SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1996
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- or -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_| EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission Number: 0-26570
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
Delaware 61-1284899
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
104 South Chiles Street, Harrodsburg, Kentucky 40330-1620
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (606) 734-5452
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the average bid price of the Registrant's Common Stock
as quoted on the National Association of Securities Dealers, Inc., Automated
Quotations System on December 9, 1996, was $30.7 million (1,683,650 shares at
$18.25 per share).
As of December 9, 1996 there were issued and outstanding 2,047,933 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1996. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I Page
<S> <C> <C>
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 26
Item 3. Legal Proceedings................................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders............................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 26
Item 6. Selected Financial Data........................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 27
Item 8. Financial Statements and Supplementary Data........................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 27
Item 11. Executive Compensation............................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 27
Item 13. Certain Relationships and Related Transactions.................................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 28
</TABLE>
<PAGE>
PART I
Item 1. Business
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General
Harrodsburg First Financial Bancorp, Inc. (the "Company") is a Delaware
corporation organized in June 1995 at the direction of First Federal Savings
Bank of Harrodsburg (the "Bank" or "First Federal") to acquire all of the
capital stock that the Bank issued upon its conversion from the mutual to stock
form of ownership. On September 29, 1995, the Bank completed its conversion and
became a wholly owned subsidiary of the Company.
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments.
First Federal is a federally chartered stock savings bank headquartered
in Harrodsburg, Kentucky. The Bank attracts deposits from the general public and
uses such deposits primarily to originate loans secured by first mortgages on
one- to four-family residences located in its market area. Such loans totaled
$64.3 million, or 80.18%, of the Bank's total loan portfolio at September 30,
1996. The Bank originates and retains adjustable-rate loans as well as, to a
lesser extent, fixed-rate loans for its mortgage loan portfolio. The Bank has
not sold mortgage loans into the secondary market during the past five years. In
addition, the Bank originates multi-family, commercial and agricultural real
estate loans, which represented $9.1 million or 11.40%, of the total loan
portfolio at September 30, 1996. These loans were primarily secured by apartment
buildings, office buildings, churches, farms and other properties. The Bank also
offers construction loans which represented $3.9 million or 4.85% of the total
loan portfolio at September 30, 1996. These loans are primarily secured by
residential properties and become permanent loans of the Bank upon completion of
the construction. The Bank offers consumer loans, which totaled $2.9 million, or
3.57% of the total loan portfolio at September 30, 1996. These loans consist
primarily of home equity loans secured by second mortgages, loans secured by
savings deposits, and personal loans which are either secured or unsecured.
In addition to interest-earning deposits with the Federal Home Loan Bank
("FHLB") of Cincinnati, the Bank maintains an investment securities portfolio
consisting of FHLB stock and Federal Home Loan Mortgage Corporation ("FHLMC")
capital stock, Government agency-backed bonds and mortgage-backed securities.
See Note 2 of the Notes to Consolidated Financial Statements.
The principal sources of funds for the Bank's lending activities are
deposits, and the amortization, repayment, and maturity of loans and investment
securities. Principal sources of income are interest on loans, interest-earning
deposits and to a lesser extent investment securities. The Bank's principal
expense is interest paid on deposits.
Market Area
The Bank's primary market area consists of Mercer and Anderson Counties,
Kentucky. This area is primarily rural with a large amount of agri-business. The
primary lending concentration is in the Bank's market area, an area mainly
comprised of the cities of Harrodsburg and Lawrenceburg which have
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populations of approximately 7,795 and 5,911, respectively. Historically, the
economy in the Bank's market area has been dependent on agriculture, agriculture
related industries and manufacturing. Tourism is the second largest industry in
Mercer County, next to agriculture. The largest employers in the market area are
Hitachi Automotive, Trim Masters, Corning, Inc. and Bay West Paper.
Economic growth in the Bank's market area remains dependent upon the
local economy. In addition, the deposit and loan activity of the Bank is
significantly affected by economic conditions in its market area.
Competition
The Bank is one of ten financial institutions serving its immediate
market area. The competition for deposit products comes from seven commercial
banks in the Bank's market area, and two credit unions. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions. Loan
competition comes from commercial banks in the Bank's market area, credit
unions, and mortgage bankers who serve the area.
First Federal has traditionally maintained a competitive position in
mortgage loan originations and market share throughout its service area by
virtue of its local presence and its involvement in the community. The Bank
believes that it has been able to effectively market its loans and other
financial products and services when compared to other local-based institutions
and its superior customer service when compared to other institutions and
mortgage bankers based outside of the Bank's market area.
Lending Activities
General. The Bank's loan portfolio predominantly consists of mortgage
loans secured by single family residences. First Federal also makes commercial
real estate, multi-family real estate, agricultural, residential construction
and consumer loans.
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Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
deferred loan origination fees and costs and allowance for loan losses) as of
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
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1996 1995
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Amount Percent Amount Percent
------ ------- ------ -------
Type of Loans: (Dollars in Thousands)
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Real Estate:
<S> <C> <C> <C> <C>
One-to four-family residential................. $64,304 80.18% $62,364 81.07%
Multi-family................................... 3,559 4.44 3,053 3.97
Agricultural................................... 2,352 2.93 2,654 3.45
Commercial..................................... 3,228 4.03 3,116 4.05
Construction................................... 3,891 4.85 1,979 2.57
Consumer:
Savings account................................ 407 .51 621 .81
Home equity.................................... 1,279 1.59 1,314 1.71
Other(1)....................................... 1,177 1.47 1,826 2.37
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Total loans receivable..................... 80,197 100.00% 76,927 100.00%
====== ======
Less:
Loans in process............................... 2,168 975
Deferred loan origination fees
and costs, net................................ 229 219
Allowance for loan losses...................... 297 297
Unearned discounts............................. 1 2
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Loans receivable, net............................ $77,502 $75,434
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</TABLE>
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(1) Includes home improvement and personal loans.
The Bank primarily originates loans for retention in its portfolio and
has not purchased or sold loans during the past two years.
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Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan portfolio
at September 30, 1996. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $15.9 million, $13.1 million and $14.9 million, for the three years
ended September 30, 1996, 1995 and 1994, respectively. Adjustable-rate mortgage
loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Multi-Family,
Agricultural
1-4 Family and
Residential Commercial Construction Consumer Total
----------- ---------- ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing............ $567 $ 58 $ -- $ 241 $ 866
--- ------ ------ ------ -----
Amounts Due:
Within 3 months......... 1 -- -- 808 809
3 months to 1 year...... 17 46 -- 480 543
----- ------- -------- ------ --------
Total due within one year 18 46 -- 1,288 1,352
----- ------- -------- ------ --------
After 1 year:
1 to 3 years............ 420 61 -- 16 497
3 to 5 years............ 1,079 100 -- 51 1,230
5 to 10 years........... 6,531 1,128 -- 373 8,032
10 to 20 years.......... 34,393 5,462 285 894 41,034
Over 20 years........... 21,296 2,284 3,606 -- 27,186
------ ----- ----- ------ ------
Total due after one year.. 63,719 9,035 3,891 1,334 77,979
------ ----- ----- ----- ------
Total amount due.......... $64,304 $9,139 $3,891 $2,863 80,197
====== ===== ===== =====
Less:
Allowance for loan losses 297
Loans in process.......... 2,168
Unearned discounts........ 1
Deferred loan fees........ 229
------
Loans receivable, net. $77,502
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have pre-determined (or fixed) interest rates and
which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One-to four-family residential............. $11,574 $52,145 $63,719
Multi-family, agriculture and commercial... 434 8,601 9,035
Construction............................... 756 3,135 3,891
Consumer................................... 16 1,318 1,334
-- ----- -----
Total.................................... $12,780 $65,199 $77,979
====== ====== ======
</TABLE>
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One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market area. The Bank
generally originates one- to four-family residential mortgage loans without
private mortgage insurance in amounts up to 85% of the lesser of the appraised
value or selling price of the mortgaged property. Loans in excess of 85% of the
value of the mortgaged property typically require private mortgage insurance in
the amount of 25% to 30% of the loan amount.
First Federal offers three types of residential ARM's, all of which use
the index value of the National Monthly Median Cost of Funds Ratio to
SAIF-Insured Institutions plus a set margin added to it. The interest rates on
these loans have an initial adjustment period of between one and five years, and
generally adjust annually thereafter, with a maximum adjustment of 2% per year
and 5% maximum increase over the life of the loan. The index margin on a non
owner-occupied one- to four-family property loan is 1% higher than on an
owner-occupied property loan. The Bank's adjustable-rate one-to four-family
mortgage loans are for terms of up to 25 years, amortized on a monthly basis,
with principal and interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their contractual
terms. Borrowers may refinance or prepay loans at their option without penalty.
First Federal originates, to a limited extent, 10 year and 20 year term
fixed-rate mortgages on one- to four-family, owner-occupied homes with loan to
value ratios of 80% or less. First Federal originated $4.3 million in fixed-rate
one- to four-family mortgage loans with a maximum term of 20 years or less
during the year ended September 30, 1996. All such loans are being held as long
term investments and none are being held for sale.
Loan originations are generally obtained from existing and walk-in
customers, members of the local community, and referrals from realtors,
depositors and borrowers within the Bank's lending area. Mortgage loans
originated and held by the Bank in its portfolio generally include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event that the borrower transfers ownership
of the property without the Bank's consent. At September 30, 1996, $64.3
million, or 80.18%, of the total loan portfolio consisted of one- to four-family
residential loans of which $52.7 million were adjustable-rate loans and $11.6
million were fixed-rate loans.
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, adjustable-rate loans which
provide for initial rates of interest below the fully indexed rates may be
subject to increased risk of delinquency or default as the higher, fully indexed
rate of interest subsequently replaces the lower, initial rate. Further,
although adjustable-rate loans allow the Bank to increase the sensitivity of its
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed rate period before the
first adjustment and the periodic and lifetime interest rate adjustment
limitations and the ability of borrowers to convert the loans to fixed rates.
Accordingly, there can be no assurance that yields on the Bank's adjustable-rate
loans will fully adjust to compensate for increases in the Bank's cost of funds.
Finally, adjustable-rate loans increase the Bank's exposure to decreases in
prevailing market interest rates, although the Bank's cost of funds tend to
offset this effect.
Construction Loans. First Federal engages in construction lending
involving loans to qualified borrowers for construction of one-to four-family
dwellings, multi-family residential, commercial buildings and churches, with the
intent of such loans converting to permanent financing upon completion of
construction. As of September 30, 1996, the Bank's loan portfolio included $3.9
million of loans secured by properties under construction, all of which were
construction/permanent loans structured to become
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permanent loans upon the completion of construction and none of which was an
interim construction loan structured to be repaid in full upon completion of
construction. All construction loans are secured by a first lien on the property
under construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans generally
have adjustable or fixed interest rates 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 twelve months, during which the borrower is not required to make
monthly payments. If construction improvements are not completed at the end of
six months, accrued interest must be paid to date. Accrued interest must be paid
at completion of construction to the first day of the following month, and
monthly payments start the first day of the following month after 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 and must execute a construction loan agreement with the Bank.
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 cost proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. The Bank has
sought to minimize this risk by requiring precise construction cost estimates,
specifications, and drawing plans from qualified borrowers in the Bank's market
area.
Multi-Family and Commercial Real Estate Loans. In order to serve its
community and enhance yields on its assets, the Bank originates loans secured by
commercial real estate and multi-family properties. The multi-family and
commercial real estate loans originated by the Bank have generally been made to
individuals, small businesses and partnerships. They have primarily been secured
by first mortgages on apartment buildings, office buildings, churches and other
properties. The Bank benefits from originating such loans due to higher
adjustable interest rates. Adjustable-rate loans for this type of lending have a
margin that is 1% higher than the margin added to single family owner-occupied
property loan. First Federal's multi-family residential and commercial real
estate loans are adjustable-rate loans with terms of 25 years or less, with
loan-to-value ratios not exceeding 80%. As of September 30, 1996, loans on
multi-family residential and commercial real estate properties constituted
approximately $9.1 million, or 11.40% of the Bank's total loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one-to four-family residential lending. For
example, such loans typically involve large loans to single borrowers or related
borrowers, the payment experience on such loans is typically dependent on the
successful operation of the project, and these risks can be significantly
affected by the supply and demand conditions in the market for commercial
property and multi-family residential units.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. To minimize these risks, First Federal generally
limits loans of this type to its market area and to borrowers with which it
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has substantial experience or who are otherwise well known to the Bank. The
Bank's underwriting procedures require verification of the borrower's credit
history, income, financial statements, banking relationships, credit references,
and income projections for the property. It is the Bank's current practice to
obtain personal guarantees from all principals obtaining this type of loan. For
the small total dollar amount of loans secured by church real estate that are
originated by the Bank, repayment is dependent upon the continuing financial
support of the church's members. The Bank also obtains appraisals on each
property. All appraisals on commercial and multi-family real estate are reviewed
by the Bank's management.
Set forth below is a brief description of the Bank's multi-family and
commercial real estate loans with outstanding principal balances in excess of
$350,000 at September 30, 1996. See also "-- Loans to One Borrower."
Shopping Center, Nicholasville, Kentucky. This loan was originated in
1987 in the amount of $885,000. At September 30, 1996, this loan had a principal
outstanding balance of $771,000 and an estimated loan-to-value ratio of
approximately 64%. The loan was over one month delinquent at September 30, 1996.
Sixteen Townhouses, Harrodsburg, Kentucky. This loan was originated in
1993 for $442,000 as a loan to facilitate the sale of real estate owned and had
an original loan-to-value ratio of 100% and therefore the Bank required
additional security for the loan. At September 30, 1996, the loan had a
principal outstanding balance of $402,000 and was current.
Church, Harrodsburg, Kentucky. This loan was originated in 1991 in the
amount of $455,000 and had an original loan-to-value ratio of 83%. This loan had
an outstanding balance of $350,000 and was current at September 30, 1996.
Eight Townhouses and Two Single Family Dwellings, Harrodsburg, Kentucky.
This loan was originated in 1996 in the amount of $450,000 and had an original
loan to value ratio of 76%. This loan had an outstanding balance of $449,000 and
was current at September 30, 1996.
Two Eight Unit and One Four Plex Unit Apartment Dwellings, Lawrenceburg,
Kentucky. This loan was originated in 1995 in the amount of $390,000 and had an
original loan to value ratio of 70%. This loan had an outstanding balance of
$382,000 and was current at September 30, 1996.
Agricultural Loans. First Federal engages in lending on improved farm
land with no dwelling, building lots and building acreage sites. The Bank
benefits from originating such loans due to higher origination fees and
adjustable interest rates. These properties must have good road access. The loan
to value ratio for this type of loan is 75% or less with a maximum loan term of
15 years. An adjustable-rate loan for this type of lending has a margin that is
1% higher than the margin added to one-to four-family owner-occupied property
loans.
First Federal also engages in loans for improved farm land with
dwelling. The loan to value ratio for this type of loan is 80% or less with a
maximum term of 25 years. These loans can be set up with payment of interest
collected semi-annually and principal yearly as well as monthly principal and
interest payments. As of September 30, 1996, agricultural farm loans constituted
approximately $2.4 million, or 2.93% of the Bank's total loan portfolio.
Consumer Lending. These loans totaled $2.9 million, or 3.57%, of the
total loan portfolio at September 30, 1996. First Federal does not emphasize
consumer lending although it does originate such
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loans on a regular basis. The Bank originates consumer loans on either a secured
or unsecured basis. These loans generally require a pre-existing relationship
with the Bank. The Bank generally makes certificate of deposit loans for terms
of up to six months in amounts up to the face amount of the certificate. The
interest rate charged on these loans is 1% higher than the rate paid on the
certificate, and interest is billed on a quarterly basis. These loans are
payable on demand and the account must be assigned to the Bank as collateral for
the loan.
Federal regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of an institution's assets.
In addition, a federal thrift has lending authority above the 35% category for
certain consumer loans, property improvement loans, and loans secured by savings
accounts. The Bank originates consumer loans in order to provide a wide range of
financial services to its customers and because the shorter terms and normally
higher interest rates on such loans help maintain a profitable spread between
its average loan yield and its cost of funds.
