exceed $500,000 or, by order of the Director of
OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired
capital and surplus to develop residential housing, provided (1) the purchase
price of each single-family dwelling in the development does not exceed
$500,000, (2) the savings institution is and continues to be in compliance with
its regulatory capital requirements, (3) the loans comply with applicable
loan-to-value requirements, and (4) the aggregate amount of loans made under
this authority does not exceed 150% of the institution's unimpaired capital and
surplus. Under these limits, the Bank's loans to one borrower were limited to
$3.0 million at June 30, 2000. At that date, the Bank had no lending
relationships in excess of the OTS's loans-to-one-borrower limit.
Interest Rates and Loan Fees. Interest rates charged by First Federal on
mortgage loans are primarily determined by competitive loan rates offered in its
market area and First Federal's yield objectives. Mortgage loan rates reflect
factors such as prevailing market interest rate levels, the supply of money
available to the savings industry and the demand for such loans. These factors
are in turn affected by general economic conditions, the monetary policies of
the federal government, including the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), the general supply of money in the
economy, tax policies and governmental budget matters.
First Federal receives fees in connection with late payments and for
miscellaneous services related to its loans. First Federal typically receives
fees of one point (one point being equivalent to 1% of the principal amount of
the loan) in connection with the origination of construction loans. Depending on
the type of loan and the competitive environment for mortgage loans, the Bank
may charge an origination fee on all or some of the loans it originates.
Asset Classification, Allowances for Losses and Non-Performing Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose a savings 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 a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. First Federal regularly reviews its
assets to determine whether any assets require classification or
re-classification. The Board of Directors reviews and approves all
classifications. At June 30, 2000, First Federal had no loans classified as loss
or doubtful and $543,000 of assets classified as substandard. At June 30, 2000,
assets designated as special mention totaled $314,000.
Management will continue to actively monitor First Federal's asset quality
and will establish loan loss reserves and will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.
First Federal's methodology for establishing the allowance for losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of First Federal's assets
and evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a quarterly basis based
on an assessment of risk in First Federal's assets taking into consideration the
composition and
8
<PAGE>
quality of the portfolio, delinquency trends, current charge-offs and loss
experience, the state of the real estate market, regulatory reviews conducted in
the regulatory examination process and economic conditions generally. Allowances
will be provided for individual assets, or portions of assets, when ultimate
collection is considered improbable by management based on the current payment
status of the assets and the fair value or net realizable value of the security.
At the date of foreclosure or other repossession, First Federal would transfer
the property to real estate acquired in settlement of loans at the lower of cost
or fair value. Any portion of the outstanding loan balance in excess of fair
value would be charged off against the allowance for loan losses. If, upon
ultimate disposition of the property, net sales proceeds exceed the net carrying
value of the property, a gain on sale of real estate would be recorded. Any
losses realized on sale would be charged to the allowance for loan losses on
real estate acquired through foreclosure. The Bank has not experienced any such
losses in recent years.
The following table sets forth an analysis of First Federal's allowance for
loan losses for the periods indicated. As indicated above, First Federal has had
no loans charged off during these periods.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...................... $ 100 $ 100 $ 100 $ 95 $ 83
Provision for loan losses........................... 1 -- -- 5 12
-------- --------- ------ ------ -----
Balance at end of period............................ $ 101 $ 100 $ 100 $ 100 $ 95
======== ========= ====== ====== =====
</TABLE>
9
<PAGE>
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- ------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential..................... $ 95 94.5% $ 94 93.8% $ 94 93.6%
Commercial...................... 1 1.1 2 1.3 1 1.3
Real estate - construction........ 1 0.6 -- 0.6 1 1.0
Consumer.......................... 4 3.8 4 4.3 4 4.1
------- ----- ------ ----- ------ -----
Total allowance for loan losses... $ 101 100.0% $ 100 100.0% $ 100 100.0%
======= ===== ====== ===== ====== =====
<CAPTION>
June 30,
-----------------------------------------------------
1997 1996
-------------------------- ------------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential..................... $ 93 93.2% $ 89 93.8%
Commercial...................... 2 1.5 1 1.3
Real estate - construction........ 1 0.9 1 0.6
Consumer.......................... 4 4.4 4 4.3
------- ----- ------ -----
Total allowance for loan losses... $ 100 100.0% $ 95 100.0%
======= ===== ====== =====
</TABLE>
10
<PAGE>
The following table sets forth information with respect to First Federal's
non-performing assets at the dates indicated. At these dates, First Federal did
not have any non-accrual loans or any restructured loans within the meaning of
SFAS No. 15. All loans 90 days or more past due are secured by residential
property for all periods in the table below.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
Accruing loans which are contractually
past due 90 days or more.......................... $ 502 $ 188 $ 363 $ 116 $ 118
Percentage of total loans........................... 0.36% 0.14% 0.29% .10% .11%
Percentage of total assets.......................... 0.35% 0.13% 0.27% .09% .09%
</TABLE>
At June 30, 2000, the Bank had no loans which were not already classified
as non-accrual, 90 days past due or restructured where known information about
possible credit problems of borrowers caused management to have serious concerns
as to the ability of the borrowers to comply with present loan repayment terms,
except as follows. At June 30, 2000, the Bank had $329,000 outstanding to one
borrower, representing four loans, one with a balance of $229,000 and secured by
the borrower's principal residence and the others secured by residential rental
properties. While all of these loans are currently fully performing, management
of the Bank is aware that the borrower is likely to have difficulty complying
with the loans' repayment terms in the future because of legal difficulties
experienced by the borrower. Management does not expect the Bank to sustain
material losses on these loans because of the estimated value of the collateral.
