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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
Mark One) FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1-13904
KENTUCKY FIRST BANCORP, INC.
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(NAME OF SMALL BUSINESS ISSUER 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)
ISSUER'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
Check whether the issuer: (1) filed all reports required by
Section 13 or 15(d) of the Exchange Act 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
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will 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. [ ]
Registrant's revenues for the fiscal year ended June 30, 1999:
$5,852,000
As of September 7, 1999, the aggregate market value of the
948,134 shares of Common Stock of the registrant issued and
outstanding held by non-affiliates on such date was approximately
$11,140,575 based on the closing sales price of $11.75 per share
of the registrant's Common Stock on September 7, 1999 as listed
on the American Stock Exchange. For purposes of this
calculation, it is assumed that directors, executive 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 7,
1999: 1,167,367
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 Proxy Statement for the 1999 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, cash
and investment securities and a note receivable from the ESOP.
The Company's principal business is the business of the Bank. At
June 30, 1999, the Company had total assets of $78.1 million,
deposits of $56.6 million, net loans receivable of $47.8 million
and shareholders' equity of $13.8 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.
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 1998
population census, Cynthiana had a population of 6,300 and
approximately 18,000 persons lived in Harrison County.
The economy in the Bank's market area is based on a mixture
of manufacturing and agriculture. Other employment is provided
by a variety of professionals, service employers, manufacturing
industries, wholesale/retail trade employers including 3M, Grede
Perm Cast (a division of Grede Foundries), Bullard Manufacturing,
Bundy Tubing, Concept Packaging Group, TR Technologies, SNAPCO,
Cynthiana Publishing Company, Fikeco, Inc., Lucas Equine
Equipment, Inc., STI Manufacturing Company, Trig, Inc., Macro
Products Company, Solutions Dispersions, and Harrison Memorial
Hospital. The Licking Valley Center of Maysville Community
College is also located in Cynthiana with an enrollment of
approximately 450 students.
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According to the US Bureau of Labor Statistics, the
unemployment rate in Harrison County as of May 31, 1999 was 3.9%
as compared to 4.3% 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
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.
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, 1999, the maximum amount that the Bank could
have loaned to any one borrower without prior OTS approval was
$1.8 million. At such date, the largest aggregate amount of
loans that the Bank had outstanding to any one borrower was
approximately $1.5 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,
1999, the Bank had no concentrations of loans exceeding 10% of
total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1999 1998
---------------- ----------------
Amount % Amount %
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans:
One- to four-family residential
and construction (1) $27,299 56.24% $27,827 56.18%
Multi-family residential . . . . . . . . 4,526 9.32 5,332 10.77
Agricultural . . . . . . . . . . . . . . 5,702 11.75 5,631 11.37
Commercial . . . . . . . . . . . . . . . 6,722 13.85 6,276 12.67
-------- ------ ------- ------
Total real estate loans . . . . . . . 44,249 91.16 45,066 90.99
Commercial loans . . . . . . . . . . . . . 904 1.86 915 1.85
Agricultural operating loans . . . . . . . 920 1.90 908 1.83
Consumer loans:
Automobiles. . . . . . . . . . . . . . . 472 0.97 373 0.75
Mobile home. . . . . . . . . . . . . . . 97 0.20 150 0.30
Savings account. . . . . . . . . . . . . 1,004 2.07 1,043 2.11
Other. . . . . . . . . . . . . . . . . . 895 1.84 1,073 2.17
-------- ------ ------- ------
Total consumer loans. . . . . . . . . 2,468 5.08 2,639 5.33
-------- ------ ------- ------
Total loans . . . . . . . . . . . . . 48,541 100.00% 49,528 100.00%
====== ======
Less:
Loans in process . . . . . . . . . . . . 227 232
Deferred loan fees . . . . . . . . . . . 89 86
Unearned discount. . . . . . . . . . . . 10 25
Allowance for loan losses. . . . . . . . 414 384
------- -------
Loans receivable, net . . . . . . . . $47,801 $48,801
======= =======
<FN>
_________
(1) At June 30, 1999, constructions loans amounted to $1.0 million and
represented 2.1% of total gross loans.
</FN>
</TABLE>
Loan Maturity Schedule. The following table sets forth
certain information at June 30, 1999 regarding the dollar amount
of loans maturing in the Bank's 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.
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<TABLE>
<CAPTION>
Due Within Due 1-5
1 Year Years Due After 5
After After Years After
6/30/99 6/30/99 6/30/99 Total
----------- ------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage . . . . . . . $ 908 $1,591 $41,750 $ 44,249
Consumer . . . . . . . . . . . . . 2,301 147 20 2,468
Commercial . . . . . . . . . . . . 1,581 46 197 1,824
------ ------ ------- -------
Total . . . . . . . . . . . . $4,790 $1,784 $41,967 $48,541
====== ====== ======= =======
</TABLE>
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The following table sets forth at June 30, 1999, the dollar
amount of all loans due one year or more after June 30, 1999
which have (i) predetermined interest rates and (ii) floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates
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(In thousands)
<S> <C> <C>
Real estate mortgage . . . . . $27,016 $16,325
Consumer . . . . . . . . . . . 167 --
Commercial . . . . . . . . . . 243 --
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Total . . . . . . . . . . . $27,426 $16,325
======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not
necessarily reflect the actual life of such assets. The average
life of long-term loans is substantially less than their
contractual terms, due to prepayments. 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.
The Bank originates both fixed rate and adjustable rate
mortgage loans ("ARMs") with terms of up to 30 years. 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
generally 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%. Prior to March
1995, the Bank's adjustable rate loans were indexed to the
National Monthly Median Cost of Funds Ratio to OTS Regulated,
SAIF-Insured Institutions.
The retention of ARMs in the portfolio helps reduce the
Bank'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 the Bank 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 the Bank's ARMs will adjust
sufficiently to compensate for increases in its cost of funds.
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, 1999, $27.3 million, or
56.2% 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'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, if applicable, of the
property. The Bank offers mortgage loans up to 95% of the
lesser of the appraised value or the purchase price, if
applicable, of the underlying property for owner occupied single
and two family dwellings that are located in Harrison County.
Private mortgage insurance is required.
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, 1999, multi-family and commercial real estate loans totaled
$4.5 million and $6.7 million, respectively, and represented
9.3% and 13.9%, respectively, of the Bank's gross loan
portfolio.
Multi-family and commercial real estate loans are made in
amounts of up to 80% of the lesser of the appraised value or the
purchase price, if applicable, of the property and may be on a
fixed rate basis for terms of up to 15 years or a adjustable
rate basis for terms of up to 20 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
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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 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 real estate lending to one borrower are
participation interests purchased from a financial institution
in Lexington, Kentucky. The participation interests amounted to
$1.3 million at June 30, 1999 and were secured by 34
triplex/duplex units.
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 warehouse property located in
Lexington, Kentucky. Such loan had a balance of $922,000 at
June 30, 1999.
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, 1999, the
average size of the Bank's multi-family and commercial real
estate loans was $94,000 as compared to the average size of
one-to four-family residential real estate loans of $43,000.
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 pricing multi-family and commercial loans it originates 60 to
120 basis points above the single-family loan rate to compensate
the Bank for these additional risks.
Construction Loans. The Bank 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 located in the Bank's market area. At June
30, 1999, the Bank's loan portfolio included $288,000 of loans
originated by the Bank and 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. Interest is billed monthly during the construction
phase. 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. The
Bank has also purchased a participation interest in construction
loans from a financial institution in Lexington, Kentucky.
These construction loans have all been to a single contractor
and are secured by a first lien on single family residential
properties located in the Bank's market area. At June 30, 1999,
the Bank's participation interest in these construction loans
was $732,000. Terms of the participation provide that the Bank
receives sufficient proceeds from the sale of individual
properties in the project to satisfy the mortgage on
that particular property. The financial institution continues
to service the loans for the Bank including performing
inspections and authorizing all draws under the construction
loan.
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
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standards which would apply to the Bank's permanent mortgage
loan financing for the subject property) in the Bank's market
area.
The Bank also makes a limited number of construction loans
to finance the construction of commercial and multi-family real
estate. As of June 30, 1999, no such loans were outstanding.
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 new
automobiles or the loan value for used automobiles as published
by the National Automobile Dealers Association. The terms of
such loans do not exceed 60 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, 1999, the Bank's consumer loans totaled $2.5
million, or 5.1% of the Bank's gross loan portfolio.
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 and refinance of agriculture-related real
estate and for operating purposes. At June 30, 1999, the Bank
had $5.7 million in agricultural real estate loans, or 11.8% of
its gross loan portfolio, and $920,000 in agricultural operating
loans, or 1.9% of the Bank's gross loan portfolio.
Agricultural real estate loans are primarily secured by
first liens on farmland and buildings thereon, if any, located
in the Bank's market area. Loans are generally underwritten in
amounts of up to 75% of the lesser of the appraised value or the
purchase price of the property on loans secured by farm land and
up to 80% of the lesser of the appraised value or purchase price
on loans secured by farms with residences. Such loans may be
underwritten on either a fixed rate basis with a term of up to
15 years with no residence or 20 years with a residence or an
adjustable rate basis with a term of 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 $56,000.
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 used
as collateral. Representatives of
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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, an evaluation may be performed by the
Executive Committee of the Bank's Board of Directors.
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
non-real estate commercial loans to small and medium sized
businesses located in its market area. At June 30, 1999, the
Bank's commercial loans amounted to $904,000, 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 and 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, directors, depositors and borrowers.
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, state certified, appraiser
approved by the Bank's Board of Directors for loans in excess of
$100,000. For loans of $100,000 and less, as circumstances
warrant, an evaluation may be performed by the Executive
Committee of the Bank's Board of Directors. Typically, an
independent appraiser is utilized.
All one- to four-family mortgage loans in excess of
$125,000 are subject to the approval of a majority of the Bank's
Board of Directors. Loans on this type of property in an amount
of $125,000 or less may be approved by an authorized Bank loan
officer. Approval authority limits for each loan officer are
determined by the Bank's Board of Directors for each type of
loan.
Commercial real estate loans over $100,000 must be approved
by a majority of the Bank's Board of Directors. Loans of
$100,000 and less may be approved by a majority of the Executive
Committee of the Board of Directors or a loan officer with that
approval authority.
Secured commercial loans (other than real estate) require
the approval of a majority of the Board of Directors for loan
amounts in excess of $150,000. Loans in excess of $40,000 up to
$150,000 may be approved by a majority of the Executive
Committee. Loans of $40,000 and less may be approved by certain
Bank Loan Officers as authorized by the Board of Directors.
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Secured consumer loans in excess of $150,000 require the
approval of a majority of the Board of Directors. Loans in
excess of $40,000 up to $150,000 may be approved by the
Executive Committee. Loans of $40,000 and less may be approved
by certain Bank loan officers as authorized by the Board of
Directors.
Unsecured commercial and consumer loans in an amount
exceeding $40,000 must be approved by a majority of the Board of
Directors. Loans in excess of $10,000 up to $40,000 may be
approved by a majority of the Executive Committee. Loans of
$10,000 and less may be approved by certain Bank loan officers
as authorized by the Board of Directors.
Home equity lines of credit require the approval of a
majority of the Board of Directors for loan amounts in excess of
$125,000. Loans for $125,000 and less may be approved by a
majority of the Executive Committee or certain loan officers as
authorized by the Board of Directors.
Fire and casualty and earthquake 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.
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 financial institutions in the Bank's market
area and has purchased a number of residential and commercial
whole mortgage loans and participation interests in mortgage
loans from a mortgage company. Historically, the Bank has not
originated any loans for sale in the secondary market. Recently,
however, the Bank executed an agreement with a mortgage company
so that the Bank can originate secondary market loans and sell
the loans and their servicing rights through the mortgage
company.
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 financial
institutions and from an unaffiliated mortgage broker. 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 the broker receives a fee
for servicing the loans. As of June 30, 1999, the Bank had
purchased from this mortgage broker participation interests in
four loans with outstanding balances as of that date totaling
$1.7 million, or 3.6% of total gross loans and had purchased
whole loans totaling $3.5 million, or 7.2% of total gross loans.
Twelve of these participation interests or whole loans
aggregating $3.0 million, or 6.3% of total gross loans
at June 30, 1999, were secured by commercial or multi-family
real estate. The Bank has also purchased participation and
whole loans from one financial institution in the Bank's market
area totaling $2.7 million, or 5.5% of total gross loans, as of
June 30, 1999. Of these, $1.3 million ,or 2.7% of total gross
loans, are participation loans secured by duplexes and
triplexes, and the remainder are participation or whole loans
secured by single family residences.
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
9
<PAGE>
<PAGE>
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.
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, 1999 the Bank had $102,000 and $245,000 in assets
classified as special mention and substandard, respectively, and
had no assets classified as doubtful or loss.
