UNITED STATES
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
FOR THE FISCAL YEAR ENDED JUNE 30, 2002.
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
16, 2002, was $62,171,384. 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 16, 2002, there were issued and outstanding 3,660,275 shares of
the registrant's common stock, of which directors and executive officers held
634,839 shares and more than 5% beneficial owners held 199,464 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders to be held November 13, 2002 are incorporated by
reference into Part III.
1
PART I
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements by First Federal Financial Corporation of Kentucky (the
"Corporation") contained in "Item 1--Business," "Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations," and other
sections of this report that are not statements of historical fact constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. In addition, the Corporation may make
forward-looking statements in future filings with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of the Corporation. Forward-looking statements include, but
are not limited to: (1) projections of revenues, income or loss, earnings or
loss per share, capital structure and other financial items; (2) statements of
plans and objectives of the Corporation or its management or Board of Directors;
(3) statements regarding future events, actions or economic performance; and (4)
statements of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "plans," "targeted," and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those indicated by the forword-looking
statements. Some of the events or circumstances that could cause such difference
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. The principal sources of funds for First
Federal's lending activities include deposits received from the general public,
borrowings from the Federal Home Loan Bank ("FHLB") of Cincinnati, and loan
repayments. First Federal's primary sources of income are interest and
origination fees on loans and interest on investments such as various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations. First Federal's principal expenses are interest
paid on deposit accounts and borrowed funds and operating expenses.
First Federal was originally founded in 1923 as a state-chartered institution
and became federally chartered in 1940. In 1987, the Bank converted to a
federally chartered savings bank and converted from mutual to stock form. The
Bank is a member of the FHLB of Cincinnati and 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").
2
The Bank's primary market area consists of six counties in Central Kentucky:
Hardin; Hart; Nelson; Bullitt; Meade; and Jefferson. The following table
provides demographic and economic information by county:
AVERAGE MEDIAN MEDIAN
% BELOW NUMBER UNEMPLOYMENT WEEKLY FAMILY HOME
COUNTY POPULATION TREND POVERTY EMPLOYED RATE% TREND WAGE INCOME PRICE
- ------ ---------- ----- ------- -------- ------------ ----- ------- ------ ------
Hardin 95,070 1.0% 12.4 38,392 6.40 1.2% 527 48,100 86,000
Hart 17,383 (.4)% 22.2 4,317 5.70 1.1% 390 33,400 45,000
Nelson 38,592 3.0% 12.0 13,057 7.00 1.4% 485 48,100 71,375
Bullitt 63,043 3.0% 9.2 11,680 3.50 .5% 450 56,300 93,250
Meade 27,008 2.5% 10.3 3,833 5.00 .7% 473 40,200 70,100
Jefferson 692,910 (.4)% 12.0 438,853 4.00 .4% 642 56,300 102,650
The Bank continues to seek and evaluate additional expansion opportunities,
either through the establishment of de novo banking centers and/ or through
acquisitions of existing institutions in the financial services industry. The
Bank intends to continue to consider various strategic acquisitions of banks or
banking assets in those geographical areas that management believes would
complement and increase the Bank's existing business lines, or expansion in new
market areas or product lines that management determines would be in the best
interest of the Bank and its shareholders.
LENDING ACTIVITIES
GENERAL. The principal lending activity of First Federal is the origination of
conventional first mortgage loans secured by residential property. 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, net of
deferred loan fees, by type 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,
-----------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ - ------ -
Type of Loan:
Real Estate:
Residential(1) $308,384 58.86% $328,297 63.12% $308,507 65.16% $297,574 73.94% $282,503 79.18%
Construction 10,662 2.03 9,079 1.75 8,975 1.89 11,430 2.84 5,960 1.67
Commercial 112,528 21.48 88,938 17.10 64,828 13.69 32,729 8.13 22,169 6.21
Consumer and
home equity 51,797 9.88 54,189 10.42 59,692 12.61 48,281 12.00 45,136 12.65
Indirect consumer 19,640 3.75 21,822 4.20 15,186 3.21 762 .19 - -
Commercial,
other 20,985 4.00 17,727 3.41 16,295 3.44 11,692 2.90 1,020 .29
-------- ------ ------- ------ -------- ------ -------- ------ -------- ------
Total loans $523,996 100.00% $520,052 100.00% $473,483 100.00% $402,468 100.00% $356,788 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
(1) Includes loans held for sale.
3
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
June 30, 2002, 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
2003 2002 2002 LOANS
---- ---- ---- -----
(DOLLARS IN THOUSANDS)
Residential mortgage (1) $ 3,685 $ 30,575 $274,124 $308,384
Real estate construction 8,102 1,300 1,260 10,662
Real estate commercial 12,515 72,969 27,044 112,528
Consumer, home equity and
indirect consumer 5,626 65,041 770 71,437
Commercial, other 7,112 12,157 1,716 20,985
------- -------- -------- --------
Total $37,040 $182,042 $304,914 $523,996
======= ======== ======== ========
(1) Includes loans held for sale.
