SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1999
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- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission Number: 0-26570
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
Delaware 61-1284899
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
104 South Chiles Street, Harrodsburg, Kentucky 40330-1620
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (606) 734-5452
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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, 1999, was $15.6 million (1,329,296
shares at $11.75 per share).
As of December 8, 1999 there were issued and outstanding 1,692,575
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, 1999. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
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INDEX
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PART I Page
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<S> <C> <C>
Item 1. Business.............................................................................................1
Item 2. Properties...........................................................................................23
Item 3. Legal Proceedings....................................................................................23
Item 4. Submission of Matters to a Vote of Security Holders..................................................23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................24
Item 6. Selected Financial Data..............................................................................24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................24
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk....................................................................................24
Item 8. Financial Statements and Supplementary Data..........................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................. 24
Item 11. Executive Compensation.............................................................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 25
Item 13. Certain Relationships and Related Transactions.......................................................25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 25
</TABLE>
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PART I
Harrodsburg First Financial Bancorp, Inc. (the "Company") may from time
to time make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-K and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors; and disruption in data processing caused by
computer malfunctions associated with the year 2000 problem may be greater than
expected.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Business
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General
The Company is a Delaware corporation organized in June 1995 at the
direction of First Federal Savings Bank of Harrodsburg (the "Bank" or "First
Federal") to acquire all of the capital stock that the Bank issued upon its
conversion from the mutual to stock form of ownership. On September 29, 1995,
the Bank completed its conversion and became a wholly owned subsidiary of the
Company.
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments.
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First Federal is a federally chartered stock savings bank headquartered
in Harrodsburg, Kentucky. The Bank attracts deposits from the general public and
uses such deposits primarily to originate loans secured by first mortgages on
one- to four-family residences located in its market area. Such loans totaled
$70.6 million, or 76.88%, of the Bank's total loan portfolio at September 30,
1999. The Bank originates and retains adjustable-rate loans as well as, to a
lesser extent, fixed-rate loans for its mortgage loan portfolio. The Bank has
not sold mortgage loans into the secondary market during the past five years. In
addition, the Bank originates multi-family, commercial and agricultural real
estate loans, which represented $13.4 million or 14.59%, of the total loan
portfolio at September 30, 1999. These loans were primarily secured by apartment
buildings, office buildings, churches, farms and other properties. The Bank also
offers construction loans which represented $4.1 million or 4.49% of the total
loan portfolio at September 30, 1999. These loans are primarily secured by
residential properties and become permanent loans of the Bank upon completion of
the construction. The Bank offers consumer loans, which totaled $3.7 million, or
4.04% of the total loan portfolio at September 30, 1999. These loans consist
primarily of home equity loans secured by second mortgages, loans secured by
savings deposits, and personal loans which are either secured or unsecured.
In addition to interest-earning deposits with the Federal Home Loan
Bank ("FHLB") of Cincinnati, the Bank maintains an investment securities
portfolio consisting of FHLB stock and Federal Home Loan Mortgage Corporation
("FHLMC") capital stock, Government agency-backed bonds, municipal bonds and
mortgage-backed securities. See Note 2 of the Notes to Consolidated Financial
Statements.
The principal sources of funds for the Bank's lending activities are
deposits, and the amortization, repayment, and maturity of loans and investment
securities. Principal sources of income are interest on loans, interest-earning
deposits and to a lesser extent investment securities. The Bank's principal
expense is interest paid on deposits.
Market Area
The Bank's primary market area consists of Mercer and Anderson
Counties, Kentucky. This area is primarily rural with a large amount of
agri-business. The primary lending concentration is in the Bank's market area,
an area mainly comprised of the cities of Harrodsburg and Lawrenceburg which
have populations of approximately 8,118 and 6,655, respectively. Historically,
the economy in the Bank's market area has been dependent on agriculture,
agriculture related industries and manufacturing. Tourism is the second largest
industry in Mercer County, next to agriculture. The largest employers in the
market area are Hitachi Automotive, Trim Masters, Corning, Inc. and Bay West
Paper.
Economic growth in the Bank's market area remains dependent upon the
local economy. In addition, the deposit and loan activity of the Bank is
significantly affected by economic conditions in its market area.
Competition
The Bank is one of nine financial institutions serving its immediate
market area. The competition for deposit products comes from six commercial
banks in the Bank's market area, and two credit unions. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition
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comes from commercial banks in the Bank's market area, credit unions, and
mortgage bankers who serve the area and varies depending upon market conditions.
First Federal has traditionally maintained a competitive position in
mortgage loan originations and market share throughout its service area by
virtue of its local presence and its involvement in the community. The Bank
believes that it has been able to effectively market its loans and other
financial products and services when compared to other local-based institutions
and its superior customer service when compared to other institutions and
mortgage bankers based outside of the Bank's market area.
Lending Activities
General. The Bank's loan portfolio predominantly consists of mortgage
loans secured by single family residences. First Federal also makes commercial
real estate, multi-family real estate, agricultural, residential construction
and consumer loans.
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
deferred loan origination fees and costs and allowance for loan losses) as of
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
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1999 1998
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Amount Percent Amount Percent
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Type of Loans:
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(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate:
One-to four-family residential.................. $70,639 76.88% $68,814 77.47%
Multi-family.................................... 3,720 4.05 3,500 3.94
Agricultural.................................... 4,542 4.94 3,860 4.35
Commercial...................................... 5,148 5.60 3,370 3.79
Construction.................................... 4,122 4.49 5,241 5.90
Consumer:
Savings account................................. 484 .53 555 .62
Home equity..................................... 1,830 1.99 1,831 2.06
Other(1)........................................ 1,399 1.52 1,661 1.87
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Total loans receivable...................... 91,884 100.00% 88,832 100.00%
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Less:
Loans in process................................ 2,042 2,925
Deferred loan origination fees
and costs, net................................. 410 300
Allowance for loan losses....................... 370 335
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Loans receivable, net............................. $89,062 $ 85,272
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</TABLE>
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(1) Includes home improvement and personal loans.
The Bank primarily originates loans for retention in its portfolio and
has not purchased or sold loans during the past two years.
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Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan
portfolio at September 30, 1999. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totaled $28.6 million, $31.9 million and $18.9 million, for the three
years ended September 30, 1999, 1998 and 1997, respectively. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Multi-Family,
Agricultural
1-4 Family and
Residential Commercial Construction Consumer Total
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(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing.................. $ 214 $ 23 -- $ 44 $ 281
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Amounts Due:
Total due within one year..... 79 87 -- 1,325 1,491
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After 1 year:
1 to 3 years.................. 547 7 -- 69 623
3 to 5 years.................. 1,643 110 -- 287 2,040
5 to 10 years................. 8,386 1,090 -- 643 10,119
10 to 15 years................ 14,758 4,386 410 882 20,436
Over 15 years................. 45,011 7,707 1,670 464 54,852
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Total due after one year........ 70,345 13,300 2,080 2,345 88,070
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Total amount due................ $70,638 $13,410 $2,080 $3,714 89,842
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Less:
Allowance for loan losses.......
Deferred loan fees.............. 370
Loans receivable, net....... 410
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$89,062
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</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have pre-determined (or fixed) interest rates and
which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
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(In Thousands)
<S> <C> <C> <C>
One- to four-family residential...................... $17,849 $52,496 $70,345
Multi-family, agriculture and commercial............. 1,064 12,236 13,300
Construction......................................... 1,173 907 2,080
Consumer............................................. 531 1,814 2,345
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Total................................................ $20,617 $67,453 $88,070
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</TABLE>
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One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market area. The Bank
generally originates one- to four-family residential mortgage loans without
private mortgage insurance in amounts up to 85% of the lesser of the appraised
value or selling price of the mortgaged property. Loans in excess of 85% of the
value of the mortgaged property typically require private mortgage insurance in
the amount of 25% to 30% of the loan amount.
First Federal offers three types of residential ARM's, all of which use
the index value of the National Monthly Median Cost of Funds Ratio to
SAIF-Insured Institutions plus a set margin added to it. The interest rates on
these loans have an initial adjustment period of between one and five years, and
generally adjust annually thereafter, with a maximum adjustment of 2% per year
and a maximum increase of 5% over the life of the loan. The index margin on a
non owner-occupied one- to four-family property loan is 1% higher than on an
owner-occupied property loan. The Bank's adjustable-rate one-to four-family
mortgage loans are for terms of up to 30 years, amortized on a monthly basis,
with principal and interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their contractual
terms. Borrowers may refinance or prepay loans at their option without penalty.
First Federal originates, to a limited extent, 10 year, 15 year, 20 and 30 year
term fixed-rate mortgages on one- to four-family, owner-occupied homes with loan
to value ratios of 85% or less. First Federal originated $10.1 million in
fixed-rate one- to four-family mortgage loans with a maximum term of 30 years or
less during the year ended September 30, 1999. All such loans are being held as
long term investments and none are being held for sale.
Loan originations are generally obtained from existing and walk-in
customers, members of the local community, and referrals from realtors,
depositors and borrowers within the Bank's lending area. Mortgage loans
originated and held by the Bank in its portfolio generally include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event that the borrower transfers ownership
of the property without the Bank's consent. At September 30, 1999, $70.6
million, or 76.88%, of the total loan portfolio consisted of one- to four-family
residential loans of which $52.7 million were adjustable-rate loans and $17.9
million were fixed-rate loans.
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, adjustable-rate loans which
provide for initial rates of interest below the fully indexed rates may be
subject to increased risk of delinquency or default as the higher, fully indexed
rate of interest subsequently replaces the lower, initial rate. Further,
although adjustable-rate loans allow the Bank to increase the sensitivity of its
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed rate period before the
first adjustment, the periodic and lifetime interest rate adjustment limitations
and the ability of borrowers to convert the loans to fixed rates. Accordingly,
there can be no assurance that yields on the Bank's adjustable-rate loans will
fully adjust to compensate for increases in the Bank's cost of funds. Finally,
adjustable-rate loans increase the Bank's exposure to decreases in prevailing
market interest rates, although the Bank's cost of funds tend to offset this
effect.
Construction Loans. First Federal engages in construction lending
involving loans to qualified borrowers for construction of one- to four-family
dwellings, multi-family residential units, commercial buildings and churches,
with the intent of such loans converting to permanent financing upon completion
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of construction. As of September 30, 1999, the Bank's loan portfolio included
$4.1 million of loans secured by properties under construction, all of which
were construction/permanent loans structured to become permanent loans upon the
completion of construction and none of which was an interim construction loan
structured to be repaid in full upon completion of construction. All
construction loans are secured by a first lien on the property under
construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans generally
have adjustable or fixed interest rates and are underwritten in accordance with
the same terms and requirements as the Bank's permanent mortgages, except the
loans generally provide for disbursement in stages during a construction period
of up to twelve months, during which the borrower is not required to make
monthly payments. If construction improvements are not completed at the end of
six months, accrued interest must be paid to date. Accrued interest must be paid
at completion of construction to the first day of the following month, and
monthly payments start the first day of the following month after the loan is
converted to permanent financing. Borrowers must satisfy all credit requirements
which would apply to the Bank's permanent mortgage loan financing for the
subject property and must execute a construction loan agreement with the Bank.
Construction financing generally is considered to involve a higher
degree of risk of loss than long term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. The Bank has
sought to minimize this risk by requiring precise construction cost estimates,
specifications, and drawing plans from qualified borrowers in the Bank's market
area.
Multi-Family and Commercial Real Estate Loans. In order to serve its
community and enhance yields on its assets, the Bank originates loans secured by
commercial real estate and multi-family properties. The multi-family and
commercial real estate loans originated by the Bank have generally been made to
individuals, small businesses and partnerships. They have primarily been secured
by first mortgages on apartment buildings, office buildings, churches and other
properties. The Bank benefits from originating such loans due to higher
adjustable interest rates. Adjustable-rate loans for this type of lending have a
margin that is 1% higher than the margin added to single family owner-occupied
property loan. First Federal's multi-family residential and commercial real
estate loans are adjustable-rate loans with terms of 25 years or less, with
loan-to-value ratios not exceeding 80%. As of September 30, 1999, loans on
multi-family residential and commercial real estate properties constituted
approximately $8.9 million, or 9.65% of the Bank's total loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one- to four-family residential lending. For
example, such loans typically involve large loans to single borrowers or related
borrowers, the payment experience on such loans is typically dependent on the
successful operation of the project, and these risks can be significantly
affected by the supply and demand conditions in the market for commercial
property and multi-family residential units.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
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typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. To minimize these risks, First Federal generally
limits loans of this type to its market area and to borrowers with which it has
substantial experience or who are otherwise well known to the Bank. The Bank's
underwriting procedures require verification of the borrower's credit history,
income, financial statements, banking relationships, credit references, and
income projections for the property. It is the Bank's current practice to obtain
personal guarantees from all principals obtaining this type of loan. For the
small total dollar amount of loans secured by church real estate that are
originated by the Bank, repayment is dependent upon the continuing financial
support of the church's members. The Bank also obtains appraisals on each
property. All appraisals on commercial and multi-family real estate are reviewed
by the Bank's management.