Consumer loans generally involve more risk than first mortgage 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 federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank and the seller of the underlying collateral. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income, expenses and ability to repay the loan and
the value of the collateral. At September 30, 1996, the Bank had $241,000 of
consumer loans delinquent more than 90 days.
The largest consumer loan made by the Bank consists of a $450,000 line
of credit made on May 23, 1996. The line of credit is secured by agricultural
crops grown in Harrodsburg, Kentucky. As of September 30, 1996, the outstanding
balance on this line of credit was $358,000.
Loan Approval Authority and Underwriting. President Hood and Vice
President Asbury have the authority to approve mortgage loans and unsecured
loans in the amount of $175,000 or less with ratification by the full board.
Loans in excess of $175,000 must be approved by the full board. Loans are
approved after determining they meet the Bank's lending and underwriting
standards.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is generally ordered,
income and certain other information is verified and, if necessary, additional
financial information is requested. An appraisal of the real estate intended to
be used as security for the proposed loan is obtained. All appraisals are
reviewed by officers of the Bank designated by the Board of Directors. An
independent appraiser designated and approved by the Board of Directors of the
Bank is utilized for all real estate mortgage loans. For construction/permanent
loans, the funds advanced during the construction phase are held in a loan-in-
process account and disbursed based upon various stages of completion in
accordance with the results of inspection reports that are based upon physical
inspection of the construction by an independent contractor hired by the Bank or
in some cases by a loan officer. For real estate loans the Bank will require
either title insurance or a title opinion. Borrowers must also obtain fire and
casualty, hazard or flood insurance (for loans on property located in a flood
zone, flood insurance is required) prior to the closing of the loan.
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Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 45 days of the date of issuance. At September 30, 1996, the
Bank had $4.7 million of commitments to cover originations, undisbursed funds
for loans in process, and unused lines of credit. The Bank believes that most of
the Bank's commitments will be funded. The approximate percentage of commitments
that expire without being funded is less than 1%.
Loans-to-One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
unimpaired surplus, calculated as the sum of the Bank's core and supplementary
capital included in total capital, plus the balance of the general valuation
allowances for loan and lease losses not included in supplementary capital, plus
investments in subsidiaries that are not included in calculating core capital,
or $500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit
was approximately $3.3 million at September 30, 1996.
At September 30, 1996, the Bank's largest amount of loans to one
borrower consisted of several residential real estate loans in the amount of
$1.3 million in loans secured by a first mortgage on single family dwellings
located in Nicholasville and Versailles, Kentucky. This does not include
$935,000 in loans secured by single family dwellings made to the father of the
borrower, which are discussed below.
The next four largest lending relationships at September 30, 1996
consisted of $1.0 million in loans secured by a first mortgage on single family
dwellings located in Nicholasville, Kentucky; $935,000 in loans secured by
single family dwellings located in Nicholasville and Lancaster, Kentucky;
$836,000 in loans secured by single family dwellings, duplexes and 18 townhouse
units all located in Harrodsburg, Lawrenceburg, and Danville, Kentucky (See
"--Multi-Family and Commercial Real Estate Loans.") and $814,000 in loans
secured by a multi-unit apartment building and single family dwellings located
in Lawrenceburg, Kentucky. (See "--Multi-Family and Commercial Real Estate
Loans.")
Non-Performing and Problem Assets
Loan Delinquencies. The Bank monitors delinquencies on all types of
loans closely. If such loans later become delinquent, the Bank contacts and
works with the borrower to resolve the delinquency before initiating foreclosure
proceedings. The Bank's collection procedures provide that when a mortgage loan
is 10 days past due, a notice of nonpayment is sent. Delinquent notices are sent
if the loan becomes delinquent for more than 30 days. If payment is still
delinquent after 60 days, the customer will receive a letter and/or telephone
call and may receive a visit from a representative of the Bank. If the
delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, management will generally initiate legal
proceedings.
Loans are reviewed on a monthly basis by management and are generally
placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At September 30, 1996, no loans were classified in a
non-accrual status.
9
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At September 30,
----------------
1996 1995
---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
<S> <C> <C>
Total................................ $ -- $ --
------ -------
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Construction loans................. -- --
Permanent loans secured by 1 to 4 family
dwelling units................... 567 472
All other mortgage loans........... 58 110
Non-mortgage loans:
Commercial......................... -- --
Consumer........................... 241 85
---- ------
Total................................ 866 667
---- ------
Total non-accrual and accrual loan... 866 667
Real estate owned.................... -- --
----- ------
Total non-performing assets.......... $ 866 $ 667
==== =====
Total non-performing loans to net loans 1.12% .88%
==== =====
Total non-performing loans to total assets .79% .62%
=== =====
Total non-performing assets to total assets .79% .62%
=== =====
</TABLE>
There was no interest income that would have been recorded on loans
accounted for on a non-accrual basis under the original terms of such loans for
the year ended September 30, 1996, because there were no loans accounted for on
a non-accrual basis for this period.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular
10
<PAGE>
problem assets. When an insured institution classifies problem assets as loss,
it is required either to establish a specific allowance for losses equal to 100%
of that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining
an institution's regulatory capital, while specific valuation allowances for
loan losses generally do not qualify as regulatory capital.
At September 30, 1996, the Bank had loans designated special mention
which aggregated $19,000 and classified assets consisting of loans classified as
substandard which aggregated $497,000, and none classified as doubtful or loss.
The Bank had delinquent loans of 60 days or more of $1.1 million (of which
$732,000 were residential mortgage loans) and an allowance for loan losses of
$297,000 which includes a general valuation allowance of $290,000 and a specific
reserve of $7,000.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of cost
or fair value at the date of foreclosure less estimated costs of disposition.
Allowance for Loan Losses. It is management's policy to provide for
losses on loans in its loan portfolio. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Bank's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
current economic conditions, and the relationship of the allowance for loan
losses to outstanding loans.
In June 1993, the Financial Accounting Standards Board (FASB) issued
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan." This
promulgation, which was amended by SFAS No. 118 as to certain income recognition
and disclosure provisions, became effective as to the Company in fiscal 1996.
The new accounting standards require 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 Bank's current procedures for
evaluating impaired loans result in carrying such loans at the lower of cost or
fair value.
See Note 1 of Notes to Consolidated Financial Statements.
The amount of provisions for loan losses recorded in future periods may
be significantly greater or lesser than the provisions taken in the past. The
allowance for loan losses, as a ratio of total loans was .37% at September 30,
1996.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for loan losses
will be adequate to cover losses which may in fact be realized in the future and
that additional provisions for losses will not be required.
11
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. Except as set forth below, the portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses that may occur within the loan category because the total loan
loss allowance is a valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1996 1995
---- ----
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
At end of period allocated (Dollars in Thousands)
to:
Real estate mortgage:
<S> <C> <C> <C> <C>
One- to four-family residential $238 80.18% $241 81.07%
Multi-family............. 13 4.44 12 3.97
Agricultural.............. 12 4.03 10 3.45
Commercial................ 14 4.85 12 4.05
Residential construction.. 9 2.93 8 2.57
Consumer(1)................. 11 3.57 14 4.89
--- ---- ---- ------
Total allowance for loan
losses................ $297 100.00% $297 100.00%
=== ====== === ======
</TABLE>
- -----------------------
(1) Includes $7,000 specific reserve attributable to a particular loan and not
available for other loan losses.
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Bank's allowance for loan losses at the
dates and for the periods indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended
September 30,
-------------------------
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding....................... $80,197 $76,927
====== ======
Average loans outstanding..................... $74,797 $74,013
====== ======
Allowance balances (at beginning of
period)..................................... $ 297 $252
Provision (credit):
Residential................................. -- 85
Consumer.................................... 7 7
Net Charge-offs (recoveries):
Residential................................. -- 27
Consumer.................................... 7 20
--- ----
Allowance balance (at end of period).......... $297 $297
=== ===
Allowance for loan losses as a percent
of total loans outstanding.................. .37% .39%
Net loans charged off as a percent of
average loans outstanding................... .01% .06%
</TABLE>
12
<PAGE>
Investment Activities
First Federal is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. See "-- Regulation -- Regulation of
the Bank -- Federal Home Loan Bank System". The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. At September 30, 1996,
First Federal had an investment portfolio which included interest-earning
deposits of $14.2 million, certificates of deposit with the FHLB of $2.5 million
and investment securities of $12.4 million, consisting of FHLB stock, Government
agency-backed bonds and FHLMC capital stock. The Bank is permitted to invest in
various securities, including U.S. Treasury securities, U.S. government agency
obligations, mortgage-backed and related securities, and municipal bonds, as
permitted by the OTS regulations. The Bank classifies its investment securities
as held-to-maturity or available-for-sale in accordance with SFAS No. 115. The
fair value of the investment portfolio at September 30, 1996, was $12.3 million,
and the carrying value of the investment portfolio includes a net unrealized
gain at that date of approximately $1.1 million, after deduction of $579,000 in
deferred income tax expense.
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment securities portfolio, short term investments and FHLB
stock, at the dates indicated. At September 30, 1996, the market value of the
Bank's investment securities portfolio was $12.3 million.
<TABLE>
<CAPTION>
At September 30,
----------------------------
1996 1995
---- ----
(In Thousands)
Investment Securities available for
sale:
<S> <C> <C>
FHLMC securities..................... $1,881 $ 1,332
----- -----
Total.............................. 1,881 1,332
----- -----
Investment securities held to maturity:
FHLB Stock and bonds .............. 10,405 1,616
Mortgaged-backed securities........ 98 131
-- ---
Total.............................. 10,503 1,747
------ -----
Total investment securities........ 12,384 3,079
Interest-earning deposits (1)........ 16,730 26,939
------ ------
Total investments................. $29,114 $30,018
====== ======
</TABLE>
- --------------------
(1) Includes interest-earning overnight deposits and term deposits with FHLB.
13
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Bank's investment securities portfolio.
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------------------------------------------------------------
More Than One to
One Year or Less Five Years
------------------------ -------------------------
Carrying Average Carrying Average
Value Yield Value Yield
------- ------- ------- -------
(Dollars in Thousands)
Investments securities available for sale:
<S> <C> <C> <C> <C>
FHLMC Securities............. $1,881 1.60% $ -- --%
----- ---- ------ ----
Investment securities held to -- --
maturity:
Bonds - U.S. Government and
Federal agencies.......... -- -- 8,996 6.32
GNMA PC...................... -- -- -- --
FHLB Stock................... -- -- -- --
Bonds - Municipal............ -- -- -- --
------ ---- ----- -----
Total...................... -- -- 8,996 6.32
------ ---- ----- ----
Total investment securities.. $ 1,881 1.60% $ 8,996 6.32%
====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------------------------------------------------------
More Than Five to
Ten Years More than Ten Years Total Investment Securities
----------------------- ------------------------ --------------------------------
Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
Investments securities available for sale:
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC Securities............. $ -- --% $ -- --% $ 1,881 1.60% $ 1,881
---- ---- ---- ---- ----- ---- -----
Investment securities held to
maturity:
Bonds - U.S. Government and
Federal agencies.......... -- -- -- -- 8,996 6.32 8,903
GNMA PC...................... -- -- 98 7.41 98 7.41 98
FHLB Stock................... -- -- 1,196 6.94 1,196 6.94 1,196
Bonds - Municipal............ 105 4.21 108 5.37 213 4.80 202
--- ---- --- ---- --- ---- ---
Total...................... 105 4.21 1,402 6.85 10,503 6.37 10,399
--- ---- ----- ---- ------ ---- ------
Total investment securities.. $ 105 4.21% $ 1,402 6.85% $12,384 5.65% $ 12,280
===== ===== ====== ===== ====== ==== =======
</TABLE>
14
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. First Federal derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings, and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. Although First Federal had no FHLB advances at
September 30, 1996, such advances may also be a source of funds for the Bank in
the future.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including passbook, NOW, non-interest earning
accounts, money market deposit and certificates of deposit ranging in term from
three months to five years. The Bank also offers IRA accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Bank on deposits are set weekly at the
direction of senior management. The Bank determines the interest rate to offer
the public on new and maturing accounts by reviewing the current U.S. Treasury
rate for the term and the market interest rates offered by competitors.
Passbook, money market and NOW accounts constituted $16.7 million, or
21.73%, of the Bank's deposit portfolio at September 30, 1996. Certificates of
deposit constituted $60.2 million or 78.27% of the deposit portfolio of which
$3.2 million or 5.3% of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. As of September 30, 1996, the Bank had no brokered
deposits.
15
<PAGE>
Deposit Portfolio. Deposits in the Bank as of September 30, 1996, were
represented by various types of savings programs described below.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Interest Balance September 30, of Total
Category Term Rate(1) Amount 1996(2) Deposits
- -------- ---- ------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Now Accounts(3) None --% $ 250 $5,402 7.02%
Regular Savings None -- 10 8,329 10.82
Money Market Accounts(4) None -- 2,500 2,994 3.89
Certificates of Deposit:
3-month Money Market 91 days 4.76 500 1,447 1.88
6-month Money Market 182 days 5.01 500 8,953 11.63
Fixed Term, Fixed Rate 12 month 6.50 * 81 .10
Fixed Term, Fixed Rate 12 month 5.31 500 14,057 18.26
Fixed Term, Fixed Rate 18 month 5.69 500 6,025 7.83
IRA 18 month 6.00 25 9,072 11.79
Fixed Term, Fixed Rate 30 month 6.75 * 11 .11
Fixed Term, Fixed Rate 30 month 5.98 500 9,790 12.70
Fixed Term, Fixed Rate 30 month 5.30 * 65 .08
Fixed Term, Fixed Rate 36 month 6.75 * 3 --
Fixed Term, Fixed Rate 42 month 5.92 500 5,178 6.72
Fixed Term, Fixed Rate 48 month 7.50 * 100 .12
Fixed Term, Fixed Rate 60 month 6.06 500 5,306 6.89
Fixed Term, Fixed Rate 72 month 7.75 * 29 .03
Fixed Term, Fixed Rate 96 month 8.00 * 104 .13
------- ------
Total $ 76,946 100.00%
======= ======
</TABLE>
- ---------------
(1) Represents weighted average interest rates.
(2) In thousands.
(3) If average daily balance of $2,500 maintained, interest rate was 2.75%
(4) If average daily balance drops below $2,500, interest rate was 2.00% * This
type of certificate was no longer offered at September 30, 1996.
Jumbo Certificates of Deposit. 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 September 30, 1996.
Certificates
of Deposit
----------
Maturity Period (In Thousands)
- ---------------
Three months or less.................................... $ 506
More than three through six months...................... 1,005
More than six through twelve months..................... 568
Over twelve months...................................... 1,132
-----
Total................................................ $ 3,211
======
16
<PAGE>
The following table sets forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1996 1995
------ -----
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
(Dollars in Thousands)
Deposit Category:
<S> <C> <C> <C> <C>
Demand Accounts(1) $ 8,430 2.32% $ 9,372 2.24%
Passbook Accounts 8,088 2.75 8,676 2.75
Certificates 60,261 5.79 63,491 5.26
------ ---- ------ ----
$76,779 5.08% $81,539 4.67%
====== ==== ====== ====
</TABLE>
- --------------
(1) Includes non-interest bearing accounts, which represent less than 10% of
total deposits.
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank may obtain advances from the FHLB of Cincinnati to supplement its supply of
lendable funds. Advances from the FHLB of Cincinnati are typically secured by a
pledge of the Bank's stock in the FHLB of Cincinnati and a portion of the Bank's
first mortgage loans and certain other assets. The Bank, if the need arises, may
also access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At September 30,
1996, the Bank had no borrowings.
Subsidiary Activity
First Federal is permitted to invest up to 2% of its assets in the
capital stock of, or provide secured or unsecured loans to, subsidiary
corporations, with an additional investment of 1% of assets when such additional
investment is utilized primarily for community development purposes. Under such
limitations, as of September 30, 1996, First Federal was authorized to invest up
to approximately $2.2 million in the stock of, or provide loans to, service
corporations (based upon the 2% limitation). The Bank has one wholly owned
subsidiary, Harrodsburg Savings and Loan Service Corporation (the "Service
Corporation"). The sole purpose of the Service Corporation is to purchase and
hold the required amount of stock of Savings and Loan Data Corp., now Intrieve,
pursuant to the Bank's agreement with Intrieve for data processing services.
