================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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, 1997
- 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 ____________________
Commission Number: 0-26570
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
-------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 61-1284899
-------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
104 South Chiles Street, Harrodsburg, Kentucky 40330-1620
- ---------------------------------------------- ----------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (606) 734-5452
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ('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 and ask price of the Registrant's
Common Stock as quoted on the National Association of Securities Dealers, Inc.,
Automated Quotations System on December 8, 1997, was $32.1 million (1,789,726
shares at $17.94 per share).
As of December 8, 1997 there were issued and outstanding 1,986,315
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, 1997. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
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<PAGE>
EXHIBIT INDEX
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.*
10.1 1996 Stock Option Plan**
10.2 Restricted Stock Plan and Trust Agreement**
13.0 1997 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.
** Previously filed.
<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: January 8, 1998 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.
By: /s/ Jack D. Hood By: /s/ Wickliffe T. Asbury, Sr.
---------------------------- ----------------------------
Jack D. Hood Wickliffe T. Asbury, Sr.
President, Chief Executive Vice President and Director
Officer and Director
Date: January 8, 1998 Date: January 8, 1998
By: /s/ Elwood Burgin By: /s/ Teresa W. Noel
-------------------------- ----------------------------
Elwood Burgin Teresa W. Noel
Director Treasurer and Chief Financial
Officer
Date: January 8, 1998 Date: January 8, 1998
By: /s/ Thomas Les Letton By: /s/ Jack L. Coleman, Jr.
--------------------------- -----------------------------
Thomas Les Letton Jack L. Coleman, Jr.
Director Director
Date: January 8, 1998 Date: January 8, 1998
Exhibit 13
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1997 ANNUAL REPORT
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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
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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 8,
1997, there were 1,986,315 shares of the Common Stock issued and outstanding,
held by approximately 556 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 such semi-annual period.
The regular semi-annual dividend of $0.20 per share was payable on October 15,
1997 to stockholders of record on October 3, 1997. On September 15, 1997, the
Board of Directors declared a special dividend of $.20 per share payable on
October 16, 1997, to stockholders of record as of October 6, 1997. 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
- --------------------------------------------------------------------------------
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..........................................Inside Back Cover
<PAGE>
LETTER TO STOCKHOLDERS
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To Our Stockholders
We are pleased to report the results of Harrodsburg First Financial Bancorp,
Inc.'s operations for the fiscal year ending September 30, 1997, our second full
year as a public company.
The Company's consolidated net income for fiscal year 1997 was $1,476,266 or
$.78 a share, representing an increase of $386,099 or 35.4% over fiscal year
1996 consolidated net income of $1,090,167. Consolidated net income for fiscal
1996 amounted to $.55 per share. For the year ending September 30, 1997, the
Company and Bank, on a consolidated basis, had $7.7 million in interest income,
$3.8 million in interest expense, and $3.9 million in net interest income.
Non-interest expense for fiscal 1997 was $1.7 million as compared to $2.2
million for fiscal 1996. This decrease was due primarily to the one-time Savings
Association Insurance Fund (SAIF) special assessment in fiscal 1996. The income
tax expense in fiscal year 1997 was $771,000 as compared to $589,000 in fiscal
year 1997.
Total assets at September 30, 1997 were $109.7 million compared to $108.9
million at September 30, 1996. Deposits were $78.6 million at September 30,
1997, compared to $76.9 million at September 30, 1996. Stockholders' equity
totaled $29.8 million at September 30, 1997, or $15.89 per share as compared to
$30.2 million or $15.34 per share at September 30, 1996.
During fiscal year 1997 in excess of $2 million was used for stock repurchases.
As of September 30, 1997 a total of 157,369 shares had been repurchased in open
market transactions. In October 1997, the Board announced another repurchase
plan of an additional 5% of the outstanding shares of the Company. All
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.
The overwhelming public response to our initial public offering has presented a
challenge to your Board and management. Specifically, optimal deployment of
capital has become one of our Company's primary areas of focus. Toward this end,
during fiscal 1997 the Board hired the services of an outside consulting firm to
develop a strategic business plan to assist management in planning for the
future growth of the Company. We feel that as recommendations from this plan are
implemented and as new products and services are introduced, this will serve to
enhance long-term shareholder value.
We want to thank you for the trust and confidence you have shown in Harrodsburg
First Financial Bancorp, Inc., and we encourage you to expand your banking
relationships with us.
Sincerely,
/s/ Jack Hood
Jack Hood
President and Chief Executive Officer
1
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
Financial Condition Data
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets............................... $ 109,638 $ 108,953 $ 107,234 $ 91,465 $ 89,744
Loans receivable, net................ 81,261 77,502 75,434 72,640 72,172
Investments (1)...................... 14,382 14,884 8,580 7,266 1,244
Cash and cash equivalents............ 12,621 15,065 21,990 10,350 15,255
Deposits............................. 78,629 76,946 75,893 82,091 81,455
Stockholders' equity................. 29,773 30,222 30,185 9,043 8,018
- -------------------------------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding........ 1,668 1,710 1,745 1,764 1,849
Deposit accounts..................... 9,594 9,524 10,559 9,930 9,908
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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest income.......................... $ 7,699 $ 7,712 $ 6,612 $ 6,210 $ 6,433
Interest expense......................... 3,835 3,901 3,807 3,277 3,745
----------- ----------- ----------- ----------- -----------
Net interest income.................. 3,864 3,811 2,805 2,933 2,688
Provision for loan losses................ 11 8 92 60 60
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses........... 3,853 3,803 2,713 2,873 2,628
Non-interest income...................... 95 101 81 86 102
Non-interest expense..................... 1,701 2,225 1,444 1,357 1,303
----------- ----------- ----------- ----------- -----------
Income before income tax expense
and cumulative effect of change
in accounting principle.............. 2,247 1,679 1,350 1,602 1,427
Income tax expense....................... 771 589 459 558 485
----------- ----------- ----------- ----------- -----------
Income before cumulative effect
of change in accounting principle... 1,476 1,090 891 1,044 942
Cumulative effect of change in
accounting principle (1)............. 19
----------- ----------- ----------- ----------- -----------
Net income............................... $ 1,476 $ 1,090 $ 891 $ 1,025 $ 942
=========== =========== =========== =========== ===========
</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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets)..... 1.36% 1.00% .95% 1.12% 1.04%
Return on average equity (net income
divided by average equity)........... 5.12 3.56 7.84 12.01 12.48
Average interest-earning assets to
average interest-bearing liabilities. 136.34 139.15 113.08 109.11 107.43
Net interest rate spread................. 2.32 2.14 2.50 2.92 2.71
Net yield on average interest-
earning assets....................... 3.64 3.57 3.04 3.26 3.03
Dividend payout.......................... 45.2 72.7
Capital Ratios:
Average equity to average assets
(average equity divided by
average total assets)................ 26.64 28.18 12.11 9.32 8.34
Equity to assets at period end........... 27.14 27.74 28.15 9.89 8.93
Asset Quality Ratios:
Net interest income after provision for
loan losses to total other expenses.. 226.51 170.92 187.88 211.56 201.69
Non-performing loans to total loans...... .64 1.12 .88 1.86 1.33
Non-performing loans to total assets..... .47 .79 .62 1.48 1.07
</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 1997 and 1996.
