UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 2002 to December 31, 2002
Commission File Number: 0-18832
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
(Exact name of registrant as specified in its charter)
Kentucky 61-1168311
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2323 Ring Road, Elizabethtown, Kentucky 42701
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (270) 765-2131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
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 outstanding voting stock held by non-affiliates of the registrant, based on the closing sales price
of the Registrant's Common Stock as quoted on The NASDAQ National Market on March 17, 2003, was $88,074,301. Solely for purposes of
this calculation, the shares held by directors and executive officers of the registrant and by any stockholder beneficially owning
more than 5% of the registrant's outstanding common stock are deemed to be shares held by affiliates.
As of March 17, 2003, there were issued and outstanding 3,623,294 shares of the registrant's common stock, of which directors and
executive officers held 535,199 shares and more than 5% beneficial owners held 200,413 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be held May 14, 2003
are incorporated by reference into Part III.
PART I
Preliminary Note Regarding Forward-Looking Statements
Statements by First Federal Financial Corporation of Kentucky (the "Corporation") contained in "Item 1--Business," "Item
7--Management's Discussion and Analysis of Financial Condition and Results of Operations," and other sections of this report that are
not statements of historical fact constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. In addition, the Corporation may make forward-looking statements in future filings with the Securities and
Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Corporation.
Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share,
capital structure and other financial items; (2) statements of plans and objectives of the Corporation or its management or Board of
Directors; (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends," "plans," "targeted," and similar expressions are intended
to identify forward-looking statements, but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those indicated by
the forward-looking statements. Some of the events or circumstances that could cause such difference include the following: changes
in general economic conditions and economic conditions in Kentucky and the markets served by the Corporation any of which may affect,
among other things, the level of non-performing assets, charge-offs, and provision expense; changes in the interest rate environment
which may reduce interest margins and impact funding sources; changes in market rates and prices which may adversely impact the value
of financial products including securities, loans and deposit; changes in tax laws, rules and regulations; various monetary and
fiscal policies and regulations, including those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation
and the Kentucky Department of Financial Institutions; competition with other local and regional commercial banks, savings banks,
credit unions and other non-bank financial institutions; ability to grow core businesses; ability to develop and introduce new
banking-related products, services and enhancements and gain market acceptance of such products; and management's ability to manage
these and other risks.
Item 1. Business
The Corporation
First Federal Financial Corporation of Kentucky was incorporated in August 1989 under the laws of the Commonwealth of Kentucky for
the purpose of becoming the holding company for First Federal Savings Bank of Elizabethtown ("First Federal" or the "Bank"), which
became effective on June 1, 1990. Since that date, the Corporation has engaged in no significant activity other than holding the
stock of First Federal and directing, planning and coordinating the business of the Bank. Accordingly, the information set forth in
this report, including financial statements and related data, relates primarily to First Federal and its subsidiaries.
On January 8, 2003, First Federal converted to a Kentucky chartered commercial bank from a federally chartered savings bank. In
connection with the conversion, both the Corporation and First Federal changed to a fiscal year ending on December 31. This report
covers the six-month transition period from July 1, 2002 to December 31, 2002.
The Bank
First Federal is headquartered in Elizabethtown, Kentucky. Its business consists of attracting deposits from the general public and
originating mortgage loans on single-family residences, multi-family housing and commercial property. First Federal also makes home
improvement loans, consumer loans, commercial business loans, FHA loans and through its subsidiaries offers insurance products and
brokerage services to its customers and makes qualified VA loans for sale to investors on the secondary market. The principal sources
of funds for First Federal's lending activities include deposits received from the general public, borrowings from the Federal Home
Loan Bank ("FHLB") of Cincinnati, and loan repayments. First Federal's primary sources of income are interest and origination fees on
loans and interest on investments such as various federal and government agency obligations and other investment securities permitted
by applicable laws and regulations. First Federal's principal expenses are interest paid on deposit accounts and borrowed funds and
operating expenses.
First Federal was originally founded in 1923 as a state-chartered institution and became federally chartered in 1940. In 1987, the
Bank converted to a federally chartered savings bank and converted from mutual to stock form. The Bank is a member of the FHLB of
Cincinnati and, since converting to a state charter, is subject to regulation, examination and supervision by the Kentucky Department
of Financial Institutions ("KDFI"). The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF") and
administered by the Federal Deposit Insurance Corporation ("FDIC").
The Bank's primary market area consists of six counties in Central Kentucky: Hardin; Hart; Nelson; Bullitt; Meade; and Jefferson.
The following table provides demographic and economic information by county as of December 31, 2002.
Average Median Median
% Below Number Unemployment Weekly Family Home
County Population Trend Poverty Employed Rate% Trend Wage Income Price
------ ---------- ----- ------- -------- ----- ----- ---- ------ -----
Hardin 95,070 1.0% 12.4 38,392 6.40 1.2% 527 48,100 86,000
Hart 17,383 (.4)% 22.2 4,317 5.70 1.1% 390 33,400 45,000
Nelson 38,592 3.0% 12.0 13,057 7.00 1.4% 485 48,100 71,375
Bullitt 63,043 3.0% 9.2 11,680 3.50 .5% 450 56,300 93,250
Meade 27,008 2.5% 10.3 3,833 5.00 .7% 473 40,200 70,100
Jefferson 692,910 (.4)% 12.0 438,853 4.00 .4% 642 56,300 102,650
The Bank continues to seek and evaluate additional expansion opportunities, either through the establishment of de novo banking
centers and/ or through acquisitions of existing institutions or branches in the financial services industry. The Bank intends to
continue to consider various strategic acquisitions of banks or banking assets in those geographical areas that management believes
would complement and increase the Bank's existing business lines, as well as expansion in new market areas or product lines that
management determines would be in the best interest of the Bank and its shareholders.
Lending Activities
General. Although the origination of conventional first mortgage loans secured by residential property comprises the largest portion
of the Bank's loan portfolio, its commercial real estate, consumer and commercial business lending has grown substantially in recent
years. Residential mortgage loans made by First Federal are secured primarily by single-family homes and include construction
loans. The majority of First Federal's mortgage loan portfolio is secured by real estate located in Hardin, Nelson, Hart, Meade, and
Bullitt counties in the state of Kentucky.
The following table presents a summary of the Bank's loan portfolio, net of deferred loan fees, by type. The Bank has no foreign
loans in its portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total
loans.
June 30,
December 31, -----------------------------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount % Amount %
Type of Loan:
Real Estate:
Residential $280,956 53.07% $306,873 58.74% $327,664 63.09% $308,507 65.16% $297,574 73.94% $282,503 79.18%
Construction 12,674 2.39 10,662 2.03 9,079 1.75 8,975 1.89 11,430 2.84 5,960 1.67
Commercial 135,191 25.54 112,528 21.55 88,938 17.12 64,828 13.69 32,729 8.13 22,169 6.21
Consumer and
home equity 51,213 9.67 51,797 9.92 54,189 10.43 59,692 12.61 48,281 12.00 45,136 12.65
Indirect consumer 20,594 3.89 19,640 3.75 21,822 4.20 15,186 3.21 762 .19 - -
Commercial,
other 28,807 5.44 20,985 4.01 17,727 3.41 16,295 3.44 11,692 2.90 1,020 .29
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ----- ---
Total loans $529,435 100.00% $522,485 100.00% $519,419 100.00% $473,483 100.00% $402,468 100.00% $356,788 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Loan Maturity Schedule. The following table sets forth information at December 31, 2002, regarding the dollar amount of loans, net
of deferred loan fees, maturing in the Bank's loan portfolio based on their contractual terms to maturity.
Due after
Due during 1 through Due after 5
the year ended 5 years after years after
December 31, December 31, December 31, Total
2003 2002 2002 Loans
---- ---- ---- -----
(Dollars in thousands)
Residential mortgage $ 2,887 $ 27,734 $250,335 $280,956
Real estate construction 10,169 910 12,674
1,595
Real estate commercial 23,688 76,368 35,135 135,191
Consumer, home equity and
indirect consumer 7,033 57,045 7,729 71,807
Commercial, other 12,291 13,759 2,757 28,807
------- -------- -------- --------
Total $56,068 $175,816 $297,551 $529,435
======= ======== ======== ========
The following table breaks down loans maturing after one year, by fixed and adjustable rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(Dollars in thousands)
Residential mortgage $213,231 $ 64,838 $278,069
Real estate construction 2,028 477 2,505
Real estate commercial 72,072 39,431 111,503
Consumer, home equity and
indirect consumer 43,773 21,001 64,774
Commercial, other 12,880 3,636 16,516
------ ----- ------
Total $343,984 $129,383 $473,367
======== ======== ========
Residential Real Estate & Construction Lending. The largest portion of the Bank's lending activity is the origination of loans on
single-family residences, which consist of one-to-four individual dwelling units. Fixed rate residential real estate loans
originated by the Bank have terms ranging from ten to thirty years. Interest rates are competitively priced within the primary
geographic lending market, and vary according to the term for which they are fixed.
In recent years, the Bank has emphasized the origination of adjustable-rate mortgage loans ("ARMs"). The Bank offers six ARM
products with an annual adjustment, which is tied to a national index with a maximum adjustment of 2% annually, and a lifetime
maximum adjustment cap of 6%. As of December 31, 2002, approximately 23.3% of the Bank's residential real estate loans were
adjustable rate loans with adjustment periods ranging from one to five years and balloon loans of seven years or less. The
origination of these mortgage loans can be more difficult in a low interest rate environment where there is a significant demand for
fixed rate mortgages. The Bank limits the maximum loan-to-value ratio on one-to-four-family residential first mortgages to 90% of
the appraised value and generally limits the loan-to-value ratio on second mortgages on one-to-four-family dwellings to 90%.
Construction loans involve additional risks because loan funds are advanced upon the security of the project under construction,
which is of uncertain value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and other unpredictable contingencies, it is relatively
difficult to evaluate accurately the total loan funds required to complete a project, and related loan-to-value ratios. The analysis
of prospective construction loan projects thus requires an expertise that varies in significant respects from that which is required
for permanent residential mortgage lending.
The Bank's underwriting criteria are designed to evaluate and minimize the risks of each construction loan. Among other things, the
Bank considers evidence of the availability of permanent financing or a takeout commitment to the borrower; the reputation of the
borrower and his or her financial condition; the amount of the borrower's equity in the project; independent appraisals and cost
estimates; pre-construction sale and leasing information; and cash flow projections of the borrower.
Commercial Real Estate Lending. In recent years, First Federal has put greater emphasis on small business lending, originating loans
for small and medium-sized businesses from its various locations. Commercial loans are primarily real estate secured and are
generated at banking centers primarily in the Bank's market area. The Bank makes commercial loans to a variety of industries.
Substantially all of the commercial real estate loans originated by First Federal have adjustable interest rates with maturities of
25 years or less or are loans with fixed interest rates and maturities of five years or less. At December 31, 2002, the Bank had
$135.2 million outstanding in commercial real estate loans. The security for commercial real estate loans includes retail businesses,
warehouses, churches, apartment buildings and motels. In addition, the payment experience of loans secured by income producing
properties typically depends on the successful operation of the related real estate project and thus may be more vulnerable to
adverse conditions in the real estate market or in the economy generally.
Loans secured by multi-family residential property, consisting of properties with more than four separate dwelling units amounted to
$16.4 million of the loan portfolio at December 31, 2002. First Federal generally does not lend above 75% of the appraised values of
multi-family residences on first mortgage loans. The mortgage loans First Federal currently offers on multi-family dwellings are
generally one or five year ARMs with maturities of 25 years or less.
Consumer Lending. The Bank's consumer loans include loans on automobiles, boats, recreational vehicles and other consumer goods, as
well as loans secured by savings accounts, home improvement loans, and unsecured lines of credit. As of December 31, 2002, consumer
loans outstanding were $71.8 million or approximately 13.6% of the Bank's total gross loan portfolio. These loans involve a higher
risk of default than loans secured by one-to-four-family residential loans. The Bank believes, however, that the shorter term and the
normally higher interest rates available on various types of consumer loans have been helpful in maintaining a profitable spread
between the Bank's average loan yield and its cost of funds. The Bank offers a home equity line of credit, which is a revolving line
of credit secured by the equity in a customer's home. As of December 31, 2002, these loans totaled $33.9 million.
The Bank's underwriting standards reflect that consumer loans are considered to have greater risk of loan losses than residential
real estate loans. Among other things, the capacity of individual borrowers to repay can change rapidly, particularly during an
economic downturn, collection costs can be relatively higher for smaller loans, and the value of collateral may be more likely to
depreciate. The Consumer Lending Policy establishes the appropriate consumer lending authority for all loan officers based on
experience, training, and past performance for approving high quality loans. Loans beyond individual authorities must be approved
by additional officers, the Executive Loan Committee or the Board of Directors, based on the size of the loan. The Bank requires
detailed financial information and credit bureau reports for each consumer loan applicant to establish the applicant's credit
history, the adequacy of income for debt retirement, and job stability based on the applicant's employment records. Co-signers are
required on applications that are determined marginal for these standards, or that fail to qualify individually. Adequate
collateral is required on the majority of consumer loans. The Executive Loan Committee monitors and evaluates unsecured lending
activity by each loan officer.
In 1999, the Bank developed an indirect consumer loan program. The indirect consumer loan portfolio is comprised of new and used
automobile, motorcycle and all terrain vehicle loans originated on the behalf of the Bank by a select group of auto dealers within
the service area. Indirect consumer loans are considered to have greater risk of loan losses than direct consumer loans due to,
among other things: borrowers may have no existing relationship with the Bank; borrowers may not be residents of the lending area;
less detailed financial statement information may be collected at application; collateral values can be more difficult to determine;
and the condition of vehicles securing the loan can deteriorate rapidly. To address the additional risks associated with indirect
consumer lending, the Executive Loan Committee continually evaluates data regarding the dealers enrolled in the program, including
monitoring turn down and delinquency rates. All applications are approved by specific lending officers, selected based on experience
in this field, who obtain credit bureau reports on each application to assist in the decision. Aggressive collection procedures
encourage more timely recovery of late payments. At December 31, 2002, total loans under the indirect consumer loan program totaled
$20.6 million.
Commercial Business Lending. The Bank's focus on small business lending has resulted in growth in the commercial business loan
portfolio in recent years. The Bank is permitted to make secured and unsecured loans for commercial, corporate, business, and
agricultural purposes, including issuing letters of credit and engaging in inventory financing and commercial leasing activities.
Commercial loans generally are made to small-to-medium size businesses located within the Bank's defined market area. Commercial
loans are considered to involve a higher degree of risk than residential real estate loans. The risks associated with commercial
business lending include potentially greater volatility in the value of the assigned collateral, the need for more technical analysis
of the borrower's financial position, the potentially greater impact of changing economic conditions may have on the borrower's
ability to retire debt, and the additional expertise required for commercial lending personnel. The Bank has developed a new
commercial lending policy and hired a Chief Lending Officer to reduce these risks and coordinate the Bank's plans to increase its
emphasis on commercial lending. The Chief Lending Officer has developed guidelines for the Bank's lending staff to assist this
process. However, commercial loans generally carry a higher yield and are made for a shorter term than real estate loans.
Commercial business loans outstanding at December 31, 2002 totaled $28.9 million
Investment Securities
Interest on securities provides the largest source of interest income for First Federal after interest on loans, constituting 5.61%
of the total interest income for the six months ended December 31, 2002. First Federal has the authority to invest in various types
of liquid assets, including short-term United States Treasury obligations and securities of various federal agencies, obligations of
states and political subdivisions, corporate bonds, certificates of deposit at insured savings and loans and banks, bankers'
acceptances, and federal funds. The Bank may also invest a portion of its assets in certain commercial paper and corporate debt
securities. First Federal is also authorized to invest in mutual funds and stocks whose assets conform to the investments that First
Federal is authorized to make directly. Securities held-to-maturity decreased in fiscal year 2001 due to redemptions of bonds held in
the Bank's investment portfolio. As interest rates declined, these bonds ceased to be an attractive funding vehicle for the issuer
and were called for redemption in accordance with their terms. See Note 2 of Notes to Consolidated Financial Statements for further
information concerning the Bank's investment portfolio.
The following table sets forth the carrying value of the Bank's securities portfolio at the dates indicated. At December 31, 2002,
the market value of the Bank's securities portfolio was $18.7 million.
December 31, At June 30
-----------------------
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Securities available-for-sale:
Equity securities ................... $ 914 $ 930 $ 996 $ 1,105
State and municipal ................. 1,085 1,048 1,017 943
----- ----- ----- ---
Total available-for-sale ...... $ 1,999 $ 1,978 $ 2,013 $ 2,048
======= ======= ======= =======
Securities held-to-maturity:
U.S. Treasury and agencies .......... $13,986 $20,964 $19,917 $41,860
Corporate Bond ...................... 2,000 -- -- --
Mortgage-backed securities .......... 590 751 1,004 1,274
--- --- ----- -----
Total held-to-maturity ....... $16,576 $21,715 $20,921 $43,134
======= ======= ======= =======
The following table sets forth the scheduled maturities, amortized cost, fair value and weighted average yields for the Bank's
securities at December 31, 2002.
Weighted
Amortized Fair Average
(Dollars in thousands) Cost Value Yield*
---- ----- ------
Securities available-for-sale:
Due after one year through five years ....... $ 776 $ 836 4.39%
Due after five years through ten years ...... 234 249 4.55
Equity securities ........................... 385 914 3.52
--- ---
Total available-for-sale ............. $1,395 $1,999
====== ======
Weighted
Amortized Fair Average
(Dollars in thousands) Cost Value Yield*
---- ----- -----
Securities held-to-maturity:
Due in one year or less ................... $ 1,986 $ 2,008 6.09%
Due after one year through five years ..... 12,000 12,043 2.80
Due after ten years ....................... 2,000 2,000 3.66
Mortgage-backed securities ................ 590 604 4.93
--- ---
Total held-to-maturity .......... $16,576 $16,655
======= =======
*The weighted average yields are calculated on amortized cost on a non tax-equivalent basis.
Deposits
First Federal attracts both short-term and long-term deposits from the general public by offering a wide range of deposit accounts
and interest rates. In recent years the Bank has been required by market conditions to rely increasingly on short-term certificate
accounts and other deposit alternatives that are more responsive to market interest rates. The Bank uses forecasts based on interest
rate risk simulations to assist management in monitoring the Bank's use of certificates of deposit and other deposit products as
funding sources and the impact of their use on interest income and net interest margin in various rate environments.
The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain deposits; however,
market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and
retain deposits. During the six months ended December 31, 2002, retail deposits decreased, primarily certificate of deposit accounts,
caused in part by the Bank's deposit customers shifting funds to higher interest earning products at other financial institutions.
