<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One) FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File No. 1-13904
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KENTUCKY FIRST BANCORP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1281483
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
306 NORTH MAIN STREET, CYNTHIANA, KENTUCKY 41031-1210
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (606) 234-1440
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.01 per share American Stock Exchange
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(Title of Class) (Name of Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required
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 _______
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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-KSB or any amendment to
this Form 10-KSB. [X]
Registrant's revenues for the fiscal year ended June 30, 1996: $5,475,000
As of September 20, 1996, the aggregate market value of the 1,098,801 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $14,696,463 based on the closing sales price of
$13.375 per share of the registrant's Common Stock on September 20, 1996 as
listed on the American Stock Exchange. 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 20, 1996: 1,388,625
Transitional Small Business Disclosure Format Yes ________ No X
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DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1996 Annual Meeting of
Stockholders. (Part III)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
The Company. Kentucky First Bancorp, Inc. (the "Company"), a Delaware
corporation, was organized at the direction of the Board of Directors of First
Federal Savings Bank, Cynthiana, Kentucky ("First Federal" or the "Bank") in
April 1995 to acquire all of the capital stock to be issued by the Bank in its
conversion from mutual to stock form (the "Conversion"). The Conversion was
completed August 28, 1995, with the Company issuing 1,388,625 shares of its
common stock, par value $0.01 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 the Conversion, the Company did not engage in any material operations.
The Company does not have any significant assets other than the outstanding
capital stock of the Bank, a portion of the net proceeds of the Conversion and a
note receivable from the ESOP. The Company's principal business is the business
of the Bank. At June 30, 1996, the Company had total assets of $86.3 million,
deposits of $51.8 million, net loans receivable of $43.0 million and
shareholders' equity of $19.3 million.
The Bank. First Federal was formed in 1888 under the name of Cynthiana
Building & Saving Association. In 1966 the Bank converted to a federally-
chartered savings and loan association and adopted the name of First Federal
Savings and Loan Association of Cynthiana. The Bank converted to a federally
chartered savings bank under the name of First Federal Savings Bank in January
1988. The Bank operates two offices in Cynthiana, Kentucky. The Bank is
principally engaged in the business of accepting deposits from the general
public through a variety of deposit programs and investing these funds by
originating and purchasing loans secured by one- to four-family residential
properties located in its market area, construction loans, commercial and multi-
family mortgage loans, agricultural loans, commercial business loans and
consumer loans.
First Federal's business strategy is to operate a well capitalized,
profitable community savings association dedicated to financing home ownership
in its market area and providing quality service to its customers. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits for each depositor. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati, which is one of the 12 district banks
comprising the FHLB System. The Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC. Such regulation is intended
primarily for the protection of depositors.
Both the Company's and First Federal's executive offices are located at 306
North Main Street, Cynthiana, Kentucky 41031-1210, and its telephone number is
(606) 234-1440.
RECENT DEVELOPMENTS
SAIF PREMIUM DISPARITY. Currently, there exists a substantial disparity in
the deposit insurance premiums paid by members of the SAIF, such as the Bank,
and members of the Bank Insurance Fund ("BIF"). This premium disparity places
SAIF-insured savings institutions at a significant competitive disadvantage to
BIF-insured institutions. A number of proposals have been considered to
recapitalize the SAIF in order to eliminate the premium disparity. The Senate
and the House of Representatives have both, as part of a budget reconciliation
package to balance the federal budget, approved legislation requiring a one-time
assessment of an amount sufficient to bring the SAIF to a level equal to 1.25%
of insured deposits (originally estimated to be approximately 0.85% of insured
deposits) to be imposed on all SAIF-insured deposits as of March 31, 1995. Such
legislation was subsequently vetoed. This assessment was originally scheduled
to be payable during the first quarter of 1996. It is unknown whether
legislation of this type will be enacted, or if enacted, the amount of any such
special assessment. It is currently estimated that an assessment of between
0.67% and 0.71% of insured deposits would be required to fully recapitalize the
SAIF.
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If a special assessment equal to 71 basis points were to be required, it would
result in a one-time charge of up to approximately $381,000, which would have
the effect of reducing the Bank's tangible and core capital to $15.2 million, or
17.8% of adjusted total assets, and risk-based capital to $15.6 million, or
34.8% of risk-weighted assets as of June 30, 1996.
BAD DEBT RECAPTURE. On August 20, 1996, the President signed into law the
Small Business Jobs Protection Act. Included within this act were provisions
repealing the percentage of taxable income method of calculating a thrift's bad
debt reserve for tax purposes. This method had permitted thrift institutions,
such as the Bank, who satisfied certain definitional tests and other conditions
prescribed by the Internal Revenue Code to deduct an annual addition to their
bad debt reserve calculated as a percentage of taxable income. Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method"). As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method will be required to recapture into taxable income post-1987
reserves in excess of the reserves calculated under the experience method, over
a period of six years commencing in the first taxable year beginning after
December 31, 1995. An institution will be able to defer recapture until up to
the third taxable year 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 loan originations 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.
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. The Bank does
not expect that the recapture of the Bank's post-1987 reserves will have a
material adverse effect on the Bank's operations.
MARKET AREA
The Bank considers its primary market area to consist of the eight counties
of Harrison, Pendleton, Scott, Grant, Robertson, Nicholas, Bourbon and Fayette
Counties, Kentucky. Management believes that most of the Bank's depositors and
borrowers are residents of these counties. The City of Cynthiana is located in
Harrison County which is the economic hub of the seven-county area, excluding
Fayette. Cynthiana is located 26 miles north of Lexington, Kentucky, 100 miles
east of Louisville, Kentucky and 80 miles south of Cincinnati, Ohio. Based upon
the 1990 population census, Cynthiana had a population of 6,100 and
approximately 16,000 persons lived in Harrison County.
The economy in the Bank's market area is based on a mixture of
manufacturing and agriculture, primarily within the tobacco industry. Other
employment is provided by a variety of service employers, manufacturing
industries, wholesale/retail trade employers and state and local government.
Large local employers include 3-M, Grede Perm, Bullard Manufacturing, Bundy
Tubing, Southland Container Concept Packaging Group, Ladish Manufacturing and
Maysville Community College - Licking Valley Office, a community college located
in Cynthiana with an enrollment of approximately 825 students. According to the
U.S. Bureau of Labor Statistics, the unemployment rate in Harrison County as of
December 1994 was 3.6% as compared to 4.4% for the Commonwealth of Kentucky.
LENDING ACTIVITIES
General. First Federal's primary lending activity is the origination and
purchase of conventional mortgage loans for the purpose of constructing,
purchasing or refinancing one- to four-family residential properties in its
primary market area. The Bank also makes construction loans and originates loans
secured by multi-family properties, commercial properties and originates
commercial, farm and consumer loans. In recent years, the Bank
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has purchased whole loans and participation interests in loans secured by one-
to four-family properties and commercial and multi-family real estate. Such
loans are originated and serviced by an unaffiliated mortgage broker. See " --
Originations and Purchases of Loans."
Savings institutions generally are subject to the lending limits applicable
to national banks. With certain limited exceptions, the maximum amount that a
savings institution or a national bank may lend to any borrower (including
certain related entities of the borrower) at one time may not exceed 15% of the
unimpaired capital and surplus of the institution, plus an additional 10% of
unimpaired capital and surplus for loans fully secured by readily marketable
collateral. Savings institutions are additionally authorized 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:
(i) the purchase price of each single-family dwelling in the development does
not exceed $500,000; (ii) the savings institution is in compliance with its
fully phased-in capital requirements; (iii) the loans comply with applicable
loan-to-value requirements, and; (iv) the aggregate amount of loans made under
this authority does not exceed 15% of unimpaired capital and surplus.
At June 30, 1996, the maximum amount that the Bank could have loaned to any
one borrower without prior OTS approval was $2.4 million. At such date, the
largest aggregate amount of loans that the Bank had outstanding to any one
borrower was approximately $1.6 million.
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Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At June 30, 1996, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
1996 1995
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Amount % Amount %
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans:
One- to four-family residential and construction (1).. $ 24,830 56.79% $ 23,971 58.71%
Multi-family residential.............................. 4,477 10.24 3,703 9.07
Agricultural.......................................... 5,206 11.91 4,887 11.97
Commercial............................................ 5,256 12.02 4,752 11.64
--------- -------- --------- --------
Total real estate loans............................ 39,769 90.96 37,313 91.39
Commercial loans........................................ 821 1.88 611 1.50
Agricultural operating loans............................ 1,030 2.36 987 2.42
Consumer loans:
Automobiles........................................... 249 0.57 290 0.71
Mobile home........................................... 219 0.50 257 0.63
Savings account....................................... 710 1.62 586 1.44
Other................................................. 922 2.11 889 1.91
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Total consumer loans............................... 2,100 4.80 1,920 4.69
--------- -------- --------- --------
Total loans........................................ 43,720 100.00% 40,933 100.00%
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Less:
Loans in process...................................... 178 321
Deferred loan fees.................................... 78 66
Unearned discount..................................... 77 103
Allowance for loan losses............................. 367 352
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Loans receivable, net.............................. $ 43,020 $ 40,091
========= =========
</TABLE>
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(1) At June 30, 1996, constructions loans amounted to $195,000 and represented
0.4% of total gross loans. Management estimates that the amount of
construction loans outstanding during the periods shown in the above table
did not exceed $300,000.
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LOAN MATURITY SCHEDULE
The following table sets forth certain information at June 30, 1996
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, including scheduled repayments of
principal. 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 Within Due 1-3 Due 3-5 Due 5-10 Due 10-20
1 Year Years Years Years Years
After After After After After
6/30/96 6/30/96 6/30/96 6/30/96 6/30/96 Total
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage...... $ 1,266 $ 3,113 $ 3,666 $ 14,664 $ 17,060 $ 39,769
Consumer.................. 197 497 604 802 -- 2,100
Commercial................ 175 441 532 703 -- 1,851
-------- -------- -------- -------- -------- --------
Total................ $ 1,638 $ 4,051 $ 4,802 $ 16,169 $ 17,060 $ 43,720
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth at June 30, 1996, the dollar amount of all
loans due one year or more after June 30, 1996 which have predetermined interest
rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
One Year or More
-----------------------------------
Predetermined Floating or
Rate Adjustable Rates
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(In thousands)
<S> <C> <C>
Real estate mortgage....... $14,687 $26,755
Consumer................... 520 --
Commercial................. 120 --
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Total.................. $15,327 $26,755
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</TABLE>
6
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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. In
addition, the Bank's mortgage loans generally give First Federal the right to
declare a loan due and payable in the event, among other things, that a borrower
sells the real property subject to the mortgage and the loan is not repaid.
One- to Four-Family Real Estate Loans. The primary emphasis of the Bank's
lending activity is the origination of loans secured by first mortgages on one-
to four-family residential properties. At June 30, 1996, $24.8 million, or 56.8%
of the Bank's gross loan portfolio consisted of loans secured by one-to four-
family residential real properties primarily located in the Bank's market area.
The Bank originates both fixed rate and adjustable rate mortgage loans
("ARMs"). The Bank offers fixed rate mortgage loans with terms of up to 30
years. Adjustable rate loans are originated for terms of up to 30 years.
Currently, First Federal's adjustable rate loans are indexed to the National
Monthly Cost of Funds Rate to SAIF-Insured Institutions (the "Index Rate"). In
late March 1995, the Bank changed the index used to the weekly average yield on
U.S. Treasury Securities adjusted to a Constant Maturity of One Year. The
interest rates on these mortgages are adjusted annually with a limitation of two
percentage points per adjustment and six percentage points over the life of the
loan. The minimum rate on such loans is 5%.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans to 85% of the lesser of the appraised value or purchase
price of the property. In August 1994, the Bank instituted a program to provide
mortgages to first time home buyers who purchase their home in Harrison County.
Such loans are made in amounts of up to 95% of the appraised value or purchase
price of the property. Private mortgage insurance is required.
The retention of ARMs in the portfolio helps reduce First Federal's
exposure to increases in interest rates. However, there are unquantifiable
credit risks resulting from potential increased costs to the borrower as a
result of repricing of ARMs. It is possible that during periods of rising
interest rates, the risk of default on ARMs may increase due to the upward
adjustment of interest costs to the borrower. Although ARMs allow First Federal
to increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate ceiling contained in ARM contracts. Accordingly, there can be no
assurance that yields on First Federal's ARM's will adjust sufficiently to
compensate for increases in its cost of funds.
Multi-family and Commercial Real Estate Loans. The Bank has been active in
the origination and purchase of loans secured by commercial real estate and
multi-family properties. At June 30, 1996, multi-family and commercial real
estate loans totaled $4.5 million and $5.3 million, respectively, and
represented 10.2% and 12.0%, respectively, of the Bank's gross loan portfolio.
Certain of these loans had been originated by an outside broker and subsequently
purchased by the Bank. See " -- Originations and Purchases of Loans."
Multi-family and commercial real estate loans are made in amounts of up to
80% of the appraised value of the property and may be on a fixed or adjustable
rate basis with fixed rate loans underwritten for terms of up to 30 years and
adjustable rate loans up to 30 years. Prior to committing to make a multi-family
or commercial real estate loan, the Bank requires that the prospective borrower
provide a cash flow statement indicating sufficient cash flow from the property
to service the loan. The Bank reviews any tenant leases and requires that the
payments under such leases be assigned to the Bank.
The Bank's multi-family real estate loans consist primarily of loans
secured by apartment buildings which are primarily located in the Bank's market
area. Generally, these apartment buildings are small with an average of eight to
twelve units. The Bank's largest multi-family property loan amounted to $567,000
at June 30, 1996 and was secured by a 42 unit duplex apartment complex.
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The Bank's commercial real estate portfolio consists of loans secured by
office buildings, nursing homes, warehouse properties and churches. The Bank's
largest commercial real estate loan is secured by a nursing home located in
Butler, Kentucky. Such loan had a balance of $698,000 at June 30, 1996.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one-to four-family residential lending. Such
loans typically involve large loans to single borrowers or related borrowers. At
June 30, 1996, the average size of the Bank's multi-family and commercial real
estate loans was $135,000 as compared to the average size of residential real
estate loans which was $34,000. Such loans also involve a greater repayment risk
as repayment is typically dependent on the successful operation of the project
such that the income generated by the project is sufficient to cover operating
expenses and debt service, and these risks can be significantly affected by the
supply and demand conditions in the market for commercial property and multi-
family residential units. In addition, commercial real estate is more likely to
be subject to some form of environmental contamination. The Bank is now pricing
multi-family and commercial loans it originates 25 to 60 basis points above the
single-family loan rate to compensate the Bank for these additional risks.
However, the interest rates on purchased multi-family and commercial real estate
loans are established by the unaffiliated loan broker and on average are at
least 50 basis points above the rates charged by the Bank on one-to four-family
mortgage loans. To minimize these risks, the Bank generally limits itself to
loans secured by properties located in the Bank's market area.
Construction Loans. First Federal engages in construction lending
involving loans to qualified borrowers for construction of one- to four-family
residential properties. Such loans convert to permanent financing upon
completion of construction. These properties are primarily located in the Bank's
market area. At June 30, 1996, the Bank's loan portfolio included $195,000 of
loans secured by properties under construction. All construction loans are
secured by a first lien on the property under construction. Loan proceeds are
disbursed in three increments as construction progresses and as inspections
warrant. Construction/permanent loans may have either an adjustable or fixed
rate and are underwritten in accordance with the same terms and requirements as
the Bank's permanent mortgages, except the loans generally provide for
disbursement in stages during a construction period of up to six months, during
which period the borrower is not required to make monthly payments. Interest
that has accrued during the construction phase is due upon the conversion of the
loan to a permanent loan. Monthly principal and interest payments commence when
the loan is converted to permanent financing. Borrowers must satisfy all credit
requirements which would apply to the Bank's permanent mortgage loan financing
for the subject property.
Construction financing generally 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 or
development and the estimated cost (including interest) of construction. 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, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral having a value which is insufficient to assure full repayment.
The Bank has sought to minimize this risk by limiting construction lending to
qualified borrowers (i.e., borrowers who satisfy all credit requirements and
whose loans satisfy all other underwriting standards which would apply to the
Bank's permanent mortgage loan financing for the subject property) in the Bank's
market area.
The Bank makes a limited number of construction loans to contractors to
finance the construction of residential properties on a speculative basis. The
largest such loan had an outstanding balance of $582,000 as of June 30, 1996 and
was secured by seven single family homes with an aggregate appraised value of
$784,000. Terms of such loans provide that the Bank receives sufficient proceeds
from the sale of individual properties in the project to satisfy the mortgage on
that particular property. Certain of these construction loans were originated by
an outside broker and purchased by the Bank. The broker continues to service the
loans for the Bank including performing inspections and authorizing all draws
under the construction loan. See " -- Originations and Purchases of Loans."
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The Bank also makes a limited number of construction loans to finance the
construction of commercial and multi-family real estate.