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
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
------------------------------------------ -----------------------------------------
Stock Price Range Stock Price Range
----------------------------- Per Share --------------------------- Per Share
Quarter Low High Dividend Low High Dividend
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $ 17.50 $ 19.25 $ 0.15 $ 12.00 $ 15.75 $
2nd 15.25 18.75 0.20 13.25 14.63 0.20
3rd 14.75 16.00 13.00 15.75
4th 14.75 16.75 15.25 18.25 0.20
- ----------------------------------------------------------------------------------------------------------------------
Total $ 0.35 $ 0.40
======= ======
</TABLE>
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.
4
<PAGE>
Asset/Liability Management
Quantitative Aspects of Market Risk. The Bank does not maintain a trading
account for any class of financial instrument. Further, it is not currently
subject to foreign currency exchange rate risk or commodity price risk. The
stock in the FHLB of Cincinnati does not have equity price risk because it is
issued only to members and is redeemable for its $100 par value. The following
table illustrates quantitative sensitivity to interest rate risk for financial
instruments other than non-interest earning cash balances, FHLB stock and demand
deposit accounts for the Bank as of September 30, 1997.
Market Rate Analysis - September 30, 1997
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------------------------------------------------------------------
Year ended September 30,
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans-fixed:
Balance $169 $97 $257 $381 $751 $10,832 $12,487 $12,860
Interest rate 8.34% 8.88% 8.99% 8.98% 8.95% 8.29% 8.36%
Loans-variable:
Balance 59,786 2,375 1,878 5,280 69,319 68,396
Interest rate 7.87% 6.99% 7.09% 7.34% 7.78%
Investments:
Balance 13,915 500 500 5,500 3,000 1,565 24,980 24,970
Interest rate 4.27% 6.0% 6.98% 6.31% 6.66% 6.76% 5.18%
Liabilities:
Deposits:
Balance 16,354 16,354 16,354
Interest rate 2.56% 2.56% 2.56%
Deposits-certificates
Balance 44,890 9,795 5,632 718 775 147 61,957 62,090
Interest rate 5.55% 5.86% 6.23% 5.89% 6.17% 7.60% 5.67%
</TABLE>
Qualitative Aspects of Market Risk. Net interest income, the primary component
of the Bank's net earnings, is derived from the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. One of the
Bank's principal financial objectives is to achieve long-term profitability
while reducing its exposure to fluctuations in interest rates. The Bank has
sought to reduce exposure of its earnings to changes in market interest rates by
managing the mismatch between asset and liability maturities and interest rates.
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
5
<PAGE>
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, 1997, 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.
In addition to shortening the average repricing of its assets, 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 market
rates of interest on its certificates of deposit, which are typically higher on
its longer term certificates, in order to encourage depositors to invest in
certificates with longer maturities.
There have been no significant changes in the Bank's primary market risk
exposures or methods for managing those exposures since September 30, 1997.
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, 1997 would decrease by $1.6 million or 5.7% 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.
Certificates of deposit constitute approximately 79% of the Bank's total
deposits and generally pay higher rates of interest than core deposits. The
Bank's emphasis on certificates of deposits may result in a higher average cost
of deposits which may adversely affect the Bank's interest rate spread. 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.
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1997 1996
---------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................... $ 79,642 $6,239 7.83% $ 74,797 $5,970 7.98%
Investment securities1 ............. 26,480 1,460 5.51 32,043 1,742 5.44
-------- ------ ------ -------- ------ ----
Total interest-earning assets..... 106,122 7,699 7.25 106,840 7,712 7.22
------ ------
Non-interest earning assets............ 2,031 1,871
-------- --------
Total assets........................ $108,153 $108,711
======== ========
Interest-bearing liabilities:
Deposits............................ $ 77,834 3,835 4.93 $ 76,779 3,901 5.08
-------- ------ ------ -------- ------ ----
Total interest-bearing liabilities.. 77,834 3,835 4.93 76,779 3,901 5.08
------ ------ -------- ------ ----
Non-interest bearing liabilities:...... 1,512 1,296
-------- --------
Total liabilities................... 79,346 78,075
Stockholders' equity................... 28,807 30,636
-------- --------
Total liabilities & stockholders'
equity............................ $108,153 $108,711
======== ========
Net interest income.................... $3,864 $ 3,811
====== ========
Interest rate spread 2................. 2.32% 2.14%
====== =====
Net yield on interest-earning assets3.. 3.64% 3.57%
====== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 136.34% 139.15%
====== ======
<PAGE>
<CAPTION>
1995
-----------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable.................... $74,013 $5,634 7.61%
Investment securities1 ............. 18,191 978 5.38
------- ------ ------
Total interest-earning assets..... 92,204 6,612 7.17
------ ------
Non-interest earning assets............ 1,673
-------
Total assets........................ $93,877
=======
Interest-bearing liabilities:
Deposits............................ $81,539 3,807 4.67
------- ------ ------
Total interest-bearing liabilities.. 81,539 3,807 4.67
------ ------
Non-interest bearing liabilities:...... 966
-------
Total liabilities................... 82,505
Stockholders' equity................... 11,372
-------
Total liabilities & stockholders'
equity............................ $93,877
=======
Net interest income.................... $2,805
======
Interest rate spread 2................. 2.50%
======
Net yield on interest-earning assets3.. 3.04%
======
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... (113.08)%
======
</TABLE>
- ------------------
1 Includes interest-bearing 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-bearing assets represents net interest income as a
percentage of average interest-earning assets.
7
<PAGE>
The net interest margin is a key measure in determining the Bank's income
performance. The Bank's net interest margin was 3.64% for the year ended
September 30, 1997 compared to 3.57% for the same period in 1996. The 1997
increase was due to an increase of net interest income of approximately $53,000
or 1.4%. Interest income for the year ended September 30, 1997 decreased
approximately $13,000 or .2% compared to the same period in 1996. During these
same periods, interest expense decreased approximately $66,000 or 1.7%.
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.