During the fiscal year ended June 30, 2002,equity investments became much less attractive, resulting in a substantial shift of
investment funds from the stock market to deposit products, specifically savings and money market accounts. The steady decline in
rates paid on certificates of deposit led to increased balances for transactional and immediate availability products. During the
fiscal year ended June 30, 2001, the Bank relied on certificates of deposit for much of its funding needs. During that period, the
stock market remained an attractive investment option for depositors, and rates being paid by competitors on deposit products had yet
to decrease significantly in response to substantial interest rate reductions in 2001.
To evaluate the funding needs of the Bank in light of deposit trends resulting from these changing conditions, management and Board
committees evaluate simulated performance reports that forecast changes in margins. The Bank continues to offer attractive
certificate rates for longer terms to allow the Bank to retain deposit customers and reduce interest rate risk during the current
low-rate environment, while protecting the margin when interest rates increase as the economy recovers.
First Federal offers statement and passbook savings accounts, NOW accounts, money market accounts and fixed and variable rate
certificates with varying maturities. First Federal also offers tax-deferred individual retirement accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in interest rates and competition. As of December 31, 2002,
approximately 41.4% of the Bank's deposits consisted of various savings and demand deposit accounts from which customers are
permitted to withdraw funds at any time without penalty. Interest earned on savings accounts is paid from the date of deposit to the
date of withdrawal and compounded quarterly. Interest earned on NOW accounts is paid from the date of deposit to the date of
withdrawal, compounded and credited monthly. Interest rates paid, maturity terms, service fees and withdrawal penalties are
established by management on a periodic basis.
First Federal also makes available to its depositors a number of certificates of deposit with various terms and interest rates to be
competitive in its market area. These certificates have minimum deposit requirements as well. The variety of deposit accounts by
First Federal has permitted it to be more competitive in obtaining funds and has allowed it to respond with more flexibility to the
flow of funds away from depository institutions into direct investment vehicles such as government and corporate securities.
However, the ability of the Bank to attract and maintain deposits and its cost of funds have been, and will continue to be,
significantly affected by market conditions.
The holders of the Bank's certificates of deposits in amounts of $100,000 or more are all non-brokered depositors, most of who reside
within our service areas. The Bank does not accept brokered deposits, which are funds deposited by an investment dealer on behalf of
a third-party investor. The Bank's policy is to maintain certificate of deposit accounts in amounts of $100,000 or more, to the
extent practical, only when the depositor uses other bank products to increase the total customer relationship. The objective is to
provide the Bank with a stable deposit base of large account balances while increasing the fee income and lower funding costs through
other products and services.
The following table breaks down the Bank's deposits as of December 31, 2002.
Dollars in Thousands
Percent
of
Category Balances Deposits
-------- -------- --------
Non-interest bearing demand accounts $ 32,391 6.22%
NOW demand accounts 65,012 12.48
Savings accounts 72,301 13.87
Money market deposit accounts 45,978 8.82
Certificates of deposit 267,194 51.27
Individual Retirement Accounts 38,245 7.34
------ ----
$521,121 100.00%
======== ======
The following table shows at December 31, 2002 the amount of the Bank's certificates of deposit of $100,000 or more by time remaining
until maturity.
Maturity Period Certificates
--------------- of Deposit
------------
(In Thousands)
Three months or less $19,897
Three through six months 15,888
Six through twelve months 43,570
Over twelve months 15,080
------
Total $94,435
=======
Borrowings
Deposits are the primary source of funds for First Federal's lending and investment activities and for its general business
purposes. The Bank can also use advances (borrowings) from the FHLB of Cincinnati to supplement its supply of lendable funds, meet
deposit withdrawal requirements and extend the term of its liabilities. Advances from the FHLB are secured by the Bank's stock in
the FHLB and substantially all of the Bank's first mortgage loans. At December 31, 2002 First Federal had $77.7 million in advances
outstanding from the FHLB and the capacity to increase its borrowings an additional $107.9 million.
The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other member financial
institutions. As a member, First Federal is required to own capital stock in the FHLB and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets (principally, securities which are obligations of, or
guaranteed by, the United States) provided certain standards related to creditworthiness have been met. For further information, see
Note 6 of the Notes to Consolidated Financial Statements in the Annual Report.
The following table sets forth certain information regarding the Bank's FHLB advances during the periods indicated.
June 30,
December 31, --------------------------------
2002 2002 2001 2000
(Dollars in thousands)
Average balance outstanding .......................$ 77,736 $ 77,709 $ 91,418 $ 52,419
Maximum amount outstanding at
any month-end during the period .............. 77,767 80,377 111,026 80,339
Year end balance .................................. 77,683 77,778 77,298 80,339
Weighted average interest rate:
At end of year ............................... 4.93% 4.94% 4.97% 5.44%
During the year .............................. 4.86% 4.81% 5.80% 5.34%
Subsidiary Activities
In 1978, the Bank formed First Service Corporation of Elizabethtown ("First Service"). First Service acts as a broker for the
purpose of selling mortgage life, credit life and accident and disability insurance to the Bank's customers. In January 1999 First
Service entered into a contract with Raymond James Financial Services, Inc. to provide investment services to the Bank's customers in
the area of tax-deferred annuities, government securities and stocks and bonds. First Service employs three full-time employees to
perform these services. This investment function operates under licenses held by First Service. The net income of First Service was
$53,000 for the six months ended December 31, 2002.
In July 1999, the Bank formed First Heartland Mortgage Company of Elizabethtown ("First Heartland") through which the secondary
market lending department originates qualified VA, KHC, RHC and conventional secondary market loans on the behalf of the investors,
thereby providing necessary liquidity to the Bank and needed loan products to the Bank's customers. The Bank has continued to
experience good growth in the level of mortgages being processed by First Heartland. As of December 31, 2002, First Heartland
originated $33.5 million in loans on the behalf of investors. The net income of First Heartland Mortgage was $98,500 for the six
months ended December 31, 2002.
Competition
First Federal experiences substantial competition both in attracting and retaining deposits and in the making of mortgage and other
loans. Direct competition for deposits comes from commercial banks, savings institutions, and credit unions located in north-central
Kentucky. Additional significant competition for deposits comes from money market mutual funds and corporate and government debt
securities.
The primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by the
various financial institutions. Competition for origination of real estate loans normally comes from commercial banks, savings
institutions, mortgage bankers, mortgage brokers, and insurance companies. Retail establishments compete for loans by offering
credit cards and retail installment contracts for the purchase of goods and merchandise. Management believes that First Federal has
been able to compete effectively in its primary market area.
First Federal has offices in nine cities in six contiguous counties. In addition to the financial institutions, which have offices
in these counties, First Federal competes with several commercial banks and savings institutions in surrounding counties, many of
which have assets substantially greater than First Federal. These competitors attempt to gain market share through their financial
product mix, pricing strategies and banking center locations. In addition, Kentucky's interstate banking statute, which permits
banks in all states to enter the Kentucky market if they have reciprocal interstate banking statutes, has further increased
competition for the Bank. We believe that competition from both bank and non-bank entities will continue to remain strong in the
near future.
The following table sets forth the Bank's market share and rank in terms of deposits in each Kentucky county where it has offices.
The Bank has one office in Jefferson County, which is Metro Louisville, Kentucky, with a population of more than 650,000.
Number of
County Offices FFKY Market Share % FFKY Rank
------ ------- ------------------- ---------
Hardin 4 18.45 1
Nelson 2 10.37 3
Hart 1 19.45 3
Bullitt 2 16.95 4
Meade 3 55.82 1
Jefferson 1 less than 1.00 N/M
Employees
As of December 31, 2002, the Bank had 230 employees of which 208 were full-time and 22 part-time. None of the Bank's employees are
subject to a collective bargaining agreement and the Bank believes that it enjoys good relations with its personnel.
Regulation
General Regulatory Matters. On January 8, 2003, First Federal converted from a federally chartered savings bank to a Kentucky
chartered commercial bank. Before the conversion, First Federal was subject to the regulation of the Office of Thrift Supervision.
As a Kentucky chartered commercial bank, First Federal is now subject to supervision and regulation, which involves regular bank
examinations, by both the Federal Deposit Insurance Corporation ("FDIC") and the Kentucky Department of Financial Institutions
("KDFI"). The deposits of First Federal are insured by the FDIC. Kentucky's banking statutes contain a "super-parity" provision
that permits a well-rated Kentucky banking corporation to engage in any banking activity in which a national bank operating in any
state; a state bank, thrift or savings bank operating in any other state; or a federal chartered thrift or federal savings
association meeting the qualified thrift lender test and operating in any state could engage, provided it first obtains a legal
opinion specifying the statutory or regulatory provisions that permit the activity.
In connection with the conversion, the Corporation registered to become a bank holding company under the Bank Holding Company Act of
1956, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As a bank holding company, the Corporation is required to file with the Federal Reserve Board annual and semiannual reports
and other information regarding its business operations and the business operations of its subsidiaries. The Corporation is also
subject to examination by the Federal Reserve Board and to operational guidelines established by the Federal Reserve Board. The
Corporation is subject to the Bank Holding Company Act and other federal laws on the types of activities in which it may engage, and
to other supervisory requirements, including regulatory enforcement actions for violations of laws and regulations.
Acquisitions and Change in Control. As a bank holding company, the Corporation must obtain Federal Reserve Board approval before
acquiring, directly or indirectly, ownership or control of more than 5% of the voting stock of a bank, and before engaging, or
acquiring a company that is not a bank but is engaged in certain non-banking activities. In approving these acquisitions, the
Federal Reserve Board considers a number of factors, and weighs the expected benefits to the public such as greater convenience,
increased competition and gains in efficiency, against the risks of possible adverse effects such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board also
considers the financial and managerial resources of the bank holding company, its subsidiaries and any company to be acquired, and
the effect of the proposed transaction on these resources. It also evaluates compliance by the holding company's financial
institution subsidiaries and the target institution with the Community Reinvestment Act. The Community Reinvestment Act generally
requires each financial institution to take affirmative action to ascertain and meet the credit needs of its entire community,
including low and moderate income neighborhoods.
Federal law also prohibits a person or group of persons from acquiring "control" of a bank holding company without notifying the
Federal Reserve Board in advance, and then only if the Federal Reserve Board does not object to the proposed transaction. The
Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of the voting stock of a
bank holding company with a class of securities registered under the Securities Exchange Act of 1934 would constitute an acquisition
of control of the bank holding company. In addition, any company is required to obtain the approval of the Federal Reserve Board
before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of any class of a bank holding company's
voting securities, or otherwise obtaining control or a "controlling influence" over a bank holding company.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), signed into law on November 12, 1999, amended a
number of Federal banking laws that affect the Corporation and First Federal. The provisions of the GLB Act believed to be of most
significance to the Corporation and First Federal are discussed below. In particular, the GLB Act permits a bank holding company to
elect to become a financial holding company, which permits the holding company to conduct activities that are "financial in nature."
To become and maintain its status as a financial holding company, the bank holding company and all of its affiliated depository
institutions must be well-capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating. The
Corporation has not filed an election to became a financial holding company.
The GLB Act also repeals most of the restrictions on affiliations among depository institutions, securities firms and insurance
companies. In particular, the GLB Act repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations
between banks and securities firms. The GLB Act also provides that, while the states continue to have the authority to regulate
insurance activities, in most instances they are prohibited from preventing or significantly interfering with the ability of a bank,
directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states
generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules
that specifically regulate bank insurance activities in areas identified in the GLB Act. Federal bank regulatory agencies adopted
insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures that became
effective April 1, 2001.
The GLB Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide
to its customers, at the inception of the customer relationship and annually thereafter, the institution's policies and procedures
regarding the handling of customers' nonpublic personal financial information. The GLB Act provides that, except for certain limited
exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses
to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An
institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or
other similar account identifiers for marketing purposes. The GLB Act allows the states to adopt stricter customer privacy
protections. The Act also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer
information of a financial nature by fraudulent or deceptive means. The GLB Act also contains requirements for the posting of notices
by operators of automated teller machines regarding fees charged for the use of such machines.
Other Holding Company Regulations. Federal law substantially restricts transactions between financial institutions and their
affiliates. As a result, a bank is limited in extending credit to its holding company (or any non-bank subsidiary), in investing in
the stock or other securities of the bank holding company or its non-bank subsidiaries, and/or in taking such stock or securities as
collateral for loans to any borrower. Moreover, transactions between a bank and a bank holding company (or any non-bank subsidiary)
must generally be on terms and under circumstances at least as favorable to the bank as those prevailing in comparable transactions
with independent third parties or, in the absence of comparable transactions, on terms and under circumstances that in good faith
would be available to nonaffiliated companies.
Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to, and to commit resources
to support, its bank subsidiaries. This support may be required at times when, absent such a policy, the bank holding company may not
be inclined to provide it. In addition, any capital loans by the bank holding company to its bank subsidiaries are subordinate in
right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary
banks will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Capital Requirements. The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital
guidelines applicable to the banking organizations they supervise. Under the risk-based capital requirements, the Corporation and
First Federal are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common
equity, retained earnings and qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles
("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred
stock and a limited amount of the loan loss allowance ("Tier 2 capital" which, together with Tier 1 capital, composes "total
capital"). To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total
risk-weighted capital ratio of at least 10% and a Tier 1 risk-weighted ratio of 6% or greater.
In addition, each of the federal bank regulatory agencies has established minimum leverage capital requirements for banking
organizations. Banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3%
to 5% subject to federal bank regulatory evaluation of an organization's overall safety and soundness. The following table shows the
ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for the Corporation and First Federal as
of December 31, 2002. See Note 19 contained in "Item 8-Financial Statements and Supplementary Data", for subsequent event regarding
regulatory capital.
Capital Adequacy Ratios as of
December 31, 2002
Regulatory Well-Capitalized
Risk-Based Capital Ratios Minimums Minimums The Corporation First Federal
- ------------------------- -------- -------- --------------- -------------
Tier 1 capital (1) 4.0% 6.0% 12.2% 10.7%
Total risk-based capital (2) 8.0% 10.0% 13.1% 11.7%
Tier 1 leverage ratio (3) 3.0% 5.0% 8.9% 7.9%
(1) Shareholders' equity plus corporation-obligated mandatory redeemable capital securities, less unrealized gains
(losses) on debt securities available for sale, net of deferred income taxes, less nonqualifying intangible assets;
computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.
(2) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted
assets, as defined in the risk-based capital guidelines.
(3) Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles.
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured
depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. The Corporation and First Federal are classified as "well-capitalized." FDICIA also requires the bank regulatory
agencies to implement systems for "prompt corrective action" for institutions that fail to meet minimum capital requirements within
these five categories, with progressively more severe restrictions on operations, management and capital distributions according to
the category in which an institution is placed. Failure to meet capital requirements can also cause an institution to be directed to
raise additional capital. FDICIA also mandates that the agencies adopt safety and soundness standards relating generally to
operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that
fails to meet such standards.
In addition, the Federal Reserve Board and the FDIC have each adopted risk-based capital standards that explicitly identify
concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by each agency in assessing an institution's overall capital adequacy. The
capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in
interest rates be considered by the agency as a factor in evaluating a banking organization's capital adequacy. The agencies also
jointly adopted a regulation, effective January 1, 2002, amending their regulatory capital standards to change the treatment of
certain recourse obligations, direct credit subsidies, residual interest and other positions in securitized transactions that expose
banking organizations to credit risk. The regulation amends the agencies' regulatory capital standards to align more closely the
risk-based capital treatment of recourse obligations and direct credit subsidies, to vary the capital requirements for positions in
securitized transactions (and certain other credit exposures) according to their relative risk, and to require capital commensurate
with the risks associated with residual interests.
In addition to the "prompt corrective action" directives, failure to meet capital guidelines can subject a banking organization to a
variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of
deposit insurance by the FDIC, and under some conditions the appointment of a conservator or receiver.
Deposit Insurance. First Federal's deposits are insured by the FDIC up to the statutory maximum limit of $100,000 per depositor
through the Savings Association Insurance Fund. For this protection, First Federal must pay semiannual assessments to the FDIC.
The assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution
by the FDIC, which will be determined by the institution's capital level and supervisory evaluations.
Dividends. The Corporation is a legal entity separate and distinct from First Federal. The majority of the Corporation's revenue is
from dividends paid to it by First Federal. First Federal is subject to laws and regulations that limit the amount of dividends they
can pay. If, in the opinion of a federal regulatory agency, an institution under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice, the agency may require, after notice and hearing, that the institution cease and desist from such
practice. The federal banking agencies have indicated that paying dividends that deplete an institution's capital base to an
inadequate level would be an unsafe and unsound banking practice. Under FDICIA, an insured institution may not pay any dividend if
payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve and the FDIC
have issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current
operating earnings.
Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. Before any dividend may be
declared for any period (other than with respect to preferred stock), a bank must increase its capital surplus by at least 10% of the
net profits of the bank for the period until the bank's capital surplus equals the amount of its stated capital attributable to its
common stock. Moreover, the KDFI Commissioner must approve the declaration of dividends if the total dividends to be declared by a
bank for any calendar year would exceed the bank's total net profits for such year combined with its retained net profits for the
preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. First Federal
is also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the
insolvency of the corporation from a balance sheet perspective or its becoming unable to pay debts as they come due.
Available Information
The Corporation files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports with the Securities and Exchange Commission. These reports are available at the SEC's website at http://www.sec.gov.
The Corporation's reports will not be available on its website at http://www.ffsbky.com until modifications of its Investor Relations
page on the website are completed. You may obtain electronic or paper copies of the Corporation's reports free of charge by
contacting Rebecca Bowling, Corporate Secretary-Treasurer, First Federal Savings Bank, 2323 Ring Road, Elizabethtown, Kentucky 42701
(telephone) 270-765-2131.
Item 2. Properties
The Corporation's executive offices, principal support and operational functions are located at 2323 Ring Road in Elizabethtown,
Kentucky. All of First Federal's banking centers are located in Kentucky. The location of the 13 banking centers, their form of
occupancy and their respective approximate square footage is set forth in the following table.