Incorporated in Kentucky in 1978, the Service Corporation has not conducted any
other business and has been inactive since its acquisition of the stock. The
Bank's investment in its subsidiary totaled $15,000 at September 30, 1996.
17
<PAGE>
Personnel
As of September 30, 1996, the Bank had 15 full-time and no part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS will have enforcement authority
over the Company and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company. The Company will also be required to file certain reports with,
and otherwise comply with, the rules and regulations of the OTS and the
Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to restrictions applicable to bank holding companies unless
such other associations each also qualify as a QTL or were acquired in a
supervised acquisition.
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience, or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
18
<PAGE>
The Bank Holding Company Act of 1956 ("BHCA") authorizes the Federal
Reserve Board to approve an application by a bank holding company to acquire
control of a savings association. Furthermore, a bank holding company that
controls a savings association is authorized to merge or consolidate the assets
and liabilities of the savings association 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. Generally, federal savings associations can acquire or be acquired by any
insured depository institution.
Federal Securities Law. The Company's Common Stock is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
Bank Regulation
General. As a federally chartered, SAIF-insured savings bank, First
Federal is subject to regulation and examination by the OTS and the FDIC.
Lending activities and other investments must comply with various federal
statutory and regulatory requirements. The Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
First Federal must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund ("SAIF") and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulations, whether
by the OTS, the FDIC or the United States Congress could have a material adverse
impact on the Company and the Bank and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan, or
the institution is operating in an unsafe or unsound manner.
19
<PAGE>
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
On September 30, 1996, H.R. 1362 was signed into law by the President.
Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act
of 1996 (the "Act"). Among its many provisions, the Act provides for resolving
the BIF/SAIF premium disparity. Currently, most insured depository institutions
holding BIF-assessable deposits pay the statutory minimum of $2,000 for deposit
insurance on these deposits while most insured depository institutions with
SAIF-assessable deposits pay 23 basis points per $100 of these deposits for
deposit insurance. The Bank currently pays an insurance premium to the FDIC
equal to 0.23% of its total deposits.
The BIF/SAIF legislation provides for a one-time assessment to
recapitalize the SAIF. The assessment will be based on the amount of
SAIF-assessable deposits held by an institution as of March 31, 1995 (with
certain exceptions). The assessment is effective on September 30, 1996 and is
payable on November 27, 1996.
The BIF/SAIF legislation does not specify an actual assessment but
states that the total assessment will be equal to the amount necessary to
recapitalize the SAIF as of October 1, 1996. A recent report of the America's
Community Bankers estimated the assessment at approximately 65.7 basis points
per $100 of SAIF-assessable deposits as of March 31, 1995. The BIF/SAIF
legislation provides that the amount of the special assessment is deductible
under section 162 of the Internal Revenue Code (the "Code") in the year in which
the assessment is paid. The BIF/SAIF legislation also provides that section
172(f) of the Code will not apply to deductions taken under section 162 of the
Code for the special assessment. The Bank has estimated the amount of the
assessment to be approximately $536,000 before tax benefit and such amount was
accrued on September 30, 1996.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The OTS leverage ratio regulation establishes a core capital ratio of at
least 3% for those savings associations in the strongest financial and
managerial condition based on the "CAMEL" rating system currently in use by the
OTS. Those savings associations receiving a CAMEL rating of "1", the best
possible rating on a scale of 1 to 5, will be required to maintain a ratio of
core capital to adjusted total assets of 3%. All other savings associations will
be required to maintain minimum core capital of at least 4% of total adjusted
assets, with a maximum core capital ratio requirement of 5%. In determining the
required minimum core capital ratio, the OTS would assess the quality of risk
management and the level of risk in each savings association on a case-by-case
basis. The OTS has not indicated the standards it
20
<PAGE>
will use in establishing the appropriate core capital requirement for savings
associations not rated "1" under the CAMEL rating system.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
As of September 30, 1996, the Bank had tangible, core and risk-based
capital of $21.7 million, $21.7 million and $22.0 million, respectively, which
amounts significantly exceed all applicable fully phased-in regulatory capital
requirements of the OTS.
OTS regulations set forth the methodology for calculating an IRR
component which is added to the risk-based capital requirements for OTS
regulated thrift institutions. Generally, savings associations with a greater
than "normal" level of interest rate exposure will be subject to a deduction
from total capital for purposes of calculating their risk-based capital
requirement. Specifically, interest rate exposure will be measured as the
decline in net portfolio value due to a 200 basis point change in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure which is defined as two percent of the estimated
economic value of its assets. Institutions, such as the Bank, with less than
$300 million in assets and a risk-based capital ratio in excess of 12% are
exempt from deducting the IRR component.
In addition, pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the OTS must revise the risk-based capital
regulations to include a credit risk component and a nontraditional activities
component, the purpose of which will be to increase the minimum capital
requirements for savings associations with higher credit risks.
Dividend and Other Capital Distribution Limitations. OTS regulations
impose limitations upon all capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash-out merger, and other
distributions charged against capital. The rule establishes three tiers of
institutions, based primarily on an institution's capital level. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account established pursuant to
the Bank's conversion. Finally, under the FDICIA, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be undercapitalized (not meet any one of its
minimum regulatory capital requirements).
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended
("HOLA"), requires savings institutions to meet a QTL test. If the Bank
maintains an appropriate level of Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Cincinnati. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
21
<PAGE>
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, Federal National Mortgage
Association ("FNMA"), and FHLMC as qualifying QTIs. Compliance with the QTL test
is determined on a monthly basis in nine out of every 12 months. As of September
30, 1996, the Bank was in compliance with its QTL requirement with 84.91% of its
assets invested in QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association 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 savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association 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).
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital and
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors, and
10% stockholders as well as to entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with minor
variation, apply Regulation O to savings associations.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. As of September 30, 1996, the Bank's
liquidity ratio was 34.26%.
Liquid assets for purposes of this ratio include specified short term
assets (e.g., cash, certain time deposits, certain banker's acceptances, and
short term U.S. Government obligations), and long term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations with a maximum remaining term of 24 months). The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Bank of Primary Dealers in United States
Government Securities or banks whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial future position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities. The OTS is also
authorized to designate as liquid assets certain mortgage-related securities
with less than one year to maturity. Short term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable
22
<PAGE>
deposit accounts and current borrowings. Monetary penalties may be imposed upon
associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. As of
September 30, 1996, the Bank had no funds borrowed from the FHLB of Cincinnati
to fund operations; however, there can be no assurances that borrowings will not
be made in the future.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of September 30, 1996, the Bank had $1.2 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended September 30, 1996, dividends paid by
the FHLB of Cincinnati to the Bank totaled $80,230.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. As of
September 30, 1996, the Bank was in compliance with its Federal Reserve Board
minimum reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at September 30, 1996.
Federal Taxation
The Bank files its tax return on a fiscal year (September 30) basis.
Savings associations are subject to the provisions of the Internal Revenue Code
in the same general manner as other corporations. However, savings associations
such as the Bank, which meet certain definitional tests and other conditions
prescribed by the Code may benefit 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 are separated
into "qualifying real property loans," which generally are loans secured by
interests in real property, and nonqualifying real property loans, which are all
other loans. The bad debt reserve deduction with respect to nonqualifying loans
must be based on actual loss experience. The amount of the bad debt reserve
deduction with respect to qualifying real property loans may be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such actual experience (the "percentage of
taxable income method"). The Bank used the percentage of taxable income method
for the years ended September 30, 1996, 1995 and 1994. The Bank is expected to
use the percentage of taxable income method for the year ending September 30,
1996.
23
<PAGE>
The Bank reviews the most favorable way to calculate the deduction attributable
to an addition to its bad debt reserve on an annual basis.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of September 30, 1988.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage of bad debt deduction thus computed is reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
If an association's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. As of September 30,
1996, at least 60% of the Bank's assets were qualifying assets as defined in the
Code. No assurance can be given that the Bank will meet the 60% test for
subsequent taxable years.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction will not be available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in income, along with the
amount deemed necessary to pay the resulting federal income tax. As of September
30, 1996, the Bank had approximately $1.6 million of accumulated earnings for
which federal income taxes have not been provided. If such amount is used for
any purpose other than bad debt losses, including a dividend distribution or a
distribution in liquidation, it will be subject to federal income tax at the
then current rate.
On August 20, 1996, the President signed into law the Small Business
Jobs Protection Act. Included within this act were provisions repealing the
percentage of taxable income method of calculating a thrift's bad debt reserve
for tax purposes. This method as described above, had permitted thrift
institutions, such as the Bank, who satisfied certain definitional tests and
other conditions prescribed by the Internal Revenue Code to deduct an annual
addition to their bad debt reserve calculated as a percentage of taxable income.
Other financial institutions generally were required to calculate their bad debt
deduction based upon actual loss experience (the "experience method"). As a
result of the elimination of the percentage of taxable income method,
institutions that have utilized such method will be required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience method, over period of six years commencing in the first taxable year
beginning after December 31, 1995. An institution will be able to defer
recapture until up to the third taxable year after December 31, 1995 if the
dollar amount of the institution's residential loan originations in each year is
not less than the average dollar amount of residential loan originations
originated in each of the six most recent years disregarding the years with the
highest and lowest originations during such period. For purposes of this test,
residential loan originations would not include refinancings and home equity
loans.
Beginning with the first taxable year beginning after December 31, 1995,
(Fiscal 1997 for the Bank) savings institutions, such as the Bank, will be
treated the same as commercial banks. Institutions with $500 million or more in
assets will only be able to take a tax deduction when a loan is actually charged
off. Institutions with less than $500 million in assets will still be permitted
to make deductible bad debt additions to reserves, but only using the experience
method. The Bank has provided deferred taxes on its post-1987 additions to the
bad debt reserve and, as a result, management does not expect that the recapture
of the Bank's post-1987 reserves will have a material adverse effect on the
Bank's operations.
24
<PAGE>
Generally, for taxable years beginning after 1986, the Code also
requires most corporations, including savings associations, to utilize the
accrual method of accounting for tax purposes. Further, for taxable years ending
after 1986, the Code disallows 100% of a savings association's interest expense
allocated to certain tax-exempt obligations acquired after August 7, 1986.
Interest expense allocable to (i) tax-exempt obligations acquired after August
7, 1986 which are not subject to this rule, and (ii) tax-exempt obligations
issued after 1982 but before August 8, 1986, are subject to the rule which
applied prior to the Code disallowing the deductibility of 20% of the interest
expense.
The Bank's federal income tax returns have not been examined by the IRS
during the past 10 years.
State Taxation
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. First Federal is subject to an annual Kentucky ad valorem
tax. This tax is .1% of the Bank's savings accounts, common stock, capital and
retained income with certain deductions allowed for amounts borrowed by
depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. For the fiscal year ended September 30, 1996, the amount of such
expense for the Bank was $93,037.
The Company is subject to an annual license fee on capital employed and
income tax on its operations by the Commonwealth of Kentucky. The annual license
fee is based on $2.10 per $1,000 of capital employed and the tax on income
ranges from 4% on the first $25,000 of taxable income to 8.25% on taxable income
in excess of $250,000. In addition, the Company must pay an annual franchise tax
to the state of Delaware.
Stockholders of the Company who are residents of the Commonwealth of
Kentucky may be subject to a Kentucky tax on intangible property, defined for
this purpose to include shares of stock in a corporation. The tax is an ad
valorem tax based upon the fair market value of the shares held by the
individual, and is assessed at a rate of $.25 per $100 in value. All Kentucky
residents are urged to consult their own tax and financial advisors as to the
applicability of this tax.
25
<PAGE>
Item 2. Properties
- --------------------
The Bank operates from its main office and one full service branch
office. The Bank's total investment in offices, office property and equipment is
$1.4 million with a net book value of $658,000 at September 30, 1996. The
following table sets forth information regarding the Bank's properties:
<TABLE>
<CAPTION>
Original
Leased Date Net Book Value at
Location or Owned Acquired September 30, 1996
- -------- -------- -------- ------------------
MAIN OFFICE:
<S> <C> <C> <C>
104 South Chiles Street Owned 1964 $535,000
Harrodsburg, Kentucky 40330
BRANCH OFFICE:
216 South Main Street Owned 1973 123,000
Lawrenceburg, Kentucky
</TABLE>
In November 1994, the Bank purchased the house and lot located next door
to the main office for $82,500. The house has been demolished and the .25 acre
lot has been filled with crushed stone. Construction of the parking lot and
expansion of the existing drive-in facility for another lane with an ATM which
began in October 1995, has been completed.
Item 3. Legal Proceedings
- --------------------------
The Bank, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank or the Company at September
30, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Market and Dividend Information" in
the Registrant's 1996 Annual Report to Stockholders on the inside cover page,
and is incorporated herein by reference.
26
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Registrants' 1996 Annual Report to Stockholders on pages 2
and 3 and is incorporated by reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Registrant's 1996 Annual Report to Stockholders on pages 4 through 15 and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of the Company and its
subsidiaries, together with the report thereon by Miller, Mayer, Sullivan &
Stevens LLP appears in the Registrant's 1996 Annual Report to Stockholders on
pages 16 through 41 and are incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" at pages 3 to 5 of the Registrant's definitive proxy
statement for the Registrant's Annual Meeting of Stockholders to be held on
January 27, 1997 (the "Proxy Statement"), which was filed with the Commission on
December 18, 1996 and incorporated herein by reference. See also "Item 1.
Business -- Personnel" included herein.
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated
herein by reference to the Registrant's Proxy Statement at pages 7 through 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement at page 4.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement at page 11.
27
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference to
the following indicated pages of the 1996 Annual Report to Stockholders.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report....................................................... 16
Consolidated Balance Sheets as of September 30, 1996 and 1995...................... 17
Consolidated Statements of Income For the Years Ended September 30, 1996, 1995
and 1994 ....................................................................... 18
Consolidated Statement of Stockholders' Equity
for the Years Ended September 30, 1996, 1995 and 1994........................... 19
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996,
1995 and 1994.................................................................... 20
Notes to Consolidated Financial Statements......................................... 22
</TABLE>
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Harrodsburg First Financial
Bancorp, Inc.*
3.2 Bylaws of Harrodsburg First Financial Bancorp, Inc.*
13.0 1996 Annual Report to Stockholders
21.0 Subsidiary Information
27.0 Financial Data Schedules
(b) Reports on Form 8-K.
None.
- -------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed on June 14, 1995,
Registration No. 33-93458.
28
<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.
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
Dated: December 30, 1996 By: /s/ Jack D. Hood
------------------------------------
Jack D. Hood
President, Chief Executive
Officer and Director
Pursuant to the requirement 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Jack D. Hood By: /s/ Wickliffe T. Asbury, Sr.
----------------------------------- -------------------------------------
Jack D. Hood Wickliffe T. Asbury, Sr.
President, Chief Executive Officer Vice President and Director
and Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Jack L. Coleman, Sr. By: /s/ Teresa W. Noel
----------------------------------- -------------------------------------
Jack L. Coleman, Sr. Teresa W. Noel
Director Treasurer and Chief Financial Officer
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Elwood Burgin By: /s/ Jack L. Coleman, Jr.
----------------------------------- -------------------------------------
Elwood Burgin Jack L. Coleman, Jr.
Director Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Thomas Les Letton
-----------------------------------
Thomas Les Letton
Director
Date: December 30, 1996
</TABLE>
EXHIBIT 13
<PAGE>
- --------------------------------------------------------------------------------
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
Harrodsburg First Financial Bancorp, Inc., a Delaware corporation (the
"Company"), was organized by First Federal Savings Bank of Harrodsburg, formerly
Harrodsburg First Federal Savings and Loan Association, ("Harrodsburg First
Federal" or the "Bank") to be a savings institution holding company whose only
subsidiaries are the Bank and its subsidiary. On September 29, 1995, the Bank
converted from mutual to stock form as a wholly owned subsidiary of the Company.
In connection with the conversion, the Company issued 2,182,125 shares of its
common stock (the "Common Stock") to the public.