Consumer Loans. The consumer loans originated by the Bank include
automobile loans, savings account loans and unsecured loans. The Bank's loan
portfolio includes loans secured by mobile homes although the Bank no longer
originates such loans. The Bank's automobile loans are generally underwritten in
amounts up to 80% of the lesser of the purchase price of the automobile or the
loan value as published by the National Automobile Dealers Association. The
terms of such loans do not exceed 48 months. The Bank requires that the vehicles
be insured and the Bank be listed as loss payee on the insurance policy. The
Bank makes savings account loans for terms of up to the lesser of six months or
the maturity date of the certificate, securing the loan for up to 100% of the
face amount of the certificate or the balance in the savings account. The
interest rate charged on these loans is normally two percentage points above the
rate paid on the certificate account and the account must be pledged as
collateral to secure the loan. At June 30, 1996, the Bank's consumer loans
totaled $2.1 million, or 4.8% of the Bank's gross loan portfolio.
The Bank intends to continue the origination of consumer loans. Consumer
loans tend to be originated at higher interest rates than mortgage loans and for
shorter terms. However, consumer loans generally involve more risk than one-to
four-family residential real estate loans. Repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various state and federal laws, including federal
and state bankruptcy and insolvency law, may limit the amount which may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income and ability to repay the
loan, and the value of the collateral. The Bank's risks associated with consumer
loans have been further limited by the modest amount of consumer loans made by
the Bank.
Agricultural Loans. The Bank originates agricultural loans both for the
purchase or refinance of agriculture-related real estate and for operating
purposes. At June 30, 1996, the Bank had $5.2 million in agricultural real
estate loans, or 11.9% of its gross loan portfolio, and $1.0 million in
agricultural operating loans, or 2.4% of the Bank's gross loan portfolio.
Agricultural real estate loans are primarily secured by first liens on
farmland or buildings thereon located in the Bank's market area. Loans are
generally underwritten in amounts of up to 65% of the lesser of the appraised
value or the fair market of the property on loans secured by farm land and 80%
of the lesser of the appraised or fair market value on loans secured by farm
buildings. Such loans may be underwritten on either a fixed rate with a term of
up to 30 years or an adjustable rate basis for up to 30 years. In originating an
agricultural real estate loan, the Bank considers the debt service coverage of
the borrower's cash flow and the appraised value of the underlying property. The
average size of an agricultural real estate loan originated by the Bank is
approximately $51,000.
Agricultural operating loans are made to finance the acquisition of farm
equipment, seed, fertilizer, cattle feed and other operating expenses of a farm
over the course of a year. As with agricultural real estate loans, the Bank has
been making these types of loans to satisfy the demand in its market area.
Because such loans are made to finance a farm's annual operations, the terms of
agricultural operating loans do not exceed one year and are at a fixed rate.
Interest payments are made at least semi-annually and the rate may be changed
semi-annually in accordance with market rates.
In underwriting agricultural operating loans, the Bank considers the cash
flow of the borrower based upon the farm's income stream as well as the value of
collateral used to secure the loan. Collateral generally consists of the cash
crops produced by the farm, predominantly tobacco in the Bank's market area, and
cattle. The Bank requires that the borrowers provide evidence of hazard
insurance on any equipment that will be collateral.
9
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Representatives of the Bank inspect such collateral on a periodic basis. In
certain instances, the Bank may also take a lien on real estate as additional
collateral for an agricultural operating loan. In such instances, the Bank
generally requires that an appraisal of the real estate by a certified appraiser
be performed, if the loan is in excess of $100,000. For loans of less than
$100,000, as circumstances warrant, the appraisal may be performed by the
Executive Committee.
Agricultural real estate and operating loans involve a greater degree of
risk as payments on such loans depend, to a large degree, on the results of
operation of the related farm. In addition, agricultural operating loans are
generally made at the beginning of the growing season and are secured by the
crops, primarily tobacco, not yet grown. The ultimate value of the collateral
depends on the grade of tobacco produced and the prevailing price for that grade
at the time the tobacco is sold. As neither the grade of the tobacco nor the
market price to be obtained at the time of sale can be determined with certainty
at the inception of the loan, there is a risk that the ultimate value of the
collateral securing an agricultural operating loan may be significantly less
than the principal balance owed.
Commercial Loans. The Bank originates a limited amount of commercial loans
to small and medium sized businesses located in its market area. At June 30,
1996, the Bank's commercial business loans amounted to $821,000, or 1.9% of the
Bank's gross loan portfolio.
Commercial loans are generally made to finance the purchase of inventory,
equipment and for short-term working capital. Such loans are generally secured,
although loans are sometimes granted on an unsecured basis. Commercial business
loans are generally written for a term of one year or less although may be
renewed by the Bank at maturity. Interest payments are made at least semi-
annually and the rate may be changed semi-annually in accordance with market
rates.
Commercial loans involve a greater degree of risk than other types of
lending as payments on such loans are often dependent on successful operation of
the business involved which may be subject to a greater extent to adverse
conditions in the economy. The Bank seeks to minimize this risk through its
underwriting guidelines, which require that the loan be supported by adequate
cash flow of the borrower, profitability of the business and collateral.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources, including walk-in customers and referrals by realtors,
depositors and borrowers. The Bank has implemented a marketing program during
fiscal 1996 under the direction of the Bank's Vice President and Marketing
Officer, Diane Ritchie.
Upon receipt of a loan application from a prospective borrower, a credit
report and employment and other verifications are ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. An appraisal of the real estate intended to secure the proposed loan
is undertaken by an independent appraiser approved by the Bank, if the loan is
in excess of $100,000. For loans of less than $100,000, as circumstances
warrant, the appraisal may be performed by the Executive Committee.
All one- to four-family and commercial mortgage loans above $125,000 are
required to be presented to the Board of Directors for final approval. Mortgage
loans below that amount may be approved by individual loan officers. Individual
loan officers may approve unsecured consumer loans and agricultural operating
loans up to $10,000; unsecured consumer loans in amounts of up to $40,000 may be
approved by the Bank's Executive Committee with loans in excess of such amounts
approved by the Bank's Board of Directors. Commercial loans up to $25,000 may be
approved by a loan officer with loans in excess of that amount up to $75,000 to
be approved by the Bank's Executive Committee. All commercial business loans in
excess of $75,000 require the approval of the Board of Directors. Loan
applicants are promptly notified of the decision of the Bank. Interest rates on
approved loans are subject to change if the loan is not funded within 30 days
after approval, although the Bank will commit to provide the financing for up to
six months from the date of approval. It has been management's experience that
substantially all approved loans are funded. Fire and casualty insurance, as
well as flood insurance, are required for all loans as appropriate, and a title
opinion is required for loans secured by real estate.
10
<PAGE>
Originations and Purchases of Loans. The Bank's loans are primarily
originated by salaried loan officers of the Bank. In addition, the Bank has
purchased one-to four-family mortgage loans from various sources in the Bank's
market area and has purchased a number of whole loans and participation
interests in loans from an established mortgage broker headquartered in
Lexington, Kentucky. The Bank does not originate any loans for sale in the
secondary market. The following table sets forth certain information with
respect to originations and purchases of loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Loans originated:
Real estate loans:
One- to four-family residential.... $ 3,541 $ 5,009
Multi-family residential........... 640 449
Agricultural....................... 1,085 347
Commercial and other............... 1,138 276
Construction....................... 575 117
Commercial loans.................... 976 398
Agricultural operating loans........ 804 609
Consumer loans:
Automobile......................... 133 106
Savings account.................... 233 533
Other consumer..................... 1,163 1,010
-------- --------
Total loans originated............ $ 10,288 $ 8,854
======== ========
Loans purchased:
Real estate loans:
One- to four-family residential.... $ 521 $ 1,360
Multi-family residential........... 74 368
Commercial and other............... 184 280
-------- --------
Total loans purchased............. $ 779 $ 2,008
======== ========
Total loans sold..................... $ -- $ --
======== ========
</TABLE>
The Bank purchases loans to supplement its lending activities during
periods of low loan demand. The Bank has purchased one- to four-family loans
from various institutions and an unaffiliated mortgage broker, located in
Lexington, Kentucky. These loans are primarily secured by real estate located in
and around Lexington, Kentucky and continue to be serviced by the sellers. In
addition, the Bank has purchased whole loans and a limited number of
participation interests in a variety of commercial real estate and multi-family
real estate loans. These loans are originated by the unaffiliated mortgage
broker headquartered in Lexington, Kentucky and are secured by properties which
are primarily located in and around Lexington Kentucky. The mortgage broker does
not retain any ownership interest in the loans purchased by the Bank although
receives a fee for servicing the loans. As of June 30, 1996, the Bank had
purchased from this broker participation interests in four loans with
outstanding balances as of that date totaling $1.6 million, or 3.7% of total
gross loans and had purchased whole loans totaling $4.3 million, or 9.8% of
total gross loans. Fourteen of these loans or participation interests
aggregating $3.9 million, or 8.9% of total gross loans at June 30, 1996 were
secured by commercial or multi-family real estate.
11
<PAGE>
With respect to purchased multi-family and commercial loans, the Bank
reviews certain financial and property information provided to the Bank by the
broker prior to determining to approve the loan. Generally, the Bank's Executive
Committee also visits the property which will secure the loan. In the case of
purchased construction loans, a representative of the broker performs
inspections on the property and informs the Bank when additional advances are
warranted.
Generally, in addition to the risks associated with the specific type of
loan purchased, the purchase of loans involves certain additional risks
resulting from the Bank's lower level of control over the origination and
subsequent administration of the loans. In addition, certain of the loans
purchased by the Bank in the past do not conform to the Bank's current
underwriting standards. In January, 1995, the Bank implemented a policy (and
informed the mortgage broker in this regard) that prior to its consideration of
any future loan purchases, the Bank will require a detailed description of the
proposed terms of the loan, copies of all applicable financial statements, tax
returns and credit reports, a current appraisal on the property securing the
proposed loan, occupancy information and copies of all underlying leases, if
applicable, and a signed application. If the proposed loan is to be a
construction loan, the Bank will also require all cost estimates and must
receive inspection certificates and lien waivers prior to making any
disbursements under the loan. The Bank will also require updated financial
information at least annually on all outstanding commercial and multi-family
real estate loans or participations.
For a discussion of certain purchased loans classified as "substandard"
under the Bank's asset classification system, see " -- Asset Classification and
Allowance for Loan Losses."
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general 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.
In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, late payments and fees for
miscellaneous services related to its loans. The Bank charges an origination fee
for its adjustable rate mortgage loans and fixed rate mortgage loans.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to be designated as "special mention." Currently, general
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation of the Bank --
Regulatory Capital Requirements." OTS examiners may disagree with the insured
institution's classifications and amounts reserved. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the OTS. Management of the Bank reviews assets on a quarterly
basis, and at the end of each quarter prepares an asset classification listing
in conformity with the OTS regulations, which is reviewed by the Board of
Directors. The Bank also makes quarterly inspections of all property securing
delinquent loans. At June 30, 1996 the Bank had $89,000 and $143,000 in assets
classified as special mention and substandard, respectively, and had $2,000 in
assets classified as doubtful, while no loans were classified as loss.
12
<PAGE>
Included in the balance of substandard loans was a loan to an individual
secured by a commercial property which had a balance of $36,000 as of June 30,
1996. Payments on this loan are approximately 13 months delinquent although the
Bank has received sporadic payments.
The remaining substandard loans consist primarily of loans secured by one-
to four-family properties.
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's earnings.
General allowances are made pursuant to management's assessment of risk in
the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. General allowances are included in calculating the
Bank's risk-based capital, while specific allowances are not so included.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loss reserves when necessary. As of June 30, 1996, the Bank's allowance
for loan losses did not include any specific loss reserves.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated. There were no charge-offs or recoveries during
either of the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
1996 1995
----- -----
(In thousands)
<S> <C> <C>
Balance at beginning of period............. $ 352 $ 152
Provision for losses on loans.............. 15 200
----- -----
Balance at end of period................... $ 367 $ 352
===== =====
Ratio of net charge-offs to average loans
outstanding during the period............ --% --%
===== =====
</TABLE>
13
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. 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>
At June 30,
-------------------------------------------------
1996 1995
------------------ -----------------------
Percent Percent
of Loans of Loans
in Each Cate- in Each Cate-
gory to Total gory to Total
Amount Loans Amount Loans
------ ------------- ------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - mortgage:
One- to four-family residential and
construction....................... $ 149 56.79% $ 166 58.71%
Multi-family residential............. -- 10.24 -- 9.07
Agricultural......................... -- 11.91 -- 11.97
Commercial........................... 174 12.02 176 11.64
Commercial loans....................... 6 1.88 6 1.50
Agricultural operating loans........... 31 2.36 -- 2.42
Consumer loans:
Automobiles.......................... -- 0.57 -- 0.71
Mobile homes......................... -- 0.50 -- 0.63
Savings account...................... -- 1.62 -- 1.44
Other consumer loans................. 7 2.11 4 1.91
----- ------ ----- ------
Total allowance for loan losses.... $ 367 100.00% $ 352 100.00%
===== ====== ===== ======
</TABLE>
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. Loans are placed on a non-accrual status when,
in the opinion of management, the collection of additional interest is doubtful.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at its fair value less estimated costs of sale. Any
required write-down of the loan to its appraised fair market value upon
foreclosure is charged against the allowance for loan losses. Subsequent to
foreclosure, in accordance with generally accepted accounting principles, a
valuation allowance is established if the carrying value of the property exceeds
its fair value net of related selling expenses.
14
<PAGE>
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated. No loans were recorded as restructured
loans within the meaning of Statement of Financial Accounting Standard ("SFAS")
No. 15 at the dates indicated. In addition, the Bank had no real estate acquired
as a result of foreclosure.
<TABLE>
<CAPTION>
At June 30,
---------------------------------
1996 1995
------- ---------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real Estate:
One- to four-family residential and construction.. $ -- $ --
Multi-family residential.......................... -- --
Agricultural...................................... -- --
Commercial........................................ 36 38
Commercial loans.................................... -- --
Agricultural operating loans........................ -- --
Consumer............................................ -- --
----- -----
Total............................................ 36 38
----- -----
Accruing loans which are contractually past due
90 days or more:
Real estate:
One- to four-family residential and construction.. -- 12
Multi-family residential.......................... -- --
Agricultural...................................... 74 --
Commercial........................................ -- 312
Commercial loans.................................... 10 --
Agricultural operating loans........................ -- --
Consumer............................................ 2 --
----- -----
Total............................................ $ 122 $ 362
===== =====
Total non-performing loans as a percentage
of total net loans.................................. 0.28% 0.90%
===== =====
Total non-performing assets as a percentage
of total assets..................................... 0.14% 0.58%
===== =====
____________________
</TABLE>
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income,
depending on assessment of the collectibility of the loan.
Loans generally are placed on non-accrual status when they become 90
days past due unless they are well secured and in the process of collection.
During the year ended June 30, 1996, gross interest income of $3,000 would have
been recorded on loans accounted for on a non-accrual basis if the loans had
been current throughout the respective periods. Accruing loans which were
contractually past due 90 days or more at June 30, 1996 totaled $122,000 and
consisted primarily of one real estate loan secured by agricultural property
which had a principal balance of $74,000 at June 30, 1996. See " -- Asset
Classification and Allowance for Loan Losses."
15
<PAGE>
Loans which are not currently classified as non-accrual, 90 days past
due or restructured but where known information about possible credit problems
of borrowers causes management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as non-accrual, 90 days past due or restructured amounted to $89,000
at June 30, 1996.
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 deposits in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank 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 the Bank 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."
The Bank invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. The investment activities of the
Bank consist primarily of investments in mortgage-backed and related securities
and other investment securities, consisting primarily of securities issued or
guaranteed by the U.S. government or agencies thereof. The Bank's investment
securities include bonds issued by the Tennessee Valley Authority ("TVA"), which
are not guaranteed by the U.S. government, and obligations of the Commonwealth
of Kentucky and political subdivisions thereof. The Bank generally does not
invest in obligations of states other than Kentucky. Such municipal securities
are not guaranteed by any third party. The Bank has also invested in structured
notes issued by the FHLB, as discussed below. Investment decisions generally
are made by the Investment Committee consisting of three directors of the Bank
and later ratified by the full Board of Directors.
In accordance with SFAS No. 115, effective July 1, 1994, the Bank
classified its investments portfolio as held to maturity. The Bank's investment
securities were recorded at cost, adjusted for amortization of premiums and
accretion of discounts using the interest method over the term of the related
security. During September 1995, the Financial Accounting Standards Board
("FASB") granted financial institutions the opportunity to reclassify investment
portfolios without calling into question the institution's prior intent with
respect to such securities under SFAS No. 115. The Company took advantage of
this opportunity by reclassifying approximately $3.0 million of investment
securities and $1.3 million of mortgage-backed securities from held-to-maturity
to the available for sale classification. All reclassifications were made on a
single day in conformity with the requirement. Management believes that such
changes will allow more flexibility in managing interest rate risk within the
investment and mortgage-backed securities portfolios. For further information,
see Notes A-2 and B of Notes to Financial Statements.
Since the Conversion, the proceeds from the sale of stock have been
invested primarily in FHLB notes aggregating $6.5 million and in notes issued by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC") of approximately $6.7 million. The FHLMC notes have an average
maturity of 2 to 25 years.