Agricultural Loans. First Federal engages in lending on improved farm
land with no dwelling, building lots and building acreage sites. The Bank
benefits from originating such loans due to higher origination fees and
adjustable interest rates. These properties must have good road access. The loan
to value ratio for this type of loan is 75% or less with a maximum loan term of
15 years. An adjustable- rate loan for this type of lending has a margin that is
1% higher than the margin added to one- to four-family owner-occupied property
loans.
First Federal also engages in loans for improved farm land with
dwelling. The loan to value ratio for this type of loan is 80% or less with a
maximum term of 25 years. These loans can be set up with payment of interest
collected semi-annually and principal yearly as well as monthly principal and
interest payments. As of September 30, 1999, agricultural farm loans constituted
approximately $4.5 million, or 4.94% of the Bank's total loan portfolio.
Consumer Lending. These loans totaled $3.7 million, or 4.04%, of the
total loan portfolio at September 30, 1999. First Federal does not emphasize
consumer lending although it does originate such loans on a regular basis. The
Bank originates consumer loans on either a secured or unsecured basis. These
loans generally require a pre-existing relationship with the Bank. The Bank
generally makes certificate of deposit loans for terms of up to six months in
amounts up to the face amount of the certificate. The interest rate charged on
these loans is 1% higher than the rate paid on the certificate, and interest is
billed on a quarterly basis. These loans are payable on demand and the account
must be assigned to the Bank as collateral for the loan.
Federal regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of an institution's assets.
In addition, a federal thrift has lending authority above the 35% category for
certain consumer loans, property improvement loans, and loans secured by savings
accounts. The Bank originates consumer loans in order to provide a wide range of
financial services to its customers and because the shorter terms and normally
higher interest rates on such loans help maintain a profitable spread between
its average loan yield and its cost of funds.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank and the seller of the underlying collateral. In
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underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income, expenses and ability to repay the loan and
the value of the collateral. At September 30, 1999, the Bank had $44,000 of
consumer loans delinquent more than 90 days.
The largest consumer loan made by the Bank consists of a $900,000
unsecured line of credit made on October 28, 1997. As of September 30, 1999, the
outstanding balance on this line of credit was $215,000.
Loan Approval Authority and Underwriting. President Hood and Vice
President Asbury have the authority to approve mortgage loans for amounts up to
$175,000 with ratification by the board. Loans in excess of $175,000 must be
approved by the board. Loans are approved after determining they meet the Bank's
lending and underwriting standards.
For all loans originated by the Bank, upon receipt of a completed loan
application from a prospective borrower, a credit report is generally ordered,
income and certain other information is verified and, if necessary, additional
financial information is requested. An appraisal of the real estate intended to
be used as security for the proposed loan is obtained. All appraisals are
reviewed by officers of the Bank designated by the Board of Directors. An
independent appraiser designated and approved by the Board of Directors of the
Bank is utilized for all real estate mortgage loans. For construction/permanent
loans, the funds advanced during the construction phase are held in a
loan-in-process account and disbursed based upon various stages of completion in
accordance with the results of inspection reports that are based upon physical
inspection of the construction by an independent contractor hired by the Bank or
in some cases by a loan officer. For real estate loans the Bank will require
either title insurance or a title opinion. Borrowers must also obtain fire and
casualty, hazard or flood insurance (for loans on property located in a flood
zone, flood insurance is required) prior to the closing of the loan.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 20 days of the date of issuance. At September 30, 1999, the
Bank had $6.0 of commitments to cover originations, undisbursed funds for
loans-in-process, and unused lines of credit. The Bank believes that most of the
Bank's commitments will be funded. Generally, the percentage of commitments that
expire without being funded is less than 1%.
Loans-to-One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to: (i) 15% of unimpaired capital
and unimpaired surplus, calculated as the sum of the Bank's core and
supplementary capital included in total capital, plus the balance of the general
valuation allowances for loan and lease losses not included in supplementary
capital, plus investments in subsidiaries that are not included in calculating
core capital, or (ii) $500,000, whichever is higher. The Bank's maximum
loan-to-one borrower limit was approximately $3.8 million at September 30, 1999.
At September 30, 1999, the Bank's largest amount of loans to one
borrower consisted of several residential real estate loans in the amount of
$2.2 million which were secured by a first mortgage on single family dwellings
located in Nicholasville and Versailles, Kentucky.
The next four largest lending relationships at September 30, 1999
consisted of $1.3 million in loans secured by a first mortgage on a single
family dwelling, a duplex, a vacant lot and five commercial properties located
in Lawrenceburg, Kentucky; $1.1 million in loans secured by single family
dwellings, duplexes, an apartment building, and 18 townhouse units all located
in Harrodsburg, Lawrenceburg, and Danville,
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Kentucky; $1.1 million in loans secured by a first mortgage on single family
dwellings located in Harrodsburg, Kentucky; and $910,000 in a single loan
secured by a warehouse in Harrodsburg, Kentucky.
(See "--Multi-Family and Commercial Real Estate Loans.")
Non-Performing and Problem Assets
Loan Delinquencies. The Bank monitors delinquencies on all types of
loans closely. If such loans later become delinquent, the Bank contacts and
works with the borrower to resolve the delinquency before initiating foreclosure
proceedings. The Bank's collection procedures provide that when a mortgage loan
is 10 days past due, a notice of nonpayment is sent. Delinquent notices are sent
if the loan becomes delinquent for more than 30 days. If payment is still
delinquent after 60 days, the customer will receive a letter and/or telephone
call and may receive a visit from a representative of the Bank. If the
delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, management will generally initiate legal
proceedings.
Loans are reviewed on a monthly basis by management and are generally
placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At September 30, 1999, no loans were classified in a
non-accrual status.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
At September 30,
----------------
1999 1998
---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Total .................................................. $-- $--
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Construction loans ................................... -- --
Permanent loans secured by 1 to 4 family
dwelling units ..................................... 214 358
All other mortgage loans ............................. 23 27
No n-mortgage loans:
Commercial
Consumer ............................................. 44 104
---- ----
Total .................................................. 281 489
---- ----
Total non-accrual and accrual loan ..................... 281 489
Real estate owned ...................................... -- --
Total non-performing assets ............................ $281 $489
==== ====
Total non-performing loans to net loans ................ .32% .57%
==== ====
Total non-performing loans to total assets ............. .25% .44%
==== ====
Total non-performing assets to total assets ............ .25% .44%
==== ====
9
<PAGE>
There was no interest income that would have been recorded on loans
accounted for on a non-accrual basis under the original terms of such loans for
the year ended September 30, 1999, because there were no loans accounted for on
a non-accrual basis for this period.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At September 30, 1999, the Bank had no loans designated special
mention, $185,000 classified as substandard, none classified as doubtful, and
$20,000 classified as loss. The Bank had delinquent loans 60 days or more of
$224,000 (which were all residential mortgage loans) and an allowance for loan
losses of $370,000 of which $350,000 is classified as a general valuation
allowance.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at fair value at the
date of foreclosure less estimated costs of disposition.
Allowance for Loan Losses. It is management's policy to provide for
losses on loans in its loan portfolio. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Bank's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
current economic conditions, and the relationship of the allowance for loan
losses to outstanding loans.
10
<PAGE>
The amount of provisions for loan losses recorded in future periods may
be significantly greater or lesser than the provisions taken in the past. The
allowance for loan losses, as a ratio of total loans was .41% at September 30,
1999.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for loan losses
will be adequate to cover losses which may in fact be realized in the future and
that additional provisions for losses will not be required.
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. Except as set forth below, the portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses that may occur within the loan category because the total loan
loss allowance is a valuation reserve applicable to the entire loan portfolio.
11
<PAGE>
At September 30,
----------------------------------------
1999 1998
--------------------- ------------------
Percent of Percent of
---------- ----------
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
At end of period allocated (Dollars in Thousands)
to:
Real estate mortgage:
One- to four-family residential. $264 71.35% $ 259 77.47%
Multi-family................... 15 4.05 13 3.94
Agricultural.................... 18 4.94 15 4.35
Commercial...................... 21 5.60 13 3.79
Residential construction........ 17 4.49 20 5.90
Consumer(1)....................... 35 9.57 15 4.55
---- ---- --- ------
Total allowance for loan
losses...................... $370 100.00% $335 100.00%
=== ====== === ======
- -----------------------
(1) In 1999, includes $20,000 specific reserve attributable to two particular
loans and not available for other loan losses.
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Bank's allowance for loan losses at the
dates and for the periods indicated:
At or For the Year
Ended September 30,
-------------------------
1999 1998
---------- ----------
(Dollars in Thousands)
Total loans outstanding ......................... $ 91,884 $ 88,832
======== ========
Average loans outstanding ....................... $ 86,754 $ 83,637
======== ========
Allowance balances (at beginning of
period) ....................................... $ 335 $ 308
Provision (credit):
Residential ................................... 15 97
Consumer ...................................... 20 --
Net Charge-offs (recoveries):
Residential ................................... -- (3)
Consumer ...................................... -- 73
-------- --------
Allowance balance (at end of period) ............ $ 370 $ 335
======== ========
Allowance for loan losses as a percent
of total loans outstanding .................... .41% .38%
Net loans charged off as a percent of
average loans outstanding ..................... -- .08%
12
<PAGE>
Investment Activities
First Federal is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. See "-- Regulation -- Regulation of
the Bank -- Federal Home Loan Bank System". The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. At September 30, 1999,
First Federal had an investment portfolio which included interest-earning
deposits of $7.8 million, and investment securities of $11.2 million, consisting
of FHLB stock, Government agency-backed bonds, municipal bonds and FHLMC capital
stock. The Bank is permitted to invest in various securities, including U.S.
Treasury securities, U.S. government agency obligations, mortgage-backed and
related securities, and municipal bonds, as permitted by the OTS regulations.
The Bank classifies its investment securities as held-to-maturity or
available-for-sale in accordance with SFAS No. 115. The fair value of the
investment portfolio at September 30, 1999, was $11.2 million, and the carrying
value of the investment portfolio includes a net unrealized gain at that date of
approximately $2.6 million, after deduction of $1.3 million in deferred income
tax expense.
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment securities portfolio, short term investments and FHLB
stock, at the dates indicated. At September 30, 1999, the market value of the
Bank's investment securities portfolio was $11.2 million.
At September 30,
---------------------
1999 1998
--------- --------
(In Thousands)
Investment Securities available for
sale:
FHLMC securities ................................... $ 4,009 $ 3,825
------- -------
Total ............................................ 4,009 3,825
------- -------
Investment securities held to maturity:
FHLB Stock and bonds ............................. 7,191 11,089
------- -------
Mortgaged-backed securities ...................... 40 52
------- -------
Total ............................................. 7,231 11,141
------- -------
Total investment securities ...................... 11,240 14,966
Interest-earning deposits (1) ...................... 7,809 7,334
------- -------
Total investments ............................... $19,049 $22,300
======= =======
- --------------------
(1) Includes interest-earning overnight deposits and term deposits with FHLB.
13
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Bank's investment securities portfolio.
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------------------------------------------------------------------------
More Than One to More Than Five to
One Year or Less Five Years Ten Years More than Ten Years Total Investment Securities
---------------- ---------------- -------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- -------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments securities available
for sale:
FHLMC Securities ............... $ 4,009 1.12% $ -- -- % $ -- -- % $ -- -- % $ 4,009 1.12% $ 4,009
------- ---- ------- ---- ----- ---- ------- ------ ------- ---- -------
Investment securities held to
maturity:
Bonds - U.S. Government and .... -- -- 5,500 6.73 -- -- -- -- 5,500 6.73 5,422
Federal agencies
GNMA PC ........................ -- -- -- -- 40 7.28 -- -- 40 7.28 41
FHLB Stock ..................... -- -- -- -- -- -- 1,478 7.00 1,478 7.00 1,478
Bonds - Municipal .............. -- -- 105 4.21 108 5.38 -- -- 213 4.80 210
------- ---- ------- ---- ----- ---- ------- ------ ------- ---- -------
Total ........................ -- -- 5,605 6.68% 148 5.89% 1,478 7.00 % 7,231 6.73% 7,151
------- ---- ------- ---- ----- ---- ------- ------ ------- ---- -------
Total investment securities .... $ 4,009 1.12% $ 5,605 6.68%$ 148 5.89% $ 1,478 7.00 % $11,240 4.73% $11,160
======= ==== ======= ==== ===== ==== ======= ====== ======= ==== =======
</TABLE>
14
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. First Federal derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings, and operations. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. Although First Federal had no FHLB advances at
September 30, 1999, such advances may also be a source of funds for the Bank in
the future.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including passbook, NOW, non-interest earning
accounts, money market deposit and certificates of deposit ranging in term from
three months to five years. The Bank also offers IRA accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The interest rates paid by the Bank on deposits are set weekly at the
direction of senior management. The Bank determines the interest rate to offer
the public on new and maturing accounts by reviewing the current U.S. Treasury
rate for the term and the market interest rates offered by competitors.
Passbook, money market and NOW accounts constituted $17.5 million, or
21.32%, of the Bank's deposit portfolio at September 30, 1999. Certificates of
deposit constituted $64.5 million or 78.68% of the deposit portfolio of which
$5.8 million or 7.05% of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. As of September 30, 1999, the Bank had no brokered
deposits.