Included in the balance of substandard loans was a loan to
an individual secured by multi-family residential property which
had a balance of $352,000 and a specific allowance for loan
losses of $150,000 as of June 30, 1999. Payments on this loan
are approximately two months delinquent. Also, included in
substandard loans was a loan to an individual secured by a
commercial property which had a balance of $22,000 as of June
30, 1999. Payments on this loan are approximately four 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
10
<PAGE>
<PAGE>
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, 1999, the Bank's allowance for
loan losses included a specific loss reserve on loan
collateralized by two 24-unit residential apartment buildings.
The following table sets forth an analysis of the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Balance at beginning of period . . . . . . . $ 384 $ 372
Charge-offs:
Real estate loans:
One- to four-family residential. . . . . . -- --
Multi-family residential . . . . . . . . -- --
Agricultural . . . . . . . . . . . . . . -- --
Commercial and other . . . . . . . . . . -- --
Construction . . . . . . . . . . . . . . -- --
Commercial loans . . . . . . . . . . . . . -- --
Agricultural operating loans . . . . . . . -- --
Consumer loans:
Automobile . . . . . . . . . . . . . . . -- --
Savings account. . . . . . . . . . . . . -- --
Other consumer . . . . . . . . . . . . . 3 18
----- -----
Total: . . . . . . . . . . . . . . . . 3 18
----- -----
Recoveries:
One- to four-family residential. . . . . . -- --
Multi-family residential . . . . . . . . -- --
Agricultural . . . . . . . . . . . . . . -- --
Commercial and other . . . . . . . . . . -- --
Construction . . . . . . . . . . . . . . -- --
Commercial loans . . . . . . . . . . . . . -- --
Agricultural operating loans . . . . . . . -- --
Consumer loans:
Automobile . . . . . . . . . . . . . . . 3 --
Savings account. . . . . . . . . . . . . -- --
Other consumer . . . . . . . . . . . . . -- --
----- -----
Total: . . . . . . . . . . . . . . . . 3 --
Net charge-offs. . . . . . . . . . . . . . . -- 18
----- -----
Provision for losses on loans. . . . . . . . 30 30
----- -----
Balance at end of period . . . . . . . . . . $ 414 $ 384
===== =====
Ratio of net charge-offs to average loans
outstanding during the period. . . . . . . -- % .04%
==== =====
</TABLE>
11
<PAGE>
<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,
-----------------------------------------------
1999 1998
--------------------- ---------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - mortgage:
One- to four-family residential
and construction . . . . . . . $ 71 56.24% $ 151 56.18%
Multi-family residential . . . . 180 9.32 -- 10.77
Agricultural . . . . . . . . . . 4 11.75 -- 11.37
Commercial . . . . . . . . . . . 117 13.85 176 12.67
Commercial loans . . . . . . . . . 11 1.86 6 1.85
Agricultural operating loans . . . 11 1.90 31 1.83
Consumer loans:
Automobiles. . . . . . . . . . . 6 0.97 -- 0.75
Mobile homes . . . . . . . . . . 2 0.20 -- 0.30
Savings account. . . . . . . . . -- 2.07 -- 2.11
Other consumer loans . . . . . . 12 1.84 20 2.17
----- ------ ----- ------
Total allowance for loan
losses . . . . . . . . . . . $ 414 100.00% $ 384 100.00%
===== ====== ===== ======
</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.
12
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<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. 114 at
the dates indicated. In addition, the Bank had no real estate
acquired as a result of foreclosure.
<TABLE>
<CAPTION>
At June 30,
--------------------
1999 1998
------ ------
(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 . . . . . . . . . . . . . 352 --
Agricultural . . . . . . . . . . . . . . . . . . . -- --
Commercial . . . . . . . . . . . . . . . . . . . . -- 31
Commercial loans . . . . . . . . . . . . . . . . . . -- --
Agricultural operating loans . . . . . . . . . . . . -- --
Consumer . . . . . . . . . . . . . . . . . . . . . . -- --
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 352 31
----- -----
Accruing loans which are contractually past due
90 days or more:
Real estate:
One- to four-family residential and construction . 34 104
Multi-family residential . . . . . . . . . . . . . -- --
Agricultural . . . . . . . . . . . . . . . . . . . -- --
Commercial . . . . . . . . . . . . . . . . . . . . 22 --
Commercial loans . . . . . . . . . . . . . . . . . . -- --
Agricultural operating loans . . . . . . . . . . . . -- --
Consumer . . . . . . . . . . . . . . . . . . . . . . 10 6
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 66 110
----- -----
Total non-performing loans (2) . . . . . . . . . . . . $ 418 $ 141
===== =====
Total non-performing loans as a percentage
of total net loans . . . . . . . . . . . . . . . . . .87% .29%
===== =====
Total non-performing assets as a percentage
of total assets. . . . . . . . . . . . . . . . . . . .53% .17%
===== =====
<FN>
(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.
(2) At June 30, 1999, non-performing loans included a specific loan loss allowance
of $150,000 on multi-family residential loans.
</FN>
</TABLE>
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, 1999,
gross interest income of $6,000 would have been recorded on
loans accounted for on a non-accrual basis if the loans had been
current throughout the respective periods. Interest income
recognized on such loans during the year ended June 30, 1999
totaled approximately $21,000. Accruing loans which were
contractually past due 90 days or more at June 30, 1999 totaled
$66,000 and consisted of one- to four-family, commercial real
estate, and consumer loans. See " -- Asset Classification and
Allowance for Loan Losses."
13
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<PAGE>
At June 30, 1999, the Bank did not have any loans not
classified as non-accrual, 90 days past due or restructured but
where known information about possible credit problems of
borrowers caused management to have serious concerns as to the
ability of the borrowers to comply with present loan repayment
terms and may result in disclosure as non-accrual, 90 days past
due or restructured.
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
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.
Mortgage-Related Securities. The Company 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 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.
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, 1999, the Bank had $3.8 million in CMOs and
REMICs, which amounted to 4.8% 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 are primarily 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 would result in actual yields to
14
<PAGE>
<PAGE>
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 Company 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
Company's assets by virtue of the guarantees that back them, are
more liquid than individual mortgage loans and may be used to
collateralize 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. 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 Company's mortgage-backed securities portfolio consists
primarily of seasoned fixed-rate mortgage-backed securities. At
June 30, 1999, the Bank had $12.6 million, or 16.1% of total
assets, in mortgage-backed securities. All of the Bank's
mortgage-backed securities are insured or guaranteed by FNMA,
FHLMC or GNMA.
15
<PAGE>
<PAGE>
The following table sets forth the carrying value of the
Company's investments at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Investment securities held to maturity:
FHLB obligations. . . . . . . . . . . . . . $ -- $ 1,387
FHLMC notes . . . . . . . . . . . . . . . . -- 2,115
Municipal obligations . . . . . . . . . . . 1,531 1,660
------- -------
Total investment securities held
to maturity . . . . . . . . . . . . . . 1,531 5,162
------- -------
Investment securities available for sale:
FHLB obligations. . . . . . . . . . . . . . 2,975 994
FHLMC notes . . . . . . . . . . . . . . . . 1,914 1,001
FNMA notes. . . . . . . . . . . . . . . . . -- 501
Municipal obligations . . . . . . . . . . . 2,408 2,111
------- -------
Total investment securities available
for sale. . . . . . . . . . . . . . . . 7,297 4,607
------- -------
Total investment securities . . . . . . . $ 8,828 $ 9,769
======= =======
Mortgage-backed securities held to maturity:
FHLMC participation certificates. . . . . . $ 706 $ 1,287
GNMA participation certificates . . . . . . 1,063 1,527
FNMA participation certificates . . . . . . 8,011 11,866
------- -------
Total mortgage-backed securities held
to maturity . . . . . . . . . . . . . . 9,780 14,680
------- -------
Mortgage-backed securities available for sale:
FHLMC participation certificates. . . . . . 3,174 3,213
FNMA participation certificates . . . . . . 3,405 --
------- -------
Total mortgage-backed securities available
for sale. . . . . . . . . . . . . . . . 6,579 3,213
------- -------
Total mortgage-backed securities. . . . . 16,359 17,893
Interest-earning deposits and certificates. . 809 1,488
------- -------
Total investments and mortgage-backed
securities: . . . . . . . . . . $25,996 $29,150
</TABLE> ======= =======
16
<PAGE>
<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, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- ----------------- ----------------- --------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
FHLB obligations . . . . . . $ 998 5.59% $1,977 5.31% -- -- $ -- -- %
FHLMC Notes. . . . . . . . . -- -- -- -- 955 6.43 959 7.00
State and municipal
obligations. . . . . . . . 125 5.25 778 5.10 1,588 4.65 1,448 5.58
Mortgage-backed securities . 49 6.55 5 8.54 1,125 6.60 15,180 6.45
Interest-earning deposits
and certificates of
deposits. . . . . . . . . 809 4.54 -- -- -- -- -- --
------ ------ ------ -------
Total . . . . . . . . . $1,981 $2,760 $3,668 $17,587
====== ====== ====== =======
<CAPTION>
Total Investment Portfolio
-------------------------------
Carrying Market Average
Value Value Yield
-------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Investment securities:
FHLB obligations . . . . . . $ 2,975 $ 2,975 5.41%
FHLMC Notes. . . . . . . . . 1,914 1,914 6.75
State and municipal
obligations. . . . . . . . 3,939 3,953 5.09
Mortgage-backed securities . 16,359 16,192 6.46
Interest-earning deposits
and certificates of
deposits. . . . . . . . . 809 809 4.54
------- -------
Total . . . . . . . . . $25,996 $25,843
======= =======
</TABLE>
17
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<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"), totaled $4.8 million, or 8.6% of the Bank's total
savings portfolio at June 30, 1999. 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.
<PAGE>
Savings deposits in the Bank as of June 30, 1999 were
represented by the various types of savings programs described
below.
<TABLE>
<CAPTION>
June 30, 1999
Interest Minimum Minimum Balance in Percentage of
Rate Term Category Amount Thousands Total Savings
- -------- ------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
2.25% None Passbook Savings $ 50 $ 6,231 11.00%
0.72 None Demand Checking 200 1,621 2.86
1.50 None NOW Accounts 400 4,348 7.68
1.55 None Super NOW Accounts 1,000 2,940 5.19
2.95 None Money Market Deposit Accounts 2,500 2,939 5.19
*4.09 None First Money MMDA Accounts 10,000 1,641 2.90
2.25 None Christmas Clubs -- 62 0.11
Certificates of Deposit
*4.00 91 days 91-day Fixed Term, Fixed Rate 1,000 590 1.04
*4.47 6 months 6 Month Fixed Term, Fixed Rate 1,000 5,544 9.79
*4.87 1 year 1 Year, Fixed Term, Fixed Rate 1,000 10,670 18.84
*5.34 18 months 18 Month Fixed Term, Fixed Rate 1,000 6,891 12.17
*5.11 18 months IRA 18 Month Fixed Term, Fixed Rate 500 3,456 6.10
*5.40 24 months 24 Month "Bump" ** 5,000 1,967 3.48
*5.38 30 months 30 Month Fixed Term, Fixed Rate 1,000 362 0.64
*5.55 36 months 36 Month Fixed Term, Fixed Rate 1,000 2,505 4.42
*5.61 36 months IRA 36 Month Fixed Term, Fixed Rate 500 161 0.29
*5.81 5 years 5 Year Fixed Term, Fixed Rate 1,000 4,002 7.07
*5.93 5 years IRA 5 Year, Fixed Term, Fixed Rate 500 698 1.23
------- ------
$56,628 100.00%
======= ======
<FN>
* 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.
</FN>
</TABLE>
18
<PAGE>
<PAGE>
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,
-----------------------------------------------------------------
1999 1998
----------------------------- -------------------------------
Interest-Bearing Interest-Bearing
Demand and Time Demand and Time
Savings Deposits Deposits Savings Deposits Deposits
------------------ -------- ----------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance. . . . . . . . . $19,718 $37,368 $19,012 $36,468
Average rate . . . . . . . . . . 2.21% 5.31% 2.53% 5.44%
</TABLE>
The following table indicates the amount of the Bank's
certificates of deposit of $100,000 or more by time remaining
until maturity as of June 30, 1999.
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
Three months or less. . . . . . . . . . . .$ 1,243
More than three through six months. . . . . 1,121
More than six through 12 months . . . . . . 1,472
Over 12 months. . . . . . . . . . . . . . . 1,007
-------
Total . . . . . . . . . . . . . . . .$ 4,843
=======
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."
