SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-13904
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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
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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. [X]
Registrant's revenues for the fiscal year ended June 30, 2000:
$5,583,000
As of September 22, 2000, the aggregate market value of the 769,290 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $7,981,384 based on the closing sales price of
$10.375 per share of the registrant's Common Stock on September 21, 2000 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
10% of the registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of September 22,
2000: 1,030,177
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 2000 Annual
Meeting of Stockholders. (Part III)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
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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 interest-bearing deposits and a note
receivable from the ESOP. The Company's principal business is the business of
the Bank. At June 30, 2000, the Company had total assets of $73.9 million,
deposits of $53.3 million, net loans receivable of $44.9 million and
shareholders' equity of $13.0 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 (859) 234-1440.
MARKET AREA
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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,
located in Harrison County, is 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 estimate, 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, A.T.K., Bullard Manufacturing, Concept Packaging
Group, Cynthiana Publishing Company, Grede Perm Cast (a division of Grede
Foundries), Harrison Memorial Hospital, Judy Construction Co., Lucas Equine
Equipment, Macro Products Company, TI Group Automotive, TR Technologies and
SNAPCO. The Licking Valley Center of Maysville Community College is also located
in Cynthiana with an enrollment of approximately 740 students.
2
<PAGE>
According to the US Bureau of Labor Statistics, the unemployment rate
in Harrison County for June 2000 was 3.8% as compared to 4.0% for the
Commonwealth of Kentucky.
LENDING ACTIVITIES
General. First Federal's primary lending activity is the origination 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 and 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.
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, 2000, the maximum amount that the Bank could have loaned to
any one borrower without prior OTS approval was $1.9 million. At such date, the
largest aggregate amount of loans that the Bank had outstanding to any one
borrower was approximately $1.6 million.
3
<PAGE>
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, 2000, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
2000 1999
------------------- --------------------
Amount % Amount %
----- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
------------
Real estate loans:
One- to four-family residential and construction (1).... $ 25,727 56.59% $ 27,299 56.24%
Multi-family residential................................ 4,740 10.43 4,526 9.32
Agricultural............................................ 5,174 11.38 5,702 11.75
Commercial.............................................. 6,708 14.75 6,722 13.85
--------- ------ ------- ------
Total real estate loans.............................. 42,349 93.15 44,249 91.16
Commercial loans.......................................... 864 1.90 904 1.86
Agricultural operating loans.............................. 419 0.92 920 1.90
Consumer loans:
Automobiles............................................. 428 0.94 472 0.97
Mobile home............................................. 71 0.16 97 0.20
Savings account......................................... 825 1.81 1,004 2.07
Other................................................... 510 1.12 895 1.84
---------- ----------- --------- --------
Total consumer loans................................. 1,834 4.03 2,468 5.08
---------- --------- --------- --------
Total loans.......................................... 45,466 100.00% 48,541 100.00%
====== ======
Less:
Loans in process........................................ 18 227
Deferred loan fees...................................... 80 89
Unearned discount....................................... 5 10
Allowance for loan losses............................... 443 414
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Loans receivable, net................................ $ 44,920 $ 47,801
========== =========
<FN>
____________
(1) At June 30, 2000, constructions loans amounted to $1.0 million and
represented 2.3% of total gross loans.
</FN>
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at June 30, 2000 regarding the dollar amount of loans maturing in
the Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
<TABLE>
<CAPTION>
Due Within Due 1-5
1 Year Years Due After 5
After After Years After
6/30/00 6/30/00 6/30/00 Total
------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage........................ $ 1,171 $ 1,426 $ 39,752 $ 42,349
Consumer.................................... 1,713 111 10 1,834
Commercial and agricultural operating....... 1,012 271 -- 1,283
---------- ---------- ---------- ----------
Total.................................. $ 3,896 $ 1,808 $ 39,762 $ 45,466
========== ========== ========== ==========
</TABLE>
4
<PAGE>
The following table sets forth at June 30, 2000, the dollar amount of
all loans due one year or more after June 30, 2000 which have (i) predetermined
interest rates and (ii) floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates
------------- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage............................... $ 27,103 $ 14,075
Consumer........................................... 121 --
Commercial and agricultural operating.............. 271 --
----------- ----------
Total......................................... $ 27,495 $ 14,075
=========== ==========
</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, 2000, $25.7 million,
or 56.6% 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, 2000, multi-family and commercial real
estate loans totaled $4.7 million and $6.7 million, respectively, and
represented 10.4% and 14.8%, 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 from the property to service the loan. The Bank requires
that the payments under such leases be assigned to the Bank.
5
<PAGE>
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, 2000 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. This loan had a balance of $888,000 at June 30,
2000.
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, 2000, the average size of the Bank's multi-family and commercial real
estate loans was $89,000 as compared to the average size of one-to four-family
residential real estate loans of $40,000. 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 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, 2000, the Bank's loan portfolio included no 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, 2000, the Bank's
participation interest in these construction loans was $1.0 million. 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 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,
2000, no such loans were outstanding.
6
<PAGE>
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, 2000, the Bank's
consumer loans totaled $1.8 million, or 4.0% 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, 2000, the Bank had $5.2 million in agricultural real
estate loans, or 11.4% of its gross loan portfolio, and $419,000 in agricultural
operating loans, or 0.9% 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. At June 30, 2000, the average size of an agricultural real
estate loan originated by the Bank was $37,000.
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 the Bank may 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 senior
loan officers of the Bank.
7
<PAGE>
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, 2000, the Bank's commercial loans amounted to $864,000,
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 senior
loan officers of the Bank. 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.
8
<PAGE>
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.
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.
The Bank purchases loans to supplement its lending activities during periods of
low loan demand. The Bank has purchased one- to four-family loans, multi-family
real estate loans and commercial loans from various financial institutions and
from an unaffiliated mortgage broker. These loans are primarily secured by real
estate located in central Kentucky.
With respect to purchased multi-family and commercial loans, the Bank
reviews certain financial and property information provided to the Bank prior to
approval of 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 servicer 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. The Bank requires a detailed description
of the proposed terms of the loan, copies of all applicable financial
statements, tax returns and credit reports, a current appraisal on the property
securing the proposed loan, occupancy information and copies of all underlying
leases, if applicable, and a signed application. If the proposed loan is to be a
construction loan, the Bank also requires all cost estimates and must receive
inspection certificates and lien waivers prior to making any disbursements under
the loan. The Bank also requests 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.
9
<PAGE>
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
as loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. 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
loans that are delinquent three months or more.
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's earnings.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. General allowances are included in calculating the
Bank's risk-based capital, while specific allowances are not so included.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loss reserves when necessary.
At June 30, 2000 the Bank had $201,000 and $182,000 in assets
classified as special mention and substandard, respectively, and had no assets
classified as doubtful or loss. Amounts classified are net of specific allowance
for losses. Included in the balance of substandard loans was a loan secured by
multi-family residential property, which had a balance of $363,000 and a
specific allowance for loan losses of $200,000 as of June 30, 2000. Payments on
this loan are approximately fourteen months delinquent.