Approximate
Banking Owned or Square
Centers Leased Footage
------- ------ -------
ELIZABETHTOWN
2323 Ring Road Owned 55,000
325 West Dixie Avenue Owned 1,764
101 Wal-Mart Drive Leased 984
RADCLIFF, 475 West Lincoln Trail Owned 2,728
BARDSTOWN
401 East John Rowan Blvd. Leased 4,500
315 North Third Street Owned 1,271
MUNFORDVILLE, 925 Main Street Owned 2,928
SHEPHERDSVILLE, 395 N. Buckman Street Owned 7,600
MT. WASHINGTON, 279 Bardstown Road Owned 2,500
BRANDENBURG
416 East Broadway Leased 4,395
50 Old Mill Road Leased 575
FLAHERTY, 4055 Flaherty Road Leased 1,216
LOUISVILLE, 11901 Standiford Plaza Drive Leased 650
Item 3. Legal Proceedings
Although the Bank is, from time to time, involved in various legal proceedings in the normal course of business, there are no
material pending legal proceedings to which the Corporation, the Bank, or its subsidiaries is a party, or to which any of their
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation's 2002 Annual Meeting of Shareholders was held on November 13, 2002. At the meeting, the directors listed below were
elected as directors of the Corporation for terms expiring at the annual meeting in the year set forth to each of their names. The
voting results for the matters brought before the 2002 Annual Meeting are as follows:
1. Election of Directors. Cumulative voting applied in the election of directors.
Name Term Expires Votes For Abstentions
---- ------------ --------- -----------
Wreno M. Hall 2005 2,581,799 22,222
Walter D. Huddleston 2005 2,630,690 22,222
J. Stephen Mouser 2005 2,611,897 22,222
Michael L. Thomas 2005 2,610,831 22,222
In addition, the following directors will continue in office until the annual meeting of the year set forth beside each of their
names. The voting results for the matters brought before the 2002 Annual Meeting are as follows:
Name Term Expires
---- ------------
Robert M. Brown 2004
B. Keith Johnson 2003
Diane E. Logsdon 2003
John L. Newcomb, Jr. 2003
Gail Schomp 2004
J. Alton Rider 2004
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Corporation's Common Stock is listed on The NASDAQ National Market under the symbol "FFKY." The following table shows the high
and low sales price for the common stock and dividends paid per share for the periods indicated.
Quarterly Stock Prices Two
Quarter Ended Months Ended
------------- ------------
December 31, 2002: 9/30 12/31 2/28/03
- ------------------ ---- ----- -------
High $ 23.50 $ 24.48 $ 30.49
Low 21.80 22.50 24.48
Cash dividends 0.18 0.18
June 30, 2002: 9/30 12/31 3/31 6/30
- -------------- ---- ----- ---- ----
High $ 18.50 $ 18.00 $ 20.50 $ 23.85
Low 14.95 16.10 17.25 20.25
Cash dividends 0.18 0.18 0.18 0.18
June 30, 2001: 9/30 12/31 3/31 6/30
- -------------- ---- ----- ---- ----
High $ 17.63 $ 16.50 $ 15.50 $ 18.25
Low 15.00 13.25 14.25 13.50
Cash dividends 0.18 0.18 0.18 0.18
The number of registered stockholders as of March 17, 2003, was 738. It is currently the policy of the Corporation's Board of
Directors to continue to pay quarterly dividends, but any future dividends are subject to the Board's discretion based on its
consideration of the Corporation's operating results, financial condition, capital, income tax considerations, regulatory
restrictions and other factors.
Item 6. Selected Financial Data
At December 31, At June 30,
---------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Financial Condition Data: (Dollars in thousands)
Total assets ............................. $670,456 $679,110 $606,726 $560,785 $488,304 $409,651
Net loans outstanding (1) ................ 528,535 520,261 517,145 471,231 400,360 354,935
Interest bearing deposits ................ - 64,000 - - - -
Investments .............................. 18,575 23,693 22,934 45,182 47,340 26,574
Deposits ................................. 521,121 529,882 468,825 423,759 399,443 306,703
Borrowings ............................... 87,411 87,493 77,298 80,339 25,894 43,249
Stockholders' equity ..................... 59,647 58,615 54,592 51,681 57,862 54,688
Number of:
Real estate loans outstanding ............ 7,156 7,577 7,618 7,154 6,968 6,709
Deposit accounts ......................... 49,210 49,726 49,615 47,238 45,425 37,764
Offices .................................. 13 13 13 13 12 8
Full time equivalent employees ........... 241 227 203 170 155 110
Six Months Ended
December 31, Year Ended June 30,
----------------------------------------------------------------
2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Operations Data: (Dollars in thousands, except per share data)
Interest income .......................... $21,556 $44,100 $45,392 $38,542 $35,496 $31,182
Interest expense ......................... 9,394 21,426 27,429 20,873 18,481 16,059
Net interest income ...................... 12,162 22,674 17,963 17,669 17,015 15,123
Provision for loan losses ................ 1,161 1,604 1,086 400 314 265
Non-interest income ...................... 3,177 5,398 5,145 3,877 3,954 2,860
Non-interest expense (2) ................. 7,597 15,281 13,570 12,691 11,706 8,082
Income tax expense ....................... 2,199 3,729 2,803 2,792 2,970 3,302
Net income ............................... 4,382 7,458 5,649 5,663 5,979 6,334
Earnings per share:
Basic ................................ $ 1.19 $ 1.99 $ 1.50 $ 1.45 $ 1.45 $ 1.53
Diluted .............................. 1.19 1.98 1.50 1.44 1.44 1.52
Book value per share ..................... 16.37 15.72 14.53 13.76 14.04 13.24
Dividends paid per share ................. 0.36 0.72 0.72 0.72 0.63 0.56
Dividend payout ratio .................... 30% 36% 48% 49% 43% 37%
Return on average assets ................. 1.31% 1.19% .95% 1.08% 1.25% 1.60%
Average equity to average
assets ................................ 8.77% 9.10% 8.97% 10.28% 11.85% 13.55%
Return on average equity ................. 14.89% 13.08% 10.62% 10.52% 10.53% 11.81%
(1) Includes loans held for sale.
(2) Non-interest expense in 1999 includes acquisition and conversion costs in the amount of $789,000, pretax.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The Corporation, through its subsidiary, First Federal, conducts banking operations in the Kentucky communities of Elizabethtown,
Radcliff, Bardstown, Munfordville, Shepherdsville, Mt. Washington, Brandenburg, Flaherty, and Hillview. The Bank offers a wide range
of financial products and services, including checking, savings and time deposit accounts; real estate, commercial and consumer
loans, and investment and trust services.
The principal source of the Bank's revenue is net interest income. Net interest income is the difference between interest income on
interest-earning assets, such as loans and securities and the interest expense on liabilities used to fund those assets, such as
interest-bearing deposits and borrowings. The amount and composition of interest-earning assets and interest-bearing liabilities,
changes in market interest rates, and the Bank's ability to manage the sensitivity of its interest-earning assets and
interest-bearing liabilities to changing rates can all have a material effect on net income. Management considers interest rate risk
to be the Bank's most significant market risk. See "Item 7A - Asset/Liability Management and Market Risk."
The Corporation's and the Bank's activities are subject to supervision and examination by federal and state bank regulatory
agencies. The Bank's capital position is directly related to its capacity to make loans, which earn the highest interest rates. The
Bank must remain "well capitalized" in accordance with regulatory standards to offer some specific lending and financial services.
See "Item 1-Regulation."
Loan quality directly affects the Bank's financial results, as loan losses reduce net interest income and capital. The Bank maintains
rigorous underwriting policies and procedures in originating loans, regularly monitors the performance and risk elements of its loan
portfolio, and maintains a loan loss allowance at a level deemed sufficient to absorb probable credit losses in the loan portfolio.
See "Allowance and Provision for Loan Losses" and "Non-Performing Assets."
The Bank's conversion to a state-chartered commercial bank in January 2003 is part of its strategic plan to increase the financial
products and services it offers to small business and retail customers and to expand into growing markets in its region. Management
believes the transition has been responsible for the renewed growth in lending and certificates of deposit. An important element of
this strategy has been to develop a bank-wide service and sales culture emphasizing expanded account relationships. To achieve this
goal, the Bank has increased the number of associates in banking centers, relationship bankers, business development officers,
stockbrokers, and loan officers with experience in commercial lending. The strategy also involves greater emphasis on originating
commercial and consumer loans, which generally have higher rates and shorter terms than residential mortgage loans. The Bank has
adjusted its lending practices and risk management policies to reflect the greater risk involved with commercial and consumer
lending.
The following discussion and analysis covers the primary factors affecting the Corporation's performance and financial condition. It
should be read in conjunction with the accompanying audited consolidated financial statements included in this report.
CRITICAL ACCOUNTING POLICIES
The Corporation's accounting and reporting policies comply with accounting principles generally accepted in the United States of
America and conform to general practices within the banking industry. The accounting policy relating to the allowance for loan losses
is critical to the understanding of the Corporation's results of operations since the application of this policy requires significant
management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying
circumstances were to change. See "Allowance and Provision for Loan Losses" herein for a complete discussion of the Corporation's
accounting methodologies related to the allowance. Also refer to Note 1 in the "Notes to Consolidated Financial Statements" for
details regarding all of the Corporation's critical accounting policies.
OVERVIEW
On January 8, 2003, the Bank converted from a federal savings bank (regulated by the OTS) to a commercial bank chartered under
Kentucky banking laws (regulated by the FDIC and KDFI). At the same time, the Corporation became a bank holding company regulated by
the Federal Reserve and changed its fiscal year from June 30 to December 31.
The Bank reported net income of $4.4 million during the six months ended December 31, 2002 compared with $3.7 million for the same
period ended 2001, an increase of 17%. Diluted earnings per share increased 19% from $1.00 during 2001 to $1.19 for 2002. The
increase in earnings for 2002 was primarily attributable to increased net interest income, and an absence of goodwill amortization,
service charges on deposit accounts and gain on sale of mortgage loans. The Bank's book value per common share increased from $15.15
at December 31, 2001 to $16.37 at December 31, 2002. Net income for 2002 generated a return on average assets of 1.31% and a return
on average equity of 14.89%. These compare with a return on average assets of 1.23% and a return on average equity of 13.35% for the
2001 period.
The Bank reported net income of $7.5 million during the fiscal year ended June 30, 2002 compared with $5.6 million for the 2001
period, an increase of 32%. Diluted earnings per share also increased 32% from $1.50 during 2001 to $1.98 for 2002. The increase in
earnings for 2002 was primarily attributable to increased net interest income, service charges on deposit accounts and gain on sale
of mortgage loans. The Bank's 2001 restructuring of $75 million of its Federal Home Loan Bank advances from overnight to 10-year
maturities at lower interest rates coupled with declines in interest rates continued to have a positive impact on earnings. The
Bank's book value per common share increased from $14.53 at June 30, 2001 to $15.72 at June 30, 2002. Net income for 2002 generated
return on average assets of 1.19% and return on average equity of 13.08%. These compare with return on average assets of .95% and
return on average equity of 10.62% for the 2001 period.
The Bank's total assets at December 31, 2002 decreased slightly to $670.5 million compared from $679.1 million at June 30, 2002. The
decrease in assets was primarily due to the decrease in the Bank's cash equivalents and interest bearing deposits, a direct result of
the decrease in retail deposits. Further, the investment portfolio decreased as interest rates declined and securities were called
for redemption in accordance with their terms. Offsetting the decline in securities, net loans (including loans held for sale)
increased $8.3 million from June 30, 2002 to $528.5 million at December 31, 2002. Residential mortgage loans decreased by $26.3
million during the 2002 period as declining market interest rates caused an increase in 1-4 family refinancing activity into
fixed-rate, secondary market loan products. The real estate construction portfolio increased $2.0 million for the six-month period
due to customer demand. The growth in the commercial and commercial real estate portfolios remained strong, increasing by $30.6
million to $164.2 million at December 31, 2002. This growth is a result of the Bank's continued emphasis on the active pursuit of
lending opportunities that meet its lending criteria. In addition, the Bank has hired a dealer loan specialist to expand its
indirect dealer loan program, which increased $1.0 million to $20.6 million at December 31, 2002, and will continue to increase.
The Bank's total assets at June 30, 2002 grew to $679.1 million compared to $606.7 million at June 30, 2001. The increase in assets
was due to the increase in the Bank's interest bearing deposits, a direct result of the growth in retail deposits. Net loans
(including loans held for sale) increased $3.1 million from June 30, 2001 to $520.3 million at June 30, 2002. Residential mortgage
loans decreased by $21.2 million during the 2002 period as declining market interest rates caused an increase in 1-4 family
refinancing activity into fixed-rate, secondary market loan products. The commercial real estate portfolio remained strong,
increasing by $23.6 million to $112.5 million at June 30, 2002. This growth is a result of the Bank's emphasis on these lending
opportunities.
Deposits decreased by $8.8 million to $521.1 million at December 31, 2002 compared to $529.9 million at June 30, 2002. The decrease
in retail deposits was primarily in certificate of deposit accounts caused in part by the Bank's deposit customers shifting funds to
higher interest earning deposit products at other financial institutions. The Bank's strategic plan includes a focus toward
increasing non-interest bearing accounts and non-interest income, in addition to maintaining the current interest margin.
Non-relationship certificate customers lack the fee income from other products and represent high-cost funding that can be replaced
by current liquidity or FHLB advances as needed. On March 26, 2002, the Corporation issued $10.0 million of Trust Preferred
Securities through First Federal Statutory Trust I, a subsidiary of the Corporation. The Corporation undertook the issuance of these
securities to enhance its regulatory capital position.
Deposits increased by $61.1 million to $529.9 million at June 30, 2002 compared to $468.8 million at June 30, 2001. The growth in
retail deposits was primarily in savings and money market accounts caused in part by a shift during recent quarters in funds from the
stock market to more conservative investments such as bank deposits. FHLB advances increased from $77.3 million at June 30, 2001 to
$77.8 million at June 30, 2002.
In January 2002, the Bank implemented a check imaging service for its customers. Imaged checks are also integrated with the Bank's
internet banking service to allow customers the benefit of reviewing their canceled checks online. Customers also have the option of
receiving their bank statements through e-mail, a service delivery improvement to the customer and an operational efficiency to the
Bank.
RESULTS OF OPERATIONS
Net Interest Income - The principal source of the Bank's revenue is net interest income. Net interest income is the difference
between interest income on interest-earning assets, such as loans and securities and the interest expense on liabilities used to fund
those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and
composition of interest-earning assets and interest-bearing liabilities as well as market interest rates.
For the six months ended December 31, 2002, net interest income was $12.2 million, up $1.2 million from the $11.0 million attained
during the comparable period of 2001. The Bank was able to increase its net interest income through growth in its interest-earning
assets and declines in the cost of interest-bearing liabilities. The Bank's net interest margin remained steady at 3.82% for the six
months ended December 31, 2002 as compared to 3.83% for the 2001 six month period. The net interest rate spread increased from 3.45%
during 2001 to 3.52% in 2002. The net interest spread and margin benefited from a significant decline in the Bank's cost of funds
due to a reduction in short-term market interest rates by the Federal Reserve which occurred principally during calendar 2001. The
Bank's cost of funds averaged 3.25% during 2002 which was a decrease of 115 basis points from the 2001 average cost of funds of 4.40%
compared to a decrease of 108 basis points on interest earning assets from 7.85% to 6.77%. The 2002 period includes Trust Preferred
Securities which were issued in March 2002. Substantially all categories of interest income and interest expense declined as a
result, however, interest-bearing liabilities declined move. During the 2002 period, average interest-earning assets were $637.3
million, an increase of $62.8 million over the same period in 2001. Total average interest bearing liabilities increased from $523.8
million during 2001 to $578.7 million for the same period in 2002. (For additional analysis on the effect of increasing and
decreasing interest rates on the Corporation's net interest margin, see the interest rate sensitivity model under "Asset/Liability
Management and Market Risk.")
For fiscal year ended June 30, 2002, net interest income was $22.7 million, up $4.7 million from the $18.0 million attained during
2001. The Bank was able to increase its net interest income through an improved interest rate margin compared to 2001. The Bank's
net interest margin increased from 3.22% during 2001 to 3.83% for the 2002 period. The net interest rate spread increased from 2.81%
during 2001 to 3.48% in 2002. The net interest spread and margin benefited from a significant decline in the Bank's cost of funds
due to a reduction in short-term market interest rates by the Federal Reserve which occurred principally during calendar 2001.
Substantially all categories of interest income and interest expense declined as a result, but more so with interest-bearing
liabilities. During the 2002 period, average interest-earning assets were $593.4 million, an increase of $35.7 million over the same
period in 2001. Total average interest bearing liabilities increased from $514.8 million during 2001 to $540.9 million for the same
period in 2002. The 2002 period includes Trust Preferred Securities which were issued in March 2002.
For fiscal year ended June 30, 2001, net interest income increased by $293,000 to $18.0 million as compared to $17.7 million in 2000
in spite of a declining net interest margin. The Bank's net interest margin declined to 3.22% for the year ended June 30, 2001
compared to 3.61% for the 2000 period. An increase in the cost of funds over the past fiscal year, offset by an increase in the
average earning assets of commercial real estate and residential mortgage loans, reduced the net interest margin. Average interest
earning assets increased by $68.2 million from $489.5 million for the 2000 period to $557.7 million for the 2001 period due to the
large growth of the Bank's loan portfolio. Average loans, which comprise 90% of the total interest earning assets, were $66.8
million higher and averaged $504.4 million during 2001, while the average yield on loans increased by 26 basis points to 8.33%.
Average interest-bearing liabilities increased by $68.1 million to an average balance of $514.8 million for 2001. Customer deposits
averaged $423.4 million during 2001, a $29.1 million increase from the 2000 average balance of $394.3 million. Average Federal Home
Loan Bank advances increased $39.0 million for the 2001 period to fund the Bank's increased lending activity that exceeded its
deposit growth during certain periods throughout the year. The Bank's cost of funds averaged 5.33% during 2001 which was an increase
of 66 basis points from the 2000 average cost of funds of 4.67% due to higher rates paid on short-term customer deposits.
AVERAGE BALANCE SHEET
The following table sets forth information relating to the Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Dividing income or expense by the average monthly balance of assets or
liabilities, respectively, derives such yields and costs for the periods presented.
Six Months Ended Year Ended
December 31, June 30,
2002 2002
(Dollars in thousands) Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
ASSETS
Interest earning assets:
Equity securities ................... $ 908 $ 16 3.52% $ 952 $ 34 3.57%
State and political subdivision
securities (1) .................... 1,071 33 6.16 1,022 71 6.95
U.S. Treasury and agencies .......... 16,266 293 3.60 10,741 589 5.48
Corporate bond ...................... 2,000 39 3.90 - - -
Mortgage-backed securities .......... 649 16 4.93 854 54 6.32
Loans receivable (2) (3) (4) ........ 525,574 20,346 7.74 523,559 42,045 8.03
FHLB stock .......................... 6,222 145 4.66 5,995 325 5.42
Interest bearing deposits ........... 84,568 679 1.61 50,260 1,006 2.00
--------- ------ ---- ------- ------ ----
Total interest earning assets ..... 637,258 21,567 6.77 593,383 44,124 7.44
Less: Allowance for loan losses ....... (4,192) ------ ---- (3,273) ------ ----
Non-interest earning assets ............ 38,094 36,371
--------- ---------
Total assets ...................... $ 671,160 $ 626,481
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts .................... $ 76,026 $ 551 1.45% $ 54,165 $ 1,190 2.20%
NOW and money market
Accounts .......................... 111,789 815 1.46 97,339 1,764 1.81
Certificates of deposit and
other time deposits ............... 303,412 5,878 3.87 308,747 14,559 4.72
FHLB Advances ....................... 77,736 1,888 4.81 77,709 3,741 4.81
Trust Preferred Securities .......... 9,724 262 5.39 2,987 172 5.76
----- --- ---- ----- --- ----
Total interest bearing liabilities. 578,687 9,394 3.25 540,947 21,426 3.96
Non-interest bearing liabilities: ----- ---- ------ ----
Non-interest bearing deposits ....... 29,669 22,996
Other liabilities ................... 3,962 5,531
----- -----
Total liabilities ................. 612,318 569,474
Stockholders' equity ................... 58,842 57,007
------ ------
Total liabilities and
stockholders' equity ............ $ 671,160 $ 626,481
========= =========
Net interest income .................... $ 12,173 $ 22,698
========= =========
Net interest spread .................... 3.52% 3.48%
==== ====
Net interest margin .................... 3.82% 3.83%
==== ====
Ratio of average interest earning
assets to average interest bearing
liabilities ................................... 110.12% 109.69%
====== ======
- -----------------------------------------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(3) Calculations include non-accruing loans in the average loan amounts outstanding.