19
<PAGE>
<PAGE>
The following table sets forth certain information
regarding the Company's FHLB advances and other borrowed money
at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
--------------------
1999 1998
------ ------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances. . . . . . . . . . . . . $7,003 $10,412
Weighted average rate paid on:
FHLB advances. . . . . . . . . . . . . 5.09% 5.85%
<CAPTION>
For the Year
Ended June 30,
--------------------
1999 1998
------ ------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances and other borrowed
money. . . . . . . . . . . . . . . . $9,511 $18,669
<CAPTION>
For the Year
Ended June 30,
--------------------
1999 1998
------ ------
(Dollars in thousands)
<S> <C> <C>
Approximate average borrowings
outstanding with respect to:
FHLB advances and other borrowed
money . . . . . . . . . . . . . . . $7,401 $14,860
Approximate weighted average rate
paid on: (1)
FHLB advances and other borrowed
money . . . . . . . . . . . . . . . 5.27% 5.71%
<FN>
(1) Weighted average computed by dividing total interest paid
by average balance outstanding.
</FN>
</TABLE>
As of June 30, 1999, the Bank had $7.0 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, 1999, the Bank was authorized to invest up to $2.3
million in the stock of or loans to subsidiaries, including the
additional 1.0% 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, 1999,
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.
20
<PAGE>
PERFORMANCE RATIOS
The table below sets forth certain performance ratios of
the Company at or for the years indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
Return on assets (net earnings divided by
average total assets). . . . . . . . . . . . 1.10% 1.07%
Return on average stockholders' equity (net
earnings divided by average stockholders'
equity). . . . . . . . . . . . . . . . . . . 6.28 6.35
Dividend payout ratio (dividends declared
per share divided by net earnings
per share) . . . . . . . . . . . . . . . . . 64.94 64.94
Interest rate spread (combined weighted
average interest rate earned less
combined weighted average interest
rate cost) . . . . . . . . . . . . . . . . . 3.05 2.79
Ratio of average interest-earning assets to
average interest-bearing liabilities . . . . 118.79 118.15
Ratio of noninterest expense to average
total assets . . . . . . . . . . . . . . . . 2.28 2.07
</TABLE>
COMPETITION
The Company 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 Company'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 two local
commercial banks, branches of an out-of-county commercial bank
and a loan production office of another out-of-county commercial
bank. 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, 1999, the Company had 20 full-time employees
and one part-time employee, none of whom was represented by a
collective bargaining agreement. The Company believes that it
enjoys good relations with its personnel.
<PAGE>
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 1999 Title
- ---- -------- -----
<S> <C> <C>
Kevin R. Tolle 42 Vice President, Secretary/Treasurer
Robbie G. Cox 52 Vice President and Financial Officer
</TABLE>
21
<PAGE>
<PAGE>
KEVIN R. TOLLE is Vice President and 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 a mortgage loan
officer of the Bank since 1986. He is a member of the New
Friendship Baptist Church in Harrison County. He is a past
member of the Harrison County Habitat for Humanity,
Cynthiana-Harrison County Jaycees, and the Harrison County
United Fund Board.
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 and Deacon
at Cynthiana Christian Church.
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 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.
22
<PAGE>
<PAGE>
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 associations are also subject to
the anti-tying provisions of Section 106(b) of the Bank Holding
Company Act of 1956 ("BHCA") which prohibits 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.
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) and all
loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus unless the institution
has less than $100 million in deposits in which case the
aggregate limit may be increased to no more than two times
unimpaired capital and surplus. Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater
than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance
by a majority of the board of directors of the institution with
any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which
includes all other outstanding loans to such person), as to
which such prior board of director approval is required, as
being the greater of $25,000 or 5% of capital and surplus (up to
$500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive
officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to
other persons unless the loan is made pursuant to a benefit or
compensation plan that is widely available to other employees
and does not give preference to insiders. 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. ' 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.
23
<PAGE>
<PAGE>
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 Section 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 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 BHCA, 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 BHCA.
24
<PAGE>
<PAGE>
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 elsewhere
herein.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES. The U.S.
Congress is in the process of drafting legislation which may
have a profound effect on the financial services industry. In
January 1999 legislation restructuring the activities and
regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress. The stated
purposes of the legislation are to enhance consumer choice in
the financial services marketplace, level the playing field
among providers of financial services and increase competition
and would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain
limitations, other commercial enterprises allowing holding
companies to offer new services and products. In particular,
the legislation repeals the Glass-Steagall Act prohibitions on
bank affiliating with securities firms and thereby allow holding
companies to engage in securities underwriting and dealing
without limits and to sponsor and act as distributor for mutual
funds. The legislation also removes the BHCA's prohibitions on
insurance underwriting allowing holding companies to underwrite
and broker any type of insurance product, calls for a new
regulatory framework for financial institutions and their
holding companies and preserves the thrift charter and all
existing thrift powers. The Senate version (S.900) was approved
by the Senate on May 6, 1999. The House version (H.R.10) was
approved by the House on July 1, 1999. A conference committee
has been appointed to reconcile the differences between the two
bills. The two versions differ principally with respect to the
powers of operating subsidiaries, permissible activities of
well-managed holding companies and restrictions on nonfinancial
activities of unitary thrift holding companies. At this time,
it is unknown how the legislation will be modified, or if
enacted, what form the final version of the legislation might
take and how it will affect the Company's and the Bank's
business and operations and competitive environment.
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 shareholders' 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 relationships. Both core and tangible
capital are further reduced by an amount equal to 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 solely as an
agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies.
At June 30, 1999, 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
25
<PAGE>
<PAGE>
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. Adjusted
total assets are 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
by 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, 1999, 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 at
origination not exceeding 80% are assigned a risk weight of 50%.
Consumer and non-qualifying single-family, multi-family and
residential construction loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by FNMA and the FHLMC and the book
value of FHLB stock 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. As of June
30, 1999, the Bank's risk-weighted assets were approximately
$45.1 million.
The table below presents the Bank's capital position
relative to its various regulatory capital requirements at June
30, 1999.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------ ----------
(Dollars in Thousands)
<S> <C> <C>
Tangible capital. . . . . . . . . . . . . $11,964 15.3%
Tangible capital requirement. . . . . . . 1,172 1.5
------- ----
Excess. . . . . . . . . . . . . . . . . $10,792 13.8%
======= ====
Core capital. . . . . . . . . . . . . . . $11,964 15.3%
Core capital requirement. . . . . . . . . 2,344 3.0
------- ----
Excess. . . . . . . . . . . . . . . . . $ 9,620 12.3%
======= ====
Total capital (i.e., core and
supplementary capital). . . . . . . . . $12,229 27.1%
Risk-based capital requirement. . . . . . 3,607 8.0
------- ----
Excess. . . . . . . . . . . . . . . . . $ 8,622 19.1%
======= ====
<FN>
____________
(1) Based upon adjusted total assets for purposes of the
tangible, core and Tier 1 capital requirements, and
risk-weighted assets for purposes of the risk-based capital
requirements.
</FN>
</TABLE>
OTS regulations require savings institutions with more than
a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is
measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. Net portfolio value is
defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts
less the present value of expected cash outflows from
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<PAGE>
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 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
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<PAGE>
bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar
quarter beginning 270 days after the date it became critically
undercapitalized. If a savings 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.
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 CAMELS 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 CAMELS rating). A "significantly under
capitalized" 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 CAMELS
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, and
educational, small business and credit card loans; (ii) shares
of stock issued by an FHLB. Subject to a 20% of portfolio
assets limit, however, savings institutions are able to treat
the following as Qualified Thrift Investments: (i) 50% of the
dollar amount of residential mortgage loans subject to sale
under certain conditions but do not include any intangible
assets; (ii) investments, both debt and equity, in the capital
stock or obligations of and any other security issued by a
service corporation or operating subsidiary, provided that such
subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing,
constructing, improving or repairing domestic residential
housing or manufactured housing; (iii) 200% of their
investments in loans to finance "starter homes" and
28
<PAGE>
<PAGE>
loans for construction, development or improvement of housing
and community service facilities or for financing small
businesses in "credit-needy" areas; (iv) loans for the purchase,
construction, development or improvement of community service
facilities, (v) loans for personal, family, household or
educational purposes, provided that the dollar amount treated as
Qualified Thrift Investments may not exceed 10% of the savings
association's portfolio assets; and (vi) shares of stock issued
by FNMA or FHLMC.
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 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 FHLB System. Upon
failure to qualify as a QTL for two years, a savings association
must convert to a commercial bank. At June 30, 1999,
approximately 75.2% of the Bank's portfolio 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. 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.
OTS regulations require that savings institutions submit
notice to the OTS prior to making a capital distribution if (a)
they would not be well-capitalized after the distribution, (b)
the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a
holding company. A savings institution must make application to
the OTS to pay a capital distribution if (x) the institution
would not be adequately capitalized following the distribution,
(y) the institution's total distributions for the calendar year
exceeds the institution's net income for the calendar year to
date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate
applicable law or regulation or an agreement with or condition
imposed by the OTS. If neither the savings institution nor the
proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed
with the OTS before making a capital distribution. The OTS may
disapprove or deny a capital distribution if in the view of the
OTS, the capital distribution would constitute an unsafe or
unsound practice.
SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended
by the Riegle Community Development and Regulatory Improvement
Act of 1994 (the "CDRI Act"), each Federal banking agency is
required to establish safety and soundness standards for
institutions under its authority. The final rule and the
guidelines 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 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.
29
<PAGE>
<PAGE>
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.
The federal banking agencies have also established Year
2000 readiness safety and soundness guidelines requiring all
insured depository institutions to implement procedures by
specified key dates to ensure the institution can continue
business operations after January 1, 2000. Every institution
must identify its internal and external "mission-critical"
systems (i.e., those systems vital to the continuance of a core
business activity) and develop a written plan establishing
priorities, oversight and reasonable deadlines to complete the
testing and renovation of mission-critical systems. In
addition, an institution must prepare a written business
resumption contingency plan that (i) defines scenarios where
mission-critical systems might fail, (ii) evaluates contingency
options to keep business operations going, and (iii) provides
for testing of the contingency plan by an independent party.
Every depository institution must also identify among its
customers those persons that represent a material risk to the
institution in the event the customer is not Year 2000 compliant
and implement appropriate risks controls to manage and mitigate
the customer's Year 2000 risk to the institution. The federal
banking agencies will examine the institution's overall progress
in meeting the Year 2000 readiness guidelines. In the event an
institution has failed to renovate its mission-critical systems
or is not on schedule with key dates, the institution must draft
a remediation contingency plan outlining alternative strategies
to comply with the guidelines and locate available third party
providers. The agencies, in their sole discretion, may take
actions under the FDICIA, the safety and soundness guidelines or
any other action available to them, including enforcement
action, to ensure an institution's Year 2000 readiness.
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.
The FDIC has adopted a new assessment schedule for SAIF
deposit insurance pursuant to which the assessment rate for
well-capitalized institutions with the highest supervisory
ratings has been reduced to zero and institutions in the lowest
risk assessment classification will be assessed at the rate of
0.27% of insured deposits. Until December 31, 1999, however,
SAIF-insured institutions, will be required to pay assessments
to the FDIC at the rate of 6.5 basis points to help fund
interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During
this period, BIF members will be assessed for these obligations
at the rate of 1.3 basis points. After December 31, 1999, both
BIF and SAIF members will be assessed at the same rate for FICO
payments.
30
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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) in each calendar quarter of not less than a
specified percentage (currently 4%) of its net withdrawable
savings deposits plus the average daily balance of short-term
borrowings during the preceding calendar quarter. 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
liquidity ratio of the Bank for the month of June 1999, was
8.38%.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the
FHLB, which consists of 12 Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Board
("FHFB"). The Federal Home Loan Banks provide a central credit
facility primarily for member institutions. As a member of the
FHLB of Cincinnati, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Cincinnati in an amount
at least equal to 1% of the aggregate unpaid principal of its
home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its
advances from the FHLB of Cincinnati, whichever is greater. The
Bank was in compliance with this requirement with investment in
FHLB of Cincinnati stock at June 30, 1999, of $1.2 million. The
FHLB of Cincinnati is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of
the FHLB of Cincinnati. As of June 30, 1999, the Bank had $7.0
million in advances and other borrowings from the FHLB of
Cincinnati. See "Deposit Activity and Other Sources of Funds --
Borrowings."
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the
Federal Reserve Board, a thrift institution must maintain
average daily reserves equal to 3% on transaction accounts of
between $4.9 million and $46.5 million, plus 10% on the
remainder. This percentage is subject to adjustment by the
Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a non-interest
bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1999, the Bank met its
reserve requirements.
TAXATION
The Company and the Bank will file a consolidated federal
income return for the year ended June 30, 1999.
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
31
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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").
The Bank 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 signed by the President in 1996 repealed the
percentage of taxable income method of calculating the bad debt
reserve. Savings associations, like the Bank, which have
previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period
beginning with the first taxable year beginning after December
31, 1995. The start of such recapture may be delayed until the
third taxable year beginning after December 31, 1995 if the
dollar amount of the institution's residential loan originations
in each year is not less than the average dollar amount of
residential 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. Under such legislation, the Bank is required to
recapture approximately $70,000 of its tax bad debt reserve.
