SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 2001.
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
XCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_____ to______
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 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 September
15, 2001, was $63,894,347. 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 September 15, 2001, there were issued and outstanding 3,758,491
shares of the registrant's common stock, of which directors and executive
officers held 658,195 shares and more than 5% beneficial owners held 207,045
shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Definitive Proxy Statement for the 2001 Annual
Meeting of Shareholders 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 such
statements. Some of the events or circumstances that could cause actual results
to differ from those indicated by forward-looking statements include, but are
not limited to, changes in economic conditions in the markets served by the
Corporation, in Kentucky and the surrounding region, or in the nation as a
whole; changes in interest rates; the impact of legislation and regulation; the
Corporation's ability to offer competitive banking products and services;
competition from other providers of financial services, the continued growth of
the markets in which the Corporation operates; and the Corporation's ability to
expand into new markets and to maintain profit margins in the face of pricing
pressure. All of these events and circumstances are difficult to predict and
many of them are beyond the Corporation's control.
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 operating the business of a savings bank
through First Federal. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to First
Federal and its subsidiaries.
The Bank
First Federal is a federally chartered savings bank headquartered in
Elizabethtown, Kentucky. The business of First Federal consists primarily 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. In April 1993, the Bank established a full
service trust department to serve the fiduciary needs of its customers. 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. First Federal also invests in 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 operating expenses.
2
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 is subject to regulation,
examination and supervision by the Office of Thrift Supervision ("OTS"). The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
and administered by the Federal Deposit Insurance Corporation ("FDIC").
LENDING ACTIVITIES
GENERAL. The principal lending activity of First Federal is the
origination of conventional first mortgage loans secured by residential
property. Residential mortgage loans are generally underwritten according to
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) guidelines. The Bank also engages in commercial real estate,
consumer and commercial business lending. 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, LaRue and Bullitt
counties in the state of Kentucky.
The following table presents a summary of the Bank's loan portfolio by
category for each of the last five years. 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,
---------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ - ------ -
Type of Loan:
Real Estate:
Mortgage $328,297 63.12% $308,507 65.16% $297,574 73.94% $282,503 79.18% $266,599 80.91%
Construction 9,079 1.75 8,975 1.89 11,430 2.84 5,960 1.67 8,346 2.53
Commercial 88,821 17.08 64,828 13.69 32,729 8.13 22,169 6.21 17,141 5.20
Consumer and
home equity 54,189 10.42 59,692 12.61 48,281 12.00 45,136 12.65 35,467 10.76
Indirect consumer 21,822 4.20 15,186 3.21 762 .19 - - - -
Commercial,
other 17,844 3.43 16,295 3.44 11,692 2.90 1,020 .29 1,953 .60
-------- ------- -------- ------ -------- ------ -------- ------ -------- ------
Total loans $520,052 100.00% $473,483 100.00% $402,468 100.00% $356,788 100.00% $329,506 100.00%
======== ======== ======== ======= ======== ======= ======== ======= ======== =======
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
June 30, 2001, regarding the dollar amount of loans 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
JUNE 30, JUNE 30, JUNE 30, TOTAL
2002 2001 2001 LOANS
---- ---- ---- -----
(DOLLARS IN THOUSANDS)
Real estate mortgage $ 728 $ 10,325 $317,244 $328,297
Real estate construction (1) 8,641 438 - 9,079
Consumer 9,209 63,552 3,250 76,011
Commercial, financial and
agricultural 19,784 47,191 39,690 106,665
------ -------- -------- -------
Total $38,362 $121,506 $360,184 $520,052
======= ======== ======== ========
(1) These loans will become permanent real estate loans upon completion of
construction.
3
The following table reflects a breakdown of loans maturing after one
year, by fixed and adjustable rates.
FLOATING OR
FIXED RATES ADJUSTABLE RATES TOTAL
(DOLLARS IN THOUSANDS)
Real estate mortgage $252,403 $ 75,166 $327,569
Real estate construction 438 - 438
Consumer 59,545 7,257 66,802
Commercial, financial and
agricultural 72,442 14,439 86,881
-------- -------- --------
Total $384,828 $ 96,862 $481,690
======== ======== ========
RESIDENTIAL REAL ESTATE & CONSTRUCTION LENDING. The Bank's primary
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 an ARM with an annual
adjustment, which is tied to various national indeces with a maximum adjustment
of 2% annually, and a lifetime cap of 15%. As of June 30, 2001, approximately
22.9% of the Bank's 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 80% of the appraised value and 95% on certain
mortgages, with the requirement that private mortgage insurance be obtained for
loans with loan-to-value ratios in excess of 90%. The Bank generally limits the
loan-to-value ratio to 80% on second mortgages on one-to-four-family dwellings.
First Federal's residential lending activities also include loans
secured by multi-family residential property, consisting of properties with more
than four separate dwelling units. These loans amounted to $12.2 million of the
loan portfolio at June 30, 2001. 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.
Construction loans involve additional risks as a result of the fact
that 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 is 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. First Federal originates loans secured
by existing commercial properties primarily on residential real estate. The
loans are secured by real estate located in Kentucky. 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 June 30, 2001, the Bank
had $88.8 million outstanding in commercial real estate loans. The security for
commercial real estate loans includes retail businesses, warehouses, churches,
apartment buildings and motels. The largest commercial real estate loan
originated during the June 30, 2001, fiscal year had a balance of $4.4 million.
Commercial real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers and may also involve higher loan
principal amount to security property appraisal value ratios as compared to
loans secured by residential real estate. In addition, the payment experience of
loans secured by income producing properties is typically dependent 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.
4
CONSUMER LOANS. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans of up to 35% of their
assets. This limit may be exceeded for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and loans secured by
savings accounts. The consumer loans granted by the Bank have included 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. In 1999,the Bank developed a dealer loan program in our Meade County
banking center that would serve all areas of operation for the Bank. The program
is producing a large volume of consumer loans at higher yields than our mortgage
portfolio. At June 30, 2001, total loans under the dealer loan program totaled
$21.8 million. As of June 30, 2001, consumer loans outstanding were $76 million
or approximately 14.6% of the Bank's total gross loan portfolio. These loans
involved 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
June 30, 2001, these loans totaled $20.2 million.
In view of the riskier nature of consumer lending, the Bank has
developed what management believes are conservative underwriting standards. In
applying these standards, the Bank obtains detailed financial information and
credit bureau reports concerning each applicant. In addition, the relationship
of the loans to the value of the collateral is considered.
COMMERCIAL BUSINESS LENDING. 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. However, commercial loans generally carry a
higher yield and are made for a shorter term than real estate loans. Commercial
business loans outstanding at June 30, 2001 totaled $17.8 million. The Bank
offers a commercial line of credit, which is a revolving line of credit secured
by the equity in the property, primarily real estate, of a business. As of June
30, 2001, these loans totaled approximately $8.5 million.
LOAN UNDERWRITING POLICIES. During the loan approval process, First
Federal assesses both the borrower's ability to repay the loan and the adequacy
of the underlying security. Potential residential borrowers complete an
application, which is submitted to a salaried loan officer. As part of the loan
application process, qualified fee appraisers inspect and appraise the property,
which is offered to secure the loan. The Bank also obtains information
concerning the income, financial condition, employment and credit history of the
applicant. First Federal analyzes the loan application and the property to be
used as collateral and subsequently approves or denies the loan request. In
connection with the origination of single-family residential adjustable rate
mortgage loans, borrowers are qualified at a rate of interest equal to the fully
accrued index rate. It is the policy of management to make loans to borrowers
who not only qualify at the initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
ORIGINATION, PURCHASES AND SALES. Historically, all residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations are generally attributable
to referrals from real estate brokers and builders, radio and periodical
advertising, depositors and walk-in customers. Commercial loan origination have
been obtained by direct solicitation, and consumer loan origination by walk-in
customers in response to the Bank's advertising, as well as by direct
solicitation. The Bank has not purchased any loans in the past five fiscal
years. For information regarding loans sold in the secondary market, see
"Subsidiary Activities" on page 13.
LOAN COMMITMENTS. Conventional loan commitments by the Bank are granted
for periods of 30 days. The total amount of the Bank's outstanding commitments
to originate real estate loans at June 30, 2001, was approximately $4.6 million.
It has been the Bank's experience that few commitments expire unfunded.
LOAN FEES. In addition to interest earned on loans, certain fees are
received for committing to and ultimately originating loans. The Bank also
receives other fees and charges relating to existing loans, which include
prepayment penalties, late charges and fees for loan modifications. Management
believes that these fees and charges do not materially affect operating results.
5
NON-PERFORMING ASSETS. Non-performing assets consist of 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 loans 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 increase, such increase is reported in the provision for loan
losses. 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 nonaccrual 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. 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. 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 is charged to the allowance for loan losses.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
AT JUNE 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Past due 90 days still on accural $ - $ - $ - $ - $ -
Loans on non-accrual status (1) 2,720 1,562 2,529 2,128 1,550
------ ------ ------ ------ ------
Total non-performing loans 2,720 1,562 2,529 2,128 1,550
Real estate acquired through
Foreclosure 296 - 109 134 184
Repossessed assets 70 - - - -
------ ------ ------ ------ ------
Total non-performing assets $3,086 $1,562 $2,638 $2,262 $1,734
====== ====== ====== ====== ======
Interest income that would have
been earned and received on
non-accrual loans $ 227 $ 126 $ 209 $ 182 $ 131
Ratios: Non-performing loans
to loans .52% .33% .63% .60% .47%
Non-performing assets
to total assets .51% .28% .54% .55% .46%
-------------------------------------------------------
(1) Loans on non-accrual status include impaired loans.
6
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The allowance for loan losses is
regularly evaluated by management and maintained at a level believed to be
adequate to absorb loan losses in the Bank's lending portfolios. Periodic
provisions to the allowance are made as needed. An appropriate level of the
general allowance is determined based on the application of projected risk
percentages to graded loans by categories. In addition, specific reserves are
established for individual loans when deemed necessary by management. The amount
of the provision for loan losses necessary to maintain an adequate allowance is
based upon an assessment of loan quality, changes in the size and character of
the loan portfolio, consultation with regulatory authorities, delinquency
trends, economic conditions, industry trends, historical charge-offs,
recoveries, and other information. Management monitors the commercial real
estate loan portfolio closely, recognizing that commercial loans carry a greater
risk of loss than residential real estate loans, and believes it has, based on
information presently available, adequately provided for loan losses at June 30,
2001. Although management believes it uses the best information available to
make allowance provisions, future adjustments, which could be material, may be
necessary if management's assumptions differ significantly from the loan
portfolio's actual performance.
The following table sets forth an analysis of the Bank's loan loss experience
for the periods indicated.
YEAR ENDED JUNE 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period $2,252 $2,108 $1,853 $1,715 $1,613
------ ------ ------ ------ ------
Loans charged-off:
Real estate mortgage 2 36 42 16 17
Consumer 482 147 248 132 114
Commercial 15 82 - - -
--- --- --- --- ---
Total charge-offs 499 265 290 148 131
--- --- --- --- ---
Recoveries:
Real estate mortgage 4 1 5 - -
Consumer 63 8 21 21 33
Commercial - - - - -
Total recoveries 67 9 26 21 33
--- --- --- --- --
Net loans charged-off 432 256 264 127 98
--- --- --- --- --
Acquired reserves - - 205 - -
Provision for loan losses 1,086 400 314 265 200
----- --- --- --- ---
Balance at end of period $2,906 $2,252 $2,108 $1,853 $1,715
------ ------ ------ ------ ------
Net charge-offs to average
loans outstanding .086% .058% .068% .037% .031%
Allowance for loan losses to
total non-performing assets 94% 144% 80% 85% 99%
The provision for loan losses was $1.1 million for 2001 compared to
$400,000 for the 2000 period. The increase in the provision is a result of the
increase in charge-offs for the period and to compensate for the Bank's
continued strong loan growth, particularly the commercial and the indirect
consumer loan portfolios. Net loan charge-offs increased $176,000 to $432,000
for 2001 compared to $256,000 for the 2000 period. The increase in charge-offs
is primarily related to charge-offs of indirect consumer loans during the 2001
period.
7
The following table is 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 are subject to change, the allocation is not necessarily
predictive of future portfolio performance.