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.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------------------------------
1997 vs 1996 1996 vs 1995
-------------------------------------------------- ------------------------------------------------
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 $ 390 $ (111) $ (7) $ 272 $ 60 $ 274 $ 3 $ 337
Investment securities1 (304) 23 (4) (285) 744 11 8 763
-------- --------- ----------- --------- ----------- --------- ---------- ----------
Total $ 86 $ (88) $ (11) $ (13) $ 804 $ 285 $ 11 $ 1,100
======== ========= =========== ========= =========== ========= ========== =========
Interest expense:
Deposits $ 54 $ (118) $ (2) $ (66) $ (222) $ 336 $ (20) $ 94
-------- --------- ----------- --------- ----------- --------- ---------- ---------
Total $ 54 $ (118) $ (2) $ (66) $ (222) $ 336 $ (20) $ 94
======== ========= =========== ========= =========== ========= ========== =========
Net change in interest income $ 32 $ 30 $ (9) $ 53 $ 1,026 $ (51) $ 31 $ 1,006
======== ========= =========== ========= =========== ========= ========== =========
</TABLE>
- ---------------
1 Includes interest-earning overnight deposits and term deposits with FHLB of
Cincinnati.
9
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 1997 AND 1996
Net Interest Income. Net interest income for the year ended September 30, 1997
was $3.9 million, compared to $3.8 million for the year ended September 30,
1996. The increase in net interest income in fiscal 1997 of $53,000 was due to a
decrease in interest expense of $66,000 offset by a decrease in interest income
of $13,000. The decrease in interest expense of $66,000 was primarily due to a
lower average interest rate paid on deposits in 1997 compared to 1996. The
average balance of interest bearing liabilities in 1997 was $77.8 million with
an average cost of funds of 4.93%, compared to average balances of interest
bearing liabilities in 1996 of $76.8 million with an average cost of funds of
5.08%. Interest income in 1997 was $7.7 million with an average yield of 7.25%,
compared to $7.7 million with an average yield of 7.22% in 1996.
Net Income. Net income increased by $386,000, or 35.4% to $1,476,000 for the
year ended September 30, 1997 as compared to $1,090,000 for the year ended
September 30, 1996. The net increase was due to an increase in net interest
income of $53,000 and a decrease in non-interest expense of $524,000 offset by
an increase in the provision for loan losses of $3,000, a decrease in
non-interest income of $6,000 and an increase in income tax expense of $182,000.
Interest Income. Interest income was $7.7 million, or 7.25% of average
interest-earning assets, for the year ended September 30, 1997 as compared to
$7.7 million, or 7.22% of average interest-earning assets, for the year ended
September 30, 1996. Interest income decreased $13,000 or .17% from 1996 to 1997.
The change was primarily due to a $718,000 decrease in the average balance of
interest-earning assets during the year ended September 30, 1997 compared to the
year ended September 30, 1996.
Interest Expense. Interest expense was $3.8 million, or 4.93% of average
interest-bearing liabilities, for the year ended September 30, 1997 as compared
to $3.9 million, or 5.08% of average interest-bearing liabilities, for the
corresponding period in 1996. The decrease in interest expense of $66,000 was
the result of a 15 basis point decrease in the average rate paid on the deposits
offset by the increase of $1.0 million in the average balance of interest
bearing deposits for the year ended September 30, 1997 compared to the same
period in 1996.
Provision for Loan Losses. The provision for loan losses was $11,000 and $8,000
for the years ended September 30, 1997 and 1996, 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, 1997 and 1996
the allowance for loan losses represented .37% of total loans.
Non-Interest Income. Non-interest income amounted to $95,000 and $101,000 for
the years ended September 30, 1997 and 1996, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $75,000 and $77,000 for 1997 and 1996, respectively.
Non-Interest Expense. Non-interest expense decreased approximately $524,000, or
23.6%, from $2.2 million for the year ended September 30, 1996 to $1.7 million
for the year ended September 30, 1997. Non-interest expense was 1.6% and 2.0% of
average assets for the years ended September 30, 1997 and 1996, respectively.
The decrease of $524,000 was primarily due to a decrease of $670,000 in federal
insurance premiums offset by an increase in compensation and benefits of $76,000
and an increase in other operating expense of $50,000. The decrease of $670,000
in federal insurance premiums was the result of a one-time special assessment of
$536,000 charged in 1996 to recapitalize the Savings Association Insurance Fund
(SAIF), and an additional $134,000 savings in 1997 due to
10
<PAGE>
the reduction of the insurance assessment rate on the Bank's deposits as a
result of the recapitalization of SAIF. The increase of $76,000 in compensation
and benefits resulted from an increase of $21,000 related to benefits earned in
the employee stock option plan, and $55,000 in normal salary increases and
related benefits. The increase of $50,000 in other operating expense was
primarily due to increases in franchise taxes of the Company and expenses
related to operating two automatic teller machines which were installed in
September of 1996.
Income Tax Expense. The provision for income tax expense amounted to
approximately $771,000 and $589,000 for the years ended September 30, 1997 and
1996, respectively. The provision for income tax expense as a percentage of
income before income tax expenses amounted to 34.3% and 35.1% for 1997 and 1996,
respectively.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 1996 AND 1995
Net Interest Income. Net interest income for the year ended September 30, 1996
was $3.8 million, compared to $2.8 million for the year ended September 30,
1995. The increase in net interest income in fiscal 1996 of $1.0 million was due
to a $1.1 million increase in interest income offset by an increase in interest
expense of $100,000. The increase in interest income in fiscal 1996 of $1.1
million was primarily due to an increase in the average balance of
interest-earning assets from the net proceeds of the stock conversion,
consumated on September 29, 1995. The average balance of interest-earning assets
in 1996 was $106.8 million with an average yield of 7.22%, compared to average
balances of interest-earning assets of $92.2 million with an average yield of
7.17% in 1995. The average balance of interest-bearing liabilities in 1996 was
$76.8 million with an average cost of funds of 5.08%, compared to average
balances of interest-bearing liabilities of $81.5 million in 1995 with an
average cost of funds of 4.67%.
Net Income. Net income 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.
11
<PAGE>
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 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 FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND 1996
The Company's consolidated assets increased $686,000, or.63%, to $109.6 million
at September 30, 1997 compared to $109.0 million at September 30, 1996.
Securities available-for-sale increased $836,000, securities held-to-maturity
increased $562,000, loans increased $3.8 million, cash and cash equivalents plus
certificates of deposit decreased $4.3 million, and other non-interest earning
assets decreased by $127,000.
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 $836,000 due to the
increase in fair value of such securities. Securities held-to-maturity increased
$562,000 due to the purchase of debt securities of U.S. Government agencies
totaling $3.5 million offset by the call of $3.0 million of debt securities of
U.S. Government agencies.
Liabilities of the Company increased $1.1 million, or 1.4%, to $79.9 million at
September 30, 1997 compared to $78.7 million at September 30, 1996. The increase
in liabilities was primarily due to the increase in deposits of $1.6 million,
reflecting management's success in attracting depositors within the local market
area.