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 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.
Neither the Company nor the Bank's federal corporate
income tax returns have 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.
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STATE INCOME TAXATION
The Commonwealth of Kentucky imposes no income or franchise
taxes on savings institutions. The Bank is subject to an annual
Kentucky ad valorem tax. This tax is 0.1% of the Bank's savings
accounts, common stock, capital and retained income with certain
deductions allowed for securities guaranteed by the U.S.
Government or certain of its agencies. For the fiscal year
ended June 30, 1999, the amount of such expense for the Bank was
$60,000.
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, 1999.
<TABLE>
<CAPTION>
Book Value
Year Owned or at June 30, Approximate
Opened Leased 1999 Square Footage
------ -------- ----------- --------------
<S> <C> <C> <C> <C>
306 North Main Street 1975 Owned $240,000 4,278
Cynthiana, Kentucky
100 Ladish Road
Cynthiana, Kentucky 1994 Owned $871,000 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
- ------------------------------------------------------------
There were no matters submitted to a vote of the security
holders during the fourth quarter of fiscal year 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
- --------------------------------------------------------------
The Common Stock began trading under the symbol "KYF" on
the American Stock Exchange on August 29, 1995. There are
currently 1,167,367 shares of the Common Stock outstanding. The
number of registered holders of Common Stock on September 10,
1999 was 323.
33
<PAGE>
<PAGE>
The following table shows the high and low stock prices for
the Common Stock and dividends declared on a quarterly basis for
the past two fiscal years.
<TABLE>
<CAPTION>
Quarter Dividends
Ended High Low Declared
------- ---- --- ---------
<S> <C> <C> <C>
September 30, 1997 $14.2500 $10.6250 $0.125
December 31, 1997 $15.0000 $13.3125 $0.125
March 31, 1998 $15.0000 $13.7500 $0.125
June 30, 1998 $16.0000 $14.0000 $0.125
September 30, 1998 $15.0000 $13.5000 $0.125
December 31, 1998 $13.6250 $12.1250 $0.125
March 31, 1999 $12.9375 $12.5000 $0.125
June 30, 1999 $12.5000 $11.8750 $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 Board 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
- --------------------------------------------------------
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, the
Company's operations and the Company's
34
<PAGE>
<PAGE>
actual results could differ significantly from those discussed
in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest
rates in the nation and the Company's market area generally.
Some of the forward-looking statements included herein are
the statements regarding management's determination of the
amount and adequacy of the allowance for losses on loans, the
effect of certain recent accounting pronouncements and the
Company's projected effects related to the year 2000 compliance
issue.
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.
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
effect 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 purchase of
federal agency bonds and 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.
<PAGE>
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 3% increase and decrease in
market interest rates.
35
<PAGE>
<PAGE>
The following tables sets forth the interest rate
sensitivity of the Bank's net portfolio value as of June 30,
1999 and June 30, 1998, in the event of 1%, 2%, and 3%
instantaneous and permanent increases and decreases in market
interest rates, respectively.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE, JUNE 30, 1999
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ---------------------------- -------------------------------------
in Rates Amount $ Change % Change NPV Ratio Basis Point Changes
- -------- ------ -------- -------- --------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 8,535 $(4,162) (33)% 11.64% (452) bp
+200 bp 9,998 (2,699) (21) 13.30 (285) bp
+100 bp 11,417 (1,280) (10) 14.84 (132) bp
0 bp 12,697 16.15
- -100 bp 13,734 1,037 8 17.16 101 bp
- -200 bp 14,664 1,967 15 18.02 187 bp
- -300 bp 15,764 3,067 24 19.01 286 bp
<CAPTION>
NET PORTFOLIO VALUE, JUNE 30, 1998
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ---------------------------- -------------------------------------
in Rates Amount $ Change % Change NPV Ratio Basis Point Changes
- -------- ------ -------- -------- --------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 9,094 $(4,370) (32)% 11.75% (451) bp
+200 bp 10,668 (2,796) (21) 13.45 (281) bp
+100 bp 12,150 (1,314) (10) 14.98 (128) bp
0 bp 13,464 16.26
- -100 bp 14,400 936 7 17.11 85 bp
- -200 bp 15,215 1,751 13 17.82 156 bp
- -300 bp 16,376 2,912 22 18.83 257 bp
</TABLE>
Certain shortcomings are inherent in the method of analysis
presented in the computation of NPV. 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 portfolio could decrease in
future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the
event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from
those assumed in the 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.
36
<PAGE>
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference
between rates of interest earned on interest-earning assets and
rates of interest paid on interest-bearing liabilities
("interest rate spread") 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
daily balance of assets or liabilities, respectively, for the
periods presented. During the periods indicated, nonaccruing
loans are included in the net loan category.
<TABLE>
<CAPTION>
For The Year Ended June 30,
-------------------------------------------------------------------------
1999 1998
------------------------------------ -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1). . $48,157 $3,914 8.13% $49,732 $4,072 8.19%
Mortgage-backed securities . 16,883 1,096 6.49 19,509 1,312 6.73
Investment securities. . . . 9,138 529 5.79 11,937 746 6.25
Other interest-earning
assets . . . . . . . . . . 2,261 126 5.57 1,930 99 5.13
------- ------ ------- ------
Total interest-earning
assets . . . . . . . . . 76,439 5,665 7.41 83,108 6,229 7.50
Non-interest-earning assets. . 2,339 2,482
------- -------
Total assets . . . . . . . $78,778 $85,590
======= =======
Interest-bearing liabilities:
Deposits . . . . . . . . . . $56,945 $2,418 4.25 $55,480 $2,467 4.45
Borrowings . . . . . . . . . 7,401 390 5.27 14,860 849 5.71
------- ------ ------- ------
Total interest-bearing
liabilities 64,346 2,808 4.36 70,340 3,316 4.71
------ ----- ------ -----
Non-interest-bearing
liabilities . . . . . . . . 642 808
------- -------
Total liabilities . . . . 64,988 71,148
Shareholders' equity . . . . . 13,790 14,442
------- -------
Total liabilities and
shareholders' equity. . $78,778 $85,590
======= =======
Net interest income. . . . . . $2,857 $2,913
====== ======
Interest rate spread (2) . . . 3.05% 2.79%
====== ======
Net yield on interest-earning
assets (3) . . . . . . . . . 3.74% 3.51%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing
liabilities. . . . . . . . . 118.79% 118.15%
====== ======
<PAGE>
<CAPTION>
For The Year Ended June 30,
------------------------------------
1997
------------------------------------
Average
Average Yield/
Balance Interest Cost
--------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1). . $49,693 $3,837 7.72%
Mortgage-backed securities . 21,161 1,438 6.80
Investment securities. . . . 12,970 927 7.15
Other interest-earning
assets . . . . . . . . . . 1,547 97 6.27
------- ------
Total interest-earning
assets . . . . . . . . . 85,371 6,299 7.38
Non-interest-earning assets. . 3,286
-------
Total assets . . . . . . . $88,657
=======
Interest-bearing liabilities:
Deposits . . . . . . . . . . $55,027 $2,280 4.14
Borrowings . . . . . . . . . 18,043 951 5.27
------- ------
Total interest-bearing
liabilities 73,070 3,231 4.42
------ ----
Non-interest-bearing
liabilities . . . . . . . . 777
-------
Total liabilities . . . . 73,847
Shareholders' equity . . . . . 14,810
-------
Total liabilities and
shareholders' equity. . $88,657
=======
Net interest income. . . . . . $3,068
======
Interest rate spread (2) . . . 2.96%
------
Net yield on interest-earning
assets (3) . . . . . . . . . 3.59%
------
Ratio of average interest-
earning assets to average
interest-bearing
liabilities. . . . . . . . . 116.83%
======
<FN>
__________
(1) Includes non-accrual loans.
(2) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(3) Represents net interest income as a percentage of the average balance
of interest-earning assets for the same period.
</FN>
</TABLE>
37
<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding
changes in interest income and interest expense of the
Bank for the periods indicated. For each category of
interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes
in volume (changes in volume multiplied by old rate);
and (ii) changes in rates (change in rate multiplied by old
volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated
proportionately between changes in rate and changes in volume.
<TABLE>
<CAPTION>
Year Ended June 30,
_________________________________________________________________________________
1999 vs 1998 1998 vs. 1997
______________________________________ ________________________________________
Increase (Decrease) Increase (Decrease)
Due to Due to
______________________________________ _______________________________________
Rate Volume Total Rate Volume Total
________ _______ _______ ________ _________ _________
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans. . . . . . . . . . . .$ (30) $(128) $(158) $ 232 $ 3 $ 235
Mortgage-backed
securities (1) . . . . . . (46) (170) (216) (14) (112) (126)
Investment securities (1). . (55) (162) (217) (110) (71) (181)
Other interest-earning
assets . . . . . . . . . . 9 18 27 (20) 22 2
----- ----- ------ ----- ----- -----
Total interest-earning
assets. . . . . . . . . (122) (442) (564) 88 (158) (70)
----- ----- ------ ----- ----- -----
Interest expense:
Deposits . . . . . . . . . . (111) 62 (49) 170 17 187
Borrowings . . . . . . . . . (66) (393) (459) 83 (185) (102)
----- ----- ------ ----- ----- -----
Total interest-bearing
liabilities. . . . . . (177) (331) (508) 253 (168) 85
----- ----- ------ ----- ----- -----
Decrease in net interest
income. . . . . . . . . . . $ (56) $(155)
====== =====
<FN>
_____________
(1) Includes securities designated as available for sale.
</FN>
</TABLE>
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1999 AND 1998
At June 30, 1999, the Company's consolidated total assets
amounted to $78.1 million, a decrease of $3.9 million, or 5.0%,
from the total at June 30, 1998. The decrease in assets
resulted primarily from a decrease of $3.4 million in advances
from the FHLB and a decline in shareholders' equity of $576,000
due to stock repurchases, which were partially offset by an
increase in deposits of $62,000.
Liquid assets (i.e. cash, interest-bearing deposits and
investment securities) decreased by $1.5 million, or 12.4%, to
a total of $10.3 million at June 30, 1999. Investment
securities totaling $7.2 million matured during the period and
were partially offset by purchases of $6.4 million.
Mortgage-backed securities totaled $16.4 million at June 30,
1999, a decrease of $1.5 million, or 8.6%, from June 30, 1998
levels. The decrease in mortgage-backed securities resulted
from principal repayments of $5.4 million and were partially
offset by $4.0 million of purchases during the period. Excess
liquid assets and proceeds from maturities of investment and
mortgage-backed securities were partially used to fund
repayments of FHLB advances. Regulatory liquidity amounted to
8.74%, at June 30, 1999.
Net loans receivable decreased by $1.0 million, or 2.0%,
during the period, to a total of $47.8 million at June 30, 1999.
Loan disbursements of $11.8 million and loan purchases of $2.6
million were exceeded by principal repayments of $15.4 million.
The allowance for loan losses totaled $414,000 at June 30, 1999,
as compared to $384,000 at June 30, 1998. Nonperforming loans
totaled $268,000 at June 30, 1999, as compared to $141,000 at
June 30, 1998.
38
<PAGE>
<PAGE>
The allowance for loan losses represented 154% of nonperforming
loans as of June 30, 1999 and 272% at June 30, 1998. Although
management believes that its allowance for loan losses at June
30, 1999, is adequate based upon the available facts and
circumstances, 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 $56.6 million at June 30, 1999, an
increase of $62,000, or 0.1%, over June 30, 1998 levels. During
the current period, management has not attempted to match
premium deposit rates offered by certain competitors and has
instead continued its conservative pricing strategy with respect
to deposit accounts during the current interest rate
environment.
Advances from the FHLB totaled $7.0 million at June 30,
1999, a decrease of $3.4 million, or 32.7%, from the total at
June 30, 1998, as proceeds from maturities of investment
securities and repayments of mortgage-backed securities and
loans were utilized to repay such advances.
The Company's shareholders' equity amounted to $13.8
million at June 30, 1999, a decrease of $576,000, or 4.0%, from
June 30, 1998 levels. The decrease resulted primarily from
dividends paid on common stock totaling $563,000, purchases of
treasury stock totaling $1.0 million, and a $205,000 decrease in
unrealized gains on securities designated as available for sale,
which were partially offset by 1999 period net earnings of
$866,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED
JUNE 30, 1999 AND 1998
GENERAL. Net earnings amounted to $866,000 for the fiscal
year ended June 30, 1999, a decrease of $51,000, or 5.6%,
compared to the $917,000 of net earnings reported in fiscal
1998. The decrease in net earnings in the current period was
due to a $56,000 decrease in net interest income, a $7,000
decrease in other income, and a $24,000 increase in general,
administrative and other expense, which were partially offset by
a $36,000 decrease in the provision for federal income taxes.