10
<PAGE>
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,
-------------------------
2000 1999
------- --------
(In thousands)
<S> <C> <C>
Balance at beginning of period................................. $ 414 $ 384
Charge-offs:
Real estate loans:
One- to four-family residential............................ 10 --
Multi-family residential................................... -- --
Agricultural............................................... -- --
Commercial and other....................................... -- --
Construction............................................... -- --
Commercial loans............................................. -- --
Agricultural operating loans................................. -- --
Consumer loans:
Automobile................................................. -- --
Savings account............................................ -- --
Other consumer............................................. -- 3
------- -------
Total:................................................... 10 3
------- -------
Recoveries:
Real estate loans:
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................................................ 10 --
------- -------
Provision for losses on loans.................................. 39 30
------- -------
Balance at end of period....................................... $ 443 $ 414
======= =======
Ratio of net charge-offs to average loans
outstanding during the period................................ .02% --%
======= =======
</TABLE>
11
<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,
----------------------------------------------------------
2000 1999
--------------------------- --------------------------
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. $ 66 56.59% $ 71 56.24%
Multi-family residential......................... 241 10.43 180 9.32
Agricultural..................................... 46 11.38 4 11.75
Commercial....................................... 60 14.75 117 13.85
Commercial loans................................... 10 1.90 11 1.86
Agricultural operating loans....................... 5 0.92 11 1.90
Consumer loans:
Automobiles...................................... 5 0.94 6 0.97
Mobile homes..................................... 3 0.16 2 0.20
Savings account.................................. -- 1.81 -- 2.07
Other consumer loans............................. 7 1.12 12 1.84
------- ------ ------ ------
Total allowance for loan losses................ $ 443 100.00% $ 414 100.00%
======= ====== ====== ======
</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
<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
Standards ("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,
-------------------------
2000 1999
-------- -------
(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............................................... 363 352
Agricultural........................................................... -- --
Commercial............................................................. -- --
Commercial loans......................................................... -- --
Agricultural operating loans............................................. -- --
Consumer................................................................. -- --
----- ------
Total................................................................. 363 352
----- ------
Accruing loans which are contractually past due 90 days or more:
Real estate:
One- to four-family residential and construction....................... -- 34
Multi-family residential............................................... -- --
Agricultural........................................................... -- --
Commercial............................................................. 166 22
Commercial loans......................................................... 4 --
Agricultural operating loans............................................. -- --
Consumer................................................................. 12 10
----- ------
Total................................................................. 182 66
----- ------
Total non-performing loans (2)............................................. $ 545 $ 418
===== ======
Total non-performing loans as a percentage
of total net loans....................................................... 1.21% .87%
===== ======
Total non-performing assets as a percentage
of total assets.......................................................... .74% .53%
===== ======
<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, 2000 and 1999, non-performing loan balances are presented
gross and do not reflect specific loan loss allowances of $200,000 and
$150,000, respectively.
</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, 2000, gross interest income of $30,000 would have
been recorded on loans accounted for on a non-accrual basis if the loans had
been current throughout the respective periods. No interest income was
recognized on such loans during the year ended June 30, 2000.
13
<PAGE>
At June 30, 2000, 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, 2000, the Bank had $3.5 million in CMOs and REMICs, which
amounted to 4.7% of total assets. All of the CMOs and REMICs owned by the Bank
are insured or guaranteed either directly or indirectly through mortgage-backed
securities underlying the obligations of either FNMA or FHLMC. The CMOs and
REMICs owned by the Bank 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 could result in actual yields to the Bank that are lower than anticipated
yields. The Bank's floating rate CMOs and REMICs would be expected to generate
lower
14
<PAGE>
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, excluding CMOs and
REMICs, consists primarily of seasoned fixed-rate mortgage-backed securities. At
June 30, 2000, the Bank had $11.1 million, or 15.1% 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>
The following table sets forth the carrying value of the Company's investments
at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------
2000 1999
-------- -------
(In thousands)
<S> <C> <C>
Investment securities held to maturity:
Municipal obligations............................... $ 2,235 $ 1,531
-------- --------
Investment securities available for sale:
FHLB obligations..................................... 4,376 2,975
FHLMC notes.......................................... 929 1,914
Municipal obligations................................ 1,478 2,408
-------- --------
Total investment securities available for sale..... 6,783 7,297
-------- --------
Total investment securities...................... $ 9,018 $ 8,828
======== ========
Mortgage-backed securities held to maturity:
FHLMC participation certificates..................... $ 808 706
GNMA participation certificates...................... 784 1,063
FNMA participation certificates...................... 6,483 8,011
-------- --------
Total mortgage-backed securities held
to maturity...................................... 8,075 9,780
-------- --------
Mortgage-backed securities available for sale:
FHLMC participation certificates..................... 3,074 3,174
FNMA participation certificates...................... 3,474 3,405
-------- --------
Total mortgage-backed securities available for sale 6,548 6,579
-------- --------
Total mortgage-backed securities................... 14,623 16,359
Interest-earning deposits and certificates............. 1,223 809
-------- --------
Total investments and mortgage-backed
securities:.................................... $ 24,864 $ 25,996
======== ========
</TABLE>
16
<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, 2000.
<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>
Investment securities:
FHLB obligations.............. $ 993 5.08% $ 2,459 6.61% $ -- --% $ 924 7.00%
FHLMC Notes................... -- -- -- -- 929 6.43 -- --
State and municipal
obligations................. 160 6.09 1,201 4.70 972 4.69 1,380 5.56
Mortgage-backed
securities.................. -- -- 17 8.55 1,129 6.63 13,477 6.79
Interest-earning deposits and
certificates of deposits.... 1,223 6.30 -- -- -- -- -- --
-------- ------- ------- -------
Total..................... $ 2,376 $ 3,677 $ 3,030 $15,781
======== ======= ======= =======
<CAPTION>
Total Investment Portfolio
------------------------------------
Carrying Market Average
Value Value Yield
-------- ------ -------
<S> <C> <C> <C>
Investment securities:
FHLB obligations.............. $ 4,376 $ 4,376 6.35%
FHLMC Notes................... 929 929 6.43
State and municipal
obligations................. 3,713 3,701 5.08
Mortgage-backed
securities.................. 14,623 14,371 6.78
Interest-earning deposits and
certificates of deposits.... 1,223 1,223 6.30
------- -------
Total..................... $24,864 $24,600
======= ========
</TABLE>
17
<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 $4.0 million, or 7.5% of the Bank's total savings portfolio at June 30,
2000. 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 were to be unable to obtain funds from
alternative sources. However, First Federal has no brokered funds, nor do these
Jumbos represent brokered funds.
Savings deposits in the Bank as of June 30, 2000 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
June 30, 2000
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 $ 6,015 11.29%
0.92 None Demand Checking 200 1,399 2.63
1.46 None Checking with Interest Accounts 200 8,744 16.41
2.95 None Money Market Deposit Accounts 2,500 1,840 3.45
* 4.11 None First Money MMDA Accounts 10,000 1,223 2.30
2.25 None Christmas Clubs -- 62 0.12
Certificates of Deposit
-----------------------
* 5.00 91 days 91 day Fixed Term, Fixed Rate 1,000 448 0.84
* 5.44 6 months 6 Month Fixed Term, Fixed Rate 1,000 3,786 7.11
* 5.91 9 months 9 Month Fixed Term, Fixed Rate 1,000 3,640 6.83
* 5.44 1 year 1 Year, Fixed Term, Fixed Rate 1,000 8,677 16.28
* 6.44 15 months 15 Month Fixed Term, Fixed Rate 1,000 1,671 3.14
* 5.25 18 months 18 Month Fixed Term, Fixed Rate 1,000 3,953 7.42
* 5.26 18 months IRA 18 Month Fixed Term, Fixed Rate 500 3,587 6.73
* 5.60 24 months 24 Month Fixed Term, Fixed Rate 1,000 1,416 2.66
* 5.51 30 months 30 Month Fixed Term, Fixed Rate 1,000 280 0.52
* 5.52 36 months 36 Month Fixed Term, Fixed Rate 1,000 2,106 3.95
* 5.61 36 months IRA 36 Month Fixed Term, Fixed Rate 500 167 0.31
* 5.77 5 years 5 Year Fixed Term, Fixed Rate 1,000 3,619 6.79
* 5.92 5 years IRA 5 Year, Fixed Term, Fixed Rate 500 651 1.22
-------- ------
$ 53,284 100.00%
======== ======
<FN>
___________
* Represents weighted average interest rate.
</FN>
</TABLE>
18
<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,
------------------------------------------------------------------
2000 1999
------------------------------ ----------------------------
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........................... $ 19,466 $35,163 $19,610 $37,335
Average rate.............................. 2.07% 5.23% 2.22% 5.31%
</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,
2000.
Maturity Period Certificates
--------------- of Deposit
------------
(In thousands)
Three months or less....................................... $1,234
More than three through six months......................... 815
More than six through 12 months............................ 491
Over 12 months............................................. 1,477
------
Total.............................................. $4,017
======
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>
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 June 30,
----------------------
2000 1999
------ ------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances.................................................. $6,827 $7,003
Weighted average rate paid on:
FHLB advances.................................................. 5.90% 5.09%
</TABLE>
<TABLE>
<CAPTION>
For the Year
Ended June 30,
----------------------
2000 1999
------ ------
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding at any month end:
FHLB advances and other borrowed money........................ $ 7,632 $ 9,511
</TABLE>
<TABLE>
<CAPTION>
For the Year
Ended June 30,
----------------------
2000 1999
------ ------
(Dollars in thousands)
<S> <C> <C>
Approximate average borrowings outstanding with respect to:
FHLB advances and other borrowed money......................... $ 7,029 $ 7,401
Approximate weighted average rate paid on: (1)
FHLB advances and other borrowed money......................... 5.58% 5.27%
<FN>
____________
(1) Weighted average computed by dividing total interest paid by
average balance outstanding.