The Company is a unitary savings and loan holding company subject to regulation
by the Office of Thrift Supervision ("OTS") of the Department of the Treasury.
The primary activity of the Company is holding the stock of the Bank and
operating the Bank. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the Bank
and its subsidiary.
First Federal Savings Bank of Harrodsburg was formed in 1961 as a federal mutual
savings and loan association and obtained insurance of accounts and became a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati at that time. Upon
its conversion to stock form in September 1995, the Bank adopted its present
name. The Bank operates through one full service office in Harrodsburg,
Kentucky, and another full service branch office in Lawrenceburg, Kentucky.
The executive offices of the Company and the Bank are located at 104 South
Chiles Street, Harrodsburg, Kentucky 40330, and its telephone number is (606)
734-5452.
MARKET AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
Market for the Common Stock
Since October 4, 1995, the Common Stock of the Company has been listed for
trading under the symbol "HFFB" on the National Association of Securities
Dealers, Inc. Automated Quotation ("Nasdaq") National Market. As of December 6,
1996, there were 2,047,933 shares of the Common Stock issued and outstanding,
held by approximately 1,274 stockholders of record, including beneficial owners
in nominee or street name.
Dividends
On March 18, 1996, the Board of Directors of the Company established a policy
whereby the Company will pay a semi-annual cash dividend of $.20 per share
payable as of the 15th day of each April and October or the first business day
thereafter if such day is not a business day, to stockholders of record as of
the last business day of the month following the end of the such semi-annual
period. On September 16, 1996, the Board of Directors declared a one time
special dividend of $.15 per share payable on October 16, 1996, to stockholders
of record as of October 1, 1996. The Board of Directors of the Company
periodically reviews its dividend policy. Any change in the Company's dividend
policy, as determined by the Board of Directors, will depend on the Company's
debt and equity structure, earnings, regulatory capital requirements, and other
factors, including economic conditions, regulatory restrictions, and tax
considerations. See Note 7 of Notes to Consolidated Financial Statements for
restrictions on the payment of cash dividends. For further information on stock
prices and dividends, see Stock Prices and Dividends (page 3).
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Harrodsburg First Financial Bancorp, Inc................................................Inside Front Cover
Market and Dividend Information.........................................................Inside Front Cover
Letter to Stockholders...................................................................................1
Selected Financial and Other Data........................................................................2
Management's Discussion and Analysis of Financial Condition and Results of Operations....................4
Financial Statements....................................................................................16
Corporate Information...........................................................................Back Cover
</TABLE>
<PAGE>
LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
To Our Stockholders
It is with great pleasure that we present the second annual report for
Harrodsburg First Financial Bancorp, Inc., for the fiscal year ended September
30, 1996. It has been an extremely busy and exciting year as your Company and
its subsidiary adjusted to life as a public company.
We are proud of the fact that of the seventy-five companies that converted from
mutual to the stock form of ownership from June 30, 1995 through September 30,
1996, the stock of Harrodsburg First Financial has led the country in
appreciation of price from its initial price of $10 per share.
The completion of the initial public offering in September 1995 paved the way
for a record earnings performance in the current fiscal year. Net earnings for
fiscal 1996 totaled $1,090,167 or $.55 per share, representing an increase of
22.3% over our fiscal 1995 earnings of $891,025. The net income for the fiscal
1996 earnings reflect a charge of $353,802, net of the federal income tax
benefit, for a special assessment by the Savings Association Insurance Fund. The
legislation that implemented this special assessment was signed into law by
President Clinton on September 30, 1996, and should put behind us, once and for
all, the federal deposit insurance premium disparity between banks and savings
institutions and the savings and loan debacle of the 1980s. This one time charge
will reduce future federal deposit insurance premium expense and will result in
improved earnings in years to come.
In late September 1996, the installation of ATMs at both offices was completed,
and the customer response to this service has been very positive.
After the completion of six months as a public company, the Board of Directors
approved a stock repurchase program of up to 5% or 109,106 shares of the
Company's stock. The authorization for this program expired September 29, 1996,
with the Company being able to repurchase 49,392 shares. A second repurchase
program of 5% of the outstanding shares has been instituted. The repurchased
shares will become treasury shares and will be used for general corporate
purposes. The Board believes that the repurchases will improve liquidity in the
market for the common stock and is expected to increase the Company's earnings
per share and book value per share.
We wish to thank you, our stockholders, for your support in our first year as a
public company. We encourage you to expand you banking relationships with us as
we pursue the ultimate goal of building long term value for your investment.
Sincerely,
/s/Jack Hood
Jack Hood
President and Chief Executive Officer
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
Financial Condition Data
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets......................... $ 108,953 $ 107,234 $ 91,465 $ 89,744 $ 90,335
Loans receivable, net.......... 77,502 75,434 72,640 72,172 71,996
Investments (1)................ 14,884 8,580 7,266 1,244 1,219
Cash and cash equivalents...... 15,065 21,990 10,350 15,255 15,435
Deposits....................... 76,946 75,893 82,091 81,455 83,006
Stockholders' equity........... 30,222 30,185 9,043 8,018 7,076
- ----------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding.. 1,710 1,745 1,764 1,849 1,922
Deposit accounts............... 9,524 10,559 9,930 9,908 10,347
Full service offices........... 2 2 2 2 2
</TABLE>
- ----------------------------
(1) Includes FHLB stock, and term deposits with the FHLB.
Operating Data
<TABLE>
<CAPTION>
For the year ended September 30,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest income................... $ 7,712 $ 6,612 $ 6,210 $ 6,433 $ 7,209
Interest expense.................. 3,901 3,807 3,277 3,745 4,985
--------- --------- --------- --------- ---------
Net interest income............ 3,811 2,805 2,933 2,688 2,224
Provision for loan losses......... 8 92 60 60 45
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses..... 3,803 2,713 2,873 2,628 2,179
Non-interest income............... 101 81 86 102 104
Non-interest expense.............. 2,225 1,444 1,357 1,303 1,206
--------- --------- --------- --------- ---------
Income before income tax expense
and cumulative effect of change
in accounting principle........ 1,679 1,350 1,602 1,427 1,077
Income tax expense................ 589 459 558 485 371
--------- --------- --------- --------- ---------
Income before cumulative effect
of change in accounting principle 1,090 891 1,044 942 706
Cumulative effect of change in
accounting principle (1)....... 19
--------- --------- --------- --------- ---------
Net income........................ $ 1,090 $ 891 $ 1,025 $ 942 $ 706
========= ========= ========= ========= =========
</TABLE>
- --------------------------------------------
(1) Reflects adoption of Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes."
2
<PAGE>
Key Operating Ratios
<TABLE>
<CAPTION>
At or for the year ended September 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets) 1.00% .95% 1.12% 1.04% .79%
Return on average equity (net income
divided by average equity)..... 3.56 7.84 12.01 12.48 10.44
Average interest-earning assets to
average interest-bearing liabilities 125.55 113.08 109.11 107.43 106.12
Net interest rate spread.......... 2.14 2.50 2.92 2.71 2.20
Net yield on average interest-
earning assets................. 3.57 3.04 3.26 3.03 2.55
Dividend payout................... 72.7
Capital Ratios:
Average equity to average assets
(average equity divided by
average total assets).......... 28.18 12.11 9.32 8.34 7.56
Equity to assets at period end.... 27.74 28.15 9.89 8.93 7.83
Asset Quality Ratios:
Net interest income after provision for
loan losses to total other expenses 170.92 187.88 211.56 201.69 180.68
Non-performing loans to total loans 1.12 .88 1.86 1.33 2.03
Non-performing loans to total assets .79 .62 1.48 1.07 1.62
</TABLE>
Stock Prices and Dividends
The following table sets forth the range of high and low sales prices for the
common stock as well as dividends declared in each quarter for 1996. The
information is not shown for 1995 because the Company's stock was issued to the
public initially on September 29, 1995. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions.
Quarterly Stock Information
Fiscal 1996
------------------------------
Stock Price Range
----------------- Per Share
Quarter Low High Dividend
- -----------------------------------------------------------------------
1st $ 12.00 $ 15.75 $
2nd 13.25 14.63 0.20
3rd 13.00 15.75
4th 15.25 18.25 0.20
- ------------------------------------------------------------------------
Total $ 0.40
=========
3
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
Harrodsburg First Financial Bancorp, Inc. ("Company") became publicly held on
September 29, 1995, when its wholly-owned subsidiary completed a conversion from
a federal mutual savings and loan association to a federal stock savings bank,
First Federal Savings Bank of Harrodsburg ("Bank"). The purpose of the
discussion that follows is to provide insight into the consolidated financial
condition and results of operations of Harrodsburg First Financial Bancorp, Inc.
and its subsidiary, First Federal Savings Bank of Harrodsburg.
The primary business of the Company is the operation of the Bank. The assets of
the Company consist of a portion of the net cash proceeds from the initial
public offering, all of the Bank's outstanding capital stock, and a note
receivable from the Company's Employee Stock Ownership Plan ("ESOP"). 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 mortgage loans
and, to a lesser extent consumer loans and to purchase investment securities. As
such, its net earnings are dependent primarily on its net interest income, which
is the difference between interest income earned on its interest-earning assets
and interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between yields earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread) and
(ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's interest rate spread is affected by regulatory,
economic, and competitive factors that influence interest rates, loan demand,
and deposit flows. To a lesser extent, the Bank's net earnings are also affected
by the level of non-interest income, which primarily consists of service charges
and other fees. In addition, net earnings are affected by the level of
non-interest (general and administrative) expenses.
The operations of the Bank and the entire thrift industry are significantly
affected by prevailing economic conditions, competition, and the monetary and
fiscal policies of the federal government and 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 influenced by prevailing market rates of
interest, competing investments, account maturities, and the levels of personal
income and savings in the Bank's market area.
The Bank's interest-earning assets have been historically concentrated in real
estate-collateralized instruments, principally single-family residential loans,
and to a lesser extent, loans secured by multi-family residential and commercial
properties, construction loans, home equity lines of credit, second mortgages on
single-family residences and consumer loans, both secured and unsecured,
including loans secured by savings accounts. The Bank also invests in
securities, primarily U.S. Government Treasury and Agency securities, and in
interest-earning deposits, primarily with the FHLB of Cincinnati. Its source of
funding for these investments has principally been deposits placed with the Bank
by consumers in the market areas it serves.
Asset/Liability Management
Net interest income, the primary component of the Bank's net earnings, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of the interest-bearing liabilities. The Bank has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Bank's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and
4
<PAGE>
by monitoring the expected effects of interest rate changes on an institution's
net interest income and net portfolio value.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Bank's assets
mature or reprice more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If the Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, as is the case with most savings institutions, the Bank's
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. The Bank's policy has been to mitigate the interest rate risk inherent in
the historical savings institution business of originating long-term loans
funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes in
interest rates.
Management's principal strategy in managing the Bank's interest rate risk has
been to maintain short and intermediate-term assets in the portfolio, including
locally originated adjustable rate mortgage loans. The Bank does not actively
offer long-term fixed rate loans. All fixed rate loans that are offered are
secured by one to four-family owner-occupied dwellings for terms of no more than
20 years. Likewise, the interest rate charged on the Bank's adjustable rate
loans typically reprice after one, three, or five years with maximum periodic
interest rate adjustment limits ("caps"). At September 30, 1996, the Bank had no
adjustable rate loans that reprice after five years from that date. In managing
its investment portfolio, the Bank seeks to purchase investments that mature on
a basis that approximates the estimated maturities of the Bank's liabilities.
Management has attempted to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit. The Bank
offers higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
Interest Rate Sensitivity Analysis
The Bank's future financial performance depends to a large extent on how
successful it is in limiting the sensitivity of earnings and net asset value to
changes in interest rates. Such sensitivity may be analyzed by examining the
amount by which the market value of the Bank's portfolio equity changes given an
immediate and sustained change in interest rates. Based on the latest
information available, the Bank's market value of portfolio equity at September
30, 1996 would decrease by $1.0 million or 3.0% given a 200 basis point
immediate and sustained increase in interest rates.
Average Balances, Interest, and Average Yields
Net interest income is affected by (i) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Savings institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" which is net interest income divided by average
interest-earning assets. The following table sets forth certain information
relating to the Bank's average interest-earning assets and interest-bearing
liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans are included in the net loan category. Average
balances are derived from month-end average balances. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------ --------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............. $ 74,797 $ 5,970 7.98% $ 74,013 $ 5,634 7.61% $ 71,745 $ 5,528 7.71%
Investment securities (1).... 32,043 1,742 5.44 18,191 978 5.38 18,322 682 3.72
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total interest-
earning assets........... 106,840 7,712 7.22 92,204 6,612 7.17 90,067 6,210 6.89
--------- --------- ---- ---------
Non-interest earning assets..... 1,871 1,673 1,586
--------- --------- ---------
Total assets................. $ 108,711 $ 93,877 $ 91,653
========= ========= =========
Interest-bearing liabilities:
Deposits..................... $ 76,779 3,901 5.08 $ 81,539 3,807 4.67 $ 82,545 3,277 3.97
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total interest-bearing
liabilities................ 76,779 3,901 5.08 81,539 3,807 4.67 82,545 3,277 3.97
--------- ---- --------- ---- ---------
Non-interest bearing
liabilities................... 1,296 966 570
--------- --------- ---------
Total liabilities............ 78,075 82,505 83,115
Stockholders' equity............ 30,636 11,372 8,538
--------- --------- ---------
Total liabilities &
stockholders' equity....... $ 108,711 $ 93,877 $ 91,653
========= ========= =========
Net interest income............. $ 3,811 $ 2,805 $ 2,933
========= ========= =========
Interest rate spread (2)........ 2.14% 2.50% 2.92%
===== ==== ====
Net yield on interest-earning
assets (3).................... 3.57% 3.04% 3.26%
===== ==== ====
Ratio of average interest-
earning assets to average
interest- bearing liabilities. 125.55% 113.08% 109.11%
======= ====== ======
</TABLE>
- --------------------------------
(1) Includes interest-earning overnight deposits and term deposits with FHLB.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
6
<PAGE>
The net interest margin is a key measure in determining the Bank's income
performance. The Bank's net interest margin was 3.57% for the year ended
September 30, 1996 compared to 3.04% for the same period in 1995. The 1996
increase was due to an increase of net interest income of approximately $1.0
million or 35.8%. Interest income for the year ended September 30, 1996
increased approximately $1.1 million or 16.6% compared to the same period in
1995. During these same periods, interest expense increased approximately
$94,000 or 2.5%.
The increase in net interest income of $1.0 million between 1996 and 1995 was
due primarily to the increase in the volume of average net interest-earning
assets of approximately $14.6 million in 1996 compared to 1995.
The Bank's net interest margin was 3.04% for the year ended September 30, 1995
compared to 3.26% for the same period in 1994. The 1995 decrease was due to a
decrease of net interest income of approximately $128,000 or 4.6%. Interest
income for the year ended September 30, 1995 increased approximately $402,000 or
6.5% compared to the same period in 1994. During these same periods, interest
expense increased approximately $530,000 or 16.2%.
The decrease in net interest income of $128,000 between 1995 and 1994 was due to
the average interest rates paid on deposits increasing at a greater rate than
the average interest yield on interest-earning assets, which was offset to some
extent by the increase in the volume of average net interest-earning assets of
approximately $2.1 million in 1995 compared to 1994.
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume). Average balances
are derived from month-end balances. Management does not believe that the use of
month-end balances instead of average daily balances has caused any material
difference in the information presented.
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
----------------------------------------- -------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ----------- --------- ------- --------- ------- --------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 60 $ 274 $ 3 $ 337 $ 175 $ (68) $ (2) $ 105
Investment securities (1) 744 11 8 763 (5) 304 (2) 297
------- -------- --------- ---------- --------- ------- --------- -------
Total $ 804 $ 285 $ 11 $ 1,100 $ 170 $ 236 $ (4) $ 402
======= ======== ========= ======= ========= ======= ========= =======
Interest expense:
Deposits $ (222) $ 336 $ (20) $ 94 $ (40) $ 577 $ (7) $ 530
------- -------- --------- ------- --------- ------- --------- -------
Total $ (222) $ 336 $ (20) $ 94 $ (40) $ 577 $ (7) $ 530
======= ======== ========= ======= ========= ======= ========= =======
Net change in interest income $ 1,026 $ (51) $ 31 $ 1,006 $ 210 $ (341) $ 3 $ (128)
======= ======== ========= ======= ========= ======= ========= =======
</TABLE>
- --------------------------------------------
(1) Includes interest-earning overnight deposits and term deposits with FHLB of
Cincinnati.