(4) Includes loans held for sale.
AVERAGE BALANCE SHEET
The following table sets forth information relating to the Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Dividing income or expense by the average monthly balance of assets or
liabilities, respectively, derives such yields and costs for the periods presented.
Year Ended June 30,
----------------------------------------------------------------------------------
2001 2000
(Dollars in thousands) Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
ASSETS
Interest earning assets:
Equity securities ...................... $ 1,005 $ 34 3.38% $ 1,432 $ 43 3.00%
State and political subdivision
securities (1) ....................... 980 67 6.84 960 67 6.98
U.S. Treasury and agencies ............. 37,207 2,552 6.86 41,507 2,711 6.53
Corporate Bond ......................... - - - - - -
Mortgage-backed securities ............. 1,115 83 7.44 1,403 93 6.63
Loans receivable (2) (3) (4) ........... 504,404 41,996 8.33 437,640 35,317 8.07
FHLB stock ............................. 5,257 385 7.32 3,354 237 7.07
Interest bearing deposits .............. 7,736 297 3.84 3,221 97 3.01
----- --- ---- ----- -- ----
Total interest earning assets ........ 557,704 45,414 8.14 489,517 38,565 7.88
------ ---- ------ ----
Less: Allowance for loan losses .......... (2,537) (2,221)
------ ------
Non-interest earning assets ............... 37,457 36,383
------ ------
Total assets ......................... $ 592,624 $ 523,679
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts ....................... $ 33,964 $ 925 2.72% $ 36,115 $ 1,047 2.90%
NOW and money market
Accounts ............................. 79,792 2,161 2.71 78,222 1,871 2.39
Certificates of deposit and
other time deposits .................. 309,651 19,039 6.15 279,941 15,155 5.41
FHLB Advances .......................... 91,418 5,304 5.80 52,419 2,800 5.34
Trust Preferred Securities ............. - - - - - -
------- ------ ---- ------- ------ ----
Total interest bearing liabilities ... 514,825 27,429 5.33 446,697 20,873 4.67
------ ---- ------ ----
Non-interest bearing liabilities:
Non-interest bearing deposits .......... 18,427 16,896
Other liabilities ...................... 6,195 6,231
----- -----
Total liabilities .................... 539,447 469,824
Stockholders' equity ...................... 53,177 53,855
------ ------
Total liabilities and
stockholders' equity ............... $ 592,624 $ 523,679
========= =========
Net interest income ....................... $ 17,985 $ 17,692
========= =========
Net interest spread ....................... 2.81% 3.21%
==== ====
Net interest margin ....................... 3.22% 3.61%
==== ====
Ratio of average interest earning
assets to average interest bearing
liabilities ............................... 108.33% 109.59%
====== ======
- --------------------------------------------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(3) Calculations include non-accruing loans in the average loan amounts outstanding.
(4) Includes loans held for sale.
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (change in volume multiplied by
old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are
proportionately allocated between rate and volume variance.
Six Months Ended Year Ended
December 31, June 30,
2002 vs. 2001 2002 vs. 2001
Increase (decrease) Increase (decrease)
Due to change in Due to change in
(Dollars in thousands)
Net Net
Rate Volume Change Rate Volume Change
---- ------ ------ ---- ------ ------
Interest income:
Equity securities ........................... $ - $ (1) $ (1) $ 2 $ (2) $ -
State and political subdivision
securities ................................ (4) 2 (2) 1 3 4
U.S. Treasury and agencies .................. (186) 156 (30) (432) (1,531) (1,963)
Corporate bond .............................. - 39 39 - - -
Mortgage-backed securities .................. (8) (8) (16) (11) (18) (29)
Loans ....................................... (1,188) (22) (1,210) (1,517) 1,566 49
FHLB stock .................................. (50) 9 (41) (109) 49 (60)
Interest bearing deposits ................... (207) 490 283 (205) 914 709
---- --- --- ---- --- ---
Total interest earning assets ............... (1,643) 665 (978) (2,271) 981 (1,290)
------ --- ---- ------ --- ------
Interest expense:
Savings accounts ........................... (182) 292 110 (205) 470 265
NOW and money market accounts .............. (386) 203 (183) (809) 412 (397)
Certificates of deposit and other
time deposits ........................... (2,040) (293) (2,333) (4,399) (81) (4,480)
FHLB advances .............................. 4 1 5 (831) (732) (1,563)
Trust Preferred Securities ................. - 262 262 - 172 172
---- --- --- ---- --- ---
Total interest bearing liabilities ......... (2,604) 465 (2,139) (6,244) 241 (6,003)
------ --- ------ ------ --- ------
Net change in net interest income ......... $ 961 $ 200 $ 1,161 $ 3,973 $ 740 $ 4,713
======= ======= ======= ======= ======= =======
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (change in volume multiplied by
old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are
proportionately allocated between rate and volume variance.
Year Ended June 30,
2001 vs. 2000 2000 vs. 1999
Increase (decrease) Increase (decrease)
Due to change in Due to change in
---------------- ----------------
(Dollars in thousands) Net Net
Rate Volume Change Rate Volume Change
---- ------ ------ ---- ------ ------
Interest income:
Equity securities ..................... $ 5 $ (14) $ (9) $ 26 $ (11) $ 15
State and political subdivision
securities .......................... (1) 1 - 1 (2) (1)
U.S. Treasury and agencies ............ 131 (290) (159) (86) 67 (19)
Corporate Bond ........................ - - - - - -
Mortgage-backed securities ............ 11 (21) (10) (5) (26) (31)
Loans ................................. 1,150 5,529 6,679 (750) 4,171 3,421
FHLB stock ............................ 9 139 148 2 19 21
Interest bearing deposits ............. 33 167 200 (147) (213) (360)
-- --- --- ---- ---- ----
Total interest earning assets ......... 1,338 5,511 6,849 (959) 4,005 3,046
----- ----- ----- ---- ----- -----
Interest expense:
Savings accounts ..................... (62) (60) (122) 126 (63) 63
NOW and money market accounts ........ 252 38 290 216 133 349
Certificates of deposit and other
time deposits ..................... 2,180 1,704 3,884 (246) 727 481
FHLB advances ........................ 260 2,244 2,504 (44) 1,543 1,499
Trust Preferred Securities ........... - - - - - -
----- ----- ----- --- -----
Total interest bearing liabilities ... 2,630 3,926 6,556 52 2,340 2,392
----- ----- ----- --- ----- -----
Net change in net interest income ... $(1,292) $ 1,585 $ 293 $(1,011) $ 1,665 $ 654
======= ======= ======= ======= ======= =======
Non-Interest Income - Non-interest income was $3.2 million for the six months ended December 31, 2002, as compared to $2.6 million
for the 2001 period. The increased level of non-interest income during 2002 was primarily due to increased service fees on deposit
accounts and to a lesser extent, gain on sale of mortgage loans. Offsetting these increases were slight decreases in brokerage and
insurance commissions and other income.
Customer service fees on deposit accounts increased by $711,000 or 50% during 2002 due to growth in overdraft fee income on retail
checking accounts. Gain on sale of mortgage loans increased by $164,000 or 46% for 2002 compared to 2001 as declining market interest
rates continued an increase in consumer refinance activity of 1-4 family fixed-rate residential loans, which the Bank sells into the
secondary market through its subsidiary, First Heartland Mortgage Company. Mortgage banking income depends upon loan demand and
refinance volume which management anticipates will continue at or near current levels for at least the next quarter. Income from
brokerage commissions and insurance sales decreased $46,000 as a result of a decline in demand for these products. Other income
decreased during the 2002 period by $294,000 due to increases in customer fees waived and increased losses on repossessed assets
attributed to the indirect dealer loan program.
Non-interest income was $5.4 million during the fiscal year ended June 30, 2002, $5.1 million during 2001, and $3.9 million during
2000. The increased level of non-interest income during 2002 was primarily due to increased service fees on deposit accounts and to
a lesser extent, gain on sale of mortgage loans. The increase from 2000 to 2001 occurred in all categories with the most significant
increases in service fees on deposit accounts and gains from investment sales.
Service charges on deposit accounts increased by $715,000 or 28% during 2002 due to growth in fee-related customer transactions and
growth in deposits, a result of the general shift in funds from the stock market to bank deposits. Service charges on deposit
accounts were positively affected by the Bank's new overdraft program.
Gain on sale of mortgage loans increased by $125,000 or 24% for 2002 compared to 2001 as declining market interest rates prompted an
increase in consumer refinance activity of 1-4 family fixed-rate residential loans, which the Bank sells into the secondary market
through its subsidiary, First Heartland Mortgage Company. During 2002 the Bank did not report any gains from investment sales
compared to reported gains of $696,000 for 2001. Income from brokerage commissions and insurance sales decreased $96,000 as a result
of a decline in demand for these products.
The increase in non-interest income from fiscal year-end 2000 to 2001 was $1.3 million or 33%. Gains from investment sales were
$696,000 in 2001 compared to $457,000 for 2000, an increase of $239,000. Gains on sale of mortgage loans increased by $172,000 or 48%
during the fiscal year due to increased refinancing activity. Customer service fees charged on deposit accounts increased by $610,000
or 31% during 2001 due to several operational changes made by the Bank, the most significant of which was an increase in overdraft
fees from $20 to $25 per occurrence. Commercial checking accounts became subject to fees assessed on the basis of account analysis.
Insufficient funds, foreign ATM transactions, returned checks, and daily overdraft fees were all increased during 2001. Brokerage
and insurance commissions increased by $175,000 or 38% during the 2001 period due as a result of increased demand and an improved
emphasis on insurance sales within the Bank's lending area. Other sources of income such as trust, and other customer transaction
fees also increased during the 2001 period by $104,000.
Non-Interest Expense - Non-interest expense increased by $316,000 or 4% during the six month period ended December 31, 2002 compared
to the same period in 2001. Factors impacting non-interest expense included an increase in staffing levels and a change in
accounting rules in which goodwill amortization expense from acquisitions is no longer recorded. Moderate increases in non-interest
expense are likely going forward as the Bank anticipates future remodeling and expansion of its banking centers in surrounding
areas. Non-interest expense levels are often measured using an efficiency ratio (non-interest expense divided by the sum of net
interest income and non-interest income). A lower efficiency ratio is indicative of higher bank performance. The Bank's efficiency
ratio improved to 50% in 2002 compared to 53% in 2001.
Employee compensation and benefits increased $542,000 or 16% for 2002. The increase reflects growth in the overall staffing level
from 219 full-time equivalent employees at December 31, 2001 to 241 at December 31, 2002. The Bank's continued emphasis on building
its commercial and retail staff to reflect its commercial bank philosophy was the largest contributing factor.
As a result of adopting new accounting standards on July 1, 2002, the Corporation ceased annual amortization of $832,000 on remaining
goodwill assets of $8.4 million. Annual impairment testing will be required for goodwill with impairment being recorded if the
carrying amount of goodwill exceeds its implied fair value. Goodwill amortization expense reported for the six months ended December
31, 2001 was $416,000.
Non-interest expense increased by $1.7 million or 13% during the fiscal year ended June 30, 2002 compared to 2001. Non-interest
expense also increased from $12.7 million in 2000 to $13.6 million in 2001. Significant factors impacting these increases included
an increase in staffing levels, increased marketing efforts for the Bank's promotional products as well as increases in other
expense. The increase in 2001 was primarily attributable to compensation and employee benefits. The Bank's efficiency ratio was 54%
in 2002 compared to 59% in 2001 and 59% in 2000.
Employee compensation and benefits increased $845,000 or 13% for 2002. The increase reflects growth in the overall staffing level
from 203 full-time equivalent employees at June 30, 2001 to 227 at June 30, 2002. The Bank's continued emphasis on building its
commercial and retail staff to reflect its commercial bank philosophy was the largest contributing factor.
Marketing and advertising costs increased during 2002 by $107,000 or 21%. The increase is attributable to the Bank's television
marketing campaign for the "Simply Free Checking" product, enhanced marketing for the Bank's new overdraft program and the Bank's
commercial business campaign.
Data processing costs increased during 2002 by $125,000 or 9%. The increase reflects the implementation of the Bank's cash
management product, internet banking, the creation of the Bank's new imaging department and processor charges relating to an increase
in the number of users.
The remainder of non-interest expense categories increased by a net of $556,000 or 23% during 2002. The increase is primarily
attributable to increases in costs associated with the new overdraft program, costs associated with postage, stationary and supplies
and other customer account expenses.
The increase in non-interest expense from fiscal year-end 2000 to 2001 was primarily related to employee compensation and benefits.
The increase includes inflationary salary adjustments and reflects growth in the overall staffing level from 170 at June 30, 2000, to
203 at June 30, 2001. Additional staffing was required to achieve a new strategic plan adopted by the Bank in 1999 to develop a
bank-wide service and sales culture. The plan emphasizes expanding account relationships, which requires increasing the number of
associates in banking centers, relationship bankers, business development officers, stockbrokers, and loan officers. The transition
has been responsible for much of the renewed growth in lending and certificates of deposit. Office occupancy and equipment expense
increased by $94,000 in 2001 compared to 2000 due to costs associated with the Bank's new Customer Service Center, which became
operational in July 2000 and the second Bardstown, Kentucky banking center, which reopened in early 2000.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is evaluated quarterly by the Executive Loan Committee and maintained at a level that is considered
sufficient to absorb probable incurred credit losses existing in the loan portfolio. Periodic provisions to the allowance are made
as needed. An appropriate level of the general allowance is determined based on the application of loss percentages to graded loans
by categories. In addition, specific reserves are established for individual loans when deemed necessary. The amount of the
provision for loan losses necessary to maintain an adequate allowance is based upon an analysis of various factors, including changes
in lending policies and procedures; underwriting standards; collection; charge-off and recovery history; changes in national and
local economic business conditions and developments; changes in the characteristics of the portfolio; ability and depth of lending
management and staff; changes in the trend of the volume and severity of past due, non-accrual and classified loans; troubled debt
restructuring and other loan modifications; and results of regulatory examinations.
The methodology for allocating the allowance for loan and lease losses has taken into account the Bank's strategic plan to increase
its emphasis on commercial and consumer lending. The Bank increased the amount of the reserve allocated to commercial loans and
consumer loans in response to the growth of the commercial and consumer loan portfolios and management's recognition of the higher
risks and loan losses in these lending areas. The indirect consumer loan program was initiated in 1999 and is comprised of new and
used automobile, motorcycle and all terrain vehicle loans originated on the behalf of the Bank by a select group of auto dealers
within the service area. The indirect loan program involves a greater degree of risk and is evaluated quarterly and monitored by
the Board of Directors. In light of the greater charge-offs from indirect consumer loans compared to direct consumer loans,
proportionally more of the allowance for consumer loans is allocated for indirect loans than direct loans. As the indirect loan
program has evolved, dealer analysis and underwriting standards have been refined to improve the loan loss experience of the
program. Estimating the reserve is a continuous process. In this regard, the Executive Loan Committee continues to monitor the
performance of indirect consumer loans as well as the Bank's other loan products and updates its estimates as the evidence warrants.
The following table sets forth an analysis of the Bank's loan loss experience for the periods indicated.
Six Months Ended
December 31, Year Ended June 30,
---------------------------------------------------------
(Dollars in thousands) 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Balance at beginning of period ............ $3,735 $2,906 $2,252 $2,108 $1,853 $1,715
Loans charged-off:
Real estate mortgage ................... 5 25 2 36 42 16
Consumer ............................... 419 635 482 147 248 132
Commercial ............................. - 256 15 82 - -
--- --- --- --- --- ---
Total charge-offs ......................... 424 916 499 265 290 148
--- --- --- --- --- ---
Recoveries:
Real estate mortgage ................... - 6 4 1 5 -
Consumer ............................... 74 97 63 8 21 21
Commercial ............................. 30 38 - - - -
--- --- -- -- -- --
Total recoveries .......................... 104 141 67 9 26 21
--- --- -- - -- --
Net loans charged-off ..................... 320 775 432 256 264 127
--- --- --- --- --- ---
Acquired reserves ......................... - - - - 205 -
Provision for loan losses ................. 1,161 1,604 1,086 400 314 265
----- ----- ----- --- --- ---
Balance at end of period .................. $4,576 $3,735 $2,906 $2,252 $2,108 $1,853
====== ====== ====== ====== ====== ======
Allowance for loan losses to net loans .... .86% .72% .56% .48% .52% .52%
Net charge-offs to average
loans outstanding ...................... .12% .15% .09% .06% .07% .04%
Allowance for loan losses to
total non-performing loans ............ 100% 100% 88% 130% 68% 87%
The provision for loan losses was $1.2 million for the six months ended December 31, 2002 compared to $760,000 for the 2001 six month
period. The total allowance for loan losses increased $841,000 to $4.6 million from June 30, 2002 to December 31, 2002. Management
increased the provision and allowance for loan losses due to a change in the loan classification and charge-off estimates, the
increase in non-performing loans, which reflects the generally recognized slowing in the U.S. economy, and continued strong growth in
commercial real estate lending. Net loan charge-offs decreased $62,000 to $320,000 during the 2002 six-month period compared to
$382,000 during 2001. The decrease in charge-offs is primarily related to an increase in recoveries of consumer and commercial loan
charge-offs during the 2002 period.
The provision for loan losses was $1.6 million for the fiscal year ended June 30, 2002 compared to $1.1 million for 2001. The total
allowance for loan losses increased $829,000 to $3.7 million from June 30, 2001 to June 30, 2002. Management increased the provision
and allowance for loan losses due to the increase in non-performing loans and charge-offs for the period, continued strong growth in
commercial real estate lending and the increase in charge-offs and non-performing loans that reflects the generally recognized
slowing in the U.S. economy. Net loan charge-offs increased $343,000 to $775,000 during 2002 compared to $432,000 during 2001. The
increase in charge-offs is primarily related to charge-offs of indirect consumer loans and commercial real estate loans during the
2002 period.