</FN>
</TABLE>
As of June 30, 2000, the Bank had $6.8 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, 2000, the Bank was authorized to invest up to $2.2 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, 2000, 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,
----------------------
2000 1999
------ ------
<S> <C> <C>
Return on assets (net earnings divided by
average total assets).................................... 1.11% 1.10%
Return on average stockholders' equity (net earnings
divided by average stockholders' equity)................. 6.27 6.28
Dividend payout ratio (dividends declared per share
divided by net earnings per share)....................... 62.50 64.94
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost).............................. 3.03 3.05
Ratio of average interest-earning assets to
average interest-bearing liabilities..................... 119.10 118.79
Ratio of noninterest expense to average total assets........ 2.29 2.28
</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, 2000, the Company had 19 full-time employees, none of whom
was represented by a collective bargaining agreement. The Company believes that
it enjoys good relations with its personnel.
EXECUTIVE OFFICERS
The following sets forth information with respect to the executive officers
of the Company who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
June 30,
Name 2000 Title
---- -------- -----
<S> <C> <C>
Kevin R. Tolle 43 Vice President, Secretary/Treasurer
Robbie G. Cox 53 Vice President
</TABLE>
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.
21
<PAGE>
ROBBIE G. COX is Vice President of the Company and 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.
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-affilate.
22
<PAGE>
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. Section 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>
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 Sec. 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>
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.
FINANCIAL MODERIZATION. On November 12, 1999, President Clinton signed
into law legislation that could have a far-reaching impact on the financial
services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations
between banking, securities and insurance firms and authorizes bank holding
companies and national banks to engage in a variety of new financial activities.
Among the new activities that will be permitted to bank holding companies and
national bank subsidiaries are securities and insurance brokerage, securities
underwriting and certain forms of insurance underwriting. Bank holding companies
will have broader insurance underwriting powers than national banks and may
engage in merchant banking activities after the adoption of implementing
regulations. Merchant banking activities may also become available to national
bank subsidiaries after five years. The Federal Reserve Board, in consultation
with the Department of Treasury, may approve additional financial activities.
The G-L-B Act, however, prohibits future affiliations between existing unitary
savings and loan holding companies, like the Corporation, and firms that are
engaged in commercial activities and prohibits the formation of new unitary
holding companies.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home Loan
Bank System. The G-L-B Act imposes new capital requirements on the Federal Home
Loan Banks and authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute $300 million to
pay interest on certain government obligations in favor of a 20% of net earnings
formula. The G-L-B Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the Federal Home Loan Bank
voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Corporation is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which the Corporation may affiliate, it may facilitate affiliations with
companies in the financial services industry.
25
<PAGE>
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. 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, 2000, First Federal had no such
investments.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments. 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, 2000, the
Bank had no high ratio land or nonresidential construction loans and had no
equity investments for which OTS regulations require deduction from total
capital.
The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by FNMA and the FHLMC are assigned a 20% risk weight.
Cash and U.S. Government securities backed by the full faith and credit of the
U.S. Government are given a 0% risk weight. As of June 30, 2000, the Bank's
risk-weighted assets were approximately $42.6 million.
26
<PAGE>
The table below presents the Bank's capital position relative to its
various regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------ ----------
(Dollars in Thousands)
<S> <C> <C>
Tangible capital............................................. $12,569 17.0%
Tangible capital requirement................................. 1,111 1.5
------- ----
Excess..................................................... $11,458 15.5%
======= ====
Core capital................................................. $12,569 17.0%
Core capital requirement..................................... 2,964 4.0
------- ----
Excess..................................................... $ 9,605 13.0%
======= ====
Total capital (i.e., core and supplementary capital)......... $12,812 30.1%
Risk-based capital requirement............................... 3,408 8.0
------- ----
Excess..................................................... $ 9,404 22.1%
======= ====
<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 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.
27
<PAGE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically 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 undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of "tangible
equity" to total assets of less than 2.0%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category (but may not
reclassify a significantly undercapitalized institution as critically
under-capitalized) if the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in an unsafe or unsound condition or
that the institution has
28
<PAGE>
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 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, 2000, approximately 75.3% 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
29
<PAGE>
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.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and earnings. Under the proposed
guidelines, a savings institution should maintain systems, commensurate with its
size and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings standards,
in the form proposed by the banking agencies, would not have a material effect
on the Bank's operations.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
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, were required to pay assessments to the FDIC at the
rate of 6.5 basis points to help
30
<PAGE>
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 were assessed for these
obligations at the rate of 1.3 basis points. Since December 31, 1999, however,
both BIF and SAIF members are being assessed at the same rate for FICO payments.
This rate is reset quarterly. For the third calendar quarter of 2000, the rate
is set at 2.06 basis points.
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 year of not less than 4% of its net withdrawable
savings deposits plus short term borrowings at the end of the preceding quarter
or 4% of the average daily balance of its net withdrawable accounts plus
short-term borrowings during the preceding calendar quarter. Monetary penalties
may be imposed for failure to meet liquidity requirements. The average daily
liquidity ratio of the Bank for the month of June 2000 was 11.3%.
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 an investment in FHLB of Cincinnati stock at June 30,
2000, of $1.3 million. The FHLB of Cincinnati is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Cincinnati. As of June 30,
2000, the Bank had $6.8 million in advances and other borrowings from the FHLB
of Cincinnati. See "Deposit Activity and Other Sources of Funds -- Borrowings."
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $44.3 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, 2000, the
Bank met its reserve requirements.
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<PAGE>
TAXATION
The Company and the Bank will file a consolidated federal income return
for the year ended June 30, 2000.
Thrift institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations. Prior to recent legislation, institutions such as First
Federal which met certain definitional tests and other conditions prescribed by
the Code benefitted from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
of the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience, however, the amount of the bad debt reserve deduction with respect
to qualifying real property loans could be based upon actual loss experience
(the "experience method") or a percentage of taxable income determined without
regard to such deduction (the "percentage of taxable income method").
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 had 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, are being 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
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<PAGE>
certain acquired intangible assets such as goodwill and customer-based
intangibles were allowed a 15-year amortization period. Beginning with tax years
ending on or after January 1, 1993, RRA also provides that securities dealers
must use mark-to-market accounting and generally reflect changes in value during
the year or upon sale as taxable gains or losses. The IRS has indicated that
financial institutions which originate and sell loans will be subject to the
rule.
STATE INCOME TAXATION
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. 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,
2000, 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, 2000.
<TABLE>
<CAPTION>
Book Value
Year Owned or at June 30, Approximate
Opened Leased 2000 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 $ 856,000 2,500
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
-------------------------
The Bank is party to a lawsuit captioned Family Bank, FSB and First
Federal Savings Bank v. Oscar S. Blankenship a/k/a O. Sam Blankenship and Jenny
Blankenship filed in the Johnson Circuit Court, Division No. II, Commonwealth of
Kentucky. The lawsuit is a collection action seeking recovery of three loans of
which the Bank has an interest in two. The suit also asks for the court to sell
the property securing the loans with the proceeds to be used to repay all
amounts owed. The defendants filed an answer on February 3, 2000 making various
counterclaims alleging breach of contract, breach of fiduciary duty and
unspecified violations of federal banking laws. The defendants are seeking money
damages (including punitive damages) of an unspecified amount. Certain of the
counterclaims relate only to the one loan in which the Bank does not have any
interest. While the Bank does not believe there is any merit in the
counterclaims, it is having the answer evaluated by counsel.
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 2000.
33
<PAGE>
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. As of September 21, 2000, there were
1,030,177 shares of the Common Stock outstanding. The number of registered
holders as of that date was 292.
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, 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
September 30, 1999 ............... $12.0000 $11.1250 $0.125
December 31, 1999 ................ $11.5000 $10.0000 $0.125
March 31, 2000 ................... $10.3750 $ 9.7500 $0.125
June 30, 2000 .................... $10.1875 $ 9.9375 $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 net income for the current calendar year plus the two preceding calendar
years, less capital distributions paid over the comparable time 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.