8
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 1996 AND 1995
Net Income
Income before the cumulative effect of a change in accounting principle
increased by $199,000 or 22.3% to $1,090,000 for the year ended September 30,
1996 as compared to $891,000 for the same period in 1995. The net increase was
due to an increase of $1,006,000 in net interest income, an increase of $20,000
in non-interest income plus a decrease in the provision for loan losses of
approximately $84,000 offset by an increase of $781,000 in non-interest expense
and an increase of $130,000 in income tax expense.
Interest Income
Interest income was $7.7 million, or 7.22% of average interest-earning assets,
for the year ended September 30, 1996 as compared to $6.6 million, or 7.17% of
average interest-earning assets, for the year ended September 30, 1995. Interest
income increased by $1.1 million or 16.6% from 1995 to 1996. The change was
primarily due to a $14.6 million increase in the average balance of
interest-earning assets during the year ended September 30, 1996 compared to the
year ended September 30, 1995.
Interest Expense
Interest expense was $3.9 million, or 5.08% of average interest-bearing
liabilities, for the year ended September 30, 1996 as compared to $3.8 million,
or 4.67% of average interest-bearing liabilities, for the corresponding period
in 1995. The increase in interest expense of $94,000 was primarily the result of
an increase in the average rates paid on deposits offset by a decrease of $4.8
million in the average balance of interest bearing deposits for the year ended
September 30, 1996 compared to the same period in 1995.
Provision for Loan Losses
The provision for loan losses was approximately $8,000 and $92,000 for the years
ended September 30, 1996 and 1995, respectively. Management considers many
factors in determining the necessary levels of the allowance for loan losses,
including an analysis of specific loans in the portfolio, estimated value of the
underlying collateral, assessment of general trends in the real estate market,
delinquency trends, prospective economic and regulatory conditions, inherent
loss in the loan portfolio, and the relationship of the allowance for loan
losses to outstanding loans. At September 30, 1996 the allowance for loan losses
represented .37% of total loans compared to .39% at September 30, 1995.
Non-Interest Income
Non-interest income amounted to $101,000 and $81,000 for the years ended
September 30, 1996 and 1995, respectively. The largest item in non-interest
income is service fees on loan and deposit accounts, which amounted to $77,000
and $59,000 for 1996 and 1995, respectively. The increase in non-interest income
of $20,000 was primarily due to the increase in income from late fees on
delinquent loans and service fee income on NOW accounts.
Non-Interest Expense
Non-interest expense increased approximately $781,000 or 54.2% to $2.2 million
for the year ended September 30, 1996 compared to $1.4 million for the same
period in 1995. Non-interest expense was 2.0% and 1.5% of average assets for the
years ended September 30, 1996 and 1995, respectively. The increase of $781,000
was
9
<PAGE>
primarily due to an increase of $560,000 in federal insurance premiums, an
increase of $89,000 in compensation and benefits, and an increase of $129,000 in
other operating expenses. The increase of $560,000 in federal insurance premiums
was primarily due to a one-time special assessment of $536,000, pursuant to
legislation signed by the President on September 30, 1996 to recapitalize the
Savings Association Insurance Fund (SAIF). The increase in compensation and
benefits resulted from compensation expense related to the ESOP of $169,000 in
1996, which was not incurred in 1995, offset in part by a $30,000 contribution
to the defined benefit pension plan in 1995 that was not incurred in 1996, plus
a decrease in salaries and bonuses of $45,000 in 1996 as compared to 1995. The
decrease in salaries and bonuses in 1996 was due to a bonus of $81,000 paid in
1995 that was not paid in 1996. The increase of $129,000 in other operating
expense was primarily due to increased legal and accounting fees, plus taxes and
other regulatory filing fees associated with being a public company.
Income Tax Expense
The provision for income tax expense amounted to approximately $589,000 and
$459,000 for the years ended September 30, 1996 and 1995, respectively. The
provision for income tax expense as a percentage of income before income tax
expense and cumulative effect of the change in accounting principle amounted to
35.1% and 34.0% for 1996 and 1995, respectively.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1995 AND 1994
Net Income
Net income decreased by $134,000 or 13.0% to $891,000 for the year ended
September 30, 1995 as compared to $1,025,000 for the same period in 1994. Income
before the cumulative effect of the change in accounting principle decreased by
$153,000 or 14.6% to $891,000 in 1995 compared to $1,044,000 in 1994. The net
decrease of $153,000 was due to a decrease of $129,000 in net interest income, a
decrease of approximately $5,000 in non-interest income, plus increases of
approximately $32,000 in the provision for loan losses and $86,000 in
non-interest expense offset by approximately a $99,000 decrease in income tax
expense for 1995 compared to 1994.
Interest Income
Interest income was $6.6 million, or 7.17% of average interest-earning assets
for the year ended September 30, 1995 as compared to $6.2 million, or 6.89% of
average interest-earning assets, for the year ended September 30, 1994. Interest
income increased by $402,000 or 6.5% from 1994 to 1995. The change was due to a
28 basis point increase in the average rate earned on the average
interest-earning assets plus a $2.1 million increase in the average balance of
interest-earning assets during the year ended September 30, 1995 compared to the
year ended September 30, 1994.
Interest Expense
Interest expense was $3.8 million, or 4.67% of average interest-bearing
deposits, for the year ended September 30, 1995 as compared to $3.3 million, or
3.97% of average interest-bearing deposits, for the corresponding period in
1994. Interest expense increased by $530,000 or 16.2% from 1994 to 1995. The
change was due primarily to a 70 basis point increase in the average rate paid
on the deposits during the year ended September 30, 1995 compared to the
corresponding period in 1994.
10
<PAGE>
Provision for Loan Losses
The provision for loan losses was $92,000 and $60,000 for the years ended
September 30, 1995 and 1994. Management considers many factors in determining
the necessary levels of the allowance for loan losses, including an analysis of
specific loans in the portfolio, estimated value of the underlying collateral,
assessment of general trends in the real estate market, delinquency trends,
prospective economic and regulatory conditions, inherent loss in the loan
portfolio, and the relationship of the allowance for loan losses to outstanding
loans. At September 30, 1995 the allowance for loan losses represented .39% of
total loans compared to .34% at September 30, 1994. The provisions were
necessary to raise the allowance for loan losses to a level consistent with
management's analysis of the loan portfolio.
Non-Interest Income
Non-interest income amounted to $81,000 and $86,000 for the years ended
September 30, 1995 and 1994, respectively. The largest items in non-interest
income are service fees on loan and deposit accounts, which amounted to $59,000
and $63,000 for 1995 and 1994, respectively. The decline in non-interest income
of $5,000 was primarily due to the decrease in income from late fees on
delinquent loans.
Non-Interest Expense
Non-interest expense increased approximately $86,000 or 6.3% to $1,444,000 at
September 30, 1995 compared to $1,358,000 at September 30, 1994. Non-interest
expense was 1.5% of average assets for both 1995 and 1994. The increase of
$86,000 was due primarily to an increase in compensation and benefits of $70,000
plus an increase of $10,000 in occupancy expenses. The increase of $70,000 in
compensation and benefits was due to normal increases in salary and benefits of
$41,000 offset by a $26,000 decline in the contribution to the multi-employer
pension plan, plus in fiscal year 1994, the Bank recognized a gain of $55,000
upon termination of their defined benefit pension plan (see Note 8 of Notes to
Consolidated Financial Statements). The increase of $10,000 in occupancy
expenses was due to increased depreciation charges and maintenance expense. For
a possible one-time expense to the Bank to recapitalized the Savings Association
Insurance Funds, see "SAIF Premium Disparity Possible Assessment."
Income Taxes
The provision for income tax expense amounted to approximately $459,000 and
$558,000 for the years ended September 30, 1995 and 1994, respectively. The
provision for income tax expense as a percentage of income before income tax
expenses and cumulative effect of the change in accounting principle amounted to
34.0% and 34.8% for 1995 and 1994, respectively.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 and 1995
The Company's consolidated assets increased $1.8 million or 1.6% to $109.0
million at September 30, 1996 compared to $107.2 million at September 30, 1995.
Securities available-for-sale increased $549,000, securities held-to-maturity
increased $8.7 million, loans increased $2.1 million, cash and cash equivalents
plus certificates of deposit decreased $9.9 million and other non-interest
earning assets increased by $270,000.
Securities classified as available-for-sale are carried at market value in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Securities available-for-sale increased $549,000 due to the
increase in fair value of such securities. Securities held-to-maturity increased
$8.7 million due
11
<PAGE>
to the purchase of debt securities of U.S. Government agencies totaling $9.2
million offset by the call of a $500,000 FHLB bond.
Liabilities of the Company increased $1.7 million or 2.2% to $78.7 million at
September 30, 1996 compared to $77.0 million at September 30, 1995. The increase
in liabilities was primarily due to the increase in deposits of $1.1 million,
reflecting management's aggressive strategy in attracting depositors within the
local market area.
Stockholder's equity was $30.2 million at September 30, 1996 and increased
approximately $37,000 over the balance at September 30, 1995. The increase was
due to net income of $1.1 million, an increase of $362,000 in the net unrealized
appreciation on securities available-for-sale, and an increase of $169,000 due
to ESOP shares earned, offset by the purchase of common stock totaling $789,000
pursuant to a repurchase agreement approved by the Board of Directors of the
Company on March 18, 1996, plus the payment of dividends totaling $795,000.
The OTS imposes regulations which provide that the savings institutions must
maintain certain levels of capital. Specifically, the regulations provide that
savings institutions must maintain tangible capital equal to 1.5% of adjusted
total assets, core capital equal to 3% of adjusted total assets and a
combination of core and supplementary capital equal to 8% of risk weighted
assets.
The following summarizes the Bank's capital requirements and position at
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
(Dollars in Thousands)
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Tangible capital........................ $ 21,754 20.2 $ 20,531 19.1
Tangible capital requirement............ 1,618 1.5 2,134 1.5
----------- --------- --------- ---------
Excess.................................. $ 20,136 18.7 $ 18,397 17.6
=========== ========= ========= =========
Core capital............................ $ 21,754 20.2 $ 20,531 19.1
Core capital requirement................ 3,235 3.0 4,268 3.0
----------- --------- --------- ---------
Excess.................................. $ 18,519 17.2 $ 16,263 16.1
=========== ========= ========= =========
Tangible capital ....................... $ 21,754 $ 20,531
General valuation allowance............. 290 290
----------- ---------
Total capital (core and supplemental)... 22,044 40.7 20,821 30.4
Risk-based capital requirement.......... 4,334 8.0 5,469 8.0
----------- --------- --------- ---------
Excess.................................. $ 17,710 32.7 $ 15,352 22.4
=========== ========= ========= =========
</TABLE>
Liquidity
The liquidity of the Company depends primarily on the dividends paid to it as
the sole shareholder of the Bank. At September 30, 1996, the Bank could pay on
its common stock dividends of approximately $11.5 million.
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments of loans. Additional sources of liquidity are advances from
the FHLB of Cincinnati and other borrowings. At September 30, 1996, the Bank had
no outstanding borrowings. The Bank has utilized and may in the future, utilize
FHLB of Cincinnati borrowings during periods when management of the Bank
believes that such borrowings provide a lower cost source of funds than deposit
accounts and the Bank desires liquidity in order to help expand its lending
operations.
12
<PAGE>
The Company's operating activities produced positive cash flows for the fiscal
years ended September 30, 1996, 1995, and 1994.
The Bank's most liquid assets are cash and cash-equivalents, which include
investments in highly liquid, short-term investments. At September 30, 1996 and
1995, cash and cash equivalents totaled $15.1 million and $22.0 million,
respectively.
At September 30, 1996, the Bank had $39.7 million in certificates of deposits
due within one year and $17.2 million due between one and three years.
Management believes, based on past experience, that the Bank will retain much of
the deposits or replace them with new deposits. At September 30, 1996, the Bank
had $900,000 in outstanding commitments to originate mortgages. The Bank intends
to fund these commitments with short-term investments and proceeds from loan
repayments.
OTS regulations require that the Bank maintain specified levels of liquidity.
Liquidity is measured as a ratio of cash and certain investments to withdrawable
savings. The minimum level of liquidity required by regulation is presently
5.0%. The Bank's liquidity ratio at September 30, 1996, 1995, and 1994 was
34.26%, 36.10%, and 15.43%, respectively.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Other Developments - BIF-SAIF Premium Disparity; Deposit Insurance Assessment;
Bad Debt Reserve Recapture
The Bank's savings deposits are insured by the Savings Associations Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). The assessment rate currently ranges from 0.23% of
deposits for well capitalized institutions to 0.31% of deposits for
undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the same
designated reserve ratio as the SAIF. On August 8, 1995, the FDIC adopted an
amendment to the BIF risk-based assessment schedule which lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of 0.31% of insured
deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for
well-capitalized institutions, which constitute over 90% of BIF-insured
institutions. The FDIC amendment became effective September 30, 1995. On
November 14, 1995, the BIF assessment rate schedule was further revised to a
statutory minimum of $2,000 annually for well capitalized institutions to 0.27%
for deposits for undercapitalized institutions. These revisions to the BIF
assessment rate schedule created a substantial disparity in the deposit
insurance premiums paid by BIF and SAIF members and placed SAIF-insured savings
institutions such as the Bank at a significant competitive disadvantage to
BIF-insured institutions.
On September 30, 1996, the President signed legislation which among other
things, recapitalized the Savings Associations Insurance Fund through a special
assessment on most savings financial institutions, such as the Bank. The special
assessment amounted to 65.7 basis points applied to the Bank's insured deposits
as of March 31, 1995, and amounted to $536,000. The expense was recognized in
the consolidated financial statements for the year ended
13
<PAGE>
statements for the year ended September 30, 1996, and the after tax impact was
to reduce net income by $354,000 or $0.18 per share of common stock. As a result
of this special assessment, the insurance assessment rate on the Bank's deposits
will be reduced beginning January 1, 1997.
In addition, the legislation repealed the bad debt deduction under the
percentage of taxable income method of the Internal Revenue Code for savings
banks. Savings banks, like the Bank, which have previously used the percentage
of taxable income method in computing its bad debt deduction for tax purposes
will be required to recapture into taxable income post-1987 reserves over a
six-year period beginning with the 1996 taxable year (fiscal year 1997 for the
Bank). The start of such recapture may be delayed until the 1998 taxable year if
the dollar amount of the institution's residential loan originations in each
year is not less than the average dollar amount of residential loans originated
in each of the nine 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 refinancing and home equity
loans. The impact of this legislation will not have a material impact on the
financial statements of the Company.
Impact of Recent Accounting Pronouncements
Disclosures of Fair Value of Financial Instruments. In December 1991, the
Financial Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS No. 107 requires the Company to disclose the fair
value of its financial instruments, which will include the majority of its
balance sheet accounts in addition to selected off-balance sheet items. SFAS No.
107 became effective for the Company in fiscal 1996 because the Company has less
than $150 million in total assets. Earlier adoption was required for entities
with assets in excess of $150 million. SFAS No. 107 focuses only on disclosure
of fair values in the financial statements, and therefore, has no effect on
consolidated financial position and results of operations.
Accounting for Impaired Loans. In September 1993, the FASB issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114 specifies that
allowances for loan losses on impaired loans should be determined using the
present value of estimated future cash flows of the loan, discounted at the
loans' effective interest rate. A loan is impaired when it is probable that all
principal and interest amounts will not be collected according to the loan
contract. SFAS No. 114 is effective for fiscal years beginning after December
15, 1994, which for the Company is the 1996 fiscal year. Management adopted SFAS
No. 114 on October 1, 1995, without material impact on consolidated financial
position or results of operations. In October 1994, the FASB amended certain of
the revenue recognition provisions of SFAS No. 114 by the issuance of SFAS No.
118. Such revisions similarly had no material effect on the consolidated
financial condition or results of operations of the Company.