NET INTEREST INCOME. Interest income totaled $5.7 million
for the fiscal year ended June 30, 1999, a decrease of $564,000,
or 9.1%, from the $6.2 million of interest income reported in
fiscal 1998. The decrease resulted primarily from a $6.7
million, or 8.0%, decrease in the weighted-average balance of
interest earning assets outstanding, and, to a lesser extent,
from by a nine basis point decrease in the average yield, from
7.50% during fiscal 1998 to 7.41% during fiscal 1999. Interest
income on loans decreased by $158,000, or 3.9%, due to a $1.6
million, or 3.2%, decrease in the weighted-average balances of
loans outstanding coupled with a six basis point decrease in
yield, from 8.19% during fiscal 1998 to 8.13% during fiscal
1999. Interest income on mortgage-backed securities decreased
by $216,000, or 16.5%, due to a $2.6 million, or 13.5%, decrease
in the weighted-average balance outstanding and due to a 24
basis point decrease in average yield, from 6.73% during fiscal
1998 to 6.49% during fiscal 1999. Interest income on investment
securities and interest-bearing deposits decreased by $190,000,
or 22.5%, due to a $2.5 million, or 17.8%, decrease in the
weighted-average balance outstanding and due to a 34 basis point
decrease in average yield, from 6.09% during fiscal 1998 to
5.75% during fiscal 1999.
Interest expense totaled $2.8 million for the fiscal year
ended June 30, 1999, a decrease of $508,000, or 15.3%, from the
$3.3 million of total interest expense reported in fiscal 1998.
Interest expense on deposits decreased by $49,000, or 2.0%, due
to a 20 basis point decrease in the average cost of deposits,
from 4.45% during fiscal 1998 to 4.25% during fiscal 1999, which
was partially offset by a $1.5 million, or 2.6%, increase in the
weighted-average balance of deposits outstanding. Interest
expense on borrowings decreased by $459,000, or 54.1%, due to a
$7.5 million, or 50.2%, decrease in the weighted-average balance
of advances outstanding from the Federal Home Loan Bank and due
to a 44 basis point decrease in the average cost on such
advances, from 5.71% during fiscal 1998 to 5.27% during fiscal
1999.
As a result of the foregoing changes in interest income and
interest expense, net interest income decreased by $56,000, or
1.9%, to a total of $2.9 million for the fiscal year ended June
30, 1999, as compared to fiscal 1998. The
39
<PAGE>
<PAGE>
interest rate spread amounted to approximately 3.05% and 2.79%
during the respective fiscal 1999 and 1998 periods, while the
net interest margin amounted to approximately 3.74% in fiscal
1999 and 3.51% in fiscal 1998.
Provision for Losses on Loans. A provision for losses on
loans is charged to earnings to bring the total 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 principal and
interest payments, general economic conditions, particularly as
such conditions relate to the Bank's market area, and other
factors related to the collectability of the Bank's loan
portfolio. As a result of such analysis, management recorded a
$30,000 provision for losses on loans during the fiscal year
ended June 30, 1999, equal to the $30,000 provision recorded for
the comparable period in 1998. There can be no assurance that
the loan loss allowance of the Bank will be adequate to cover
losses on nonperforming assets in the future.
OTHER INCOME. Other income decreased by $7,000, or 3.6%,
for the fiscal year ended June 30, 1999, compared to fiscal
1998, due to an $11,000, or 68.8%, decrease in gain on
investment securities transactions, which was partially offset
by a $3,000, or 2.3%, increase in service charges and fees on
loans and deposits.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General,
administrative and other expense totaled $1.8 million for the
fiscal year ended June 30, 1999, an increase of $24,000, or
1.4%, from fiscal 1998. The increase was due to a $38,000, or
25.3%, increase in occupancy and equipment, a $7,000, or 5.6%,
increase in data processing, and a $9,000, or 2.2%, increase in
other operating expense, which were partially offset by a
$30,000, or 2.8%, decrease in employee compensation and
benefits.
The increase of $38,000 in occupancy and equipment was due
to an increase in depreciation expense in fiscal 1999 as
compared to fiscal 1998. The decrease of $30,000 in employee
compensation and benefits was due to a decrease in the expense
recorded in fiscal 1999 related to the stock benefit plans
reflecting the decreased market price of the Kentucky First
Bancorp, Inc. common stock, which was offset by an increase in
compensation due to an increased staffing level during fiscal
1999.
FEDERAL INCOME TAXES. The provision for federal income
taxes totaled $350,000 for the fiscal year ended June 30, 1999,
a decrease of $36,000, or 9.3%, compared to fiscal 1998. This
decrease resulted primarily from the decrease in net earnings
before taxes of $87,000, or 6.7%. The effective tax rates were
28.8% and 29.6% for the fiscal years ended June 30, 1999 and
1998, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED
JUNE 30, 1998 AND 1997
GENERAL. Net earnings amounted to $917,000 for the fiscal
year ended June 30, 1998, an increase of $155,000, or 20.3%,
over the $762,000 of net earnings reported in fiscal 1997. Net
earnings during the fiscal 1997 period reflected a $351,000
one-time special assessment recorded in the first quarter of
fiscal 1997 to recapitalize the Savings Association Insurance
Fund ("SAIF"). The increase in net earnings in the current
period was also due to a $38,000 increase in other income, which
was partially offset by a $155,000 decrease in net interest
income, a $13,000 increase in general, administrative and other
expense (excluding the effects of the SAIF recapitalization
assessment) and a $51,000 increase in the provision for federal
income taxes.
NET INTEREST INCOME. Interest income totaled $6.2 million
for the fiscal year ended June 30, 1998, a decrease of $70,000,
or 1.1%, from the $6.3 million of total interest income reported
in fiscal 1997. The decrease resulted primarily from a $2.3
million, or 2.7%, decrease in the weighted-average balance of
interest earning assets outstanding, partially offset by a
twelve basis point increase in the average yield, to 7.50% in
fiscal 1998. Interest income on loans increased by $235,000, or
6.1%, due primarily to a 47 basis point increase in yield, to
8.19% for fiscal 1998. Interest income on mortgage-backed
securities decreased by $126,000, or 8.8%, due primarily to a
$1.7 million, or 7.8%, decrease in the weighted-average balance
outstanding. Interest income on investment securities and
interest-bearing
40
<PAGE>
<PAGE>
deposits decreased by $179,000, or 17.5%, due primarily to a
decline in the average yields available on short-term deposits.
Interest expense on deposits increased by $187,000, or
8.2%, due primarily to a 31 basis point increase in the cost of
deposits year to year, from 4.14% in fiscal 1997 to 4.45% in
fiscal 1998. Interest expense on borrowings decreased by
$102,000, or 10.7%, during the current period, due primarily to
a $3.2 million decrease in the weighted-average balance of
advances outstanding from the Federal Home Loan Bank, which was
partially offset by a 44 basis point increase in the average
rate on such advances, to 5.71% for fiscal 1998.
As a result of the foregoing changes in interest income and
interest expense, net interest income decreased by $155,000, or
5.1%, to a total of $2.9 million for the fiscal year ended June
30, 1998, as compared to fiscal 1997. The interest rate spread
amounted to approximately 2.79% and 2.96% during the respective
fiscal 1998 and 1997 periods, while the net interest margin
amounted to approximately 3.51% in fiscal 1998 and 3.59% in
fiscal 1997.
PROVISION FOR LOSSES ON LOANS. A provision for losses on
loans is charged to earnings to bring the total 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 principal and
interest payments, general economic conditions, particularly as
such conditions relate to the Bank's market area, and other
factors related to the collectibility of the Bank's loan
portfolio. As a result of such analysis, management recorded a
$30,000 provision for losses on loans during the fiscal year
ended June 30, 1998, compared to a $15,000 provision for the
comparable period in 1997. There can be no assurance that the
loan loss allowance of the Bank will be adequate to cover losses
on nonperforming assets in the future.
OTHER INCOME. Other income increased by $38,000, or 24.4%,
for the fiscal year ended June 30, 1998, compared to fiscal
1997, due primarily to a $16,000 gain on investment securities
transactions, coupled with a $21,000, or 19.3%, increase in
service charges and fees on loans and deposits.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General,
administrative and other expense totaled $1.8 million for the
fiscal year ended June 30, 1998, a decrease of $338,000, or
16.0%, from fiscal 1997. This decrease resulted primarily from
the $351,000 charge recorded in the first quarter of fiscal 1997
attendant to the aforementioned SAIF recapitalization.
Excluding the effects of this recapitalization assessment,
general, administrative and other expense increased by $13,000,
or 0.7%, due primarily to a $99,000, or 10.3%, increase in
employee compensation and benefits and a $19,000, or 17.8%,
increase in data processing, which were partially offset by a
$35,000, or 50.7%, decrease in federal deposit insurance
premiums and a $78,000, or 16.1%, decrease in other operating
expense.
The decrease in federal deposit insurance premiums resulted
from the decline in premium rates following the recapitalization
of the SAIF. The decline in other operating expense reflects
the absence of professional costs related to the Company's
return of capital distribution paid in November 1996. The
increase in employee compensation and benefits was due to the
combined effects of the costs associated with the acceleration
of vesting of certain stock awards resulting from the death of a
director, increased expenses relating to the Company's employee
stock ownership plan reflecting the increased market price of
the Kentucky First Bancorp, Inc. common stock and an increase in
cash bonuses paid in lieu of annual salary increases.
FEDERAL INCOME TAXES. The provision for federal income
taxes totaled $386,000 for the fiscal year ended June 30, 1998,
an increase of $51,000, or 15.2%, over fiscal 1997. This
increase resulted primarily from the increase in net earnings
before taxes of $206,000, or 18.8%. The effective tax rates
were 29.6% and 30.5% for the fiscal years ended June 30, 1998
and 1997, respectively.
41
<PAGE>
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The following information constitutes "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness
Disclosure Act.
As with all providers of financial services, the Bank's
operations are heavily dependent on information technology
systems. The Bank is addressing the potential problems
associated with the possibility that the computers that control
or operate the Bank's information technology system and
infrastructure may not be programmed to read four-digit date
codes and, upon arrival of the year 2000, may recognize the
two-digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data.
As part of the awareness and assessment phases of its
action plan related to the Year 2000 problem, the Bank
identified the operating systems that it considers critical to
the on-going operations of the Bank. The Bank contacted
companies that supply or service its information technology
systems to remedy any year 2000 problems.
Of the systems that the Bank identified as mission-
critical, the most significant is the on-line core account
processing system that is performed by a third party service
provider, Intrieve, Inc. The service provider has converted its
hardware to a new Year 2000 compliant system. The Bank's
conversion to this new system was completed on October 17, 1998.
The service provider successfully performed Year 2000 proxy
testing with several of its larger users during early October
1998. On November 15, 1998, the Bank performed final customer
testing, which was designed to test the Savings Bank's unique
equipment configuration and communications link to the service
provider.
In September 1998, the Bank developed a contingency plan in
case the mission-critical systems are not successfully renovated
in a timely manner or if they actually fail at Year 2000
critical dates. The contingency plan states that the Bank deems
the likelihood of failure of the service provider's efforts to
renovate Year 2000 changes to the on-line core account
processing system to be remote. The plan primarily addresses
action to deal with the possibility that the service provider's
system would be down for several days or weeks upon arrival of
Year 2000. The Bank has the ability to process transactions
utilizing spreadsheet software on in-house personal computers
for a period of time, if necessary. The board has amended its
contingency plan several times since the original adoption. The
most recent amendment, in July 1999, details the methods to be
taken should it become necessary to implement the contingency
plan. Final testing of the methology involved in the
spreadsheet processing is to be completed by September 30, 1999.
Management of the Bank developed an estimate of expenses
that were reasonably likely to be incurred by the Bank in
connection with its efforts to achieve compliance of $20,000.
The amount expended, as June 30, 1999, was approximately $6,000.
No assurance can be given, however, that significant expense
will not be incurred in future periods. In the event that the
Bank is ultimately required to purchase replacement computer
systems, programs and equipment, or incur substantial expense to
make the Bank's current systems, programs and equipment Year
2000 compliant, the Savings Bank's net earnings and financial
condition could be adversely affected.
In addition to possible expense related to its own systems,
the Bank could incur losses if loan payments are delayed due to
Year 2000 problems affecting any major borrowers in the Bank's
primary market area. Because the Bank's loan portfolio is
highly diversified with regard to individual borrowers and types
of businesses and the Bank's primary market area is not
significantly dependent upon one employer or industry, the Bank
does not expect any significant or prolonged difficulties that
will affect net earnings or cash flow.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is dividends paid
by the Bank. The Bank, as a stock savings institution, is
subject to certain regulatory limitations with respect to the
payment of dividends to the Company.