Stockholder's equity was $29.8 million at September 30, 1997 and decreased
approximately $449,000 over the balance at September 30, 1996. The decrease was
due to the purchase of common stock totaling $2.0 million plus the payment of
dividends totaling $668,000 offset by net income of $1.5 million, an increase of
$552,000 in the net unrealized appreciation on securities available-for-sale,
plus an increase of $192,000 due to ESOP shares earned in 1997.
12
<PAGE>
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 regulatory capital requirements and position
at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------- --------------------------
(Dollars in Thousands)
Amount Percent Amount Percent
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Tangible capital................................. $ 23,392 21.3 $ 21,754 20.2
Tangible capital requirement..................... 1,605 1.5 1,618 1.5
-------------- ----------- ----------- -----------
Excess........................................... $ 21,787 19.8 $ 20,136 18.7
============== =========== =========== ===========
Core capital..................................... $ 23,392 21.3 $ 21,754 20.2
Core capital requirement......................... 3,210 3.0 3,235 3.0
-------------- ----------- ----------- -----------
Excess........................................... $ 20,182 18.3 $ 18,519 17.2
============== =========== =========== ===========
Tangible capital ................................ $ 23,862 $ 21,754
General valuation allowance...................... 235 290
-------------- -----------
Total capital (core and supplemental)............ 23,627 43.1 22,044 40.7
Risk-based capital requirement................... 4,387 8.0 4,334 8.0
-------------- ----------- ----------- -----------
Excess........................................... $ 19,240 35.1 $ 17,710 32.7
============== =========== =========== ===========
</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, 1997, the Bank could pay on
its common stock dividends of approximately $11.1 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, 1997, 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.
The Company's operating activities produced positive cash flows for the fiscal
years ended September 30, 1997, 1996, and 1995.
The Bank's most liquid assets are cash and cash-equivalents, which include
investments in highly liquid, short-term investments. At September 30, 1997 and
1996, cash and cash equivalents totaled $12.6 million and $15.1 million,
respectively.
13
<PAGE>
At September 30, 1997, the Bank had $44.9 million in certificates of deposits
due within one year and $15.4 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 or borrowings. At September 30,
1997, the Bank had $629,000 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, 1997, 1996, and 1995 was
32.2%, 34.26%, and 36.10%, 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.
Impact of Recent Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125"). SFAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Bank adopted the provisions of
SFAS 125 in January 1997 with no material effect on the Company's financial
statements.
Accounting for Earnings Per Share. In February 1997, the FASB issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures, and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt the statement at the end of the first quarter
in fiscal year 1998. Basic and diluted earnings per share under SFAS 128 would
be identical to earnings per share as presented in the financial statements, and
therefore, will not have any material effect on the Company.
14
<PAGE>
Reporting of Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130,
Reporting of Comprehensive Income ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of financial statements. This
statement also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company does
not anticipate that adoption of SFAS 130 will have a material effect on the
Company.
Disclosure about Segments and Related Information. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments.
This statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. The Company does not anticipate that the
adoption of SFAS 131 will have a material effect on the Company.
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, 1997 and 1996
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,
1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three year period ended September 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
December 8, 1997
16
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
---------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 739,782 $ 834,621
Interest Bearing Deposits 11,881,011 14,230,056
Certificates of deposit 600,000 2,500,000
Securities available-for-sale at fair value 2,717,352 1,881,429
Securities held-to-maturity, fair value of $11,055,369 and
$10,398,994 for 1997 and 1996, respectively 11,064,606 10,502,766
Loans receivable, net 81,261,278 77,502,336
Accrued interest receivable 641,324 675,433
Premises and equipment, net 656,197 657,920
Other assets 76,771 168,113
--------------- ---------------
Total assets $ 109,638,321 $ 108,952,674
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 78,629,205 $ 76,946,210
Advance payments by borrowers for taxes and insurance 66,070 68,534
Deferred Federal income tax 1,003,636 719,402
Dividends payable 391,633
Other liabilities 166,586 604,906
--------------- ---------------
Total liabilities 79,865,497 78,730,685
--------------- ---------------
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 21,077,239 21,001,572
Retained earnings, substantially restricted 11,037,504 10,229,074
Net unrealized appreciation on securities available-for-sale,
net of deferred income taxes 1,743,634 1,191,925
Treasury stock, 157,369 and 49,392 shares, at cost, for 1997 (2,790,826) (789,495)
and 1996, respectively
Unallocated employee stock ownership plan (ESOP) shares (1,512,940) (1,629,300)
--------------- ---------------
Total stockholders' equity 29,772,824 30,221,989
--------------- ---------------
Total liabilities and stockholders' equity $ 109,638,321 $ 108,952,674
=============== ===============
</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, 1997, 1996, and 1995
---------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ --------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 6,238,613 $ 5,970,236 $ 5,634,417
Interest and dividends on securities 781,583 433,018 104,368
Other interest income 678,480 1,308,723 872,911
------------- ------------ --------------
Total interest income 7,698,676 7,711,977 6,611,696
------------- ------------ --------------
Interest expense:
Interest on deposits 3,834,806 3,901,228 3,807,113
------------- ------------ --------------
Net interest income 3,863,870 3,810,749 2,804,583
Provision for loan losses 11,000 7,500 91,982
------------- ------------ --------------
Net interest income after provision for loan losses 3,852,870 3,803,249 2,712,601
------------- ------------ --------------
Non-interest income:
Loan and other service fees, net 75,275 77,214 58,829
Other 20,165 24,030 22,314
------------- ------------ --------------
95,440 101,244 81,143
------------- ------------ --------------
Non-interest expense:
Compensation and benefits 911,051 834,471 745,285
Occupancy expenses, net 129,040 121,604 130,781
Federal and other insurance premiums 78,539 748,464 188,072
Data processing expenses 104,842 95,711 92,976
State franchise tax 94,904 93,037 83,694
Other operating expenses 383,031 332,295 202,898
------------- ------------ --------------
1,701,407 2,225,582 1,443,706
------------- ------------ --------------
Income before income tax expense 2,246,903 1,678,911 1,350,038
Income tax expense 770,637 588,744 459,013
------------- ------------ --------------
Net income $ 1,476,266 $ 1,090,167 $ 891,025
============= ============ ==============
Earnings per share $ 0.78 $ 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, 1997, 1996, and 1995
---------------------------
<TABLE>
<CAPTION>
Net Unrealized
Additional Appreciation on
Common Paid-In Retained Securities
Stock Capital Earnings Available-for-Sale
------------- ----------- ------------- ------------------
<S> <C> <C> <C> <C>
Balance, September 30, 1994 $ $ 9,043,353 $
Issuance of common stock 218,213 20,948,904
Net income 891,025
Cumulative effect October 1, 1994 of change in accounting
for securities, net of deferred income taxes 629,086