INVESTMENT ACTIVITIES
First Federal is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Cincinnati, certificates of
deposit in federally insured institutions, certain bankers' acceptances and
federal funds. First Federal may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require First Federal to
maintain an investment in FHLB of Cincinnati stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets which savings
institutions are required to maintain. For additional information, see " --
Regulation of the Bank -- Liquidity Requirements."
First Federal makes investments in order to diversify its assets, manage
cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. The Bank currently maintains an investment
portfolio consisting primarily of deposits in other financial institutions and
U.S. Government agency issues. Investment decisions generally are made by First
Federal's Investment Committee and approved by the Board of Directors. In the
future, the Investment Committee may consider other investment options and
investment strategies, including but not limited to FHLB Certificates of
Deposit, U.S. Treasury issues, Federal agency issues, and mortgage-backed
securities.
First Federal has the ability and it is management's intention to hold the
Bank's investment securities to maturity. Therefore, First Federal carries these
securities at cost, adjusted for amortization of premiums and accretion of
discounts on a method which approximates the interest method over the term of
the security.
11
<PAGE>
The following table sets forth the carrying value of the First Federal's
investment portfolio and FHLB stock at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
2000 1999 1998
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. Government agency issues.................................. $ 1,979 $ 2,004 $ 2,996
Interest-earning deposits and certificates of deposit.......... 945 1,800 1,320
FHLB stock..................................................... 2,351 1,621 1,494
--------- --------- ---------
Total investments......................................... $ 5,275 $ 5,425 $ 5,810
========= ========= =========
</TABLE>
The following table sets forth information regarding the scheduled
maturities, market value and weighted average yields for First Federal's
investments, excluding FHLB stock, at June 30, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------------------------------------------------
One Year or Less One to Five Years Total Investment Portfolio
-------------------- ---------------------- -----------------------------
Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Federal agency issued bonds....... $ -- --% $ 1,979 6.4% $ 1,979 $ 1,965 6.4 %
Interest-earning deposits and
certificates of deposit........... 945 6.53 -- -- 945 945 6.53
-------- -------- ------- -------
Total........................... $ 945 $ 1,979 $ 2,924 $ 2,910
======== ======== ======= =======
</TABLE>
For additional information, see Notes A2 and B of the Notes to Consolidated
Financial Statements included in the 2000 Annual Report to Stockholders (the
"Annual Report").
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of First Federal's funds for
lending and other investment purposes. In addition to deposits, First Federal
derives funds from borrowings from the FHLB of Cincinnati, loan principal
repayments, interest payments and maturing investments. FHLB advances are
generally more costly than deposits but provide greater flexibility in terms and
are more easily matched to the life of assets in the Bank's portfolio. Loan
repayments and interest payments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by prevailing market
interest rates and money market conditions.
Deposits. First Federal attracts deposits principally from within its
market area by offering a variety of deposit instruments, including passbook
accounts, money market accounts, retirement savings accounts, checking accounts
and certificates of deposit which range in term from three to 120 months.
Deposit terms vary, principally on the basis of the minimum balance required,
the length of time the funds must remain on deposit and the interest rate.
First Federal's policies are designed primarily to attract deposits from
local residents through First Federal's branch network rather than from outside
First Federal's market area. First Federal does not accept deposits from brokers
due to their rate sensitivity. First Federal's interest rates, maturities,
service fees and withdrawal penalties on deposits are established by management
on a periodic basis. Management determines deposit interest rates and maturities
based on First Federal's liquidity requirements, the rates paid by First
Federal's competitors, First Federal's growth goals and applicable regulatory
restrictions and requirements.
12
<PAGE>
Savings deposits in First Federal at June 30, 2000 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Balance in Percentage of
Rate (1) Term Category Amount Thousands Total Savings
-------- ------- -------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C>
3.00% None Passbook $ 100 $ 10,091 12.23%
3.00 None Christmas Savings N/A 149 0.18
3.00 None NOW 300 1,619 1.96
3.00 None Home Equity & Construction N/A 11 0.01
3.10 None Golden 50 300 2,074 2.52
3.08 None Super NOW 1,000 568 0.69
3.23 None MMDA 1,000 3,952 4.79
-- None Noninterest-bearing 300 165 0.20
---------- -----
18,629 22.58
Certificates of Deposit
-----------------------
4.03% 91-Days Fixed Term, Fixed Rate 500 871 1.05
4.34 182-Days Fixed-Term, Fixed Rate 500 3,290 3.99
6.05 7-month Fixed-Term, Fixed Rate (2) 5,000 11,328 13.73
3.50 9-month Fixed-Term, Fixed Rate 500 355 0.43
6.34 9-month Fixed-Term, Fixed Rate 500 5,920 7.18
4.76 12-month Fixed-Term, Fixed Rate 500 9,132 11.07
5.75 15-month Fixed-Term, Fixed Rate 500 384 0.46
4.88 18-month Fixed-Term, Fixed Rate 500 1,759 2.13
6.78 21-month Fixed-Term, Fixed Rate 500 939 1.14
5.03 24-month Fixed-Term, Fixed Rate 500 5,054 6.13
5.21 30-month Fixed-Term, Fixed Rate 500 2,696 3.27
5.88 36-month Fixed-Term, Fixed Rate 500 10,068 12.20
6.00 60-month Fixed-Term, Variable Rate 500 3,163 3.83
5.73 72-month Fixed Term, Variable Rate 500 278 0.34
4.65 12-month Variable IRA 100 3,598 4.36
4.65 12-month Fixed-Term, Variable Rate 500 571 0.69
4.91 24-month Fixed-Term, Variable Rate (3) 500 4,429 5.37
3.00 Varies Other N/A 38 0.05
---------- -----
63,873 77.42
---------- -----
$ 82,502 100.00%
========== ======
<FN>
_________________
(1) Represents weighted average interest rate.