Derivative Financial Statements. In October 1994, the FASB issued SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS No. 119 requires financial statement disclosure of certain
derivative financial instruments, defined as futures, forwards, swaps, option
contracts, or other financial instruments with similar characteristics. In the
opinion of management, the disclosure requirements of SFAS No. 119 will not have
a material effect on the Company's consolidated financial condition or results
of operations, as the Company does not invest in derivative financial
instruments, as defined in SFAS No. 119. As a result, the applicability of SFAS
No. 119 relates solely to disclosure requirements pertaining to fixed-rate and
adjustable-rate loan commitments.
Accounting for ESOP. The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") has issued
Statement of Position ("SOP 93-6") on "Employers' Accounting for Employee Stock
Ownership Plans" ("ESOP"). SOP 93-6, among other things, changes the measure of
compensation expense recorded by employers from the cost of ESOP shares to the
fair value of ESOP shares. To the extent that fair value of the Company's ESOP
shares differs from the costs of such shares, compensation expense must be
14
<PAGE>
recorded in the Company's financial statements for the fair value of ESOP shares
allocated to participants for a reporting period. SOP 93-6 was adopted by the
Company during fiscal 1995, without material financial statement effect.
Accounting for Mortgage Servicing. In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that the
Company recognizes as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights were acquired. An institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage servicing
rights. SFAS No. 122 also requires that an enterprise allocate the cost of
purchasing or originating the mortgage loans between the mortgage servicing
rights and the loans, when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally, SFAS No.
122 requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment would be measured
based on fair value. SFAS No. 122 is to be applied prospectively in the
Company's fiscal year beginning October 1, 1996, to transactions in which an
entity acquires mortgage servicing rights and to impairment evaluations of all
capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited. Management
adopted SFAS No. 122 on October 1, 1996, as required, without material effect on
the Company's consolidated financial position or results of operations.
Accounting for Stock-Based Compensation. In October 1994, the FASB issued SFAS
No. 123 entitled "Accounting for Stock-Based Compensation." SFAS No. 123
establishes a fair value based method of accounting for stock-based compensation
paid to employees. SFAS No. 123 recognizes the fair value of an award of stock
or stock options on the grant date and is effective for transactions occurring
after December 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net earnings, and
if presented, earnings per share, as if SFAS No. 123 had been adopted. The
Company does not currently have any outstanding stock options, and therefore,
adoption of SFAS No. 123 will not have a material effect on the Company's
consolidated financial condition or results of operations.
Accounting for Transfers of Financial Assets. In June 1996, the FASB issued SFAS
No. 125, "Accounting for Transfers of Financial Assets, Servicing Rights, and
Extinguishment of Liabilities," that provides accounting guidance on transfers
of financial assets, servicing of financial assets, and extinguishment of
liabilities. SFAS No. 125 introduces an approach to accounting for transfers of
financial assets that provides a means of dealing with more complex transactions
in which the seller disposes of only a partial interest in the assets, retains
rights or obligations, makes use of special purpose entities in the transaction,
or otherwise has continuing involvement with the transferred assets. The new
accounting method, the financial components approach, provides that the carrying
amount of the financial assets transferred be allocated to components of the
transaction based on their relative fair values. SFAS No. 125 provides criteria
for determining whether control of assets has been relinquished and whether a
sale has occurred. If the transfer does not qualify as a sale, it is accounted
for as secured borrowing. Transactions subject to the provisions of SFAS No. 125
include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring
arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
15
<PAGE>
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"(sm)
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harrodsburg First Financial Bancorp, Inc.
Harrodsburg, Kentucky
We have audited the accompanying consolidated balance sheets of Harrodsburg
First Financial Bancorp, Inc. and Subsidiary as of September 30, 1996 and 1995
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three year period ended September 30,
1996. These consolidated financial statements are the responsibility of the
management of Harrodsburg First Financial Bancorp, Inc. (Company). 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harrodsburg First
Financial Bancorp, Inc. and Subsidiary as of September 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three year period ended September 30, 1996 in conformity with generally
accepted accounting principles.
/s/Miller, Mayer, Sullivan & Stevens
Lexington, Kentucky
November 27, 1996
(606) 223-3095
2365 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40504-3399 FAX: (606) 223-2143
16
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
----------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- ------------
<S> <C> <C>
Cash and due from banks $ 834,621 $ 551,447
Interest Bearing Deposits 14,230,056 21,438,983
Certificates of deposit 2,500,000 5,500,000
Securities available-for-sale at fair value 1,881,429 1,332,177
Securities held-to-maturity, fair value of $10,398,994 and
$1,751,411 for 1996 and 1995, respectively 10,502,766 1,747,343
Loans receivable, net 77,502,336 75,433,526
Accrued interest receivable 675,433 553,686
Premises and equipment, net 657,920 538,584
Other assets, including Federal income tax refund of $49,272
and $35,428 for 1996 and 1995, respectively 168,113 138,527
------------- ------------
Total assets $ 108,952,674 $107,234,273
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 76,946,210 $ 75,893,177
Advance payments by borrowers for taxes and insurance 68,534 86,929
Deferred Federal income tax 719,402 634,083
Dividends payable 391,633
Other liabilities 604,906 434,870
------------- -------------
Total liabilities 78,730,685 77,049,059
------------- -------------
Stockholders' equity
Common stock, $0.10 par value, 5,000,000 shares authorized;
2,182,125 shares issued and outstanding 218,213 218,213
Additional paid-in capital 21,001,572 20,948,904
Retained earnings, substantially restricted 10,229,074 9,934,378
Net unrealized appreciation on securities available-for-sale,
net of deferred income taxes 1,191,925 829,419
Treasury stock, 49,392 shares, at cost (789,495)
Unallocated employee stock ownership plan (ESOP) shares (1,629,300) (1,745,700)
------------- ------------
Total stockholders' equity 30,221,989 30,185,214
------------- ------------
Total liabilities and stockholders' equity $ 108,952,674 $107,234,273
============= ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
17
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1996, 1995, and 1994
----------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 5,970,236 $ 5,634,417 $ 5,527,683
Interest and dividends on securities 433,018 104,368 84,588
Other interest income 1,308,723 872,911 598,271
----------- ----------- -----------
Total interest income 7,711,977 6,611,696 6,210,542
----------- ----------- -----------
Interest expense:
Interest on deposits 3,901,228 3,807,113 3,277,153
----------- ----------- -----------
Net interest income 3,810,749 2,804,583 2,933,389
Provision for loan losses 7,500 91,982 60,000
----------- ----------- -----------
Net interest income after provision for loan losses 3,803,249 2,712,601 2,873,389
----------- ----------- -----------
Non-interest income:
Loan and other service fees, net 77,214 58,829 63,234
Other 24,030 22,314 22,587
----------- ----------- -----------
101,244 81,143 85,821
----------- ----------- -----------
Non-interest expense:
Compensation and benefits 834,471 745,285 675,114
Occupancy expenses, net 121,604 130,781 120,816
Federal and other insurance premiums 748,464 188,072 187,979
Data processing expenses 95,711 92,976 86,044
State franchise tax 93,037 83,694 87,472
Other operating expenses 332,295 202,898 200,282
----------- ----------- -----------
2,225,582 1,443,706 1,357,707
----------- ----------- -----------
Income before income tax expense and cumulative effect
of change in accounting principle 1,678,911 1,350,038 1,601,503
Income tax expense 588,744 459,013 557,921
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle 1,090,167 891,025 1,043,582
Cumulative effect of change in accounting principle (18,591)
----------- ----------- -----------
Net income $ 1,090,167 $ 891,025 $ 1,024,991
=========== =========== ===========
Earnings per share $ 0.55
===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
18
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1996, 1995, and 1994
----------------------
<TABLE>
<CAPTION>
Net Unrealized
Additional Appreciation on Unearned Total
Common Paid-In Retained Securities Treasury ESOP Stockholders'
Stock Capital Earnings Available-for-Sale Stock Shares Equity
----------- ----------- ---------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 $ $ $8,018,362 $ $ $ $8,018,362
Net income 1,024,991 1,024,991
----------- ----------- ---------- -------------- ----------- ----------- ----------
Balance, September 30, 1994 9,043,353 9,043,353
Issuance of common stock 218,213 20,948,904 (1,745,700) 19,421,417
Net income 891,025 891,025
Cumulative effect
October 1, 1994 of change in
accounting for securities 629,086 629,086
Change in net unrealized
gain on securities
available-for-sale,
net of deferred income taxes 200,333 200,333
----------- ----------- ---------- -------------- ----------- ----------- ----------
Balance, September 30, 1995 218,213 20,948,904 9,934,378 829,419 (1,745,700) 30,185,214
Net income 1,090,167 1,090,167
Change in net unrealized
gain on securities
available-for-sale,
net of deferred income taxes 362,506 362,506
Dividend declared (795,471) (795,471)
ESOP shares earned in 1996 52,668 116,400 169,068
Purchase of 49,392 shares
of common stock (789,495) (789,495)
----------- ----------- ---------- -------------- ----------- ----------- ----------
Balance, September 30, 1996 $ 218,213 $21,001,572 $10,229,074 $ 1,191,925 $ (789,495) $(1,629,300) $30,221,989
=========== =========== ========== ============== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
19
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996, 1995, and 1994
----------------------
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income $ 1,090,167 $ 891,025 $ 1,024,991
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle 18,591
Provision for loan losses 7,500 91,982 60,000
Provision for depreciation 58,344 70,496 65,175
ESOP benefit expense 169,068
Amortization of loan fees (56,935) (41,232) (48,509)
Amortization of investment discount (466)
FHLB stock dividend (80,000) (71,100) (52,900)
Change in:
Interest receivable (121,747) (35,124) (100,252)
Interest payable (1,522) 132 (1,237)
Accrued liabilities 171,557 (8,915) (29,885)
Prepaid expense (9,646) 8,157 (2,658)
Income taxes payable (121,367) 56,804 43,238
----------- ----------- -----------
Net cash provided by operating activities 1,104,953 962,225 976,554
----------- ----------- -----------
Investing activities
Net (increase) decrease in loans (2,019,375) (2,819,505) (504,087)
Purchase of certificates of deposit (6,000,000)
Maturity of certificates of deposit 3,000,000 500,000
Purchase of securities held-to-maturity (9,208,636) (500,000)
Call of security held-to-maturity 500,000
Principle repayments - mortgage back securities 33,679 15,031 30,238
Purchase of fixed assets (177,977) (115,999) (43,936)
Retirement of assets 297 182
----------- ----------- -----------
Net cash provided (used) by investing activities (7,872,012) (2,920,473) (6,517,603)
----------- ----------- -----------
</TABLE>
(Continued)
The accompanying notes are an integral part of the
consolidated financial statements.
20
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1996, 1995, and 1994
----------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 984,882 (3,101,122) (523,059)
Net increase (decrease) in certificates of deposit 68,152 (3,096,803) 1,158,678
Net increase (decrease) in custodial accounts (18,395) 9,316 808
Proceeds from issuance of common stock ,net 21,532,531
ESOP loan (1,745,700)
Purchase of treasury stock (789,495)
Payment of dividends (403,838)
------------ ------------ ------------
Net cash provided (used) by financing activities (158,694) 13,598,222 636,427
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (6,925,753) 11,639,974 (4,904,622)
Cash and cash equivalents, beginning of year 21,990,430 10,350,456 15,255,078
------------ ------------ ------------
Cash and cash equivalents, end of year $ 15,064,677 $ 21,990,430 $ 10,350,456
============ ============ ============
Supplemental Disclosures
Cash payments for:
Interest on deposits $ 3,902,750 $ 3,806,981 $ 3,289,998
Income taxes $ 710,111 $ 402,209 $ 514,683
Mortgage loans originated to finance sale of
foreclosed real estate $ 17,500 $
Transfers from loans to real estate acquired
through foreclosures $ 25,000
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
21
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
1. Summary of Significant Accounting Policies
On September 29, 1995, Harrodsburg First Financial Bancorp, Inc. sold
through a public offering 2,182,125 shares of common stock at a price of
$10 per share in connection with the conversion of Harrodsburg First
Federal Savings and Loan Association from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank,
and the simultaneous formation of a savings and loan holding company. In
the conversion, Harrodsburg First Federal Savings and Loan Association
changed its name to First Federal Savings Bank of Harrodsburg (Bank). The
net proceeds from the conversion amounted to $21,167,117, after deduction
of certain costs associated with the conversion which totaled $654,133. The
Company received all of the capital stock of the Bank in exchange for 50%
of the net proceeds received in the conversion.
The Company's articles of incorporation authorize the issuance of up to
500,000 shares of preferred stock, which may be issued with certain rights
and preferences. As of September 30, 1996, no preferred stock has been
issued.
The Company is a corporation organized under the laws of Delaware. The
Company is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Bank. The Bank is a federally
chartered stock savings bank and a member of the Federal Home Loan Bank
System. As a member of this system, the Bank is required to maintain an
investment in capital stock of the Federal Home Loan Bank of Cincinnati
(FHLB) in an amount equal to at least the greater of 1% of its outstanding
loan and mortgage-backed securities or .3% of total assets as of December
31 of each year.
The Bank conducts a general banking business in central Kentucky which
primarily consists of attracting deposits from the general public and
applying those funds to the origination of loans for residential, consumer,
and nonresidential purposes. The Bank's profitability is significantly
dependent on 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 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 Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
22
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and the Bank. All significant intercompany
accounts and transactions have been eliminated.
Loan Origination Fees. The Bank accounts for loan origination fees in
accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Cost of
Leases." Pursuant to the provisions of SFAS No. 91, origination fees
received from loans, net of direct origination costs, are deferred and
amortized to interest income using the level-yield method, giving effect to
actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable to
originating a loan, i.e., principally actual personnel costs. Fees received
for loan commitments that are expected to be drawn upon, based on the
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.
Investment Securities. On October 1, 1994, the Bank adopted Statement of
Financial Accounting Standards(SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that all
investments in debt securities and all investments in equity securities
that have readily determinable fair values be classified into three
categories. Securities that management has positive intent and ability to
hold until maturity are classified as held-to-maturity. Securities that are
bought and held specifically for the purpose of selling them in the near
term are classified as trading securities. All other securities are
classified as available-for-sale. Securities classified as trading and
available-for-sale are carried at market value. Unrealized holding gains
and s losses for trading securities are included in current income.
Unrealized holding gains and losses for securities available-for-sale are
reported as a net amount in a separate component of stockholders' equity
until realized. Investments classified as held-to-maturity will be carried
at amortized cost. The cumulative effect of this change was to increase
stockholders' equity by $629,086, net of deferred taxes of $324,075, as of
October 1, 1994.
Securities that management has the intent and ability to hold to maturity
are classified as held-to- maturity, and carried at cost, adjusted for
amortization of premium or accretion of discount over the term of the
security, using the level yield method. Included in this category of
investments is the FHLB stock which is a restricted stock carried at cost.
Securities available-for-sale are carried at market value. Adjustments from
amortized cost to market value are recorded in stockholders' equity net of
deferred income tax until realized. The identified security method is used
to determine gains or losses on sales of securities.
Prior to October 1, 1994, investment securities were carried at cost,
adjusted for amortization of premiums and accretion of discounts. The
investment securities were carried at cost, as it was management's intent
and the Bank had the ability to hold the securities until maturity.
Investment securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held-for-sale at the point of purchase and carried at the lower of cost
or market.
(Continued)
23
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
Regulations require the Bank to maintain an amount of cash and U.S.
government and other approved securities equal to a prescribed percentage
(5% at September 30, 1996 and 1995) of deposit accounts (net of loans
secured by deposits) plus short-term borrowings. At September 30, 1996 and
1995, the Bank met these requirements.
Federal Home Loan Mortgage Corporation Stock: On December 6, 1984, the
Federal Home Loan Mortgage Corporation created a new class of participating
preferred stock. The preferred stock was distributed to the twelve district
banks of the Federal Home Loan Banking System for subsequent distribution
to their member institutions. The Bank received 1,606 shares of the stock
and recorded it at its fair value of $40 per share as of December 31, 1984.
The fair value of the stock recognized as of December 1984 became its cost.
The stock has been subsequently classified as available-for- sale and
carried at market value.