Change in unrealized gain on securities available-for-sale
net of deferred income taxes, 200,333
------------- ------------- ------------- ------------------
Balance, September 30, 1995 218,213 20,948,904 9,934,378 829,419
Net income 1,090,167
Change in net unrealized gain on securities available-for-
sale, net of deferred income taxes 362,506
Dividend declared (795,471)
ESOP shares earned in 1996 52,668
Purchase of 49,392 shares of common stock
------------- ------------- ------------- ------------------
Balance, September 30, 1996 218,213 21,001,572 10,229,074 1,191,925
Net income 1,476,266
Change in net unrealized gain on securities available-for-
sale, net of deferred income taxes 551,709
Dividend declared (667,836)
ESOP shares earned in 1997 75,667
Purchase of 107,977 shares of common stock
------------- ------------- ------------- ------------------
Balance, September 30, 1997 $ 218,213 $ 21,077,239 $ 11,037,504 $ 1,743,634
============= ============= ============= ==================
<CAPTION>
Unallocated Total
Treasury ESOP Stockholders'
Stock Shares Equity
------------- ------------- ------------
<S> <C> <C> <C>
Balance, September 30, 1994 $ $ 9,043,353
Issuance of common stock (1,745,700) 19,421,417
Net income 891,025
Cumulative effect October 1, 1994 of change in accounting
for securities, net of deferred income taxes 629,086
Change in unrealized gain on securities available-for-sale
net of deferred income taxes, 200,333
------------- ------------- ------------
Balance, September 30, 1995 (1,745,700) 30,185,214
Net income 1,090,167
Change in net unrealized gain on securities available-for-
sale, net of deferred income taxes 362,506
Dividend declared (795,471)
ESOP shares earned in 1996 116,400 169,068
Purchase of 49,392 shares of common stock (789,495) (789,495)
------------- ------------- ------------
Balance, September 30, 1996 (789,495) (1,629,300) 30,221,989
Net income 1,476,266
Change in net unrealized gain on securities available-for-
sale, net of deferred income taxes 551,709
Dividend declared (667,836
ESOP shares earned in 1997 116,360 192,027
Purchase of 107,977 shares of common stock (2,001,331) (2,001,331)
------------- ------------- ------------
Balance, September 30, 1997 $ (2,790,826) $ (1,512,940) $ 29,772,824
============= ============= ============
</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, 1997, 1996, and 1995
---------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,476,266 $ 1,090,167 $ 891,025
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 11,000 7,500 91,982
Provision for depreciation 55,017 58,344 70,496
ESOP benefit expense 192,027 169,068
Amortization of loan fees (41,689) (56,935) (41,232)
Amortization of investment discount (2,691) (466)
FHLB stock dividend (87,300) (80,000) (71,100)
Change in:
Interest receivable 34,109 (121,747) (35,124)
Interest payable 676 (1,522) 132
Accrued liabilities (552,244) 171,557 (8,915)
Prepaid expense 41,610 (9,646) 8,157
Income taxes payable 163,000 (121,367) 56,804
------------- ------------- -------------
Net cash provided by operating activities 1,289,781 1,104,953 962,225
------------- ------------- -------------
Investing activities
Net (increase) decrease in loans (3,728,253) (2,019,375) (2,819,505)
Purchase of certificates of deposit (600,000)
Maturity of certificates of deposit 2,500,000 3,000,000 500,000
Purchase of securities held-to-maturity (3,502,968) (9,208,636) (500,000)
Call of security held-to-maturity 3,000,000 500,000
Principle repayments - mortgage back securities 31,119 33,679 15,031
Purchase of fixed assets (53,294) (177,977) (115,999)
Retirement of assets 297
------------- ------------- -------------
Net cash provided (used) by investing activities (2,353,396) (7,872,012) (2,920,473)
------------- ------------- -------------
</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, 1997, 1996, and 1995
---------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts (53,051) 984,882 (3,101,122)
Net increase (decrease) in certificates of deposit 1,736,046 68,152 (3,096,803)
Net increase (decrease) in custodial accounts (2,464) (18,395) 9,316
Proceeds from issuance of common stock ,net 21,532,531
ESOP stock purchase (1,745,700)
Purchase of treasury stock (2,001,331) (789,495)
Payment of dividends (1,059,469) (403,838)
-------------- -------------- ---------------
Net cash provided (used) by financing activities (1,380,269) (158,694) 13,598,222
-------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents (2,443,884) (6,925,753) 11,639,974
Cash and cash equivalents, beginning of year 15,064,677 21,990,430 10,350,456
-------------- -------------- ---------------
Cash and cash equivalents, end of year $ 12,620,793 $ 15,064,677 $ 21,990,430
============= ============== ===============
Supplemental Disclosures
Cash payments for:
Interest on deposits $ 3,834,129 $ 3,902,750 $ 3,806,981
Income taxes $ 602,000 $ 710,111 $ 402,209
Mortgage loans originated to finance sale of
foreclosed real estate 17,500
</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 500,000
shares of preferred stock, which may be issued with certain rights and
preferences. As of September 30, 1997, 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 those 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 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.
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, 1997 and 1996) of deposit accounts (net of loans
secured by deposits) plus short-term borrowings. At September 30, 1997 and
1996, 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
(Continued)
23
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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 initially recorded at fair value, net of selling expenses,
establishing a new cost basis. Expenses relating to holding property,
including interest expense, are not capitalized. These expenses are charged
to operations as incurred. After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of
carrying amount or fair value less estimated selling expenses.
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 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.
In June 1993, the 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.
(Continued)
24
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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"). 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, was reduced from 23% to approximately 6% 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.
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
(Continued)
25
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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.
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, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
Federal Home Loan Mortgage, capital
stock, 77,088 shares $ 75,482 $ 2,641,870 $ $ 2,717,352
=========== =========== ======== ===========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $ 9,501,551 $ $ 8,171 $ 9,493,380
Municipal bonds 213,211 2,881 210,330
----------- ----------- -------- -----------
9,714,762 11,052 9,703,710
----------- ----------- -------- -----------
Mortgage-backed Securities 66,744 1,815 68,559
----------- ----------- -------- -----------
Federal Home Loan
Bank of Cincinnati, capital
stock - 12,831 shares 1,283,100 1,283,100
----------- ----------- -------- -----------
$11,064,606 $ 1,815 $ 11,052 $11,055,369
=========== =========== ======== ===========
<CAPTION>
1996
--------------------------------------------------
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 $ 1,805,947 $ $ 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>
(Continued)
27
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
The amortized cost and estimated market value of debt securities at
September 30, 1997, by contractual maturity, are as follows:
Estimated
Amortized Market
Cost Value
---- -----
Due after one year through five years $ 9,501,551 $ 9,493,380
Due after five through ten years 104,725 102,778
Due after ten years 108,486 107,552
----------- -----------
$ 9,714,762 $ 9,703,710
=========== ===========
In accordance with the requirements of SPAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities, "the unrealized gain on
securities available-for-sale of $2,641,870 net of deferred income taxes of
$898,236 has been recorded as a separate component of stockholders' equity
as of September 30, 1997.