15
<PAGE>
Deposit Portfolio. Deposits in the Bank as of September 30, 1999, were
represented by various types of savings programs described below.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Interest Balance September 30, of Total
Category Term Rate(1) Amount 1999(2) Deposits
- -------- ---- ------- ------ --------- -------------
<S> <C> <C> <C> <C> <C>
Now Accounts None 2.33% $ 250 $7,905 9.64%
Regular Savings None 2.82 10 7,486 9.13
Money Market None 2.74 2,500 2,093 2.55
Accounts(3)(4)
Certificates of Deposit:
3-month Money Market 91 days 4.22 500 1,012 1.23
6-month Money Market 182 days 4.46 500 6,428 7.84
Fixed Term, Fixed Rate 7 month 4.77 2,500 6,382 7.78
Fixed Term, Fixed Rate 12 month 6.50 * 86 .11
Fixed Term, Fixed Rate 12 month 4.81 500 14,885 18.15
Fixed Term, Fixed Rate 18 month 5.10 500 6,974 8.50
IRA 18 month 5.34 25 10,221 12.46
Fixed Term, Fixed Rate 30 month 6.75 * 13 .02
Fixed Term, Fixed Rate 30 month 5.56 500 7,992 9.74
Fixed Term, Fixed Rate 30 month 5.28 * 71 .09
Fixed Term, Fixed Rate 42 month 5.64 500 4,790 5.84
Fixed Term, Fixed Rate 48 month 7.50 * 51 .06
Fixed Term, Fixed Rate 60 month 6.21 500 5,498 6.70
Fixed Term, Fixed Rate 72 month 7.75 * 23 .03
Fixed Term, Fixed Rate 96 month 8.00 * 108 .13
------ ------
Total $82,018 100.00%
====== ======
</TABLE>
- ---------------
(1) Represents weighted average interest rates.
(2) In thousands.
(3) If average daily balance of $2,500 maintained, interest rate was 2.75%.
(4) If average daily balance drops below $2,500, interest rate was 2.00%.
* This type of certificate was no longer offered at September 30, 1999.
16
<PAGE>
Jumbo Certificates of Deposit. The following table indicates the amount
of the Bank's certificates of deposit of $100,000 or more by time remaining
until maturity as of September 30, 1999.
Certificates
of Deposit
----------
Maturity Period (In Thousands)
- ---------------
Three months or less.............................. 1,118
More than three through six months................ 1,770
More than six through twelve months............... 1,590
Over twelve months................................ 1,303
------
Total.......................................... $ 5,781
======
The following table sets forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
Year Ended September 30,
--------------------------------------
1999 1998
----------------- -------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
(Dollars in Thousands)
Deposit Category:
Demand Accounts(1)............. $ 9,645 2.27% $ 8,918 2.24%
Passbook Accounts.............. 7,553 2.80 7,590 2.79
Certificates................... 63,824 5.32 61,917 5.63
------ ----- ------ ----
$81,022 4.71% $78,425 4.97%
====== ===== ====== ====
- -------------
(1) Includes non-interest bearing accounts, which represent less than 10% of
total deposits.
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank may obtain advances from the FHLB of Cincinnati to supplement its supply of
lendable funds. Advances from the FHLB of Cincinnati are typically secured by a
pledge of the Bank's stock in the FHLB of Cincinnati and a portion of the Bank's
first mortgage loans and certain other assets. The Bank, if the need arises, may
also access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At September 30,
1999, the Bank had no borrowings.
Subsidiary Activity
First Federal is permitted to invest up to 2% of its assets in the
capital stock of, or provide secured or unsecured loans to, subsidiary
corporations, with an additional investment of 1% of assets when such additional
investment is utilized primarily for community development purposes. Under such
limitations, as of September 30, 1999, First Federal was authorized to invest up
to approximately $2.2 million in the stock of, or provide loans to, service
corporations (based upon the 2% limitation). The Bank has one wholly
17
<PAGE>
owned subsidiary, Harrodsburg Savings and Loan Service Corporation (the "Service
Corporation"). The sole purpose of the Service Corporation is to purchase and
hold the required amount of stock of Savings and Loan Data Corp., now Intrieve,
pursuant to the Bank's agreement with Intrieve for data processing services.
Incorporated in Kentucky in 1978, the Service Corporation has not conducted any
other business and has been inactive since its acquisition of the stock. The
Bank's investment in its subsidiary totaled $15,000 at September 30, 1999.
Personnel
As of September 30, 1999, the Bank had 15 full-time and no part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Recent Developments
Financial Modernization. On November 12, 1999, President Clinton signed
into law the Gramm- Leach-Bliley Act (the "Act") which will, effective March 11,
2000, permit qualifying bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. The Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with an nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS will have enforcement authority
over the Company and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company. The Company is also required to file
18
<PAGE>
certain reports with, and otherwise comply with, the rules and regulations of
the OTS and the Securities and Exchange Commission ("SEC").
QTL Test. As a unitary savings and loan holding company, the Company
generally will not be subject to activity restrictions, provided the Bank
satisfies the QTL test. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to restrictions applicable to bank holding companies unless
such other associations each also qualify as a QTL or were acquired in a
supervised acquisition.
Federal Securities Law. The Company's Common Stock is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
Bank Regulation
General. As a federally chartered, SAIF-insured savings bank, First
Federal is subject to regulation and examination by the OTS and the FDIC.
Lending activities and other investments must comply with various federal
statutory and regulatory requirements. The Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
First Federal must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the Savings Association
Insurance Fund ("SAIF") and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulations, whether
by the OTS, the FDIC or the United States Congress could have a material adverse
impact on the Company and the Bank and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan, or
the institution is operating in an unsafe or unsound manner.
19
<PAGE>
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet two capital standards: (1) a leverage ratio (core
capital) equal to at least 4% of total adjusted assets and (2) a risk-based
capital requirement equal to 8.0% of total risk-weighted assets.
Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, and qualifying
supervisory goodwill, less nonqualifying intangible assets.
The OTS leverage ratio regulation establishes a core capital ratio of
at least 4% for those savings associations in the strongest financial and
managerial condition based on the "CAMELS" rating system currently in use by the
OTS. Those savings associations receiving a CAMELS rating of "1", the best
possible rating on a scale of 1 to 5, are be required to maintain a ratio of
core capital to adjusted total assets of 4%. All other savings associations are
required to maintain minimum core capital of at least 4% of total adjusted
assets, with a maximum core capital ratio requirement of 5%. In determining the
required minimum core capital ratio, the OTS assesses the quality of risk
management and the level of risk in each savings association on a case-by-case
basis.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
As of September 30, 1999, the Bank had core and risk-based capital of
$22.6 million and $22.9 million, respectively, which amounts significantly
exceed all applicable fully phased-in regulatory capital requirements of the
OTS.
OTS regulations set forth the methodology for calculating an IRR
component which is added to the risk-based capital requirements for OTS
regulated thrift institutions. Generally, savings associations with a greater
than "normal" level of interest rate exposure will be subject to a deduction
from total capital for purposes of calculating their risk-based capital
requirement. Specifically, interest rate exposure will be measured as the
decline in net portfolio value due to a 200 basis point change in market
interest rates. The IRR component to be deducted from total capital is equal to
one-half the difference between an institution's measured exposure and the
"normal" level of exposure which is defined as two percent of the estimated
economic value of its assets. Institutions, such as the Bank, with less than
$300 million in assets and a risk- based capital ratio in excess of 12% are
exempt from deducting the IRR component.
20
<PAGE>
In addition, pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the OTS must revise the risk-based capital
regulations to include a credit risk component and a nontraditional activities
component, the purpose of which will be to increase the minimum capital
requirements for savings associations with higher credit risks.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institution to
capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Association after the conversion, must file an
application or a notice with the OTS at least 30 days before making a capital
distribution. Savings associations are not required to file an application for
permission to make a capital distribution and need only file a notice if the
following conditions are met: (1) they are eligible for expedited treatment
under OTS regulations, (2) they would remain adequately capitalized after the
distribution, (3) the annual amount of capital distribution does not exceed net
income for that year to date added to retained net income for the two preceding
years, and (4) the capital distribution would not violate any agreements between
the OTS and the savings association or any OTS regulations. Any other situation
would require an application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution by
any institution, which would otherwise be permitted by the regulation, if the
OTS determines that the distribution would constitute an unsafe or unsound
practice.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would be
unable to meet any one of its minimum regulatory capital requirements. Further,
a federal savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended
("HOLA"), requires savings institutions to meet a QTL test. If the Bank
maintains an appropriate level of Qualified Thrift Investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Cincinnati. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, Federal National Mortgage
Association ("FNMA"), and FHLMC as qualifying QTIs. Compliance with the QTL test
is determined on a monthly basis in nine out of every 12 months. As of September
30, 1999, the Bank was in compliance with its QTL requirement with 94.87% of its
assets invested in QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
21
<PAGE>
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital and
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors, and
10% stockholders as well as to entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with minor
variation, apply Regulation O to savings associations.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. As of September 30, 1999, the Bank's
liquidity ratio was 23.21%.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. As of
September 30, 1999, the Bank had no funds borrowed from the FHLB of Cincinnati
to fund operations; however, there can be no assurances that borrowings will not
be made in the future.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of September 30, 1999, the Bank had $1.5 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended September 30, 1999, dividends paid by
the FHLB of Cincinnati to the Bank totaled $99,971.
22
<PAGE>
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. As of
September 30, 1999, the Bank was in compliance with its Federal Reserve Board
minimum reserve requirements.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at September 30, 1999.
Item 2. Properties
- --------------------
The Bank operates from its main office and one full service branch
office. The Bank's total investment in offices, office property and equipment is
$1.8 million with a net book value of $1.1 million at September 30, 1999. The
following table sets forth information regarding the Bank's properties:
Original
Leased Date Net Book Value at
Location or Owned Acquired September 30, 1999
- -------- -------- -------- ------------------
MAIN OFFICE:
104 South Chiles Street Owned 1964 $554,000
Harrodsburg, Kentucky 40330
BRANCH OFFICE: Owned 1973 $120,000
216 South Main Street
Lawrenceburg,Kentucky
FUTURE BRANCH OFFICE: Owned 1998 $381,000
1015 Cross Road Drive
Lawrenceburg, Kentucky
(under construction)
Item 3. Legal Proceedings
- --------------------------
The Bank, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no material
lawsuits pending or known to be contemplated against the Bank or the Company at
September 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
23
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Market and Dividend Information" in
the Registrant's 1999 Annual Report to Stockholders on the inside cover page and
"Stock Prices and Dividends" on page 3 of the Annual Report, and is incorporated
herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears under "Selected Financial and
Other Data" in the Registrants' 1999 Annual Report to Stockholders on pages 2
and 3 is incorporated by reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Registrant's 1999 Annual Report to Stockholders on pages 4 through 16 and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The above-captioned information appears under "Asset/Liability
Management" in the Registrant's 1999 Annual Report to Stockholders on pages 4
through 6 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements of the Company and its
subsidiaries, together with the report thereon by Miller, Mayer, Sullivan &
Stevens LLP appears in the Registrant's 1999 Annual Report to Stockholders on
pages 17 through 43 and are incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" at pages 4 to 6 of the Registrant's definitive proxy
statement for the Registrant's Annual Meeting of Stockholders to be held on
January 24, 2000 (the "Proxy Statement"), which was filed with the Commission on
December 22, 1999 and incorporated herein by reference. See also "Item 1.
Business -- Personnel" included herein.
24
<PAGE>
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated
herein by reference to the Registrant's Proxy Statement at pages 7 through 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement at pages 1 through 4.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement at page 11.
PART IV
Item 14. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference
to the following indicated pages of the 1999 Annual Report to Stockholders.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................. 17
Consolidated Balance Sheets as of September 30, 1999 and 1998............................ 18
Consolidated Statements of Income For the Years Ended September 30, 1999, 1998
and 1997 ............................................................................. 19
Consolidated Statement of Stockholders' Equity
for the Years Ended September 30, 1999, 1998 and 1997................................. 20
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999,
1998 and 1997............................................................................ 21-22
Notes to Consolidated Financial Statements............................................... 23
</TABLE>
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Harrodsburg First Financial Bancorp, Inc.*
3.2 Bylaws of Harrodsburg First Financial Bancorp, Inc.*
10.1 1996 Stock Option Plan**
10.2 Restricted Stock Plan and Trust Agreement**
10.3 Employment Agreement with Arthur L. Freeman
13.0 1999 Annual Report to Stockholders
21.0 Subsidiary Information
27.0 Financial Data Schedule (in electronic filing only)
(b) Reports on Form 8-K.
None.
</TABLE>
- ----------------
* 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.
** Incorporated herein by reference into this document from the Exhibits to
the Form 10-K filed on December 29, 1997.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
Dated: December 23, 1999 By: /s/ Arthur L. Freeman
---------------------------
Arthur L. Freeman
Chief Executive Officer
and Chairman
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.
------------------------ --------------------------------------
President and Director Wickliffe T. Asbury, Sr.
Vice President and Director
Date: December 23, 1999 Date:December 23, 1999
By: /s/ Elwood Burgin By: /s/ Teresa W. Noel
------------------------ --------------------------------------
Elwood Burgin Teresa W. Noel
Director Treasurer and Chief Financial Officer
Date: December 23, 1999 Date:December 23, 1999
By: /s/ Thomas Les Letton By: /s/ Jack L. Coleman, Jr.
------------------------ --------------------------------------
Thomas Les Letton Jack L. Coleman, Jr.