Office Properties and Equipment. Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using the
straight line method and the double declining balance method over the
estimated useful lives of the related assets. The gain or loss on the sales
of property and equipment is recorded in the year of disposition.
Real Estate Owned. Real estate owned is generally comprised of property
acquired through foreclosure or deed in lieu of foreclosure. Foreclosed
real estate is recorded at the lower of cost or fair value, net of selling
expenses, which subsequently becomes the cost, at the date of foreclosure.
Expenses relating to holding property, including interest expense, are not
capitalized. These expenses are charged to operations as incurred. Gains on
the sale of real estate are recognized upon the ultimate disposal of the
property. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its net realizable value.
Loans Receivable: Loans receivable are stated at the principal amount
outstanding less the allowance for loan losses and net deferred loan fees.
The Bank has adequate liquidity and capital, and it is generally
management's intention to hold such assets to maturity.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to pay, estimated value
of any underlying collateral, and current economic conditions. While
management uses the best information available, future adjustments may be
necessary if conditions differ substantially from assumptions used in
management's evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
allowance for loan losses and may require additions to the allowances based
on their judgment about information available to them at the time of their
examination.
Interest earned on loans receivable is recorded in the period earned.
Uncollectible 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 cash payments are
(Continued)
24
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which case
the loan is returned to accrual status.
The Bank adopted SFAS No. 114, as subsequently amended, on October 1, 1995,
without material effect on consolidated financial condition or results of
operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Bank considers
its investment in one-to-four family residential loans and consumer
installment loans to be homogenous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Bank's
investment in impaired multi-family and nonresidential loans, such loans
are collateral dependent, and as a result, are carried as a practical
expedient at the lower of cost or fair value.
Collateral dependent loans when put in non-accrual status are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
Deposits. The Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank currently pays an assessment rate
of 23% on customer deposit balances under $100,000. On September 30, 1996,
the President signed legislation, which among other things, recapitalized
the Savings Association Insurance Fund through a special assessment on
savings financial institutions, such as the Bank. The special assessment
amounted to $536,063 for the Bank and is included in the Federal and other
insurance premium expense for the year ended September 30, 1996. As a
result of the recapitalization of the SAIF, the Bank's assessment rate for
insurance on deposits, beginning in 1997, is expected to be reduced to
approximately 4% on customer deposit balances under $100,000.
Income Taxes. The Company accounts for federal income taxes in accordance
with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS
No. 109 established financial accounting and reporting standards for the
effects of income taxes that result from the Company's activities within
the current and previous years. Pursuant to the provisions of SFAS No. 109,
a deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible differences
between the tax basis of an asset or liability and its reported amount in
the financial statements that will result in taxable or deductible amounts
in future periods. Deferred tax assets are recorded only to the extent that
the amount of net deductible temporary differences or carryforward
attributes may be utilized against current period earnings, carried back
against prior years earnings, offset against taxable temporary differences
reversing in future periods, or utilized to the extent of management's
estimate of future taxable income. A valuation allowance is provided for
deferred tax assets to the extent that the value of net deductible
temporary differences and carryforward attributes exceeds management's
estimates of taxes payable on future taxable income. Deferred tax
liabilities are provided on the total amount of net temporary differences
taxable in the future.
(Continued)
25
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
The Company files a consolidated federal income tax return with the Bank.
The current income tax expense or benefit is allocated to each Corporation
included in the consolidated tax return based on their tax expense or
benefit computed on a separate return basis.
Employee Stock Ownership Plan. Shares of common stock issued to the
Company's employee stock ownership plan (ESOP) are initially recorded as
unearned ESOP shares in the stockholders' equity at the fair value of the
shares at the date of the issuance of the plan. As shares are committed to
be released as compensation to employees, the Company reduces the carrying
value of the unearned shares and records compensation expense equal to the
current value of the shares.
Effect of Implementing New Accounting Standards. In March 1995, the FASB
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used, and for long-lived assets and certain identifiable intangible
assets to be disposed of. The Standard requires an impairment loss to be
recognized when the carrying amount of the asset exceeds the fair value of
the asset. Management does not anticipate the implementation of this
standard having a material adverse impact on the financial statements.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which amended SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 requires a mortgage banking
enterprise to recognize as separate assets rights to service mortgage loans
for others; however, these servicing rights are acquired. This statement
applies prospectively in fiscal years beginning after December 15, 1995.
The Company and the Bank are not currently involved with mortgage banking
activities, and therefore, this standard would not currently have any
impact on the consolidated financial statements of the Company.
Cash and Cash Equivalents. For purposes of reporting consolidated cash
flows, the Bank considers cash, balances with banks, and interest bearing
deposits in other financial institutions with original maturities of three
months or less to be cash equivalents.
Reclassification. Certain presentations of accounts previously reported
have been reclassified in these consolidated financial statements. Such
reclassifications had no effect on net income or retained income as
previously reported.
(Continued)
26
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
2. Investment Securities
The cost and estimated fair value of securities held by the Bank as of
September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Gross Gross
Amortized Unrealized nrealized
Cost Gains U Losses Fair Value
------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
Federal Home Loan Mortgage,
capital stock, 19,272 shares $ 75,482 $ 1,805,947 $ $ 1,881,429
============= ============ ========== ============
Securities, held-to-maturity:
Debt Securities:
U.S. Government and
Federal Agencies $ 8,996,019 $ 5,625 $ 98,574 $ 8,903,070
Municipal bonds 213,083 11,392 201,691
------------- ------------ ---------- ------------
9,209,102 5,625 109,966 9,104,761
------------- ------------ ---------- ------------
Mortgage-backed Securities 97,864 569 98,433
------------- ------------ ---------- ------------
Federal Home Loan
Bank of Cincinnati,
capital stock - 11,958 shares 1,195,800 1,195,800
------------- ------------ ---------- ------------
$ 10,502,766 $ 6,194 $ 109,966 $ 10,398,994
============= ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
Federal Home Loan Mortgage,
capital stock, 19,272 shares $ 75,482 $ 1,256,695 $ $ 1,332,177
=========== =========== =========== ===========
Securities, held-to-maturity:
Debt Securities:
Federal Home Loan Bank Bond $ 500,000 $ 780 $ $ 500,780
----------- ----------- ----------- -----------
Mortgage-backed Securities 131543 3288 134831
----------- ----------- ----------- -----------
Federal Home Loan
Bank of Cincinnati,
capital stock - 11,158 shares 1115800 1115800
----------- ----------- ----------- -----------
$1,747,343 $ 4,068 $ $ 1,751,411
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of debt securities at
September 30, 1996, by contractual maturity, are as follows:
(Continued)
27
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------- ------------
<S> <C> <C>
Due after one year through five years $ 8,996,019 $ 8,903,070
Due after five through ten years 104,684 98,655
Due after ten years 108,399 103,036
------------- ------------
$ 9,209,102 $ 9,104,761
============= ============
</TABLE>
In accordance with the requirements of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities," the unrealized gain on
securities available-for-sale of $1,805,947 net of deferred income taxes of
$614,022 has been recorded as a separate component of stockholders' equity
as of September 30, 1996.
For the year ended September 30, 1996, the Bank received $500,000 from the
call of a debt security backed by a U.S. Government agency, which was
classified as held-to-maturity. There were no sales of securities for the
years ended September 30, 1995 and 1994.
3. Loans Receivable
Loans receivable, net at September 30, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Loans secured by first lien mortgages on real estate:
One-to-four residential property $ 64,303,729 $ 62,363,932
Multi-family residential property 3,558,839 3,053,364
Commercial properties 3,228,376 3,115,742
Construction 3,891,250 1,978,700
Agricultural 2,351,985 2,654,301
Consumer loans:
Home equity 1,278,828 1,314,148
Home improvement and personal 1,176,371 1,825,930
Loans secured by savings deposits 407,469 620,595
------------- ------------
80,196,847 76,926,712
Loans in process (2,167,621) (975,197)
Provisions for loan losses (297,250) (297,292)
Deferred loan origination fees (229,640) (220,697)
------------- ------------
Loans receivable, net $ 77,502,336 $ 75,433,526
============= ============
</TABLE>
The Bank has concentrated its lending activity within a 45 mile radius of
Harrodsburg, Kentucky. Therefore, a substantial portion of its debtors'
ability to honor their contracts is dependent on the economy of this area.
(Continued)
28
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
The Bank provides an allowance to the extent considered necessary to
provide for losses that may be incurred upon the ultimate realization of
loans. The changes in the allowance on loan losses is analyzed as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning or period $ 297,292 $ 252,019 $ 195,273
Additions charged to operations 7,500 91,982 60,000
Charge-offs (7,542) (49,297) (3,254)
Recoveries 2,588
---------- ----------- -----------
Balance at end of period $ 297,250 $ 297,292 $ 252,019
========== =========== ===========
</TABLE>
The following is a summary of non-performing loans (in thousands) at
September 30, 1996, 1995, and 1994, respectively:
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Non-accrual loans
Loans past due 90 days or more $ 866 $ 667 $ 1,354
---------- ----------- -----------
Total non-performing loan balances $ 866 $ 667 $ 1,354
========== =========== ===========
</TABLE>
At September 30, 1996, the Bank had identified no impaired loans as defined
by SFAS No. 114. There were no loans in non-accrual status, and as such,
all interest income earned for the year ended September 30, 1996 on the
loans outstanding has been included in income.
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal owners,
and loans to members of the immediate family of such persons at September
30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 207,696 $ 172,425
Additions during year 65,000
Repayments (13,250) (29,729)
----------- -----------
Balance at end of period $ 194,446 $ 207,696
=========== ===========
</TABLE>
(Continued)
29
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
4. Premises and Equipment
Office premises and equipment included the following:
<TABLE>
<CAPTION>
Description Useful Life 1996 1995
- ----------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Land, buildings and improvements 30-45 years $ 839,285 $ 744,072
Furniture, fixtures and equipment 5-10 years 548,357 472,098
----------- ----------
1,387,642 1,216,170
Less accumulated depreciation (729,722) (677,586)
----------- ----------
$ 657,920 $ 538,584
=========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1996, 1995 and 1994
amounted to $58,344, $70,496, and $65,175, respectively.
5. Deposits
Deposit account balances as of the dates indicated are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Demand deposit accounts, non-interest bearing $ 487,377 $ 393,546
Passbook accounts with a weighted average rate of 2.79% at
September 30, 1996 and 1995 8,328,830 7,828,538
NOW and MMDA deposits with a weighted average rate of 2.47%
at September 30, 1996 and 1995 7,908,815 7,600,151
------------ -------------
16,725,022 15,822,235
Certificate of deposits with a weighted average interest rate of
5.63% and 5.84% at September 30, 1996 and 1995, respectively 60,221,188 60,070,942
------------ -------------
Total Deposits $ 76,946,210 $ 75,893,177
============ =============
Jumbo certificates of deposit (minimum denomination of $100,000) $ 3,211,065 $ 3,855,034
============ =============
</TABLE>
(Continued)
30
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
Certificates of deposit by maturity at September 30, 1996 and 1995 (in
thousands) are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Within one year $ 39,678 $ 38,329
Over 1 to 3 years 17,707 17,177
Maturing in years thereafter 2,836 4,565
------------ -------------
$ 60,221 $ 60,071
============ =============
</TABLE>
Certificates of deposit by maturity and interest rate category at September
30, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------
Less Than After 3
One Year 1-2 Years 2-3 Years Years Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
2.01--4.00% $ $ $ $ $
4.01--6.00% 32,780 9,004 2,857 947 45,588
6.01--8.00% 6,898 4,154 1,692 1,889 14,633
8.05--10.00%
----------- ----------- ----------- ----------- -----------
$ 39,678 $ 13,158 $ 4,549 $ 2,836 $ 60,221
=========== =========== =========== =========== ===========
</TABLE>
Interest expense on deposits for the periods indicated is summarized as
follows:
<TABLE>
Years Ended September 30,
------------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Money market and NOW account $ 195,471 $ 212,952 $ 217,059
Savings Accounts 224,418 283,208 285,790
Certificates 3,481,339 3,310,953 2,774,304
------------ ----------- ------------
$ 3,901,228 $ 3,807,113 $ 3,277,153
============ =========== ============
</TABLE>
The Bank maintains arrangements for clearing NOW and MMDA accounts with the
Federal Home Loan Bank of Cincinnati. The Bank is required to maintain
adequate collected funds in its Demand Account to cover average daily
clearings. The Bank was in compliance with this requirement at September
30, 1996 and 1995. At September 30, 1996, the Bank had pledged $450,000 of
their overnight deposits held by the FHLB of Cincinnati to secure certain
customer deposit balances.
6. Income Taxes
Effective January 1, 1993, the Bank adopted SFAS No. 109 "Accounting for
Income Taxes" which requires an asset and liability approach to accounting
for income taxes. The cumulative effect of adopting SFAS No. 109 was to
decrease net income for the year ended September 30, 1994 by $18,591.
Financial statements for prior periods were not restated.
(Continued)
31
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Federal income tax expense:
Current expense $ 690,171 $ 402,949 $ 501,572
Deferred expense (benefit) (101,427) 56,064 56,349
----------- ---------- -----------
$ 588,744 $ 459,013 $ 557,921
=========== ========== ===========
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expenses for tax and financial statement purposes. The source
of these temporary differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Deposit insurance $ (182,261) $ $
Accrued pension cost 18,690
FHLB stock 27,200 24,174 18,054
Allowance for loan losses 57,357 35,947 21,574
Other, net (3,723) (4,057) (1,969)
----------- ---------- -----------
Net deferred tax expense (benefit) $ (101,427) $ 56,064 $ 56,349
=========== ========== ===========
</TABLE>
Forthe periods indicated, total income tax expense differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as follows:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 570,830 $ 459,013 $ 544,511
Other, net 17,914 13,410
----------- ---------- -----------
Total income tax expense $ 588,744 $ 459,013 $ 557,921
=========== ========== ===========
Effective income tax rate 35.1% 34.0% 34.8%
=========== ========== ===========
</TABLE>
(Continued)
32
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
Deferred tax assets and liabilities as of September 30, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred loan fee income $ 78,077 $ 74,439
Deposit insurance assessment 182,261
---------- -----------
260,338 74,439
---------- -----------
Deferred tax liabilities:
FHLB stock 210,120 182,920
Allowance for loan losses 93,305 35,948
Fixed asset basis over tax basis 62,293 62,378
---------- -----------
365,718 281,246
---------- -----------
Net deferred taxes payable $ 105,380 $ 206,807
========== ===========
</TABLE>
In addition to the net deferred tax liability of $105,380 outlined in the
preceding table, the financial statements include a deferred tax liability
of $614,022 that was charged against the unrealized gain on securities
available-for-sale of $1,805,947. The net amount of $1,191,925 is recorded
as a separate component of stockholders' equity.
The Internal Revenue Code allows savings institutions a special bad debt
deduction, subject to certain limitations, based on the greater of actual
experience or a percentage of taxable income method before such deduction.
The effective bad debt deduction under the percentage of taxable income
method is equal to approximately 8% of taxable income. In September of
1996, legislation was passed by Congress, which repealed the bad debt
deduction under the percentage of taxable income method of the Internal
Revenue Code for savings banks. Savings banks, like the Bank, which have
previously used the percentage of taxable income method in computing its
bad debt deduction for tax purposes will be required to recapture into
taxable income post 1987 tax reserves over a six-year period, effective in
fiscal year 1997 for the Bank. The impact of this legislation will not have
a material impact on the financial statements of the Company.
7. Stockholders' Equity and Regulatory Capital
Regulatory Capital. The Bank is subject to minimum regulatory capital
requirements promulgated by the Office of Thrift Supervision (OTS). Such
minimum capital standards generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as
the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as stockholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets such as capitalized mortgage servicing rights) equal to 3.0% of
adjusted total assets. A recent OTS proposal, if adopted in present form,
would increase the core capital requirement to a range of 4%-5% of adjusted
total assets for substantially all savings institutions. Management
anticipates no material change to the Bank's present excess regulatory
capital position as a result of this change in the regulatory capital
requirement. The risk-based capital requirement provides for the
maintenance of core capital plus general loss allowances equal to 8.0% of
risk-weighted assets. In computing risk- weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial
(Continued)
33
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
condition by a defined risk-weighting factor, e.g., one-to-four family
residential loans carry a risk- weighted factor of 50%.