For the year ended September 30, 1997, the Bank received $3,000,000 from the
call of four debt securities backed by a U.S. Government agency, which was
classified as held-to-maturity. 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.
3. Loans Receivable
Loans receivable, net at September 30, 1997 and 1996 consists of the
following:
1997 1996
---- ----
Loans secured by first lien mortgages
on real estate:
Multi-family residential property 3,449,405 3,558,839
Commercial properties 3,035,878 3,228,376
Construction 3,534,550 3,891,250
Agricultural 2,996,550 2,351,985
Consumer loans:
Home equity 1,495,124 1,278,828
Home improvement and personal 1,617,668 1,176,371
Loans secured by savings deposits 482,938 407,469
----------- -----------
83,696,185 80,196,847
Loans in process (1,890,397) (2,167,621)
Provisions for loan losses (308,250) (297,250)
Deferred loan origination fees (236,260) (229,640)
----------- -----------
Loans receivable, net $81,261,278 $77,502,336
=========== ===========
(Continued)
28
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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.
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:
Year Ended September 30,
-------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning or period $297,250 $297,292 $252,019
Additions charged to operations 11,000 7,500 91,982
Charge-offs (7,542) (49,297)
Recoveries 2,588
-------- -------- --------
Balance at end of period $308,250 $297,250 $297,292
======== ======== ========
The following is a summary of non-performing loans (in thousands) at
September 30, 1997, 1996, and 1995, respectively:
September 30,
-------------------------------
1997 1996 1995
---- ---- ----
Non-accrual loans $ $ $
Loans past due 90 days or more 520 866 667
----- ----- -----
Total non-performing loan balances $ 520 $ 866 $ 667
===== ===== =====
At September 30, 1997 and 1996, the Bank had identified no impaired loans as
defined by SPAS No. 114. There were no loans in non-accrual status, and as
such, all interest income earned for the years ended September 30, 1997 and
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, 1997 and 1996 are summarized as follows:
September 30,
------------------------
1997 1996
---- ----
Balance at beginning of period $ 194,446 $ 207,696
Additions during year 3,050
Repayments (9,639) (13,250)
--------- ---------
Balance at end of period $ 187,857 $ 194,446
========= =========
(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:
Description Useful Life 1997 1996
----------- ----------- ---- ----
Land, buildings and improvements 30-45 years $ 839,285 $ 839,285
Furniture, fixtures and equipment 5-10 years 604,099 548,357
---------- ----------
1,443,384 1,387,642
Less accumulated depreciation (787,187) (729,722)
---------- ----------
$ 656,197 $ 657,920
========== ==========
Depreciation expense for the years ended September 30, 1997, 1996 and 1995
amounted to $55,017, $58,344, and $70,496, respectively. In fiscal year
1997, payments totaling $39,017 were made to an affiliate of a Director for
improvements made to the Bank's main office.
5. Deposits
Deposit account balances as of the dates indicated are summarized as
follows:
September 30,
------------------------
1997 1996
---- ----
Demand deposit accounts, non-interest
bearing $ 317,760 $ 487,377
Passbook accounts with a weighted average
rate of 2.79% at September 30, 1997 and
1996 7,778,239 8,328,830
NOW and MMDA deposits with a weighted
average rate of 2.45% and 2.47% at
September 30, 1997 and 1996, respectively 8,565,254 7,908,815
----------- -----------
16,671,971 16,725,022
Certificate of deposits with a weighted
average interest rate of 5.63% and 5.84%
at September 30, 1997 and 1996,
respectively 61,957,234 60,221,188
----------- -----------
Total Deposits $78,629,205 $76,946,210
=========== ===========
Jumbo certificates of deposit (minimum
denomination of $100,000) $ 4,315,449 $ 3,211,065
=========== ===========
(Continued)
30
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
Certificates of deposit by maturity at September 30, 1997 and 1996 (in
thousands) are as follows:
September 30,
--------------------
1997 1996
---- ----
Within one year $ 44,890 $ 39,678
Over 1 to 3 years 15,427 17,707
Maturing in years thereafter 1,640 2,836
-------- --------
$ 61,957 $ 60,221
======== ========
Certificates of deposit by maturity and interest rate category at September
30, 1997 (in thousands) are as follows:
Amount Due
--------------------------------------------------------
Less Than After 3
One Year 1-2 Years 2-3 Years Years Total
-------- --------- --------- ----- -----
4.01-6.00% $ 40,265 $ 7,000 $ 3,767 $ 729 $ 51,761
6.01-8.00% 4,625 2,795 1,860 916 10,196
-------- ------- ------- ------ --------
$ 44,890 $ 9,795 $ 5,627 $1,645 $ 61,957
======== ======= ======= ====== ========
Interest expense on deposits for the periods indicated is summarized as
follows:
Years Ended September 30,
--------------------------------------
1997 1996 1995
---- ---- ----
Money market and NOW account $ 202,209 $ 195,471 $ 212,952
Savings Accounts 217,967 224,418 283,208
Certificates 3,414,630 3,481,339 3,310,953
----------- ----------- -----------
$ 3,834,806 $ 3,901,228 $ 3,807,113
=========== =========== ===========
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,
1997 and 1996. At September 30, 1997, the Bank had pledged $800,000 of their
overnight deposits held by the FHLB of Cincinnati to secure certain customer
deposit balances.
(Continued)
31
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
6. Income Taxes
Effective January 1, 1993, the Bank adopted SPAS No. 109 "Accounting for
Income Taxes" which requires an asset and liability approach to accounting
for income taxes.