Director Director
Date: December 23, 1999 Date:December 23, 1999
By: /s/W. Dudley Shryock
------------------------
W. Dudley Shryock
Director
Date: December 23, 1999
EXHIBIT 13
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
Harrodsburg First Financial Bancorp, Inc., a Delaware corporation (the
"Company"), is a unitary savings and loan holding company whose only
subsidiaries are First Federal Savings Bank of Harrodsburg ("Harrodsburg First
Federal" or 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 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.
The Bank was formed in 1961 as a federal mutual savings and loan association and
obtained insurance of accounts and became a member of the Federal Home Loan Bank
("FHLB") of Cincinnati at that time. Upon its conversion to stock form in
September 1995, the Bank adopted its present name. The Bank operates through one
full service office in Harrodsburg, Kentucky, and another full service branch
office in Lawrenceburg, Kentucky.
The executive offices of the Company and the Bank are located at 104 South
Chiles Street, Harrodsburg, Kentucky 40330, and its telephone number is (606)
734-5452.
MARKET AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
Market for the Common Stock
Since October 4, 1995, the Common Stock of the Company has been listed for
trading under the symbol "HFFB" on the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market. As of December
8th, there were 1,692,575 shares of the Common Stock issued and outstanding,
held by approximately 497 stockholders of record, not including beneficial
owners in nominee or street name.
Dividends
The Company maintains a policy whereby it will pay a semi-annual cash dividend
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 $0.30 per share was payable on October 15,
1999 to stockholders of record on September 30, 1999. On September 20, 1999, the
Board of Directors declared a special dividend of $.25 per share payable on
October 16, 1999, to stockholders of record as of October 1, 1999. 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>
<CAPTION>
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Harrodsburg First Financial Bancorp, Inc. Inside Front Cover
Market and Dividend Information Inside Front Cover
Letter to Stockholders 1
Selected Financial and Other Data 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 4
Financial Statements 17
Corporate Information Inside Back Cover
</TABLE>
<PAGE>
[LOGO]
Harrodsburg First Financial Bancorp, Inc.
- --------------------------------------------------------------------------------
104 S. Chiles St., P.O. Box 384
Harrodsburg, KY 40330
LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
Dear Stockholder:
On behalf of the Board of Directors of Harrodsburg First Financial Bancorp,
Inc., I am proud to provide you with our 1999 Annual Report to Stockholders. The
Company's consolidated net income for our fourth full year as a public company
was over $1.5 million or $.94 per share. This compares with the prior year's
income of $.79 per share.
Total assets at September 30, 1999 were $110.4 million, deposits were $82
million, and our net loan balance was $89.1 million. Stockholders' equity
totaled $26.2 million or $16.67 per share, representing 23.7% of assets.
During fiscal year 1999, 222,643 shares of the Company's stock were repurchased
in open market transactions totaling $3.2 million. In December 1999, the Board
announced another repurchase plan of an additional 5% of the outstanding shares
of the Company, in an effort to improve liquidity in the market for our common
stock and increase the Company's earnings and book value per share.
Since coming to the Company and the Bank on October 1, 1999, I have spent much
of my time with the Board and staff doing strategic planning for the 21st
Century. As a result of that planning, the Bank will open the new millennium
with a new attitude and a new name. First Federal Savings will become First
Financial Bank. The new name more closely reflects that of our holding company
and better identifies us as a provider of a wide range of financial products.
At our upcoming Annual Meeting, I will share with you our plans and vision for
the coming months and years. You can expect to see First Financial broaden its
markets, through growth, acquisition, and new technologies, and become much more
aggressive in becoming the market leader in each community we serve. Our mission
is a simple one: To provide the very best service and financial products through
a network of locally managed community banks while assuring growth and income
for our shareholders.
Having served as Kentucky's Banking Commissioner for the past two years, I am
confident in the preparation the banking industry has made for Year 2000. As CEO
of Harrodsburg First Financial Bancorp, Inc., I want to reassure you that we are
ready for the calendar change. We have either upgraded or replaced every
component of our operating systems to bring them into Y2K compliance. Testing
has been successfully completed in all areas of the bank and contingency plans
are in place. We fully expect the transition to the Year 2000 to be uneventful
for our customers.
The directors, management, and staff of Harrodsburg First Financial Bancorp,
Inc. and First Financial Bank are proud of the confidence stockholders have
shown in our company. We are, however, in the banking business. If you are a
First Federal customer, thank you! If you are not currently banking with First
Federal, stop by or call me. I would like to show you why you should be doing
business with the bank you own.
Sincerely,
/s/ Art Freeman
Art Freeman
Chairman and Chief Executive Officer
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Condition Data
At September 30,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets............................... $ 110,416 $ 109,919 $ 109,638 $ 108,953 $ 107,234
Loans receivable, net................ 89,062 85,272 81,261 77,502 75,434
Investments (1)...................... 11,240 14,966 14,382 14,884 8,580
Cash and cash equivalents............ 8,350 8,074 12,621 15,065 21,990
Deposits............................. 82,018 78,996 78,629 76,946 75,893
Stockholders' equity................. 26,220 28,982 29,773 30,222 30,185
Number of:
Real estate loans outstanding.......... 1,532 1,601 1,668 1,710 1,745
Deposit accounts..................... 9,574 9,590 9,594 9,524 10,559
Full service offices................. 2 2 2 2 2
</TABLE>
- -------------------------------
(1) Includes FHLB stock, and term deposits with the FHLB.
<TABLE>
<CAPTION>
Operating Data
For the year ended September 30,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income ................... $7,745 $7,778 $7,699 $7,712 $6,612
Interest expense .................. 3,813 3,897 3,835 3,901 3,807
------ ------ ------ ------ ------
Net interest income ........... 3,932 3,881 3,864 3,811 2,805
Provision for loan losses ......... 35 96 11 8 92
------ ------ ------ ------ ------
Net interest income after
provision for loan losses .... 3,897 3,785 3,853 3,803 2,713
Non-interest income ............... 116 122 95 101 81
Non-interest expense1 ............. 1,728 1,679 1,701 2,225 1,444
------ ------ ------ ------ ------
Income before income tax expense .. 2,285 2,228 2,247 1,679 1,350
Income tax expense ................ 777 799 771 589 459
------ ------ ------ ------ ------
Net income ........................ $1,508 $1,429 $1,476 $1,090 $ 891
====== ====== ====== ====== ======
</TABLE>
- -----------------------
1 Reflects one-time special SAIF assessment of $536,063 in fiscal 1996.
2
<PAGE>
<TABLE>
<CAPTION>
Key Operating Ratios
At or for the year ended September 30,
1999 1998 1997 1996 1995
-------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets) 1.36% 1.31% 1.36% 1.00% .95%
Return on average equity (net income
divided by average equity) 5.49 4.98 5.12 3.56 7.84
Average interest-earning assets to
average interest-bearing liabilities 133.86 136.40 136.34 139.15 113.08
Net interest rate spread 2.43 2.30 2.32 2.14 2.50
Net yield on average interest-
earning assets 3.63 3.63 3.64 3.57 3.04
Dividend payout 87.74 102.38 45.26 72.71 N/A
Capital Ratios:
Average equity to average assets
(average equity divided by
average total assets) 24.80 26.31 26.64 28.18 12.11
Equity to assets at period end 23.75 26.37 27.14 27.74 28.15
Asset Quality Ratios:
Net interest income after provision for
loan losses to total other expenses . 225.58 225.43 226.51 170.92 187.88
Non-performing loans to total loans .32 .57 .64 1.12 .88
Non-performing loans to total assets .25 .44 .47 .79 .62
</TABLE>
Stock Prices and Dividends
The following table sets forth the range of high and low sales prices for the
common stock as well as dividends declared in each quarter for 1999 and 1998.
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.
<TABLE>
<CAPTION>
Quarterly Stock Information
Fiscal 1999 Fiscal 1998
------------------------------------ --------------------------------------
Stock Price Range Per Share Stock Price Range Per Share
Quarter Low High Dividend Low High Dividend
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $ 13.75 $ 15.38 $ .30 $ 16.125 $ 18.250 $ 0.40
2nd 13.00 15.06 .20 16.500 17.875 0.20
3rd 12.00 13.56 16.500 17.750
4th 12.63 14.00 .30 14.000 16.750 0.20
- -------------------------------------------------------------------------------------
Total $ .80 $ 0.80
====== ========
</TABLE>
<PAGE>
MANAGEMENTS 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 cash on deposit with the Bank, all of the Bank's
outstanding capital stock, and a note receivable from the Company's Employee
Stock Ownership Plan ("ESOP"). Therefore, this discussion relates primarily to
the Bank.
Historically, the Bank has functioned as a financial intermediary, attracting
deposits from the general public and using such deposits, to make mortgage loans
and, to a lesser extent consumer loans and to purchase investment securities. As
such, its net earnings are dependent primarily on its net interest income, which
is the difference between interest income earned on its interest-earning assets
and interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between yields earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread) and
(ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's interest rate spread is affected by regulatory,
economic, and competitive factors that influence interest rates, loan demand,
and deposit flows. To a lesser extent, the Bank's net earnings are also affected
by the level of non-interest income, which primarily consists of service charges
and other fees. In addition, net earnings are affected by the level of
non-interest (general and administrative) expenses.
The operations of the Bank and the entire thrift industry are significantly
affected by prevailing economic conditions, competition, and the monetary and
fiscal policies of the federal government and governmental agencies. Lending
activities are influenced by the demand for and supply of housing, competition
among lenders, the level of interest rates, and the availability of funds.
Deposit flows and costs of funds are influenced by prevailing market rates of
interest, competing investments, account maturities, and the levels of personal
income and savings in the Bank's market area.
The Bank's interest-earning assets have been historically concentrated in real
estate-collateralized instruments, principally single-family residential loans,
and to a lesser extent, loans secured by multi-family residential and commercial
properties, construction loans, home equity lines of credit, second mortgages on
single-family residences and consumer loans, both secured and unsecured,
including loans secured by savings accounts. The Bank also invests in
securities, primarily U.S. Government Treasury and Agency securities, and in
interest-earning deposits, primarily with the FHLB of Cincinnati. Its source of
funding for these investments has principally been deposits placed with the Bank
by consumers in the market areas it serves.
Asset/Liability Management
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
4
<PAGE>
financial instruments other than non-interest earning cash balances, FHLB stock
and demand deposit accounts for the Bank as of September 30, 1999.
Market Rate Analysis - September 30, 1999
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------------------------------------------------------------------------------------
Year ended September 30,
----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
2000 2001 2002 2003 2004 Thereafter Total Fair
Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans-fixed:
Balance $110 $129 $226 $292 $282 $19,738 $20,777 $20,836
Interest rate 5.87% 9.17% 8.80% 8.81% 8.81% 7.82% 7.87%
Loans-variable:
Balance 43,647 1,461 4,343 7,803 11,811 69,065 69,261
Interest rate 7.61% 7.06% 7.21% 7.34% 7.30% 7.49%
Investments:
Balance 11,818 3,038 2,567 148 17,571 17,490
Interest rate 4.07% 6.37% 6.40% 5.89% 4.82%
Liabilities:
Deposits:
Balance 16,741 16,741 16,741
Interest rate 2.61% 2.61%
Deposits-certificates
Balance 48,310 10,241 2,971 3,012 64,534 64,631
Interest rate 5.09% 5.27% 5.42% 5.74% 5.16%
</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 owner-occupied dwellings for terms of up to 30
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, 1999, 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.
5
<PAGE>
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, 1999.
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, 1999 would decrease by $2.2 million or 7.8% 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>
1999 1998 1997
---------------------------- ---------------------------- -------------------------
Average Average Average Average
Average Yield Average Yield/ Average Yield/
Yield/Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ---------- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $ 86,754 $ 6,757 7.79% $ 83,637 $ 6,550 7.83% $ 79,642 $ 6,239 7.83%
Investment securities1 .................. 21,701 988 4.55 23,335 1,228 5.26 26,480 1,460 5.51
----------- ------- -------- ----- -------- -------
Total interest-earning assets.......... 108,455 7,745 7.14 106,972 7,778 7.27 106,122 7,699 7.25
------- ----- -------
Non-interest earning assets................. 2,409 2,118 2,031
----------- -------- -------
Total assets............................. $ 110,864 $109,090 $108,153
=========== ======== ========
Interest-bearing liabilities:
Deposits................................. $ 81,022 3,813 4.71 $ 78,425 3,897 4.97 $ 77,834 3,835 4.93
----------- ------- -------- ----- -------- -------
Total interest-bearing liabilities....... 81,022 3,813 4.71 78,425 3,897 4.97 77,834 3,835 4.93
------- ----- -------- -------
Non-interest bearing liabilities:........... 2,351 1,965 1,512
----------- -------- --------
Total liabilities........................ 83,373 80,390 79,346
Stockholders' equity........................ 27,491 28,700 28,807
----------- -------- --------
Total liabilities & stockholders' equity. $ 110,864 $109,090 $108,153
=========== ======== ========
Net interest income......................... 3,932 3,881 3,864
======= ===== =======
Interest rate spread 2...................... 2.43% 2.30% 2.32%
==== ==== ====
Net yield on interest-earning assets3....... 3.63% 3.63% 3.64%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 133.86% 136.40% 136.34%
====== ====== ======
</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 3.63% for the years ended
September 30, 1999 and 1998. Net interest income increased $51,000 or 1.3% for
the year ended September 30, 1999 as compared to the same period in 1998.