34
<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 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 and the effect of certain recent accounting
pronouncements.
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.
35
<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.
The following tables set forth the interest rate sensitivity of the
Bank's net portfolio value as of June 30, 2000 and June 30, 1999, 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, 2000
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 ......... $ 9,050 $(4,061) (31)% 13.12% (460) bp
+200 bp ......... 10,396 (2,715) (21) 14.72 (300) bp
+100 bp ......... 11,762 (1,349) (10) 16.27 (145) bp
0 bp ......... 13,111 17.72
-100 bp ......... 14,313 1,202 9 18.94 122 bp
-200 bp ......... 15,184 2,073 16 19.77 205 bp
-300 bp ......... 16,056 2,945 22 20.57 285 bp
<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% (451) bp
+200 bp ......... 9,998 (2,699) (21) 13.30 (285) bp
+100 bp ......... 11,417 (1,280) (10) 14.84 (131) 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
</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.
36
<PAGE>
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.
37
<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>
Year Ended June 30,
-----------------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
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)............... $ 46,913 $ 3,728 7.95% $ 48,157 $ 3,914 8.13%
Mortgage-backed securities.............. 15,167 990 6.53 16,883 1,096 6.49
Investment securities................... 9,213 521 5.66 9,138 529 5.79
Other interest-earning assets........... 2,145 125 5.83 2,261 126 5.57
--------- -------- --------- ---------
Total interest-earning assets......... 73,438 5,364 7.30 76,439 5,665 7.41
Non-interest-earning assets............... 2,468 2,339
--------- ---------
Total assets.......................... $ 75,906 $ 78,778
========= =========
Interest-bearing liabilities:
Deposits................................ $ 54,629 2,241 4.10 $ 56,945 2,418 4.25
Borrowings.............................. 7,029 392 5.58 7,401 390 5.27
--------- -------- --------- ---------
Total interest-bearing liabilities... 61,658 2,633 4.27 64,346 2,808 4.36
-------- -------- --------- --------
Non-interest-bearing liabilities.......... 853 642
--------- ---------
Total liabilities.................... 62,511 64,988
Shareholders' equity...................... 13,395 13,790
--------- ---------
Total liabilities and
shareholders' equity............... $ 75,906 $ 78,778
========= =========
Net interest income....................... $ 2,731 $ 2,857
======== =========
Interest rate spread (2).................. 3.03% 3.05%
======== ========
Net yield on interest-earning assets (3).. 3.72% 3.74%
======== ========
Ratio of average interest-earning assets to
average interest-bearing liabilities.... 119.11% 118.79%
====== ======
<CAPTION>
Year Ended June 30,
-----------------------------------
1998
-----------------------------------
Average Yield/
Balance Interest Cost
------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)............... $ 49,732 $ 4,072 8.19%
Mortgage-backed securities.............. 19,509 1,312 6.73
Investment securities................... 11,937 746 6.25
Other interest-earning assets........... 1,930 99 5.13
-------- --------
Total interest-earning assets......... 83,108 6,229 7.50
Non-interest-earning assets............... 2,482
--------
Total assets.......................... $ 85,590
========
Interest-bearing liabilities:
Deposits................................ $ 55,480 2,467 4.45
Borrowings.............................. 14,860 849 5.71
-------- --------
Total interest-bearing liabilities... 70,340 3,316 4.71
-------- ------
Non-interest-bearing liabilities.......... 808
--------
Total liabilities.................... 71,148
Shareholders' equity...................... 14,442
--------
Total liabilities and
shareholders' equity............... $ 85,590
========
Net interest income....................... $ 2,913
=========
Interest rate spread (2).................. 2.79%
=======
Net yield on interest-earning assets (3).. 3.51%
=======
Ratio of average interest-earning assets to
average interest-bearing liabilities.... 118.15%
======
<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>
38
<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,
-----------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-------------------------------- -----------------------------
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................................ $ (86) $ (100) $ (186) $ (30) $ (128) $ (158)
Mortgage-backed securities (1)....... 6 (112) (106) (46) (170) (216)
Investment securities (1)............ (12) 4 (8) (55) (162) (217)
Other interest-earning assets........ 8 (9) (1) 9 18 27
------ ------ ------- ------ ------ ------
Total interest-earning assets..... (84) (217) (301) (122) (442) (564)
------ ------ ------- ------ ------ ------
Interest expense:
Deposits............................. (81) (96) (177) (111) 62 (49)
Borrowings........................... 15 (13) 2 (66) (393) (459)
------ ------ ------- ------ ------ ------
Total interest-bearing
liabilities..................... (66) (109) (175) (177) (331) (508)
------ ------ ------- ------ ------ ------
Decrease in net interest income........ $ (126) $ (56)
======= ======
<FN>
_________
(1) Includes securities designated as available for sale.
</FN>
</TABLE>
COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 2000 AND 1999
At June 30, 2000, the Company's consolidated total assets amounted to
$73.9 million, a decrease of $4.2 million, or 5.5%, from the total at June 30,
1999. The decrease in assets resulted primarily from a decrease of $3.3 million
in deposits, a $176,000 decrease in advances from the Federal Home Loan Bank and
a decline in shareholders' equity of $849,000.
Liquid assets (i.e. cash, interest-bearing deposits and investment
securities) increased by $347,000, or 3.4%, to a total of $10.6 million at June
30, 2000. Investment securities totaling $1.5 million were purchased during the
period and were offset by maturities of $1.2 million. Mortgage-backed securities
totaled $14.6 million at June 30, 2000, a decrease of $1.7 million, or 10.6%,
from June 30, 1999 levels. The decrease in mortgage-backed securities resulted
primarily from principal repayments of $2.6 million offset by $1.0 million of
purchases during the period. Proceeds from maturities of investment and
mortgage-backed securities were primarily used to fund deposit withdrawals.
Regulatory liquidity amounted to 11.51% at June 30, 2000.
Net loans receivable decreased by $2.9 million, or 6.0%, during the
period, to a total of $44.9 million at June 30, 2000. Loan disbursements of $5.6
million and loan purchases of $2.9 million were exceeded by principal repayments
of $11.3 million. The allowance for loan losses totaled $443,000 at June 30,
2000, as compared to $414,000 at June 30, 1999. Non-performing loans totaled
$345,000 at June 30, 2000, as compared to $268,000 at June 30, 1999. The
allowance for loan losses represented 128% of non-performing loans as of June
30, 2000 and 154% at June 30, 1999. Although management believes that its
allowance for loan losses at June 30, 2000, 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.
39
<PAGE>
Deposits totaled $53.3 million at June 30, 2000, a decrease of $3.3
million, or 5.9%, from June 30, 1999 levels. During the current period,
management had not attempted to match premium deposit rates offered by certain
competitors and had instead continued its conservative pricing strategy with
respect to deposit accounts during the current interest rate environment.
Advances from the FHLB totaled $6.8 million at June 30, 2000, a decrease of
$176,000, or 2.5%, from the total at June 30, 1999.
The Company's shareholders' equity amounted to $13.0 million at June
30, 2000, a decrease of $849,000, or 6.1%, from June 30, 1999 levels. The
decrease resulted from purchases of treasury stock totaling $1.3 million,
dividends paid on common stock totaling $533,000 and a $154,000 increase in
unrealized losses on securities designated as available for sale, which were
partially offset by fiscal 2000 net earnings of $840,000, the issuance of shares
under the stock option plan of $73,000 and the amortization of stock benefit
plans of $237,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE
30, 2000 AND 1999
GENERAL. Net earnings amounted to $840,000 for the fiscal year ended
June 30, 2000, a decrease of $26,000, or 3.0%, compared to the $866,000 of net
earnings reported in fiscal 1999. The decrease in net earnings in the current
period was due to a $126,000 decrease in net interest income and a $9,000
increase in the provision for losses on loans, which were partially offset by a
$32,000 increase in other income, a $61,000 decrease in general, administrative
and other expense and a $16,000 decrease in the provision for federal income
taxes.