---------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
Real estate mortgage $1,399 65% $1,411 67% $1,546 77%
Consumer 953 15 603 16 472 12
Commercial 554 20 238 17 90 11
------ ------ ------ ------ ------ ------
Total $2,906 100.00% $2,252 100.00% $2,108 100.00%
====== ======= ====== ======= ====== =======
There were no material changes in estimation methods or assumptions
affecting allowance allocation. Any reallocation to the allowance is primarily
indicative of changes in loan portfolio mix, not changes in loan concentrations
or terms.
Federal regulations require insured institutions to classify their own
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, classify them. The regulations provide for three
classifications of asset categories -- substandard, doubtful and loss. The
regulations also contain a special mention category, defined as assets which 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. 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 June 30, 2001, on the basis of management's review of the Bank's
loan portfolio, the Bank had $2.7 million of assets classified substandard,
$248,000 of assets classified as doubtful and $324,000 of assets classified as
loss.
Each element of the allowance was determined by applying the following
risk percentages to each grade of loan: Substandard-2.5% to 20%; Doubtful-5% to
50%; Loss-100%; and Special Mention-2% to 6%. The risk percentages are developed
by the Bank in consultation with regulatory authorities, actual loss experience,
peer group loss experience and are adjusted for current economic conditions. The
risk percentages are considered a prudent measurement of the risk of the Bank's
loan portfolio. Such risk percentages are applied to individual loans based on
loan type.
INVESTMENT SECURITIES
Interest on securities provides the largest source of income for First
Federal after interest on loans, constituting 7.5% of the total interest income
for fiscal year 2001. First Federal maintains its liquid assets at a level
believed adequate to meet requirements of normal banking activities and
potential savings outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is provided. As of June 30, 2001,
First Federal's liquidity ratio (liquid assets as a percentage of deposits and
short-term borrowings) was 6.01%.
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, 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. See Note 2 of Notes to Consolidated Financial Statements for
further information concerning the Bank's investment portfolio.
8
The following table sets forth the carrying value of the Bank's securities
portfolio at the dates indicated. At June 30, 2001, the market value of the
Bank's securities portfolio was $23 million.
AT JUNE 30
-------------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Equity securities $ 996 $ 1,105 $ 1,948
Obligations of states and political
Subdivisions 1,017 943 988
----- ------ -------
Total available-for-sale $ 2,013 $ 2,048 $ 2,936
======= ======= =======
Securities held-to-maturity:
U.S. Treasury and agencies $19,917 $41,860 $42,814
Mortgage-backed securities 1,004 1,274 1,590
----- ------ -------
Total held-to-maturity $20,921 $43,134 $44,404
======= ======= =======
The following table sets forth the scheduled maturities, amortized cost,
fair value and weighted average yields for the Bank's securities at June
30, 2001.
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD*
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Due after one year through five years $ 357 $ 360 4.38%
Due after five years through ten years 653 657 4.40
Equity securities 385 996 3.38
------ -------
Total available-for-sale $1,395 $ 2,013
====== =======
Securities held-to-maturity:
Due after one year through five years $ 6,921 $ 7,071 6.75
Due after five years through ten years 11,996 11,913 6.53
Due after ten years 1,000 979 6.75
Mortgage-backed securities 1,004 991 7.44
------- --------
Total held-to-maturity $20,921 $20,954
======= =======
*The weighted average yields are calculated on amortized cost on a
non tax-equivalent basis.
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have
traditionally been an important source of the Bank's funds for use in lending
and for other general business purposes. In addition to deposit accounts, the
Bank derives funds from loan repayments, FHLB advances, other borrowings and
operations. Borrowings may be used on a short-term basis to compensate for
reductions in deposits or deposit inflows at less than projected levels and may
be used on a longer-term basis to support expanded lending activities.
9
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. 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. The Bank relies primarily on customer service
and long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits.
As of June 30, 2001, approximately 31% of First Federal'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 First Federal's 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 following table sets forth the amount of deposits as of June 30, 2001 by
various interest rate categories.
WEIGHTED
AVERAGE PERCENT
INTEREST OF
RATE CATEGORY BALANCES (1) DEPOSITS
---- -------- ------------ --------
- % Non-interest bearing demand accounts $ 21,208 4.52%
1.60 NOW demand accounts 58,354 12.45
2.60 Savings accounts 34,833 7.43
3.27 Money market deposit accounts 30,799 6.57
6.44 Certificates of deposit 288,256 61.48
5.21 Individual Retirement Accounts 35,375 7.55
------- -------
$468,825 100.00%
======== =======
(1) Dollars in thousands.
The following table indicates at June 30, 2001 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 $ 30,457
Three through six months 26,502
Six through twelve months 23,133
Over twelve months 22,485
------
Total $102,577
========
10
The following table sets forth the average balances and interest rates based on
month-end balances for various deposit categories during the periods indicated.
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
(DOLLARS IN THOUSANDS)
Non-interest bearing
demand accounts $18,427 - % $ 16,896 - % $ 14,651 - %
Demand deposit and
money market accounts 79,792 2.71 78,222 2.39 72,224 2.11
Savings deposits 33,964 2.72 36,115 2.90 38,494 2.56
Certificates of deposit 309,651 6.15 279,941 5.41 266,575 5.50
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 to extend the term of its liabilities. Advances from the FHLB
are typically secured by the Bank's stock in the FHLB and substantially all of
the Bank's first mortgage loans. At June 30, 2001 First Federal had $77.3
million in advances outstanding from the FHLB and the capacity to increase its
borrowings an additional $39.6 million.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings banks and certain other member financial institutions. As a
member, First Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to credit-worthiness 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.
AT JUNE 30,
----------------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Average balance outstanding $91,418 $23,560 $41,990
Maximum amount outstanding at
any month-end during the period 111,026 25,894 43,441
Year end balance 77,298 25,894 43,249
Weighted average interest rate:
At end of year 4.89% 5.25% 5.39%
During the year 5.80% 5.52% 5.68%
11
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 1999
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
ASSETS (DOLLARS IN THOUSANDS)
Interest earning assets:
Equity securities $ 1,005 $ 34 3.38% $ 1,432 $ 43 3.00% $ 2,109 $ 28 1.33%
State and political subdivision
Securities (1) 980 67 6.84 960 67 6.98 992 68 6.85
U.S. Treasury and agencies 37,207 2,552 6.86 41,507 2,711 6.53 40,506 2,730 6.74
Mortgage-backed securities 1,115 83 7.44 1,403 93 6.63 1,786 124 6.94
Loans receivable (2) (3) 504,404 41,996 8.33 437,640 35,317 8.07 386,132 31,896 8.26
FHLB stock 5,257 385 7.32 3,354 237 7.07 3,082 216 7.01
Interest bearing deposits 7,736 297 3.84 3,221 97 3.01 8,635 457 5.29
------ ----- ---- ------ ------ ---- ------- ------ ----
TOTAL INTEREST EARNING ASSETS 557,704 45,414 8.14 489,517 38,565 7.88 443,242 35,519 8.01
------ ---- ------ ---- ------ ----
Less: Allowance for loan losses (2,537) (2,221) (2,071)
Non-interest earning assets 37,457 36,383 37,636
-------- -------- --------
TOTAL ASSETS $592,624 $523,679 $478,807
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $ 33,964 $ 925 2.72% $36,115 $ 1,047 2.90% $38,494 $ 984 2.56%
NOW and money market
Accounts 79,792 2,161 2.71 78,222 1,871 2.39 72,224 1,522 2.11
Certificates of deposit and
other time deposits 309,651 19,039 6.15 279,941 15,155 5.41 266,575 14,674 5.50
FHLB Advances 91,418 5,304 5.80 52,419 2,800 5.34 23,560 1,301 5.52
------- ------ ---- -------- ------ ---- ------- ------ ----
TOTAL INTEREST BEARING LIABILITIES 514,825 27,429 5.33 446,697 20,873 4.67 400,853 18,481 4.61
------ ---- ------ ---- ------ ----
Non-interest bearing liabilities:
Non-interest bearing deposits 18,427 16,896 14,651
Other liabilities 6,195 6,231 6,542
------ ------ ------
TOTAL LIABILITIES 539,447 469,824 422,046
Stockholders' equity 53,177 53,855 56,761
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $592,624 $523,679 $478,807
======== ======== ========
NET INTEREST INCOME $17,985 $17,692 $17,038
======= ======= =======
NET INTEREST SPREAD 2.81% 3.21% 3.40%
===== ===== =====
NET INTEREST MARGIN 3.22% 3.61% 3.84%
===== ===== =====
Ratio of average interest earning
assets to average interest bearing
liabilities 108.33% 109.59% 110.57
======= ======= =======
------------------------------------------------------
(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.
12
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 1999 VS. 1998
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN DUE TO CHANGE IN
NET NET NET
RATE VOLUME CHANGE RATE VOLUME CHANGE RATE VOLUME CHANGE
---- ------ ------ ---- ------ ------ ---- ------ ------
(DOLLARS IN THOUSANDS)
INTEREST INCOME:
Loans $1,150 $5,529 $6,679 $(750) $4,171 $3,421 $(962) $3,519 $2,557
Equity securities 5 (14) (9) 26 (11) 15 (35) (10) (45)
State and political subdivision
securities (1) 1 0 1 (2) (1) 0 68 68
U.S. Treasury and agencies 131 (290) (159) (86) 67 (19) 55 1,617 1,672
Mortgage-backed securities 11 (21) (10) (5) (26) (31) (2) (21) (23)
FHLB stock 9 139 148 2 19 21 (6) 15 9
Interest bearing deposits 33 167 200 (147) (213) (360) (4) 103 99
------ ------ ------ ----- ------ ------ ----- ------ ------
TOTAL INTEREST EARNING ASSETS $1,338 $5,511 $6,849 $(959) $4,005 $3,046 $(954) $5,291 $4,337
====== ====== ====== ===== ====== ====== ===== ====== ======
INTEREST EXPENSE:
Savings accounts $ (62) $ (60) $ (122) $ 126 $ (63) $ 63 $ (25) $ 200 $ 175
NOW and money market accounts 252 38 290 216 133 349 33 602 635
Certificates of deposit and
other time deposits 2,180 1,704 3,884 (246) 727 481 (590) 3,284 2,694
FHLB advances 260 2,244 2,504 (44) 1,543 1,499 (63) (1,019) (1,082)
------ ----- ------- ---- ----- ------ ----- ------ ------
TOTAL INTEREST BEARING LIABILITIES $2,630 $3,926 $6,556 $ 52 $2,340 $2,392 $(645) $3,067 $2,422
====== ====== ====== ==== ====== ====== ===== ====== ======
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
intercity, and community development purposes. Under such limitations, on June
30, 2001, the Bank was authorized to invest up to approximately $18.2 million in
the stock of or loans to subsidiaries. In addition, institutions meeting
regulatory capital requirements, which the Bank does, may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock. As of June 30, 2001, the Bank's
investment in and loans to subsidiaries was approximately $676,000 consisting of
investments in common stock and earnings.
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 four full-time employees to perform
these services. This investment function operates under licenses held by First
Service. The net income of First Service was $208,000 during fiscal year 2001.
13
In July 1999, the Bank formed First Heartland Mortgage Company of
Elizabethtown ("First Heartland") through which the secondary market lending
department originates qualified VA loans on the behalf of the investors, thereby
providing necessary liquidity to the Bank and needed loan products to the Bank's
customers. The new subsidiary has been successful in assisting other banks that
for whatever reason do not have access to the secondary mortgage loan market.
The Bank has continued to experience good growth in the level of mortgages being
processed by First Heartland. As of June 30, 2001, First Heartland originated
$29.4 million in loans on the behalf of investors.
Savings associations, in determining compliance with capital
requirements, are required to deduct from capital an increasing percentage of
their debt and equity investments in, and extensions of credit to, service
corporations in activities not permissible for a national bank. Certain
activities of the Bank's service corporation are not permissible for national
banks. Accordingly, on June 30, 2001, the Bank deducted 100% of its investment
in its service corporation from its regulatory capital. See
"Regulation--Regulatory Capital Requirements." Because the Bank's investment in
its subsidiary is insignificant, management does not believe that the required
deductions from capital will have a material effect on the Bank's regulatory
capital position.
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 other savings institutions, commercial
banks, 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 other savings institutions, commercial banks, 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. First Federal is 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
products 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. It is anticipated that
competition from both bank and non-bank entities will continue to remain strong
in the near future.