(2) Account holder may withdraw all or part of the account balance after 30 days.
(3) Account holder has a one-time option to increase the interest rate to the rate offered by the Bank on a
new 24-month Certificate of Deposit.
</FN>
</TABLE>
13
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by First Federal between the dates
indicated.
<TABLE>
<CAPTION>
Balance at Balance at
June 30, % of Increase June 30, % of Increase
2000 Deposits (Decrease) 1999 Deposits (Decrease)
---- -------- ---------- ---- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook............................... $ 10,091 12.23% $ (132) $ 10,223 11.85% $ 79
Christmas savings...................... 149 0.18 (13) 162 0.19 (22)
NOW.................................... 1,619 1.96 (42) 1,661 1.93 30
Home equity............................ 11 0.01 8 3 0.00 3
Golden 50.............................. 2,074 2.52 256 1,818 2.11 212
Super Now.............................. 568 0.69 (2,160) 2,728 3.16 2,249
MMDA................................... 3,952 4.79 (495) 4,447 5.16 (85)
Noninterest-bearing.................... 165 0.20 (182) 347 0.40 34
---------- ------ -------- ---------- ------ -----------
18,629 22.58 (2,760) 21,389 24.80 2,500
Certificates of Deposit
-----------------------
Fixed-Term, Fixed-Rate:
91-days.............................. 871 1.05 (463) 1,334 1.55 (80)
182-days............................. 3,290 3.99 (2,178) 5,468 6.34 (169)
7-month.............................. 11,328 13.73 11,328 0 0.00 (3,231)
9-month.............................. 6,275 7.61 4,671 1,604 1.86 1,266
12-month............................. 9,132 11.07 (4,872) 14,004 16.24 5,296
15-month............................. 384 0.46 (3,996) 4,380 5.08 (6,442)
18-month............................. 1,759 2.13 (6,352) 8,111 9.40 8,011
21-month............................. 939 1.14 939 0 0.00 0
24-month............................. 5,054 6.13 549 4,505 5.22 (692)
30-month............................. 2,696 3.27 (4,293) 6,989 8.10 1,382
36-month............................. 10,068 12.20 6,013 4,055 4.70 (1,186)
60-month............................. 3,163 3.83 (78) 3,241 3.76 (738)
72-month............................. 278 0.34 (18) 296 0.34 (17)
Variable IRA (12-month)................ 3,598 0.34 (1,147) 4,745 5.50 114
Fixed-Term, Variable-Rate (12 month)... 571 0.69 (72) 643 0.75 (314)
Fixed-Term, Variable-Rate (24 month)... 4,429 5.37 (1,025) 5,454 6.32 (1,306)
Other.................................. 38 0.05 2 36 0.04 (31)
---------- ------ -------- ---------- ------ -----------
63,873 77.42 (992) 64,865 75.20 1,863
---------- ------ -------- ---------- ------ -----------
Total.............................. $ 82,502 100.00% $ (3,752) $ 86,254 100.00% $ 4,363
========== ====== ======== ========== ====== ===========
<CAPTION>
Balance at
June 30, % of
1998 Deposits
---- --------
<S> <C> <C>
Passbook............................... $ 10,144 12.39%
Christmas savings...................... 184 0.22
NOW.................................... 1,631 1.99
Home equity............................ -- --
Golden 50.............................. 1,606 1.96
Super Now.............................. 479 0.58
MMDA................................... 4,532 5.53
Noninterest-bearing.................... 313 0.40
---------- ------
18,889 23.07
Certificates of Deposit
-----------------------
Fixed-Term, Fixed-Rate:
91-days.............................. 1,414 1.73
182-days............................. 5,637 6.88
7-month.............................. 3,231 3.95
9-month.............................. 338 0.41
12-month............................. 8,708 10.63
15-month............................. 10,822 13.22
18-month............................. 100 0.12
21-month............................. 0 0.00
24-month............................. 5,197 6.35
30-month............................. 5,607 6.85
36-month............................. 5,241 6.40
60-month............................. 3,979 4.86
72-month............................. 313 0.38
Variable IRA (12-month)................ 4,631 5.66
Fixed-Term, Variable-Rate (12 month)... 957 1.17
Fixed-Term, Variable-Rate (24 month)... 6,760 8.25
Other.................................. 67 0.07
---------- ------
63,002 76.93
---------- ------
Total.............................. $ 81,891 100.00%
========== ======
</TABLE>
14
<PAGE>
The following table sets forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
2000 1999 1998
------------------- ----------------- --------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance.............. $ 9,127 $ 64,073 $ 8,945 $ 63,692 $ 9,204 $ 63,761
Average rate................. 3.20% 5.14% 3.17% 5.21% 3.10% 5.33%
</TABLE>
The following table sets forth the time deposits in First Federal
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
2000 1999 1998
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
2 - 3.99%............................... $ 284 $ 178 $ 90
4 - 5.99%............................... 40,046 62,114 58,966
6 - 7.99%............................... 23,543 2,573 3,944
8 - 9.99%............................... -- -- 2
--------- --------- ---------
$ 63,873 $ 64,865 $ 63,002
========= ========= =========
</TABLE>
The following table sets forth the amount and maturities of time deposits
in First Federal at June 30, 2000.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- -------- --------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2 - 3.99%..................... $ 258 $ 26 $ -- $ -- $ 284
4 - 5.99%..................... 28,405 7,338 3,660 643 40,046
6 - 7.99%..................... 14,108 4,174 4,918 343 23,543
--------- ---------- ---------- ---------- ----------
$ 42,771 $ 11,538 $ 8,578 $ 986 $ 63,873
========= ========== ========== ========== ==========
</TABLE>
The following table indicates the amount of the certificates of deposit of
$100,000 or more in First Federal by time remaining until maturity at June 30,
2000.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less............................................... $ 1,635
More than three through six months................................. 2,067