42
<PAGE>
<PAGE>
First Federal's capital ratios are substantially in excess
of current regulatory capital requirements. At June 30, 1999,
the Bank's tangible and core capital amounted to 15.3% of
adjusted total assets, or 13.8% and 12.3%, 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 27.1% at June 30, 1999, or 19.1% 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 mortgage-backed securities and
proceeds from maturing investment securities. 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 4% of deposits and borrowings. First Federal's daily
average liquidity ratio for the month of June 1999 was 8.7%.
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 regulatory liquid assets consist of cash and
cash equivalents and certain of the Bank's investment and
mortgage-backed securities, with original maturities of less
than five years. The level of liquid assets is dependent on the
Bank's operating, financing and investing activities during any
given period. At June 30, 1999 the Bank's regulatory liquidity
totaled approximately $4.9 million.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income. In June 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under
accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the
same prominence as other financial statements. It does not
require a specific format for that financial statement but
requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management
adopted SFAS No. 130 effective July 1, 1998, as required without
material impact on the Company's financial statements.
Business Segments. In June 1997, the FASB issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 significantly changes the way that
public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about reportable
segments in interim financial reports issued to shareholders.
It also established standards for related disclosures about
products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial
and descriptive information about the way that management
organizes the segments within the enterprise for making
operating decisions and assessing performance. For many
enterprises, the management approach will likely result in more
segments being reported. In addition, SFAS No. 131 requires
significantly more information to be disclosed for each
reportable segment than is presently being reported in annual
financial statements and also requires that selected information
be reported in interim financial statements. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997.
Management adopted SFAS No. 131 effective July 1, 1998, as
required, without material impact on the Company's financial
statements.
43
<PAGE>
<PAGE>
Derivatives and Hedging Activities. In June 1998, the FASB
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which requires entities to recognize all
derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes
the items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting.
The definition of a derivative financial instrument is
complex, but in general it is an instrument with one or more
underlyings, such as an interest rate or foreign exchange rate,
that is applied to a notional amount, such as an amount of
currency, to determine the settlement amount(s). It generally
requires no significant initial investment and can be settled
net or by delivery of an asset that is readily convertible to
cash. SFAS No. 133 applies to derivatives embedded in other
contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. On adoption,
entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale category or trading
category without calling into question their intent to hold
other debt securities to maturity in the future. SFAS No. 133
is not expected to have a material impact on the Company's
financial statements.
44
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants 46
Consolidated Statements of Financial Condition as of
June 30, 1999 and 1998 47
Consolidated Statements of Earnings for the Years Ended
June 30, 1999, 1998 and 1997 48
Consolidated Statements of Comprehensive Income 49
Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 1999, 1998 and 1997 50
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997 51
Notes to Consolidated Financial Statements 53
45
<PAGE>
<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 statements of
financial condition of Kentucky First Bancorp, Inc. as of June
30, 1999 and 1998, and the related consolidated statements of
earnings, comprehensive income, shareholders' equity, and cash
flows for the years ended June 30, 1999, 1998 and 1997. 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.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Kentucky First Bancorp, Inc. as of June
30, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years ended June 30, 1999,
1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
August 3, 1999
46
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 635 $ 469
Interest-bearing deposits in other financial institutions 809 1,488
------- -------
Cash and cash equivalents 1,444 1,957
Investment securities available for sale - at market 7,297 4,607
Investment securities held to maturity - at amortized
cost, approximate market value of $1,545 and $5,211
as of June 30, 1999 and 1998 1,531 5,162
Mortgage-backed securities available for sale - at market 6,579 3,213
Mortgage-backed securities held to maturity - at
amortized cost, approximate market value of $9,613
and $14,797 as of June 30, 1999 and 1998 9,780 14,680
Loans receivable - net 47,801 48,801
Office premises and equipment - at depreciated cost 1,271 1,356
Federal Home Loan Bank stock - at cost 1,212 1,130
Accrued interest receivable 409 492
Prepaid expenses and other assets 479 460
Prepaid federal income taxes 181 144
Deferred federal income taxes 160 44
------- -------
Total assets $78,144 $82,046
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $56,628 $56,566
Advances from the Federal Home Loan Bank 7,003 10,412
Accrued interest payable 91 117
Other liabilities 590 543
------- -------
Total liabilities 64,312 67,638
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 14 14
Additional paid-in capital 9,300 9,291
Retained earnings - restricted 8,447 8,144
Less shares acquired by stock benefit plans (1,024) (1,249)
Less 214,658 and 147,520 shares of treasury stock -
at cost (2,791) (1,883)
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects (114) 91
------- -------
Total shareholders' equity 13,832 14,408
------- -------
Total liabilities and shareholders' equity $78,144 $82,046
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
47
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED JUNE 30,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $3,914 $4,072 $3,837
Mortgage-backed securities 1,096 1,312 1,438
Investment securities 529 746 927
Interest-bearing deposits and other 126 99 97
------ ------ ------
Total interest income 5,665 6,229 6,299
Interest expense
Deposits 2,418 2,467 2,280
Borrowings 390 849 951
------ ------ ------
Total interest expense 2,808 3,316 3,231
------ ------ ------
Net interest income 2,857 2,913 3,068
Provision for losses on loans 30 30 15
------ ------ ------
Net interest income after provision
for losses on loans 2,827 2,883 3,053
Other income
Gain on investment securities
transactions 5 16 -
Service charges 133 130 109
Other operating 49 48 47
------ ------ ------
Total other income 187 194 156
General, administrative and other expense
Employee compensation and benefits 1,029 1,059 960
Occupancy and equipment 188 150 142
Federal deposit insurance premiums 34 34 420
Data processing 133 126 107
Other operating 414 405 483
------ ------ ------
Total general, administrative
and other expense 1,798 1,774 2,112
------ ------ ------
Earnings before income taxes 1,216 1,303 1,097
Federal income taxes
Current 361 385 373
Deferred (11) 1 (38)
------ ------ ------
Total federal income taxes 350 386 335
------ ------ ------
NET EARNINGS $ 866 $ 917 $ 762
====== ====== ======
EARNINGS PER SHARE
Basic $.77 $.77 $.60
==== ==== ====
Diluted $.75 $.75 $.59
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
48
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings $ 866 $ 917 $762
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities during the period (202) 107 45
Reclassification adjustment for realized
gains included in earnings, net of
tax of $2 and $5 for the years ended
June 30, 1999 and 1998 (3) (11) -
----- ------ ----
Comprehensive income $ 661 $1,013 $807
===== ====== ====
Accumulated comprehensive income (loss) $(114) $ 91 $ (5)
===== ====== ====
</TABLE>
The accompanying notes are an integral part of these statements.
49
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For The Years Ended June 30, 1999, 1998 And 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
SHARES ON SECURITIES
ADDITIONAL ACQUIRED DESIGNATED
COMMON PAID-IN RETAINED BY STOCK TREASURY AS AVAILABLE
STOCK CAPITAL EARNINGS BENEFIT PLANS STOCK FOR SALE TOTAL
------ ---------- -------- ------------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $14 $13,351 $7,689 $(1,748) $ - $ (50) $19,256
Purchase of treasury stock - - - - (818) - (818)
Amortization expense of stock
benefit plans - 35 - 239 - - 274
Net earnings for the year
ended June 30, 1997 - - 762 - - - 762
Cash dividends of $.50 per
share - - (626) - - - (626)
Capital distribution of
$3.00 per share - (4,166) - - - - (4,166)
Unrealized gains on securities
designated as available for
sale, net of related tax
effects - - - - - 45 45
--- ------- ------ ------- ------- ----- -------
Balance at June 30, 1997 14 9,220 7,825 (1,509) (818) (5) 14,727
Purchase of treasury stock - - - - (1,124) - (1,124)
Amortization expense of stock
benefit plans - 81 - 260 - - 341
Net earnings for the year ended
June 30, 1998 - - 917 - - - 917
Cash dividends of $.50 per share - - (598) - - - (598)
Issuance of shares under stock
option plan - (10) - - 59 - 49
Unrealized gains on securities
designated as available for
sale, net of related tax
effects - - - - - 96 96
--- ------- ------ ------- ------- ----- -------
Balance at June 30, 1998 14 9,291 8,144 (1,249) (1,883) 91 14,408
Purchase of treasury stock - - - - (1,050) - (1,050)
Amortization expense of stock
benefit plans - 34 - 225 - - 259
Net earnings for the year ended
June 30, 1999 - - 866 - - - 866
Cash dividends of $.50 per share - - (563) - - - (563)
Issuance of shares under stock
option plan - (25) - - 142 - 117
Unrealized losses on securities
designated as available for
sale, net of related tax
effects - - - - - (205) (205)
--- ------- ------ ------- ------- ----- -------
Balance at June 30, 1999 $14 $ 9,300 $8,447 $(1,024) $(2,791) $(114) $13,832
=== ======= ====== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
50
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 866 $ 917 $ 762
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 (11) (14) (19)
Amortization of deferred loan origination
fees (21) (36) (44)
Depreciation and amortization 100 67 64
Provision for losses on loans 30 30 15
Amortization of expense related to stock
benefit plans 259 341 274
Gain on investment securities transactions (5) (16) -
Federal Home Loan Bank stock dividends (82) (78) (65)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 83 82 (57)
Prepaid expenses and other assets (19) (45) (69)
Accrued interest payable (26) (31) 77
Other liabilities 47 (25) 66
Federal income taxes
Current (37) (112) (194)
Deferred (11) 1 (38)
-------- -------- -------
Net cash provided by operating activities 1,173 1,081 772
Cash flows provided by (used in) investing
activities:
Proceeds from maturity of investment
securities 7,173 7,811 2,440
Purchase of investment securities designated
as held to maturity - - (701)
Purchase of investment securities designated
as available for sale (6,369) (3,580) (100)
Purchase of mortgage-backed securities
designated as available for sale (3,975) - -
Principal repayments on mortgage-backed
securities 5,352 3,387 2,053
Purchase of loans (2,601) (783) (1,654)
Loan principal repayments 15,387 12,756 11,140
Loan disbursements (11,795) (11,848) (15,357)
Purchase of office premises and equipment (15) (26) (100)
Purchase of Federal Home Loan Bank stock - - (249)
-------- -------- -------
Net cash provided by (used in)
investing activities 3,157 7,717 (2,528)
-------- -------- -------
Net cash provided by (used in) operating
and investing activities (subtotal
carried forward) 4,330 8,798 (1,756)
-------- -------- -------
</TABLE>
51
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Year Ended June 30,
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net cash provided by (used in) operating
and investing activities (subtotal
brought forward) $ 4,330 $ 8,798 $ (1,756)
Cash flows provided by (used in) financing
activities:
Net increase in deposits 62 1,123 3,665
Proceeds from Federal Home Loan Bank
advances 6,900 28,700 19,250
Repayment of Federal Home Loan Bank
advances (10,309) (36,258) (15,808)
Proceeds from note payable - - 2,000
Repayment of note payable - - (2,000)
Purchase of treasury stock (1,050) (1,124) (818)
Proceeds from issuance of shares under
stock option plan 117 49 -
Dividends and capital distributions on
common stock (563) (598) (4,792)
------- ------- -------
Net cash provided by (used in) financing
activities (4,843) (8,108) 1,497
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (513) 690 (259)
Cash and cash equivalents at beginning of year 1,957 1,267 1,526
------- ------- -------
Cash and cash equivalents at end of year $ 1,444 $ 1,957 $ 1,267
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 419 $ 466 $ 350
======= ======= =======
Interest on deposits and borrowings $ 2,834 $ 3,347 $ 3,154
======= ======= =======
Unrealized gains (losses) on securities
designated as available for sale, net of
related tax effects $ (205) $ 96 $ 45
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
52
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentucky First Bancorp, Inc. (the "Corporation") is a savings
and loan holding company whose activities are primarily
limited to holding the common stock of First Federal Savings
Bank (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.
2. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The Corporation accounts for investment and mortgage-backed
securities in accordance with 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. At June 30, 1999 and 1998, the
Corporation's shareholders' equity reflected a net unrealized
loss and a net unrealized gain on securities designated as
available for sale totaling $114,000 and $91,000,
respectively.
53
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
2. Investment Securities and Mortgage-Backed
-----------------------------------------
Securities(continued)
----------
Realized gains and losses on sales of securities are
recognized using the specific identification method.
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 Costs 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).
54
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
5. Allowance for Losses on Loans (continued)
-----------------------------
The Savings Bank accounts for impaired loans in
accordance with SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," which 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.
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 multi-family
and nonresidential loans, and its evaluation of
impairment thereof, 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, 1999, the Savings Bank had one loan totaling
$352,000 that met the definition for impairment under
SFAS No. 114. The allowance for losses related to this
account amounted to $150,000 at that date. At June 30,
1998, the Savings Bank had no impaired loans pursuant to
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.
55
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
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.