The following table depicts management's allocation of the allowance for loan losses by loan type. Allowance funding and allocation
is based on management's current evaluation of risk in each category, economic conditions, past loss experience, loan volume, past
due history and other factors. Since these factors and management's assumptions are subject to change, the allocation is not
necessarily predictive of future portfolio performance.
December 31, June 30,
2002 2002 2001 2000
---- ---- ---- ----
(Dollars in Amount of Percent of Amount of Percent of Amount of Percent of Amount of Percent of
thousands) Allowance Total loans Allowance Total loans Allowance Total loans Allowance Total loans
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Residential mortgage $ 608 53% $ 645 59% $ 884 62% $1,116 67%
Consumer 1,096 16 1,023 16 953 18 603 16
Commercial 2,872 31 2,067 25 1,069 20 533 17
Total $4,576 100% $3,735 100% $2,906 100% $2,252 100%
Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three
categories of classified loans -- substandard, doubtful and loss. The regulations also contain a special mention and a specific
allowance category. Special mention is defined as loans that do not currently expose an insured institution to a sufficient degree
of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention.
Specific allowance is defined as loans for which the Bank has designated specific reserves to cover specifically identified losses.
Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or
portion thereof is classified as loss, the insured institution must either establish specified allowances for loan losses in the
amount of 100% of the portion of the asset classified loss, or charge off such amount. At December 31, 2002, on the basis of
management's review of the Bank's loan portfolio, the Bank had $4.9 million of assets classified substandard, $409,000 classified as
doubtful, $163,000 classified as specific allowance, $8.3 million classified as special mention and $22,000 of assets classified as
loss as compared to $3.5 million, $0, $206,000, $2.3 million and $100,000 at June 30, 2002.
Classified loan ranges of estimated loss are as follows: Substandard-2.5% to 35%; Doubtful-5% to 50%; Loss-100%; Special Mention-2%
to 6%; and Specific Allowance-100%. The Bank additionally provides a reserve estimate for incurred losses in non-classified loans
ranging from .20% to 3.50%. Allowance estimates are developed by the Bank in consultation with regulatory authorities, actual loss
experience and peer group loss experience and are adjusted for current economic conditions. Allowance estimates are considered a
prudent measurement of the risk of the Bank's loan portfolio and are applied to individual loans based on loan type.
NON-PERFORMING ASSETS
Non-performing assets consist of certain restructured loans where interest rate or other terms have been renegotiated, loans on which
interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The Bank does not have any loans
greater than 90 days past due still on accrual. All loans considered impaired under SFAS 114 are included in non-performing loans.
Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan
terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest
rate or at the fair value of the collateral if the loan is collateral dependent.
Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required
payment on a loan. If the delinquency on a mortgage loan exceeds 90 days and is not cured through normal collection procedures or an
acceptable arrangement is not worked out with the borrower, the Bank institutes measures to remedy the default, including commencing
a foreclosure action. Consumer loans generally are charged off when a loan is deemed uncollectible by management and any available
collateral has been disposed of. Commercial business and real estate loan delinquencies are handled on an individual basis by
management with the advice of the Bank's legal counsel. The Bank anticipates that the increase in non-performing real estate loans
will continue due to the growth of the Bank's loan portfolio.
Interest income on loans is recognized on the accrual basis except for those loans in a non-accrual of income status. The
accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business
conditions and collection efforts that the borrowers' financial condition is such that collection of interest is doubtful, typically
after the loan becomes 90 days delinquent. When interest accrual is discontinued, interest income is subsequently recognized only to
the extent cash payments are received.
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 such time as it is sold. New and used automobile, motorcycle and all terrain vehicles acquired by the Bank as a result of
foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value. Any write-down of the property at the time of acquisition
is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest income.
The following table sets forth information with respect to the Bank's non-performing assets for the periods indicated.
December 31, June 30,
--------------------------------------------------------
(Dollars in thousands) 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Restructured $3,325 $3,350 $ - $ - $ - $ -
Past due 90 days still on accural - - - - - -
Loans on non-accrual status 1,259 386 3,309 1,728 3,082 2,128
----- --- ----- ----- ----- -----
Total non-performing loans 4,584 3,736 3,309 1,728 3,082 2,128
Real estate acquired through
foreclosure 510 660 296 - 109 134
Other repossessed assets 119 119 70 - - -
----- ------ ------ ------ ------ ------
Total non-performing assets $5,213 $4,515 $3,675 $1,728 $3,191 $2,262
====== ====== ====== ====== ====== ======
Interest income that would have
been earned on non-performing loans $ 177 $ 300 $ 276 $ 139 $ 255 $ 182
Interest income recognized
on non-performing loans 158 32 26 7 29 16
Ratios: Non-performing loans
to net loans .87% .72% .64% .37% .77% .60%
Non-performing assets
to net loans .99% .86% .71% .37% .80% .64%
LIQUIDITY
The Bank maintains sufficient liquidity to fund loan demand and routine deposit withdrawal activity. Liquidity is managed by
retaining sufficient liquid assets such as cash and cash equivalents, interest-bearing deposits, principal and interest payments from
loans and securities. If large certificate depositors shift to the Bank's competitors or the stock market in response to interest
rate changes, the Bank has the ability to replenish them through alternative funding sources. While the Bank can use a number of
funding sources to meet liquidity requirements, FHLB borrowings remain a material component of management's balance sheet strategy.
Also, the proceeds of trust preferred securities held by the Corporation are on deposit with a third party and available to the
Corporation or Bank if needed. At December 31, 2002, the Bank had an unused approved line of credit in the amount of $53.9 million
and sufficient collateral to borrow an additional $107.9 million in advances from the FHLB.
CAPITAL
The Corporation on a consolidated basis and the Bank continue to exceed the regulatory requirements for Tier I, Tier I leverage and
total risk-based capital. Management intends to maintain a capital position that meets or exceeds the "well capitalized"
requirements as defined by the FDIC. See Item 1. Business-Supervision and Regulation--Regulatory Capital Requirements. The Bank's
average stockholders' equity to average assets ratio was 8.77% during the six months ended December 31, 2002 compared to 9.10% for
the year ended June 30, 2002.
On March 26, 2002, First Federal Statutory Trust I, a trust subsidiary of the Corporation completed the private placement of 10,000
shares of cumulative trust preferred securities with a liquidation preference of $1,000 per security. The proceeds of the offering
were loaned to the Corporation in exchange for floating rate junior subordinated deferrable interest debentures. Distributions on
the securities are payable quarterly at a rate per annum equal to the 3-month LIBOR plus 3.60%. The Corporation undertook the
issuance of these securities to enhance its regulatory capital position as they are considered as Tier I capital under current
regulatory guidelines. The Corporation intends to use the proceeds for general business purposes and to support the Bank's future
opportunities for growth.
Since 1995, the Corporation has repurchased a total of 732,719 shares under successive stock repurchase programs. Each program has
generally authorized the repurchase of up to 10% of the Corporation's outstanding stock from time to time in the open market or
private transactions during an 18-month period. Management considers repurchasing shares when the financial and other terms of the
purchase and its impact on earnings per share and other financial measures offer an attractive return to stockholders. The
Corporation adopted its most recent plan on March 18, 2003.
On March 12, 2003, the Corporation purchased 194,500 shares of its own common stock at $31.84 per share, the market price on the
date of purchase. As a result, total capital decreased by $6.2 million, which in turn reduced consolidated regulatory capital (see
Note 9). The Corporation and the Bank continue to be well capitalized after the transaction.
OFF BALANCE SHEET ARRANGEMENTS & AGGREGATE CONTRACTUAL OBLIGATIONS
Greater than Greater than
Less than one year to 3 years to More than
Total One year 3 years 5 years 5 years
----- -------- ------- ------- -------
(Dollars in thousands)
Commitments to make loans $ 3,140 $ 3,140 $ - $ - $ -
Unused lines of credit 51,658 16,240 16,020 19,089 309
Standby letters of credit 7,825 4,106 3,579 25 115
FHLB letters of credit 52,260 52,260 - - -
Lease commitments 2,113 272 496 385 960
Mortgage banking rate-lock
Commitments 7,479 7,479 - - -
Commitments to make loans assure the borrower of financing for a specified period of time at a specified rate as long as there is no
violation of any condition established in the contract such as deterioration of the borrower's financial condition. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Standby letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a third party. The
credit risk involved in issuing these letters of credit is essentially the same as the risk involved in issuing loan commitments and
extending credit.
The Bank obtained letters of credit from the FHLB to be used to collateralize public deposits. These letters of credit are secured by
a blanket pledge of eligible one-to-four family residential mortgage loans.
Lease commitments represent the total future minimum lease payments under noncancelable operating leases.
The Corporation's mortgage banking activities include commitments to extend credit, primarily representing fixed rate mortgage loans.
These commitments are generally for a period of 60 to 90 days and are at market rates. To deliver these loans to the secondary
market, the Corporation has entered into "best efforts" forward sales contracts on a loan for loan basis.
IMPACT OF INFLATION & CHANGING PRICES
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating results in historical dollars without considering
changes in the relative purchasing power of money over time due to inflation.
The Bank has an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more
significant impact on the Bank's performance than the effects of general levels of inflation. Periods of high inflation are often
accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As
market interest rates rise or fall in relation to the rates earned on the Bank's loans and investments, the value of these assets
decreases or increases respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, the
Bank manages its exposure to adverse changes in interest rates through asset and liability management activities within guidelines
established by its Asset Liability Committee ("ALCO"). The ALCO, which includes senior management representatives, has the
responsibility for approving and ensuring compliance with asset/liability management polices of the Corporation. Interest rate risk
is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. The ALCO, on an
ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies.
Management considers interest rate risk to be the Bank's most significant market risk.
The Bank utilizes an earnings simulation model to analyze net interest income sensitivity. Potential changes in market interest
rates and their subsequent effects on net interest income are then evaluated. The model projects the effect of instantaneous
movements in interest rates of both 100 and 200 basis points. Assumptions based on the historical behavior of the Bank's deposit
rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently
uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results will differ from the model's simulated results due to
timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of
various management strategies.
The Bank's interest sensitivity profile was asset sensitive at December 31, 2002 compared to being liability sensitive at June 30,
2002. Given a sustained 100 basis point decrease in rates, the Bank's base net interest income would decrease by an estimated 2.83%
at December 31, 2002 compared to an increase of 5.52% at June 30, 2002. Given a 100 basis point increase in interest rates the
Bank's base net interest income would increase by an estimated 1.70% at December 31, 2002 compared to a decrease of 2.57% at June 30,
2002.
The interest sensitivity of the Corporation at any point in time will be affected by a number of factors. These factors include the
mix of interest sensitive assets and liabilities as well as their relative pricing schedules. It is also influenced by market
interest rates, decay rates and prepayment speed assumptions. Our previous disclosures of sensitivity included growth rates for
loans and deposits. To provide improved period-to-period comparisons, the tables are presented without these growth estimates.
As demonstrated by the June 30, and December 31, 2002 sensitivity tables presented below, the Corporation is transitioning away from
a liability sensitive thrift organization to a more balanced, asset sensitive commercial bank institution. The current reporting
period improvement in the Corporation's asset sensitivity is a result of changes in the investment portfolio to a greater extent than
loan products. While lending practices have shifted emphasis to shorter term, variable rate commercial and consumer loans, that
impact will be evidenced in smaller degrees over time. The more dramatic contribution to sensitivity over the June 30 period results
from the redemption of longer-term investments which were reinvested in overnight accounts that immediately reprice during rate
shocks. The Corporation's sensitivity to interest rate changes is presented based on data as of December 31 and June 30, 2002
annualized to a one year period.
December 31, 2002
Decrease in Rates Increase in Rates
200 100 100 200
(Dollars in thousands) Basis Points Basis Points Base Basis Points Basis Points
------------ ------------ ---- ------------ ------------
Projected interest income
Loans $35,590 $37,261 $38,733 $39,982 $41,111
Investments 704 1,309 2,331 3,326 4,324
--- ----- ----- ----- -----
Total interest income 36,294 38,570 41,064 43,308 45,435
Projected interest expense
Deposits 8,149 9,453 11,081 12,830 14,583
Borrowed funds 4,033 4,130 4,267 4,325 4,422
----- ----- ----- ----- -----
Total interest expense 12,182 13,583 15,348 17,155 19,005
Net interest income $24,112 $24,987 $25,716 $26,153 $26,430
Change from base $(1,604) $(729) $437 $714
% Change from base (6.24)% (2.83)% 1.70% 2.78%
June 30, 2002
Decrease in Rates Increase in Rates
200 100 100 200
(Dollars in Thousands) Basis Points Basis Points Base Basis Points Basis Points
------------ ------------ ---- ------------ ------------
Projected interest income
Loans $37,450 $38,864 $39,999 $40,940 $41,784
Investments 3,333 3,520 3,612 3,659 3,723
----- ----- ----- ----- -----
Total interest income 40,783 42,384 43,611 44,599 45,507
Projected interest expense
Deposits 10,174 11,958 14,548 16,170 17,791
Borrowed funds 4,335 4,337 4,338 4,339 4,340
----- ----- ----- ----- -----
Total interest expense 14,509 16,295 18,886 20,509 22,131
Net interest income $26,274 $26,089 $24,725 $24,090 $23,376
Change from base $1,549 $1,364 $(635) $(1,349)
% Change from base 6.26% 5.52% (2.57)% (5.46)%
Item 8. Financial Statements and Supplementary Data
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Table of Contents
Audited Consolidated Financial Statements:
o Report of Independent Auditors 32
o Consolidated Statements of Financial Condition 33
o Consolidated Statements of Income 34
o Consolidated Statements of Comprehensive Income 35
o Consolidated Statements of Changes in Stockholders' Equity 36
o Consolidated Statements of Cash Flows 37
o Notes to Consolidated Financial Statements 38-70
[GRAPHIC OMITTED]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
First Federal Financial Corporation of Kentucky
Elizabethtown, Kentucky
We have audited the accompanying consolidated statements of financial condition of First Federal Financial Corporation of Kentucky as
of December 31, 2002, June 30, 2002 and 2001 and the related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for the six month period ended December 31, 2002 and each of the three years in the period ending
June 30, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of First Federal Financial Corporation of Kentucky as of December 31, 2002, June 30, 2002 and 2001 and the results of its
operations and its cash flows for the six month period ended December 31, 2002 and each of the three years in the period ending June
30, 2002 in conformity with accounting principles generally accepted in the United States of America.
As disclosed in Note 1, the Corporation adopted new accounting guidance for goodwill on July 1, 2002.