Interest expense decreased $84,000 or 2.2% while interest income decreased
$33,000 or .4% for the 1999 period compared to the 1998 period.
The Bank's net interest margin was 3.63% for the year ended September 30, 1998
compared to 3.64% for the same period in 1997. Net interest income increased
$17,000 or .4% for the year ended September 30, 1998 as compared to the same
period in 1997. Interest income increased $79,000 or 1.0% while interest expense
increased $62,000 or 1.6% for the 1998 period compared to the 1997 period.
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,
----------------------------------------------------------------
1999 vs 1998 1998 vs 1997
--------------------------------- -----------------------------
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>
Interest-earning assets:
Loans receivable $ 241 $ (33) $ (1) $ 207 $ 313 $ $ $313
Investment securities1 (86) (166) 12 (240) (176) (66) $ 8 (234)
----- ----- ----- ----- ----- ----- ---- ----
Total $ 155 $(199) $ 11 $ (33) $ 137 $ (66) $ 8 $ 79
===== ===== ===== ===== ===== ===== ==== ====
Interest expense:
Deposits $ 126 $(204) $ (6) $ (84) $ 30 $ 32 $ $ 62
----- ----- ----- ----- ----- ----- ---- ----
Total $ 126 $(204) $ (6) $ (84) $ 30 $ 32 $ $ 62
===== ===== ===== ===== ===== ===== ==== ====
Net change in interest income $ 29 $ 5 $ 17 $ 51 $ 107 $ (98) $ 8 $ 17
===== ===== ===== ===== ===== ===== ==== ====
</TABLE>
- -----------------------------
1 Includes interest-earning overnight deposits and term deposits with FHLB of
Cincinnati.
9
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risk and uncertainties.
Economic circumstances, the Company's operations, and the Company's actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation and the Company's market area generally.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 1999 AND 1998
Net Income. Net income increased by $79,000, or 5.58% to $1,508,000 for the year
ended September 30, 1999 as compared to $1,429,000 for the year ended September
30, 1998. The net increase was due to an increase in net interest income of
$51,000, a decrease in the provision for loan losses of $61,000, and a decrease
in income tax expense of $23,000 offset by a decrease of $7,000 in non-interest
income and an increase of $49,000 in non-interest expense.
Net Interest Income. Net interest income for the year ended September 30, 1999
was $3.9 million. The increase in net interest income in fiscal 1999 compared to
1998 of $51,000 was due to a decrease in interest expense of $84,000 offset by a
decrease in interest income of $33,000. Interest income in 1999 was $7.7 million
with an average yield of 7.14% compared to $7.8 million with an average yield of
7.27% in 1998. The decrease in interest expense of $84,000 was primarily due to
the decrease in the average rate paid on interest bearing liabilities. The
average balance of interest bearing liabilities in 1999 was $81.0 million with
an average cost of funds of 4.71% compared to average balances of interest
bearing liabilities in 1998 of $78.4 million with an average cost of funds of
4.97%.
Interest Income. Interest income was $7.7 million, or 7.14% of average
interest-earning assets, for the year ended September 30, 1999 as compared to
$7.8 million, or 7.27% of average interest-earning assets, for the year ended
September 30, 1998. Interest income decreased $33,000 or .4% from 1999 to 1998.
The decrease was due to a decline of 13 basis points in the rate earned on the
average balance of interest earning assets offset by an increase of $1.5 million
in the average balance of interest earning assets.
Interest Expense. Interest expense was $3.8 million, or 4.71% of average
interest-bearing liabilities, for the year ended September 30, 1999 as compared
to $3.9 million, or 4.97% of average interest-bearing liabilities, for the
corresponding period in 1998. The decrease in interest expense of $84,000 was
the result of a 26 basis point decrease in the average rate paid on the deposits
offset by the increase of $2.6 million in the average balance of interest
bearing deposits for the year ended September 30, 1999 compared to the same
period in 1998.
Provision for Loan Losses. The provision for loan losses was $35,000 and $96,000
for the years ended September 30, 1999 and 1998, 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, 1999 and 1998
the allowance for loan losses represented .41% and .38% of total loans,
respectively.
10
<PAGE>
Non-Interest Income. Non-interest income amounted to $116,000 and $123,000 for
the years ended September 30, 1999 and 1998, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $99,000 for 1999 and 1998.
Non-Interest Expense. Non-interest expense increased approximately $49,000, or
2.93%, to $1.7 million for the year ended September 30, 1999. Non-interest
expense was 1.6% and 1.5% of average assets for the years ended September 30,
1999 and 1998, respectively. The increase of $49,000 was primarily due to an
increase of $15,000 in data processing expenses, $6,000 in franchise tax, and
$28,000 in other operating expenses. The increase of $15,000 in data processing
expenses is due to increased services from the provider related to Y2K changes
and item processing. The increase of $28,000 in other operating expenses was due
to increases in advertising, transfer agent fees, ATM expense and accounting
fees.
Income Tax Expense. The provision for income tax expense amounted to
approximately $777,000 and $800,000 for the years ended September 30, 1999 and
1998, respectively. The provision for income tax expense as a percentage of
income before income tax expenses amounted to 34.0% and 35.9% for 1999 and 1998,
respectively.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 1998 AND 1997
Net Income. Net income decreased by $47,000, or 3.18% to $1,429,000 for the year
ended September 30, 1998 as compared to $1,476,000 for the year ended September
30, 1997. The net decrease was due to an increase in net interest income of
$17,000 an increase in non-interest income of $27,000, and a decrease in
non-interest expense of $22,000 offset by an increase in the provision for loan
losses of $85,000, and an increase in income tax expense of $28,000.
Net Interest Income. Net interest income for the year ended September 30, 1998
was $3.9 million. The increase in net interest income in fiscal 1998 compared to
1997 of $17,000 was due to an increase in interest income of $79,000 offset by
an increase in interest expense of $62,000. Interest income in 1998 was $7.8
million with an average yield of 7.27% compared to $7.7 million with an average
yield of 7.25% in 1997. The increase in interest expense of $62,000 was
primarily due to the increase in the average balance in interest bearing
liabilities. The average balance of interest bearing liabilities in 1998 was
$78.4 million with an average cost of funds of 4.97% compared to average
balances of interest bearing liabilities in 1997 of $77.8 million with an
average cost of funds of 4.93%.
Interest Income. Interest income was $7.8 million, or 7.27% of average
interest-earning assets, for the year ended September 30, 1998 as compared to
$7.7 million, or 7.25% of average interest-earning assets, for the year ended
September 30, 1997. Interest income increased $79,000 or 1.03% from 1997 to
1998. The increase was primarily due to management maintaining a higher average
balance of loans receivable, which has a higher average yield during the year
ended September 30, 1998 compared to the year ended September 30, 1997.
Interest Expense. Interest expense was $3.9 million, or 4.97% of average
interest-bearing liabilities, for the year ended September 30, 1998 as compared
to $3.8 million, or 4.93% of average interest-bearing liabilities, for the
corresponding period in 1997. The increase in interest expense of $62,000 was
the result of a 4 basis point increase in the average rate paid on the deposits
plus the increase of $591,000 in the average balance of interest bearing
deposits for the year ended September 30, 1998 compared to the same period in
1997.
Provision for Loan Losses. The provision for loan losses was $96,000 and $11,000
for the years ended September 30, 1998 and 1997, respectively. Management
considers many factors in determining the necessary levels of the
11
<PAGE>
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, 1998 and
1997 the allowance for loan losses represented .38% of total loans.
Non-Interest Income. Non-interest income amounted to $122,000 and $95,000 for
the years ended September 30, 1998 and 1997, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $99,000 and $75,000 for 1998 and 1997, respectively.
Non-Interest Expense. Non-interest expense decreased approximately $22,000, or
1.29%, to $1.7 million for the year ended September 30, 1998. Non-interest
expense was 1.5% and 1.6% of average assets for the years ended September 30,
1998 and 1997, respectively. The decrease of $22,000 was due to a decrease of
$27,000 in federal and other insurance premiums, a decrease of $22,000 in
franchise tax, and a decrease of $25,000 in other operating expenses offset by
an increase of $29,000 in compensation and benefits, an increase of $9,000 in
occupancy expenses plus an increase of $14,000 in data processing expenses. The
decrease of $27,000 in federal and other insurance premiums is due to savings in
1998 resulting from the reduction of the insurance assessment rate on the Bank's
deposits as a result of the recapitalization of SAIF. The decrease of $25,000 in
other operating expenses was primarily due to decrease in legal expense of the
Company. The increase of $29,000 in compensation and benefits resulted from a
$9,000 increase related to benefits earned in the employee stock option plan and
normal salary increases and related benefits of $20,000.
Income Tax Expense. The provision for income tax expense amounted to
approximately $800,000 and $772,000 for the years ended September 30, 1998 and
1997, respectively. The provision for income tax expense as a percentage of
income before income tax expenses amounted to 35.9% and 34.3% for 1998 and 1997,
respectively.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND 1998
The Company's consolidated assets increased $497,000, or .45%, to $110.4 million
at September 30, 1999 compared to $109.9 million at September 30, 1998. Cash and
cash equivalents increased $276,000, securities available-for-sale increased
$183,000, securities held-to-maturity decreased $3.9 million, loans increased
$3.8 million, and other non-interest earning assets increased by $157,000.
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 $183,000 due to the
increase in fair value of such securities. Securities held-to-maturity decreased
$3.9 million due to the call of thirteen debt securities backed by a U.S.
Government Agency offset by the purchase of five debt securities backed by a
U.S. Government Agency.
Loans receivable increased $3.8 million or 4.4% to $89.1 million at September
30, 1999 from $85.3 million at September 30, 1998. The increase in loans during
the year ended September 30, 1999 is the result of management becoming more
active in loan solicitation.
Liabilities of the Company increased $3.3 million, or 4.0%, to $84.2 million at
September 30, 1999 compared to $80.9 million at September 30, 1998. The increase
in liabilities was primarily due to the increase in deposits of $3.0 million,
reflecting management's success in attracting depositors within the local market
area.
Stockholder's equity was $26.2 million at September 30, 1999 and decreased
approximately $2.8 million from the balance at September 30, 1998. The decrease
was due to the repurchase of common stock totaling $3.2 million plus the
declaration of dividends totaling $1.3 million offset by net income of $1.5
million, an increase of $121,000 in
12
<PAGE>
the net unrealized appreciation on securities available-for-sale, plus an
increase of $154,000 due to ESOP shares released from collateral in 1998.
Year 2000 Readiness
The financial industry is one of the largest industries impacted by the year
2000 issue. However, this is not a new problem. This issue was first faced years
ago when financial institutions began issuing mortgage loans for 25-30 years,
which caused the maturity date to fall in year 2000 or beyond. So, this is not a
new issue for financial institutions.
The following discussion of the implications of the Year 2000 problem for the
Bank contains numerous forward looking statements based on inherently uncertain
information. The cost of the project and the date on which the Bank plans to
complete the internal Year 2000 modifications are based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications, and other factors. However, there can be no guarantee that
these statements will be achieved, and actual results could differ. Moreover,
although management believes it will be able to make the necessary modifications
in advance, there can be no guarantee that failure to modify the systems would
not have a material adverse effect on the Bank.
The Bank places a high degree of reliance on computer systems of third parties,
such as customers, suppliers, and other financial and governmental institutions.
Although the Bank is assessing the readiness of these third parties and
preparing contingency plans, there can be no guarantee that the failure of these
third parties to modify their systems in advance of December 31, 1999 would not
have a material adverse affect on the Bank.
Harrodsburg First Financial Bancorp, Inc. has fully completed the Awareness
Phase, Assessment Phase, and Renovation Phase of its Year 2000 Compliance Plan.
All mission critical systems have been identified, and all systems requiring
replacement have been replaced. The Bank's entire computer system has been
replaced with Y2K compliant hardware and software and is already in use; thus,
completing the Implementation Phase. All testing, including the Contingency
Plan, has been successfully completed.
The Bank's service provider, INTRIEVE, Inc., continues to actively pursue every
avenue required to insure their Y2K compliance and continues to be monitored by
the Bank's regulatory agency, the Office of Thrift Supervision. INTRIEVE, Inc.
is keeping their customers informed as to their state of readiness.
Total expenses related to Year 2000 compliance are estimated at approximately
$187,000. Expenses consist of the cost of replacement hardware and software,
consulting fees, and labor. Expenses to date are approximately $183,000. The
balance of expenses are estimated at $2,000 for 1999, of which consists of
consulting fees and labor, with the remaining expense of $2,000 in the year 2000
for consulting fees and labor.
The major component of risk to the Bank lies with its service provider,
INTRIEVE, Inc. Should INTRIEVE, Inc. not become fully Y2K compliant, it would be
necessary for the Bank to revert to manual processing of customer accounts.
Though this would be a labor-intensive process, it would be possible to operate
in such a manner for a reasonable period of time. The Bank does not anticipate
any risk associated with environmental systems, such as heating/air
conditioning, phone systems, or utilities, as it has been assured that all
systems are Y2K compliant. The Bank is relying on the utility companies internal
testing and representations to provide the required services as drives the
Bank's data systems. Any failure of the utilities to address the Year 2000
issues could result in the Bank being unable to service its customers on a
timely basis. However, as Harrodsburg First Financial Bancorp, Inc. does not
control all software it uses or interfaces to, it is possible that errors may be
undetected should other parties fail to ensure their systems are year 2000
compliant.