8. Federal Income Taxes
--------------------
The Corporation accounts for federal income taxes in
accordance with the provisions of SFAS No. 109, "Accounting
for Income Taxes". 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
consolidated 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, certain components of benefit plans and the
accumulated post-1987 percentage of earnings bad debt
deductions. Additional temporary differences result from
depreciation computed using accelerated methods for tax
purposes.
56
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
9. Benefit Plans
-------------
The Corporation provides retirement benefits for
substantially all employees who have completed one year of
service and have attained the age of 21 through the Kentucky
First Bancorp, Inc. Employee Stock Ownership Plan ("ESOP").
Expense recognized related to the ESOP totaled approximately
$147,000, $158,000 and $128,000 for the fiscal years ended
June 30, 1999, 1998 and 1997, respectively.
Additionally, the Corporation has the Kentucky First
Bancorp, Inc. Management Recognition Plan ("MRP"). The MRP
purchased 55,545 shares of the Corporation's 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 in fiscal 1996 upon receipt of
shareholder approval. The MRP provides that common stock
awarded under the MRP vests ratably over a five year period.
A provision of $125,000, $186,000 and $146,000 related to
the MRP was charged to expense for the fiscal years ended
June 30, 1999, 1998 and 1997, respectively.
10. Earnings and Dividends Per Share
--------------------------------
Basic earnings per share for the years ended June 30, 1999,
1998 and 1997, is computed based upon the weighted-average
shares outstanding during the period less shares in the ESOP
that are unallocated and not committed to be released.
Weighted-average common shares deemed outstanding (which
gives effect to 80,153, 92,574 and 101,832 unallocated ESOP
shares), totaled 1,121,745, 1,188,719 and 1,264,832 for the
years ended June 30, 1999, 1998 and 1997, respectively.
Diluted earnings per share is computed taking into
consideration common shares outstanding and dilutive
potential common shares to be issued under the Corporation's
stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per
share totaled 1,159,390, 1,230,251 and 1,294,928 for the
fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Incremental shares related to the assumed
exercise of stock options included in the computation of
diluted earnings per share totaled 37,645, 41,532 and 30,096
for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
During fiscal 1997, the Corporation paid cash distributions
of $3.50 per share. Of these distributions, management
deemed $3.00 per share a return of capital charging such
amount to additional paid-in capital in the 1997
consolidated financial statements.
57
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
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, 1999 and
1998 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," 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, 1999 and 1998:
Cash and cash equivalents: The carrying amounts
presented in the consolidated statements 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.
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.
58
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
Federal Home Loan Bank stock: The carrying
amount presented in the consolidated statements
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, 1999 and 1998 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 are as follows:
<TABLE>
<CAPTION>
1999 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 1,444 $ 1,444 $ 1,957 $ 1,957
Investment securities 8,828 8,842 9,769 9,818
Mortgage-backed securities 16,359 16,192 17,893 18,010
Loans receivable 47,801 48,045 48,801 50,265
Federal Home Loan Bank stock 1,212 1,212 1,130 1,130
------- ------- ------- -------
$75,664 $75,735 $79,550 $81,180
======= ======= ======= =======
Financial liabilities
Deposits $56,628 $56,851 $56,566 $56,613
Advances from the Federal Home
Loan Bank 7,003 6,896 10,412 10,396
------- ------- ------- -------
$63,631 $63,747 $66,978 $67,009
======= ======= ======= =======
</TABLE>
59
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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 1999 consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of investment
securities held to maturity at June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government
agency obligations $ - $ - $3,502 $3,514
Municipal obligations 1,531 1,545 1,660 1,697
------ ------ ------ ------
$1,531 $1,545 $5,162 $5,211
====== ====== ====== ======
</TABLE>
At June 30, 1999 and 1998, the estimated fair value of the
Corporation's investment securities exceeded the carrying
value of such securities by $14,000 and $49,000, respectively,
consisting solely of gross unrealized gains.
The amortized cost and estimated fair value of U.S. Government
agency and municipal obligations designated as held to
maturity at June 30, by contractual term to maturity, are
shown below:
<TABLE>
<CAPTION>
1999 1998
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in three years or less $ 285 $ 293 $ 957 $ 962
Due after three years through
five years 394 398 135 145
Due after five years 852 854 4,070 4,104
------ ------ ------ ------
$1,531 $1,545 $5,162 $5,211
====== ====== ====== ======
</TABLE>
60
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized
losses, and estimated fair values of investment securities
designated as available for sale at June 30, 1999 and 1998,
are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency obligations:
Due in three years or less $2,990 $ 3 $ (18) $2,975
Due after five years 2,000 - (86) 1,914
Municipal obligations:
Due after three years through
five years 219 5 - 224
Due after five years 2,226 - (42) 2,184
------ ---- ------ ------
$7,435 $ 8 $ (146) $7,297
====== ==== ====== ======
<CAPTION>
JUNE 30, 1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency obligations:
Due in three years or less $ 990 $ 4 $ - $ 994
Due after five years 1,500 1 - 1,501
Municipal obligations:
Due after five years 2,105 9 (2) 2,112
------ ---- ---- ------
$4,595 $ 14 $ (2) $4,607
====== ==== ==== ======
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized
losses and estimated fair values of mortgage-backed securities
at June 30, 1999 and 1998 (including those designated as
available for sale) are summarized as follows:
<TABLE>
<CAPTION>
1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage
Corporation participation
certificates $ 706 $ - $ (18) $ 688
Government National Mortgage
Association participation
certificates 1,063 26 (4) 1,085
Federal National Mortgage
Association participation
certificates 8,011 4 (175) 7,840
------- ---- ------ -------
Total mortgage-backed securities
held to maturity 9,780 30 (197) 9,613
------- ---- ------ -------
AVAILABLE FOR SALE:
Federal Home Loan Mortgage
Corporation participation
certificates 3,088 86 - 3,174
Federal National Mortgage
Association participation
certificates 3,526 - (121) 3,405
------- ---- ------ -------
Total mortgage-backed securities
available for sale 6,614 86 (121) 6,579
------- ---- ------ -------
Total mortgage-backed
securities $16,394 $116 $ (318) $16,192
======= ==== ====== =======
</TABLE>
61
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY: (In Thousands)
Federal Home Loan Mortgage
Corporation participation
certificates $ 1,786 $ 20 $ (19) $ 1,787
Government National Mortgage
Association participation
certificates 1,527 57 - 1,584
Federal National Mortgage
Association participation
certificates 11,367 62 (3) 11,426
------- ---- ------ -------
Total mortgage-backed securities
held to maturity 14,680 139 (22) 14,797
AVAILABLE FOR SALE:
Federal Home Loan Mortgage
Corporation participation
certificates 3,088 125 - 3,213
------- ---- ------ -------
securities $17,768 $264 $ (22) $18,010
======= ==== ====== =======
</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,
1999 1998
(In thousands)
<S> <C> <C>
Due within three years $ 51 $ 249
Due in three to five years 3 7
Due in five to ten years 1,125 815
Due in ten to twenty years 9,929 11,814
Due after twenty years 5,286 4,883
------- -------
$16,394 $17,768
======= =======
</TABLE>
At June 30, 1999 and 1998, investment securities totaling $2.7
million and $2.5 million, respectively, were pledged to secure
public deposits.
62
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as
follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $26,279 $27,174
Multi-family 4,526 5,322
Construction 1,020 1,220
Nonresidential real estate and land 12,424 11,350
Consumer and other 4,292 4,462
------- -------
48,541 49,528
Less:
Undisbursed portion of loans in process 227 232
Deferred loan origination fees 89 86
Unearned discount 10 25
Allowance for loan losses 414 384
------- -------
$47,801 $48,801
======= =======
</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 $31.6 million, or 66%, of
the total loan portfolio at June 30, 1999, and $33.5 million,
or 69%, of the total loan portfolio at June 30, 1998.
Generally, such loans have been underwritten on the basis of
no more than an 85% 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. In
the opinion of management, such loans are consistent with
sound lending practices and are within applicable regulatory
lending limitations. The aggregate dollar amount of loans
outstanding to directors and officers totaled approximately
$170,000 and $199,000 at June 30, 1999 and 1998, respectively.
63
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
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>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $384 $372 $367
Provision for loan losses 30 30 15
Charge-offs, net of recoveries - (18) (10)
---- ---- ----
Balance at end of year $414 $384 $372
==== ==== ====
</TABLE>
As of June 30, 1999, $264,000 of the Savings Bank's allowance
for loan losses was general in nature, and is includible as a
component of regulatory risk-based capital, subject to certain
percentage limitations. The remaining allowance for loan
losses of $150,000 relates specifically to a non-accruing
multi-family residential real estate loan.
Nonperforming and nonaccrual loans totaled approximately
$268,000, $141,000 and $59,000 at June 30, 1999, 1998 and
1997, respectively.
During the years ended June 30, 1999, 1998 and 1997, interest
income of approximately $6,000, $3,000 and $3,000,
respectively, would have been recognized had such 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>
1999 1998
(In thousands)
<S> <C> <C>
Land $ 448 $ 448
Office buildings and improvements 982 982
Furniture, fixtures and equipment 403 388
------- ------
1,833 1,818
Less accumulated depreciation and
amortization 562 462
------- ------
$1,271 $1,356
======= ======
</TABLE>
64
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1999 1998
(In thousands)
<S> <C> <C>
NOW accounts
1999 - 1.40% $ 8,909
1998 - 1.90% $ 8,610
Passbook
1999 - 2.25% 6,293
1998 - 2.97% 6,090
Money market deposit accounts
1999 - 3.35% 4,580
1998 - 3.31% 4,248
------- -------
Total demand, transaction and
passbook deposits 19,782 18,948
Certificates of deposit
Original maturities of:
Less than 12 months
1999 - 4.43% 6,134
1998 - 5.00% 6,101
12 months to 24 months
1999 - 5.09% 19,528
1998 - 5.57% 19,965
30 months to 36 months
1999 - 5.53% 2,867
1998 - 5.69% 3,497
More than 36 months
1999 - 5.81% 4,002
1998 - 5.74% 4,082
Individual retirement accounts
1999 - 5.26% 4,315
1998 - 5.63% 3,973
------- -------
Total certificates of deposit 36,846 37,618
------- -------
Total deposit accounts $56,628 $56,566
======= =======
</TABLE>
At June 30, 1999 and 1998, the Savings Bank had certificate of
deposit accounts with balances in excess of $100,000 totaling
$2.4 million and $2.1 million, respectively.
65
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the year ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Passbook $ 148 $ 180 $ 180
NOW and money market deposit
accounts 287 302 267
Certificates of deposit 1,983 1,985 1,833
------ ------ ------
$2,418 $2,467 $2,280
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit at June 30
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Less than one year $27,864 $27,219
One to three years 6,142 7,510
Over three years 2,840 2,889
------- -------
$36,846 $37,618
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at
June 30, 1999 by pledges of certain residential mortgage loans
totaling $10.5 million, certain securities totaling $5.0
million and the Savings Bank's investment in Federal Home Loan
Bank stock, are summarized as follows:
<TABLE>
<CAPTION>
MATURING
YEAR ENDING JUNE 30,
INTEREST RATE JUNE 30, 1999 1998
(Dollars in thousands)
<C> <C> <C> <C>
6.45% 1999 $ - $ 6,900
6.02% 2000 500 -
5.07% - 5.71% 2006 3,100 3,100
5.15% 2009 3,000 -
4.00% 2025 304 311
4.00% 2026 99 101
------ -------
$7,003 $10,412
====== =======
</TABLE>
Weighted-average interest rate 5.09% 5.85%
====== =======
66
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the
statutory corporate tax rate for the year ended June 30 as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $413 $443 $373
Increase (decrease) in taxes resulting from:
Municipal interest income (63) (57) (43)
Other - - 5
---- ---- ----
Federal income tax provision per consolidated
statements of earnings $350 $386 $335
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax asset at
June 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate:
Deferred tax assets:
Allowance for loan losses $145 $131
Deferred loan origination fees - 5
Deferred compensation 95 92
Retirement plans 86 70
Unrealized losses on securities designated as
available for sale 59 -
----- -----
Total deferred tax assets 385 298
Deferred tax liabilities:
Percentage of earnings bad debt deduction (12) (16)
Book/tax depreciation (49) (42)
Federal Home Loan Bank stock dividends (97) (69)
Accrual vs. cash basis of accounting (49) (74)
Unrealized gains on securities designated
as available for sale - (46)
Deferred loan origination costs (18) -
Other - (7)
----- -----
Total deferred tax liabilities (225) (254)
----- -----
Net deferred tax asset $ 160 $ 44
===== =====
</TABLE>
67
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE H - FEDERAL INCOME TAXES (continued)
The Savings Bank was 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 qualified 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, 1999
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 $520,000 at June 30, 1999. See
Note L for additional information 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 its 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, 1999, the Savings Bank had outstanding commitments
of approximately $244,000 to originate loans. In the opinion
of management all loan commitments equaled or exceeded
prevailing market interest rates as of June 30, 1999, and will
be funded from normal cash flow from operations.