More than six through 12 months.................................... 2,804
Over 12 months..................................................... 3,396
---------
Total..................................................... $ 9,902
=========
</TABLE>
15
<PAGE>
The following table sets forth the deposit activities of First Federal for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
2000 1999 1998
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance................................. $ 86,254 $ 81,891 $ 85,957
Deposits.......................................... 63,558 56,813 57,438
Withdrawals....................................... 71,187 56,378 65,540
--------- --------- ---------
Net increase (decrease) before interest credited.. (7,629) 435 (8,102)
Interest credited................................. 3,877 3,928 4,036
--------- --------- ---------
Net increase (decrease) in deposits............... (3,752) 4,363 (4,066)
--------- --------- ---------
Ending balance.................................... $ 82,502 $ 86,254 $ 81,891
========= ========= =========
</TABLE>
Borrowings. Savings deposits historically have been the primary source of
funds for First Federal's lending, investment and general operating activities.
First Federal is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Cincinnati functions as a central reserve
bank providing credit for savings institutions and certain other member
financial institutions. As a member of the FHLB system, First Federal is
required to own stock in the FHLB of Cincinnati and is authorized to apply for
advances. Advances are made pursuant to several different programs, each of
which has its own interest rate and range of maturities. Advances from the FHLB
of Cincinnati are secured by a portion of First Federal's mortgage loan
portfolio. At June 30, 2000, First Federal had $42.1 million in advances
outstanding from the FHLB of Cincinnati.
The following table sets forth certain information regarding the borrowings
outstanding of the Company and the Bank at the dates and for the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------
2000 1999
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances............................................... $ 42,108 $ 30,878
Other loans................................................. 373 284
--------- ---------
Total.................................................... 42,481 31,162
Weighted average rate paid on:
FHLB advances............................................... 6.12% 5.50%
Other loans................................................. 9.25% 7.50%
<CAPTION>
For the Year
Ended June 30,
-------------------------------
2000 1999
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding at any month end:
FHLB advances............................................... $ 42,108 $ 31,640
Other loans................................................. 373 284
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
For the Year
Ended June 30,
-----------------------------
2000 1999
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Approximate average short-term borrowings outstanding
with respect to:
FHLB advances............................................... $ 3,758 $ 3,211
Other loans................................................. 177 33
Approximate weighted average rate paid on: (1)
FHLB advances............................................... 5.83% 5.73%
Other loans ................................................ 8.35% 7.50%
<FN>
(1) Weighted average computed by dividing total interest paid by average balance outstanding.
</FN>
</TABLE>
MARKET AREA
First Federal currently conducts its business through three banking offices
located in the City of Frankfort, Kentucky, which is located in the bluegrass
region of central Kentucky in Franklin County and which is about 50 miles east
of Louisville and 30 miles west of Lexington. The Bank's primary lending area
includes the Kentucky Counties of Franklin, Anderson, Scott, Shelby and
Woodford, with the majority of lending being originated on properties located in
Franklin County.
Franklin County has a population of approximately 46,000, of which
approximately 27,000 live within the city of Frankfort, which serves as the
capital of Kentucky. The primary employer in the area is the state government,
which employs about 30% of the work force. In addition, there are several large
industrial, financial and government employers in the community. Due to this
large, relatively stable source of employment, there has been little fluctuation
in the unemployment rate of about 2-3% in recent years.
COMPETITION
First Federal faces strong competition for deposits and loans. First
Federal's principal competitors for deposits are other banking institutions,
such as commercial banks and credit unions, as well as mutual funds and other
investments. First Federal principally competes for deposits by offering a
variety of deposit accounts, convenient business hours and branch locations,
customer service and a well trained staff. First Federal competes for loans with
other depository institutions, as well as specialty mortgage lenders and brokers
and consumer finance companies. First Federal principally competes for loans on
the basis of interest rates and the loan fees it charges, the types of loans it
originates and the convenience and service it provides to borrowers. In
addition, First Federal believes it has developed strong relationships with the
businesses, real estate agents, builders and general public in its market area.
Despite First Federal's small size relative to the many and various other
depository and lending institutions in its market area, First Federal usually
ranks first with respect to the origination of single-family purchase mortgages
made on properties located in Franklin County. Nevertheless, the level of
competition in the Bank's market area has limited to a certain extent the
lending opportunities in the area.
EMPLOYEES
As of June 30, 2000, First Federal had 25 full-time employees, none of whom
was represented by a collective bargaining agreement.