EMPLOYEES
As of June 30, 2001, the Bank had 200 employees of which 183 were
full-time and 17 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. As a federally chartered savings association, First Federal is
subject to extensive regulation by the OTS. The OTS periodically examines the
Bank for compliance with various regulatory requirements and the FDIC also has
the authority to conduct special examinations of institutions insured by the
SAIF. The Bank must file reports, at least quarterly, with the OTS describing
its activities and financial condition. The Bank is also subject to certain
reserve requirements promulgated by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). This supervision and regulation is
intended primarily for the protection of depositors.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System, which
consists of 12 regional Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board. The Federal Home Loan Banks
provide a Central Credit facility primarily for member institutions. As a member
of the FHLB, the Bank is required to acquire and hold shares of capital stock in
the FHLB in an amount at least equal to 1% of the aggregate unpaid principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. First Federal was in compliance with this requirement with
investment in the FHLB stock at June 30, 2001, of $5.8 million.
14
The FHLB serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB. As of June 30, 2001, First
Federal had $77.3 million in advances outstanding from the FHLB. See "Business -
Sources of Funds - Borrowings."
QUALIFIED THRIFT LENDER TEST. The Bank is currently subject to the Home
Owners' Loan Act, which uses the qualified thrift lender ("QTL") test to
determine eligibility for Federal Home Loan Bank advances and for certain other
purposes. To qualify as a QTL, a savings association must maintain at least 65%
of its "portfolio" assets in qualified thrift investments. Portfolio assets are
defined as total assets less goodwill and other intangibles, property used by a
savings association in its business and liquidity investments in an amount not
exceeding 20% of total assets. Qualified thrift investments consist of: (i)
loans, equity positions, or securities related to domestic, residential real
estate or manufactured housing, credit card and education loans; (ii) property
used by the savings association in the conduct of its business; and (iii) stock
in a Federal Home Loan Bank or the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation. Qualified thrift investments may also
include liquidity investments and 50% of the dollar amount of residential
mortgage loans subject to sale under certain conditions. To qualify as a QTL, a
savings association must maintain its status as a QTL on a monthly basis in nine
out of every 12 months. Failure to qualify as a QTL results in a number of
sanctions, including the imposition of certain operating restrictions imposed on
national banks and a restriction on obtaining additional advances from the
Federal Home Loan Bank System. Upon failure to qualify as a QTL for two years, a
savings association must convert to a commercial bank. At June 30, 2001,
approximately 94.57% of the Bank's assets were invested in qualified thrift
investments.
LENDING LIMITS. Under regulations of the OTS, loans and extensions of
credit to a person outstanding at one time and not fully secured cannot exceed
15% of capital and surplus. Loans and extensions of credit fully secured by
readily marketable collateral (as defined) may comprise an additional 10% of
capital and surplus. At June 30, 2001, the Bank complied with its regulatory
lending limits. The aggregate amount of loans that a federally chartered savings
association may make on the security of liens on non-residential real property
may not exceed 400% of the institution's capital, though the Director of OTS has
the authority to permit savings associations to exceed the 400% of capital limit
in certain circumstances.
REGULATORY CAPITAL REQUIREMENTS. OTS regulations require savings
associations to satisfy three different capital requirements. Specifically,
savings associations must maintain a 4% Tier 1 leverage ratio, a 4% Tier 1
risk-based capital ratio and an 8% total risk-based capital ratio. OTS
regulations restrict savings associations that have a total risk-based capital
ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets
of less than 4.0% or a ratio of Tier 1 capital to average assets of less than
4.0%. As of June 30, 2001, the Bank's actual capital percentages for current
risk-based capital of 10.96%, Tier 1 capital of 10.20%, and Tier 1 leverage of
7.24%, significantly exceed the regulatory requirement for each category. For
additional information see Note 8 of the Notes to Consolidated Financial
Statements in the Annual Report.
For purposes of the OTS's regulatory capital regulations, Tier 1
capital is defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tier 1 capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill held by an eligible savings
association.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both Tier 1 capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's Tier 1 capital. Supplementary capital is defined to
include certain preferred stock issues, nonwithdrawable accounts and pledged
deposits that do not qualify as Tier 1 capital; certain approved subordinated
debt, certain other capital instruments and a portion of the savings
association's general loss allowances. Total Tier 1 and supplementary capital
are reduced by an amount equal to the savings association's high loan-to-value
ratio land loans and non-residential construction loans and the amount of
capital instruments held by other depository institutions pursuant to reciprocal
arrangements as well as by an increasing percentage of the savings association's
equity investments.
15
The risk-based capital requirement is measured against risk-weighted
assets, which equals the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighted system, one-to four-family first mortgages not more
than 90 days past due with loan-to-value ratios under 80% are assigned a risk
weight of 50%. Consumer and commercial loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. The risk-based capital requirement is 8% of
risk-weighted assets.
In determining compliance with capital standards, all of a savings
association's investments in, and extensions of credit to, any subsidiary
engaged in activities not permissible for a national bank are also to be
deducted from the savings association's capital. Certain subsidiaries are
exempted from this treatment, including any subsidiary engaged in impermissible
activities solely as agent for its customers (unless the FDIC determined
otherwise), subsidiaries engaged solely in mortgage banking, and depository
institution subsidiaries acquired prior to May 1, 1989. In addition, the capital
deduction is not applied to federal savings associations existing as of August
9, 1989 that were either chartered as a state savings bank or state cooperative
bank prior to October 10, 1982 or that acquired their principal assets from such
an association. The required reduction of capital for this purpose is being
phased in over a period of approximately five years. At June 30, 2001, the
Bank's investment in First Service, a wholly owned subsidiary of the Bank
engaged in activities which are not permitted for a national bank, amounted to
$622,000. Accordingly, on June 30, 2001, the Bank deducted 100% of this
investment from its Tier1 and tangible capital.
The OTS risk-based capital requirements require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS will calculate the sensitivity of a savings institution's net
portfolio value ("NPV") based on data submitted by the institution in a schedule
to its quarterly Thrift Financial Report and using the interest rate risk
measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, for any quarter is based on the institution's Thrift
Financial Report filed three quarters earlier. The Bank does not have more than
a normal level of interest rate risk under the new rule and is not required to
increase its total capital as a result of the rule.
Presented below as of June 30, 2001 is an analysis of the Bank's
interest rate risk ("IRR") as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 to 300 basis points in market interest rates.
AS OF JUNE 30, 2001
Net Portfolio Value NPV as % of PV of Assets
------------------- ------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
+300 bp 39,054 (30,419) (44) 6.69 (444 bp)
+200 bp 49,458 (20,015) (29) 8.28 (285 bp)
+100 bp 59,900 (9,573) (14) 9.81 (133 bp)
0 bp 69,473 11.14
-100 bp 75,434 5,960 9 11.90 76 bp
-200 bp 78,621 9,147 13 12.24 110 bp
-300 bp 80,681 11,207 16 12.39 125 bp
16
While the Bank complies with its currently applicable capital
requirements and expects to continue to comply with the requirements, any
failure to comply with the capital requirements in the future would result in
severe penalties. In addition to requiring generally applicable capital
standards for savings associations, applicable regulations authorize the
Director of OTS to establish the minimum level of capital for a savings
institution at such amount or at such ratio of capital-to-assets as the Director
determines to be necessary or appropriate for such institution in light of the
particular circumstances of the institution. The Director of OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution, which fails to maintain capital at or above the minimum level,
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
The OTS staff policies specify that savings institutions failing any
one of their minimum regulatory capital requirements may not increase their
total assets during any quarter in excess of an amount equal to net interest
credited during the quarter. Under these policies, institutions that have
submitted capital plans that are rejected by the District Director or that have
had capital plans approved but do not meet the targets or requirements of the
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will only be granted
when the proposed loan or investment is reasonable in the context of the
institution's operations and does not significantly increase the risk profile of
the savings institution.
The Director of OTS must restrict the asset growth of savings associations not
in regulatory capital compliance, subject to a limited exception for growth not
exceeding interest credited. In addition, savings associations not in full
compliance with applicable capital standards are subject to a capital directive,
which may include such restrictions, including restrictions on the payment of
dividends and on compensation, as deemed appropriate by the Director of OTS. The
Director of OTS must treat as an unsafe and unsound practice any material
failure by a savings association to comply with a capital plan or capital
directive. The sanctions and penalties that could be imposed range from
restrictions on branching or on the activities of the institution, to
restrictions on the ability to obtain FHLB advances, to termination of insurance
of accounts following appropriate proceedings, to the appointment of a
conservator or receiver.
PROMPT CORRECTIVE REGULATORY ACTION
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators must take prompt corrective action if
an insured depository institution fails to satisfy certain minimum capital
requirements. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees if
the institution would thereafter fail to satisfy the minimum levels for any of
its capital requirements. An institution that fails to meet the minimum level
for any relevant capital measure (an "undercapitalized institution") may be: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses. The
capital restoration plan must include a guarantee by the institution's holding
company that the institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters, under which the
holding company would be liable up to the lesser of 5% of the institution's
total assets or the amount necessary to bring the institution into capital
compliance as of the date it failed to comply with its capital restoration plan.
A "significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could also be required to divest subsidiaries. The senior executive officers of
a significantly undercapitalized institution may not receive bonuses or
increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated
debt. In their discretion, the federal banking regulators may also impose the
foregoing sanctions on an undercapitalized institution if the regulators
determine that such actions are necessary to carry out the purposes of the
prompt corrective action provisions. If an institution's ratio of tangible
capital to total assets falls below a "critical capital level," the institution
will be subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such action would better
protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized. If a
savings association is in compliance with an approved
17
capital plan on the date of enactment of FDICIA, however, it will not be
required to submit a capital restoration plan if it is undercapitalized or
become subject to the statutory prompt corrective action provisions applicable
to significantly and critically undercapitalized institutions prior to July 1,
1995.
Under FDICIA, regulations implementing the prompt corrective action
provisions of a depository institution's capital adequacy is measured on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 capital ratio (the ratio of its
Tier 1 capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). Under the regulations, a savings
association that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1
risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" savings association is a savings
association that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or
greater (or 3.0% or greater if the savings association has a composite of 1
MACRO rating). An "undercapitalized institution" is a savings association that
has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the association has a composite 1 MACRO rating). A
"significantly undercapitalized" institution is defined as a savings association
that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier
1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less
than 3.0%. A "critically undercapitalized" savings association defined as a
savings association that has a ratio of core capital to total assets of less
than 2.0%. The OTS may reclassify a well capitalized savings association as
adequately capitalized and may require an adequately capitalized or
undercapitalized association to comply with the supervisory actions applicable
to associations in the next lower opportunity for a hearing, that the savings
association is in an unsafe or unsound condition or that the association has
received and not corrected a less-than-satisfactory rating for any MACRO rating
category. First Federal is classified as "well capitalized" under the new
regulations.
DEPOSIT INSURANCE
Under FDICIA, the FDIC has established a risk-based assessment system
for insured depository institutions. Under the system, 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. Institutions are
assigned to one of three capital groups; well capitalized, adequately
capitalized or undercapitalized, based on the data reported to regulators for
date closest to the last day of the seventh month preceding the semi-annual
assessment period. Within each capital group, institutions are assigned to one
of the three subgroups on the basis of supervisory evaluations by the
institution's primary supervisory authority and such other information as the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance fund. Subgroup A consists of financially
sound institutions with only a few minor weaknesses. Subgroup B consists of
institutions that demonstrate weaknesses, which, if not corrected, could result
in significant deterioration of the fund. Subgroup C consists of institutions
that pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken.
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3% on the first $51.9
million of transaction accounts, plus 10% on the remainder. This percentage is
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. As of June 30,
2001, the Bank met its reserve requirements.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS. The Corporation is a
savings and loan holding company within the meaning of the Home Owners' Loan
Act, as amended. As such, it is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, First Federal is subject to
certain restrictions in its dealings with the Corporation and affiliates
thereof.
The Home Owners' Loan Act, as amended, generally prohibits a savings
and loan holding company, without prior approval of the Director of OTS, from
(i) acquiring control of any other savings institution or savings and loan
holding company or controlling the assets thereof or (ii) acquiring or retaining
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary.
18
Additionally, under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of OTS, up to 15% of
previously unissued voting shares of an under-capitalized savings association
for cash without that savings association being deemed controlled by the holding
company. Except with the prior approval of the Director of OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution or any
other savings and loan holding company.