Crowe, Chizek and Company LLP
Louisville, Kentucky
January 24, 2003
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data) December 31, June 30,
ASSETS 2002 2002 2001
---- ---- ----
Cash and due from banks ................................................. $ 31,776 $ 40,016 $ 35,464
Federal funds sold ...................................................... 60,000 -- --
------ ------ ------
Cash and cash equivalents .......................................... 91,776 40,016 35,464
Interest bearing deposits ............................................... -- 64,000 --
Securities available-for-sale ........................................... 1,999 1,978 2,013
Securities held-to-maturity: fair value of $16,655 Dec (2002)
$21,750 Jun (2002) and $20,954 Jun (2001) ............................ 16,576 21,715 20,921
Loans held for sale ..................................................... 3,676 1,511 632
Loans receivable, less allowance for loan losses of $4,576 Dec (2002),
$3,735 Jun (2002) and $2,906 Jun (2001) ............................. 524,859 518,750 516,513
Federal Home Loan Bank stock ............................................ 6,314 6,170 5,845
Premises and equipment .................................................. 11,672 11,487 11,454
Real estate owned:
Acquired through foreclosure .......................................... 510 660 296
Held for development .................................................. 721 721 721
Other repossessed assets ................................................ 119 119 70
Goodwill ................................................................ 8,384 8,384 9,215
Accrued interest receivable ............................................. 1,742 1,925 2,025
Other assets ............................................................ 2,108 1,674 1,557
----- ----- -----
TOTAL ASSETS .................................................. $670,456 $679,110 $606,726
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing ................................................. $ 32,391 $ 28,341 $ 21,208
Interest bearing ..................................................... 488,730 501,541 447,617
------- ------- -------
Total deposits ............................................. 521,121 529,882 468,825
Advances from Federal Home Loan Bank .................................... 77,683 77,778 77,298
Trust Preferred Securities .............................................. 9,728 9,715 --
Accrued interest payable ................................................ 504 516 1,970
Accounts payable and other liabilities .................................. 948 1,574 2,476
Deferred income taxes ................................................... 825 1,030 1,565
--- ----- -----
TOTAL LIABILITIES ............................................. 610,809 620,495 552,134
------- ------- -------
STOCKHOLDERS' EQUITY:
Serial preferred stock, 5,000,000 shares
authorized and unissued ............................................ -- -- --
Common stock, $1 par value per share;
authorized 10,000,000 shares; issued and
outstanding, 3,643,706 shares Dec (2002), 3,729,400 shares
Jun (2002) and 3,758,491 shares Jun (2001) ........................ 3,644 3,729 3,758
Additional paid-in capital ............................................. -- 18 21
Retained earnings ...................................................... 55,605 54,483 50,405
Accumulated other comprehensive
income, net of tax ................................................ 398 385 408
--- --- ---
TOTAL STOCKHOLDERS' EQUITY .................................... 59,647 58,615 54,592
------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $670,456 $679,110 $606,726
======== ======== ========
See notes to consolidated financial statements.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Income
Year Ended
Six Months Ended -----------------------------------------
(Dollars in thousands, except per share data) December 31, June 30, June 30, June 30,
2002 2002 2001 2000
---- ---- ---- ----
Interest Income:
Interest and fees on loans ......................... $20,346 $42,045 $41,996 $35,317
Interest and dividends on investments and deposits . 1,210 2,055 3,396 3,225
----- ----- ----- -----
Total interest income ...................... 21,556 44,100 45,392 38,542
------ ------ ------ ------
Interest Expense:
Deposits ........................................... 7,218 17,539 22,125 18,073
Federal Home Loan Bank advances .................... 1,888 3,741 5,304 2,800
Trust Preferred Securities ......................... 288 146 -- --
----- ------ ------ ------
Total interest expense ..................... 9,394 21,426 27,429 20,873
----- ------ ------ ------
Net interest income .................................. 12,162 22,674 17,963 17,669
Provision for loan losses ............................ 1,161 1,604 1,086 400
----- ----- ----- ---
Net interest income after provision for loan losses .. 11,001 21,070 16,877 17,269
------ ------ ------ ------
Non-interest Income:
Customer service fees on deposit accounts .......... 2,139 3,283 2,568 1,958
Gain on sale of mortgage loans ..................... 518 651 526 354
Gain on sale of investments ........................ -- -- 696 457
Brokerage and insurance commissions ................ 230 543 639 464
Other income ....................................... 290 921 716 644
--- --- --- ---
Total non-interest income .................. 3,177 5,398 5,145 3,877
----- ----- ----- -----
Non-interest Expense:
Employee compensation and benefits ................. 4,005 7,262 6,417 5,644
Office occupancy expense and equipment ............. 786 1,488 1,457 1,363
FDIC insurance premiums ............................ 43 85 85 158
Marketing and advertising .......................... 287 612 505 524
Outside services and data processing ............... 855 1,545 1,420 1,259
State franchise tax ................................ 268 472 425 404
Goodwill amortization .............................. -- 832 832 832
Other expense ...................................... 1,353 2,985 2,429 2,507
----- ----- ----- -----
Total non-interest expense ................. 7,597 15,281 13,570 12,691
----- ------ ------ ------
Income before income taxes ......................... 6,581 11,187 8,452 8,455
Income taxes ....................................... 2,199 3,729 2,803 2,792
----- ----- ----- -----
Net Income ........................................... $ 4,382 $ 7,458 $ 5,649 $ 5,663
======= ======= ======= =======
Earnings per share:
Basic ...................................... $ 1.19 $ 1.99 $ 1.50 $ 1.45
Diluted .................................... $ 1.19 $ 1.98 $ 1.50 $ 1.44
See notes to consolidated financial statements.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Comprehensive Income
Six Months Ended
December 31, Year Ended June 30,
------------ -----------------------------
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Net Income .................................... $ 4,382 $ 7,458 $ 5,649 $ 5,663
Other comprehensive income (loss):
Change in unrealized gain (loss)
on securities .......................... 21 (35) 641 (533)
Reclassification of realized amount ...... -- -- (696) (457)
---- ---- ---- ----
Net unrealized gain (loss) recognized in
comprehensive income .................. 21 (35) (55) (990)
Tax effect ............................... (7) 12 19 336
-- -- -- ---
Total other comprehensive income ......... 13 (23) (36) (654)
-- --- --- ----
Comprehensive Income .......................... $ 4,395 $ 7,435 $ 5,613 $ 5,009
======= ======= ======= =======
See notes to consolidated financial statements.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Changes in Stockholders' Equity
Years Ending June 30, 2002, 2001, and 2000
Six Months Ended December 31, 2002
Accumulated
Other
(In thousands, except per Additional Comprehensive
share data) Paid - in Retained Income,
Shares Amount Capital Earnings Net of Tax Total
------ ------ ------- -------- ---------- -----
Balance, July 1, 1999 ............ 4,121 $ 4,121 $ 3,056 $ 49,587 $ 1,098 $ 57,862
Net income ....................... - - - 5,663 - 5,663
Exercise of stock
options, net of redemptions ... 2 2 4 - - 6
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax ........... - - - - (654) (654)
Cash dividends declared
($.72 per share) .............. - - - (2,803) - (2,803)
Stock repurchased ................ (367) (367) (3,060) (4,966) - (8,393)
----- ----- ------ ------ ----- ------
Balance, June 30, 2000 ........... 3,756 3,756 - 47,481 444 51,681
Net income ....................... - - - 5,649 - 5,649
Exercise of stock
options ....................... 4 4 28 - - 32
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax ........... - - - - (36) (36)
Cash dividends declared
($.72 per share) .............. - - - (2,704) - (2,704)
Stock repurchased ................ (2) (2) (7) (21) - (30)
----- ----- ---- ------- ---- ------
Balance, June 30, 2001 ........... 3,758 3,758 21 50,405 408 54,592
Net income ....................... - - - 7,458 - 7,458
Exercise of stock
options, net of redemptions ... 3 3 (3) - - -
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax ........... - - - - (23) (23)
Cash dividends declared
($.72 per share) .............. - - - (2,700) - (2,700)
Stock repurchased ................ (32) (32) - (680) - (712)
----- ----- --- ------ --- ------
Balance, June 30, 2002 ........... 3,729 3,729 18 54,483 385 58,615
Net income ....................... - - - 4,382 - 4,382
Exercise of stock
options, net of redemptions ... 2 2 (2) - - -
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax ........... - - - - 13 13
Cash dividends declared
($.36 per share) .............. - - - (1,316) - (1,316)
Stock repurchased ................ (87) (87) (16) (1,944) - (2,047)
----- ------ ------ ------ ---- ------
Balance, December 31, 2002 ....... 3,644 $ 3,644 $ - $ 55,605 $ 398 $ 59,647
===== ======== ====== ======== ===== ========
See notes to consolidated financial statements.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Cash Flows
Six Months Ended
(Dollars in thousands) December 31, Year Ended June 30,
------------ ------------------------------------
2002 2002 2001 2000
---- ---- ---- ----
Operating Activities:
Net income ................................................. $ 4,382 $ 7,458 $ 5,649 $ 5,663
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ............................... 1,161 1,604 1,086 400
Depreciation on premises and equipment .................. 505 1,052 1,136 1,022
Federal Home Loan Bank stock dividends .................. (144) (325) (384) (237)
Goodwill amortization ................................... -- 832 832 832
Net amortization (accretion) ............................ 26 (42) (72) (61)
Gain on sale of investments available-for-sale .......... -- -- (696) (457)
Gain on sale of mortgage loans .......................... (518) (651) (526) (354)
Origination of loans held for sale ...................... (33,536) (41,461) (29,516) (23,608)
Proceeds on sale of loans held for sale ................. 31,889 41,233 30,150 24,610
Deferred taxes .......................................... (212) (523) (330) 353
Changes in:
Interest receivable ................................... 183 99 7 (428)
Other assets .......................................... (434) (117) (479) (198)
Interest payable ...................................... (12) (1,453) 841 259
Accounts payable and other liabilities ................ (627) (901) 513 (374)
---- ---- --- ----
Net cash from operating activities .......................... 2,663 6,805 8,211 7,422
----- ----- ----- ----
Investing Activities:
Change in interest bearing deposits ....................... 64,000 (64,000) -- --
Sales of securities available-for-sale .................... -- -- 707 462
Purchases of securities available-for-sale ................ -- -- (32) (107)
Purchases of securities held-to-maturity .................. (29,000) (24,000) -- (5,000)
Maturities of securities held-to-maturity ................. 34,126 23,263 22,285 6,332
Net increase in loans ..................................... (7,120) (4,254) (47,474) (71,810)
Purchase of Federal Home Loan Bank stock .................. -- -- (1,380) (644)
Net purchases of premises and equipment ................... (690) (1,085) (880) (1,137)
Purchase of real estate held for development .............. -- -- (275) --
------ ------- ------ -------
Net cash from investing activities .......................... 61,316 (70,076) (27,049) (71,904)
------ ------- ------- -------
Financing Activities:
Net change in deposits .................................... (8,761) 61,057 45,066 24,315
Advances from Federal Home Loan Bank ...................... -- 723 76,090 79,647
Repayments to Federal Home Loan Bank ...................... (95) (243) (79,131) (25,203)
Proceeds from stock options exercised ..................... -- -- 32 6
Net proceeds from issuance of trust preferred securities .. -- 9,698 -- --
Dividends paid ............................................ (1,316) (2,700) (2,704) (2,803)
Common stock repurchased .................................. (2,047) (712) (30) (8,393)
------ ---- --- ------
Net cash from financing activities .......................... (12,219) 67,823 39,323 67,569
------- ------ ------ ------
Increase in cash and cash equivalents ....................... 51,760 4,552 20,485 3,087
Cash and cash equivalents, beginning of year ................ 40,016 35,464 14,979 11,892
------ ------ ------ ------
Cash and cash equivalents, end of year ...................... $ 91,776 $ 40,016 $ 35,464 $ 14,979
======== ======== ======== ========
See notes to consolidated financial statements.
See Notes to consolidated financial statements.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies which First Federal Financial Corporation of Kentucky
follows in preparing and presenting its consolidated financial statements:
Principles of Consolidation and Business - The consolidated financial statements include the accounts of First Federal
Financial Corporation of Kentucky (the Corporation) and its wholly owned subsidiaries, First Federal Savings Bank of
Elizabethtown (the Bank), and First Federal Statutory Trust I. The Bank has two wholly owned subsidiaries, First Service
Corporation of Elizabethtown and First Heartland Mortgage Company. All significant intercompany transactions and
balances have been eliminated.
On October 22, 2002, the Board of Directors of the Corporation adopted a plan to convert the Bank from a federal savings
bank (regulated by the Office of Thrift Supervision) to a commercial bank chartered under Kentucky banking laws
(regulated by the FDIC and Kentucky Department of Financial Institutions). The plan of conversion also provides that
the Corporation will become a bank holding company regulated by the Federal Reserve and will change its fiscal year from
June 30 to December 31. The charter conversion became effective January 8, 2003.
The business of the Bank consists primarily of attracting deposits from the general public and originating mortgage
loans on single-family residences, multi-family housing and commercial property. The Bank also makes home improvement
loans, consumer loans and commercial business loans. The Bank's primary lending area is a region within North Central
Kentucky. The economy within this region is based on agriculture, a variety of manufacturing industries and Fort Knox,
a military installation.
The principal sources of funds for the Bank's lending and investment activities are deposits, repayment of loans and
Federal Home Loan Bank advances. The Bank's principal source of income is interest on loans. In addition, other income
is derived from loan origination fees, service charges, returns on investment securities, gain on sale of mortgage
loans, and brokerage and insurance commissions.
Estimates and Assumptions - The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The allowance for loan losses and the fair value of financial
instruments are particularly subject to change.
Cash Flows - For purposes of the statement of cash flows, the Corporation considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and certain interest bearing deposits. Net cash flows are
reported for interest-bearing deposits, loans, deposits, and premises and equipment.
Interest Bearing Deposits - Deposits with original maturities of greater than 90 days are reported separately. At June
30, 2002, interest-bearing deposits included time deposits with the Federal Home Loan Bank with original maturities of
60 to 180 days at rates of 1.65 % to 2.03%.
Securities - The Corporation classifies its investments into held-to-maturity and available-for-sale. Debt securities
in which the Corporation has a positive intent and ability to hold are classified as held-to-maturity and are carried at
cost adjusted for the amortization of premiums and discounts using the interest method over the terms of the securities.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Securities - (Continued) - Debt and equity securities, which do not fall into this category, nor held for the purpose of
selling in the near term, are classified as available-for-sale. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate component of stockholders' equity until
realized.
Loans Receivable - Loans receivable are stated at unpaid principal balances, less undistributed construction loans, net
deferred loan origination fees and allowance for loan losses. The Bank defers loan origination fees and discounts net
of certain direct origination costs. These net deferred fees are amortized using the level yield method on a
loan-by-loan basis over the lives of the underlying loans.
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 repay, estimated
value of any underlying collateral, and current economic conditions.
Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the
contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of
the allowance for loan losses is allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require an increase, such increase is reported in
the provision for loan losses.
Interest income on loans is recognized on the accrual basis except for those loans in nonaccrual status. The accrual of
interest is discontinued when a loan becomes 90 or more days delinquent. When interest accrual is discontinued, interest
income is subsequently recognized only to the extent cash payments are received.
Mortgage Banking Activities - Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or market value. To deliver closed loans to the secondary market and to control its interest
rate risk prior to sale, the Corporation enters "best efforts" agreements to sell loans. The aggregate market value of
mortgage loans held for sale considers the price of the sales contracts.
On July 1, 2002, the Corporation became subject to new accounting guidance for certain commitments to originate loans.
The new guidance requires loan commitments related to the origination of mortgage loans held for sale to be accounted
for as derivative instruments. The Corporation's commitments are for fixed rate mortgage loans, generally lasting 60 to
90 days and are at market rates when initiated. Considered derivatives, the Corporation had commitments to originate
$7.5 million in loans at December 31, 2002 which it intends to sell after the loans are closed. The impact of adopting
this guidance was not material and substantially all of the gain on sale generated from mortgage banking activities
continues to be recorded when closed loans are delivered into the sales contracts.
Federal Home Loan Bank Stock - Investment in stock of Federal Home Loan Bank is carried at cost.
Premises and Equipment - Land is carried cost. Premises and equipment are stated at cost less accumulated
depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging
from 5 to 50 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives
ranging from 5 to 15 years.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Real Estate Owned - Real estate properties acquired through foreclosure and in settlement of loans are stated at lower
of cost or fair value less estimated selling costs at the date of foreclosure. The excess of cost over fair value less
the estimated costs to sell at the time of foreclosure is charged to the allowance for loan losses. Costs relating to
development and improvement of property are capitalized, whereas costs relating to holding property are not capitalized
and are charged against operations in the current period.
Real estate properties held for development and sale are carried at the lower of cost, including cost of development and
improvement subsequent to acquisition, or fair value less estimated selling costs. The portion of interest costs
relating to the development of real estate is capitalized.
Other Repossessed Assets - Consumer assets acquired through repossession and in settlement of loans, typically
automobiles, are carried at lower of cost or fair value at the date of repossession. The excess cost over fair value at
time of repossession is charged to the allowance for loan losses.
Brokerage and Insurance Commissions - Brokerage commissions are recognized as income on settlement date. Insurance
commissions on loan products (credit life, mortgage life, accidental death, and guaranteed auto protection) are
recognized as income over the life of the loan.
Stock Option Plans - Employee compensation expense under stock option plans is reported using the intrinsic value
method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal
to the market price of the underlying common stock at date of grant. The following table illustrates the effect on net
income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation.
(Dollars in thousands Six Months Ended
except per share data) December 31, Year Ended June 30,
----------------------------
2002 2002 2001 2000
---- ---- ---- ----
Net income:
As reported $4,382 $7,458 $5,649 $5,663
Pro-forma 4,328 7,340 5,545 5,601
Earnings per share:
Basic As reported $ 1.19 $ 1.99 $ 1.50 $ 1.45
Pro-forma 1.18 1.96 1.48 1.43
Diluted As reported $ 1.19 $ 1.98 $ 1.50 $ 1.44
Pro-forma 1.18 1.95 1.47 1.43
The weighted-average assumptions for options granted during the year and the resulting estimated weighted average fair
values per share used in computing pro forma disclosures is presented below. There were no options granted in the
six-month period ended December 31, 2002.
June 30,
------------------------------
2002 2001 2000
---- ---- ----
Assumptions:
Risk-free interest rate 4.94% 5.88% 5.75%
Expected dividend yield 4.44 4.20 2.60
Expected life (years) 10 10 10
Expected common stock
market price volatility 28% 31% 22%
Estimated fair value per share $3.79 $4.71 $7.06
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Income Taxes - Deferred income tax assets and liabilities are determined using the liability method. Under this method,
the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and
tax basis of the various balance sheet assets and liabilities.
Employee Stock Ownership Plan - Compensation expense is based on the market price of shares as they are committed to be
released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings.
Earnings Per Common Share - Basic earnings per common share is net income divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all
stock splits through the date of issuance of the financial statements.
Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities available-for- sale, which are also recognized as a separate
component of equity.
Derivatives - The Corporation only uses derivative instruments as described in "Mortgage Banking Activities."
New Accounting Pronouncements - On October 1, 2002, new guidance was issued on the accounting for financial institution
acquisitions. Under this new guidance, if certain criteria are met, the amount of the unidentifiable intangible asset
resulting from prior financial institutions acquisitions is to be reclassified to goodwill commensurate with the
previously adopted business combination standards. Accordingly, the Corporation reclassified $6.6 million of previously
recognized unidentifiable intangible assets to goodwill effective July 1, 2002. Thus, the acquisition intangibles
consist solely of goodwill, which is no longer amortized. The effect on net income of ceasing goodwill amortization for
the six months ended December 31, 2002 was $416,000 and will be $832,000 on an annual basis.
The effect of not amortizing goodwill, net of tax effects, is summarized as follows:
Six Months Ended
December 31, Year Ended June 30,
2002 2002 2001 2000
---- ---- ---- ----
Reported net income $ 4,382 $ 7,458 $ 5,649 $ 5,663
Add back: goodwill amortization - 631 631 631
--------- ----------- ----------- -----------
Adjusted net income $ 4,382 $ 8,089 $ 6,280 $ 6,294
========= =========== =========== ===========
Basic earnings per share:
Reported net income $ 1.19 $ 1.99 $ 1.50 $ 1.45
Goodwill amortization - .17 .17 .16
---------- ---------- ----------- -----------
Adjusted net income $ 1.19 $ 2.16 $ 1.67 $ 1.61
========== ========== =========== ===========
Diluted earnings per share:
Reported net income $ 1.19 $ 1.98 $ 1.50 $ 1.44
Goodwill amortization - .17 .17 .16
---------- ---------- ----------- -----------
Adjusted net income $ 1.19 $ 2.15 $ 1.67 $ 1.60
========== ========== =========== ===========
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
New Accounting Pronouncements - (Continued) - On July 1, 2002, the Corporation became subject to new accounting guidance
for certain commitments to originate loans as described in "Mortgage Banking Activities."
New accounting standards on asset retirement obligations, restructuring activities and exit costs, operating leases, and
early extinguishment of debt were issued in 2002. Management determined that when the new accounting standards are
adopted in 2003 they will not have a material impact on the Corporation's financial condition or results of operations.
Industry Segments - Segments are parts of a company evaluated by management with separate financial information. The
Corporation's internal information is reported and evaluated in three lines of business-banking, mortgage banking, and
brokerage and insurance. These segments are dominated by banking at a magnitude for which separate individual segment
disclosures are not required.
Reclassifications - Certain amounts for prior periods have been reclassified to conform to the December 31, 2002
presentation.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SECURITIES
The amortized cost basis and fair values of securities are as follows:
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Securities available-for-sale:
December 31, 2002:
Equity securities ................ $ 385 $ 532 $ (3) $ 914
State and municipal .............. 1,010 75 - 1,085
------ ------ ---- ------
Total available-for-sale .... $1,395 $ 607 $ (3) $1,999
====== ====== ==== ======
June 30, 2002:
Equity securities ................ $ 385 $ 545 $ - $ 930
State and municipal .............. 1,010 38 - 1,048
------ ------ ----- ------
Total available-for-sale .... $1,395 $ 583 $ - $1,978
====== ====== ===== ======
June 30, 2001:
Equity securities ................ $ 385 $ 617 $ (5) $ 997
State and municipal .............. 1,010 6 - 1,016
------ ------ ----- ------
Total available-for-sale .... $1,395 $ 623 $ (5) $2,013
====== ====== ==== ======
Gross Gross
Amortized Unrecognized Unrecognized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Securities held-to-maturity:
December 31, 2002:
U.S. Treasury and agencies $13,986 $ 65 $ - $14,051
Corporate Bond 2,000 - - 2,000
Mortgage-backed securities 590 14 - 604
------- ----- ------ -------
Total held-to-maturity securities $16,576 $ 79 $ - $16,655
======= ===== ====== =======
June 30, 2002:
U.S. Treasury and agencies $20,964 $ 58 $ - $21,022
Mortgage-backed securities 751 7 (30) 728
------- ----- ----- -------
Total held-to-maturity securities $21,715 $ 65 $ (30) $21,750
======= ===== ===== =======
June 30, 2001:
U.S. Treasury and agencies $19,917 $ 150 $(104) $19,963
Mortgage-backed securities 1,004 4 (17) 991
------- ----- ----- -------
Total held-to-maturity securities $20,921 $ 154 $(121) $20,954
======= ===== ===== =======
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. SECURITIES - (Continued)
The amortized cost and fair value of securities at December 31, 2002, by contractual maturity, are shown below.