NET INTEREST INCOME. Interest income totaled $5.4 million for the
fiscal year ended June 30, 2000, a decrease of $301,000, or 5.3%, from the $5.7
million of interest income reported in fiscal 1999. The decrease resulted from a
$3.0 million, or 3.9%, decrease in the weighted-average balance of interest
earning assets outstanding and an 11 basis point decrease in the average yield,
from 7.41% during fiscal 1999 to 7.30% during fiscal 2000. Interest income on
loans decreased by $186,000, or 4.8%, due to a $1.2 million, or 2.6%, decrease
in the weighted-average balances of loans outstanding, coupled with an 18 basis
point decrease in yield, from 8.13% during fiscal 1999 to 7.95% during fiscal
2000. Interest income on mortgage-backed securities decreased by $106,000, or
9.7%, due to a $1.7 million, or 10.2%, decrease in the weighted-average balance
outstanding, offset by a four basis point increase in average yield, from 6.49%
during fiscal 1999 to 6.53% during fiscal 2000. Interest income on investment
securities and interest-bearing deposits decreased by $9,000, or 1.4%, due to a
$41,000, or 0.4%, decrease in the weighted-average balance outstanding and due
to a six basis point decrease in average yield, from 5.75% during fiscal 1999 to
5.69% during fiscal 2000.
Interest expense totaled $2.6 million for the fiscal year ended June
30, 2000, a decrease of $175,000, or 6.2%, from the $2.8 million of total
interest expense reported in fiscal 1999. Interest expense on deposits decreased
by $177,000, or 7.3%, due to a $2.3 million, or 4.1%, decrease in the
weighted-average balance of deposits outstanding and due to a 15 basis point
decrease in the average cost of deposits, from 4.25% during fiscal 1999 to 4.10%
during fiscal 2000. Interest expense on borrowings increased by $2,000, or 0.5%,
due to a 31 basis point increase in the average cost of advances from the
Federal Home Loan Bank from 5.27% during fiscal 1999 to 5.58% during fiscal
2000, offset by a $372,000, or 5.0%, decrease in the weighted-average balance of
such advances outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $126,000, or 4.4%, to a total of $2.7
million for the fiscal year ended June 30, 2000, as compared to fiscal 1999. The
interest rate spread amounted to approximately 3.03% and 3.05% during the
respective fiscal 2000 and 1999 years, while the net interest margin amounted to
approximately 3.72% in fiscal 2000 and 3.74% in fiscal 1999.
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 $39,000 and a $30,000 provision for losses on loans during
the fiscal years ended June 30, 2000 and 1999, respectively. The increase in the
provision in the current year is reflective of management's concern about a
moderate increase in the level of the Bank's non-performing loans. There can be
no assurance that the loan loss allowance of the Bank will be adequate to cover
losses on non-performing assets in the future.
40
<PAGE>
OTHER INCOME. Other income increased by $32,000, or 17.1%, for the
fiscal year ended June 30, 2000, compared to fiscal 1999, due to a $35,000, or
26.3%, increase in service charges on deposits and a $2,000, or 4.1% increase in
other operating income, which were partially offset by the lack of any gain or
loss on investment securities transactions in fiscal 2000 compared to a gain of
$5,000 in such transactions in fiscal 1999. The increase in service charges on
deposits was due to an increase, during the early part of fiscal 2000, in the
monthly service charge fee schedule on checking accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $1.7 million for the fiscal year ended June 30, 2000, a
decrease of $61,000, or 3.4%, from fiscal 1999. The decrease was due to a
$19,000, or 1.9%, decrease in employee compensation and benefits, a $19,000, or
10.1%, decrease in occupancy and equipment expense, a $12,000, or 35.3%,
decrease in federal deposit insurance premiums and a $20,000, or 4.8%, decrease
in other operating expense, which were partially offset by a $9,000, or 6.8%,
increase in data processing.
The decrease in employee compensation and benefits was primarily due to
a decrease in expenses of the employee stock benefit plan related to the reduced
market value of the Company's stock and due to the director retirement plan
becoming fully funded prior to the beginning of fiscal 2000. The decrease in
other operating expense is primarily due to the reduction of outsourced internal
audit services and the elimination of asset/liability consulting services.
Internal audit and asset/liability management functions are now being performed
by the Bank's staff. The increase in data processing was primarily due to
increased charges for on-line services and ATM processing related to preparing
computer systems for the change to calendar year 2000.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$334,000 for the fiscal year ended June 30, 2000, a decrease of $16,000, or
4.6%, compared to fiscal 1999. This decrease resulted primarily from the
decrease in net earnings before taxes of $42,000, or 3.5%. The effective tax
rates were 28.4% and 28.8% for the fiscal years ended June 30, 2000 and 1999,
respectively.
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 fiscal 1999 net earnings 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 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
41
<PAGE>
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
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.
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.
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.
First Federal's capital ratios are substantially in excess of current
regulatory capital requirements. At June 30, 2000, the Bank's tangible and core
capital amounted to 17.0% of adjusted total assets, or 15.5% and 13.0%,
respectively, in excess of the Bank's current 1.5% tangible and 4.0% core
capital requirements. Additionally, the Bank's risk-based capital ratio was
30.1% at June 30, 2000, or 22.1% 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 2000 was 11.3%.
Management seeks to maintain a liquidity ratio at or near the regulatory minimum
as a means of improving the return on the investment of the Bank's assets.
42
<PAGE>
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, 2000 the Bank's regulatory liquidity totaled
approximately $6.0 million.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Derivatives and Hedging Activities. In June 1998, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financing Accounting
Standards ("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. Management adopted SFAS No. 133, effective
July 1, 2000, as required, without a material impact on the Company's financial
statements.
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.....................44
Consolidated Statements of Financial Condition.........................45
Consolidated Statements of Earnings....................................46
Consolidated Statements of Comprehensive Income........................47
Consolidated Statements of Shareholders' Equity........................48
Consolidated Statements of Cash Flows..................................49
Notes to Consolidated Financial Statements.............................51
43
<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, 2000 and 1999, and the related
consolidated statements of earnings, comprehensive income, shareholders' equity
and cash flows for the years ended June 30, 2000, 1999 and 1998. 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for the years ended June 30, 2000, 1999 and 1998,
in conformity with generally accepted accounting principles.