The provision for income taxes for the periods indicated consist of the
following:
Years ended September 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Federal income tax expense:
Current expense $ 762,596 $ 690,171 $ 402,949
Deferred expense (benefit) 8,041 (101,427) 56,064
--------- --------- ---------
$ 770,637 $ 588,744 $ 459,013
========= ========= =========
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:
Years ended September 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Deposit insurance $ 182,261 $ (182,261) $
FHLB stock 29,682 27,200 24,174
Allowance for loan losses (196,898) 57,357 35,947
Other, net (7,004) (3,723) (4,057)
--------- ---------- --------
Net deferred tax expense
(benefit) $ 8,041 $ (101,427) $ 56,064
========= ========== ========
For the 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:
Years ended September 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Expected income tax expense at
federal tax rate $ 763,947 $ 570,830 $ 459,013
Other, net 6,690 17,914
--------- --------- ---------
Total income tax expense $ 770,637 $ 588,744 $ 459,013
========= ========= =========
Effective income tax rate 34.3% 35.1% 34.0%
========= ========= =========
(Continued)
32
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
Deferred tax assets and liabilities as of September 30,1997 and 1996
consisted of the following:
1997 1996
Deferred tax assets:
Deferred loan fee income $ 80,328 $ 78,077
Deposit insurance assessment 182,261
Allowance for loan losses 103,593
-------- --------
183,921 260,338
-------- --------
Deferred tax liabilities:
FHLB stock 239,802 210,120
Allowance for loan losses 93,305
Fixed asset basis over tax basis 49,519 62,293
-------- --------
289,321 365,718
-------- --------
Net deferred tax liability $105,400 $105,380
======== ========
In addition to the net deferred tax liability at September 30,1997 of
$105,400 outlined in the preceding table, the financial statements include a
deferred tax liability of $898,236 that was charged against the unrealized
gain on securities available-for-sale of $2,641,870. The net amount of
$1,743,634 is recorded as a separate component of stockholders' equity.
For the years ended September 30, 1996 and 1995, the Bank was 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
amounts qualifying as deductions under the Internal Revenue Code provision
were later used for purposes other than bad debt losses, they would be
subject to Federal income tax at the then current corporation rate.
In 1996, the Internal Revenue Service repealed this special provision for
thrift institutions, such as the Bank, for determining the allowable tax bad
debt reserves. Effective for tax years ending December 31, 1996 or after,
fiscal year September 30, 1997 for the Bank, all thrift institutions are
taxed as other banking institutions. Institutions under $500 million in
assets are allowed to use the reserve method of determining their bad debt
deduction based on their actual experience while larger institutions (over
$500 million) must use the specific charge off method in determining their
deduction. Tax bad debt reserves accumulated since September 30, 1988 must
be included in taxable income of the Bank prorated over a six year period,
beginning in the tax year effected by the change. This change did not have a
material impact on the Bank as a deferred tax liability was provided for
these accumulated reserves. The accumulated tax bad debt reserves as of
September 30, 1988, which amounts to approximately $2,134,000 is only
subject to being taxed at a later date under certain circumstances, such as
the Bank converting to a type of institution that is not considered a bank
for tax purposes. These financial statements do not include any deferred tax
liability related to the accumulated tax bad debt reserves as of September
30, 1988.
(Continued)
33
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
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. 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 Bank multiplies the value of each asset on its
statement of financial condition by a defined risk-weighting factor, e.g.,
one-to-four family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1997, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
Regulatory Capital
-------------------------------------------------------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
--------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting principles $25,136 % $25,136 % $25,136 %
Adjustments:
Net unrealized appreciation
on securities available-for
sale (1,744) (1,744) (1,744)
General valuation allowances 235
-------- ------- ------
Regulatory capital computed 23,392 21.3 23,392 21.3 23,627 43.1
Minimum capital requirement 1,605 1.5 3,210 3.0 4,387 8.0
------- ---- ------- ---- ------- ----
Regulatory capital-excess $21,787 19.8% $20,182 18.3% $19,240 35.1%
======= ==== ======= ==== ======= ====
</TABLE>
Retained Earnings Restriction. Retained earnings at September 30, 1997
includes tax bad debt reserves of approximately $2,134,000 accumulated prior
to December 31, 1987, for which no Federal income tax has been provided.
These tax bad debt reserves are only taxable in certain circumstances, such
as if the Bank converted to an institution that did not qualify as a bank for
tax purposes (see Note 6).
(Continued)
34
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
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.
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 of 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.
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 multi-employer pension 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-, $-0-, and $30,843 for the years ended September 30, 1997, 1996, and
1995, 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
$7,440, $6,888, and $7,485 to the Plan for the years ended September 30,
1997, 1996, and 1995, 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
(Continued)
35
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
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 Bank makes annual contributions to the ESOP Trust equal to the ESOP's
debt service requirement less dividends, if any, received by the ESOP which
are used for debt service. Dividends of $57,026 and $67,500 were used in
fiscal year 1997 and 1996 to pay ESOP 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 $192,027 for the year ended September 30, 1997. For
1997, 11,638 shares were released from collateral. At September 30, 1997,
there were 151,294 unallocated ESOP shares having a fair value of $2,458,528.
ESOP compensation was $169,068 for the year ended September 30, 1996. For
1996, 11,638 shares were released from collateral. At September 30, 1996,
there were 162,932 unallocated ESOP shares having a fair value of $2,851,275.
Option Plan. On January 21, 1997, the stockholders of the Company approved
the establishment of the Harrodsburg First Financial Bancorp, Inc. 1996 Stock
Option Plan. Under the Option Plan, the Company may grant either incentive or
non-qualified stock options to Directors and key employees for an aggregate
of 200,000 shares of the Company's common stock, with an exercise price equal
to the fair market value of the stock at the date of the award. Upon exercise
of the options, the Company may issue stock out of authorized shares or
purchase the stock in the open market. The option to purchase shares expires
ten years after the date of the grant. Effective with the approval of the
Option Plan, options to purchase 190,000 shares of common stock were awarded
to key employees and directors with an exercise price of $16.50 per share.
The options vest, and thereby become exercisable, at the rate of 20% on the
date of grant, January 21, 1997, and 20% annually thereafter. The Options
become vested immediately in the case of death or disability, or upon a
change in the control of the Company.
A summary of option transactions for the year ended September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Option Number
Price of Units
-------- --------
<S> <C> <C>
Balance outstanding at beginning of year
Granted $16.50 190,000
-------
Exercised
Balance outstanding at end of year $16.50 190,000
=======
Shares exercisable 38,000
=======
Shares available for grant 10,000
=======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SPAS No. 123
"Accounting for Stock-Based Compensation," which was effective for fiscal
years beginning after December 15, 1995. The new standard defines a fair
value method of accounting for stock options and similar equity instruments.
Under the fair value method, compensation cost is measured at the grant date,
based on the fair value of the award and is recognized over the service
period, which is usually the vesting period.
(Continued)
36
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
Companies are not required to adopt the fair value method of accounting for
employee stock-based transactions, and may continue to account for such
transactions under Accounting Principles Board (APB) Opinion No. 25
"Accounting for Stock Issued to Employees." Under this method the
compensation cost is measured by the difference between the value of the
Company's stock at the date of the award, and the exercise price to be paid
by the employee. If a company chooses to report stock based compensation
under APB 25, they must disclose the pro forma net income and earnings per
share as if the Company had applied the new method of accounting.
Accordingly, the following table shows the Company's net income and earnings
per share on a pro forma basis as if the compensation cost for the stock
options awarded were accounted for in accordance with SPAS No. 123 for the
year ended September 30, 1997.