Mortgage-Related Securities. The Bank invests in mortgage-related
securities such as collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs"), primarily as an alternative to mortgage
loans or mortgage-backed securities. CMOs and REMICs are typically issued by a
special purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities, which are used to collateralize the mortgage-related
securities. Once combined, the cash flows can be divided into "tranches" or
"classes" of individual securities, thereby creating more predictable average
lives for each security than the underlying pass-through pools. Accordingly,
under this security
16
<PAGE>
structure, all principal paydowns from the various mortgage pools are allocated
to a mortgage-related securities' class or classes structured to have priority
until it has been paid off. These securities generally have fixed interest
rates, and, as a result, changes in interest rates generally would affect the
market value and possibly the prepayment rates of such securities.
Some mortgage-related securities instruments are like traditional debt
instruments due to their stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other mortgage-related securities
instruments are entitled to the excess, if any, of the issuer's cash inflows.
These mortgage-related securities instruments may include instruments designated
as residual interest and are riskier in that they could result in the loss of a
portion of the original investment. Cash flows from residual interests are very
sensitive to prepayments and, thus, contain a high degree of interest rate risk.
The Bank does not purchase residual interests in mortgage-related securities.
At June 30, 1996, the Bank had $5.8 million in CMOs and REMICs, which
amounted to 6.7% of total assets. All of the CMOs and REMICs owned by the Bank
are insured or guaranteed either directly or indirectly through mortgage-backed
securities underlying the obligations of either FNMA or FHLMC. The CMOs and
REMICs owned by the Bank include both fixed and floating rate instruments.
Prepayments in the Bank's mortgage-related securities portfolio may be
affected by declining and rising interest rate environments. In a low and
declining interest rate environment, prepayments would be expected to increase.
In such an event, the Bank's fixed-rate CMOs and REMICs purchased at a premium
price could result in actual yields to the Bank that are lower than anticipated
yields. The Bank's floating rate CMOs and REMICs would be expected to generate
lower yields as a result of the effect of falling interest rates on the indexes
for determining payment of interest. Additionally, the increased principal
payments received may be subject to reinvestment at lower rates. Conversely, in
a period of rising rates, prepayments would be expected to decrease, which would
make less principal available for reinvestment at higher rates. In a rising
rate environment, floating rate instruments would generate higher yields to the
extent that the indexes for determining payment of interest did not exceed the
life-time interest rate caps. Such prepayment may subject the Bank's CMOs and
REMICs to yield and price volatility.
Mortgage-Backed Securities. The Bank also invests in traditional
mortgage-backed securities. Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators through intermediaries that pool and repackage the participation
interest in the form of securities to investors such as the Bank. Such
intermediaries may include quasi-governmental agencies such as FHLMC, FNMA and
GNMA which guarantee the payment of principal and interest to investors.
Mortgage-backed securities generally increase the quality of the Bank's assets
by virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collaterize borrowings or other obligations of
the Bank.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over
17
<PAGE>
the estimated term of the securities using the interest method. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect the actual prepayment. The
actual prepayments of the underlying mortgages depend on many factors, including
the type of mortgage, the coupon rate, the age of the mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates. The difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates is an important determinant in the rate of prepayments. During
periods of falling mortgage interest rates, prepayments generally increase, and,
conversely, during periods of rising mortgage interest rates, prepayments
generally decrease. If the coupon rate of the underlying mortgage significantly
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages. Prepayment experience is more difficult to estimate for adjustable-
rate mortgage-backed securities.
The Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate and adjustable rate mortgage-backed and mortgage-related
securities. At June 30, 1996, the Bank had $23.2 million in mortgage-backed
securities (representing 100% of the Bank's gross mortgage-backed securities
portfolio, or 26.9% of total assets), insured or guaranteed by FNMA, FHLMC or
GNMA.
Structured Notes. The Bank has also invested in structured notes
issued by the FHLBs. These securities represent obligations of the FHLBs to
repay principal with interest that is either fixed or fluctuates in accordance
with an interest formula tied to various indices. Certain of these securities
involve certain risks not associated with investments in a conventional debt
security. If the interest rate on a note is indexed, the change in the interest
rate may result in an interest rate that is less than that payable on a
conventional fixed rate debt security issued at the same time. Moreover, the
secondary market for such notes is affected by factors independent of the
creditworthiness of the issuer and the value of the index, including other
interest rates, the volatility of the index to which interest on the notes is
tied, time remaining to maturity, and the amount of such notes outstanding. The
Bank has purchased its structured notes in an effort to increase the yield in
its investment portfolio.
The Bank's structured notes have adjustable rates that adjust
quarterly or semi-annually based on certain indices such as the Ten-Year CMT.
The interest rates on these notes have caps and floors. The interest rate
floors on the Bank's structured notes range from 0.6% to 5.0% and the interest
rate caps range from 8.9% to 24.0%. The Bank's current intention is to
discontinue purchases of structured notes.
18
<PAGE>
The following table sets forth the carrying value of the Bank's
investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------
1996 1995
------- -----------
(In thousands)
<S> <C> <C>
Investment securities held to maturity:
U.S. government obligations............................ $ -- $ 1,498
Tennessee Valley Authority bonds....................... -- 644
FHLB obligations....................................... 4,386 6,972
FHLMC notes............................................ 3,610 --
FNMA notes............................................. 2,089 995
Municipal obligations.................................. 2,379 1,814
------- -------
Total investment securities held to maturity........ 12,464 11,923
------- -------
Investment securities available for sale:
Tennessee Valley Authority bonds....................... 652 --
FHLB obligations....................................... 1,917 --
FNMA notes............................................. 500 --
------- -------
Total investment securities available for sale....... 3,069 --
------- -------
Total investment securities........................ $15,533 $11,923
======= =======
Mortgage-backed securities held to maturity:
FHLMC participation certificates....................... 1,988 2,712
GNMA participation certificates........................ 2,377 1,752
FNMA participation certificates........................ 14,677 1,562
------- -------
Total mortgage-backed securities held
to security........................................ 19,042 6,026
------- -------
Mortgage-backed securities available for sale:
FHLMC participation certificates....................... 4,135 --
------- -------
Total mortgage-backed securities available for sale.. 4,135 --
Total mortgage-backed securities..................... 23,177 6,026
Interest-earning deposits and certificates............... 643 1,173
------- -------
Total investments and mortgage-backed
securities:...................................... $39,353 $19,122
======= =======
</TABLE>
19
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Company's investment and mortgage-
backed securities, including those designated as available for sale at June 30,
1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
----------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- ------- -------- ------- -------- -------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. obligations..... $ -- --% $ 250 7.12% $3,300 7.28% $ -- --% $ 3,550 $ 3,488 7.27%
Tennessee Valley
Authority bonds..... 498 6.00 -- -- 149 7.45 -- -- 647 653 6.33
FHLB obligations..... -- -- 3,368 5.36 2,995 6.18 -- -- 6,363 6,089 5.75
FNMA notes........... 1,100 5.30 500 6.02 994 6.27 -- -- 2,594 2,560 5.81
State and municipal
obligations......... 320 6.65 520 4.96 739 4.99 800 4.94 2,379 2,348 5.19
Mortgage-backed
securities.......... 191 7.00 769 5.96 557 7.34 21,680 6.78 23,197 22,480 6.77
Interest-earning
deposits and
certificates of
deposits.......... 643 4.02 -- -- -- -- -- -- 643 643 4.02
------ ------ ------- ------- ------- -------
Total............. $2,732 $5,407 $ 8,734 $22,480 $39,353 $38,261
====== ====== ======= ======= ======= =======
</TABLE>
20
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, First Federal derives
funds primarily from loan principal repayments, maturing investment securities,
and interest payments. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit currently
ranging in term from 91 days to five years. Deposit account terms vary,
principally on the basis of the minimum balance required, the time periods the
funds must remain on deposit and the interest rate. The Bank also offers
individual retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside its primary market.
Interest rates paid, maturity terms, service fees and withdrawal penalties are
established by the Bank on a periodic basis. Determination of rates and terms
are predicated upon funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
Certificates of deposit in amounts of $100,000 or more ("Jumbos"), totalled
$3.4 million, or 6.6% of the Bank's total savings portfolio at June 30, 1996.
The majority of these Jumbos represent deposits by individuals. This large
amount of Jumbos as a percentage of total deposits makes the Bank susceptible to
large deposit withdrawals if one or more depositors withdraw deposits from the
Bank. Such withdrawals may adversely affect the Bank's liquidity and funds
available for lending if the Bank was unable to obtain funds from alternative
sources. However, First Federal has no brokered funds, nor do these Jumbos
represent brokered funds.
21
<PAGE>
Savings deposits in the Bank as of June 30, 1996 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
June 30,
1996
Interest Minimum Minimum Balances Percentage of
Rate Term Category Amount in Thousands Total Savings
-------- ------- -------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
2.80% None Passbook Savings $ 50 $ 6,299 12.17%
-- None Demand Checking 200 1,088 2.10
2.00 None NOW Accounts 400 4,849 9.37
2.10 None Super NOW Accounts 1,000 2,931 5.66
2.95 None Money Market Deposit Accounts 2,500 2,365 4.57
* 3.44 None First Money MMDA Accounts 10,000 493 0.95
Certificates of Deposit
-----------------------
* 4.00 91 days 91-day Fixed Term, Fixed Rate 1,000 274 0.53
* 4.79 6 months 6 Month Fixed Term, Fixed Rate 1,000 5,832 11.26
* 5.15 1 year 1 Year, Fixed Term, Fixed Rate 1,000 11,179 21.59
* 5.73 18 months 18 Month Fixed Term, Fixed Rate 1,000 894 1.73
* 5.60 24 months 24 Month "Bump" ** 5,000 4,159 8.03
* 5.45 30 months 30 Month Fixed Term, Fixed Rate 1,000 738 1.43
* 5.23 36 months 36 Month Fixed Term, Fixed Rate 1,000 3,630 7.01
* 5.46 5 years 5 Year Fixed Term, Fixed Rate 1,000 3,512 6.78
* 5.67 18 months IRA 18 Month Fixed Term, Fixed Rate 500 3,535 6.82
------------ -------
$ 51,778 100.00%
============ =======
</TABLE>
- --------------------
* Represents weighted average interest rate. Certificate holder has option at
** any time during term of certificate to request a one-time increase to then
prevailing 24 month certificate of deposit rate.
The following table sets forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
demand deposits and time deposits.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1996 1995
------ ------
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance.... $16,700 $34,847 $18,519 $35,307
Average rate....... 2.93% 5.21% 2.64% 4.63%
</TABLE>
22
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at
June 30, % of Increase June 30, % of
1996 Deposits (Decrease) 1995 Deposits
---------- --------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NOW and super NOW...... $ 8,868 17.13% $ 1,396 $ 7,472 14.07%
Money Market Accounts.. 2,858 5.52 (810) 3,668 6.91
Jumbo certificates..... 3,413 6.58 (1,066) 4,479 8.43
Certificates........... 30,340 58.60 (1,114) 31,454 59.23
Passbook savings....... 6,299 12.17 268 6,031 11.36
Other.................. -- -- (1) 1 --
------- ------ ------- ------- ------
Total............. $51,778 100.00% $(1,327) $53,105 100.00%
======= ====== ======= ======= ======
</TABLE>
The following table sets forth the time deposits in the Bank classified by
nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
2.01 - 4.00%.... $ 2,201 $ 2,252
4.01 - 6.00%.... 20,816 22,078
6.01 - 8.00%.... 10,611 11,350
8.01 - 10.00%.... 125 254
--------- ---------
$ 33,753 $ 35,934
========= =========
</TABLE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1996.
<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>
2.01 - 4.00%................. $ 2,201 $ -- $ -- $ -- $ 2,201
4.01 - 6.00%................. 18,341 934 1,121 420 20,816
6.01 - 8.00%................. 4,051 5,481 721 358 10,611
8.01 - 10.00%................. 120 5 -- -- 125
--------- --------- -------- -------- ----------
$ 24,713 $ 6,420 $ 1,842 $ 778 $ 33,753
========= ========= ======== ======== ==========
</TABLE>
23
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
<S> <C>
Three months or less................ $ 553
More than three through six months.. 603
More than six through 12 months..... 1,100
Over 12 months...................... 1,157
------
Total......................... $3,413
======
</TABLE>
The following table sets forth the savings deposit activities of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Deposits............................................ $ 133,516 $ 94,403
Withdrawals......................................... (135,529) (97,205)
--------- --------
Net increase (decrease) before interest credited.. (2,013) (2,802)
Interest credited................................... 686 653
--------- --------
Net increase (decrease) in savings deposits....... $ (1,327) $ (2,149)
========= ========
</TABLE>
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB are secured by the
Bank's one-to-four-family mortgage loans.
The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, First Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. See "Regulation of the Bank --Federal
Home Loan Bank System."
24
<PAGE>
The following table sets forth certain information regarding the Bank's
FHLB advances (the Bank's only borrowing's outstanding during the periods) at
the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
-------------------------
1996 1995
------ ------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances........................................ $14,528 $2,079
Weighted average rate paid on:
FHLB advances........................................ 5.46% 4.95%
<CAPTION>
For the Year
Ended June 30,
-------------------------
1996 1995
------ ------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances........................................ $14,528 $2,536
<CAPTION>
For the Year
Ended June 30,
-------------------------
1996 1995
------ ------
(Dollars in thousands)
<S> <C> <C>
Approximate average short-term borrowings outstanding
with respect to:
FHLB advances........................................ $ -- $ 833
Approximate weighted average rate paid on: (1)
FHLB advances........................................ 5.07% 5.88%
</TABLE>
- --------------------
(1) Weighted average computed by dividing total interest paid by average
balance outstanding.
As of June 30, 1996, the Bank had $14.5 million in advances outstanding.
Further asset growth may be funded through additional advances.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries, with an additional investment
of 1% of assets where such investment serves primarily community, inner-city and
community-development purposes. Under such limitations, as of June 30, 1996, the
Bank was authorized to invest up to $2.6 million in the stock of or loans to
subsidiaries, including the additional 1% investment for community inner-city
and community development purposes. The Bank has one wholly owned subsidiary:
Cynthiana Service Corporation, a Kentucky corporation, formed for the purpose of
holding the Bank's investments in data processing operations. At June 30, 1996,
the Bank's total investment in the subsidiary was $15,000. The operations of
Cynthiana Service Corporation are not consolidated with the operations of the
Bank as the subsidiary's operations were immaterial.
25
<PAGE>
COMPETITION
The Bank experiences competition both in attracting and retaining savings
deposits and in the making of mortgage and other loans. Direct competition for
savings deposits and loans in Harrison County and the other counties in the
Bank's market area comes from other savings institutions, credit unions,
commercial banks, money market mutual funds, brokerage firms and insurance
companies. Within Harrison County, the Bank is the only thrift institution
although there are branches of commercial banks and one loan production office
of a commercial bank. Although the Bank believes it ranks second in Harrison
County in terms of total deposits, one of its primary competitors may have
resources substantially greater than that of the Bank and can offer a wide
variety of deposit and loan products. The primary factors in competing for loans
are interest rates and loan origination fees and the range of services offered
by various financial institutions.
EMPLOYEES
As of June 30, 1996, the Bank had 21 full-time employees, none of whom was
represented by a collective bargaining agreement. First Federal believes that it
enjoys good relations with its personnel.
EXECUTIVE OFFICERS
The following sets forth information with respect to the executive officers
of the Company who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
June 30,
NAME 1996 TITLE
---- ------ -----
<S> <C> <C>
Kevin R. Tolle 39 Secretary/Treasurer
Robbie G. Cox 49 Vice President and Financial Officer
</TABLE>
KEVIN R. TOLLE is Secretary/Treasurer of the Company and Vice President and
Secretary of the Bank. Mr. Tolle joined the Bank in 1975 as a teller and was
promoted to his current position in 1994. He has served as the Bank's mortgage
loan officer since 1986. He serves as a member of the Harrison County Habitat
for Humanity and is a past member of the Cynthiana-Harrison County Jaycees and
the Harrison County United Fund Board. He is a member of the New Friendship
Baptist Church in Harrison County.
ROBBIE G. COX is Vice President and Financial Officer of the Company and
Vice President of the Bank, a position he has held since joining the Bank in
December 1986. From September 1992 to December 31, 1993 he also served as Chief
Executive Officer of the Bank and served as President and Chief Executive
Officer of the Bank from January 1994 to May 1994. Mr. Cox is a member and past
president of the Cynthiana Lions Club.
REGULATION OF THE COMPANY
GENERAL. The Company is a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such the Company
is registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, 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 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 association, 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
26
<PAGE>
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 such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and unless the savings association
requalifies as a QTL within one year thereafter, register as, and become subject
to, the 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 association,
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. 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
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.
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) 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.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings institution, and
certain affiliated entities of either, 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
27
<PAGE>
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.
Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act and Regulation on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. 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. Section 1972 prohibits (i) a depository institution from extending
credit to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) 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 from acquiring, without prior approval of the Director of
OTS, (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
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes 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).