/S/ Grant Thornton LLP
Cincinnati, Ohio
August 28, 2000
44
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 378 $ 635
Interest-bearing deposits in other financial institutions 1,223 809
------- -------
Cash and cash equivalents 1,601 1,444
Investment securities available for sale - at market 6,783 7,297
Investment securities held to maturity - at amortized cost, approximate
market value of $2,223 and $1,545 as of June 30, 2000 and 1999 2,235 1,531
Mortgage-backed securities available for sale - at market 6,548 6,579
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $7,823 and $9,613 as of June 30, 2000 and 1999 8,075 9,780
Loans receivable - net 44,920 47,801
Office premises and equipment - at depreciated cost 1,203 1,271
Federal Home Loan Bank stock - at cost 1,301 1,212
Accrued interest receivable 424 409
Prepaid expenses and other assets 520 479
Prepaid federal income taxes 86 181
Deferred federal income taxes 165 160
------- -------
Total assets $73,861 $78,144
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $53,284 $56,628
Advances from the Federal Home Loan Bank 6,827 7,003
Accrued interest payable 147 91
Other liabilities 620 590
------- -------
Total liabilities 60,878 64,312
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 9,320 9,300
Retained earnings - restricted 8,754 8,447
Less shares acquired by stock benefit plans (798) (1,024)
Less 333,933 and 214,658 shares of treasury stock - at cost (4,039) (2,791)
Accumulated comprehensive loss, unrealized losses on securities
designated as available for sale, net of related tax effects (268) (114)
------- --------
Total shareholders' equity 12,983 13,832
------ ------
Total liabilities and shareholders' equity $73,861 $78,144
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
45
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest income
Loans $3,728 $3,914 $4,072
Mortgage-backed securities 990 1,096 1,312
Investment securities 521 529 746
Interest-bearing deposits and other 125 126 99
------ ------ -------
Total interest income 5,364 5,665 6,229
Interest expense
Deposits 2,241 2,418 2,467
Borrowings 392 390 849
------ ------ ------
Total interest expense 2,633 2,808 3,316
----- ----- -----
Net interest income 2,731 2,857 2,913
Provision for losses on loans 39 30 30
------ ------ ------
Net interest income after provision
for losses on loans 2,692 2,827 2,883
Other income
Gain on investment securities transactions - 5 16
Service charges on deposit accounts 168 133 130
Other operating 51 49 48
------ ------ ------
Total other income 219 187 194
General, administrative and other expense
Employee compensation and benefits 1,010 1,029 1,059
Occupancy and equipment 169 188 150
Federal deposit insurance premiums 22 34 34
Data processing 142 133 126
Other operating 394 414 405
------ ------ ------
Total general, administrative and other expense 1,737 1,798 1,774
----- ----- -----
Earnings before income taxes 1,174 1,216 1,303
Federal income taxes
Current 260 361 385
Deferred 74 (11) 1
------- ------- --------
Total federal income taxes 334 350 386
------ ------ ------
NET EARNINGS $ 840 $ 866 $ 917
====== ====== ======
EARNINGS PER SHARE
Basic $.80 $.77 $.77
=== === ===
Diluted $.79 $.75 $.75
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net earnings $ 840 $ 866 $ 917
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax of $(79), $(104) and $55
in 2000, 1999 and 1998, respectively (154) (202) 107
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 $ 686 $ 661 $1,013
===== ===== =====
Accumulated comprehensive income (loss) $ (268) $ (114) $ 91
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
47
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES
ADDITIONAL ACQUIRED
COMMON PAID-IN RETAINED BY STOCK
STOCK CAPITAL EARNINGS BENEFIT PLANS
<S> <C> <C> <C> <C>
Balance at July 1, 1997 $ 14 $9,220 $7,825 $(1,509)
Purchase of treasury stock - - - -
Amortization expense of stock benefit plans - 81 - 260
Net earnings for the year ended June 30, 1998 - - 917 -
Cash dividends of $.50 per share - - (598) -
Issuance of shares under stock option plan - (10) - -
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - -
----- ----- ----- -----
Balance at June 30, 1998 14 9,291 8,144 (1,249)
Purchase of treasury stock - - - -
Amortization expense of stock benefit plans - 34 - 225
Net earnings for the year ended June 30, 1999 - - 866 -
Cash dividends of $.50 per share - - (563) -
Issuance of shares under stock option plan - (25) - -
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - -
----- ----- ----- -----
Balance at June 30, 1999 14 9,300 8,447 (1,024)
Purchase of treasury stock - - - -
Amortization expense of stock benefit plans - 11 - 226
Net earnings for the year ended June 30, 2000 - - 840 -
Cash dividends of $.50 per share - - (533) -
Issuance of shares under stock option plan - 9 - -
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - -
----- ----- ----- -----
Balance at June 30, 2000 $ 14 $9,320 $8,754 $ (798)
===== ===== ===== =====
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
DESIGNATED
TREASURY AS AVAILABLE
STOCK FOR SALE TOTAL
<S> <C> <C> <C>
Balance at July 1, 1997 $ (818) $ (5) $14,727
Purchase of treasury stock (1,124) - (1,124)
Amortization expense of stock benefit plans - - 341
Net earnings for the year ended June 30, 1998 - - 917
Cash dividends of $.50 per share - - (598)
Issuance of shares under stock option plan 59 - 49
Unrealized gains on securities designated as
available for sale, net of related tax effects - 96 96
----- ------- --------
Balance at June 30, 1998 (1,883) 91 14,408
Purchase of treasury stock (1,050) - (1,050)
Amortization expense of stock benefit plans - - 259
Net earnings for the year ended June 30, 1999 - - 866
Cash dividends of $.50 per share - - (563)
Issuance of shares under stock option plan 142 - 117
Unrealized losses on securities designated as
available for sale, net of related tax effects - (205) (205)
----- ------- --------
Balance at June 30, 1999 (2,791) (114) 13,832
Purchase of treasury stock (1,312) - (1,312)
Amortization expense of stock benefit plans - - 237
Net earnings for the year ended June 30, 2000 - - 840
Cash dividends of $.50 per share - - (533)
Issuance of shares under stock option plan 64 - 73
Unrealized losses on securities designated as
available for sale, net of related tax effects - (154) (154)
----- ------ -------
Balance at June 30, 2000 $(4,039) $ (268) $12,983
====== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
48
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 840 $ 866 $ 917
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 (1) (11) (14)
Amortization of deferred loan origination fees (14) (21) (36)
Depreciation and amortization 83 100 67
Provision for losses on loans 39 30 30
Amortization of expense related to stock benefit plans 237 259 341
Gain on investment securities transactions - (5) (16)
Federal Home Loan Bank stock dividends (89) (82) (78)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (15) 83 82
Prepaid expenses and other assets (41) (19) (45)
Accrued interest payable 56 (26) (31)
Other liabilities 30 47 (25)
Federal income taxes
Current 95 (37) (112)
Deferred 74 (11) 1
-------- -------- --------
Net cash provided by operating activities 1,294 1,173 1,081
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 1,175 7,173 7,811
Purchase of investment securities designated as available for sale (1,485) (6,369) (3,580)
Purchase of mortgage-backed securities designated as available for sale (978) (3,975) -
Principal repayments on mortgage-backed securities 2,602 5,352 3,387
Purchase of loans (2,908) (2,601) (783)
Loan principal repayments 11,329 15,387 12,756
Loan disbursements (5,565) (11,795) (11,848)
Purchase of office premises and equipment (15) (15) (26)
-------- -------- --------
Net cash provided by investing activities 4,155 3,157 7,717
-------- -------- --------
Net cash provided by operating and investing
activities (subtotal carried forward) 5,449 4,330 8,798
-------- -------- --------
</TABLE>
49
<PAGE>
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended June 30,
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net cash provided by operating and investing
activities (subtotal brought forward) $ 5,449 $ 4,330 $ 8,798
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (3,344) 62 1,123
Proceeds from Federal Home Loan Bank advances 4,536 6,900 28,700
Repayment of Federal Home Loan Bank advances (4,712) (10,309) (36,258)
Proceeds from note payable 550 - -
Repayment of note payable (550) - -
Purchase of treasury stock (1,312) (1,050) (1,124)
Proceeds from issuance of shares under stock option plan 73 117 49
Dividends on common stock (533) (563) (598)
------- ------- -------
Net cash used in financing activities (5,292) (4,843) (8,108)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 157 (513) 690
Cash and cash equivalents at beginning of year 1,444 1,957 1,267
------- ------- -------
Cash and cash equivalents at end of year $ 1,601 $ 1,444 $ 1,957
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 166 $ 419 $ 466
======= ======= =======
Interest on deposits and borrowings $ 2,577 $ 2,834 $ 3,347
======= ======= =======
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (154) $ (205) $ 96
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
50
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
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, 2000 and
1999, the Corporation's shareholders' equity reflected a net unrealized loss
on securities designated as available for sale totaling $268,000 and
$114,000, respectively. Realized gains and losses on sales of securities are
recognized using the specific identification method.
51
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable
----------------
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Interest on loans that are contractually past due is charged off, or
an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status. If
the ultimate collectibility of the loan is in doubt, in whole or in part,
all payments received on nonaccrual loans are applied to reduce principal
until such doubt is eliminated.
4. Loan Origination Fees
---------------------
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct 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 Loan Losses
-------------------------
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).
52
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (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.
The Savings Bank had one loan totaling $363,000 and $352,000 at June 30,
2000 and 1999, respectively, that met the definition for impairment under
SFAS No. 114. The allowance for losses specifically related to this account
amounted to $200,000 and $150,000 at June 30, 2000 and 1999, respectively.
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.
53
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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.
54
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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
$125,000, $147,000 and $158,000 for the fiscal years ended June 30, 2000,
1999 and 1998, 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. The MRP provides that common stock awarded
under the MRP vests ratably over a five year period. A provision of
$133,000, $125,000 and $186,000 related to the MRP was charged to expense
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
10. Earnings Per Share
------------------
Basic earnings per share for the years ended June 30, 2000, 1999 and 1998,
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 65,935, 80,153 and 92,574 unallocated ESOP shares), totaled
1,055,126, 1,121,745 and 1,188,719 for the years ended June 30, 2000, 1999
and 1998, 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
1,066,541, 1,159,390 and 1,230,251 for the fiscal years ended June 30, 2000,
1999 and 1998, respectively. Incremental shares related to the assumed
exercise of stock options included in the computation of diluted earnings
per share totaled 11,415, 37,645 and 41,532 for the fiscal years ended June
30, 2000, 1999 and 1998, respectively.