The Bank Holding Company Act of 1956 specifically authorizes the
Federal Reserve Board and the Director of the OTS to approve an application by a
bank holding company to acquire control of any savings institution. Pursuant to
rules promulgated by the Federal Reserve Board, owning, controlling or operating
a savings institution is a permissible activity for bank holding companies, if
the savings institution engages only in deposit-taking activities and lending
and other activities that are permissible for the bank holding companies. In
approving such as application, the Federal Reserve Board may not impose any
restriction on transaction between the savings institution and its holding
company affiliates except as required by Sections 23A and 23B of the Federal
Reserve Act.
A bank holding company that controls a savings institution may merge or
consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank, which is a member of
the BIF with the approval of the appropriate federal banking agency and the
Federal Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
Transactions between savings associations and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
savings association is any company or entity, which controls, is controlled by
or is under common control with the savings association. In a holding company
context, the parent holding company of a savings association (such as the
Corporation) and any companies, which are controlled, by such parent holding
company are affiliates of the savings association. Generally, Sections 23A and
23B (i) limit the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
Savings associations are also subject to the restrictions contained in
Section 22 (h) of the Federal Reserve Act on loans to executive officers,
directors and principal shareholders. Under Section 22 (h), loans to an
executive officer and to a greater than 10% shareholder of a savings association
(18% in the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed together
with all other outstanding loans to such person and affiliated entities the
association's loan to one borrower limit as established by FIRREA (generally
equal to 15% of the institution's unimpaired capital and surplus, for loans
fully secured by certain readily marketable collateral, an additional 10% of the
institution's unimpaired capital and surplus). Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% shareholders of savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal shareholders be made on terms
substantially the same as offered in comparable transactions to other persons.
19
The Board of Directors of the Corporation presently intends to operate
the Corporation as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
company. However, if the Director of OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the Director of OTS may impose
such restrictions as deemed necessary to address such risk and limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet (in three out to every four
quarters and two out of every three years) the QTL test, see "Qualified Thrift
Lender Test" above, then such unitary holding company shall also become subject
to the activities restrictions applicable to multiple holding companies
(additional restrictions on securing advances from the FHLB also apply).
If the Corporation were to acquire control of another savings
institution other than through merger or other business combinations with First
Federal, the Corporation would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, the activities of the Corporation and any of its
subsidiaries (other than First Federal or other subsidiary savings institutions)
would thereafter be subject to further restrictions. The Home Owners' Loan Act,
as amended, provides that, among other things, no multiple savings and loan
holding company or subsidiary thereof which is not a savings institution shall
commence or continue for more than a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
FSLIC by regulations as of March 5, 1987 to be engaged in by multiple holding
companies or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the Director of OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of OTS prior to being engaged in by a multiple holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state, if the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office in the state of the institution to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institution to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The Director of OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings institutions
in more than one state in the case of certain emergency thrift acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of OTS 30 day advance notice of such declaration and
payment. Any dividend declared during such period or without the giving of such
notice shall be invalid.
FEDERAL AND STATE TAXATION
The Corporation and the Bank currently file consolidated federal income
tax returns based on a fiscal year ending June 30.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction will not be allowable for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), without payment of federal income taxes on such dividends or
distributions by the Bank at the then current tax rates on the amount deemed
removed to the Bank would include not only the amount actually distributed, but
would also be increased (subject to certain limitations) by the amount of the
tax payable by reason of such distribution.
The Commonwealth of Kentucky imposes no income tax on savings
institutions. Nonetheless, First Federal must pay a Kentucky ad valorem tax.
This tax is 1/10th of 1% of First Federals total savings accounts, common stock,
capital and retained income with certain deductions for amounts borrowed by
depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. The Bank's subsidiary must pay a state income tax, as well as a
tax on capital. The tax on income is 4% for the first $25,000 of taxable income,
5% for the next $25,000, 6% for the next $50,000, 7% for the next $150,000 and
20
8.25% for all income over $250,000. The tax on capital is .0021 times the
capital employed with a credit of .0014 times the first $350,000 of capital for
those corporations with gross income of under $500,000.
For information regarding federal income taxes, see Note 7 of the Notes
to Consolidated Financial Statements in the Annual Report.
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
Owned or Square
Banking 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
As of June 30, 2001, the net book value of office properties and
equipment owned or leased by the Bank and its subsidiary was $11.5 million. For
further information, see Note 4 of the Notes to Consolidated Financial
Statements in the Annual Report.
The Bank utilizes the services of an outside data processing center for
most of its savings and loan operations. All accounting and internal record
keeping functions are handled by the Bank's in-house computer system.
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
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 2001.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of First Federal Financial Corporation of Kentucky is
traded over the counter and quoted on The NASDAQ National Market under the
symbol "FFKY." The number of registered stockholders as of September 15, 2001,
was 746. 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.
QUARTERLY STOCK PRICES TWO
MONTHS ENDED
QUARTER ENDED
FISCAL 2001: 9/30 12/31 3/31 6/30 8/31/01
---- ----- ---- ---- -------
High $ 17.63 $ 16.50 $ 15.50 $ 18.25 $ 18.50
Low 15.00 13.25 14.25 13.50 16.02
Cash dividends 0.18 0.18 0.18 0.18
FISCAL 2000: 9/30 12/31 3/31 6/30
---- ----- ---- ----
High $ 24.88 $ 24.50 $ 24.38 $ 20.50
Low 22.50 21.75 17.25 15.25
Cash dividends 0.18 0.18 0.18 0.18
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial and other data of
the Corporation. This financial data is derived in part from, and should be read
in conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT JUNE 30,
-----------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (Dollars in thousands)
Total assets $606,726 $560,785 $488,304 $409,651 $377,380
Net loans outstanding 517,145 471,231 400,360 354,935 327,502
Investments 22,934 45,182 47,340 26,574 22,677
Deposits 468,825 423,759 399,443 306,703 281,342
Borrowings 77,298 80,339 25,894 43,249 41,514
Stockholders' equity 54,592 51,681 57,862 54,688 51,665
Number of:
Real estate loans outstanding 6,837 7,154 6,968 6,709 6,380
Deposit accounts 49,615 47,238 45,425 37,764 36,378
Offices 13 13 12 8 8
22
YEAR ENDED JUNE 30,
----------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
OPERATIONS DATA: (Dollars in thousands)
Interest income $45,392 $38,542 $35,496 $31,182 $28,782
Interest expense 27,429 20,873 18,481 16,059 14,375
Net interest income 17,963 17,669 17,015 15,123 14,407
Provision for loan losses 1,086 400 314 265 200
Non-interest income 5,145 3,877 3,954 2,860 2,468
Non-interest expense (1) 13,570 12,691 11,706 8,082 9,472
Income tax expense 2,803 2,792 2,970 3,302 2,429
Net income 5,649 5,663 5,979 6,334 4,774
Earnings per share:
Basic 1.50 1.45 1.45 1.53 1.14
Diluted 1.50 1.44 1.44 1.52 1.13
Book value per share 14.53 13.76 14.04 13.24 12.39
Dividends paid per share 0.72 0.72 0.63 0.56 0.50
Dividend payout ratio 48% 49% 43% 37% 44%
Return on average assets .95% 1.08% 1.25% 1.60% 1.30%
Average equity to average
assets 8.97% 10.28% 11.85% 13.55% 13.77%
Return on average equity 10.62% 10.52% 10.53% 11.81% 9.46%
(1) Non-interest expense in 1997 includes the non-recurring special
assessment paid to the FDIC in the amount of $1.7 million, pretax.
Non-interest expense in 1999 includes one time 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
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.
OVERVIEW
Net income was $5.6 million or $1.50 per share diluted in 2001 compared to $5.7
million or $1.44 per share diluted in 2000. Even though overall earnings are
down for the period, a result of the decreasing net interest margin, net
interest income increased by 1.7% during 2001 compared to an increase of 3.8% in
2000. Increasing average earning asset balances during these periods contributed
to the growth in net interest income. In January 2001, the Bank restructured $75
million of its Federal Home Loan Bank advances to secure longer term financing
at lower interest rates. Management anticipates that the restructuring of
advances coupled with the Federal Open Market Committee's interest rate
reductions will have a positive impact on future earnings. The Bank's book value
per common share increased from $13.76 at June 30, 2000 to $14.53 at June 30,
2001. Net income for 2001 generated return on average assets of .95% and return
on average equity of 10.62%. These compare with return on average assets of
1.08% and return on average equity of 10.52% for the 2000 period.
The Bank's total assets at June 30, 2001 grew to $606.7 million compared to
$560.8 million at June 30, 2000. Net loans increased $45.9 million from June 30,
2000 to $517.1 million at June 30, 2001. The commercial real estate portfolio
increased $25.7 million while the residential real estate portfolio grew $19.4
million. This growth is a result of the Bank's continued emphasis on the active
pursuit of lending opportunities. The Bank's dealer loan program increased $6.6
million while consumer and home equity loans decreased $5.5 million. While loan
growth remained strong, the percentage of non-performing loans to total loans
remained low at .52%, as the Bank maintained its underwriting standards and
continued its emphasis on secured real estate lending.
23
Funding for the growth in the loan portfolio was derived from deposits. Deposits
increased by $45 million to $468.8 million at June 30, 2001 compared to $423.8
million at June 30, 2000. The growth in retail deposits was primarily in
short-term certificate of deposits and money market accounts caused in part by a
shift during recent quarters in funds from the stock market to more conservative
investments. FHLB advances decreased from $80.3 million at June 30, 2000 to
$77.3 million at June 30, 2001.
RESULTS OF OPERATIONS
NET INTEREST INCOME - Net interest income increased by $294,000 during 2001 to
$18 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.
While market interest rates increased the first half of the fiscal year,
short-term rates increased more than long-term rates during that time period.
This caused interest bearing liabilities, which are generally tied to
shorter-term market indices to reprice at higher rates than interest earning
assets, which are generally tied to longer-term indexes. Also, the Bank's
interest bearing liabilities have a shorter repricing frequency and are subject
to repricing at a faster pace than its interest earning assets. However, during
the last half of the fiscal year, the margin recovered significantly. For the
month of December 2000, the net interest margin was 2.91% compared to 3.67 % for
the month of June 2001. Actions by the Federal Reserve Board to lower the
federal discount rate, coupled with the restructuring of Federal Home Loan Bank
advances during 2001, are the contributing factors towards the rebound in the
net interest margin. Management believes that the Federal Reserve Board is
closer to a stable interest rate environment, which will lead to a less volatile
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
million for the 2001 period to fund the Bank's increased lending activity that
exceeded its deposit growth during certain periods throughout the year. This
same lending growth has impacted the level of future Bank investments that will
be decreasing in balance in the near future, given the need for available
deposit dollars to fund lending activity. 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.
NON-INTEREST INCOME - Non-interest income was $5.1 million for 2001 as compared
to $3.9 million for the 2000 period, an increase of $1.2 million, or 32.7%.
Gains from investment sales were $696,000 in 2001 compared to $457,000 for 2000,
an increase of $239,000. Fee income from secondary market lending operations
increased by $172,000 or 48% during the fiscal year. Customer service fees
charged on deposit accounts increased by $610,000 or 31% during 2001 due to an
increase in fees charged and also growth in accounts and deposit relationships
with existing customers. Brokerage and insurance commissions increased by
$175,000 or 38% during the 2001 period. Other sources of income such as trust,
loan fee income, and other customer transaction fees also increased during the
2001 period by $104,000.
NON-INTEREST EXPENSE - Non-interest expense increased by $879,000 or 7% during
2001 as compared to 2000. Compensation and employee benefits, the largest
component of non-interest expense, increased by $772,000 or 14% in 2001 compared
to 2000. The increase includes cost-of-living 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.
24
Beyond compensation and benefits, 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.
Data processing expense also increased during the fiscal year due to an increase
in processor charges relating to an increase in the number of users, training
expenses and the implementation of internet banking.
ALLOWANCE AND PROVISION FOR LOAN LOSSES - The allowance for loan losses is
regularly evaluated by management and maintained at a level believed to be
adequate to absorb loan losses in the Bank's lending portfolios. Periodic
provisions to the allowance are made as needed. An appropriate level of the
general allowance is determined based on the application of projected risk
percentages to graded loans by categories. In addition, specific reserves are
established for individual loans when deemed necessary by management. The amount
of the provision for loan losses necessary to maintain an adequate allowance is
based upon an assessment of loan quality, changes in the size and character of
the loan portfolio, consultation with regulatory authorities, delinquency
trends, economic conditions, industry trends, historical charge-offs,
recoveries, and other information. Management is monitoring the commercial real
estate loan portfolio closely, recognizing that commercial real estate loans
carry a greater risk of loss than residential real estate loans, and believes it
has, based on information presently available, adequately provided for loan
losses at June 30, 2001. Although management believes it uses the best
information available to make allowance provisions, future adjustments, which
could be material, may be necessary if management's assumptions differ
significantly from the loan portfolio's actual performance.