The OTS regulations permit federal associations 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 association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under (S)7701(a)(19) of the Code and the total assets attributable
to all branches of the association in the state would qualify such branches
taken as a whole for treatment 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 association subsidiaries of
banking holding companies. Federal associations generally may not establish
28
<PAGE>
new branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
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 FDIC also has the authority to conduct
special examinations of the Bank because its deposits are insured by SAIF. The
Bank must file reports with these agencies describing its activities and
financial condition. 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 else where herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See "-- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital which is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. 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 and purchased credit card relationship. Both core and
tangible capital are further reduced by an amount equal to a gradually
increasing percentage of the savings association'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, 1996, First Federal had no such investments.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments as well as a pro rated portion of
the assets of other subsidiaries for which deduction is not fully required under
phase-in rules. Adjusted total assets are
29
<PAGE>
reduced by the amount of assets that have been deducted from capital, the
portion of the savings association's investments in subsidiaries that must be
netted against capital under the capital rules and, for purposes of the core
capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association'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 association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and, after July 1, 1990, by an increasing percentage of
the savings association's high loan-to-value ratio land loans and non-
residential construction loans and equity investments other than those deducted
from core and tangible capital. At June 30, 1996, the Bank had no high ratio
land or nonresidential construction loans and had no equity investments for
which OTS regulations require 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 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, 1996.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital...................................... $15,628 18.20%
Tangible capital requirement.......................... 1,288 1.50
------- -----
Excess.............................................. $14,340 16.70%
======= =====
Core capital.......................................... $15,628 18.20%
Core capital requirement.............................. 2,575 3.00
------- -----
Excess.............................................. $13,053 15.20%
======= =====
Total capital (i.e., core and supplementary capital).. $15,995 35.60%
Risk-based capital requirement........................ 3,594 8.00
------- -----
Excess.............................................. $12,401 27.60%
======= =====
</TABLE>
- --------------------
(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.
The OTS has adopted an amendment to its risk-based capital requirements
that requires 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 will be 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
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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 will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements. 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 new rule and does not expect that it will be
required to increase its total capital as a result of the rule upon its
implementation.
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. 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 the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically
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<PAGE>
undercapitalized. If a savings institution is in compliance with an approved
capital plan on the date of enactment of FDICIA, however, it will not be
required to submit a capital restoration plan if it is undercapitalized or
become subject to the statutory prompt corrective action provisions applicable
to significantly and critically undercapitalized institutions prior to July 1,
1994.
Under implementing regulations, the federal banking regulators, including
the OTS, generally measure a depository institution's capital adequacy on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
institution that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-
based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" savings institution is a savings
institution that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater
(or 3.0% or greater if the savings institution has a composite 1 CAMEL rating).
An "undercapitalized institution" is a savings institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as a savings institution that has: (i)
a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" savings institution is defined as a savings
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 under-capitalized) 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 CAMEL rating category. The Bank is
classified as "well capitalized" under these regulations.
QUALIFIED THRIFT LENDER TEST. A savings institution that does not meet the
Qualified Thrift Lender test ("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 a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. 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 a
national bank and immediately repay any outstanding FHLB advances (subject to
safety and soundness considerations).
To qualify as a QTL, a savings institution must maintain at least 65% of
its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified Thrift Investments consist of: (i) loans, equity positions,
or securities related to domestic, residential real estate or manufactured
housing; (ii) 50% of the dollar amount of residential mortgage loans subject to
sale under certain conditions but do not include any intangible assets. Subject
to a 20% of portfolio assets limit, however, savings institutions are able to
treat as Qualified Thrift Investments 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.
In addition, 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 Qualified Thrift Lender status will be permitted to requalify
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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.
Failure to qualify as a QTL results in a number of sanctions, including the
imposition of certain operating restrictions imposed on national banks and a
restriction on obtaining additional advances from the Federal Home Loan Bank
System. Upon failure to qualify as a QTL for two years, a savings association
must convert to a commercial bank. At June 30, 1996, approximately 79.31% of the
Bank's assets were invested in Qualified Thrift Investments.
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. In addition, savings institution subsidiaries of savings and
loan holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of (i) 75% of net income for the previous four quarters or (ii) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
is authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Association.
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 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. 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.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
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. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect 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
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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
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 will materially affect the
Bank's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are 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
assessment rate currently ranges from 0.23% of deposits for well capitalized
institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C.
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF and an entrance fee to BIF. A savings institution is not prohibited
from adopting a commercial bank or savings bank charter if the resulting bank
remains a SAIF member.
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On August 8, 1995, the FDIC adopted an amendment to the BIF risk-based
assessment schedule which lowered the deposit insurance rate for most commercial
banks and other depository institutions with deposits insured by the BIF to a
range of from 0.31% of insured deposits for undercapitalized BIF-insured
institutions to 0.04% of deposits for well-capitalized institutions, which
constitute over 90% of BIF-insured institutions. The FDIC amendment became
effective September 30, 1995. Subsequently, the FDIC reduced the premium rate
to a range from the statutory minimum of $1,000 per semi-annual period for the
most highly rated BIF-insured institutions and 0.27% of insured deposits for
under-capitalized institutions. These amendments created a substantial
disparity in the deposit insurance premiums paid by BIF and SAIF members and
places SAIF-insured savings institutions at a significant competitive
disadvantage to BIF-insured institutions.
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate the premium disparity. The Senate and the House of
Representatives have both, as part of a budget reconciliation package to balance
the federal budget, approved legislation requiring a one-time assessment of an
amount sufficient to bring the SAIF to a level equal to 1.25% of insured
deposits (originally estimated to be approximately 0.85% of insured deposits) to
be imposed on all SAIF-insured deposits as of March 31, 1995. This legislation
was subsequently vetoed by the President. This assessment was originally
scheduled to be payable during the first quarter of 1996. It is unknown whether
legislation of this type will be enacted, or if enacted, the amount of such
special assessment. It is currently estimated that an assessment of between
0.67% and 0.71% of insured deposits would be required to fully recapitalize the
SAIF. If a special assessment of 71 basis points were to be required it would
result in a one-time charge of up to approximately $381,000, which would have
the effect of reducing the Bank's tangible and core capital to $15.2 million, or
17.8% of adjusted total assets, and risk-based capital to $15.6 million, or
34.8% of risk-weighted assets as of June 30, 1996.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4% of total assets.
LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances
of short-term liquid assets at a specified percentage (currently 1%) of the
total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily and short-term liquidity ratios of the Bank for
the month of June 1996, were 6.1% and 11.1%, respectively.
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
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stock at June 30, 1996, of $738,000. 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, 1996, the Bank had $14.5 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
the first $52.0 million of transaction accounts, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1996, the Bank met its reserve requirements.
TAXATION
The Company and First Federal will file separate federal income tax
returns.
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
benefitted 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 recently signed by the President 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 loan
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. The Bank has provided deferred taxes for the amount of the recapture.
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
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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.
First Federal's federal corporate income tax returns have not been audited
in the last five years.
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 rule.
STATE INCOME TAXATION
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. First Federal is subject to an annual Kentucky ad valorem
tax. This tax is 0.1% of First Federal's savings accounts, common stock,
capital and retained income with certain deductions allowed for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. For the year ended June 30, 1996, the amount of such expense for
First Federal was $48,000.
Shareholders of the Company who are residents of the Commonwealth of
Kentucky may be subject to a Kentucky tax on intangible property, defined for
this purpose to include shares of stock in a corporation. The tax is an ad
valorem tax based upon the fair market value of the shares held by the
individual, and is assessed at a rate of $.25 per $100 in value.
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ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth the location and certain additional
information regarding the Bank's two offices at June 30, 1996.
<TABLE>
<CAPTION>
Book Value
Year Owned or at June 30, Approximate
Opened Leased 1996 Square Footage
---------- -------- ----------- --------------
<S> <C> <C> <C> <C>
306 North Main Street 1975 Owned $257,000 4,278
Cynthiana, Kentucky
100 Ladish Road
Cynthiana, Kentucky 1994 Owned 918,000 2,500
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
Although First Federal, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Company or First Federal is a party or to which any of
its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
(a) On April 3, 1996, the Company held its Annual Meeting of Stockholders
for the purposes of election of three directors ("Proposal I"), approval of the
Kentucky First Bancorp, Inc. Stock Option and Incentive Plan (the "Option Plan")
("Proposal II") and approval of the Kentucky First Bancorp, Inc. Management
Recognition Plan (the "MRP") ("Proposal III").
(b) This sub-item is not applicable as (i) proxies for the meeting were
solicited pursuant to Regulation 14A, (ii) there was no solicitation in
opposition to management's nominees as listed in the proxy statement, and (iii)
all such nominees were elected.
(c) The following matters were voted upon at the Annual Meeting: (i)
the election of Betty J. Long, Milton G. Rees and Wilbur H. Wilson as directors
of the Company, each to serve for a three year term, (ii) approval of the Option
Plan, and (iii) approval of the MRP. Pursuant to the Option Plan, awards of
stock options, stock appreciation rights and restricted stock may be made by a
committee of the Board of Directors to such employees as the committee shall
designate. The Option Plan reserves 138,862 authorized but unissued shares of
common stock for issuance upon the exercise of options or stock appreciation
rights or the grant of restricted stock. The MRP is administered by a committee
of the Board of Directors who has authority to select and grant plan share
awards to eligible employees. The MRP Trust has purchased an aggregate of
55,545 shares of the Company's common stock. The results of voting on these
proposals was as follows:
<TABLE>
<CAPTION>
Against
or Broker
For Withheld Abstentions Non-Votes
---- -------- ----------- ---------
<S> <C> <C> <C> <C>
Proposal I: Betty J. Long 1,190,788 23,000 -- --
Milton G. Rees 1,178,788 35,000 -- --
Wilbur H. Wilson 1,190,788 23,000 -- --
Proposal II 945,699 126,194 22,020 119,875
Proposal III 1,033,466 138,674 22,020 19,628
</TABLE>
(d) Not applicable.
38
<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 1996 Annual Report to
Stockholders (the "Annual Report").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
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 7. FINANCIAL STATEMENTS
- -----------------------------
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 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
Company's Current Report on Form 8-K dated May 9, 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------
The information required by this item is incorporated by reference to
"Proposal I -- Election of Directors" in the Proxy Statement.
For certain information regarding the non-director executive officers of
the Company, see "Item 1. Description of Business -- Executive Officers."
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated by reference to
"Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this item is incorporated by reference to
"Voting Securities and Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.
39
<PAGE>
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
- -------------------------------------------------
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following financial statements are
incorporated by reference from Item 7:
Independent Auditors' Report
Consolidated Statements of Financial Condition as of June 30, 1996 and
1995
Consolidated Statements of Earnings for Each of the Years in the
Three-Year Period Ended June 30, 1996
Consolidated Statements of Shareholders' Equity for Each of the Years
in the Three-Year Period Ended June 30, 1996
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended June 30, 1996
Notes to Consolidated Financial Statements
(2) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-KSB and is also the Exhibit Index.
<TABLE>
<CAPTION>
Page in
Sequentially
No. Description Numbered Copy
--- ------------- -------------
<S> <C> <C>
3.1 Certificate of Incorporation of Kentucky First Bancorp, Inc. *
3.2 Bylaws of Kentucky First Bancorp, Inc. *
4 Form of Common Stock Certificate of Kentucky First Bancorp, Inc. *
10.1 First Federal Savings Bank Incentive Compensation Plan *+
10.2 Kentucky First Bancorp, Inc. Stock Option and Incentive Plan
10.3 Kentucky First Bancorp, Inc. Management Recognition Plans *+
10.4 Deferred Compensation Agreements, as amended
10.5 First Federal Savings Bank Retirement Plan for Non-Employee Directors *+
10.6 Supplemental Executive Retirement Agreement between First Federal
Savings Bank and Betty J. Long *+
10.7 Employment Agreements between First Federal Savings Bank and Betty J.
Long and Kevin R. Tolle *+
10.8 Employment Agreements between Kentucky First Bancorp, Inc. and Betty
J. Long and Kevin R. Tolle *
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton L.L.P.
23.2 Consent of England and Hensley
27 Financial Data Schedule
</TABLE>
- ------------------
(*) Incorporated herein by reference from Registration Statement on Form S-1
filed (File No. 33-91134).
(+) Management contract or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K. A current report on Form 8-K dated May 9, 1996
-------------------
was filed by the Company to report under Item 4 a change in the Company's
certifying accountant.
40
<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.
KENTUCKY FIRST BANCORP, INC.
September 24, 1996 By: /s/ Betty J. Long
-------------------------------------
Betty J. Long
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Betty J. Long September 24, 1996
- --------------------------------------------
Betty J. Long
President and Chief Executive Officer
(Director and Principal Executive Officer)
/s/ William D. Morris September 24, 1996
- --------------------------------------------
William D. Morris
Chairman of the Board
(Director)
/s/ Luther O. Beckett September 24, 1996
- --------------------------------------------
Luther O. Beckett
Vice Chairman of the Board
(Director)
/s/ G. Bernard Midden, Jr. September 24, 1996
- --------------------------------------------
G. Bernard Midden, Jr.
(Director)
/s/ Milton G. Rees September 24, 1996
- --------------------------------------------
Milton G. Rees
(Director)
/s/ Diane Ritchie September 24, 1996
- --------------------------------------------
Diane Ritchie
Vice President
(Director)
/s/ John Swinford September 24, 1996
- --------------------------------------------
John Swinford
(Director)
/s/ Wilbur H. Wilson September 24, 1996
- --------------------------------------------
Wilbur H. Wilson
(Director)
/s/ Robbie Cox September 24, 1996
- --------------------------------------------
Robbie G. Cox
Vice President
(Principal Accounting and Financial Officer)
41
<PAGE>
KENTUCKY FIRST BANCORP. INC.
<LOGO>
ANNUAL
________
1996
________
REPORT
<PAGE>
Dear Stockholders:
We are very pleased to present Kentucky First Bancorp's Second Annual
Report to Stockholders covering the fiscal year ended June 30, 1996.
We were very satisfied with our first year of operations as a public
company. Net earnings for fiscal 1996 totaled $849,000, or $.66 per share,
representing a very solid increase of $370,000, or 77.2% over our fiscal 1995
results. The fiscal 1996 earnings improvement was primarily fueled by asset
growth of $23.6 million, or 37.7% which translated into a $646,000, or 30.9%,
increase in net interest income.
We believe our success during the current fiscal year can be attributed to
several key factors. First and foremost, it is your Board and management's
opinion that consumers want the personalized service provided by an independent
community financial institution. In this regard, your management implemented a
marketing program during fiscal 1996 under the direction of the Bank's Vice-
President and Marketing Officer, Diane Ritchie. Diane has spent an extensive
amount of time in our market area promoting the Bank's services. We believe our
loan growth rate during fiscal 1996 is a clear indicator of this program's
success. In order to strengthen and accommodate our anticipated loan growth as
a result of the foregoing efforts, we transferred Vice-President and Chief
Lending Officer, Kevin Tolle to the Main Office, automated our loan origination
process, and hired an additional loan officer. Finally, we are commencing
substantial renovations to our Main Street Office.
We are pleased with the manner in which the investment community has
rewarded our hard work during fiscal 1996. Specifically, our charter
stockholders have realized first year market value appreciation totaling 37% of
their original investments based on the closing market value on June 28, 1996.
Not complacent with our performance, we had previously announced our intent to
distribute from $1.00 - $3.00 in nonrecurring tax free dividends if we receive a
favorable ruling from the Internal Revenue Service (IRS). While there can be no
assurances, our professionals advise us that the IRS decision on the matter is
imminent. We will continue to advise you of the status of the special dividend
as further information becomes available to us.
Notwithstanding our accomplishments during the year, we continue to
operate at a competitive disadvantage to our commercial banking competitors as a
result of the significant disparity in the amount of federal deposit insurance
premiums. We are cautiously optimistic that this significant competitive
disadvantage will be eliminated during fiscal 1997, and that the financial
services industry will shift once again toward a truly level paying field.
However, there is no assurance that favorable legislation will be enacted in
support of our beliefs.
In summary, your Board and management remain ever-committed to maximizing
the return on your investment in Kentucky First Bancorp. We look forward
optimistically to fiscal 1997, and as always, ask you for your continued
support.
Very truly yours,
/s/ Betty J. Long /s/ William D. Morris
Betty J. Long William D. Morris
President and Chief Executive Officer Chairman of the Board
<PAGE>
KENTUCKY FIRST BANCORP, INC.
Kentucky First Bancorp, Inc. (the "Company") was incorporated under the
laws of the State of Delaware in April 1995 at the direction of the Board of
Directors of First Federal Savings Bank ("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 August 28, 1995, with the Company issuing 1,388,625 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, a portion of the net proceeds of the Conversion
and a note receivable from the Employee Stock Ownership Plan of the Bank (the
"ESOP"). The Company's principal business is the business of the Bank. At June
30, 1996, the Company had total assets of $86.3 million, deposits of $51.8
million, net loans receivable of $43.0 million and stockholders' equity of $19.3
million.