13
<PAGE>
The Bank has adopted a Contingency Plan to be used in the event on-line
processing with INTRIEVE, Inc., the Bank's service provider, is not operational
due to the rollover of the date from December 31, 1999 to January 1, 2000. The
plan, if needed, will be implemented by the Year 2000 Steering Team as
designated in the Bank's Year 2000 Compliance Plan approved by the Board of
Directors.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Company, such as customers, vendors, payment system providers, and other
financial institutions, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Bank.
Regulatory Capital
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 core capital equal to 4% 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
(Dollars in Thousands)
Amount Percent Amount Percent
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Core capital..................................... $ 22,556 21.2 $ 24,912 23.5
Core capital requirement......................... 4,260 4.0 4,247 4.0
--------- ------- -------- -------
Excess........................................... $ 18,296 17.2 $ 20,665 19.5
========= ======= ======== =======
Core capital .................................... $ 22,556 $ 24,912
General valuation allowance...................... 350 335
--------- --------
Total capital (core and supplemental)............ 22,906 36.9 25,247 43.8
Risk-based capital requirement................... 4,961 8.0 4,612 8.0
--------- ------- -------- -------
Excess........................................... $ 17,945 28.9 $ 20,635 35.8
========= ======= ======== =======
</TABLE>
Liquidity
The liquidity of the Company depends primarily on the dividends paid to it as
the sole shareholder of the Bank. The payment of cash dividends by the Bank on
its common stock is limited by regulations of the OTS, which are tied to the
Bank's level of compliance with its regulatory capital requirements.
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, 1999, 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, 1999, 1998, and 1997.
14
<PAGE>
The Bank's most liquid assets are cash and cash-equivalents, which include
investments in highly liquid, short-term investments. At September 30, 1999 and
1998, cash and cash equivalents totaled $8.4 million and $8.1 million,
respectively.
At September 30, 1999, the Bank had $48.3 million in certificates of deposits
due within one year and $13.2 million due between one and three years.
Management believes, based on past experience, that the Bank will retain much of
the deposits or replace them with new deposits or borrowings. At September 30,
1999, the Bank had $1.5 million 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 deposits
subject to withdrawal. The minimum level of liquidity required by regulation is
presently 4.0%. The Bank's liquidity ratio at September 30, 1999, 1998, and 1997
was 23.21%, 27.34%, and 32.2%, 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
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
adopted SFAS 130 during fiscal year 1999 without 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 adopted SFAS 131 during fiscal
year 1999, and there was no material effect on the Company's financial position
or operating results.
15
<PAGE>
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires entities to recognize all derivatives in their
financial statements as either assets or liabilities measured at fair value.
SFAS No. 133 also specifies new methods of accounting for hedging transactions,
prescribes the items and transactions that may be hedged, and specifies detailed
criteria to be met to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate of
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amounts. It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on the Company's financial statements.
16
<PAGE>
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"sm
(606) 223-3095
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, 1999 and 1998
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,
1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three year period ended September 30, 1999 in conformity with generally
accepted accounting principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
November 29, 1999
(606) 223-3095
2365 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40504-3399 FAX: (606) 223-2143
17
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
--------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------------------------
<S> <C> <C>
Cash and due from banks $ 541,527 $ 739,772
Interest Bearing Deposits 7,808,786 7,334,333
Securities available-for-sale at fair value 4,008,576 3,825,492
Securities held-to-maturity, fair value of $7,150,839 and 7,231,745 11,140,809
$11,226,762 for 1999 and 1998, respectively
Loans receivable, net 89,061,610 85,271,904
Accrued interest receivable 618,854 660,798
Premises and equipment, net 1,055,196 852,123
Other assets 89,837 94,046
------------- -------------
Total assets $ 110,416,131 $ 109,919,277
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 82,018,317 $ 78,995,644
Advance payments by borrowers for taxes and insurance 80,865 71,849
Deferred Federal income tax 1,395,875 1,398,193
Dividends payable 468,701 354,445
Other liabilities 232,139 117,533
------------- -------------
Total liabilities 84,195,897 80,937,664
------------- -------------
Stockholders' equity
Common stock, $0.10 par value, 5,000,000 shares authorized; 218,213 218,213
2,182,125 shares issued and outstanding
Additional paid-in capital 21,194,168 21,154,129
Retained earnings, substantially restricted 11,187,966 11,003,179
Accumulated other comprehensive income 2,595,842 2,475,007
Treasury stock, 481,250 and 258,607 shares, at cost, for 1999 (7,698,625) (4,477,515)
and 1998, respectively
Unallocated employee stock ownership plan (ESOP) shares (1,277,330) (1,391,400)
------------- -------------
Total stockholders' equity 26,220,234 28,981,613
------------- -------------
Total liabilities and stockholders' equity $ 110,416,131 $ 109,919,277
============= =============
</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 INCOME
for the years ended September 30, 1999, 1998, and 1997
-----------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans $6,757,256 $6,549,702 $6,238,613
Interest and dividends on securities 552,243 769,604 781,583
Other interest income 435,817 459,484 678,480
---------- ---------- ----------
Total interest income 7,745,316 7,778,790 7,698,676
---------- ---------- ----------
Interest expense:
Interest on deposits 3,812,626 3,897,383 3,834,806
---------- ---------- ----------
Net interest income 3,932,690 3,881,407 3,863,870
Provision for loan losses 35,000 96,631 11,000
---------- ---------- ----------
Net interest income after provision for loan losses 3,897,690 3,784,776 3,852,870
---------- ---------- ----------
Non-interest income:
Loan and other service fees, net 99,932 99,189 75,275
Other 16,330 23,594 20,165
---------- ---------- ----------
116,262 122,783 95,440
---------- ---------- ----------
Non-interest expense:
Compensation and benefits 934,838 940,119 911,051
Occupancy expenses, net 144,784 138,310 129,040
Federal and other insurance premiums 48,297 51,062 78,539
Data processing expenses 135,063 119,365 104,842
State franchise tax 124,034 117,096 139,350
Other operating expenses 341,400 313,313 338,585
---------- ---------- ----------
1,728,416 1,679,265 1,701,407
---------- ---------- ----------
Income before income tax expense 2,285,536 2,228,294 2,246,903
Income tax expense 777,074 799,620 770,637
---------- ---------- ----------
Net income $1,508,462 $1,428,674 $1,476,266
========== ========== ==========
Earnings per common share $ .94 $ 0.79 $ 0.78
========== ========== ==========
Earnings per common share assuming dilution $ .94 $ 0.79 $ 0.78
========== ========== ==========
Weighted average common shares outstanding during the year 1,609,855 1,811,551 1,896,684
========== ========== ==========
Weighted average common shares after dilutive
effect outstanding during the year 1,609,855 1,813,229 1,896,684
========== ========== ==========
</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 STOCKHOLDERS' EQUITY
for the years ended September 30, 1999, 1998, and 1997
-------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other Unallocated Total
Common Paid-In Retained Comprehensive Treasury ESOP Stockholders'
Stock Capital Earnings Income Stock Shares Equity
---------- ----------- ----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 $218,213 $21,001,572 $10,229,074 $1,191,925 $(789,495) $(1,629,300) $30,221,989
--------------
Comprehensive income:
Net income 1,476,266 1,476,266
Other comprehensive income, net of tax
unrealized gains on securities 551,709 551,709
--------------
Total comprehensive income 2,027,975
Dividend declared (667,836) (667,836)
ESOP shares earned in 1997 75,667 116,360 192,027
Purchase of 107,977 shares of common stock (2,001,331) (2,001,331)
---------- ----------- ----------- ----------- ---------- ----------- ------------
Balance, September 30, 1997 218,213 21,077,239 11,037,504 1,743,634 (2,790,826) (1,512,940) 29,772,824
--------------
Comprehensive income:
Net income 1,428,674 1,428,674
Other comprehensive income, net of tax
unrealized gains on securities 731,373 731,373
--------------
Total comprehensive income 2,160,047
Dividend declared (1,462,999) (1,462,999)
ESOP shares earned in 1998 76,890 121,540 198,430
Purchase of 101,238 shares of common stock (1,686,689) (1,686,689)
---------- ----------- ----------- ----------- ---------- ----------- ------------
Balance, September 30, 1998 218,213 21,154,129 11,003,179 2,475,007 (4,477,515) (1,391,400) 28,981,613
--------------
Comprehensive income:
Net income 1,508,462 1,508,462
Other comprehensive income, net of tax
unrealized gains on securities 120,835 120,835
--------------
Total comprehensive income 1,629,297
Dividend declared (1,323,675) (1,323,675)
ESOP shares earned in 1999 40,039 114,070 154,109
Purchase of 222,643 shares of common stock (3,221,110) (3,221,110)
---------- ----------- ----------- ----------- ---------- ----------- ------------
Balance, September 30, 1999 $218,213 $21,194,168 $11,187,966 $2,595,842 $(7,698,625) $(1,277,330) $26,220,234
========== =========== =========== =========== ========== =========== ============
</TABLE>
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
for the years ended September 30, 1999, 1998, and 1997
-------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Operating activities
<S> <C> <C> <C>
Net income $ 1,508,462 $ 1,428,674 $ 1,476,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 35,000 96,631 11,000
Provision for depreciation 68,042 70,809 55,017
ESOP benefit expense 154,109 198,430 192,027
Amortization of loan fees (66,649) (65,361) (41,689)
Amortization of investment premium (discount) (3,055) 4,349 (2,691)
Loss on sale of fixed asset 3,397
FHLB stock dividend (99,900) (95,400) (87,300)
Change in:
Interest receivable 41,944 (19,474) 34,109
Interest payable 1,004 (437) 676
Accrued liabilities 113,602 (48,615) (552,244)
Prepaid expense 4,209 (17,275) 41,610
Income taxes payable (64,567) 17,790 163,000
----------- ----------- -----------
Net cash provided by operating activities 1,695,598 1,570,121 1,289,781
----------- ----------- -----------
Investing activities
Net (increase) decrease in loans (3,758,057) (4,041,896) (3,728,253)
Purchase of certificates of deposit (600,000)
Maturity of certificates of deposit 600,000 2,500,000
Purchase of securities held-to-maturity (2,500,000) (5,000,000) (3,502,968)
Call of security held-to-maturity 6,500,000 5,000,000 3,000,000
Principle repayments - mortgage back securities 12,018 14,847 31,119
Purchase of fixed assets (274,512) (266,735) (53,294)
----------- ----------- -----------
Net cash provided (used) by investing activities (20,551) (3,693,784) (2,353,396)
----------- ----------- -----------
</TABLE>
(Continued)
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1999, 1998, and 1997
-------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Financing activities
Net increase (decrease) in demand deposits, 1,191,312 (378,672) (53,051)
NOW accounts and savings accounts
Net increase (decrease) in certificates of deposit 1,831,362 745,111 1,736,046
Net increase (decrease) in custodial accounts 9,017 5,779 (2,464)
Purchase of treasury stock (3,221,110) (1,686,689) (2,001,331)
Payment of dividends (1,209,420) (1,108,554) (1,059,469)
------------ ------------ ------------
Net cash provided (used) by financing activities (1,398,839) (2,423,025) (1,380,269)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 276,208 (4,546,688) (2,443,884)
Cash and cash equivalents, beginning of year 8,074,105 12,620,793 15,064,677
------------ ------------ ------------
Cash and cash equivalents, end of year $ 8,350,313 $ 8,074,105 $ 12,620,793
============ ============ ============
Supplemental Disclosures
Cash payments for:
Interest on deposits $ 3,811,622 $ 3,897,821 $ 3,834,129
Income taxes $ 745,000 $ 830,000 $ 602,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<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 Company's articles of incorporation authorize the issuance of up to
500,000 shares of preferred stock, which may be issued with certain rights
and preferences. As of September 30, 1999, no preferred stock has been
issued.
The Company is a corporation organized under the laws of Delaware. The
Company is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Bank. The Bank is a federally
chartered stock savings bank and a member of the Federal Home Loan Bank
System. As a member of this system, the Bank is required to maintain an
investment in capital stock of the Federal Home Loan Bank of Cincinnati
(FHLB) in an amount equal to at least the greater of 1% of its outstanding
loan and mortgage-backed securities or .3% of total assets as of December
31 of each year.
The Bank conducts a general banking business in central Kentucky which
primarily consists of attracting deposits from the general public and
applying those funds to the origination of loans for residential, consumer,
and nonresidential purposes. The Bank's profitability is significantly
dependent on net interest income, which is the difference between interest
income generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e.
customer deposits and borrowed funds). Net interest income is affected by
the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level
of interest rates paid or received by the Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles (GAAP) and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
23
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company, the Bank, and the Bank's wholly owned
subsidiary, Harrodsburg Savings & Loan Service Corporation. 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. Investment 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
(4% at September 30, 1999 and 1998) of deposit accounts (net of loans
secured by deposits) plus short-term borrowings. At September 30, 1999 and
1998, the Bank met these requirements.