The provision for loan losses was $1.1 million for 2001 compared to $400,000 for
the 2000 period. The increase in the provision is a result of the increase in
charge-offs for the period and to compensate for the Bank's continued strong
loan growth. Net loan charge-offs increased $176,000 to $432,000 for 2001
compared to $255,000 for the 2000 period. The increase in charge-offs is
primarily related to charge-offs of indirect consumer loans during the 2001
period. The following table presents an analysis of the Bank's loan loss
experience and non-performing assets for the periods indicated.
YEAR ENDED JUNE 30,
-------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Allowance for loan losses:
Balance, July 1 $ 2,252 $ 2,108 $ 1,853
Provision for loan losses 1,086 400 314
Acquired - - 205
Charge-offs (499) (265) (290)
Recoveries 67 9 26
------- -------- -------
Balance, June 30 $ 2,906 $ 2,252 $ 2,108
======= ======= =======
Loans outstanding at year end $520,052 $473,483 $402,468
Non-performing loans at year end:
Collateralized by one-to-four
family homes $ 644 $ 977 $ 1,633
Other non-performing loans 2,076 585 896
------- ------- --------
Total non-performing loans 2,720 1,562 2,529
Real estate acquired through foreclosure 296 - 109
Repossessed assets 70 - -
------- -------- --------
Total non-performing assets $ 3,086 $ 1,562 $ 2,638
======= ======== ========
Ratios: Non-performing loans to loans .52% .33% .63%
Allowance for loan losses to
non-performing loans 107% 144% 83%
Allowance for loan losses to net loans .56% .48% .52%
Non-performing assets to total assets .51% .28% .54%
25
LIQUIDITY
The Bank maintains sufficient liquidity to fund loan demand and routine deposit
withdrawal activity. The Bank's primary source of funds for meeting its
liquidity needs are customer deposits, borrowings from the Federal Home Loan
Bank, principal and interest payments from loans and mortgage-backed securities,
and earnings from operations retained by the Bank. At June 30, 2001, the Bank's
liquid assets were 6.01% of its liquidity base. The Bank intends to continue to
fund loan growth (outstanding loan commitments were $4.6 million at June 30,
2001) with customer deposits and additional advances from the FHLB. While the
Bank utilizes other funding sources in order to meet its liquidity needs, FHLB
borrowings remain a material component of management's balance sheet strategy.
At June 30, 2001, the Bank had an unused approved line of credit in the amount
of $38.3 million and sufficient collateral to borrow an additional $39.6 million
in advances from the FHLB.
CAPITAL
Savings institutions insured by the FDIC must meet various regulatory capital
requirements: a 4% Tier I leverage ratio; a 4% Tier I capital ratio; and an 8%
risk-based capital standard. As of June 30, 2001, the Bank's actual capital
percentages for Tier I leverage of 7.24%, Tier I capital of 10.20%, and current
risk-based capital of 10.96%, exceed the regulatory requirement for each
category. The Bank expects to maintain a capital position that meets or exceeds
the "well capitalized" requirements as defined by the FDIC.
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 improved from June 30, 2000 to June 30,
2001. Given a sustained 100 basis point downward shock to the yield curve used
in the simulation model, the Bank's base net interest income would increase by
an estimated 3.92% at June 30, 2001 compared to an increase of 7.58% at June 30,
2000. Given a 100 basis point increase in the yield curve the Bank's base net
interest income would decrease by an estimated 4.30% at June 30, 2001 compared
to a decrease of 8.99% at June 30, 2000. The improvement in the Bank's interest
sensitivity profile is primarily attributable to the restructuring of $75
million of the Bank's Federal Home Loan Bank advances to secure longer term
financing at lower interest rates.
The interest sensitivity profile of the Bank 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, deposit growth, loan growth, and
other factors. The table below is representative only and is not a precise
measurement of the effect of changing interest rates on the Bank's net interest
income in the future.
26
JUNE 30, 2001
DECREASE IN RATES INCREASE IN RATES
----------------- -----------------
200 100 100 200
BASIS POINTS BASIS POINTS BASE BASIS POINTS BASIS POINTS
(Dollars in thousands)
PROJECTED INTEREST INCOME
Loans $40,259 $41,873 $43,221 $44,342 $45,361
Investments 2,068 2,184 2,271 2,507 2,628
------- ------- ------ ------- ------
TOTAL INTEREST INCOME 42,327 44,057 45,492 46,849 47,989
PROJECTED INTEREST EXPENSE
Deposits 16,858 19,092 21,326 23,560 25,149
Borrowed funds 3,734 3,735 3,736 3,738 3,785
------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE 20,592 22,827 25,062 27,298 28,934
NET INTEREST INCOME $21,735 $21,230 $20,430 $19,551 $19,055
Change from base $1,305 $800 $(879) $(1,375)
% Change from base 6.39% 3.92% (4.30)% (6.73)%
JUNE 30, 2000
DECREASE IN RATES INCREASE IN RATES
------------------ -----------------
200 100 100 200
BASIS POINTS BASIS POINTS BASE BASIS POINTS BASIS POINTS
(Dollars in thousands)
PROJECTED INTEREST INCOME
Loans $39,133 $40,340 $41,318 $42,169 $42,955
Investments 2,944 3,050 3,162 3,173 3,168
------ ------ ------ ------ -------
TOTAL INTEREST INCOME 42,077 43,390 44,480 45,342 46,123
PROJECTED INTEREST EXPENSE
Deposits 18,913 20,505 22,097 23,688 25,280
Borrowed funds 3,573 4,331 5,136 5,957 6,779
------ ------ ------ ------- ------
TOTAL INTEREST EXPENSE 22,486 24,836 27,233 29,645 32,059
NET INTEREST INCOME $19,591 $18,554 $17,247 $15,697 $14,064
Change from base $2,344 $1,307 $(1,550) $(3,183)
% Change from base 13.59% 7.58% (8.99)% (18.46)%
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.
27
COMPARISON OF FISCAL 2000 TO 1999
Net income for the fiscal year ended June 30, 2000, was $5.7 million or $1.44
per share diluted as compared to net income of $6.0 million or $1.44 per share
diluted for the same period in 1999. Acquisition-related costs in connection
with the purchase of three banking centers during the quarter ended September
30, 1998, in the amount of $292,000 ($193,000, net of tax) were charged against
earnings. Also, during the 1999 period, the Corporation incurred data and
computer conversion costs of $497,000 ($328,000, net of tax) relating to its
conversion to a new data processor. In addition to these expenses, amortization
of acquisition intangibles increased to $831,000 ($630,000, net of tax) in 2000
from $781,000 ($597,000, net of tax) in 1999.
NET INTEREST INCOME - Net interest income increased by $654,000 during 2000 to
$17.7 million as compared to $17.0 million in 1999 in spite of a declining net
interest margin. The Bank's net interest margin declined to 3.61% for the year
ended June 30, 2000 compared to 3.84% for the 1999 period. This decline in net
interest margin can be largely attributed to the rise in certificate of deposit
rates on specials offered by the Bank over the last eight months of the year. To
maintain a customer base in the midst of fierce rate competition, the Bank
offered both short and long term certificate specials to retain maturing
accounts renewing at much lower rates. These promotions were also necessary to
assist in funding the loan growth in the Bank driven by the transition to a
sales culture for retail associates. Home equity lines of credit at low
introductory rates were also a focus of the retail promotions for increasing
loan relationships with our home mortgage portfolio customers.
In order to offset the narrowing margin, the Bank developed a dealer loan
program in our Meade County banking center that would serve all the areas of
operation for the Bank. The program is producing a large volume of consumer
loans at higher yields than our mortgage portfolio. At June 30, 2000, total
loans under the dealer loan program totaled $15.2 million. A commercial loan
program composed of shorter-term fixed and variable rate loans was responsible
for much of the Bank's loan growth. Realizing that both these programs represent
products with added credit risk, the Bank has in place loan processing review
procedures to monitor loan underwriting and documentation. A formal process of
application presentation to the Executive Loan Committee has been developed to
insure compliance with lending policies. Monthly reporting requirements and
internal auditing practices have been developed to provide additional control
over delinquencies.
Average interest earning assets increased by $46.3 million from $443.2 million
for the 1999 period to $489.5 million for the 2000 period due to the growth of
the Bank's loan portfolio. Average loans, which comprise 89% of the total
interest earning assets, were $51.5 million higher and averaged $437.6 million
during 2000, while the average yield on loans decreased by 19 basis points to
8.07%.
Average interest bearing liabilities increased by $45.8 million to an average
balance of $446.7 million for 2000. Customer deposits averaged $394.3 million
during 2000, a $17.0 million increase from the 1999 average balance of $377.3
million. Average Federal Home Loan Bank advances increased $28.8 million for the
2000 period to fund the Bank's increased lending activity that exceeded its
deposit growth. This same lending growth impacts the level of future Bank
investments that should be decreasing in balance, given the need for all deposit
dollars to fund lending activity. The Bank's cost of funds averaged 4.67% during
2000 which was an increase of 6 basis points from the 1999 average cost of funds
of 4.61% due to higher rates paid on short-term customer deposits.
ALLOWANCE AND PROVISION FOR LOAN LOSSES - Management periodically evaluates the
adequacy of the allowance for loan losses 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 and other factors. The provision for
loan losses was $400,000 for 2000 as compared to $314,000 for 1999. Net
charge-offs were $256,000 during 2000 as compared to $264,000 during 1999. The
Bank's allowance for loan losses was $2.3 million or .48% of loans outstanding
at June 30, 2000 compared to $2.1 million or .52% of loans outstanding at June
30, 1999. Non-performing loans represented .33% of the loans outstanding at June
30, 2000.
28
NON-INTEREST INCOME - Non-interest income was $3.9 million in 2000, a decrease
of $77,000 or 2% over 1999. Gains on investment sales were $457,000 in 2000
compared to $352,000 for 1999, an increase of $105,000. Fee income from
secondary market lending operations decreased by $284,000 or 45% during the
fiscal year due to rising mortgage rates that slowed the new originations and
refinancing activity in home loans. Customer service fees charged on deposit
accounts increased by $237,000 or 14% during 2000 due to growth in customer
accounts. Fee income from trust, brokerage and other services also increased due
to growth in deposit relationships with existing customers. Through a subsidiary
of the Bank, gains on sales of real estate held for development were $6,000 for
2000 compared to gains of $255,000 for 1999. Three commercial lots in an office
park currently under development were sold in 1999.
NON-INTEREST EXPENSE - Non-interest expense (excluding the one-time acquisition
related charges and information technology upgrades in 1999) increased by $1.8
million or 15% during 2000 as compared to 1999. Factors contributing to the
increase are expenses relating to the Bank's transition to a sales and service
culture, the re-opening of a banking center located in Bardstown, Kentucky and a
full year of operating expenses related to the Hillview Wal-mart banking center.
Compensation and employee benefits, the largest component of non-interest
expense, increased by $1.1 million or 25% in 2000 compared to 1999. The increase
includes salary increases and reflects increases in the number of full time
equivalent employees from 155 at June 30, 1999, to 170 at June 30, 2000. The
increased staffing is a result of the Bank adopting a strategic plan to develop
a sales and service culture to promote retail growth which added an additional
seven employees and the opening of the new Hillview and Bardstown banking
centers which also added seven new full time employees.
Beyond compensation and benefits, office occupancy and equipment expenses
increased by $88,000 in 2000 compared to 1999 due to the opening of an
additional in-store facility, remodeling an existing office, and installing
three new ATM machines. All other expenses increased by $549,000 in 2000
compared to 1999 including postage, telephone, data processing, supplies and
customer account expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section
entitled "Asset/Liability Management and Market Risk" included under Item 7 of
the document and is incorporated herein by reference.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
TABLE OF CONTENTS
Page
Audited Consolidated Financial Statements: ----
Report of Independent Auditors-Crowe, Chizek and Company LLP 31
Consolidated Statements of Financial Condition 32
Consolidated Statements of Income 33
Consolidated Statements of Comprehensive Income 34
Consolidated Statements of Changes in Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37-53
30
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 June 30, 2001 and 2000
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity and cash flows for the three years in the period ending
June 30, 2001. 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 June 30, 2001 and 2000 and the results
of its operations and its cash flows for the three years in the period ending
June 30, 2001 in conformity with accounting principles generally accepted in the
United States of America.