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, 2000
and 1999 are limited to a $15,000 investment in such stock. As a result, the
subsidiary has not been consolidated based on materiality.
55
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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,
2000 and 1999:
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.
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.
56
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
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, 2000 and 1999 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>
2000 1999
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 1,601 $ 1,601 $ 1,444 $ 1,444
Investment securities 9,018 9,006 8,828 8,842
Mortgage-backed securities 14,623 14,371 16,359 16,192
Loans receivable 44,920 43,813 47,801 48,045
Federal Home Loan Bank stock 1,301 1,301 1,212 1,212
------- ------- ------- -------
Total financial assets $71,463 $70,092 $75,664 $75,735
====== ====== ====== ======
Financial liabilities
Deposits $53,284 $53,263 $56,628 $56,851
Advances from the Federal Home Loan Bank 6,827 6,713 7,003 6,896
------- ------- ------- -------
Total financial liabilities $60,111 $59,976 $63,631 $63,747
====== ====== ====== ======
</TABLE>
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.
57
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 2000
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>
2000 1999
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Municipal obligations $2,235 $2,223 $1,531 $1,545
===== ===== ===== =====
</TABLE>
At June 30, 2000, the carrying value of the Corporation's investment
securities exceeded the estimated fair value of such securities by $12,000,
consisting solely of gross unrealized losses. At June 30, 1999, the
estimated fair value of the Corporation's investment securities exceeded the
carrying value of such securities by $14,000, consisting solely of gross
unrealized gains.
The amortized cost and estimated fair value of municipal obligations
designated as held to maturity at June 30, by contractual term to maturity,
are shown below:
<TABLE>
<CAPTION>
2000 1999
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in three years or less $ 195 $ 199 $ 285 $ 293
Due after three years through
five years 619 610 394 398
Due after five years 1,421 1,414 852 854
----- ----- ----- -----
$2,235 $2,223 $1,531 $1,545
===== ===== ===== =====
</TABLE>
58
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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, 2000 and 1999, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
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 $2,983 $ 3 $ (34) $2,952
Due after three years through five years 500 - (1) 499
Due after five years 2,000 - (146) 1,854
Municipal obligations:
Due in three years or less 120 - (2) 118
Due after three years through five years 640 - (20) 620
Due after five years 809 - (69) 740
------ ------ ----- ------
$7,052 $ 3 $(272) $6,783
===== ===== ==== =====
<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
===== ===== ==== =====
</TABLE>
59
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at June 30, 2000 and
1999 (including those designated as available for sale) are summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
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 $ 808 $ - $ (14) $ 794
Government National Mortgage
Association participation certificates 784 9 (7) 786
Federal National Mortgage Association
participation certificates 6,483 - (240) 6,243
------- -------- ------ -------
Total mortgage-backed securities held to maturity 8,075 9 (261) 7,823
------- ------- ------ -------
AVAILABLE FOR SALE:
Federal Home Loan Mortgage
Corporation participation certificates 3,065 9 - 3,074
Federal National Mortgage Association
participation certificates 3,620 3 (149) 3,474
------- ------- ------ -------
Total mortgage-backed securities available for sale 6,685 12 (149) 6,548
------- ------ ------ -------
Total mortgage-backed securities $14,760 $ 21 $ (410) $14,371
====== ====== ====== ======
<CAPTION>
JUNE 30, 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>
60
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
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,
2000 1999
(In thousands)
<S> <C> <C>
Due within three years $ 3 $ 51
Due in three to five years 15 3
Due in five to ten years 1,133 1,125
Due in ten to twenty years 8,291 9,929
Due after twenty years 5,318 5,286
------- -------
$14,760 $16,394
====== ======
</TABLE>
At June 30, 2000 and 1999, investment securities totaling $3.4 million and
$2.7 million, respectively, were pledged to secure public deposits.
61
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $24,694 $26,279
Multi-family 4,740 4,526
Construction 1,033 1,020
Nonresidential real estate and land 11,882 12,424
Consumer and other 3,117 4,292
------- -------
45,466 48,541
Less:
Undisbursed portion of loans in process 18 227
Deferred loan origination fees 80 89
Unearned discount 5 10
Allowance for loan losses 443 414
-------- --------
$44,920 $47,801
====== ======
</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 $30.4 million, or 68%, of the total loan portfolio at June 30,
2000, and $31.6 million, or 66%, of the total loan portfolio at June 30,
1999. 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 executive officers totaled approximately
$202,000 and $170,000 at June 30, 2000 and 1999, respectively.
62
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $414 $384 $372
Provision for losses on loans 39 30 30
Charge-offs, net of recoveries (10) - (18)
----- ------- ----
Balance at end of year $443 $414 $384
=== === ===
</TABLE>
As of June 30, 2000, $243,000 of the Savings Bank's allowance for loan
losses was general in nature, and was includible as a component of
regulatory risk-based capital, subject to certain percentage limitations.
The remaining allowance for loan losses of $200,000 relates specifically to
a non-accruing multi-family residential real estate loan.
Nonperforming and nonaccrual loans totaled approximately $345,000, $268,000
and $141,000 at June 30, 2000, 1999 and 1998, respectively.
During the years ended June 30, 2000, 1999 and 1998, interest income of
approximately $30,000, $6,000 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>
2000 1999
(In thousands)
<S> <C> <C>
Land $ 448 $ 448
Office buildings and improvements 949 982
Furniture, fixtures and equipment 339 403
------ ------
1,736 1,833
Less accumulated depreciation and
amortization 533 562
------ ------
$1,203 $1,271
===== =====
</TABLE>
63
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 2000 1999
(In thousands)
<S> <C> <C>
NOW accounts
2000 - 1.39% $ 10,143
1999 - 1.40% $ 8,909
Passbook
2000 - 2.25% 6,077
1999 - 2.25% 6,293
Money market deposit accounts
2000 - 3.35% 3,063
1999 - 3.35% 4,580
------ ------
Total demand, transaction and
passbook deposits 19,283 19,782
Certificates of deposit
Original maturities of:
Less than 12 months
2000 - 5.63% 7,874
1999 - 4.43% 6,134
12 months to 24 months
2000 - 5.51% 15,717
1999 - 5.09% 19,528
30 months to 36 months
2000 - 5.52% 2,385
1999 - 5.53% 2,867
More than 36 months
2000 - 5.77% 3,620
1999 - 5.81% 4,002
Individual retirement accounts
2000 - 5.37% 4,405
1999 - 5.26% 4,315
------ ------
Total certificates of deposit 34,001 36,846
------ ------
Total deposit accounts $53,284 $56,628
====== ======
</TABLE>
At June 30, 2000 and 1999, the Savings Bank had certificate of deposit accounts
with balances in excess of $100,000 totaling $1.9 million and $2.4 million,
respectively.
64
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the year ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Passbook $ 136 $ 148 $ 180
NOW and money market deposit
accounts 266 287 302
Certificates of deposit 1,839 1,983 1,985
----- ----- -----
$2,241 $2,418 $2,467
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Less than one year $23,785 $27,864
One to three years 8,778 6,142
Over three years 1,438 2,840
------- -------
$34,001 $36,846
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 2000 by
pledges of certain residential mortgage loans totaling $6.6 million, certain
securities totaling $4.0 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, 2000 1999
(Dollars in thousands)
<S> <C> <C> <C>
6.02% 2000 $ - $ 500
5.14% - 6.70% 2006 3,100 3,100
5.15% - 5.64% 2009 3,000 3,000
4.00% 2025 297 304
4.00% 2026 97 99
3.00% 2030 333 -
----- ------
$6,827 $7,003
===== =====
Weighted-average interest rate 5.90% 5.09%
==== ====
</TABLE>
65
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $399 $413 $443
Decrease in taxes resulting from:
Municipal interest income (65) (63) (57)
---- ---- ----
Federal income tax provision per consolidated
statements of earnings $334 $350 $386
=== === ===
</TABLE>
The composition of the Corporation's net deferred tax asset at June 30 is as
follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary differences at estimated corporate
tax rate:
Deferred tax assets:
Allowance for loan losses $ 82 $145
Deferred compensation 99 95
Retirement plans 97 86
Unrealized losses on securities designated as
available for sale 138 59
---- ----
Total deferred tax assets 416 385
Deferred tax liabilities:
Percentage of earnings bad debt deduction (8) (12)
Book/tax depreciation (30) (49)
Federal Home Loan Bank stock dividends (128) (97)
Accrual vs. cash basis of accounting (25) (49)
Deferred loan origination costs (60) (18)
---- ----
Total deferred tax liabilities (251) (225)
--- ---
Net deferred tax asset $165 $160
=== ===
</TABLE>
66
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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,
2000 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, 2000. 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
began, in fiscal 1998, to amortize the recapture of the bad debt reserve
into taxable income over a six year period.