Federal Home Loan Mortgage Corporation Stock. On December 6, 1984, the
Federal Home Loan Mortgage Corporation created a new class of participating
preferred stock. The preferred stock was distributed to the twelve district
banks of the Federal Home Loan Banking System for subsequent distribution
to their member institutions. The Bank received 1,606 shares of the stock
and recorded it at its fair value of $40 per share as of December 31, 1984.
The fair value of the stock recognized as of December 1984 became its cost.
The stock has been subsequently classified as available-for-sale and
carried at market value.
Office Properties and Equipment. Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using the
straight line method and the double declining balance method over the
estimated useful lives of the related assets. The gain or loss on the sales
of property and equipment is recorded in the year of disposition.
(continued)
24
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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.
The Bank accounts for the impairment of a loan in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS
No. 118 as to certain income recognition and disclosure provisions. These
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.
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.
(continued)
25
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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").
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 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.
Earnings Per Share. Earnings per common share is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding during the period. Earnings per common share
assuming dilution reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock,
that then shared in the earnings of the company.
Comprehensive Income. The Corporation adopted SFAS 130, Reporting
Comprehensive Income, as of October 1, 1998. Accounting principles
generally require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and liabilities,
such
(Continued)
26
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance
sheet, such items, along with net income are components of comprehensive
income. The adoption of SFAS 130 had no effect on the Corporation's net
income or shareholder's equity. The components of other comprehensive
income is presented in the consolidated statements of stockholders' equity.
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.
2. Investment Securities
The cost and estimated fair value of securities held by the Bank as of
September 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
Amortized Gross Gross Fair Value
Cost Unrealized Unrealized
Gains Losses
--------------------------------------------------------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
Federal Home Loan Mortgage, capital $75,482 $3,933,094 $ $4,008,576
stock, 77,088 shares
========================================================
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $5,500,000 $ 77,896 $5,422,104
Municipal bonds 213,467 3,724 209,743
--------------------------------------------------------
5,713,467 81,620 5,631,847
--------------------------------------------------------
Mortgage-backed Securities 39,878 714 40,592
--------------------------------------------------------
Federal Home Loan
Bank of Cincinnati, capital stock - 14,784 shares 1,478,400 1,478,400
--------------------------------------------------------
$7,231,745 $714 $ 81,620 $7,150,839
========================================================
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
Amortized Gross Gross Fair Value
Cost Unrealized Unrealized
Gains Losses
--------------------------------------------------------
<S> <C> <C> <C> <C>
Securities, available-for-sale:
Federal Home Loan Mortgage, capital $75,482 $3,750,010 $ 3,825,492
stock, 77,088 shares
========================================================
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $9,497,073 $ 75,502 $ 9,572,575
Municipal bonds 213,339 8,518 221,857
--------------------------------------------------------
9,710,412 84,020 9,794,432
--------------------------------------------------------
Mortgage-backed Securities 51,897 1,933 53,830
--------------------------------------------------------
Federal Home Loan
Bank of Cincinnati, capital stock - 13,785 shares 1,378,500 1,378,500
--------------------------------------------------------
$11,140,809 $ 85,953 $11,226,762
========================================================
</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, 1999, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------------- -----------------
<S> <C> <C>
Due after one year through five years $5,604,819 $5,526,064
Due after five through ten years 108,648 105,783
----------------- -----------------
$5,713,467 $5,631,847
================= =================
</TABLE>
In accordance with the requirements of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities," the unrealized
gain on securities available-for-sale of $3,933,094 net of deferred
income taxes of $1,337,252 has been recorded as a separate component
of stockholders' equity as of September 30, 1999.
For the year ended September 30, 1999, the Bank received $6,500,000
from the call of thirteen debt securities backed by a U.S. Government
Agency, which were classified as held-to-maturity. For the year ended
September 30, 1998, the Bank received $5,000,000 from the call of ten
debt securities backed by a U.S. Government agency, which were
classified as held-to-maturity. 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 were classified as
held-to-maturity.
3. Loans Receivable
Loans receivable, net at September 30, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Loans secured by first lien mortgages on real estate:
One-to-four residential property $70,638,534 $68,813,909
Multi-family residential property 3,720,015 3,500,193
Commercial properties 5,148,023 3,370,033
Construction 4,121,550 5,241,492
Agricultural 4,541,585 3,859,698
Consumer loans:
Home equity 1,830,682 1,831,249
Home improvement and personal 1,398,978 1,660,771
Loans secured by savings deposits 484,317 554,653
----------------- -----------------
91,883,684 88,831,998
Loans in process (2,041,995) (2,925,287)
Provisions for loan losses (370,000) (335,000)
Deferred loan origination fees (410,079) (299,807)
----------------- -----------------
Loans receivable, net $89,061,610 $85,271,904
================= =================
</TABLE>
(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:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at beginning or period $335,000 $308,250 $297,250
Additions charged to operations 35,000 96,631 11,000
Charge-offs (73,084)
Recoveries 3,203
-------------- -------------- --------------
Balance at end of period $370,000 $335,000 $308,250
============== ============== ==============
</TABLE>
The following is a summary of non-performing loans (in thousands) at
September 30, 1999, 1998, and 1997, respectively:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Non-accrual loans $ $ $
Loans past due 90 days or more 281 489 520
-------------- -------------- --------------
Total non-performing loan balances $281 $489 $520
============== ============== ==============
</TABLE>
At September 30, 1999 and 1998, the Bank had identified no impaired
loans as defined by SFAS No. 114. There were no loans in non-accrual
status, and as such, all interest income earned for the years ended
September 30, 1999 and 1998 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, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Balance at beginning of period $182,796 $187,857
Additions during year 3,886
Repayments (16,089) (8,947)
-------------- --------------
Balance at end of period $166,707 $182,796
============== ==============
</TABLE>
(Continued)
29
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
4. Premises and Equipment
Office premises and equipment included the following:
<TABLE>
<CAPTION>
Description Useful Life 1999 1998
- ------------------------------------------------------------ -------------- --------------- ---------------
<S> <C> <C> <C>
Land, buildings and improvements 30-45 years $1,186,965 $1,086,560
Furniture, fixtures and equipment 5-10 years 656,874 613,650
--------------- ---------------
1,843,839 1,700,210
Less accumulated depreciation (788,643) (848,087)
--------------- ---------------
$1,055,196 $852,123
=============== ===============
</TABLE>
Depreciation expense for the years ended September 30, 1999, 1998 and 1997
amounted to $68,042, $70,809, and $55,017, respectively.
5. Deposits
Deposit account balances as of the dates indicated are summarized as
follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Demand deposit accounts, non-interest bearing $743,944 $392,679
Passbook accounts with a weighted average rate of 2.82% and 2.79% at 7,485,269 7,402,288
September 30, 1999 and 1998, respectively
NOW and MMDA deposits with a weighted average rate of 2.45% and 2.40% at 9,255,397 8,498,332
September 30, 1999 and 1998, respectively
---------------- ----------------
17,484,610 16,293,299
Certificate of deposits with a weighted average interest rate of 5.16% and 64,533,707 62,702,345
5.63% at September 30, 1999 and 1998, respectively
---------------- ----------------
Total Deposits $82,018,317 $78,995,644
================ ================
Jumbo certificates of deposit (minimum denomination of $100,000) $5,780,668 $4,970,710
================ ================
</TABLE>
Certificates of deposit by maturity at September 30, 1999 and 1998 (in
thousands) are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Within one year $48,310 $38,962
Over 1 to 3 years 13,232 20,545
Maturing in years thereafter 2,992 3,195
---------------- ----------------
$64,534 $62,702
================ ================
</TABLE>
(Continued)
30
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
Certificates of deposit by maturity and interest rate category at September
30, 1999 (in thousands) are as follows:
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------------------
Less Than 1-2 Years 2-3 Years After 3 Years Total
One Year
-------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
4.01--6.00% $46,330 $10,089 $2,336 $2,542 $61,297
6.01--8.00% 1,980 152 635 470 3,237
-------------- -------------- --------------- -------------- --------------
$48,310 $10,241 $2,971 $3,012 $64,534
============== ============== =============== ============== ==============
</TABLE>
Interest expense on deposits for the periods indicated is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Money market and NOW account $222,707 $202,576 $202,209
Savings Accounts 207,735 211,923 217,967
Certificates 3,382,184 3,482,884 3,414,630
--------------- --------------- ---------------
$3,812,626 $3,897,383 $3,834,806
=============== =============== ===============
</TABLE>
The Bank maintains arrangements for clearing NOW and MMDA accounts with the
Federal Home Loan Bank of Cincinnati. The Bank is required to maintain
adequate collected funds in its Demand Account to cover average daily
clearings. The Bank was in compliance with this requirement at September
30, 1999 and 1998. At September 30, 1999, the Bank had pledged $1,275,000
of its overnight deposits held by the FHLB of Cincinnati to secure certain
customer deposit balances.
6. Income Taxes
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Federal income tax expense:
Current expense $847,787 $781,830 $762,596
Deferred expense (benefit) (70,713) 17,790 8,041
-------------- ------------- --------------
$777,074 $799,620 $770,637
============== ============= ==============
</TABLE>
(Continued)
31
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
Deferred income taxes result from temporary differences in the recognition
of income and expenses for tax and financial statement purposes. The source
of these temporary differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Deferred loan fee income $ (37,492) $(21,605) $(2,251)
Deposit insurance 182,261
FHLB stock 33,966 32,436 29,682
Allowance for loan losses (7,646) (9,095) (196,898)
Other, net (59,541) 16,054 (4,753)
-------------- -------------- --------------
Net deferred tax expense (benefit) $(70,713) $17,790 $8,041
============== ============== ==============
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 777,082 $ 757,619 $ 763,947
Other, net (8) 42,001 6,690
--------- --------- ---------
Total income tax expense $ 777,074 $ 799,620 $ 770,637
========= ========= =========
Effective income tax rate 34.0% 35.9% 34.3%
========= ========= =========
</TABLE>
Deferred tax assets and liabilities as of September 30, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fee income $139,427 $101,934
ESOP loan 61,577
Allowance for loan losses 120,335 112,688
------------- --------------
321,339 214,622
------------- --------------
Deferred tax liabilities:
FHLB stock 306,204 272,237
Fixed asset basis over tax basis 67,610 65,575
------------- --------------
373,814 337,812
------------- --------------
Net deferred tax liability $52,475 $123,190
============= ==============
</TABLE>
In addition to the net deferred tax liability at September 30, 1999 of
$52,475 outlined in the preceding table, the financial statements include a
deferred tax liability of $1,337,252 that was charged against the
unrealized gain on securities available-for-sale of $3,933,094. The net
amount of $2,595,842 is recorded as a separate component of stockholders'
equity.
(Continued)
32
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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.
7. Stockholders' Equity and Regulatory Capital
Regulatory Capital. The Bank's actual capital and its statutory required
capital levels based on the consolidated financial statements accompanying
these notes are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------------------------
For Capital To be Well
Adequacy Purposes Capitalized Under
Prompt Corrective
Action Provisions
------------------------ ------------------------ ------------------------
Actual Required Required
------------------------ ------------------------ ------------------------
Amount % Amount % Amount %
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Core capital $22,556 21.2% $4,260 4.0% $6,390 6.0%
Tangible capital $22,556 21.2% $1,598 1.5% N/A N/A
Total Risk based capital $22,906 36.9% $4,961 8.0% $6,201 10.0%
Leverage $22,556 21.2% N/A N/A $5,325 5.0%
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------------------------------
For Capital To be Well
Adequacy Purposes Capitalized Under
Prompt Corrective
Action Provisions
------------------------ ------------------------ ------------------------
Actual Required Required
------------------------ ------------------------ ------------------------
Amount % Amount % Amount %
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Core capital $24,912 23.5% $4,247 4.0% $6,371 6.0%
Tangible capital $24,912 23.5% $1,593 1.5% N/A N/A
Total Risk based capital $25,247 43.8% $4,612 8.0% $5,765 10.0%
Leverage $24,912 23.5% N/A N/A $5,309 5.0%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to implement prompt
corrective actions for institutions that it regulates. In response to this
requirement, OTS adopted final rules based upon FDICIA's five capital
tiers. The rules
(Continued)
33
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
provide that a savings bank is "well capitalized" if its total risk-based
capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6%
or greater, its leverage is 5% or greater and the institution is not
subject to a capital directive. Under this regulation, the Bank was deemed
to be "well capitalized" as of September 30, 1999 and 1998 based upon the
most recent notifications from its regulators. There are no conditions or
events since those notifications that management believes would change its
classifications.
Retained Earnings Restriction. Retained earnings at September 30, 1998
includes tax bad debt reserves of approximately $2,134,000 accumulated
prior to September 30, 1988, 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).
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 is 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.
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. There was no
pension expense for the years ended September 30, 1999, 1998, and 1997.
(Continued)
34
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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 $9,428, $8,614, and $7,440 to the Plan for the years ended
September 30, 1999, 1998, and 1997, respectively.
Employee Stock Ownership Plan. In connection with the stock conversion
September 30, 1995, the Company established an internally leveraged
Employee Stock Ownership Plan (the "ESOP") which covers substantially all
full time employees. The ESOP borrowed $1,745,700 from the Company and
purchased 174,570 shares of common stock of the Company at the date of
conversion. The loan is to be repaid in annual installments over a 15 year
period with interest, which is based on the published prime rate (currently
8.50%) per the Wall Street Journal.