Crowe, Chizek and Company LLP
Louisville, Kentucky
August 6, 2001
31
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS JUNE 30,
2001 2000
---- ----
Cash and due from banks $ 14,927,588 $ 11,310,438
Interest bearing deposits 20,536,800 3,668,498
---------- ------------
Total cash and cash equivalents 35,464,388 14,978,936
Securities available-for-sale 2,013,107 2,047,642
Securities held-to-maturity: fair value of
$20,954,198 (2001) and $41,194,541 (2000) 20,920,760 43,133,967
Loans receivable, less allowance for loan losses
of $2,906,356 (2001) and $2,252,062 (2000) 517,145,157 471,231,319
Federal Home Loan Bank stock 5,845,000 4,080,800
Premises and equipment 11,453,601 11,709,268
Real estate owned:
Acquired through foreclosure 295,989 -
Held for development 720,683 445,683
Repossessed assets 70,050 -
Acquisition intangibles 9,215,373 10,047,173
Accrued interest receivable 2,024,554 2,031,877
Other assets 1,557,078 1,078,157
------------ -----------
TOTAL ASSETS $606,725,740 $560,784,822
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 21,208,411 $ 16,821,604
Interest bearing 447,616,786 406,937,351
------------ -----------
Total Deposits 468,825,197 423,758,955
Advances from Federal Home Loan Bank 77,297,658 80,338,550
Accrued interest payable 1,969,545 1,128,790
Accounts payable and other liabilities 2,475,687 1,962,543
Deferred income taxes 1,565,376 1,914,903
----------- -----------
TOTAL LIABILITIES 552,133,463 509,103,741
----------- -----------
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, 3,758,491 shares in 2001 and
3,755,761 shares in 2000 3,758,491 3,755,761
Additional paid-in capital 20,527 -
Retained earnings 50,405,481 47,481,149
Accumulated other comprehensive
income, net of tax 407,778 444,171
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 54,592,277 51,681,081
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $606,725,740 $560,784,822
============ ============
See notes to consolidated financial statements.
32
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30,
-----------------------------------------------
2001 2000 1999
INTEREST INCOME:
Interest and fees on loans $41,996,226 $35,316,819 $31,895,805
Interest and dividends on investments and deposits 3,395,588 3,225,633 3,600,283
----------- ---------- ----------
Total interest income 45,391,814 38,542,452 35,496,088
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 22,125,115 18,073,392 17,180,146
Federal Home Loan Bank advances 5,304,192 2,800,076 1,301,096
---------- ---------- ----------
Total interest expense 27,429,307 20,873,468 18,481,242
---------- ---------- ----------
Net interest income 17,962,507 17,668,984 17,014,846
Provision for loan losses 1,086,100 399,500 314,000
---------- ---------- ----------
Net interest income after provision for loan losses 16,876,407 17,269,484 16,700,846
---------- ---------- ----------
NON-INTEREST INCOME:
Customer service fees on deposit accounts 2,567,780 1,957,445 1,720,542
Secondary mortgage market closing fees 526,304 354,391 638,877
Gain on sale of investments 696,041 456,926 351,753
Brokerage and insurance commissions 639,637 464,388 394,070
Gain on sale of real estate held for development 11,718 6,194 254,688
Other income 703,997 637,779 594,364
--------- --------- ---------
Total non-interest income 5,145,477 3,877,123 3,954,294
--------- --------- ---------
NON-INTEREST EXPENSE:
Employee compensation and benefits 6,416,848 5,644,270 4,506,758
Office occupancy expense and equipment 1,456,721 1,362,424 1,274,885
FDIC insurance premiums 84,653 158,117 207,298
Marketing and advertising 505,418 524,349 527,110
Outside services and data processing 1,420,324 1,259,148 1,001,612
State franchise tax 424,663 403,869 357,776
Acquisition related expense - - 291,869
Data and equipment conversion expense - - 497,368
Amortization of acquisition intangibles 831,799 831,799 781,347
Other expense 2,429,330 2,506,928 2,260,025
----------- --------- ---------
Total non-interest expense 13,569,756 12,690,904 11,706,048
---------- ---------- ----------
Income before income taxes 8,452,128 8,455,703 8,949,092
Income taxes 2,802,693 2,792,361 2,970,291
---------- ---------- ---------
NET INCOME $5,649,435 $5,663,342 $5,978,801
========== ========== ==========
Earnings per share:
Basic $ 1.50 $ 1.45 $ 1.45
Diluted $ 1.50 $ 1.44 $ 1.44
See notes to consolidated financial statements.
33
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED JUNE 30,
2001 2000 1999
---- ---- ----
NET INCOME $5,649,435 $5,663,342 $5,978,801
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities 422,994 (352,242) 233,837
Reclassification of realized amount (459,387) (301,571) (232,157)
---------- -------- --------
Net unrealized gain (loss) recognized in
comprehensive income (36,393) (653,813) 1,680
---------- -------- ----------
COMPREHENSIVE INCOME $5,613,042 $5,009,529 $5,980,481
========== ========== ==========
See notes to consolidated financial statements.
34
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDING JUNE 30, 2001, 2000, AND 1999
ACCUMULATED OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID - IN RETAINED INCOME,
SHARES AMOUNT CAPITAL EARNINGS NET OF TAX TOTAL
------ ------ -------- -------- ---------- -----
BALANCE, JUNE 30, 1998 4,129,612 $4,129,612 $3,253,664 $46,208,807 $1,096,304 $54,688,387
Net income - - - 5,978,801 - 5,978,801
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - 1,680 1,680
Cash dividends declared
($.56 per share) - - - (2,600,186) - (2,600,186)
Stock repurchased (8,500) (8,500) (198,020) - - (206,520)
--------- --------- ---------- ----------- --------- ----------
BALANCE, JUNE 30, 1999 4,121,112 4,121,112 3,055,644 49,587,422 1,097,984 57,862,162
Net income - - - 5,663,342 - 5,663,342
Exercise of stock
options 4,834 4,834 68,150 - - 72,984
Stock tendered as
payment for options
exercised (3,281) (3,281) (63,941) - - (67,222)
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (653,813) (653,813)
Cash dividends declared
($.72 per share) - - - (2,802,833) - (2,802,833)
Stock repurchased (366,904) (366,904) (3,059,853) (4,966,782) - (8,393,539)
---------- ----------- ---------- ----------- ------- ----------
BALANCE, JUNE 30, 2000 3,755,761 3,755,761 - 47,481,149 444,171 51,681,081
Net income - - - 5,649,435 - 5,649,435
Exercise of stock
options 4,730 4,730 27,788 - - 32,518
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (36,393) (36,393)
Cash dividends declared
($.72 per share) - - - (2,704,364) - (2,704,364)
Stock repurchased (2,000) (2,000) (7,261) (20,739) - (30,000)
--------- ---------- ----------- ------------ ---------- ------------
BALANCE, JUNE 30, 2001 3,758,491 $ 3,758,491 $ 20,527 $ 50,405,481 $ 407,778 $ 54,592,277
========= =========== =========== ============ ========== ============
See notes to consolidated financial statements.
35
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES:
Net income $5,649,435 $5,663,342 $5,978,801
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,086,100 399,500 314,000
Depreciation of premises and equipment 1,136,143 1,022,327 825,483
Net change in deferred loan fees and costs 338,316 226,177 238,711
Federal Home Loan Bank stock dividends (384,600) (237,300) (216,200)
Amortization of acquired intangible assets 831,799 831,799 781,347
Amortization and accretion on securities (71,922) (61,435) (137,369)
Gain on sale of investments available-for-sale (696,041) (456,926) (351,753)
Gain on sale of real estate held for development (11,718) (6,194) (254,688)
Deferred taxes (330,781) 353,014 (178,266)
Changes in:
Interest receivable 7,323 (428,363) (769,462)
Other assets (478,920) (197,941) 3,293
Interest payable 840,755 259,950 (328,249)
Accounts payable and other liabilities 524,862 (367,766) (286,766)
--------- --------- ---------
Net cash provided by operating activities 8,440,751 7,000,184 5,618,882
--------- --------- ---------
INVESTING ACTIVITIES:
Sales of securities available-for-sale 707,607 461,782 362,459
Purchases of securities available-for-sale (32,325) (107,300) (1,010,000)
Purchases of securities held-to-maturity - (5,000,000) (49,855,000)
Maturities of securities held-to-maturity 22,285,284 6,332,014 30,227,733
Net increase in loans (47,704,293) (71,387,984) (34,934,161)
Purchase of Federal Home Loan Bank stock (1,379,600) (643,500) -
Net purchases of premises and equipment (880,476) (1,137,226) (1,545,933)
Purchase of real estate held for development (275,000) - -
Sales of real estate held for development - - 451,496
Net cash received in acquisition - - 52,456,754
----------- ----------- ----------
Net cash used in investing activities (27,278,803) (71,482,214) (3,846,652)
----------- ----------- ----------
FINANCING ACTIVITIES:
Net increase in deposits 45,066,242 24,315,516 21,131,129
Advances from Federal Home Loan Bank 76,090,434 79,647,360 5,000,000
Repayments to Federal Home Loan Bank (79,131,326) (25,202,937) (22,354,728)
Proceeds from stock options exercised 32,518 5,762 -
Dividends paid (2,704,364) (2,802,833) (2,600,186)
Common stock repurchased (30,000) (8,393,539) (206,520)
---------- ---------- -------
Net cash provided by financing activities 39,323,504 67,569,329 969,695
---------- ---------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 20,485,452 3,087,299 2,741,925
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,978,936 11,891,637 9,149,712
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $35,464,388 $14,978,936 $11,891,637
=========== =========== ===========
See notes to consolidated financial statements.
36
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 subsidiary, First Federal Savings Bank of
Elizabethtown (the Bank), and its wholly-owned subsidiaries,
First Service Corp. of Elizabethtown and First Heartland
Mortgage. All significant intercompany transactions and
balances have been eliminated.
The business of the Bank consists primarily of attracting
deposits from the general public and originating mortgage
loans on single-family residences. To a lesser extent, the
Bank also originates loans on 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 Ft.
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, and trust department and brokerage
services.
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 a maturity of three months or less to be cash
equivalents. Cash and cash equivalents include cash on hand,
amounts due from banks, and interest bearing deposits. Net
cash flows are reported for loans and deposits.
SECURITIES - The Corporation classifies its investments into
held-to-maturity and available-for-sale. Based upon a periodic
review of the investment portfolio, 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.
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.
37
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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. Unearned discounts on
consumer loans are recognized over the lives of the loans
using methods that approximate the interest method.
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 a nonaccrual 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. When interest accrual is discontinued, interest
income is subsequently recognized only to the extent cash
payments are received.
FEDERAL HOME LOAN BANK STOCK - Investment in stock of Federal
Home Loan Bank is carried at cost.
PREMISES AND EQUIPMENT - Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
by the straight-line method for buildings and improvements and
furniture and fixtures, over the estimated useful lives of the
related assets.
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.
38
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
ACQUISITION INTANGIBLES - The unamortized costs in excess of
the fair value of acquired net tangible assets are included in
acquisition intangibles. Acquisition intangibles are amortized
on a straight-line basis over 15 years.
STOCK OPTION PLANS - Although the Corporation applies APB No.
25, SFAS No. 123, "Accounting for Stock Based Compensation"
requires pro-forma disclosure of net income and earnings per
share as if the Corporation had accounted for its employee
stock options under that Statement. The fair value of each
option grant was estimated on the grant date using an
option-pricing model. Under SFAS No. 123, compensation cost is
recognized in the amount of the estimated fair value of the
options and amortized to expense over the options' vesting
period.
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.
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.
NEW ACCOUNTING PRONOUNCEMENTS - On July 1, 2000, the
Corporation adopted a new accounting standard that requires
all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair
value of the hedged item is not otherwise recorded. The
adoption of this new standard did not have a material effect
on the Corporation's financial statements.
The Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangibles" in June 2001. As a result and effective
immediately, the purchase method is the only allowable method
for accounting for prospective business combinations.