Available-for-Sale Held-to-Maturity
------------------------- -------------------------
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
---- ----- ---- ---------
Due in one year or less $ - $ - $ 1,986 $ 2,008
Due after one year through five years 776 836 12,000 12,043
Due after five years through ten years 234 249 - -
Due after ten years - - 2,000 2,000
Mortgage-backed securities - - 590 604
Equity securities 385 914 - -
------ ------ ------- -------
$1,395 $1,999 $16,576 $16,655
====== ====== ======= =======
The following schedule sets forth the proceeds from sales of available-for-sale securities and the gross realized gains on
those sales:
Six Months Ended
December 31, Year Ended June 30,
-----------------------
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Proceeds from sales $ - $ - $707 $462
Gross realized gains - - 696 457
Investment securities having an amortized cost of $6.5 million and fair value of $6.6 million at December 31, 2002 were
pledged to secure public deposits.
3. LOANS RECEIVABL
Loans receivable are summarized as follows:
December 31, June 30,
(Dollars in thousands) 2002 2002 2001
---- ---- ----
Commercial $ 29,024 $ 21,130 $ 17,844
Real estate commercial 135,191 112,528 88,938
Real estate construction 12,674 10,662 9,079
Residential mortgage 282,437 308,690 329,856
Consumer and home equity 51,215 51,796 54,189
Indirect consumer 20,594 19,640 21,822
------ ------ ------
531,135 524,446 521,728
------- ------- -------
Less:
Net deferred loan origination fees (1,700) (1,961) (2,309)
Allowance for loan losses (4,576) (3,735) (2,906)
------ ------ ------
(6,276) (5,696) (5,215)
------ ------ ------
Loans Receivable $524,859 $518,750 $516,513
======== ======== ========
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS RECEIVABLE - (Continued)
The Bank utilizes eligible real estate loans to collateralize advances and letters of credit from the Federal Home Loan
Bank. At December 31, 2002, June 30, 2002 and 2001, the Bank had approximately $265 million, $292 million and $313 million
in one-to-four family residential mortgage loans pledged under this arrangement.
The allowance for loan loss is summarized as follows:
Six Months Ended
December 31, Year Ended June 30,
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Balance, beginning of year $3,735 $2,906 $2,252 $2,108
Provision for loan losses 1,161 1,604 1,086 400
Charge-offs (424) (916) (499) (265)
Recoveries 104 141 67 9
--- --- -- -
Balance, end of year $4,576 $3,735 $2,906 $2,252
====== ====== ====== ======
Impaired loans are summarized below. There were no impaired loans for the periods presented without an allowance allocation.
June 30,
December 31, ----------------------------
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Year-end impaired loans $4,584 $3,736 $3,309 $ 1,728
Amount of allowance for loan
loss allocated 751 511 324 117
Average impaired loans outstanding 4,066 3,507 2,499 2,688
Interest income recognized 126 201 93 111
Interest income received 126 201 93 111
Non-performing loans were as follows:
June 30,
December 31, --------------
(Dollars in thousands) 2002 2002 2001
---- ---- ----
Restructured $3,325 $3,350 $ -
Loans past due over 90 days still
on accrual - - -
Non accrual loans 1,259 386 3,309
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31, June 30,
(Dollars in thousands) 2002 2002 2001
---- ---- ----
Land $ 1,128 $ 954 $ 954
Buildings 10,374 10,206 10,055
Furniture, fixtures and equipment 7,202 6,854 5,924
----- ----- -----
18,704 18,014 16,933
Less accumulated depreciation (7,032) (6,527) (5,479)
------ ------ ------
$11,672 $11,487 $11,454
======= ======= =======
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. PREMISES AND EQUIPMENT - (Continued)
Certain premises are leased under various operating leases. Rental expense was $134,000, $263,000, $256,000 and $259,600
for the six months ended December 31, 2002 and the years ended June 30, 2002, 2001, and 2000, respectively. Future minimum
commitments under these leases are:
Year Ended
(Dollars in thousands) December 31,
2003 $ 272
2004 253
2005 243
2006 213
2007 172
Thereafter 960
---
$2,113
======
5. DEPOSITS
Time Deposits of $100,000 or more were $94.4 million, $100.1 million and $102.6 million at December 31, 2002, June 30, 2002
and 2001, respectively. At December 31, 2002, scheduled maturities of time deposits are as follows:
(Dollars in thousands) Amount
------
2003 $166,835
2004 99,460
2005 21,669
2006 7,813
Thereafter 9,662
-----
$305,439
========
6. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) of Cincinnati are collateralized by FHLB stock and a blanket pledge of
one-to-four family residential mortgage loans equivalent to 125 percent of the outstanding advances and letters of credit.
At December 31, 2002, the Bank has available collateral to borrow an additional $107.9 million from the FHLB. During
January 2001, the Bank entered into $75 million in convertible fixed rate advances with a maturity of ten years. These
advances are fixed for periods of two to three years. At the end of the fixed term and quarterly thereafter, the FHLB has
the right to convert these advances to variable rate advances tied to the three-month LIBOR index. There is a substantial
penalty if the Corporation prepays the advance before the FHLB exercises its right. At December 31, 2002, June 30, 2002 and
2001, the Bank had $52.3 million, $22.2 million and $0 in letters of credit from the FHLB issued to collateralize public
deposits. Advances from the FHLB at year-end are as follows:
June 30,
December 31, ------------------------------------------
2002 2002 2001
Weighted- Weighted- Weighted-
(Dollars in thousands) Average Average Average
Rate Amount Rate Amount Rate Amount
---- ------ ---- ------ ---- ------
Fixed rate advances:
Mortgage matched advances with
interest rates from 5.30% to 7.80% 6.40% $ 327 6.36% $ 385 6.52% $ 560
Convertible fixed rate advances 4.92% 75,000 4.92% 75,000 4.92% 75,000
Other fixed rate advances 5.04% 2,356 5.45% 2,393 6.76% 1,738
------- ------- -------
Total borrowings $77,683 $77,778 $77,298
======= ======= =======
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. ADVANCES FROM FEDERAL HOME LOAN BANK - (Continued
The aggregate minimum annual repayments of borrowings as of December 31, 2002 is as follows:
(Dollars in thousands)
2003 $ 141
2004 146
2005 151
2006 156
2007 133
Thereafter 76,956
------
$77,683
=======
7. TRUST PREFERRED SECURITIES
On March 26, 2002, the Corporation issued $10.0 million of Floating Rate Capital Securities (Trust Preferred Securities)
through First Federal Statutory Trust I (Trust), a subsidiary of the Corporation. The proceeds of the offering were loaned
by the Trust to the Corporation in exchange for subordinated debentures with terms that are similar to the Trust Preferred
Securities and is the sole asset of the Trust. Issuance costs of $302,000 paid from the proceeds are being amortized to
maturity. The Corporation has guaranteed that the Trust will make distributions to the holders of the Trust Preferred
Securities if the Trust has available funds to make such distribution which is reflected as a liability on the balance sheet
net of issuance costs. Distributions on the Trust Preferred Securities are payable quarterly in arrears at the annual rate
(adjusted quarterly) of three-month LIBOR plus 3.60% (5.39% as of the last adjustment), and are included in interest
expense. The annual rate cannot exceed 11% prior to March 26, 2007.
The Trust Preferred Securities, which mature March 26, 2032, are subject to mandatory redemption, in whole or in part,
upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The
subordinated debentures are redeemable prior to the maturity date at the option of the Corporation on or after March 26,
2007 at their principal amount plus accrued interest. The subordinated debentures are also redeemable in whole or in part
from time to time, upon the occurrence of specific events defined within the trust debenture. The Corporation has the
option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive
quarters.
Trust Preferred Securities are considered as Tier I capital for the Corporation under current regulatory guidelines.
8. INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax return and income tax is apportioned among all
companies based on their taxable income or loss. Provision for income taxes is as follows:
Six Months Ended
December 31, Year Ended June 30,
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Current $2,411 $4,252 $3,133 $2,439
Deferred (212) (523) (330) 353
---- ---- ---- ---
Total income tax expense $2,199 $3,729 $2,803 $2,792
====== ====== ====== ======
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. INCOME TAXES - (Continued)
The provision for income taxes differs from the amount computed at the statutory rates as follows:
Six Months Ended
December 31, Year Ended June 30,
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0% 34.0%
Tax-exempt interest income (.2) (.2) (.2) (.2)
Acquisition intangibles - .7 1.0 1.0
Dividends to ESOP (.3) (.4) (.6) (.6)
Other (.1) (.8) (1.0) (1.2)
Effective rate 33.4% 33.3% 33.2% 33.0%
Temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities that give
rise to significant portions of deferred income taxes relate to the following:
December 31, June 30,
(Dollars in thousands) 2002 2002 2001
---- ---- ----
Deferred tax assets:
Allowance for loan losses $1,404 $ 966 $ 533
Investment securities 5 12 27
Accrued liabilities and other 272 284 262
--- --- ---
1,681 1,263 822
----- ----- ---
Deferred tax liabilities:
Depreciation $ 851 $ 905 $ 872
Net unrealized gain on securities
available-for-sale 205 198 210
Federal Home Loan Bank stock 1,004 955 845
Intangibles 101 - -
Other 345 235 460
--- --- ---
2,506 2,293 2,387
----- ----- -----
Net deferred tax liability $ 825 $1,030 $1,565
====== ====== ======
Federal income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $9.3 million for
the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which would otherwise
total $3.2 million at December 31, 2002, June 30, 2002 and 2001. If the Bank was liquidated or otherwise ceased to be a
bank or if tax laws were to change, the $3.2 million would be recorded as a liability with an offset to expense.
9. STOCKHOLDERS' EQUITY
(a) Charter Conversion - On October 22, 2002, the Board of Directors of the Corporation adopted a plan to convert the Bank from
a federal savings bank to a commercial bank chartered under Kentucky banking laws. The plan also provided that the
Corporation would become a bank holding company. Effective January 8, 2003, the Bank became a Kentucky State
Chartered Commercial Bank and the Corporation became a bank holding company regulated by the Federal Reserve Board.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY
(b) Regulatory Capital Requirement - The Corporation and the Bank must meet various regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on
growth or operations or, in extreme cases, seizure. As of December 31, 2002, both the Corporation on a consolidated
basis and Bank were categorized as well capitalized. The actual and required capital amounts and ratios are
presented below. See Note 19 for subsequent event regarding regulatory capital.
To Be Considered
Well Capitalized
Under Prompt
(Dollars in thousands) For Capital Correction
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------
As of December 31, 2002: Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital (to risk-
weighted assets)
Consolidated $64,566 13.1% $39,314 8.0% $49,142 10.0%
Bank 56,713 11.7 38,703 8.0 48,379 10.0
Tier I capital (to risk-weighted
assets)
Consolidated 59,752 12.2 19,657 4.0 29,485 6.0
Bank 51,913 10.7 19,352 4.0 29,027 6.0
Tier I capital (to average assets)
Consolidated 59,752 8.9 26,735 4.0 33,419 5.0
Bank 51,913 7.9 26,419 4.0 33,024 5.0
To Be Considered
Well Capitalized
Under Prompt
(Dollars in thousands) For Capital Correction
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------
As of June 30, 2002: Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital (to risk-
weighted assets)
Consolidated $62,770 13.5% $37,216 8.0% $46,520 10.0%
Bank 53,049 11.5 37,012 8.0 46,265 10.0
Tier I capital (to risk-weighted
assets)
Consolidated 58,773 12.6 18,608 4.0 27,912 6.0
Bank 49,082 10.6 18,506 4.0 27,759 6.0
Tier I capital (to average assets)
Consolidated 58,773 8.9 26,485 4.0 33,106 5.0
Bank 49,082 7.4 26,191 4.0 32,739 5.0
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. STOCKHOLDERS' EQUITY - (Continued)
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of June 30, 2001:
Total risk-based capital (to risk-
weighted assets)
Consolidated $47,534 11.1% $34,334 8.0% $42,918 10.0%
Bank 46,945 11.0 34,280 8.0 42,850 10.0
Tier I capital (to risk-weighted
assets)
Consolidated 44,347 10.3 17,167 4.0 25,751 6.0
Bank 43,722 10.2 17,140 4.0 25,710 6.0
Tier I capital (to average assets)
Consolidated 44,347 7.3 24,168 4.0 30,210 5.0
Bank 43,722 7.3 23,925 4.0 29,907 5.0
(c) Dividend Restrictions - The Corporation's principal source of funds for dividend payments is dividends received from the
Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the
current year's net profits, combined with the retained net profits of the preceding two years, subject to the
capital requirements described above. During 2003, the Bank could, without prior approval, declare dividends of
approximately $9.4 million plus any 2003 net profits retained to the date of the dividend declaration.
(d) Liquidation Account - In connection with the Bank's conversion from mutual to stock form of ownership during 1987, the Bank
established a "liquidation account", currently in the amount of $738,000 for the purpose of granting to eligible
deposit account holders a priority in the event of future liquidation. Only in such an event, an eligible account
holder who continues to maintain a deposit account will be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account decreases in an amount proportionately corresponding to
decreases in the deposit account balances of the eligible account holders.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the basic and diluted EPS is as follows:
Six Months Ended
(Dollars in thousands, December 31, Year Ended June 30,
except per share data) ------------------------------
2002 2002 2001 2000
---- ---- ---- ----
Net income available to common shareholders .. $4,382 $7,458 $5,649 $5,663
Basic EPS:
Weighted average common shares ............. 3,668 3,753 3,756 3,906
Diluted EPS:
Weighted average common shares ............. 3,668 3,753 3,756 3,906
Dilutive effect of stock options ........... 16 16 5 17
Weighted average common and incremental
shares ................................... 3,684 3,769 3,761 3,923
Earnings Per Share:
Basic ...................................... $ 1.19 $ 1.99 $ 1.50 $ 1.45
Diluted .................................... $ 1.19 $ 1.98 $ 1.50 $ 1.44
Stock options for 7,500, 60,000, 79,500, and 65,000 shares of common stock were not included in the December 31,
2002, June 30, 2002, 2001, and 2000 computation of diluted earning per share because their impact was
anti-dilutive.
11. EMPLOYEE BENEFIT PLANS:
(a) Pension Plans - The Bank is a participant in the Financial Institutions Retirement Fund, a multiple-employer defined benefit
pension plan, covering employees hired before June 1, 2002. Because the plan was curtailed, employees hired on or
after that date are not eligible for membership in the fund. Eligible employees are 100% vested at the completion
of five years of participation in the plan. The Bank's policy is to contribute annually the minimum funding
amounts. Employer contributions and administrative expenses charged to operations for the six months ended December
31, 2002, years ended June 30, 2002, 2001 and 2000 totaled $60,000, $7,000, $0, and $5,000, respectively.
The Bank also has a contributory thrift plan, which covers substantially all of the employees. Under the terms of
the plan, voluntary employee contributions are matched by up to 6% of the employee base pay and employees are 100%
vested at the completion of three years of participation in the plan. Employer contributions and administrative
expenses charged to operations for the six months ended December 31, 2002, years ended June 30, 2002, 2001 and 2000
were $121,000, $223,000, $184,000, and $167,000, respectively.
(b) Employee Stock Ownership Plan - The Corporation has a non-contributory employee stock ownership plan (ESOP) in which
employees are eligible to participate upon completion of one year of service. Employees are vested in accordance
with a schedule, which provides for 100% vesting upon completion of seven years of service.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. EMPLOYEE BENEFIT PLANS - (Continued)
Shares of the Corporation's common stock are acquired in non-leveraged transactions. At the time of purchase, the
shares are released and allocated to eligible employees determined by a formula specified in the plan agreement.
shares in the plan and the fair value of shares released during the year charged to compensation expense were as
follows:
Six Months Ended
December 31, Year Ended June 30,
2002 2002 2001 2000
---- ---- ---- ----
ESOP shares 200,413 199,464 207,045 211,503
Compensation expense $27,000 $54,000 $56,000 $66,000
(c) Stock Option Plan - Under the 1998 Stock Option and Incentive Plan, the Corporation may grant either incentive or
non-qualified stock options to key employees for an aggregate of 166,000 shares of the Corporation's common stock at
not less than fair market value at the date such options are granted. The option to purchase shares vest over
periods of one to five years and expire ten years after the date of grant. At December 31, 2002 options available
for future grant under the 1998 Stock Option Plan totaled 79,000. Of the options outstanding at December 31, 2002,
12,000 were granted under a previous plan. A summary of option transactions is as follows:
December 31, June 30,
2002 2002
Weighted Weighted
Number of Average Number of Average
Options Exercise Options Exercise
Price Price
Outstanding, beginning of year 105,000 $19.34 104,500 $19.18
Granted during year - - 10,000 16.23
Forfeited during year - - - -
Exercised during the year (6,000) 16.67 (9,500) 14.32
Outstanding, end of year 99,000 $19.51 105,000 $19.34
Eligible for exercise at year end 62,300 $18.97 57,300 $18.40
June 30,
-----------------------------------------------------
2001 2000
Weighted Weighted
Number of Average Number of Average
Options Exercise Options Exercise
Price Price
Outstanding, beginning of year 102,230 $19.13 55,064 $15.52
Granted during year 12,000 17.00 52,500 22.53
Forfeited during year (5,000) 24.50 (500) 17.13
Exercised during the year (4,730) 6.88 (4,834) 15.10
Outstanding, end of year 104,500 $19.18 102,230 $19.13
Eligible for exercise at year end 47,900 $16.49 32,230 $14.18
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. EMPLOYEE BENEFIT PLANS - (Continued)
The following table summarizes information about stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------
Weighted Weighted
Weighted Average Average Average
Range of Exercise Number Remaining Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$12.50 20,000 .8 years $12.50 20,000 $ 12.50
$16.00 to $17.00 19,000 7.6 16.54 5,300 16.45
$22.38 to $22.63 52,500 6.7 22.53 32,500 22.59
$24.50 7,500 6.2 24.50 4,500 24.50
----- -----
99,000 5.6 $19.51 62,300 $18.97
====== ======
12. CASH FLOW ACTIVITIES
The following information is presented as supplemental disclosures to the statement of cash flows.