The 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 $111,312 and $120,671 were used in
fiscal year 1999 and 1998, respectively, 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 $154,109 for the year ended September 30, 1999. For
1999, 11,407 shares were released from collateral. At September 30, 1999,
there were 127,733 unallocated ESOP shares having a fair value of
$1,692,462. ESOP compensation was $198,430 for the year ended September 30,
1998. For 1998, 12,154 shares were released from collateral. At September
30, 1998, there were 139,140 unallocated ESOP shares having a fair value of
$2,104,493. 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.
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.
(Continued)
35
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
A summary of option transactions for the year ended September 30, 1999 are
as follows:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------
1999 1998
---------------------- -------------------------
Option Number Option Number
Price of Units Price of Units
----- -------- ----- --------
<S> <C> <C> <C> <C>
Balance outstanding at beginning of year $ 16.50 190,000 $ 16.50 190,000
Granted
Exercised
Balance outstanding at end of year $ 16.50 190,000 $ 16.50 190,000
======= =======
Shares exercisable 118,000 82,000
======= =======
Shares available for grant 10,000 10,000
======= =======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS
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.
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 Based (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees." Under this
method the compensation cost is measured by the difference between the
fair 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 SFAS No. 123 for the year ended
September 30, 1999, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
Reported Per Consolidated
Financial Statements Pro Forma Amount
-------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 1,508,462 $ 1,428,674 $ 1,476,266 $ 1,391,102 $ 1,283,604 $ 1,383,356
Earnings per common share $ .94 $ .79 $ .78 $ .86 $ .71 $ .73
Earnings per common share
assuming dilution $ .94 $ .79 $ .78 $ .86 $ .71 $ .73
</TABLE>
(Continued)
36
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1999 1998 1997
---- ---- ----
Dividend yield 2.4% 2.4% 2.4%
Expected volatility .03% .03% .03%
Expected life 10 10 10
Free interest rate 5.3% 5.3% 5.3%
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-qualified
plan that is managed through a separate trust. The Bank can 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, 1998, 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 $1,467,100 plus unused lines of credit granted to
customers totaling $2,479,469 at September 30, 1999. Of the mortgage loan
commitments at September 30, 1999 approximately $12,000 were for fixed rate
loans. At September 30, 1998 mortgage commitments outstanding amounted to
approximately $1,854,000 and unused lines of credit amounted to $2,179,848.
Of the mortgage loan commitments at September 30, 1998, approximately
$255,000 were in fixed rate loans. 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
(Continued)
37
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
extends the existing fair value disclosure practices for some instruments
by requiring all entities to disclose the fair value of financial
instruments (as defined), both assets and liabilities recognized and not
recognized in the statements of financial condition, for which it is
practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as they
relate only to specific data based on relevant information at that time. As
a significant percentage of the Bank's financial instruments do not have an
active trading market, fair value estimates are necessarily based on future
expected cash flows, credit losses, and other related factors. Such
estimates are accordingly, subjective in nature, judgmental and involve
imprecision. Future events will occur at levels different from that in the
assumptions, and such differences may significantly affect the estimates.
The statement excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company. Additionally, the tax impact of the unrealized gains or losses has
not been presented or included in the estimates of fair value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the statement
of financial condition for cash and short-term instruments approximate
those assets' fair values.
Investment Securities. Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. No active market exists for the Federal Home Loan Bank capital
stock. The carrying value is estimated to be fair value since if the Bank
withdraws membership in the Federal Home Loan Bank, the stock must be
redeemed for face value.
Loans Receivable. The fair value of loans was estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
Deposits. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
(Continued)
38
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $8,350,313 $8,350,313 $8,074,105 $8,074,105
Securities available-for-sale 4,008,576 4,008,576 3,825,492 3,825,492
Securities held-to-maturity 7,231,745 7,150,839 11,140,809 11,226,762
Loans receivable, net 89,061,610 89,317,215 85,271,904 88,067,824
Liabilities
Deposits 82,018,317 82,115,268 78,995,644 79,740,918
Unrecognized Financial Instruments
Loan commitments 1,467,100 1,854,000
Unused lines of credit 2,479,469 2,179,848
</TABLE>
(Continued)
39
<PAGE>
11. 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.
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Financial Condition
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.
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Financial Condition
<TABLE>
<CAPTION>
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 1,321,727 $ 1,668,775
Investment in subsidiary 25,152,122 27,387,374
Other assets 216,532 279,992
------------ ------------
Total assets $ 26,690,381 $ 29,336,141
============ ============
Liabilities and Stockholders Equity:
Accounts payable $ 1,446 $ 83
Dividends payable 468,701 354,445
------------ ------------
Total liabilities 470,147 354,528
------------ ------------
Stockholders equity
Common stock 218,213 218,213
Additional paid-in capital 21,194,168 21,154,129
Retained earnings 11,187,966 11,003,179
Accumulated other comprehensive income 2,595,842 2,475,007
Treasury stock, 481,250 and 258,607 shares, respectively, at cost (7,698,625) (4,477,515)
Unearned ESOP shares (1,277,330) (1,391,400)
------------ ------------
Total stockholders' equity 26,220,234 28,981,613
------------ ------------
Total liabilities and stockholders' equity $ 26,690,381 $ 29,336,141
============ ============
</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
<TABLE>
<CAPTION>
For the years ended September 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Dividends from Harrodsburg First Federal $ 1,569,145 $ -- $ -
----------- ----------- -----------
Expense:
Legal fees 11,940 10,588 24,192
Franchise and license tax 35,650 31,372 60,064
Transfer agent fees 15,465 9,126 9,000
Accounting fees 5,550 6,550 9,880
Other operating expenses 23,339 26,252 18,496
----------- ----------- -----------
91,944 83,888 121,632
----------- ----------- -----------
Net income (loss) before tax benefit 1,477,201 (83,888) (121,632)
Income tax benefit 31,261 28,522 34,561
----------- ----------- -----------
Net income (loss) before equity in undistributed net
income of subsidiary 1,508,462 (55,366) (87,071)
Equity in undistributed net income of subsidiary 1,484,040 1,563,337
----------- ----------- -----------
Net income $ 1,508,462 $ 1,428,674 $ 1,476,266
=========== =========== ===========
</TABLE>
(Continued)
41
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the years ended September 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,508,462 $ 1,428,674 $ 1,476,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,484,040) (1,563,337)
Excess distributions from consolidated subsidiary 2,430,855
Decrease in other receivables 28,546 92,057 29,406
Decrease in other liabilities 115,619 (1,281) (964)
----------- ----------- -----------
Net cash provided (used) by operating activities 4,083,482 35,410 (58,629)
----------- ----------- -----------
Cash flows from investing activities:
Net cash provided (used) by investing activities -- -- --
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (1,209,420) (1,108,554) (1,059,469)
Purchase of common stock (3,221,110) (1,686,689) (2,001,331)
----------- ----------- -----------
Net cash used by financing activities (4,430,530) (2,795,243) (3,060,800)
----------- ----------- -----------
Net decrease in cash and cash equivalents (347,048) (2,759,833) (3,119,429)
Cash and cash equivalents at beginning of period 1,668,775 4,428,608 7,548,037
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,321,727 $ 1,668,775 $ 4,428,608
=========== =========== ===========
</TABLE>
(Continued)
42
<PAGE>
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------
12. Harrodsburg Savings and Loan Service Corporation
In 1978, the Bank formed Harrodsburg Savings and Loan Service Corporation,
a wholly owned subsidiary, by purchasing its stock for $15,000. The
Subsidiary was created to hold stock in a not for profit corporation that
provides on line computer processing and inquiry service for the Bank and
other savings and loan institutions.
Summary balance sheets for the wholly owned subsidiary are as follows:
Harrodsburg Savings & Loan Service Corporation
Balance Sheets, September 30, 1999 and 1998
------------------------
Assets 1999 1998
-------------- --------------
Investments $15,000 $15,000
============== ==============
Stockholders' Equity
Common stock $15,000 $15,000
============== ==============
The Service Corporation did not receive income nor did it incur expense
during the years ended September 30, 1999, 1998, and 1997.
13. Stock Purchase
During fiscal year 1997, the Company repurchased 107,977 shares of common
stock at a total cost of $2,001,331. During fiscal year 1998, the Company
repurchased 101,238 shares of common stock at a total cost of $1,686,689.
On September 21, 1998 and December 21, 1998, the Board of Directors of the
Company authorized the repurchase of up to 5% of their outstanding stock.
In addition, on March 15, 1999, the Board authorized the repurchase of 2.5%
of their outstanding stock. During fiscal year 1999, the Company
repurchased 222,643 shares of common stock at a total cost of $3,221,110.
14. Commitments
During June of 1999, the Company entered into a construction contract in
the amount of $456,327 to build a new branch in Lawrenceburg, Kentucky. As
of September 30, 1999, this contract was approximately 44% complete.
43
<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS
<S> <C> <C>
*Arthur L. Freeman
Chairman and Chief Executive Officer of
the Bank and the Company
Jack D. Hood Jack L. Coleman, Jr. W. Dudley Shryock, CPA
President and Chief Operating Officer of Representative, State of Kentucky; Sole Practitioner
the Bank and the Company Partner, Coleman's Lumber Yard
Elwood Burgin Thomas Les Letton Wickliffe T. Asbury, Sr.
Retired President, The Letton Company Vice President of the Bank and the
Company
- ------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
*Arthur L. Freeman Jack D. Hood Charles W. Graves, Jr.
Chairman and Chief Executive Officer of President and Chief Operating Officer Vice President of the Bank and the Company
the Bank and the Company of the Bank and the Company
Wickliffe T. Asbury, Sr. Debbie C. Roach Teresa W. Noel
Vice President of the Bank and the Company Secretary of the Bank and the Company Treasurer of the Bank and the Company
*Effective 10/1/99
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICE LOCATIONS
104 South Chiles Street 216 South Main Street
Harrodsburg, Kentucky 40330 Lawrenceburg, Kentucky 40342
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL INFORMATION
Independent Accountants Special Counsel Annual Report on Form 10K
Miller, Mayer, Sullivan, & Stevens, LLP Malizia Spidi & Fisch, PC
2365 Harrodsburg Road One Franklin Square
Lexington, KY 40504-3399 1301 K Street, N.W., Suite 700 East A copy of the company's 1999
Washington, DC 20005 annual report on form 10-k
without exhibits will be
General Counsel Annual Meeting furnished without charge to
David Patrick The 2000 Annual Meeting of stockholders upon written
Attorney-at-Law Stockholders will be held on request to:
321 South Main Street January 24, 2000 at 5:30 p.m. at:
Harrodsburg, KY 40330
Ragged Edge Community Theater Jack D. Hood
111 S. Main Street Harrodsburg First Financial
Walter Patrick Harrodsburg, KY 40330 Bancorp, Inc.
Attorney-at-Law POB 384
Gordon Building Transfer Agent 104 South Chiles Street
P.O. Box 178 Illinois Stock Transfer Harrodsburg, KY 40330
Lawrenceburg, KY 40342 209 West Jackson Blvd., Suite 903
Chicago, IL 60606
</TABLE>
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Parent
Harrodsburg First Financial Bancorp, Inc.
Percentage State of
Subsidiaries Owned Incorporation
- --------------------------------------------------------------------------------
First Federal Savings Bank of Harrodsburg (a) 100% United States
Harrodsburg Savings and Loan 100% Kentucky
Service Corporation (a)
- -------------
(a) The operations of this subsidiary are included in the consolidated
financial statements contained in the 1999 Annual Report to
Stockholders incorporated herein by reference.
EXHIBIT 23
<PAGE>
[MILLER, MAYER, SULLIVAN & STEVENS LLP LETTERHEAD]
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"SM
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Harrodsburg First Financial Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
0-26570) on Form S- 8 of Harrodsburg First Financial Bancorp, Inc. of our report
dated November 29, 1999, relating to the consolidated balance sheets of
Harrodsburg First Financial Bancorp, Inc. and subsidiary as of September 30,
1999 and 1998, 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, 1999, which report is incorporated by reference in the September
30, 1999 annual report on Form 10-K of Harrodsburg First Financial Bancorp, Inc.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
December 8, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 541
<INT-BEARING-DEPOSITS> 7,809
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,009
<INVESTMENTS-CARRYING> 7,231
<INVESTMENTS-MARKET> 7,151
<LOANS> 89,432
<ALLOWANCE> 370
<TOTAL-ASSETS> 110,416
<DEPOSITS> 82,018
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,178
<LONG-TERM> 0
0
0
<COMMON> 218
<OTHER-SE> 26,002
<TOTAL-LIABILITIES-AND-EQUITY> 110,416
<INTEREST-LOAN> 6,757
<INTEREST-INVEST> 552
<INTEREST-OTHER> 436
<INTEREST-TOTAL> 7,745
<INTEREST-DEPOSIT> 3,813
<INTEREST-EXPENSE> 3,813
<INTEREST-INCOME-NET> 3,932
<LOAN-LOSSES> 35
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,728
<INCOME-PRETAX> 2,285
<INCOME-PRE-EXTRAORDINARY> 2,285
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,508
<EPS-BASIC> .94
<EPS-DILUTED> .94
<YIELD-ACTUAL> 3.63
<LOANS-NON> 0
<LOANS-PAST> 281
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 335
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 370
<ALLOWANCE-DOMESTIC> 370
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