Effective July 1, 2002 for the Corporation, acquisition
intangibles must be separated into goodwill and identifiable
intangibles. Identifiable intangibles will continue to be
amortized while amortization of goodwill will cease. Annual
impairment testing will be required for goodwill with
impairment charges to be recorded if the carrying amount is in
excess of its fair value. The Corporation's acquisition
intangibles as currently reported include both core deposit
and goodwill, the amounts of which and therefore the financial
statement impact, have not yet been determined.
INDUSTRY SEGMENTS - All of the Corporation's operations are
considered by management to be aggregated into one reportable
operating segment.
RECLASSIFICATIONS - Certain amounts for 2000 and 1999 have
been reclassified to conform to the presentation for 2001.
39
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SECURITIES
The amortized cost basis and fair values of securities at June 30 are
as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
Securities available-for-sale:
June 30, 2001:
Equity securities $ 385,484 $ 616,676 $ (5,625) $ 996,535
Obligation of states and political
Subdivisions 1,009,773 6,799 - 1,016,572
--------- --------- -------- -----------
Total available-for-sale $ 1,395,257 $ 623,475 $ (5,625) $ 2,013,107
=========== ========= ======== ===========
June 30, 2000:
Equity securities $ 364,725 $ 807,396 $ (67,187) $ 1,104,934
Obligation of states and political
Subdivisions 1,009,928 - (67,220) 942,708
----------- --------- --------- -----------
Total available-for-sale $ 1,374,653 $ 807,396 $(134,407) $ 2,047,642
=========== ========= ========= ===========
Securities held-to-maturity:
June 30, 2001:
U.S. Treasury and agencies $19,917,029 $ 150,470 $(103,869) $19,963,630
Mortgage-backed securities 1,003,731 4,235 (17,398) 990,568
----------- --------- --------- -----------
Total held-to-maturity securities $20,920,760 $ 154,705 $(121,267) $20,954,198
=========== ========= ========= ===========
June 30, 2000:
U.S. Treasury and agencies $41,860,127 $ 65,220 $(1,989,224) $39,936,123
Mortgage-backed securities 1,273,840 7,493 (22,915) 1,258,418
----------- --------- ----------- -----------
Total held-to-maturity securities $43,133,967 $ 72,713 $(2,012,139) $41,194,541
=========== ========= =========== ===========
The amortized cost and fair value of securities at June 30, 2001, by
contractual maturity, are shown below.
Available-for-Sale Held-to-Maturity
------------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due after one year through five years $ 356,894 $ 359,926 $ 6,920,800 $ 7,071,270
Due after five years through ten years 652,879 656,646 11,996,229 11,912,830
Due after ten years - - 1,000,000 979,530
Mortgage-backed securities - - 1,003,731 990,568
Equity securities 385,484 996,535 - -
--- ------- ---------- ----------- -----------
$1,395,257 $2,013,107 $20,920,760 $20,954,198
========== ========== =========== ===========
40
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SECURITIES - (CONTINUED)
The following schedule sets forth the proceeds from sales of
available-for-sale securities and the gross realized gains on those
sales for the fiscal years ended June 30:
2001 2000 1999
---- ---- ----
Proceeds from sales $707,607 $461,782 $362,459
Gross realized gains 696,041 456,926 351,753
Realized gains, net of tax 459,387 301,571 232,157
Investment securities having an amortized cost of $20,401,230 and fair
value of $20,442,480 at June 30, 2001 were pledged to secure public
deposits.
3. LOANS RECEIVABLE:
-----------------
Loans receivable at June 30 are summarized as follows:
2001 2000
---- ----
Commercial $ 17,843,459 $ 16,294,738
Real estate commercial 88,937,849 64,828,182
Real estate construction 9,079,184 8,974,863
Real estate mortgage 330,488,000 311,091,127
Consumer and home equity 54,189,225 59,692,209
Indirect consumer 21,822,325 15,185,698
----------- -----------
522,360,042 476,066,817
Less:
Net deferred loan origination fees (2,308,529) (2,583,436)
Allowance for loan losses (2,906,356) (2,252,062)
------------ ------------
(5,214,885) (4,835,498)
------------ ------------
$517,145,157 $471,231,319
The Bank did not service loans for others on any of the dates presented
in these financial statements.
The allowance for losses on loans is summarized as follows:
Year Ended June 30,
----------------------------------------
2001 2000 1999
---- ---- ----
Balance, beginning of year $2,252,062 $2,107,994 $1,852,576
Provision for loan losses 1,086,100 399,500 314,000
Acquired - - 205,400
Charge-offs (498,796) (265,302) (290,049)
Recoveries 66,990 9,870 26,067
---------- ---------- ----------
Balance, end of year $2,906,356 $2,252,062 $2,107,994
========== ========== ==========
41
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. LOANS RECEIVABLE - (CONTINUED)
Investment in impaired loans is summarized below. There were no
impaired loans for the periods presented without an allowance
allocation.
June 30,
--------------------------------------
2001 2000 1999
---- ---- ----
Year-end impaired loans $2,720,000 $1,562,000 $ 2,529,000
Amount of allowance for loan
loss allocated 268,000 117,000 135,000
Average impaired loans outstanding 1,921,000 2,764,000 2,382,000
Interest income recognized 223,000 197,000
160,000
Interest income received 160,000 223,000 197,000
Non-performing loans, including impaired loans, are as follows:
June 30,
-----------------------------------
2001 2000 1999
---- ---- ----
Past due 90 days still on accrual $ - $ - $ -
Nonaccrual 1,381,000 1,307,000 2,381,000
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
June 30,
------------------------------
2001 2000
---- ----
Land $ 953,765 $ 816,265
Buildings 10,055,266 9,962,447
Furniture, fixtures and equipment 5,924,356 5,746,366
--------- ---------
16,933,387 16,525,078
Less accumulated depreciation (5,479,786) (4,815,810)
---------- ----------
$11,453,601 $11,709,268
=========== ===========
Certain premises are leased under various operating leases. Rental
expense was $256,000, $259,600 and $233,318 for the years ended June
30, 2001, 2000, and 1999, respectively. Future minimum commitments
under these leases are:
Year Ended
June 30
----------
2002 $ 260,011
2003 263,208
2004 266,408
2005 239,908
Thereafter 1,463,690
---------
$2,493,225
==========
42
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. DEPOSITS
Time Deposits of $100,000 or more were $102,577,000 and $87,941,000 at
June 30, 2001 and 2000, respectively. At June 30, 2001, scheduled
maturities of time deposits are as follows:
Amount
------
2002 $261,683,009
2003 44,912,152
2004 10,486,348
2005 4,851,251
Thereafter 5,038,038
------------
$326,970,798
============
6. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati are
collateralized by Federal Home Loan Bank stock and a blanket pledge of
one-to-four family residential mortgage loans equivalent to 125 percent
of the outstanding advances. At June 30, 2001, the Bank has available
collateral to borrow an additional $39.6 million from the Federal Home
Loan Bank. During the first quarter of 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, the FHLB has the right to convert these
advances to variable rate advances tied to the three-month LIBOR index.
June 30,
2001 2000
------------------------------------------------------------
Weighted- Weighted-
Average Rate Amount Average Rate Amount
------------ ------ ------------ ------
Fixed rate advances:
Mortgage matched advances
with interest rates from 5.30% to 7.80% 6.52% $ 559,864 6.54% $ 691,190
Overnight repo advance - % - 7.20% 44,000,000
One month repo advance - % - 6.55% 35,000,000
Convertible fixed rate advances 4.92% 75,000,000 - -
Other fixed rate advances 6.76% 1,737,794 7.53% 647,360
Lines of credit in the amount
of $38.3 million (2001) and $28.0
million (2000) maturing in 2004
through 2006 8.01% - 7.62% -
----------- -----------
Total borrowings $77,297,658 $80,338,550
=========== ===========
The aggregate minimum annual repayments of borrowings as of June 30,
2001 is as follows:
2002 $134,784
2003 142,694
2004 146,834
2005 152,158
2006 157,847
Thereafter 76,563,341
-----------
$77,297,658
===========
43
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. 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 for the years ended June 30, are as follows:
2001 2000 1999
---- ---- ----
Current $3,133,474 $2,439,347 $3,148,557
Deferred (330,781) 353,014 (178,266)
---------- ---------- ----------
Total income tax expense $2,802,693 $2,792,361 $2,970,291
========== ========== ==========
The provision for income taxes differs from the amount computed at the
statutory rates as follows:
2001 2000 1999
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Tax-exempt interest income (.2) (.2) (.2)
Acquisition intangibles 1.0 1.0 .9
Dividends to ESOP (.6) (.6) (.5)
Other (1.0) (1.2) (1.0)
---- ---- ----
Effective rate 33.2% 33.0% 33.2%
===== ===== =====
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 at June 30, relate to the following:
2001 2000
---- ----
Deferred tax assets:
Allowance for loan losses $ 532,644 $ 158,344
Investment securities 26,928 107,426
Accrued liabilities and other 262,244 211,400
------- -------
821,816 477,170
------- -------
Deferred tax liabilities:
Depreciation 872,006 890,335
Net unrealized gain on securities
available-for-sale 210,072 228,818
Federal Home Loan Bank stock 844,919 714,155
Other 460,195 558,765
--------- ---------
2,387,192 2,392,073
--------- ---------
Net deferred tax liability $1,565,376 $1,914,903
========== ==========
44
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. INCOME TAXES - (CONTINUED)
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 liability otherwise would total $3.2 million at June
30, 2001 and 2000. 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 expense.
8. STOCKHOLDERS' EQUITY
(A) 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 $632,725 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.
(B) REGULATORY CAPITAL REQUIREMENTS - Savings institutions insured
by the FDIC 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 June 30, 2001, the Bank was categorized as well
capitalized. The Bank's actual and required capital amounts
and ratios are presented below:
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------
AS OF JUNE 30, 2001: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-
weighted assets) $46,945,000 11.0% $34,280,000 8.0% $42,850,000 10.0%
Tier I capital (to risk-weighted
assets) 43,722,000 10.2 17,140,000 4.0 25,710,000 6.0
Tier I capital (to average assets) 43,722,000 7.2 24,168,000 4.0 30,210,000 5.0
AS OF JUNE 30, 2000:
Total risk-based capital (to risk-
weighted assets) $44,606,000 11.4% $31,262,000 8.0% $39,078,000 10.0%
Tier I capital (to risk-weighted
assets) 42,354,000 10.8 15,631,000 4.0 23,447,000 6.0
Tier I capital (to average assets) 42,354,000 7.8 21,865,000 4.0 27,331,000 5.0
(C) DIVIDEND RESTRICTIONS-Under OTS regulations, limitations have
been imposed on all "capital distributions" by savings
institutions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the
greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination
ratings by the OTS. For example,a thrift which is given one of
45
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. STOCKHOLDERS' EQUITY - (CONTINUED)
the two highest examination ratings and has "capital" equal
to its fully phased-in regulatory capital requirements (a
"tier 1 institution") could, if a subsidiary of a holding
company, after prior notice but without the prior approval of
the OTS, make capital distributions in any year to the extent
not in excess of its net income for the calendar year-to-date
plus retained net income for the previous two calendar years
(less any dividends previously paid), provided that the thrift
remains adequately capitalized following the distribution.
Other thrifts would be subject to more stringent procedural
and substantive requirements, the most restrictive being prior
OTS approval of any capital distribution. The Bank is a tier
one institution. Under the most restrictive of the dividend
limitations described above, at June 30, 2001, the Bank was
able to declare $7.3 million in additional dividends to the
holding company without obtaining the prior approval of the
OTS.
(D) QUALIFIED THRIFT LENDER - The Qualified Thrift Lender ("QTL")
test requires that approximately 65% of assets be maintained
in housing-related finance and other specified areas. If the
QTL test is not met, limits are placed on growth, branching,
new investments, FHLB advances and dividends, or the Bank must
convert to a commercial bank charter. Management believes that
the QTL test has been met.
9. EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the
basic and diluted EPS is as follows:
Year Ended June 30,
2001 2000 1999
---- ---- ----
Net income available to common
Shareholders $5,649,435 $5,663,342 $5,978,801
========== ========== ==========
Basic EPS:
Weighted average common shares 3,755,688 3,906,197 4,127,804
========= ========= =========
Diluted EPS:
Weighted average common shares 3,755,688 3,906,197 4,127,804
Dilutive effect of stock options 5,348 16,766 20,419
--------- --------- ---------
Weighted average common and
incremental shares 3,761,036 3,922,963 4,148,223
========= ========= =========
Earnings Per Share:
Basic $1.50 $1.45 $1.45
===== ===== =====
Diluted $1.50 $1.44 $1.44
===== ===== =====
Stock options for 79,500 shares of common stock were not
included in the 2001 computation of diluted earning per share
because their impact was anti-dilutive.