17
<PAGE>
REGULATION OF THE COMPANY
GENERAL. The Company is registered as a savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended ("HOLA") with the
OTS and subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank is
subject to certain restrictions in its dealings with the Company and affiliates
thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company. There are
generally no restrictions on the activities of the Company as a unitary savings
and loan holding 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 institution, the
Director of OTS may impose such restrictions as deemed necessary to address such
risk including limiting: (i) payment of dividends by the savings institution,
(ii) transactions between the savings institution and its affiliates; and (iii)
any activities of the savings institution that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") Test, then within one year after the institution ceased to
be a QTL, such unitary savings and loan holding company shall register as and be
deemed to be a bank holding company and will become subject to the activities
restrictions applicable to a bank holding company. See "Regulation of the Bank
-- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company 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 Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
institution may commence or continue for a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof, any business
activity, upon prior notice to, and no objection by the OTS, 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 authorized by regulation as of March 5, 1987 to be
directly engaged in by multiple savings and loan 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 savings and loan holding company.
TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a savings institution is any company or entity which controls,
is controlled by or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings institution
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings institution. 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. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution 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)
18
<PAGE>
purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution. Section 106 of the Bank Holding Company Act of 1956, as
amended ("BHCA") which also applies to the Bank, prohibits the Bank from
extending credit to or offering any other services, or fixing or varying the
consideration for such extension of credit or service, on condition that the
customer obtain some additional services from the institution or certain of its
affiliates or not obtain services of a competitor of the institution, subject to
certain exceptions.
Savings institutions are also subject to the restrictions contained in
Section 22(h) and Section 22(g) of the Federal Reserve Act on loans to executive
officers, directors and principal stockholders. Under Section 22(h), loans to a
director, executive officer or to a greater than 10% stockholder of a savings
institution, and certain affiliated entities of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated entities
the institution's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and greater
than 10% stockholders of a savings institution, and their respective affiliates,
unless such loan is approved in advance by a majority of the board of directors
of the institution 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 is 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
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the BHCA extensions of
credit to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
RESTRICTIONS ON ACQUISITIONS. The HOLA generally prohibits savings and loan
holding companies, without prior approval of the Director of OTS, from acquiring
(i) control of any other savings institution or savings and loan holding company
or substantially all the assets thereof, or (ii) more than 5% of the voting
shares of a savings institution or holding company thereof which is not a
subsidiary. Under certain circumstances, a registered savings and loan holding
company is permitted to acquire, with the approval of the Director of OTS, up to
15% of the voting shares of an under-capitalized savings institution pursuant to
a "qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6 1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. 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 savings institution, or of any other savings and loan 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: (i) 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; (ii) the acquiror is authorized to acquire control of the savings
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<PAGE>
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the laws of the state in which the institution
to be acquired is located specifically permit institutions 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).
OTS regulations permit federal savings institutions to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal savings institution may not establish an
out-of-state branch unless (i) the institution qualifies as a QTL or as a
"domestic building and loan association" under ss.7701(a)(19) of the Code and
the total assets attributable to all branches of the institution in the state
would qualify such branches taken as a whole for treatment as a QTL or as a
domestic building and loan association and (ii) such branch would not result in
(a) formation of a prohibited multi-state multiple savings and loan holding
company, or (b) a violation of certain statutory restrictions on branching by
savings institution subsidiaries of banking holding companies. Federal savings
institutions generally may not establish new branches unless the institution
meets or exceeds minimum regulatory capital requirements. The OTS will also
consider the institution's record of compliance with the Community Reinvestment
Act in connection with any branch application.
REGULATION OF THE BANK
GENERAL. As a federally chartered savings institution, First Federal is
subject to extensive regulation by the OTS. The lending activities and other
investments of First Federal must comply with various state and federal
regulatory requirements. The OTS periodically examines the Bank for compliance
with various regulatory requirements. The Bank must file reports with the OTS
describing its activities and financial condition. The FDIC also has the
authority to conduct special examinations of the Bank because its deposits are
insured by the SAIF. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Among the new activities that will be
permitted to bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant banking. The
Federal Reserve Board, in consultation with the Secretary of the Treasury, may
approve additional financial activities. The G-L-B Act, however, prohibits
future acquisitions of existing unitary savings and loan holding companies, like
the Company, by firms which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective in November 2000, with full compliance required by July 1, 2001.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300
20
<PAGE>
million to pay interest on certain government obligations in favor of a 20% of
net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for
federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which may acquire control of the Company, it may facilitate affiliations
with companies in the financial services industry.
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulatory capital requirements,
savings institutions must maintain "tangible" capital equal to 1.5% of adjusted
total assets, "core" capital equal to 4% (or 3.0% if the association is rated
composite 1 CAMELS under the OTS examination rating system) of adjusted total
assets and a combination of core and "supplementary" capital equal to 8% of
"risk-weighted" assets. In addition, the OTS regulations impose certain
restrictions on savings institutions that have a total risk-based capital ratio
that is less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less
than 4% or a ratio of Tier 1 capital to adjusted total assets of less than 4%
(or 3% if the institution is rated composite 1 CAMELS under the OTS examination
rating system). See "-- Prompt Corrective Regulatory Action." For purposes of
these regulations, Tier 1 capital has the same definition as core capital. 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
institution'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. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights. Both core and tangible capital are further reduced by
an amount equal to the savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At June 30, 2000, First Federal had no such investments.
Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
unconsolidated includable subsidiaries in which the savings institution holds a
minority interest. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital, the portion of the savings institution's
investments in unconsolidated includable subsidiaries and, for purposes of the
core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital in its total capital provided the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loss allowances and up to 45% of unrealized
gains on equity securities. Total core and supplementary capital are reduced by
the amount of capital instruments held by other depository institutions pursuant
to reciprocal arrangements, all equity investments and that portion of the
institution's land loans and non-residential construction
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<PAGE>
loans in excess of an 80% loan-to-value ratio. At June 30, 2000, the Bank had no
high ratio land or nonresidential construction loans and had no equity
investments for which OTS regulations require a deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal 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-weighting 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 and residential construction 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 table below presents the Bank's capital position relative to its
various regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ -----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital............................................. $ 20,129 13.9%
Tangible capital requirement................................. 2,179 1.5
-------- ----
Excess....................................................... $ 17,950 12.4%
======== ====
Core capital................................................. $ 20,129 13.9%
Core capital requirement..................................... 5,811 4.0 (2)
-------- ----
Excess....................................................... $ 14,318 9.9%
======== ====
Risk-based capital........................................... $ 20,230 26.5%
Risked-based capital requirement............................. 6,101 8.0
-------- ----
Excess....................................................... $ 14,129 18.5%
======== ====
<FN>
(1) Based upon adjusted total assets for purposes of the tangible, core and
Tier 1 capital requirements and risk-weighted assets for purposes of
the risk-based capital requirements.
(2) The higher core capital ratio requirement is used to maintain
confidentiality of the Bank's CAMELS rating.
</FN>
</TABLE>
The OTS' risk-based capital requirements require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a
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<PAGE>
quarterly basis. The Bank has determined that, on the basis of current financial
data, it will not be deemed to have more than normal level of interest rate risk
under the rule and believes that it will not be required to increase its total
capital as a result of the rule.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. Such circumstances
would include a high degree of exposure of interest rate risk, prepayment risk,
credit risk and concentration of credit risk and certain risks arising from
non-traditional activities. The 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 OTS 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.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital 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
does 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 may also be
required to divest the institution or the institution could 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
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level" established by the appropriate federal
banking regulator, the institution will be subject to conservatorship or
receivership within specified time periods.
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<PAGE>
Under the implementing regulations, the federal banking regulators,
including the OTS, generally measure an institution's capital adequacy on the
basis of its 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). The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
<FN>
-----------
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
A "critically undercapitalized" savings institution is defined as an institution
that has a ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative perpetual preferred
stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
LIQUIDITY REQUIREMENTS. As a member of the FHLB System, the Bank is
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
(currently 4%) of its net withdrawable savings deposits plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily ratio of the Bank for June 2000 was 7.66%.
QUALIFIED THRIFT LENDER TEST. The Bank is currently subject to OTS
regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for Federal Home Loan Bank advances and for certain other
purposes. A savings institution that does not meet the QTL Test must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the institution may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for both a national bank and a savings institution; (ii) the
branching powers of the institution are restricted to those of a national bank
located in the institution's home state; and (iii) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. In addition, any company that controls a savings institution that
fails to qualify as a QTL will be required to register as and be deemed a bank
holding company subject to all of the provisions of the BHCA and other statutes
applicable to bank holding companies. Upon the expiration of three years from
the date the institution ceases to be a QTL, it must cease any activity, and not
retain any investment not permissible for both a national bank and a savings
institution.
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, the value of
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. All of the following may be included
as Qualified Thrift Investments: investments in mortgage-backed securities,
residential mortgages, home equity
24
<PAGE>
loans, loans made for educational purposes, small business loans, credit card
loans and shares of stock issued by a Federal Home Loan Bank. Subject to a 20%
of portfolio assets limit, savings institutions are also able to treat the
following as Qualified Thrift Investments: (i) 50% of the dollar amount of
residential mortgage loans subject to sale under certain conditions, (ii)
investments, both debt and equity, in the capital stock or obligations of and
any other security issued by a service corporation or operating subsidiary,
provided that such subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing, constructing,
improving or repairing domestic residential housing or manufactured housing,
(iii) 200% of their investments in loans to finance "starter homes" and loans
for construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas, (iv) loans
for the purchase, construction, development or improvement of community service
facilities, and (v) loans for personal, family, household or educational
purposes, provided that the dollar amount treated as Qualified Thrift
Investments may not exceed 10% of the savings institution's portfolio assets.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain QTL
status will be permitted to requalify once, and if it fails the QTL Test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired. At June 30, 2000, approximately 99.6% of
the Bank's "portfolio" assets were invested in Qualified Thrift Investments, as
currently defined.
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form.
Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8%; (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a
leverage ratio of less than 4%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
OTS regulations require that savings institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution, (b) the distribution would result in the retirement of
any of the institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS. If neither the savings
institution nor the proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed with the OTS
before making a capital distribution. The OTS may disapprove or deny a capital
distribution if in the view of the OTS, the capital distribution would
constitute an unsafe or unsound practice.
SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. The final rule and the
guidelines became effective on August 9, 1995. The guidelines require savings
institutions to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
institution's business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure, and
asset growth. The guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the OTS determines that a savings institution is not
in compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
25
<PAGE>
guidelines. A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions. Management believes that the Bank already meets substantially all the
standards adopted in the interagency guidelines, and therefore does not believe
that implementation of these regulatory standards has materially affected the
Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the Federal banking
agencies were required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
Federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of 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 institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
Bank is a Subgroup A institution, and therefore, currently pays assessments to
the FDIC at the rate of $0.0206 per $100 of insured deposits.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB of Cincinnati, the Bank is required to acquire and hold shares of capital
stock in the FHLB of Cincinnati 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
from the FHLB of Cincinnati, whichever is greater. The Bank was in compliance
with this requirement with investment in FHLB of Cincinnati stock at June 30,
2000, of $2.4 million. The FHLB of Cincinnati 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 of Cincinnati. As of June 30,
2000, the Bank had $42.1 million in advances and other borrowings from the FHLB
of Cincinnati. See " -- Deposit Activity and Other Sources of Funds --
Borrowings."
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
transaction accounts between $4.9 million to $44.3 million, plus
26
<PAGE>
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 noninterest 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.
TAXATION
First Federal files its tax return based on a fiscal year ending June 30.
The Company and the Bank will file separate tax returns for fiscal 2000.
Thrift institutions are subject to the provisions of the Internal Revenue
Code of 1986, as amended (the "Code") in the same general manner as other
corporations. Prior to recent legislation, institutions such as First Federal
which met certain definitional tests and other conditions prescribed by the Code
benefited from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience, however, the amount of the bad debt reserve deduction with respect
to qualifying real property loans could be based upon actual loss experience
(the "experience method") or a percentage of taxable income determined without
regard to such deduction (the "percentage of taxable income method").
First Federal historically elected to use the percentage of taxable income
method. Under such method, the bad debt reserve deduction for qualifying real
property loans was computed as a percentage of taxable income, with certain
adjustments, effective for taxable years beginning after 1986. The allowable
deduction under the percentage of taxable income method (the "percentage bad
debt deduction") for taxable years beginning before 1987 was scaled downward in
the event that less than 82% of the total dollar amount of the assets of an
association were within certain designated categories. When the percentage
method bad debt deduction was lowered to 8%, the 82% qualifying assets
requirement was lowered to 60%. For all taxable years, no deduction was
permitted in the event that less than 60% of the total dollar amount of the
assets of an association fell within such categories.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Legislation enacted in 1996 repealed the percentage of taxable income
method of calculating the bad debt reserve. Savings associations, like the Bank,
which have previously used that method are required to recapture into taxable
income post-1987 reserves in excess of the reserves calculated under the
experience method over a six-year period beginning with the first taxable year
beginning after December 31, 1995. The start of such recapture may be delayed
until the third taxable year beginning after December 31, 1995 if the dollar
amount of the institution's residential loan originations in each year is not
less than the average dollar amount of residential loans originated in each of
the six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans. Under such
legislation, the Bank is required to recapture approximately $140,000 of its bad
debt reserve. The Bank has provided deferred taxes on its post-1987 additions to
its bad debt reserves and, as a result, the recapture provisions will have no
effect on the Bank's results of operations.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method.
27
<PAGE>
During the fiscal year ended June 30, 2000 First Federal's federal
corporate income tax returns for the years ended June 30, 1999, 1998 and 1997
were audited by the Internal Revenue Service. Additional income tax and interest
of approximately $9,0000 has been charged against income for the year ended June
30, 2000.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period. Beginning
with tax years ending on or after January 1, 1993, RRA also provides that
securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the new rule.
STATE INCOME TAXATION
The Commonwealth of Kentucky imposes an annual franchise tax on federally
or state chartered savings and loan associations, savings banks and other
similar institutions operating in Kentucky. The tax is 0.1% of taxable capital
stock held as of January 1 each year. Taxable capital stock includes an
institution's undivided profits, surplus and general reserves plus savings
accounts and paid-up stock less deductible items. Deductible items include
certain exempt federal obligations and Kentucky municipal bonds. Financial
institutions which are subject to tax both within and without Kentucky must
apportion their net capital.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive officers
of the Company who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
June 30,
Name 2000 Title
---- ---- -----
<S> <C> <C>
Don Jennings (1) 35 Vice President and Treasurer
Joyce Jennings 63 Vice President
R. Clay Hulette 38 Vice President and Principal Financial and Accounting Officer
<FN>
________________
(1) Don Jennings is the son of Joyce Jennings, Vice President of the Company and William C. Jennings,
President of the Company.
</FN>
</TABLE>
DON JENNINGS has been employed by the Bank since 1991. He currently serves
as Executive Vice President and Secretary of the Bank. He serves as Treasurer of
Frankfort/Franklin County CrimeStoppers and as a Board member of the Kentucky
Education Alliance.
JOYCE H. JENNINGS has been an employee of First Federal since 1955. She has
served as Vice President of the Bank since 1983 and Vice President of the
Company since its inception. Mrs. Jennings has been active in philanthropy and
civic activities in the Frankfort area, and holds several offices in her church.
She currently serves on the Board of the Franklin County Council on Aging. Her
husband, William C. Jennings, is President and Chairman of the Board of the
Company and her son, Don Jennings, is Vice President of the Company.
28
<PAGE>
R. CLAY HULETTE has been employed by the Bank since 1997. He currently
serves as Vice President and Treasurer of the Bank and Vice President and
Principal Financial and Accounting Officer of the Company. A licensed Certified
Public Accountant, he is a member of the American Institute of Certified Public
Accountants and the Kentucky Society of Certified Public Accountants. He is a
member of the Frankfort Rotary Club and The Gideons International and has served
as a Board member and officer of those local organizations as well as the
Frankfort/Franklin County Chamber of Commerce.