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, 2000, the Savings Bank had outstanding commitments of
approximately $146,000 to originate loans. In the opinion of management all
loan commitments equaled or exceeded prevailing market interest rates as of
June 30, 2000, and will be funded from normal cash flow from operations.
67
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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 4.0% of adjusted total assets, except for those
associations with the highest examination rating and acceptable levels of
risk. The risk-based capital requirement provides for the maintenance of
core capital plus general loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighted assets, the Savings Bank multiplies the
value of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one- to four-family residential loans carry a
risk-weighted factor of 50%.
During fiscal 2000, the Savings Bank was notified from its regulator that it
was categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well-capitalized" the
Savings Bank must maintain minimum capital ratios as set forth in the
following tables. As of June 30, 2000 and 1999, management believes that the
Savings Bank met all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
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 $12,569 17.0% >$1,111 >1.5% >$3,705 > 5.0%
- - - -
Core capital $12,569 17.0% >$2,964 >4.0% >$4,445 > 6.0%
- - - -
Risk-based capital $12,812 30.1% >$3,408 >8.0% >$4,261 > 10.0%
- - - -
</TABLE>
68
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE J - REGULATORY CAPITAL (continued)
<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% >$3,126 >4.0% >$4,689 > 6.0%
- - - -
Risk-based capital $12,229 27.1% >$3,607 >8.0% >$4,509 >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 grant.
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.
69
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
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, 2000, 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, 2000, 1999 and 1998, and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
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 149,661 $9.7375 168,609 $9.7375 173,579 $9.7375
Granted - - - - - -
Exercised (5,379) 9.7375 (12,005) 9.7375 (4,970) 9.7375
Forfeited - - (6,943) - - -
-------- ------ --------- ------ -------- ------
Outstanding at end of year 144,282 $9.7375 149,661 $9.7375 168,609 $9.7375
======= ====== ======= ====== ======= ======
Options exercisable at year-end 112,662 $9.7375 86,457 $9.7375 69,654 $9.7375
======= ====== ======= ====== ======= ======
The following information applies to options outstanding at June 30, 2000:
Number outstanding 144,282
Range of exercise prices $9.7375
Weighted-average exercise price $9.7375
Weighted-average remaining contractual life 5.4 years
</TABLE>
70
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE L - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST BANCORP, INC.
The following condensed financial statements summarize the financial
position of Kentucky First Bancorp, Inc. as of June 30, 2000 and 1999, and
the results of its operations and its cash flows for the years ended June
30, 2000, 1999 and 1998.
KENTUCKY FIRST BANCORP, INC.
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
Deposits in First Federal Savings Bank $ 1 $ 139
Interest-bearing deposits in other financial institutions 1 46
Loan receivable from ESOP 648 741
Investment in First Federal Savings Bank 12,301 11,851
Prepaid expenses and other assets 3 1,005
Prepaid federal income taxes 35 57
-------- --------
Total assets $12,989 $13,839
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 6 $ 7
Shareholders' equity
Common stock and additional paid-in capital 9,334 9,314
Retained earnings 8,754 8,447
Less treasury stock (4,039) (2,791)
Less shares acquired by stock benefit plans (798) (1,024)
Unrealized losses on securities designated as available for sale,
net of related tax effects (268) (114)
------- --------
Total shareholders' equity 12,983 13,832
------ ------
Total liabilities and shareholders' equity $12,989 $13,839
====== ======
</TABLE>
KENTUCKY FIRST BANCORP, INC.
STATEMENTS OF EARNINGS
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Revenue
Interest income $ 39 $ 50 $ 55
Equity in earnings of First Federal Savings Bank 868 877 964
------ ------ ------
Total revenue 907 927 1,019
General, administrative and other expense 81 67 126
------- ------ -----
Earnings before income tax credits 826 860 893
Federal income tax credits (14) (6) (24)
------ ------- ------
NET EARNINGS $ 840 $ 866 $ 917
===== ===== =====
</TABLE>
71
<PAGE>
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000, 1999 and 1998
NOTE L - 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>
2000 1999 1998
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 840 $ 866 $ 917
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities
Distributions from consolidated subsidiary in excess of earnings 633 123 996
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 2 125 (617)
Prepaid federal income taxes 22 (6) (20)
Accounts payable and other liabilities (1) 6 (24)
-------- -------- --------
Net cash provided by operating activities 1,496 1,114 1,252
Cash flows provided by investing activities:
Proceeds from repayment of loan 93 92 93
Proceeds from maturities of investment securities - - 501
------ ------ ------
Net cash provided by investing activities 93 92 594
Cash flows provided by (used in) financing activities:
Proceeds from note payable 550 - -
Repayment of note payable (550) - -
Payment of dividends on common stock (533) (563) (598)
Proceeds from exercise of stock options 73 117 93
Purchase of treasury stock (1,312) (1,050) (1,124)
------ ------ ------
Net cash used in financing activities (1,772) (1,496) (1,629)
------ ------ ------
Net increase (decrease) in cash and cash equivalents (183) (290) 217
Cash and cash equivalents at beginning of year 185 475 258
------ ------ ------
Cash and cash equivalents at end of year $ 2 $ 185 $ 475
======= ====== ======
</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 the year ended June 30, 2000, the Savings
Bank received OTS approval to make $5.0 million in capital distributions,
and, at June 30, 2000, $4.5 million of this amount remained as available for
future capital distributions.
72
<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,
2000 and 1999
Consolidated Statements of Earnings for Each of the
Years in the Three-Year Period Ended June 30, 2000
Consolidated Statements of Comprehensive Income for
Each of the Years in the Three-Year Period Ended
June 30, 2000
Consolidated Statements of Shareholders' Equity for
Each of the Years in the Three-Year Period
Ended June 30, 2000
Consolidated Statements of Cash Flows for Each of
the Years in the Three-Year Period Ended
June 30, 2000
Notes to Consolidated Financial Statements
73
<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 *+
10.2 Kentucky First Bancorp, Inc. Stock Option and Incentive Plan *+
10.3 Kentucky First Bancorp, Inc. Management Recognition Plan *+
10.4 Deferred Compensation Agreements, as amended *+
10.5 First Federal Savings Bank Retirement Plan for Non-Employee
Directors *+
10.6 Supplemental Executive Retirement Agreement between First
Federal Savings Bank and Betty J. Long *+
10.7 Employment Agreements between First Federal Savings Bank
and Betty J. Long and Kevin R. Tolle *+
10.8 Employment Agreements between Kentucky First Bancorp,
Inc. and Betty J. Long and Kevin R. Tolle *
21 Subsidiaries of the Registrant
23 Consent of Grant Thornton LLP
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.
(+) 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 2000.
74
<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, 2000 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, 2000
------------------------------------------
September 27, 2000
Betty J. Long
President and Chief Executive Officer
(Director and Principal Executive Officer)
/s/ William D. Morris September 27, 2000
------------------------------------------
September 27, 2000
William D. Morris
Chairman of the Board
(Director)
/s/ Luther O. Beckett September 27, 2000
------------------------------------------
September 27, 2000
Luther O. Beckett
Vice Chairman of the Board
(Director)
/s/ Milton G. Rees September 27, 2000
------------------------------------------
September 27, 2000
Milton G. Rees
(Director)
/s/ Diane Ritchie September 27, 2000
------------------------------------------
September 27, 2000
Diane Ritchie
(Director)
/s/ John Swinford September 27, 2000
------------------------------------------
September 27, 2000
John Swinford
(Director)
/s/ Wilbur H. Wilson September 27, 2000
------------------------------------------
Wilbur H. Wilson
(Director)
/s/ Russell M. Brooks September 27, 2000
------------------------------------------
September 27, 2000
Russell M. Brooks
Executive Vice President
(Director and Principal Accounting and
Financial Officer)