46
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. 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 substantially all employees. 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 2001, 2000 and 1999 totaled
$0, $5,418, and $4,486, respectively. The Bank 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
immediately vested. Employer contributions and administrative
expenses charged to operations for 2001, 2000 and 1999 were
$184,331, $166,577, and $142,465, 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.
Shares of the Corporation's common stock were acquired in a
non-leveraged transaction. 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 at
June 30 and contributions charged to compensation expense during
the year were as follows:
2001 2000 1999
---- ---- ----
Allocated ESOP shares 207,045 211,503 225,889
Contributions to ESOP $56,000 $66,000 $50,000
(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 expires ten years after the date of grant. At
June 30, 2001 options available for future grant under the 1998
Stock Option Plan totaled 89,000. A summary of option
transactions is as follows:
June 30,
---------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
-------- -------- --------- -------- --------- --------
Outstanding, beginning of year 102,230 $19.13 55,064 $15.52 42,564 $12.88
Granted during year 12,000 17.00 52,500 22.53 12,500 24.50
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 55,064 15.52
======= ======= ======
Eligible for exercise at year end 47,900 32,230 26,564
Weighted average fair value of
options granted during the year $ 4.71 $ 7.06 $ 8.79
47
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. EMPLOYEE BENEFIT PLANS - (CONTINUED)
The following table summarizes information about stock options
outstanding at June 30, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Weighted Average Average Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
------ ----------- ---------------- ----- ----------- -----
$12.50 25,000 2.7 years $12.50 25,000 $ 12.50
$16.00 to $17.00 19,500 7.1 16.70 7,400 16.32
$22.38 to $22.63 52,500 8.6 22.53 12,500 22.63
$24.50 7,500 7.8 24.50 3,000 24.50
------- -----
104,500 6.8 $19.18 47,900 $16.49
======= ======
The pro-forma effect on net income and earnings per share is
as follows:
Year Ended June 30,
2001 2000 1999
---- ---- ----
Net income: As reported $5,649,435 $5,663,342 $5,978,801
Pro-forma 5,544,858 5,600,975 5,968,780
Earnings per share:
Basic As reported $ 1.50 $ 1.45 $ 1.45
Pro-forma 1.48 1.43 1.45
Diluted As reported $ 1.50 $ 1.44 $ 1.44
Pro-forma 1.47 1.43 1.44
The fair value of each stock option granted is estimated on
the date of grant using the Black-Scholes option-pricing
model with the following assumptions for grants in 2001: 1)
expected dividend yields at 4.2%, 2) risk-free interest rates
at 5.88%, 3) expected volatility at 31%, and 4) expected life
of options at 10 years. Future pro-forma net income will be
negatively impacted to the extent more options are granted.
11. CASH FLOW ACTIVITIES
The following information is presented as supplemental
disclosures to the statement of cash flows.
(a) Cash paid during the year ended June 30 for:
2001 2000 1999
---- ---- ----
Interest expense $26,588,552 $20,613,518 $18,165,549
=========== =========== ===========
Income taxes $ 3,127,940 $ 2,973,347 $ 2,946,000
=========== =========== ===========
48
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. CASH FLOW ACTIVITIES - (CONTINUED)
(b) Supplemental disclosure of non-cash activities:
2001 2000 1999
---- ---- ----
Loans to facilitate sales of
real state owned $120,766 $783,075 $320,688
======== ======== ========
Transfers from loans to real estate
acquired through foreclosure $416,755 $674,465 $295,714
======== ======== ========
12. 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
June 30,
------------------------------
2001 2000
---- ----
ASSETS
Cash and interest bearing deposits $ 312,275 $ 211,100
Investment in subsidiary 54,003,275 53,302,018
Securities available-for-sale 396,355 279,301
Receivable from Bank 270,965 -
Other assets 6,685 10,241
----------- -----------
$54,989,555 $53,802,660
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to Bank $ 10,539 $ 1,985,835
Other liabilities 386,739 135,744
Stockholders' equity 54,592,277 51,681,081
----------- ----------
$54,989,555 $53,802,660
=========== ===========
CONDENSED STATEMENTS OF INCOME
Year Ended June 30,
-------------------------------------
2001 2000 1999
---- ---- ----
Dividend from subsidiary $4,900,000 $7,000,000 $4,000,000
Interest income 20,916 52,695 34,681
Other expenses (169,816) (164,893) (547,656)
---------- ---------- ---------
Income before income tax benefit 4,751,100 6,887,802 3,487,025
Income tax benefit 104,764 93,942 222,473
---------- ---------- ----------
Income before equity in undistributed
net income of subsidiary 4,855,864 6,981,744 3,709,498
Equity in undistributed net income of
subsidiaries (distributions in excess
of net income) 793,571 (1,318,402) 2,269,303
--------- ---------- ----------
Net income $5,649,435 $5,663,342 $5,978,801
========== ========== ==========
49
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended June 30,
--------------------------------------------
2001 2000 1999
---- ---- ----
Operating Activities:
Net income $5,649,435 $5,663,342 $5,978,801
Adjustments to reconcile net income to
cash provided by operating activities:
(Equity in undistributed net income
from subsidiary) distributions in
excess of net income (793,571) 1,318,402 (2,269,303)
Decrease (increase) in other assets (25,252) 22,344
(5,265)
Increase in other liabilities 250,995 135,744 -
--------- --------- ---------
Net cash provided by operating activities 5,081,607 7,139,832 3,704,233
--------- --------- ---------
Investing Activities:
Purchases of securities available-for-sale (32,325) (107,300) -
Net change in receivable from Bank (270,965) 1,787,705 (393,895)
-------- --------- --------
Net cash provided (used) by investing
activities (303,290) 1,680,405 (393,895)
-------- --------- --------
Financing Activities:
Proceeds from stock options exercised 32,518 5,762 -
Dividends paid (2,704,364) (2,802,833) (2,600,186)
Common stock repurchases (30,000) (8,393,539) (206,520)
Net change in payable to Bank (1,975,296) 1,985,835 -
---------- ---------
Net cash used by financing activities (4,677,142) (9,204,775) (2,806,706)
---------- ---------- ----------
Net increase (decrease) in cash 101,175 (384,538) 503,632
Cash and interest bearing deposits,
beginning of year 211,100 595,638 92,006
----------- ----------- ---------
Cash and interest bearing deposits,
end of year $ 312,275 $ 211,100 $ 595,638
=========== =========== =========
50
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments are as
follows:
June 30, 2001 June 30, 2000
---------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 35,464,388 $ 35,464,000 $ 14,978,936 $ 14,979,000
Investment securities:
Securities available-for-sale 2,013,107 2,013,000 2,047,642 2,048,000
Securities held-to-maturity 20,920,760 20,954,000 43,133,967 41,195,000
Loans, net 517,145,157 526,880,000 471,231,319 463,191,000
Federal Home Loan Bank stock 5,845,000 5,845,000 4,080,800 4,080,800
Accrued interest receivable 2,024,554 2,025,000 2,031,877 2,032,000
Financial liabilities:
Deposits (468,825,197) (469,719,000) (423,758,955) (422,696,000)
Advances from Federal
Home Loan Bank (77,297,658) (81,923,000) (80,338,550) (79,992,000)
Accrued interest payable (1,969,545) (1,970,000) (1,128,790) (1,129,000)
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,
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. 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 is based on current rates for similar financing. 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.
14. 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.
15. 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. Those
instruments 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.
51
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - (CONTINUED)
---------------------------------------------------------------
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. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
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. The Bank evaluates each customer's credit worthiness. The
amount of collateral obtained, if it is deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of
the counterparty.
Commitments to make loans, excluding undisbursed portions of loans in
process, at June 30 were as follows:
2001 2000
-----------------------------------------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Commitments to make loans $ 4,231,215 $ 389,500 $ 3,218,720 $ 1,859,590
Unused lines of credit - 38,257,649 - 28,020,618
Standby letters of credit - 3,846,000 - 3,240,860
----------- ----------- ----------- -----------
$ 4,231,215 $42,493,149 $ 3,218,720 $33,121,068
=========== =========== =========== ===========
Fixed rate loan commitments at June 30, 2001 were at current rates
ranging from 6.99% to 8.00%. Variable rate loan commitments at June 30,
2001 were at a current rate of 7.00%, 6.00% to 18.00% for unused lines
of credit and primarily at the national prime rate of interest plus 50
to 200 basis points for standby letters of credit.
At June 30, 2001, a reserve of $3,573,000 was required as deposits with
the Federal Reserve or as cash on hand. The reserves do not earn
interest.
16. RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Company, including associates of such persons, are loan customers. A
summary of the related party loan activity, for loans aggregating
$60,000 or more to any one related party, is as follows:
June 30,
-------------------------------
2001 2000
---- ----
Beginning of year $1,283,427 $1,668,630
New loans 7,726 -
Repayments (68,823) (246,857)
Other changes 167,130 (138,346)
---------- ----------
End of year $1,389,460 $1,283,427
========== ==========
Other changes include adjustments for loans applicable to one reporting
period that are excludable from the other reporting period. These loans
were made in the ordinary course of business at market interest rates
and normal credit terms.
52
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
17. SUMMARY OF QUARTERLY FINANCIAL DATA - (UNAUDITED)
(Dollars in thousands except per share data)
FISCAL 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
FISCAL 2000: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $9,100 $9,423 $9,744 $10,275
Total interest expense 4,633 4,992 5,368 5,880
Net interest income 4,467 4,431 4,376 4,395
Provision for loan losses 90 90 90 130
Non-interest income 962 1,001 984 930
Non-interest expense 2,998 3,192 3,124 3,377
Net income 1,573 1,464 1,403 1,223
Earnings per share:
Basic 0.39 0.37 0.36 0.33
Diluted 0.38 0.37 0.36 0.33
53
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 2001 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.
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.
54
PART IV
ITEM 14. 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 June 30,
2001 and 2000.
(c) Consolidated Statements of Income for the years ended
June 30, 2001, 2000, and 1999.
(d) Consolidated Statements of Comprehensive Income for the
years ended June 30, 2001, 2000, and 1999.
(e) Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2001, 2000, and 1999.
(f) Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000, and 1999.
(g) Notes to Consolidated Financial Statements
2. 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
4. The Registrant has filed no reports on Form 8-K for the quarter
ending June 30, 2001.
* 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.
*** Incorporated by reference to the Corporation's Form 8-K filed April 20,1999.
55
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: 9/18/01 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
and Director
Date: 9/18/01 Date: 9/18/01
By: /s/ Wreno M. Hall By: /s/ Diane E. Logsdon
-------------------- ---------------------
Wreno M. Hall Diane E. Logsdon
Director Director
Date: 9/18/01 Date: 9/18/01
By: /s/ J. Alton Rider By: /s/ John L. Newcomb, Jr.
------------------ -------------------------
J. Alton Rider John L. Newcomb, Jr.
Director Director
Date: 9/18/01 Date: 9/18/01
By: /s/ Burlyn Pike By: /s/ Walter D. Huddleston
---------------- -------------------------
Burlyn Pike Walter D. Huddleston
Director Director
Date: 9/18/01 Date: 9/18/01
By: /s/ Stephen Mouser By: /s/ Charles Chaney
------------------- ------------------
Stephen Mouser Charles Chaney
Director Chief Operating Officer
Date: 9/18/01 Date: 9/18/01
By: /s/ Michael Thomas, DVM
-----------------------
Michael Thomas, DVM
Director
Date: 9/18/01
56
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**
(16) Letter re Change in Auditor***
(21) Subsidiaries of the Registrant
(23)(a) Consent of Crowe, Chizek and Company LLP, Certified Public
Accountants
* 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.
*** Incorporated by reference to the Corporation's Form 8-K filed April 20,1999.
57
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.
58
EXHIBIT 23(A) - CONSENT OF CROWE, CHIZEK & 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 August 6, 2001 on the consolidated financial statements of First
Federal Financial Corporation of Kentucky as of June 30, 2001 and 2000 for the
years in the period ending June 30, 2001 as included in the registrant's annual
report on Form 10-K.
Crowe, Chizek & Company LLP
Louisville, Kentucky
September 28, 2001