As of September 30, 1996, the Bank's regulatory capital exceeded all
minimum regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
Regulatory Capital
-------------------------------------------------------------------------
Tangible Core isk-based
Capital Percent Capital Percent R Capital Percent
---------- --------- ---------- --------- ----------- ---------
(in thousands)
-------------------------------------------------------------------------
Capital under generally
<S> <C> <C> <C> <C> <C> <C>
accepted accounting princiles $ 22,946 % $ 22,946 % $ 22,946 %
Adjustments:
Net unrealized appreciation
on securities available-for-
sale (1,192) (1,192) (1,192)
General valuation allowances 290
---------- ---------- -----------
Regulatory capital computed 21,754 20.2 21,754 20.2 22,044 40.7
Minimum capital requirement 1,618 1.5 3,235 3.0 4,334 8.0
---------- --------- ---------- --------- ----------- ---------
Regulatory capital-excess $ 20,136 18.7% 4 18,519 17.2% $ 17,710 32.7%
========== ========= ========== ========= =========== =========
</TABLE>
Retained Earnings Restriction. The Bank is allowed a special bad debt
deduction limited generally to eight percent (8%) of otherwise taxable
income and subject to certain limitations based on aggregate loans and
savings account balances at the end of the year. If the amount qualifying
as deductions under the Internal Revenue Code are later used for purposes
other than for bad debt losses, they will be subject to Federal income tax
at the then current corporation rate. Retained earnings at September 30,
1996 includes approximately $1,596,000, for which Federal income tax has
not been provided nor has been required to be provided (see Note 6).
Liquidation Account: Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts
in the Bank were granted priority in the event of the future liquidation of
the Bank through the establishment of a special "Liquidation Account" in an
amount equal to the consolidated net worth of the Bank at March 31, 1995.
The liquidation account was $10,236,488 at March 31, 1995 and will be
reduced in proportion to reductions in the balance of eligible account
holders as determined on each subsequent fiscal year end. The existence of
the liquidation account will not restrict the use or application of net
worth except with respect to the cash payment of dividends. The Bank may
not declare or pay a cash dividend on or repurchase any of its common stock
if the effect thereof would cause its regulatory capital to be reduced
below the amount required for the liquidation account.
(Continued)
34
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
Dividend Restrictions: The payment of cash dividends by the Bank on its
Common Stock is limited by regulations of the OTS. Interest on savings
accounts will be paid prior to payments or dividends on common stock. The
Bank may not declare or pay a cash dividend to the Company in excess of the
greater of (i) 100% of its net income to date during the current calendar
year plus the amount that would reduce by one-half the Bank's capital ratio
at the beginning of the year or (ii) 75% of its net income over the most
recent four quarter period without prior OTS approval. Additional
limitation on dividends declared or paid, or repurchases of the Bank stock
are tied to the Bank's level of compliance with its regulatory capital
requirements. At September 30, 1996, $11.5 million was available for
payment of dividends from the Bank to the Company under the above mentioned
OTS restrictions.
8. Retirement Benefits
Retirement Benefits: The Bank maintained a noncontributory defined benefit
pension plan (Pension Trust) for the year ended September 30, 1993, which
covered all full-time employees with one year of service who had attained
the age of 21. Effective October 1, 1993, the Bank's Board of Directors
terminated the Pension Trust, and effective the same date approved the
Bank's participation in the Pentegra Retirement Fund ("Pentegra"), a
multi-employer defined benefit retirement plan. Net assets of the Pension
Trust were transferred to the Pentegra Plan on October 1, 1993. The
accounting on that date was to recognize the termination of the Pension
Trust, which resulted in a settlement gain of $54,972. The gain was due to
the removal of the accrued pension liability related to the Pension Trust
as of October 1, 1993.
The new multi-employer plan covers all full-time employees with one year of
service who have attained the age of 21. Under a multi-employer defined
benefit plan, pension expense is the amount of the annual required
contribution, and a liability will be recognized only for contributions
which are due but unpaid at the end of the accounting period. Pension
expense was $-0-, $30,843 and $57,500 for the years ended September 30,
1996, 1995, and 1994, respectively.
Effective April 1, 1993, the Board of Directors adopted an employee pension
benefit plan (referred to as a "401K Plan") as described under the
Employees' Retirement Income Security Act of 1974. Under the Plan, the Bank
is required to match 25% of employee contributions up to a maximum of 1.5%
of eligible compensation. The Plan covers all full-time employees. The Bank
contributed $6,888, $7,485, and $7,328 to the Plan for the years ended
September 30, 1996, 1995, and 1994, respectively.
Employee Stock Ownership Plan: In connection with the stock conversion
September 30, 1995, the Company established an internally leveraged
Employee Stock Ownership Plan (the "ESOP") which covers substantially all
full time employees. The ESOP borrowed $1,745,700 from the Company and
purchased 174,570 shares of common stock of the Company at the date of
conversion. The loan is to be repaid in annual installments over a 15 year
period with interest, which is based on the published prime rate (currently
8.50%) per the Wall Street Journal.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends, if any, received by the ESOP and used for debt
service. Dividends received by the ESOP on shares held as collateral may be
used to pay debt service; dividends on allocated shares may be credited to
participants' accounts. Dividends of $67,500 were used in fiscal year 1996
to pay ESOP
(Continued)
35
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
debt service. The ESOP shares are pledged as collateral on the debt. As the
debt is repaid, shares are released from collateral and allocated to active
participants based on a formula specified in the ESOP agreement.
ESOP compensation was $169,067 for the year ended September 30, 1996. For
1996, 11,640 were released from collateral. At September 30, 1996, there
were 162,930 unallocated ESOP shares having a fair value of $2,851,275.
9. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include mortgage commitments outstanding which
amounted to approximately $931,000 plus unused lines of credit granted to
customers totaling $1,588,846 at September 30, 1996. At September 30, 1995
mortgage commitments outstanding amounted to approximately $1,050,000 and
unused lines of credit amounted to $1,297,367. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and consumer
lines of credit are represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained upon extension of credit is based
on management's credit evaluation of the counterparty. Collateral held
varies, but primarily includes residential real estate.
10. Earnings Per Share
Earnings per share for the year ended September 30, 1996 was calculated by
dividing net income of $1,090,167 by the weighted average number of shares
of common stock outstanding during the year, which was 1,998,877 for the
year ended September 30, 1996. Earnings per share for fiscal year 1995 and
prior years are not shown because the stock conversion was effective
September 29, 1995.
11. Trust Accounts
The Bank maintained two Trust accounts during the year ended September 30,
1996. The following is a summary of the Trust Department assets at
September 30, 1996:
Description September 30, 1996
----------- --------------------
Cash in passbook and checking account $ 3,331
Certificates of deposit 22,021
-----------
Total $ 25,352
===========
(Continued)
36
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
12. Disclosures about Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." This statement extends the existing fair
value disclosure practices for some instruments by requiring all entities
to disclose the fair value of financial instruments (as defined), both
assets and liabilities recognized and not recognized in the statements of
financial condition, for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as they
relate only to specific data based on relevant information at that time. As
a significant percentage of the Bank's financial instruments do not have an
active trading market, fair value estimates are necessarily based on future
expected cash flows, credit losses, and other related factors. Such
estimates are accordingly, subjective in nature, judgmental and involve
imprecision. Future events will occur at levels different from that in the
assumptions, and such differences may significantly affect the estimates.
The statement excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company. Additionally, the tax impact of the unrealized gains or losses has
not been presented or included in the estimates of fair value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the statement
of financial condition for cash and short-term instruments approximate
those assets' fair values.
Investment Securities. Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. No active market exists for the Federal Home Loan Bank capital
stock. The carrying value is estimated to be fair value since if the Bank
withdraws membership in the Federal Home Loan Bank, the stock must be
redeemed for face value.
Loans Receivable. The fair value of loans was estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
Deposits. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Loan Commitments and Unused Home Equity Lines of Credit. The fair value of
loan commitments and unused lines of credit is estimated by taking into
account the remaining terms of the agreements and the present
credit-worthiness of the counterparties.
(Continued)
37
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
The estimated fair value of the Company's financial instruments at
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------------- --------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 15,064,677 $ 15,064,677
Certificates of deposit 2,500,000 2,500,000
Securities available-for-sale 1,881,429 1,881,429
Securities held-to-maturity 10,502,766 10,398,994
Loans receivable, net 77,502,336 77,617,294
Liabilities
Deposits 76,946,210 77,081,851
Unrecognized Financial Instruments
Loan commitments 931,000
Unused lines of credit 1,588,846
</TABLE>
(Continued)
38
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
13. Harrodsburg First Financial Bancorp, Inc. Financial Information (Parent
Company Only)
The parent company's principal assets are its investment in the Bank and
cash balances on deposit with the Bank. The following are condensed
financial statements for the parent company as of September 30, 1996.
<TABLE>
<CAPTION>
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Financial Condition
September 30, 1996
<S> <C>
Assets:
Cash and due from banks $ 7,548,037
Investment in subsidiary 22,945,415
Other assets 122,498
-----------
Total assets $30,615,950
===========
Liabilities and Stockholders' Equity:
Dividends payable $ 391,633
Accounts payable 2,328
-----------
393,961
-----------
Stockholders' equity
Common stock 218,213
Additional paid-in capital 21,001,572
Retained earnings 10,229,074
Net unrealized appreciation on securities available-for-sale 1,191,925
Treasury stock, 49,392 shares, at cost (789,495)
Unearned ESOP shares (1,629,300)
-----------
Total stockholders' equity 30,221,989
-----------
Total liabilities and stockholders' equity $30,615,950
===========
</TABLE>
(Continued)
39
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
<TABLE>
<CAPTION>
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Income
year ended September 30, 1996
Income:
<S> <C>
Miscellaneous income $ 1,000
-----------
Expense:
Legal fees 32,196
Franchise and license tax 30,435
Transfer agent fees 10,832
Accounting fees 10,000
Other operating expenses 16,351
-----------
99,814
-----------
Net loss before tax benefit (98,814)
Income tax benefit 6,096
-----------
Net loss before equity in undistributed net income of subsidiary (92,718)
Equity in undistributed net income of subsidiary 1,182,885
-----------
Net income $ 1,090,167
===========
</TABLE>
<TABLE>
<CAPTION>
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Cash Flows
year ended September 30, 1996
<S> <C>
Cash flows from operating activities:
Net income $ 1,090,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,182,885)
Increase in other receivables (6,098)
Decrease in other liabilities (363,086)
-----------
Net cash used by operating activities (461,902)
-----------
Cash flows from investing activities:
Net cash provided (used) by investing activities
-----------
Cash flows from financing activities:
Dividends paid (403,838)
Purchase of common stock (789,495)
-----------
Net cash used by financing activities (1,193,333)
-----------
Net decrease in cash and cash equivalents (1,655,235)
Cash and cash equivalents at beginning of period 9,203,272
-----------
Cash and cash equivalents at end of period $ 7,548,037
===========
</TABLE>
(Continued)
40
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
14. Harrodsburg Savings and Loan Service Corporation
In 1978, the Bank formed Harrodsburg Savings and Loan Service Corporation,
a wholly owned subsidiary, by purchasing its stock for $15,000. The
Subsidiary was created to hold stock in a not for profit corporation that
provides on line computer processing and inquiry service for the Bank and
other savings and loan institutions.
Summary balance sheets for the wholly owned subsidiary are as follows:
Harrodsburg Savings & Loan Service Corporation
Balance Sheets, September 30, 1996 and 1995
----------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- -----------
<S> <C> <C>
Investments $ 15,000 $ 15,000
========== ===========
STOCKHOLDERS' EQUITY
Common stock $ 15,000 $ 15,000
========== ===========
</TABLE>
The Service Corporation did not receive income nor did it incur expense
during the years ended September 30, 1996 and 1995.
15. Stock Purchase
On March 18, 1996, the Board of Directors of the Company authorized the
repurchase of up to 5% or 109,106 shares of the Company's stock.
Subsequently, 49,392 shares were repurchased at a total cost of $789,495.
This plan, as approved by OTS, expired September 30, 1996. On September 16,
1996, the Board of Directors approved filing a second application with OTS
to purchase 5% of the then outstanding stock (106,636 shares).
41
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
Jack D. Hood Jack L. Coleman, Jr. Jack L. Coleman, Sr.
President and Chief Executive Representative, State of Partner, Coleman's Lumber Yard
Officer of the Bank and the Kentucky; Partner, Coleman's
Company Lumber Yard
Elwood Burgin Thomas Les Letton Wickliffe T. Asbury, Sr.
Retired President, The Letton Company Vice President of the Bank and
the Company
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
<S> <C> <C>
Jack D. Hood Charles W. Graves, Jr. Wickliffe T. Asbury, Sr.
President and Chief Executive Vice President of the Bank Vice President of the Bank
Officer of the Bank and the and the Company and the Company
Company
Debbie C. Roach Teresa W. Noel
Secretary of the Bank and the Company Treasurer of the Bank and the
Company
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OFFICE LOCATIONS
<S> <C>
104 South Chiles Street 216 South Main Street
Harrodsburg, Kentucky 40330 Lawrenceburg, Kentucky 40356
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL INFORMATION
<S> <C> <C>
Independent Accountants Special Counsel Annual Report on Form 10K
Miller, Mayer, Sullivan, & Stevens, Malizia, Spidi, Sloane, & Fisch, P.C. A COPY OF THE COMPANY'S
LLP One Franklin Square 1996 ANNUAL REPORT ON FORM
2365 Harrodsburg Road 1301 K Street, N.W., Suite 700 East 10-K WITHOUT EXHIBITS WILL
Lexington, KY 40504-3399 Washington, DC 20005 BE FURNISHED WITHOUT
CHARGE TO STOCKHOLDERS AS
General Counsel Annual Meeting OF THE RECORD DATE FOR THE
David Patrick The 1997 Annual Meeting of 1997 ANNUAL MEETING UPON
Attorney-at-Law Stockholders will be held on January WRITTEN REQUEST TO JACK D.
321 South Main Street 27, 1997 at 2:00 p.m. at First Federal HOOD, HARRODSBURG FIRST
Harrodsburg, KY 40330 Savings Bank of Harrodsburg, 104 FINANCIAL BANCORP, INC., P.O.
South Chiles Street, Harrodsburg, KY BOX 384, 104 SOUTH CHILES
Walter Patrick STREET, HARRODSBURG, KY
Attorney-at-Law Transfer Agent 40330
Gordon Building Illinois Stock Transfer
P.O. Box 178 223 West Jackson Blvd,, Suite 1210
Lawrenceburg, KY 40342 Chicago, IL 60606
</TABLE>
42
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Harrodsburg First Financial Bancorp, Inc.
<TABLE>
<CAPTION>
Percentage State of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
<S> <C> <C>
First Federal Savings Bank of Harrodsburg (a) 100% United States
Harrodsburg Savings and Loan 100% Kentucky
Service Corporation (a)
</TABLE>
- -----------------
(a) The operations of this subsidiary are included in the consolidated
financial statements contained in the 1996 Annual Report to
Stockholders incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 834
<INT-BEARING-DEPOSITS> 16,730
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,881
<INVESTMENTS-CARRYING> 10,503
<INVESTMENTS-MARKET> 10,399
<LOANS> 77,799
<ALLOWANCE> 297
<TOTAL-ASSETS> 108,953
<DEPOSITS> 76,946
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,785
<LONG-TERM> 0
0
0
<COMMON> 218
<OTHER-SE> 30,004
<TOTAL-LIABILITIES-AND-EQUITY> 108,953
<INTEREST-LOAN> 5,970
<INTEREST-INVEST> 433
<INTEREST-OTHER> 1,309
<INTEREST-TOTAL> 7,712
<INTEREST-DEPOSIT> 3,901
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 3,811
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,225
<INCOME-PRETAX> 1,679
<INCOME-PRE-EXTRAORDINARY> 1,679
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,090
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.57
<LOANS-NON> 0
<LOANS-PAST> 866
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 297
<CHARGE-OFFS> 7
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 297
<ALLOWANCE-DOMESTIC> 297
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