(a) Cash paid for:
December 31, June 30,
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Interest expense $9,406 $22,879 $26,588 $20,613
====== ======= ======= =======
Income taxes $2,615 $ 4,257 $ 3,128 $ 2,973
====== ======= ======= =======
(b) Supplemental disclosure of non-cash activities:
(Dollars in thousands) December 31, June 30,
2002 2002 2001 2000
---- ---- ---- ----
Loans to facilitate sales of real
estate owned and repossessed assets $1,025 $1,006 $477 $783
Transfers from loans to real estate
acquired through foreclosure and
repossessed assets $ 875 $1,419 $843 $674
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statements summarize the financial position, operating results and cash flows of First Federal
Financial Corporation of Kentucky (Parent Company only).
Condensed Statements of Financial Condition
December 31, June 30,
(Dollars in thousands) 2002 2002 2001
---- ---- ----
Assets
Cash and interest bearing deposits ........ $ 7,191 $ 9,363 $ 312
Investment in subsidiaries:
Bank .................................. 61,516 58,620 54,003
Trust ................................. 310 310 --
Securities available-for-sale ............. 408 405 397
Receivable from Bank ...................... 598 266 260
Other assets .............................. 26 38 7
------- ------- -------
$70,049 $69,002 $54,979
======= ======= =======
Liabilities and Stockholders' Equity
Subordinated debentures issued to
Trust, net .......................... $10,038 $10,025 $ --
Other Liabilities ......................... 364 362 387
Stockholders' equity ...................... 59,647 58,615 54,592
------ ------ ------
$70,049 $69,002 $54,979
======= ======= =======
Condensed Statements of Income
Six Months Ended
December 31, Year Ended June 30,
(Dollars in thousands) 2002 2002 2001 2000
---- ---- ---- ----
Dividend from Bank $1,680 $2,940 $4,900 $7,000
Interest income 70 69 21 53
Interest expense (273) (146) - -
Other expenses (116) (197) (170) (165)
---- ---- ---- ----
Income before income tax benefit 1,361 2,666 4,751 6,888
Income tax benefit 136 147 105 93
--- --- --- --
Income before equity in undistributed
net income of subsidiaries 1,497 2,813 4,856 6,981
Equity in undistributed net income of
subsidiaries (distributions in excess
of net income) 2,885 4,645 793 (1,318)
----- ----- --- ------
Net income $4,382 $7,458 $5,649 $5,663
====== ====== ====== ======
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (Continued)
Condensed Statements of Cash Flows
Six Months Ended
(Dollars in thousands) December 31, Year Ended June 30,
2002 2002 2001 2000
---- ---- ---- ----
Operating Activities:
Net income .................................... $ 4,382 $ 7,458 $ 5,649 $ 5,663
Adjustments to reconcile net income to
cash provided by operating activities:
(Equity in undistributed net income
from subsidiaries) distributions in
excess of net income ..................... (2,885) (4,645) (793) 1,318
Amortization ............................... 13 16 - -
Decrease (increase) in other assets ........ 12 (31) (25) 23
(Decrease) increase in other liabilities .... 1 (27) 250 136
----- --- --- ---
Net cash from operating activities .............. 1,523 2,771 5,081 7,140
----- ----- ----- -----
Investing Activities:
Purchases of securities available-for-sale .... - - (32) (107)
Net change in receivable from Bank ............ (332) (6) - -
---- -- --- ---
Net cash from investing activities .............. (332) (6) (32) (107)
---- -- --- ----
Financing Activities:
Proceeds from stock options exercised ........ - - 32 6
Proceeds from subordinated debentures
issued to Trust, net ...................... - 9,698 - -
Dividends paid ............................... (1,316) (2,700) (2,704) (2,803)
Common stock repurchases ..................... (2,047) (712) (30) (8,393)
Net change in payable to Bank ................ - - (2,246) 3,773
------ ----- ------ ------
Net cash from financing activities .............. (3,363) 6,286 (4,948) (7,417)
------ ----- ------ ------
Net increase (decrease) in cash ................. (2,172) 9,051 101 (384)
Cash and interest bearing deposits,
beginning of year ............................ 9,363 312 211 595
----- --- --- ---
Cash and interest bearing deposits,
end of year .................................. $ 7,191 $ 9,363 $ 312 $ 211
======= ======= ======= =======
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Corporation's financial instruments are as follows:
(Dollars in thousands) December 31, 2002 June 30, 2002
---------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 91,776 $ 91,776 $ 40,016 $ 40,016
Interest bearing deposits - - 64,000 64,000
Investment securities:
Securities available-for-sale 1,999 1,999 1,978 1,978
Securities held-to-maturity 16,576 16,655 21,715 21,750
Loans held for sale 3,676 3,731 1,511 1,534
Loans, net 524,859 547,855 518,750 533,665
Federal Home Loan Bank stock 6,314 6,314 6,170 6,170
Accrued interest receivable 1,742 1,742 1,925 1,925
Financial liabilities:
Deposits (521,121) (523,760) (529,882) (535,586)
Advances from Federal
Home Loan Bank (77,683) (85,609) (77,778) (81,268)
Trust Preferred Securities (9,728) (10,000) (9,715) (10,000)
Accrued interest payable (504) (504) (516) (516)
June 30, 2001
-----------------------------
Carrying Fair
Value Value
----- -----
Financial assets:
Cash and cash equivalents $ 35,464 $ 35,464
Interest bearing deposits - -
Investment securities:
Securities available-for-sale 2,013 2,013
Securities held-to-maturity 20,921 20,954
Loans held for sale 632 642
Loans, net 516,513 526,238
Federal Home Loan Bank stock 5,845 5,845
Accrued interest receivable 2,025 2,025
Financial liabilities:
Deposits (468,825) (469,719)
Advances from Federal
Home Loan Bank (77,298) (81,923)
Trust Preferred Securities - -
Accrued interest payable (1,970) 1,970)
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS - (Continued)
The methods and assumptions used by the Corporation in estimating its fair value disclosures for financial instruments are
presented below:
Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, Federal Home Loan Bank
stock, accrued interest receivable and payable, demand deposits, and variable rate loans or deposits that reprice frequently
and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on
the rate and term of the security and information about the issuer. The value of loans held for sale is based on the
underlying sale commitments. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair values of advances from Federal Home Loan Bank are based on current rates for similar
financing. The principal amount of the Trust Preferred Securities is the estimated fair value. The fair value of
off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such
arrangements and is not material.
15. CONTINGENCIES
In the normal course of business, there are various outstanding legal proceedings and claims. In the opinion of management,
after consultation with legal counsel, the disposition of such legal proceedings and claims will not materially affect the
Corporation's consolidated financial position, results of operations or liquidity.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional amount of those instruments. Creditworthiness for
all instruments is evaluated on a case-by-case basis in accordance with the Bank's credit policies. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral
from the customer may be required based on management's credit evaluation of the customer and may include business assets of
commercial customers as well as personal property and real estate of individual customers or guarantors.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK- (Continued)
Commitments to make loans for the Corporation's portfolio, excluding undisbursed portions of loans in process, were as
follows:
(Dollars in thousands) December 31, 2002 June 30, 2002
---------------------------- ---------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
Commitments to make loans $ 1,529 $ 1,611 $ 628 $ -
Unused lines of credit - 51,658 - 45,108
Standby letters of credit - 7,825 - 4,792
------- -------- ----- -------
$ 1,529 $ 61,094 $ 628 $49,900
======= ======== ===== =======
June 30, 2001
----------------------------
Fixed Variable
Rate Rate
Commitments to make loans $ 4,231 $ 389
Unused lines of credit - 38,258
Standby letters of credit - 3,846
------- -------
$ 4,231 $42,493
======= =======
Fixed rate loan commitments at December 31, 2002 were at current rates ranging from 6.25% to 7.75%, 4.00% to 18.00% for
unused lines of credit and primarily at the national prime rate of interest plus .5 to 2% for standby letters of credit.
At December 31, 2002, a reserve of $5.3 million was required as deposits with the Federal Reserve or as cash on hand. The
reserves do not earn interest.
At December 31, 2002 and June 30, 2002 and 2001, the Bank had $52.3 million, $22.2 million and $0 in letters of credit from
the Federal Home Loan Bank issued to collateralize public deposits. These letters of credit are secured by a blanket pledge
of eligible one-to-four family residential mortgage loans. (For additional information see Note 3 on Loans Receivable and
Note 6 on Advances from the Federal Home Loan Bank.)
See Note 1 for discussion on mortgage banking activities.
17. RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the Corporation, including associates of such persons,
are loan and deposit customers of the Bank. Related party deposits at December 31, 2002 and June 30, 2002 and 2001 were
$3.2 million, $2.9 million and $3.6 million. A summary of the related party loan activity, for loans aggregating $60,000 or
more to any one related party, is as follows:
December 31, June 30,
(Dollars in thousands) 2002 2002 2001
---- ---- ----
Beginning of year $1,191 $1,389 $1,283
New loans 381 644 8
Repayments (464) (548) (69)
Other changes 156 (294) 167
--- ---- ---
End of year $1,264 $1,191 $1,389
====== ====== ======
Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting
period.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. SUMMARY OF QUARTERLY FINANCIAL DATA - (Unaudited)
(Dollars in thousands except per share data)
Fiscal Year Ended December 31, 2002: September 30 December 31
------------ -----------
Total interest income $10,865 $10,691
Total interest expense 4,830 4,564
Net interest income 6,035 6,127
Provision for loan losses 726 435
Non-interest income 1,532 1,645
Non-interest expense 3,609 3,988
Net income 2,154 2,228
Earnings per share:
Basic 0.59 0.60
Diluted 0.59 0.60
Fiscal Year Ended June 30, 2002: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $11,486 $11,046 $10,735 $10,833
Total interest expense 6,166 5,368 4,883 5,009
Net interest income 5,320 5,678 5,852 5,824
Provision for loan losses 300 460 415 429
Non-interest income 1,234 1,407 1,328 1,429
Non-interest expense 3,623 3,657 3,913 4,088
Net income 1,752 1,978 1,925 1,803
Earnings per share:
Basic 0.47 0.53 0.51 0.48
Diluted 0.47 0.53 0.51 0.47
Fiscal Year Ended June 30, 2001: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $10,818 $11,301 $11,662 $11,611
Total interest expense 6,603 7,177 6,933 6,716
Net interest income 4,215 4,124 4,729 4,895
Provision for loan losses 195 306 285 300
Non-interest income 1,313 1,464 1,112 1,256
Non-interest expense 3,256 3,349 3,447 3,518
Net income 1,389 1,305 1,404 1,551
Earnings per share:
Basic 0.37 0.35 0.37 0.41
Diluted 0.37 0.35 0.37 0.41
19. SUBSEQUENT EVENT - (Unaudited)
On March 12, 2003, the Corporation purchased 194,500 shares of its own common stock at $31.84 per share, the market price
on the date of purchase. As a result, total capital decreased by $6.2 million, which in turn reduced consolidated
regulatory capital (see Note 9). The Corporation and the Bank continue to be well capitalized.
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 sections captioned "Proposal I - Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Corporation's definitive proxy statement for the Corporation's 2003 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the sections captioned "Summary Compensation Table," "Option Exercises and Year-end Value
Table," "Directors Compensation," and "Retirement Plan" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Voting
Securities and Principal Holders Thereof" in the Proxy Statement
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the sections captioned "Proposal I
- Election of Directors" and "Voting Securities and Principal Holders Thereof" in the Proxy Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements, including any pledge by any person of securities of
the Corporation, the operation of which may at a subsequent date result in a change of control of the
Corporation.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities
Number of securities Remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category Warrants and rights warrants and rights reflected in column (1))
Equity compensation
plans approved by
security holders 99,000 $19.51 79,000
Equity compensation
plans not approved by
security holders - - -
------ ------ ------
Total 99,000 $19.51 79,000
====== ====== ======
Of the options outstanding at December 31, 2002, 12,000 were granted under a previous plan. See additional
information required by this item is incorporated herein by reference to Note 11 of the Notes to
Consolidated Financial Statements in the Annual Report.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the section captioned "Transactions with the
Corporation and the Bank" in the Proxy Statement.
Item 14. Controls and Procedures
Within the 90-day period before the filing date of this report, an evaluation was carried out under the supervision and with
the participation of First Federal Financial Corporation's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge,
effective to ensure that information required to be disclosed by First Federal Financial Corporation in reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. After the date of their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that there were no significant changes in First Federal Financial Corporation's internal
controls or in other factors that could significantly affect its internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Item 16. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the section captioned "Independent Public
Accountants" in the Proxy Statement.
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements Filed
(a) (1) Report of Independent Auditors-Crowe, Chizek and Company LLP
(b) Consolidated Statements of Financial Condition at December 31, 2002, June 30, 2002 and 2001.
(c) Consolidated Statements of Income for the six-month period ended December 31, 2002 and the years ended
June 30, 2002, 2001, and 2000.
(d) Consolidated Statements of Comprehensive Income for the six-month period ended December 31, 2002 and the
years ended June 30, 2002, 2001, and 2000.
(e) Consolidated Statements of Changes in Stockholders' Equity for the six-month period ended December 31,
2002 and the years ended June 30, 2002, 2001, and 2000.
(f) Consolidated Statements of Cash Flows for the six-month period ended December 31, 2002 and the years
ended June 30, 2002, 2001, and 2000.
(g) Notes to Consolidated Financial Statements
2. Financial Statements Schedules
All financial statement schedules have been omitted, as the required information is either inapplicable or included
in the financial statements or related notes.
3. Exhibits
(3)(a) Articles of Incorporation *
(3)(b) Bylaws *
(10)(b) First Federal Savings Bank of Elizabethtown Stock Option and Incentive Plan, as amended**
(21) Subsidiaries of the Registrant
(23)(a) Consent of Crowe, Chizek and Company LLP, Certified Public Accountants
(99)(a) Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act
(99)(b) Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
4. Reports on Form 8-K
The Corporation filed a Form 8-K on November 29, 2002 announcing its plan to convert its wholly owned banking
subsidiary, First Federal Savings Bank, from a federal savings bank to a commercial bank chartered under Kentucky
banking laws. The plan of conversion also provided that the Corporation would become a bank holding company and change
its fiscal year end from June 30 to December 31.
* Incorporated by reference to the Corporation's Form S-4 Registration Statement (No. 33-30582).
** Incorporated by reference to Exhibit 10(b) of the Corporation's 1998 definitive proxy statement.
62
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.
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY
Date: 3/18/03 By: /s/ B. Keith Johnson
--------------------
B. Keith Johnson
President and Chief Executive Officer
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ B. Keith Johnson By: /s/ Bob Brown
-------------------- -------------
B. Keith Johnson Bob Brown
Principal Executive Officer Director
& Director
Date: 3/18/03 Date: 3/18/03
By: /s/ Wreno M. Hall By: /s/ Diane E. Logsdon
----------------- ---------------------
Wreno M. Hall Diane E. Logsdon
Director Director
Date: 3/18/03 Date: 3/18/03
By: /s/ J. Alton Rider By: /s/ John L. Newcomb, Jr.
------------------ ------------------------
J. Alton Rider John L. Newcomb, Jr.
Director Director
Date: 3/18/03 Date: 3/18/03
By: /s/ Walter D. Huddleston By: /s/ Michael Thomas, DVM
------------------------ ------------------------
Walter D. Huddleston Michael Thomas, DVM
Director Director
Date: 3/18/03 Date: 3/18/03
By: /s/ Stephen Mouser By: /s/ Charles Chaney
------------------ --------------------
Stephen Mouser Charles Chaney
Director Chief Operating Officer,
Chief Financial Officer &
Principal Accounting Officer
Date: 3/18/03 Date: 3/18/03
By: /s/ Gail Schomp
----------------
Gail Schomp
Director
Date: 3/18/03
CERTIFICATIONS
I, B. Keith Johnson, certify that:
1) I have reviewed this annual report on Form 10-K of First Federal Financial Corporation of Kentucky;
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this annaul report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ B. Keith Johnson
----------------------
B. Keith Johnson
President and Chief Executive Officer
64
CERTIFICATIONS
I, Charles Chaney, certify that:
1) I have reviewed this annual report on Form 10-K of First Federal Financial Corporation of Kentucky;
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annaul report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annaul report whether there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ Charles Chaney
------------------
Charles Chaney
Chief Operating Officer,
Chief Financial Officer &
Principal Accounting Officer
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(3) (a) Articles of Incorporation *
(3) (b) Bylaws*
(10)(b) First Federal Savings Bank of Elizabethtown Stock Option and Incentive Plan, as amended **
(21) Subsidiaries of the Registrant
(23)(a) Consent of Crowe, Chizek and Company LLP, Certified Public Accountants
(99)(a) Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act
(99)(b) Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
* Incorporated by reference to the Corporation's Form S-4 Registration Statement (No. 33-30582).
** Incorporated by reference to Exhibit 10(b) of the Corporation's 1998 definitive proxy statement.
EXHIBIT 21
Subsidiaries of the Registrant
Parent
------
First Federal Financial Corporation of Kentucky
State of Percentage
Subsidiaries Incorporation Owned
------------ ------------- -----
First Federal Savings Bank United States 100%
of Elizabethtown
First Service Corporation Kentucky 100%
of Elizabethtown (a)
First Heartland Mortgage Kentucky 100%
of Elizabethtown (a)
(a) Wholly-owned subsidiaries of First Federal Savings Bank of Elizabethtown.
EXHIBIT 23(a) - CONSENT OF CROWE, CHIZEK AND COMPANY LLP
We hereby consent to the incorporation by reference in the Form S-8 Registration Statement No. 33-30582 of First Federal Financial
Corporation of Kentucky of our report dated January 24, 2003 on the consolidated financial statements of First Federal Financial
Corporation of Kentucky as of December 31, 2002, June 30, 2002 and 2001 and for the six-month period ended December 31, 2002 and each
of the three years in the period ending June 30, 2002 as included in the registrant's annual report on Form 10-K.
Crowe, Chizek and Company LLP
Louisville, Kentucky
March 28, 2003
EXHIBIT 99 (a)
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Certification of Principal Executive Officer for Annual Report on Form 10-K
I, B. Keith Johnson, President & Chief Executive Officer of First Federal Financial Corporation of Kentucky, certify that to my
knowledge:
1. The annual report fully complies with the requirements of section 13 (a) of the Securities Exchange Act of 1934 and;
2. The information contained in the annual report fairly presents, in all material respects, the financial condition and
results of operations of the Company;
Date: March 28, 2003 By: /s/ B. Keith Johnson
---------------------
B. Keith Johnson
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the
Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99 (b)
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Certification of Principal Financial Officer for Annual Report on Form 10-K
I, Charles Chaney, Chief Operating Officer, Chief Financial Officer & Principal Accounting Officer of First Federal Financial
Corporation of Kentucky, certify that to my knowledge:
1. The annual report fully complies with the requirements of section 13 (a) of the Securities Exchange Act of 1934 and;
2. The information contained in the quarterly report fairly presents, in all material respects, the financial condition and
results of operations of the Company;
Date: March 28, 2003 By: /s/ Charles Chaney
------------------
Charles Chaney
Chief Operating Officer,
Chief Financial Officer &
Principal Accounting Officer
A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the
Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