68
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL
The Savings Bank is subject to minimum regulatory capital
standards promulgated by the Office of Thrift Supervision (the
"OTS"). Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the consolidated
financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the
Savings Bank must meet specific capital guidelines that
involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Savings Bank's
capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
The minimum capital standards of the OTS 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) equal to 3.0% of adjusted total assets. An
OTS proposal, if adopted in present form, would increase the
core capital requirement to a range of 4.0% - 5.0% of adjusted
total assets for substantially all savings associations.
Management anticipates no material change to the Savings
Bank's excess regulatory capital position as a result of this
proposed change in the regulatory capital requirement. The
risk-based capital requirement currently 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, 1999 and 1998, management believes that the
Savings Bank met all capital adequacy requirements to which it
was subject.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $11,964 15.3% > $1,172 >1.5% >$3,907 > 5.0%
- - - -
Core capital $11,964 15.3% > $2,344 >3.0% >$4,689 > 6.0%
- - - -
Risk-based capital $12,229 27.1% > $3,607 >8.0% >$4,509 >10.0%
- - - -
</TABLE>
69
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL (continued)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $12,328 15.1% > $1,223 >1.5% >$4,076 > 5.0%
- - - -
Core capital $12,328 15.1% > $2,446 >3.0% >$4,892 > 6.0%
- - - -
Risk-based capital $12,712 27.3% > $3,729 >8.0% >$4,662 >10.0%
- - - -
</TABLE>
The Savings Bank's management believes that, under the current
regulatory capital regulations, the Savings Bank will continue
to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Savings
Bank, such as increased interest rates or a downturn in the
economy in the Savings Bank's market area, could adversely
affect future earnings and, consequently, the ability to meet
future minimum regulatory capital requirements.
NOTE K - STOCK OPTION PLAN
In fiscal 1996 the Board of Directors adopted the Kentucky
First Bancorp, Inc. Stock Option and Incentive Plan (the
"Plan") which provided for the issuance of 173,579 shares
(adjusted for the fiscal 1997 return of capital distribution)
of authorized, but unissued shares of common stock at fair
value at the date of grant. The Corporation immediately
granted all options at an adjusted fair value of $9.74 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 Plan, commencing in April 1996.
The Corporation accounts for the Plan in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which
contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively,
SFAS No. 123 permits entities to continue to account for stock
options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for
stock options using APB Opinion No. 25 are required to make
pro forma disclosures of net earnings and earnings per share,
as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
70
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE K - STOCK OPTION PLAN (continued)
The Corporation applies APB Opinion No. 25 and related
Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized with
respect to the Plan. The pro-forma disclosures required under
SFAS No. 123 are not applicable to the three years in the
period ended June 30, 1999, as no stock option grants occurred
during the period.
A summary of the status of the Corporation's stock option plan
as of June 30, 1999, 1998 and 1997, and changes during the
periods ending on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 168,609 $9.7375 173,579 $9.7375 138,862 $12.1875
Adjustments for return of capital
distribution - - - - 34,717 (2.4500)
Granted - - - - - -
Exercised (12,005) 9.7375 (4,970) 9.7375 - -
Forfeited (6,943) - - - - -
------- ------- ------- ------- ------- -------
Outstanding at end of year 149,661 $9.7375 168,609 $9.7375 173,579 $9.7375
======= ======= ======= ======= ======= =======
Options exercisable at year-end 83,007 $9.7375 64,462 $9.7375 34,716 $9.7375
======= ======= ======= ======= ======= =======
Weighted-average fair value of
options granted during the year N/A N/A N/A
=== === ===
</TABLE>
The following information applies to options outstanding at
June 30, 1999:
Number outstanding 149,661
Range of exercise prices $9.7375
Weighted-average exercise price $9.7375
Weighted-average remaining contractual life 6.4 years
71
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE L - LEGISLATIVE MATTERS
The deposit accounts of the Savings Bank and of other savings
associations are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Savings Association Insurance
Fund ("SAIF"). The reserves of the SAIF were below the level
required by law, because a significant portion of the
assessments paid into the fund were used to pay the cost of
prior thrift failures. The deposit accounts of commercial
banks are insured by the FDIC through 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.
Legislation which was enacted during fiscal 1997 to
recapitalize the SAIF provided for a special assessment
totaling $.657 per $100 of SAIF deposits held at March 31,
1995, in order to increase SAIF reserves to the level required
by law. The Savings Bank held $53.6 million in deposits at
March 31, 1995, resulting in an approximate $351,000, or
$232,000 after-tax, charge to operations in fiscal 1997.
Under separate legislation related to the recapitalization
plan, the Savings Bank is required to recapture as taxable
income approximately $70,000 of its tax bad debt reserve,
which represents the post-1987 additions to the reserve, and
will 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 will
amortize the recapture of the bad debt reserve into taxable
income over a six year period which commenced in fiscal 1998.
72
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE M - 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, 1999 and 1998, and the results of its operations and its
cash flows for the years ended June 30, 1999, 1998 and 1997.
KENTUCKY FIRST BANCORP, INC.
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Deposits in First Federal Savings Bank $ 139 $ 90
Interest-bearing deposits in other financial institutions 46 385
Loan receivable from ESOP 741 833
Investment in First Federal Savings Bank 11,851 12,419
Prepaid expenses and other assets 1,005 631
Prepaid federal income taxes 57 51
------- -------
Total assets $13,839 $14,409
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 7 $ 1
Shareholders' equity
Common stock and additional paid-in capital 9,314 9,305
Retained earnings 8,447 8,144
Less treasury stock (2,791) (1,883)
Less shares acquired by stock benefit plans (1,024) (1,249)
Unrealized gains (losses) on securities designated
as available for sale, net of related tax effects (114) 91
------- -------
Total shareholders' equity 13,832 14,408
------- -------
Total liabilities and shareholders' equity $13,839 $14,409
======= =======
</TABLE>
KENTUCKY FIRST BANCORP, INC.
STATEMENTS OF EARNINGS
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenue
Interest income $ 50 $ 55 $106
Equity in earnings of First Federal
Savings Bank 877 964 822
----- ------ ----
Total revenue 927 1,019 928
General, administrative and other expense 67 126 197
----- ------ ----
Earnings before income tax credits 860 893 731
Federal income tax credits (6) (24) (31)
----- ------ ----
NET EARNINGS $ 866 $ 917 $762
===== ====== ====
</TABLE>
73
<PAGE>
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST
BANCORP, INC. (continued)
KENTUCKY FIRST BANCORP, INC.
STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 866 $ 917 $ 762
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Excess of distributions from consolidated
subsidiary 123 996 2,878
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 125 (617) 7
Prepaid federal income taxes (6) (20) (31)
Accounts payable and other liabilities 6 (24) 25
------ ------- -------
Net cash provided by operating activities 1,114 1,252 3,641
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan 92 93 92
Proceeds from maturities of investment
securities - 501 2,200
Purchase of investment securities - - (701)
------ ------- -------
Net cash provided by investing activities 92 594 1,591
Cash flows provided by (used in) financing activities:
Proceeds from note payable - - 2,000
Repayment of note payable - - (2,000)
Payment of dividends on common stock (563) (598) (4,792)
Proceeds from exercise of stock options 117 93 -
Purchase of treasury stock (1,050) (1,124) (818)
------ ------- -------
Net cash used in financing activities (1,496) (1,629) (5,610)
------ ------- -------
Net increase (decrease) in cash and cash
equivalents (290) 217 (378)
Cash and cash equivalents at beginning of year 475 258 636
------ ------- -------
Cash and cash equivalents at end of year $ 185 $ 475 $ 258
====== ======= =======
</TABLE>
The Savings Bank is subject to regulations imposed by the
Office of Thrift Supervision ("OTS") regarding the amount of
capital distributions payable by the Savings Bank to the
Corporation. Generally, the Savings Bank's payment of
dividends is limited, without prior OTS approval, to net
income for the current calendar year plus the two preceding
calendar years, less capital distributions paid over the
comparable time period. Insured institutions are required to
file an application with the OTS for capital distributions in
excess of this limitation. During fiscal 1999, the Savings
Bank received OTS approval to make $1.5 million in capital
distributions. At June 30, 1999, the Savings Bank had $1.0
million available for future capital distributions.
74
<PAGE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
Not applicable.
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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated
herein by reference to the section captioned "Transactions with
Management" in the Proxy Statement.
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, 1999 and 1998
Consolidated Statements of Earnings for Each of the
Years in the Three-Year Period Ended June 30, 1999
Consolidated Statements of Shareholders' Equity for
Each of the Years in the Three-Year Period Ended
June 30, 1999
Consolidated Statements of Cash Flows for Each of the
Years in the Three-Year Period Ended June 30, 1999
Notes to Consolidated Financial Statements
75
<PAGE>
<PAGE>
(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.
Page in
Sequentially
No. Description Numbered Copy
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 *H
10.2 Kentucky First Bancorp, Inc. Stock Option
and Incentive Plan *H
10.3 Kentucky First Bancorp, Inc. Management
Recognition Plan *H
10.4 Deferred Compensation Agreements, as amended *H
10.5 First Federal Savings Bank Retirement Plan
for Non-Employee Directors *H
10.6 Supplemental Executive Retirement Agreement
between First Federal Savings Bank and
Betty J. Long *H
10.7 Employment Agreements between First Federal
Savings Bank and Betty J.Long and
Kevin R. Tolle *H
10.8 Employment Agreements between Kentucky
First Bancorp, Inc. and Betty J. Long and
Kevin R. Tolle *
21 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton L.L.P.
27 Financial Data Schedule (EDGAR only)
(*) Incorporated herein by reference from Registration
Statement on Form S-1 filed (File No. 33-91134).
(**) Incorporated herein by reference from the Company's
Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1999.
(H) Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K. There were no Current Reports on
Form 8-K filed by the Company during the fourth quarter of
fiscal year 1999.
76
<PAGE>
<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 27, 1999 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 27, 1999
Betty J. Long
President and Chief Executive Officer
(Director and Principal Executive Officer)
/s/ William D. Morris
- --------------------------- September 27, 1999
William D. Morris
Chairman of the Board
(Director)
/s/ Luther O. Beckett
- --------------------------- September 27, 1999
Luther O. Beckett
Vice Chairman of the Board
(Director)
/s/ Milton G. Rees
- --------------------------- September 27, 1999
Milton G. Rees
(Director)
/s Diane Ritchie
- --------------------------- September 27, 1999
Diane Ritchie
(Director)
/s/ John Swinford
- --------------------------- September 27, 1999
John Swinford
(Director)
/s/ Wilbur H. Wilson
- --------------------------- September 27, 1999
Wilbur H. Wilson
(Director)
/s/ Russell M. Brooks
- --------------------------- September 27, 1999
Russell M. Brooks
Executive Vice President
(Director and Principal Accounting
and Financial Officer)
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Kentucky First Bancorp, Inc.
<TABLE>
<CAPTION>
State or Other Percentage
Subsidiaries (1) Jurisdiction of Incorporation Ownership
- ---------------- ----------------------------- ----------
<S> <C> <C>
First Federal Savings Bank United States 100%
Cynthiana Service Corporation (2) Kentucky 100%
<FN>
_____________
(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.
</FN>
</TABLE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
We have issued our report dated August 3, 1999, 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, 1999. We hereby consent to
the incorporation by reference of said report in the
Corporation's Form S-8.
/s/ Grant Thornton LLP
Cincinnati, Ohio
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 635
<INT-BEARING-DEPOSITS> 809
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,876
<INVESTMENTS-CARRYING> 11,311
<INVESTMENTS-MARKET> 11,158
<LOANS> 47,801
<ALLOWANCE> 414
<TOTAL-ASSETS> 78,144
<DEPOSITS> 56,566
<SHORT-TERM> 0
<LIABILITIES-OTHER> 681
<LONG-TERM> 7,003
<COMMON> 14
0
0
<OTHER-SE> 13,818
<TOTAL-LIABILITIES-AND-EQUITY> 78,144
<INTEREST-LOAN> 3,914
<INTEREST-INVEST> 1,625
<INTEREST-OTHER> 126
<INTEREST-TOTAL> 5,665
<INTEREST-DEPOSIT> 2,418
<INTEREST-EXPENSE> 2,808
<INTEREST-INCOME-NET> 2,857
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,798
<INCOME-PRETAX> 1,216
<INCOME-PRE-EXTRAORDINARY> 1,216
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 866
<EPS-BASIC> .77
<EPS-DILUTED> .75
<YIELD-ACTUAL> 3.74
<LOANS-NON> 202
<LOANS-PAST> 66
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 384
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 414
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 414
</TABLE>