As a savings and loan holding company, the Company is subject to
regulations, supervision and examination by the Officer of Thrift Supervision of
the Department of the Treasury (the "OTS").
FIRST FEDERAL SAVINGS BANK
First Federal was formed in 1888 under the name of Cynthiana Building &
Saving Association. In 1966 the Bank converted to a federally-chartered savings
and loan association and adopted the name of First Federal Savings and Loan
Association of Cynthiana. The Bank converted to a federally chartered savings
bank under the name of First Federal Savings Bank in January 1988. The Bank
operates two offices in Cynthiana, Kentucky. The Bank is principally engaged in
the business of accepting deposits from the general public through a variety of
deposit programs and investing these funds by originating and purchasing loans
secured by one- to four-family residential properties located in its market
area, construction loans, commercial and multi-family mortgage loans,
agricultural loans, commercial business loans and consumer loans. In addition
to its lending activities, the Bank invests in mortgage-backed securities, U.S.
Government and agency obligations, municipal obligations and other investments
permitted by applicable law.
First Federal's business strategy is to operate a well capitalized,
profitable community savings association dedicated to financing home ownership
in its market area and providing quality service to its customers. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits for each depositor. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati, which is one of the 12 district banks
comprising the FHLB System. The Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC. Such regulation is intended
primarily for the protection of depositors.
Both the Company's and First Federal's executive offices are located at 306
North Main Street, Cynthiana, Kentucky 41031-1210, and its telephone number is
(606) 234-1440.
MARKET INFORMATION
The Common Stock began trading under the symbol "KYF" on the American Stock
Exchange on August 29, 1995. There are currently 1,388,625 shares of the Common
Stock outstanding. The number of registered holders of Common Stock on
September 6, 1996 was 368.
2
<PAGE>
The following table shows the high and low stock prices for the Common
Stock and dividends declared on a quarterly basis since it began trading on the
American Stock Exchange through June 30, 1996.
<TABLE>
<CAPTION>
Quarter Dividends
Ended High Low Declared
----- ---- --- --------
<S> <C> <C> <C>
September 30, 1995 $ 13.00 $ 12.00 $ --
December 31, 1995 $ 12.75 $ 11.25 $ --
March 31, 1996 $ 12.50 $ 11.375 $ 0.125
June 30, 1996 $ 13.875 $ 12.00 $ 0.125
</TABLE>
The income of the Company consists of interest on investment and related
securities and dividends which may periodically be declared and paid by the
Baoard of Directors of the Bank on the common shares of the Bank held by the
Company.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if the Bank's regulatory capital would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
established in connection with the Conversion or applicable regulatory capital
requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
asset ratio exceeded its required capital to asset ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
The Bank currently meets all of its regulatory requirements and, unless the
OTS determines that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of the OTS regulations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal business since August 28, 1995 has been that of the
Bank. Therefore, this discussion relates primarily to the Bank. Historically,
the Bank has functioned as a financial intermediary, attracting deposits from
the general public and using such deposits to make and purchase mortgage and
other loans and, to a lesser extent, to purchase investment and mortgage-backed
securities. As such, its earnings have depended primarily on its net interest
income, or "spread", which is the difference between the amount it receives from
interest earned on loans and investments ("interest-earning assets") and the
amount it pays in interest on its deposits and borrowings ("interest-bearing
liabilities"). Results of operations are also dependent upon the level of the
Bank's other income, including fee income and service charges and by the level
of its general, administrative and other expense, including SAIF deposit
insurance premiums, employee compensation and benefits, occupancy and equipment
expense and other operating expenses.
3
<PAGE>
The operations of the Bank are significantly affected by prevailing
economic conditions and the monetary, fiscal and regulatory policies of
governmental agencies. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, the level of interest rates and
the availability of funds. Deposit flows and costs of funds are likewise heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Bank's market areas.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of First Federal's net earnings,
is determined by the difference, or "spread", between the yield earned on the
Bank's interest-earning assets and the rates paid on its interest-bearing
liabilities and the relative amounts of such assets and liabilities. Key
components of a successful asset/liability strategy are the monitoring and
managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios. First Federal has employed various
strategies intended to minimize the adverse affect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity of its assets and liabilities. Such strategies include the
origination and purchase of adjustable-rate mortgage loans secured by one- to
four-family residential real estate, multi-family and commercial real estate
loans. The Bank's loan pricing strategies are designed to encourage customers to
choose adjustable rate, rather than fixed rate, mortgage loans, although the
fixed rates offered have been reduced recently to become more competitive with
the rates offered by competitors in the Bank's lending areas. In addition, the
Bank has used excess funds to invest in various short-term investments as well
as mortgage-backed securities. The Bank's present investment strategy is to
purchase relatively short-term securities with adjustable rates in order to
maintain liquidity and manage interest rate risk.
INTEREST RATE SENSITIVITY ANALYSIS AND NET PORTFOLIO VALUE
In recent years, the Bank has measured its interest rate sensitivity by
computing the "gap" between the assets and liabilities which were expected to
mature or reprice within certain periods, based on assumptions regarding loan
prepayment and deposit decay rates formerly provided by the OTS. However, the
OTS now requires the computation of amounts by which the net present value of an
institution's cash flows from assets, liabilities and off balance sheet items
(the institution's net portfolio value, or "NPV") would change in the event of a
range of assumed changes in market interest rates. The OTS also requires the
computation of estimated changes in net interest income over a four-quarter
period. These computations estimate the effect on an institution's NPV and net
interest income of an instantaneous and permanent 1% to 4% increase and decrease
in market interest rates.
4
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's
net interest income and net portfolio value as of June 30, 1996 in the event of
1%, 2%, 3% and 4% instantaneous and permanent increases and decreases in market
interest rates, respectively.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of Portfolio Value of Assets
------------------------------------ --------------------------------------
in Rates Amount $ Change % Change NPV Ratio Basis Point Changes
-------- ------ -------- -------- --------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $ 11,440 $(5,725) (33.4)% 14.6% (540)
+300 bp 12,802 (4,363) (25.4) 16.0 (402)
+200 bp 14,388 (2,777) (16.2) 17.5 (248)
+100 bp 15,817 (1,347) (7.8) 18.8 (117)
0 bp 17,165 -- -- 20.0 --
-100 bp 18,295 1,130 6.6 20.9 93
-200 bp 19,061 1,897 11.1 21.5 149
-300 bp 19,564 2,399 14.0 21.8 181
-400 bp 20,206 3,042 17.7 22.2 223
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interestbearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable rate
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In addition, the proportion of adjustable
rate loans in the Bank's portfolios could decrease in future periods if market
interest rates remain at or decrease below current levels due to refinance
activity. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the tables. Finally, the ability of many borrowers to service their adjustable-
rate debt may decrease in the event of an interest rate increase.
The retention of adjustable-rate mortgage and commercial loans in the
Bank's portfolio helps reduce the Bank's exposure to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to borrowers as a result of repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower.
5
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference ("interest rate
spread") between rates of interest earned on interest-earning assets and rates
of interest paid on interest-bearing liabilities and (ii) the relative amounts
of interest-earning assets and interest-bearing liabilities. When interest-
earning assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Savings institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institution's net interest income is its "net
yield on interest-earning assets" which is net interest income divided by
average interest-earning assets. The following table sets forth certain
information relating to the Bank's average interest-earning assets and interest-
bearing liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans are included in the net loan category. Average
balances are derived from month-end average balances. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
Average Average Average
Yield/ Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- -------- ------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1).................. $42,544 $3,265 7.67% $39,424 $3,020 7.66% $37,845 $3,028 8.00%
Investment securities...................... 12,421 962 7.74 12,150 903 7.43 9,226 825 8.94
Mortgage-backed securities................. 12,094 864 7.14 6,475 302 4.66 9,924 348 3.51
Other interest-earning assets.............. 4,827 266 5.51 1,582 38 2.40 2,182 60 2.75
------- ------ ------- ------ ------- ------
Total interest-earning assets............ 71,886 5,357 7.45 59,631 4,263 7.15 59,177 4,261 7.20
Non-interest-earning assets.................. 3,003 2,676 1,976
------- ------- -------
Total assets............................. $74,889 $62,307 $61,153
======= ======= =======
Interest-bearing liabilities:
Deposits................................... $51,547 $2,305 4.47% $53,260 2,124 3.99 $53,642 1,979 3.69%
Borrowings................................. 6,234 316 5.07 833 49 5.88 200 7 3.50
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities...... 57,781 2,621 4.54 54,093 2,173 4.02 53,842 1,986 3.69
------ ---- ------ ------ ------ ----
Non-interest-bearing liabilities............. 478 1,392 1,198
------- ------- -------
Total liabilities....................... 58,259 55,485 55,040
Shareholders' equity (2)..................... 16,630 6,822 6,113
------- ------- -------
Total liabilities and
shareholders' equity.................. $74,889 $62,307 $61,153
======= ======= =======
Net interest income.......................... $2,736 $2,090 $2,275
====== ====== ======
Interest rate spread (3)..................... 2.91% 3.13% 3.51%
====== ====== ======
Net yield on interest-earning assets (4)..... 3.81% 3.50% 3.84%
====== ====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 124.41% 110.24% 109.91%
====== ====== ======
</TABLE>
- --------------------
(1) Includes non-accrual loans.
(2) Consisted of retained earnings only for the fiscal years ended June 30,
1995 and 1994.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest income as a percentage of the average balance of
interest-earning assets for the same period.
6
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated proportionately between
changes in rate and changes in volume.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- ------------------------------
Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans.............................. $ 6 $ 239 $ 245 $(126) $ 118 $ (8)
Investment securities (1).......... 214 348 562 134 (180) (46)
Mortgage-backed securities (1)..... 39 20 59 (130) 208 78
Other interest-earning assets...... 88 140 228 (7) (15) (22)
----- ---- ------ ----- ----- -----
Total interest-earning assets... 346 748 1,094 (129) 131 2
----- ---- ------ ----- ----- -----
Interest expense:
Deposits........................... 264 (83) 181 161 (16) 145
Borrowings......................... (6) 273 267 8 34 42
----- ---- ------ ----- ----- -----
Total interest-bearing
liabilities.................. 258 190 448 169 18 187
----- ---- ------ ----- ----- -----
Increase (decrease) in net interest
income............................. $ 646 $(185)
====== =====
</TABLE>
- --------------------
(1) Includes securities designated as available for sale.
7
<PAGE>
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1996 AND 1995 AND OPERATING
RESULTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
FINANCIAL CONDITION
The Company's total assets at June 30, 1996 amounted to $86.3 million,
an increase of $23.6 million, or 37.7%, over the $62.7 million total at June 30,
1995. The increase in assets was funded primarily by the $12.2 million in net
proceeds from the Company's offering of common stock, a $12.4 million increase
in advances from the Federal Home Loan Bank and undistributed net earnings of
$502,000, which were partially offset by a $1.3 million decline in deposits.
Cash and cash equivalents and investment securities totaled $17.1
million at June 30, 1996, an increase of $3.1 million, or 22.4%, over June 30,
1995 levels. During fiscal 1996, $14.3 million of investment securities were
purchased, while $10.6 million of securities matured. Securities purchased
consisted primarily of intermediate and long-term U.S. Government agency
obligations.
Mortgage-backed securities totaled $23.2 million at June 30, 1996, an
increase of $17.2 million over fiscal 1995 year-end levels. The increase
resulted from purchases totaling $18.3 million, which were partially offset by
principal repayments of $1.2 million. Such purchases were funded primarily with
proceeds from Federal Home Loan Bank advances, and consisted of long-term
securities bearing interest primarily at rates ranging from 6.50% to 7.00%.
Loans receivable totaled $43.0 million at June 30, 1996, an increase
of $2.9 million, or 7.3%, over the $40.1 million total at June 30, 1995. During
fiscal 1996, loan disbursements and purchases amounted to $11.1 million, which
were partially offset by principal repayments of $8.1 million. During fiscal
1996, as consumer preference has shifted to fixed-rate loan products, management
elected to pursue growth in the portfolio by meeting the demand. At June 30,
1996, approximately 43.0% of the Bank's loan portfolio consisted of fixed rate
loans.
The Bank's allowance for loan losses totaled $367,000 at June 30,
1996, which represented 0.8% of total loans and 300.8% of nonperforming loans.
At June 30, 1995, the allowance for loan losses totaled $352,000, which
represented 0.9% of total loans and 97.2% of nonperforming loans. Nonperforming
loans amounted to $122,000 and $362,000 at June 30, 1996 and 1995, respectively,
and represented 0.1% and 0.6% of total assets at those dates. Although
management believes that its allowance for loan losses at June 30, 1996, was
adequate based on facts and circumstances available to it, there can be no
assurance that additions to such allowance will not be necessary in future
periods, which could adversely affect the Company's results of operations.
Deposits totaled $51.8 million at June 30, 1996, a decrease of $1.3
million, or 2.5%, from 1995 levels. During fiscal 1996 management has elected
to fund growth in the loan portfolio and in other interest-earning assets by
utilizing lower costing advances from the Federal Home Loan Bank, in lieu of
savings deposits.
Advances from the Federal Home Loan Bank totaled $14.5 million, an
increase of $12.4 million over fiscal 1995 levels. During fiscal 1996,
management elected to finance the purchase of mortgage-backed securities through
proceeds from Federal Home Loan Bank advances totaling $16.1 million. Short-
term advances, generally maturing within the next two fiscal years and bearing
interest at rates ranging from 4.80% to 5.75%, totaling $13.0 million, and long-
term advances totaling $3.1 million were used to fund the purchase of mortgage-
backed securities, as previously discussed.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND
1995
GENERAL. Net earnings for the fiscal year ended June 30, 1996
amounted to $849,000, an increase of $370,000, or 77.2%, over the $479,000 in
net earnings recorded in fiscal 1995. The increase in net earnings resulted
primarily from a $646,000 increase in net interest income, a $185,000 decline in
the provision for losses on loans
8
<PAGE>
and a $25,000 increase in other income, which were partially offset by a
$344,000 increase in general, administrative and other expenses and a $142,000
increase in the provision for federal income taxes.
NET INTEREST INCOME. Net interest income totaled $2.7 million for the
fiscal year ended June 30, 1996, an increase of $646,000, or 30.9%, over the
$2.1 million recorded in fiscal 1995. Interest income on loans increased by
$245,000, or 8.1%, during fiscal 1996, due primarily to a $3.1 million increase
in the average balance of loans outstanding. Interest income on mortgage-backed
securities increased by $562,000, or 186.1%, due primarily to a $5.6 million, or
86.8% increase in the average balance of mortgage-backed securities outstanding,
coupled with an increase in the average yield year to year, from 4.66% in fiscal
1995 to 7.14% in fiscal 1996. Interest income on investment securities and
interest-bearing deposits increased by $287,000, or 30.5%, as the average
balance increased by $3.5 million year to year and the related yield increased
by 27 basis points to 7.12% in fiscal 1996.
Interest expense on deposits increased by $181,000, or 8.5% during
fiscal 1996, due primarily to an increase in the weighted-average cost of
deposits of 48 basis points, from 3.99% in fiscal 1995 to 4.47% in fiscal 1996.
The increase in weighted-average cost was partially offset by a $1.7 million
decline in the average balance outstanding year to year. Interest expense on
borrowings increased by $267,000 during fiscal 1996, due primarily to a $5.4
million increase in the average balance outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $646,000, or 30.9%, during fiscal 1996
as compared to fiscal 1995. The interest rate spread declined by 22 basis
points, to 2.91% for fiscal 1996, as compared to 3.13% for fiscal 1995, while
the net interest margin increased by 31 basis points, to 3.81% for the year
ended June 30, 1996. The overall increase in net interest income reflects
management's deployment of the net proceeds from the Company's common stock
offering which was completed in August 1995.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is
charged to earnings to bring the allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Bank, the status of past due loan payments and general
economic conditions related to the loan portfolio. During fiscal 1996, the
provision for losses on loans amounted to $15,000, a decline of $185,000 from
the provision recorded in fiscal 1995. The decline in the provision during
fiscal 1996 resulted primarily from the reduction in nonperforming loans, as
previously discussed.
OTHER INCOME. Other income totaled $118,000 for the fiscal year ended
June 30, 1996, an increase of $25,000, or 26.9% over the $93,000 total recorded
in fiscal 1995. The increase resulted primarily from a $24,000, or 41.4%,
increase in service fees on NOW accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative
and other expense increased by $344,000, or 27.3%, to a total of $1.6 million
for the fiscal year ended June 30, 1996 as compared to fiscal 1995. The
increase resulted primarily from a $194,000, or 30.0%, increase in employee
compensation and benefits, a $35,000, or 34.0% increase in occupancy and
equipment expense and a $121,000, or 42.2%, increase in other operating
expenses. The increase in employee compensation and benefits was due primarily
to expenses related to employee stock benefit plans, totaling approximately
$169,000, as well as normal merit increases and an increase in staffing levels
year to year as a result of the new branch facility which opened in 1995. The
increase in occupancy and equipment expense was similarly due primarily to the
costs associated with the new branch facility. The increase in other operating
expense was due primarily to professional fees, printing and other expenses
related to the reporting requirements of public companies.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$385,000 for the fiscal year ended June 30, 1996, an increase of $142,000, or
58.4%, over the $243,000 provision recorded in fiscal 1995. The increase
resulted primarily from the $512,000, or 70.9%, increase in pretax earnings year
to year. The Company's effective tax rates were 31.2% and 33.7% for the fiscal
years ended June 30, 1996 and 1995, respectively.