ITEM 2. PROPERTIES
-------------------
The following table sets forth information regarding First Federal's
offices at June 30, 2000.
<TABLE>
<CAPTION>
Book Value Deposits at
Year Owned or at June 30, Approximate June 30,
Opened Leased 2000 Square Footage 2000
------ ------ ---- -------------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Main Office:
216 West Main Street 1989 Owned $ 1,089 14,400 $ 42,861
Frankfort, Kentucky 40601
Branch Offices:
East Branch 1971 Owned 94 1,800 22,891
1980 Versailles Road
Frankfort, Kentucky 40601
West Branch 1975 Owned 98 2,480 16,750
1220 US 127 South
Frankfort, Kentucky 40601
</TABLE>
The net book value of the Automatic Teller Machines buildings located at
the East and West Branches at June 30, 2000 was $22,000. First Federal owns a
small parcel of land to the rear of the East Branch which is rented to a local
business for parking.
The book value of First Federal's investment in premises and equipment
totaled $1.5 million at June 30, 2000.
ITEM 3. LEGAL PROCEEDINGS.
-------------------------
From time to time, First Federal is a party to various legal proceedings
incident to its business. At June 30, 2000, there were no legal proceedings to
which the Company or First Federal was a party, or to which any of their
property was subject, which were expected by management to result in a material
loss to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 2000.
29
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
----------------------------------------------------------------------------
MATTERS
-------
The information required by this Item is incorporated by reference to
"Market Information" contained in the Company's Annual Report attached as
Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information required by this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
The information required by this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The financial statements required by this item are incorporated by
reference to the Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Independent Auditors' Report in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
For information concerning the Board of Directors and executive officers of
the Company, the information contained under the section captioned "Proposal I
-- Election of Directors" in the Company's definitive proxy statement for the
Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
For certain information regarding the three executive officers of the
Company who are not directors, see "Item 1. Description of Business -- Executive
Officers Who Are Not Directors."
For more information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, the information contained under the
section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The information required by this item is incorporated by reference to
"Executive Compensation" in the Proxy Statement.
30
<PAGE>
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 "Voting Securities and
Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the registrant.
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 -- Transactions
with Management" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
-------------------------------------------------------------------------
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following consolidated financial
statements are incorporated by from Item 8 hereof:
Independent Auditors' Report
Consolidated Statements of Financial Condition as of June 30,
2000 and 1999
Consolidated Statements of Earnings for the years ended June
30, 2000, 1999, and 1998
Consolidated Statements of Shareholders' Equity for the years
ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended June
30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements for the years ended
June 30, 2000, 1999 and 1998
(2) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
31
<PAGE>
(3) Exhibits. The following is a list of exhibits filed as part
of this Annual Report on Form 10-K is also the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C> <C>
3.1 Certificate of Incorporation of Frankfort First Bancorp, Inc. *
3.2 Bylaws of Frankfort First Bancorp, Inc. *
4 Form of Stock Certificate of Frankfort First Bancorp, Inc. *
10.1 Stock Option and Incentive Plan * +
10.3(a) Employment Agreements with First Federal Savings Bank of Frankfort * +
10.3(b) Employment Agreements with Frankfort First Bancorp, Inc. * +
10.3(c) 1999 Employment Agreements and Guaranty Agreements with First
Federal Savings Bank of Frankfort
10.4 Deferred Compensation Plan * +
10.5 Trust Agreement Relating to Employment Agreements and Deferred ** +
Compensation Plan ** +
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Grant Thornton L.L.P.
27 Financial Data Schedule
<FN>
____________
(*) Incorporated herein by reference from Registration Statement on Form S-1 filed (File No. 33-83968).
(**) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995.
(+) Management contract or compensatory plan or arrangement.
</FN>
</TABLE>
(B) REPORTS ON FORM 8-K. None.
-------------------
(C) EXHIBITS. The exhibits required by Item 601 of Regulation
--------
S-K are either filed as part of this Annual Report on Form 10-K or incorporated
by reference herein.
(D) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL
-------------------------------------------------------
REPORT.
-------
There are no other financial statements and financial statement schedules which
were excluded from the Annual Report to Stockholders pursuant to Rule which are
required to be included herein.
32
<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.
FRANKFORT FIRST BANCORP, INC.
September 25, 2000 By: /s/ William C. Jennings
-------------------------------
William C. Jennings
President and Chief Executive Officer
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.
/s/ William C. Jennings September 25, 2000
-----------------------------------------
William C. Jennings
President, Chief Executive Officer and Chairman
of the Board
(Principal Executive Officer)
/s/ R. Clay Hulette September 26, 2000
-----------------------------------------
R. Clay Hulette
Vice President
(Principal Financial and Accounting Officer)
/s/ Danny A. Garland September 26, 2000
-----------------------------------------
Danny A. Garland
Vice President and Director
/s/ Charles A. Cotton September 26, 2000
-----------------------------------------
Charles A. Cotton, III
Director
/s/ David Eddins September 27, 2000
-----------------------------------------
David Eddins
Director
/s/ William M. Johnson September 26, 2000
-----------------------------------------
William M. Johnson
Director
/s/ Frank McGrath September 26, 2000
-----------------------------------------
Frank McGrath
Director
/s/ Herman D. Regan, Jr. September 26, 2000
-----------------------------------------
Herman D. Regan, Jr.
Director
/s/ C. Michael Davenport September 26, 2000
-----------------------------------------
C. Michael Davenport
Director