<TABLE>
<CAPTION>
Reported Per Consolidated
Financial Statements Pro Forma Amount
1997 1997
----------- -----------
<S> <C> <C>
Net income $1,476,266 $1,286,598
========== ==========
Earnings per share $ 0.78 $ 0.68
========== ==========
</TABLE>
Employee Recognition Plan. On January 21, 1997, the stockholders of the
Company approved the establishment of the First Federal Savings Bank of
Harrodsburg Restricted Stock Plan (RSP). The objective of the RSP is to
enable the Bank to attract and retain personnel of experience and ability in
key positions of responsibility. Those eligible to receive benefits under the
RSP will be such employees as selected by members of a committee appointed by
the Company's Board of Directors. The RSP is a non~ualified plan that is
managed through a separate trust. The Bank will contribute sufficient funds
to the RSP Trust for the purchase of up to 85,000 shares of common stock.
Awards made to employees will vest 20% on each anniversary date of the award.
Shares will be held by the trustee and are voted by the RSP trustee as
directed by the participant for those shares earned or by the Committee for
those shares held, but unearned or unawarded. Any assets of the trust are
subject to the general creditors of the Company. All shares awarded vest
immediately in the case of a participant's death, disability, or upon a
change in control of the Company. The Company intends to expense RSP awards
over the years during which the shares are payable, based on the fair market
value of the common stock at the date of the grant to the employee. As of
September 30, 1997, no awards had been made under the RSP.
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 $629,800 plus unused lines of credit granted to customers
totaling $1,734,061 at September 30, 1997. None of the mortgage loan
commitments at September 30, 1997 were for fixed rate loans. At September 30,
1996 mortgage commitments outstanding amounted to approximately $931,000 and
unused lines of credit amounted to $1,588,846. Mortgage loan commitments for
fixed rate loans at September 30, 1996 totaled
(Continued)
37
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
$128,000. 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 years ended September 30, 1997 and 1996 was
calculated by dividing net income of $1,476,266 and $1,090,167 by the
weighted average number of shares of common stock outstanding during the
year, which was 1,896,684 and 1,998,877 for the years ended September 30,
1997 and 1996, respectively. Earnings per share for fiscal year 1995 and is
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,
1997. The following is a summary of the Trust Department assets at September
30, 1997:
<TABLE>
<CAPTION>
Description September 30, 1997
------------ ------------------
<S> <C>
Cash in passbook and checking account $ 3,331
Certificates of deposit 22,021
--------
Total $ 25,352
========
</TABLE>
12. Disclosures about Fair Value of Financial Instruments
In December 1991, the FASB issued SPAS 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.
(Continued)
38
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
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.
The estimated fair value of the Company's financial instruments at September
30, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
---------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 12,620,793 $ 12,620,793
Certificates of deposit 600,000 600,000
Securities available-for-sale 2,717,352 2,717,352
Securities held-to-maturity 11,064,606 11,055,369
Loans receivable, net 81,261,278 80,729,161
Liabilities
Deposits 78,629,205 78,762,257
Unrecognized Financial Instruments
Loan commitments 629,800
Unused lines of credit 1,734,061
</TABLE>
(Continued)
39
<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, 1997.
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Financial Condition
September 30, 1997
<TABLE>
<S> <C>
Assets:
Cash and due from banks $ 4,428,608
Investment in subsidiary 25,136,128
Other assets 209,451
------------
Total assets 29,774,187
============
Liabilities and Sfockholders' Equity:
Accounts payable $ 1,363
------------
Stockholders' equity
Common stock 218,213
Additional paid-in capital 21,077,239
Retained earnings 11,037,504
Net unrealized appreciation on securities available-for-sale 1,743,634
Treasury stock, 157,369 shares, at cost (2,790,826)
Unearned ESOP shares (1,512,940)
------------
Total stockholders' equity 29,772,824
------------
Total liabilities and stockholders' equity $ 29,774,187
=============
</TABLE>
(Continued)
40
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Income
year ended September 30, 1997
<TABLE>
<S> <C>
Income: $
------------
Expense:
Legal fees 24,192
Franchise and license tax 60,064
Transfer agent fees 9,000
Accounting fees 9,880
Other operating expenses 18,496
------------
121,632
------------
Net loss before tax benefit (121,632)
Income tax benefit 34,561
------------
Net loss before equity in undistributed net income of
subsidiary (87,071)
Equity in undistributed net income of subsidiary 1,563,337
------------
Net income $1,476,266
============
</TABLE>
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Cash Flows
year ended September 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 1,476,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,563,337)
Increase in other receivables 29,406
Decrease in other liabilities (964)
------------
Net cash used by operating activities (58,629)
------------
Cash flows from investing activities:
Net cash provided (used) by investing activities
------------
Cash flows from financing activities:
Dividends paid (1,059,469)
Purchase of common stock (2,001,331)
------------
Net cash used by financing activities (3,060,800)
------------
Net decrease in cash and cash equivalents (3,119,429)
Cash and cash equivalents at beginning of period 7,548,037
------------
Cash and cash equivalents at end of period $ 4,428,608
============
</TABLE>
(Continued)
41
<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 creased 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, 1997 and 1996
---------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
------- ------
<S> <C> <C>
Investments $l5,000 $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, 1997 and 1996.
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 filed a second application, which was
subsequently approved by OTS, to purchase up to 5% of the then outstanding
stock. During fiscal year 1997, the Company repurchased 107,977 shares of
common stock at a total cost of $2,001,331. On September 15, 1997, the Board
of Directors approved filing an application with OTS to purchase up to an
additional 5% of the outstanding shares of common stock as of that date.
42
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
<TABLE>
<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>
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
<TABLE>
<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>
- -------------------------------------------------------------------------------
OFFICE LOCATIONS
104 South Chiles Street 216 South Main Street
Harrodsburg, Kentucky 40330 Lawrenceburg, Kentucky 40342
- -------------------------------------------------------------------------------
GENERAL INFORMATION
<TABLE>
<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 1997 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
General Counsel Annual Meeting AS OF THE RECORD DATE FOR
David Patrick The 1998 Annual Meeting of THE 1998 ANNUAL MEETING
Attorney-at-Law Stockholders will be held on January UPON WRITTEN REQUEST TO
321 South Main Street 26, 1998 at 2:00 p.m. at First Federal JACK D. HOOD, HARRODSBURG
Harrodsburg, KY40330 Savings Bank of Harrodsburg, 104 FIRST FINANCIAL BANCORP,
South Chiles Street, Harrodsburg, KY INC., P. O. BOX 384, 104 SOUTH
Walter Patrick C H I L E S S T R E E T.
Attorney-at-Law Transfer Agent HARRODSBURG, KY 40330
Gordon Building Illinois Stock Transfer
P.O. Box 178 223 West Jackson Blvd., Suite 1210
Lawrenceburg, KY 40342 Chicago, IL 60606
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