9
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1995 AND
1994
GENERAL. Net earnings for the year ended June 30, 1995 totaled
$479,000, a decrease of $431,000, or 47.4%, as compared to the year ended June
30, 1994. This net decrease was attributable to a decline in net interest income
of $185,000, an increase in general, administrative and other expense of
$230,000 and an increase in the provision for loan losses of $170,000, which
were partially offset by an increase in other income of $6,000 and a decrease in
the provision for federal income taxes of $148,000.
NET INTEREST INCOME. Net interest income decreased by $185,000, or
8.1%, from fiscal 1994 to fiscal 1995. Total interest income increased by
$2,000 or 0.05%, due primarily to a $454,000 increase in the average balances
outstanding year to year.
Interest expense totaled $2.2 million and $2.0 million for the years
ended June 30, 1995 and 1994, respectively. The increase in interest expense
for fiscal year 1995 resulted from the 33 basis point increase in the average
rate paid on interest-bearing liabilities, which was attributable to the
increase in market interest rates during fiscal year 1995.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $185,000, or 8.1%, to a total of $2.1
million in fiscal 1995. The interest rate spread declined by 38 basis points,
from 3.51% in fiscal 1994 to 3.13% in fiscal 1995, while the net interest margin
declined by 34 basis points, from 3.84% in fiscal 1994 to 3.50% in fiscal 1995.
PROVISION FOR LOSSES ON LOANS. The Bank's provision for loan losses
totaled $200,000 for the year ended June 30, 1995 and $30,000 for the year ended
June 30, 1994. The increase in the provision for loan losses during fiscal 1995
was due primarily to an increase in the Bank's nonperforming assets during the
period. The Bank had no loan charge-offs during fiscal 1995 and 1994.
Management determines the level of the allowance for loan losses based on its
analysis of various factors, including the market value of the underlying
collateral, growth and composition of the loan portfolio, the relationship of
the allowance for loan losses to outstanding loans, historical loss experience,
delinquency trends and prevailing and projected economic conditions.
OTHER INCOME. Other income totaled $93,000 and $87,000 for the years
ended June 30, 1995 and 1994, respectively. The increase in other income in
fiscal year 1995 was attributable to an increase in service charges on deposit
accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative
and other expense totaled $1.3 million for the year ended June 30, 1995, an
increase of $230,000, or 22.3%, over the $1.0 million recorded in fiscal 1994.
The increase in fiscal 1995 as compared to fiscal 1994 was attributable to
increases in compensation and benefits, occupancy expense, data processing and
other expenses relating to the Bank's establishment of a branch office in August
1994. The increases in other expenses included increases in advertising,
accounting services, office supplies, telephone and postage costs.
FEDERAL INCOME TAXES. The effective tax rate on earnings before
income taxes was 33.7% and 30.1% for the years ended June 30, 1995 and 1994,
respectively. The provision for income taxes amounted to $243,000 and $391,000
for the years ended June 30, 1995 and 1994, respectively. The decrease in income
tax expense was primarily due to the decline in earnings before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity, in addition to the $3.9
million in net proceeds retained by the Company from the Conversion, is
dividends paid by the Bank and earnings on that portion of the net proceeds
retained by the Company. The Bank, as a stock savings institution, is subject
to certain regulatory limitations with respect to the payment of dividends to
the Company.
10
<PAGE>
First Federal's capital ratios are substantially in excess of current
regulatory capital requirements. At June 30, 1996, the Bank's tangible and core
capital amounted to 18.2% of adjusted total assets, or 16.7% and 15.2%,
respectively, in excess of the Bank's current 1.5% tangible and 3.0% core
capital requirements. Additionally, the Bank's risk-based capital ratio was
35.6% at June 30, 1996, or 27.6% in excess of the Bank's 8.0% risk-based capital
requirement.
First Federal's principal sources of funds for operations are deposits
from its primary market area, principal and interest payments on loans and
proceeds from maturing investment securities, as well as the net proceeds from
the Conversion of approximately $10.0 million. In addition, as a member of the
FHLB of Cincinnati, the Bank is eligible to borrow funds from the FHLB of
Cincinnati in the form of advances.
First Federal is required by OTS regulations to maintain minimum
levels of specified liquid assets which are currently equal to 5% of deposits
and borrowings. First Federal's liquidity ratio at June 30, 1996, was
approximately 11.3%. Management seeks to maintain a liquidity ratio at or near
the regulatory minimum as a means of improving the return on the investment of
the Bank's assets.
The Bank's liquid assets consist of cash and cash equivalents, which
are short-term, highly liquid investments with original maturities of less than
three months. The level of liquid assets is dependent on the Bank's operating,
financing and investing activities during any given period. At June 30, 1996
and 1995, cash and cash equivalents totalled approximately $1.5 million and $2.0
million, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements, and notes thereto, presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Disclosures of Fair Value of Financial Instruments. In December 1991,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to disclose the fair
value of financial instruments (both assets and liabilities recognized and not
recognized in the statements of financial condition) for which it is practicable
to estimate the fair value, except those financial instruments specifically
excluded. The disclosure shall be either in the body of the financial
statements or in the accompanying notes and shall include the methods and
significant assumptions used to estimate the fair value of a financial
instrument or a class of financial instruments as well as the reasons why it is
not practicable to estimate fair value. SFAS No. 107 is effective for fiscal
years ending after December 15, 1992 for companies with assets of greater than
$150 million. For companies with assets of less than $150 million, SFAS No. 107
is effective for fiscal years ending after December 15, 1995. The Bank adopted
the disclosure requirements of SFAS No. 107 for the fiscal year ended June 30,
1996.
Accounting for Impaired Loans. In September 1993, the FASB issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
requires that specified impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or,
as an alternative, at the fair value of the collateral or the observable market
price of the loan. SFAS No. 114 does not apply to large groups of small
balance, homogeneous loans that are collectively evaluated for impairment.
Subsequent to October 1994, the FASB issued SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures" as an
amendment to SFAS No. 114. SFAS No. 118 amends the disclosure requirements of
SFAS
11
<PAGE>
No. 114 to require information about the recorded investment in certain impaired
loans and about how a creditor recognizes interest income related to those
impaired loans. SFAS No. 114, as amended by SFAS No. 118, is effective for years
beginning after December 15, 1994. The Company adopted SFAS No. 114 as of July
1, 1995, as required, without a material effect on the Company's consolidated
financial condition or results of operations.
Accounting for ESOP. In November 1993, the AICPA approved Statement of
Position ("SOP") No. 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." SOP 93-6 changed the measure of compensation recorded by employers from
the cost of ESOP shares to their fair value. To the extent that the fair value
of the Company's ESOP shares, committed to be released directly to compensate
employees differs from the cost of such shares, compensation expenses and a
related charge or credit to additional paid-in capital will be reflected in the
Company's financial statements. SOP No. 93-6 also requires that shares committed
to be released be considered as outstanding for earnings per share computations.
Management adopted SOP No. 93-6 in fiscal 1996 without a material effect on the
Company's consolidated financial condition or results of operations.
Accounting for Stock-Based Compensation. In October 1994, the FASB
issued SFAS No. 123 entitled "Accounting for Stock Based Compensation." SFAS No.
123 establishes a fair value based method of accounting for stock-based
compensation paid to employees. SFAS No. 123 recognizes the fair value of an
award of stock or stock options on the grant date and is effective for
transactions occurring after December 1995. Companies are allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123
had been adopted. Management has determined that the Company will continue to
account for stock-based compensation pursuant to Accounting Principles Board
Opinion No. 25, and therefore adoption of the disclosure provisions set forth in
SFAS No. 123 will not have a material effect on the Company's consolidated
financial condition or results of operations.
Derivative Financial Instruments. In October 1994, the FASB issued
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," which is applicable for financial statements issued
for fiscal years ending after December 15, 1994, except for entities with less
than $150 million in total assets for which it is effective for fiscal years
ending after December 15, 1995. SFAS No. 119 requires the disclosure of the
amounts, nature and terms of derivative financial instruments that are not
subject to SFAS No. 105 because they do not result in off-balance sheet risk of
accounting loss. SFAS No. 119 requires that a distinction be made between
financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading. It also amends SFAS
No. 105 and SFAS No. 107 to require that distinction in certain disclosures
required by those statements. The Company adopted SFAS No. 119 on July 1, 1995,
as required, without material effect on consolidated financial condition or
results of operations.
Accounting for Transfers of Financial Assets. In June 1996, the FASB
issued SFAS No. 125, "Accounting for Transfer of Financial Assets, Servicing
Rights, and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 introduces an approach to accounting for transfers
of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are
12
<PAGE>
retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligations
for the liability or is legally released from being the primary obligor. SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
OTHER DEVELOPMENTS -- BIF-SAIF PREMIUM DISPARITY
The Bank's savings deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). The assessment rate currently ranges from 0.23% of
deposits for well capitalized institutions to 0.31% of deposits for
undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the
same designated reserve ratio as the SAIF. On August 8, 1995, the FDIC adopted
an amendment to the BIF risk-based assessment schedule which lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of from 0.31% of
insured deposits for undercapitalized BIF-insured institutions to 0.04% of
deposits for well-capitalized institutions, which constitute over 90% of BIF-
insured institutions. The FDIC amendment became effective September 30, 1995.
On November 14, 1995, the BIF assessment rate schedule was further revised to a
statutory minimum of $2,000 annually for well capitalized institutions to 0.27%
of deposits for undercapitalized institutions. These revisions to the BIF
assessment rate schedule created a substantial disparity in the deposit
insurance premiums paid by BIF and SAIF members and placed SAIF-insured savings
institutions such as the Bank at a significant competitive disadvantage to BIF-
insured institutions.
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate the premium disparity. The Senate and the House of
Representatives have both, as part of a budget reconciliation package to balance
the federal budget, approved legislation requiring a one time assessment in an
amount sufficient to recapitalize the SAIF at a level equal to 1.25% of insured
deposits to be imposed on all SAIF-insured deposits held as of March 31, 1995.
This assessment was originally scheduled to be payable during the first quarter
of 1996. This legislation was vetoed by the President. It is unknown whether
legislation of this type will be enacted, or if enacted, the amount of such
special assessment. It is currently estimated that an assessment of between
.67% and .71% of insured deposits would be required to fully recapitalize the
SAIF. If a special assessment equal to 71 basis points were to be required, it
would result in a one-time charge of approximately $381,000. Such assessment
would have the effect of reducing the Bank's tangible and core capital to $15.2
million, or 17.8%, of adjusted total assets, and risk-based capital to $15.6
million, or 34.8%, of risk-weighted assets as of June 30, 1996. If such a
special assessment were required and the SAIF as a result was fully
recapitalized, it could have the effect of reducing the Bank's deposit insurance
premiums to the SAIF, thereby increasing net earnings in future periods.
13
<PAGE>
[Letterhead of Grant Thornton LLP]
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Kentucky First Bancorp, Inc.
We have audited the accompanying consolidated statement of financial condition
of Kentucky First Bancorp, Inc. (the holding company for First Federal Savings
Bank of Cynthiana) as of June 30, 1996, and the related consolidated statements
of earnings, shareholders' equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements as of June 30, 1995, and for the years ended June 30, 1995
and 1994, were audited by other auditors, whose report thereon dated August 14,
1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kentucky First
Bancorp, Inc. as of June 30, 1996, and the consolidated results of its
operations and its consolidated cash flows for the year ended June 30, 1996, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
August 20, 1996
14
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 883 $ 841
Interest-bearing deposits in other financial institutions 643 1,173
------- -------
Total cash and cash equivalents 1,526 2,014
Investment securities available for sale - at market 3,069 -
Investment securities - at amortized cost, approximate
market value of $12,069 and $11,898 as of
June 30, 1996 and 1995 12,464 11,923
Mortgage-backed securities available for sale - at market 4,135 -
Mortgage-backed securities - at cost, approximate market
value of $18,345 and $5,996 as of June 30, 1996 and 1995 19,042 6,026
Loans receivable - net 43,020 40,091
Office premises and equipment - at depreciated cost 1,361 1,378
Federal Home Loan Bank stock - at cost 738 303
Accrued interest receivable 517 443
Prepaid expenses and other assets 346 402
Prepaid federal income taxes - 60
Deferred federal income taxes 79 35
------- -------
Total assets $86,297 $62,675
====== ======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
<S> <C> <C>
Deposits $51,778 $53,105
Advances from the Federal Home Loan Bank 14,528 2,079
Accrued interest payable 71 83
Other liabilities 502 246
Accrued federal income taxes 162 -
------- -------
Total liabilities 67,041 55,516
Commitments - -
Shareholders' equity
Preferred stock - authorized 500,000 shares of $.01 par value;
no shares issued - -
Common stock, authorized 3,000,000 shares of $.01 par value;
1,388,625 shares issued at June 30, 1996 14 -
Additional paid-in capital 13,351 -
Retained earnings - restricted 7,689 7,159
Less shares acquired by employee stock ownership plan (1,018) -
Less shares acquired by management recognition plan (730) -
Unrealized losses on securities designated as available for sale,
net of related tax effects (50) -
------- -------
Total shareholders' equity 19,256 7,159
------- -------
Total liabilities and shareholders' equity $86,297 $62,675
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans $3,265 $3,020 $3,028
Mortgage-backed securities 864 302 348
Investment securities 962 903 825
Interest-bearing deposits and other 266 38 60
------ ------ ------
Total interest income 5,357 4,263 4,261
Interest expense
Deposits 2,305 2,124 1,979
Borrowings 316 49 7
------ ------ ------
Total interest expense 2,621 2,173 1,986
------ ------ ------
Net interest income 2,736 2,090 2,275
Provision for losses on loans 15 200 30
------ ------ ------
Net interest income after provision
for losses on loans 2,721 1,890 2,245
Other income
Service charges 82 58 45
Other operating 36 35 42
------ ------ ------
Total other income 118 93 87
General, administrative and other expense
Employee compensation and benefits 841 647 528
Occupancy and equipment 138 103 64
Federal deposit insurance premiums 119 125 124
Data processing 99 99 68
Other operating 408 287 247
------ ------ ------
Total general, administrative and other expense 1,605 1,261 1,031
------ ------ ------
Earnings before income taxes 1,234 722 1,301
Federal income taxes
Current 403 237 415
Deferred (18) 6 (24)
------ ------ ------
Total federal income taxes 385 243 391
------ ------ ------
NET EARNINGS $ 849 $ 479 $ 910
====== ====== ======
EARNINGS PER SHARE $ .66 N/A N/A
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1996, 1995 and 1994
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED LOSSES
SHARES ON SECURITIES
ADDITIONAL ACQUIRED DESIGNATED
COMMON PAID-IN RETAINED BY EMPLOYEE AS AVAILABLE
STOCK CAPITAL EARNINGS BENEFIT PLANS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 $- $ - $5,770 $ - $- $ 5,770
Net earnings for the year ended June 30, 1994 - - 910 - - 910
----- -------- ------ -------- ------ -------
Balance at June 30, 1994 - - 6,680 - - 6,680
Net earnings for the year ended June 30, 1995 - - 479 - - 479
----- -------- ------ -------- ------ -------
Balance at June 30, 1995 - - 7,159 - - 7,159
Net proceeds from issuance of common stock 14 13,316 - (1,111) - 12,219
Purchase of shares for management recognition plan - - - (730) - (730)
Amortization expense of employee stock benefit plans - 35 28 93 - 156
Net earnings for the year ended June 30, 1996 - - 849 - - 849
Cash dividends paid of $.25 per share - - (347) - - (347)
Unrealized losses on securities designated as available
for sale, net of related tax effects - - - - (50) (50)
----- -------- ------ -------- ------ -------
Balance at June 30, 1996 $ 14 $13,351 $7,689 $(1,748) $ (50) $19,256
===== ====== ===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 849 $ 479 $ 910
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net (8) (33) (16)
Amortization of deferred loan origination fees (14) (11) (10)
Depreciation and amortization 50 51 23
Provision for losses on loans 15 200 30
Amortization of employee stock benefit plan expense 156 - -
Federal Home Loan Bank stock dividends (30) (20) (15)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (74) (69) 28
Prepaid expenses and other assets 56 (265) (1)
Accrued interest payable (12) (2) (4)
Other liabilities 253 (22) 79
Federal income taxes
Current 222 (43) (118)
Deferred (18) 6 (24)
-------- ------- -------
Net cash provided by operating activities 1,445 271 882
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 10,628 1,075 4,498
Purchase of investment securities designated as held to maturity (14,305) (500) (7,040)
Purchase of mortgage-backed securities designated as available for sale (3,088) - -
Purchase of mortgage-backed securities designated as held to maturity (15,253) (510) (988)
Principal repayments on mortgage-backed securities 1,189 1,426 4,391
Purchase of loans (779) (2,008) (772)
Loan principal repayments 8,137 8,567 9,719
Loan disbursements (10,288) (8,854) (8,563)
Purchase of office premises and equipment (43) (290) (458)
Proceeds from sale of office equipment 10 - -
Purchase of Federal Home Loan Bank stock (405) (39) -
-------- ------- -------
Net cash provided by (used in) investing activities (24,197) (1,133) 787
-------- ------- -------
Net cash provided by (used in) operating and investing
activities (subtotal carried forward) (22,752) (862) 1,669
-------- ------- -------
</TABLE>
19
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net cash provided by ( used in) operating and investing
activities (subtotal brought forward) $(22,752) $ (862) $ 1,669
Cash flows provided by financing activities:
Net decrease in deposits (1,327) (2,149) (374)
Net proceeds from the issuance of common stock 12,219 - -
Shares acquired by the management recognition plan (730) - -
Proceeds from Federal Home Loan Bank advances 16,606 9,080 2,000
Repayment of Federal Home Loan Bank advances (4,157) (7,001) (2,000)
Dividends on common stock (347) - -
------- ------ ------
Net cash provided by (used in) financing activities 22,264 (70) (374)
------- ------ ------
Net increase (decrease) in cash and cash equivalents (488) (932) 1,295
Cash and cash equivalents at beginning of year 2,014 2,946 1,651
------- ------ ------
Cash and cash equivalents at end of year $ 1,526 $ 2,014 $ 2,946
======= ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 197 $ 280 $ 533
======= ====== ======
Interest on deposits and borrowings $ 2,633 $ 2,160 $ 1,976
======= ====== ======
Supplemental disclosure of noncash investing activities:
Transfers of investment and mortgage-backed securities
to an available for sale classification $ 4,301 $ - $ -
======= ===== ======
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (50) $ - $ -
======= ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During fiscal 1995, the Board of Directors of First Federal Savings Bank (the
Savings Bank) adopted a plan of conversion (the Plan) whereby the Savings Bank
would convert to the stock form of ownership (the Conversion), followed by the
issuance of all of the Savings Bank's outstanding stock to a newly formed
holding company, Kentucky First Bancorp, Inc. (the Corporation), and the
issuance of common shares of the Corporation to subscribing members of the
Savings Bank. The conversion to the stock form of ownership was completed on
August 28, 1995, culminating in the Corporation's issuance of 1,388,625 common
shares. Condensed financial statements of the Corporation as of and for the
period ended June 30, 1996 are presented in Note L. Future references are
made to either the Corporation or the Savings Bank as applicable.
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the common stock of the Savings Bank. The
Savings Bank conducts a general banking business in central Kentucky which
consists of attracting deposits from the general public and applying those
funds to the origination of loans for residential, consumer and nonresidential
purposes. The Savings Bank's profitability is significantly dependent on its
net interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Savings Bank can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside
of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles (GAAP) and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Corporation
and the Savings Bank. All significant intercompany balances and transactions
have been eliminated.
21
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
Prior to July 1, 1994, investment securities and mortgage-backed securities
were carried at cost, adjusted for amortization of premiums and accretion of
discounts. The investments and mortgage-backed securities were carried at
cost, as it was management's intent and the Savings Bank had the ability to
hold the securities until maturity. Investment securities and mortgage-backed
securities held for indefinite periods of time, or which management utilized
as part of its asset/liability management strategy, or that would be sold in
response to changes in interest rates, prepayment risk, or the perceived need
to increase regulatory capital were classified as held for sale at the point
of purchase and carried at the lower of cost or market. There were no
investment securities or mortgage-backed securities identified as held for
sale at June 30, 1994.
In May 1993, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
that investments in debt and equity securities be categorized as held-to-
maturity, trading, or available for sale. Securities classified as held-to-
maturity are to be carried at cost only if the Corporation has the positive
intent and ability to hold these securities to maturity. Trading securities
and securities designated as available for sale are carried at fair value with
the resulting unrealized gains or losses recorded to operations or
shareholders' equity, respectively. The Savings Bank adopted the SFAS No. 115
for the fiscal year beginning July 1, 1994 by designating all investment and
mortgage-backed securities as held-to-maturity.
During September 1995, the FASB granted financial institutions the opportunity
to reclassify investment portfolios without calling into question the
Corporation's prior intent with respect to such securities under SFAS No. 115.
The Corporation took advantage of this opportunity by reclassifying
approximately $3.0 million of investment securities and $1.3 million of
mortgage-backed securities from held-to-maturity to the available for sale
classification. All reclassifications were made on a single day in conformity
with the requirement. Management believes that such changes will allow more
flexibility in managing interest rate risk within the investment and mortgage-
backed securities portfolios. At June 30, 1996, the Corporation's
shareholders' equity reflected net unrealized losses totaling $50,000.
Realized gains or losses on sales of securities are recognized using the
specific identification method.
22
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable
----------------
Loans receivable are stated at the principal amount outstanding, adjusted for
deferred loan origination fees and the allowance for loan losses. Interest is
accrued as earned unless the collectibility of the loan is in doubt. Interest
on loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability
to make periodic interest and principal payments has returned to normal, in
which case the loan is returned to accrual status. If the ultimate
collectibility of the loan is in doubt, in whole or in part, all payments
received on nonaccrual loans are applied to reduce principal until such doubt
is eliminated.
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net of
direct origination costs, are deferred and amortized to interest income using
the level-yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan origination
costs to the direct costs attributable to originating a loan, i.e.,
principally actual personnel costs. Fees received for loan commitments that
are expected to be drawn upon, based on the Savings Bank's experience with
similar commitments, are deferred and amortized over the life of the loan
using the level-yield method. Fees for other loan commitments are deferred
and amortized over the loan commitment period on a straight-line basis.
5. Allowance for Losses on Loans
-----------------------------
It is the Savings Bank's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of
delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current and anticipated economic conditions in the primary lending area.
When the collection of a loan becomes doubtful, or otherwise troubled, the
Savings Bank records a loan charge-off equal to the difference between the
fair value of the property securing the loan and the loan's carrying value.
Major loans (including development projects) and major lending areas are
reviewed periodically to determine potential problems at an early date. The
allowance for loan losses is increased by charges to earnings and decreased by
charge-offs (net of recoveries).
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, which was amended by SFAS No. 118 as to
certain income recognition and disclosure provisions, requires that impaired
loans be measured based upon the present value of expected future cash flows
discounted at the loan's effective interest rate or, as an alternative, at the
loan's observable market price or fair value of the collateral. The Savings
Bank's current procedures for evaluating impaired loans result in carrying
such loans at the lower of cost or fair value.
23
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
-----------------------------
On July 1, 1995, the Savings Bank adopted SFAS No. 114 without material effect
on consolidated financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one-to-four family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Savings
Bank's investment in impaired multi-family and nonresidential loans, such
loans are collateral dependent and as a result are carried as a practical
expedient at the lower of cost or fair value.
It is the Savings Bank's general policy to charge off unsecured credits that
are more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment under SFAS
No. 114 at that time.
At June 30, 1996, the Savings Bank had no loans that would be defined as
impaired under SFAS No. 114.
6. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting, depreciation
and amortization are provided on the straight-line and accelerated methods
over the useful lives of the assets, estimated to be forty years for
buildings, ten to forty years for building improvements, and five to ten years
for furniture and equipment. An accelerated method is used for tax reporting
purposes.
7. Real Estate Acquired Through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the loan's
unpaid principal balance (cost) or fair value less estimated selling expenses
at the date of acquisition. Real estate loss provisions are recorded if the
properties' fair value subsequently declines below the amount determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through
foreclosure, net of rental income, are charged against earnings as incurred.
24
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Federal Income Taxes
--------------------
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the current
and previous years. Pursuant to the provisions of SFAS No. 109, a deferred
tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount
of net deductible temporary differences or carryforward attributes may be
utilized against current period earnings, carried back against prior years
earnings, offset against taxable temporary differences reversing in future
periods, or utilized to the extent of management's estimate of future taxable
income. A valuation allowance is provided for deferred tax assets to the
extent that the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, Federal Home Loan Bank stock
dividends, the general loan loss allowance, deferred compensation, and
percentage of earnings bad debt deductions. Additional temporary differences
result from depreciation computed using accelerated methods for tax purposes.
9. Retirement Plans and Stock Option Plans
---------------------------------------
In conjunction with the common stock offering, the Corporation implemented the
Kentucky First Bancorp, Inc. Employee Stock Ownership Plan (ESOP). The ESOP
provides retirement benefits for substantially all employees who have
completed one year of service and have attained the age of 21. Expense
recognized related to the ESOP totaled approximately $127,000 for the year
ended June 30, 1996.
The Corporation accounts for ESOP expense in accordance with Statement of
Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership
Plans". SOP 93-6 requires ESOP compensation expense to equal the fair value
of ESOP shares allocated to participants during a fiscal year. Utilization of
SOP 93-6 resulted in a $35,000 increase in compensation expense recorded for
the fiscal year ended June 30, 1996 from the cost amount which would have been
computed under the prior accounting method.
25
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Retirement Plans and Stock Option Plans (continued)
---------------------------------------
The Corporation also implemented the Kentucky First Bancorp, Inc. Management
Recognition Plan (MRP). Subsequent to the Conversion, the MRP purchased 55,545
shares of common stock in the open market. All of the shares available under
the MRP were granted to executive officers, directors and employees of the
Savings Bank upon receipt of shareholder approval of the MRP. The MRP provides
that common stock granted under the MRP vests over a five year period at
twenty percent per year. A provision of $42,000 related to the MRP was charged
to expense for the year ended June 30, 1996.
Also, the Board of Directors adopted the Kentucky First Bancorp, Inc. Stock
Option and Incentive Plan (the Option Plan) that provided for the issuance of
138,862 shares of common stock at fair market value at the date of grant. On
April 3, 1996, the Corporation granted options to purchase 116,646 shares at
the fair value of $12.1875 per share. The Plan provides for one-fifth of the
shares granted to be exercisable on each of the first five anniversaries of
the date of the option grant. As of June 30, 1996, none of the stock options
granted had been exercised.
Additionally, the Savings Bank had a defined contribution plan, which is
designated to qualify under Sections 401(a) and 401(k) of the Code (the
"Thrift Plan"). An employee was eligible to participate in the Thrift Plan
after having worked a minimum of six months from the date of hire (or during a
calendar year). The Thrift Plan allowed each participant to make before-tax
contributions in an amount equal to 3% of gross salary. The Savings Bank was
required to match the elective contributions made on behalf of the
participant, and, in addition was able to make discretionary contributions up
to a maximum of 15% of compensation. The contributions were allocated to the
participant's account as of the anniversary date. The Thrift Plan was intended
to comply with all the rights and protection afforded employees pursuant to
the Employee Retirement Income Security Act of 1974, as amended.
The Savings Bank's contributions to the Thrift Plan were $1,000, $10,000 and
$23,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Effective August 1995, the Thrift Plan was frozen as to future contributions.
26
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Earnings Per Share
------------------
Earnings per share for the year ended June 30, 1996 is based upon the
weighted-average shares outstanding during the period plus those stock options
that are dilutive, less shares in the ESOP that are unallocated and not
committed to be released. Weighted-average common shares deemed outstanding,
which gives effect to 101,832 unallocated ESOP shares, totaled 1,286,793 for
the year ended June 30, 1996. There is no dilutive effect associated with the
Corporation's stock option plan.
The provisions of Accounting Principles Board Opinion No. 15 "Earnings Per
Share" are not applicable to the fiscal years ended June 30, 1995 and 1994, as
the Corporation had not issued any common stock prior to its initial offering
in August 1995.
11. Investment in Subsidiary
------------------------
The Savings Bank has a wholly-owned subsidiary, Cynthiana Service Corporation,
which was incorporated for the sole purpose of owning stock in the Savings
Bank's data processor. The subsidiary's assets at June 30, 1996 and 1995 are
limited to a $15,000 investment in such stock. As a result, the subsidiary has
not been consolidated based on materiality.
12. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", (SFAS
No. 107) requires disclosure of the fair value of financial instruments, both
assets and liabilities whether or not recognized in the consolidated statement
of financial condition, for which it is practicable to estimate that value.
For financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1996:
Cash and cash equivalents: The carrying amounts presented in the
-------------------------
consolidated statement of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investments and
-----------------------------------------
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
27
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
Loans receivable: The loan portfolio has been segregated into
----------------
categories with similar characteristics, such as one-to-four family
residential, multi-family residential and nonresidential real estate.
These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan
categories were computed via discounted cash flow analysis, using
current interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit accounts and
consumer and other loans, fair values were deemed to equal the
historic carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
----------------------------
consolidated statement of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook accounts and
--------
money market deposits is deemed to approximate the amount payable on
demand. Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the interest
rates currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank: The fair value of these
------------------------------------
advances is estimated using the rates currently offered for similar
advances of similar remaining maturities or, when available, quoted
market prices.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
----------------------------
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. The difference
between the fair value and notional amount of outstanding loan
commitments at June 30, 1996 was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at June 30, 1996, are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
(In thousands)
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 1,526 $ 1,526
Investment securities 15,533 15,138
Mortgage-backed securities 23,177 22,480
Loans receivable 43,020 43,782
Stock in Federal Home Loan Bank 738 738
------- -------
$83,994 $83,664
======= =======
Financial liabilities
Deposits $51,778 $52,233
Advances from the Federal Home Loan Bank 14,528 14,378
------- -------
$66,306 $66,611
======= =======
</TABLE>
28
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits due from other financial
institutions with original maturities of less than ninety days.
14. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Carrying values and approximate market values of investment securities held to
maturity at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government and
agency obligations $10,085 $ 9,721 $10,109 $10,069
Municipal obligations 2,379 2,348 1,814 1,829
------- ------- ------- -------
$12,464 $12,069 $11,923 $11,898
======= ======= ======= =======
</TABLE>
At June 30, 1996, the carrying value of the Corporation's investment
securities exceeded the market value of such securities by $395,000,
consisting of $23,000 in gross unrealized gains and $418,000 in gross
unrealized losses. At June 30, 1995, the carrying value of the Corporation's
investment securities exceeded the market value by $25,000, consisting of
$83,000 in gross unrealized gains and $108,000 in gross unrealized losses.
At June 30, 1996, investment securities totaling $850,000 were pledged to
secure public deposits. The amortized cost, gross unrealized gains, gross
unrealized losses, and market values of investment securities designated as
available for sale at June 30, 1996, are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency obligations:
Due in three years or less $1,997 $ - $ 46 $1,951
Due after three years through five years 979 - 13 966
Due after five years 149 3 - 152
------ ------ ------- ------
$3,125 $ 3 $ 59 $3,069
====== ====== ======= ======
</TABLE>
29
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and market value of U.S. Government and agency and
municipal obligations designated as held to maturity, by contractual term to
maturity at June 30 are shown below:
<TABLE>
<CAPTION>
1996 1995
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in three years or less $ 3,850 $ 3,665 $ 6,042 $ 6,000
Due after three years through
five years 194 219 4,029 4,001
Due after five years 8,420 8,185 1,852 1,897
------- ------- ------- -------
$12,464 $12,069 $11,923 $11,898
======= ======= ======= =======
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of mortgage-backed securities at June 30, 1996 and 1995 (including
those designated as available for sale) are summarized as follows:
<TABLE>
<CAPTION>
1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
HELD TO MATURITY: (In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
participation certificates $ 1,988 $ 3 $ 75 $ 1,916
Government National
Mortgage Association
participation certificates 2,377 27 25 2,379
Federal National
Mortgage Association
participation certificates 14,677 1 628 14,050
------- ------- ---- -------
Total mortgage-backed
securities held to maturity 19,042 31 728 18,345
AVAILABLE FOR SALE:
Federal Home Loan
Mortgage Corporation
participation certificates 4,155 -- 20 4,135
------- ------- ---- -------
Total mortgage-backed
securities $23,197 $ 31 $748 $22,480
======= ======= ==== =======
</TABLE>
30
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
HELD TO MATURITY: (In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation
participation certificates $2,712 $ 6 $ 74 $2,644
Government National
Mortgage Association
participation certificates 1,752 71 - 1,823
Federal National
Mortgage Association
participation certificates 1,562 2 35 1,529
------ --- ----- ------
Total mortgage-backed
securities held to maturity $6,026 $79 $ 109 $5,996
====== === ===== ======
</TABLE>
The amortized cost of mortgage-backed securities, by contractual terms to
maturity, are shown below. Based on materiality, contractual maturities of
mortgage-backed securities designated as available for sale have been combined
with those designated as held to maturity. Expected maturities will differ
from contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30,
1996 1995
<S> <C> <C>
Due within three years $ 1,184 $ 308
Due in three to five years 934 243
Due in five to ten years 2,959 769
Due in ten to twenty years 10,002 2,598
Due after twenty years 8,118 2,108
------- ------
$23,197 $6,026
======= ======
</TABLE>
31
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $24,635 $23,596
Multi-family 4,477 3,703
Construction 195 375
Nonresidential real estate and land 10,462 9,639
Consumer and other 3,951 3,620
------- -------
43,720 40,933
Less:
Undisbursed portion of loans in process 178 321
Deferred loan origination fees 78 66
Unearned discount 77 103
Allowance for loan losses 367 352
------- -------
$43,020 $40,091
======= =======
</TABLE>
The Savings Bank's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans, which comprise
approximately $28.6 million, or 66%, of the total loan portfolio at June 30,
1996 and $26.9 million, or 67%, of the total loan portfolio at June 30, 1995.
Generally, such loans have been underwritten on the basis of no more than an
80% loan-to-value ratio, which has historically provided the Savings Bank with
adequate collateral coverage in the event of default. Nevertheless, the
Savings Bank, as with any lending institution, is subject to the risk that
real estate values could deteriorate in its primary lending area of central
Kentucky, thereby impairing collateral values. However, management is of the
belief that residential real estate values in the Savings Bank's primary
lending area are presently stable.
In the normal course of business, the Savings Bank has made loans to some of
its directors, officers and employees. Related party loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than the normal risk of collectibility. The
aggregate dollar amount of loans outstanding to directors and officers totaled
approximately $303,000 and $217,000 at June 30, 1996 and 1995, respectively.
32
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 352 $ 152 $ 122
Provision for loan losses 15 200 30
----- ----- -----
Balance at end of year $ 367 $ 352 $ 152
===== ===== =====
</TABLE>
As of June 30, 1996, the Savings Bank's allowance for loan losses was solely
general in nature, and is includible as a component of regulatory risk-based
capital, subject to certain percentage limitations.
Nonperforming and renegotiated loans for which interest has been reduced
totaled approximately $122,000, $362,000 and $101,000 at June 30, 1996, 1995
and 1994, respectively.
During the years ended June 30, 1996, 1995 and 1994, interest income of
approximately $3,000, $1,000 and $1,000, respectively, would have been
recognized had nonperforming and renegotiated loans been performing in
accordance with contractual terms.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Land and improvements $ 477 $ 475
Office buildings and improvements 939 939
Furniture, fixtures and equipment 276 243
------ ------
1,692 1,657
Less accumulated depreciation and
amortization 331 279
------ ------
$1,361 $1,378
====== ======
</TABLE>
33
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1996 1995
(In thousands)
<S> <C> <C>
NOW accounts
1996 - 1.92% $ 8,868
1995 - 2.31% $ 7,472
Passbook
1996 - 2.80% 6,299
1995 - 3.05% 6,031
Money market deposit accounts
1996 - 3.02% 2,858
1995 - 2.67% 3,668
------ -------
Total demand, transaction and
passbook deposits 18,025 17,171
Certificates of deposit
Original maturities of:
Less than 12 months
1996 - 4.75% 6,106
1995 - 5.12% 6,764
12 months to 24 months
1996 - 5.30% 16,232
1995 - 5.75% 16,667
30 months to 36 months
1996 - 5.27% 4,368
1995 - 4.86% 4,817
More than 36 months
1996 - 5.46% 3,512
1995 - 5.67% 4,033
Individual retirement accounts
1996 - 5.67% 3,535
1995 - 5.30% 3,653
------- -------
Total certificates of deposit 33,753 35,934
------- -------
Total deposit accounts $51,778 $53,105
======= =======
</TABLE>
34
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the year ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Passbook $ 185 $ 180 $ 168
NOW and money market deposit
accounts 264 308 287
Certificates of deposit 1,856 1,636 1,524
------ ------- -------
$2,305 $ 2,124 $ 1,979
====== ======= =======
</TABLE>
Maturities of outstanding certificates of deposit at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Less than one year $24,713 $25,245
One to three years 8,262 10,282
Over three years 778 407
------- -------
$33,753 $35,934
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1996 by
pledges of certain residential mortgage loans totaling $21.8 million and the
Savings Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
MATURING
WEIGHTED-AVERAGE YEAR ENDING
INTEREST RATE JUNE 30, 1996 1995
(In thousands)
<S> <C> <C> <C>
5.01% 1996 $ - $1,750
5.40% - 5.75% 1998 11,000 -
5.52% 2006 3,100 -
4.00% 2025 323 329
4.00% 2026 105 -
------- ------
$14,528 $2,079
======= ======
Weighted-average interest rate 5.46% 4.85%
==== ====
</TABLE>
35
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $ 420 $ 245 $ 442
Increase (decrease) in taxes
resulting from:
Non-taxable interest income (39) (29) (29)
Other 4 27 (22)
----- ----- -----
Federal income tax provision per
consolidated
statements of earnings $ 385 $ 243 $ 391
===== ===== =====
</TABLE>
The composition of the Corporation's net deferred tax asset at June 30 is as
follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on
temporary
differences at estimated corporate
tax rate:
Deferred tax assets:
General loan loss allowance $ 91 $ 91
Deferred loan origination fees 26 23
Deferred compensation 83 73
Unrealized losses on securities
designated as
available for sale 26 -
----- -----
Total deferred tax assets 226 187
Deferred tax liabilities:
Percentage of earnings bad debt
deduction (91) (91)
Book/tax depreciation (17) (16)
Federal Home Loan Bank stock
dividends (20) (11)
Other (19) (34)
----- -----
Total deferred tax liabilities (147) (152)
----- -----
Net deferred tax asset $ 79 $ 35
===== =====
</TABLE>
36
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES (continued)
The Savings Bank is allowed a special bad debt deduction, generally limited
to 8% of otherwise taxable income, and subject to certain limitations based
on aggregate loans and deposit account balances at the end of the year. If
the amounts that qualify as deductions for federal income taxes are later
used for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. Retained earnings at June 30,
1996 include approximately $1.6 million for which federal income taxes have
not been provided. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $450,000 at
June 30, 1996. See Note J regarding the Savings Bank's future percentage of
earnings bad debt deductions.
NOTE I - LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Savings Bank uses the same credit policies in making
commitments and conditional obligations as those utilized for on-balance-
sheet instruments.
At June 30, 1996, the Savings Bank had outstanding commitments of
approximately $419,000 to originate loans. In the opinion of management all
loan commitments equaled or exceeded prevailing market interest rates as of
June 30, 1996, and will be funded from normal cash flow from operations.
37
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). Such minimum capital
standards generally require the maintenance of regulatory capital
sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-
based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as shareholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets such as capitalized mortgage servicing rights) equal to 3.0% of
adjusted total assets. A recent OTS proposal, if adopted in present form,
would increase the core capital requirement to a range of 4% - 5% of
adjusted total assets for substantially all savings institutions.
Management anticipates no material change to the Savings Bank's present
excess regulatory capital position as a result of this change in the
regulatory capital requirement. The risk-based capital requirement provides
for the maintenance of core capital plus general loss allowances equal to
8.0% of risk-weighted assets. In computing risk-weighted assets, the
Savings Bank multiplies the value of each asset on its statement of
financial condition by a defined risk-weighting factor, e.g., one-to-four
family residential loans carry a risk-weighted factor of 50%.
As of June 30, 1996, the Savings Bank's regulatory capital exceeded all
minimum regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $15,578 $15,578 $15,578
Unrealized losses on securities
designated as available for sale 50 50 50
Additional capital items
General valuation
allowances - - 367
-------- ------- -------
Regulatory capital computed 15,628 18.2 15,628 18.2 15,995 35.6
Minimum capital requirement 1,288 1.5 2,575 3.0 3,594 8.0
-------- ---- ------- ---- ------- ----
Regulatory capital - excess $14,340 16.7 $13,053 15.2 $12,401 27.6
======= ==== ======= ==== ======= ====
</TABLE>
38
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC in the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF are below the level required by law, because a
significant portion of the assessments paid into the fund are used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF
assessments are required for healthy commercial banks except for a $2,000
minimum fee. A continuation of this premium disparity could have a negative
competitive impact on the Savings Bank and other institutions with SAIF
deposits.
Congress is considering legislation to recapitalize the SAIF and eliminate
the significant premium disparity. Currently, that recapitalization plan
provides for a special assessment of approximately $.69 to $.71 per $100 of
SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF. This would likely increase
BIF assessments by $.02 to $.025 per $100 in deposits. SAIF assessments
would initially be set at the same level as BIF assessments and could never
be reduced below the level for BIF assessments. These projected assessment
levels may change if commercial banks holding SAIF deposits are provided
some relief from the special assessment or are allowed to transfer SAIF
deposits to the BIF.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1998. However, the SAIF recapitalization
legislation currently provides for an elimination of the thrift charter or
of the separate federal regulation of thrifts prior to the merger of the
deposit insurance funds. As a result, the Savings Bank would be regulated
as a bank under federal laws which would subject it to the more restrictive
activity limits imposed on national banks. Under recently enacted
legislation, the Savings Bank is required to recapture, as taxable income,
approximately $268,000 of its percentage of earnings bad debt deduction,
which represents post-1987 additions, and would be unable to utilize the
percentage of earnings method to compute its bad debt deduction in the
future. The Savings Bank has provided deferred taxes for this amount and is
permitted to amortize the recapture of its percentage of earnings bad debt
deduction over six years.
The Savings Bank had $53.6 million in deposits at March 31, 1995. If the
special assessment level is finalized at $.71 per $100 in deposits, the
Savings Bank will pay an assessment of $380,000. This assessment will be
tax deductible, but it will reduce earnings and capital for the quarter in
which it is recorded.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the
Savings Bank can give no assurances that the disparity between BIF and SAIF
assessments will be eliminated.
39
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE K - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
During fiscal 1995, the Savings Bank's Board of Directors adopted a plan of
conversion (the Plan) whereby the Savings Bank would convert to the stock
form of ownership, followed by the issuance of all of the Savings Bank's
outstanding stock to a newly formed holding company, Kentucky First
Bancorp, Inc. Pursuant to the Plan, the Savings Bank offered for sale up to
1.4 million common shares to its depositors. The stock offering was
completed on August 28, 1995, culminating in the sale of 1,388,625 common
shares and the receipt of $12.2 million of net equity capital after
consideration of offering expenses and shares acquired by the ESOP.
At the completion of the conversion to stock form, the Savings Bank
established a liquidation account in an amount equal to retained earnings
contained in the final offering circular. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintain
deposit accounts in the Savings Bank after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation
distribution may be made with respect to common stock. Except for the
repurchase of stock and payment of dividends by the Savings Bank, the
existence of the liquidation account will not restrict the use or
application of such retained earnings. The Savings Bank may not declare,
pay a cash dividend on, or repurchase any of its common stock, if the
effect thereof would cause retained earnings to be reduced below either the
amount required for the liquidation account or the regulatory capital
requirements for SAIF insured institutions.
40
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996, 1995 and 1994
NOTE L - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST BANCORP, INC.
The following condensed financial statements summarize the financial position
of Kentucky First Bancorp, Inc. as of June 30, 1996, and the results of its
operations for the ten month period then ended.
KENTUCKY FIRST BANCORP, INC.
STATEMENT OF FINANCIAL CONDITION
June 30, 1996
(In thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Interest-bearing deposits in First Federal Savings Bank of Cynthiana $ 76
Interest-bearing deposits in other financial institutions 560
Investment securities 2,000
Loan receivable from ESOP 1,018
Investment in First Federal Savings Bank of Cynthiana 15,578
Prepaid expenses and other 24
-------
Total assets $19,256
=======
SHAREHOLDERS' EQUITY
Shareholders' equity
Common stock and additional paid-in capital $18,875
Retained earnings 431
Unrealized losses on securities designated as available for sale,
net of related tax effects (50)
-------
Total shareholders' equity $19,256
=======
</TABLE>
KENTUCKY FIRST BANCORP, INC.
STATEMENT OF EARNINGS
Period ended June 30, 1996
(In thousands)
<TABLE>
<S> <C>
Revenue
Interest income $171
Equity in earnings of First Federal Savings Bank of Cynthiana 780
----
Total revenue 951
General and administrative expenses 173
----
Earnings before income taxes 778
Federal income taxes --
----
NET EARNINGS $778
====
</TABLE>
41
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
WILLIAM D. MORRIS G. BERNARD MIDDEN, JR. JOHN SWINFORD
Chairman of the Board of the Retired Attorney, Swinford & Sims, P.S.C.
Company and the Bank
BETTY J. LONG MILTON G. REES WILBUR H. WILSON
President and Chief Executive Retired Physician
Officer of the Company and the Bank
LUTHER O. BECKETT DIANE E. RITCHIE
Vice Chairman of the Board of the Vice President of the Bank
Company and the Bank
EXECUTIVE OFFICERS
WILLIAM D. MORRIS LUTHER O. BECKETT BETTY J. LONG
Chairman of the Board of the Company and Vice Chairman of the Board of the President and Chief Executive Officer of
the Bank Company and the Bank the
Company and the Bank
KEVIN R. TOLLE ROBBIE G. COX DIANE E. RITCHIE
Vice President of the Bank Vice President and Financial Vice President of the Bank
Secretary/Treasurer of the Company Officer
of the Company and the Bank
RHONDA BROWN JANE KEARNS
Vice President of the Bank Treasurer of the Bank
OFFICE LOCATIONS
MAIN OFFICE AND CORPORATE BRANCH OFFICE:
HEADQUARTERS: 100 Ladish Road
306 North Main Street Cynthiana, Kentucky 41031-1210
Cynthiana, Kentucky 41031-1210
(606) 234-1440
GENERAL INFORMATION
INDEPENDENT AUDITORS ANNUAL MEETING STOCKHOLDER INQUIRIES AND AVAILABILITY OF
Grant Thornton LLP The Annual Meeting of Stockholders 10-KSB REPORT
Suite 900 will be held on November 6, 1996 at A COPY OF THE COMPANY'S
625 Eden Park Drive 4:30 p.m. at First Federal Savings ANNUAL REPORT ON FORM
Cincinnati, Ohio 45202 Bank 10-KSB FOR THE FISCAL YEAR
306 North Main Street ENDED JUNE 30, 1996 AS FILED
SPECIAL COUNSEL Cynthiana, Kentucky 41031-1210 WITH THE SECURITIES AND
Housley Kantarian & Bronstein, P.C. EXCHANGE COMMISSION WILL BE
1220 19th Street, N.W. Suite 700 TRANSFER AGENT AND REGISTRAR FURNISHED WITHOUT CHARGE TO
Washington, D.C. 20036 Registrar and Transfer Company STOCKHOLDERS AS OF THE
10 Commerce Drive RECORD DATE FOR THE
Cranford, New Jersey 07016 NOVEMBER 6, 1996 ANNUAL
MEETING UPON WRITTEN
REQUEST TO INVESTOR
RELATIONS, KENTUCKY FIRST
BANCORP, INC., 306 NORTH MAIN
STREET, CYNTHIANA, KENTUCKY
41031-1210.
</TABLE>
42
<PAGE>
KENTUCKY FIRST BANCORP. INC.
-----------------------------
<LOGO>
360 N. MAIN STREET, P.O. BOX 368
CYNTHIANA, KENTUCKY 41031
(606) 234-1440
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Kentucky First Bancorp, Inc.
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- --------------- ----------
<S> <C> <C>
First Federal Savings Bank United States 100%
Cynthiana Service Corporation (2) Kentucky 100%
</TABLE>
________________
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the financial statements
attached hereto as an exhibit.
(2) Wholly owned subsidiary of First Federal Savings Bank.
<PAGE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
We have issued our report dated August 20, 1996, accompanying the
consolidated financial statements of Kentucky First Bancorp, Inc. which are
incorporated within the Annual Report on Form 10-KSB for the year ended June 30,
1996. We hereby consent to the incorporation by reference of said report in
Kentucky First Bancorp, Inc.'s Forms S-8.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
September 25, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
___________________
We consent to the incorporation by reference in the registration statements of
Kentucky First Bancorp, Inc. and Subsidiary on Form S-8 (as filed with the
Commission on July 7, 1995 and April 5, 1996) of our reports for each of the
periods ended June 30, 1995 and 1994, which reports are incorporated by
reference in this Annual Report on Form 10-KSB.
/s/ England & Hensley
England & Hensley, CPAs
Lexington, Kentucky
September 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 883
<INT-BEARING-DEPOSITS> 643
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,204
<INVESTMENTS-CARRYING> 31,506
<INVESTMENTS-MARKET> 30,414
<LOANS> 43,020
<ALLOWANCE> 367
<TOTAL-ASSETS> 86,297
<DEPOSITS> 51,778
<SHORT-TERM> 0
<LIABILITIES-OTHER> 735
<LONG-TERM> 14,528
0
0
<COMMON> 14
<OTHER-SE> 19,242
<TOTAL-LIABILITIES-AND-EQUITY> 86,297
<INTEREST-LOAN> 3,265
<INTEREST-INVEST> 1,826
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 5,357
<INTEREST-DEPOSIT> 2,305
<INTEREST-EXPENSE> 2,621
<INTEREST-INCOME-NET> 2,736
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,605
<INCOME-PRETAX> 1,234
<INCOME-PRE-EXTRAORDINARY> 849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 7.45
<LOANS-NON> 36
<LOANS-PAST> 86
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 89
<ALLOWANCE-OPEN> 352
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 367
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 367
</TABLE>