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)
Residential mortgage (1) $242,725 $ 61,974 $304,699
Real estate construction 1,843 717 2,560
Real estate commercial 74,924 25,089 100,013
Consumer, home equity and
indirect consumer 46,460 19,351 65,811
Commercial, other 12,135 1,738 13,873
-------- -------- --------
Total $378,087 $108,869 $486,956
======== ======== ========
(1) Includes loans held for sale.
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 indices with a maximum adjustment of 2% annually,
and a lifetime cap of 15%. As of June 30, 2002, approximately 20.3% of the
Bank's residential real estate loans were adjustable rate loans with adjustment
periods ranging from one to five years and balloon loans of seven years or less.
The origination of these mortgage loans can be more difficult in a low interest
rate environment where there is a significant demand for fixed rate mortgages.
The Bank limits the maximum loan-to-value ratio on one-to-four-family
residential first mortgages to 90% of the appraised value and generally limits
the loan-to-value ratio on second mortgages on one-to-four-family dwellings to
90%.
Construction loans involve additional risks 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.
4
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 for small and
medium-sized businesses from its various locations. Commercial loans are
primarilly real estate secured and are generated at banking centers primarily in
the Bank's market area. The Bank makes commercial loans to a variety of
industries. Substantially all of the commercial real estate loans originated by
First Federal have adjustable interest rates with maturities of 25 years or less
or are loans with fixed interest rates and maturities of five years or less. At
June 30, 2002, the Bank had $112.5 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, 2002, fiscal year had a balance
of $2.2 million.
First Federal's commercial real estate lending activities include loans secured
by multi-family residential property, consisting of properties with more than
four separate dwelling units. These loans amounted to $15.1 million of the loan
portfolio at June 30, 2002. First Federal generally does not lend above 75% of
the appraised values of multi-family residences on first mortgage loans. The
mortgage loans First Federal currently offers on multi-family dwellings are
generally one or five year ARMs with maturities of 25 years or less.
Commercial real estate loans typically involve large loan balances to single
borrowers or groups of related borrowers and may also involve higher loan
principal amounts to collateral values 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.
CONSUMER LENDING. 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. As of June 30, 2002, consumer loans outstanding were $71.4 million or
approximately 13.6% of the Bank's total gross loan portfolio. These loans
involve a higher risk of default than loans secured by one-to-four-family
residential loans. The Bank believes, however, that the shorter term and the
normally higher interest rates available on various types of consumer loans have
been helpful in maintaining a profitable spread between the Bank's average loan
yield and its cost of funds. The Bank offers a home equity line of credit, which
is a revolving line of credit secured by the equity in a customer's home. As of
June 30, 2002, these loans totaled $32.1 million.
The Bank's underwriting standards reflect that consumer loans are considered to
have greater risk of loan losses than residential real estate loans. Among other
things, the capacity of individual borrowers to repay can change rapidly,
particularly during an economic downturn, collection costs can be relatively
higher for smaller loans, and the value of collateral may be more likely to
depreciate. The Consumer Lending Policy establishes the appropriate consumer
lending authority for all loan officers based on experience, training, and past
performance for approving high quality loans. Loans beyond individual
authorities must be approved by additional officers, the Executive Loan
Committee or the Board of Directors, based on the size of the loan. The Bank
requires detailed financial information and credit bureau reports for each
consumer loan applicant to establish the applicant's credit history, the
adequacy of income for debt retirement, and job stability based on the
applicant's employment records. Co-signers are required on applications that are
determined marginal for these standards, or that fail to qualify individually.
Adequate collateral is required on the majority of consumer loans. The Executive
Loan Committee monitors and evaluates unsecured lending activity by each loan
officer.
In 1999, the Bank developed an indirect consumer loan program. The indirect
consumer loan portfolio is comprised of new and used automobile, motorcycle and
all terrain vehicle loans originated on the behalf of the Bank by a select group
of auto dealers within the service area. Indirect consumer loans are considered
to have greater risk of loan losses than direct consumer loans due to, among
other things: borrowers may have no existing relationship with the Bank;
borrowers may not be residents of the lending area; less detailed financial
statement information may be collected at application; collateral values can be
more difficult to determine; and the condition of vehicles securing the loan can
deteriorate rapidly. To address the additional risks associated with indirect
consumer lending, the Executive Loan Committee continually evaluates data
regarding the dealers enrolled in the program, including monitoring turn down
5
and delinquency rates. All applications are approved by specific lending
officers, selected based on experience in this field, who obtain credit bureau
reports on each application to assist in the decision. Aggressive collection
procedures encourage more timely recovery of late payments. At June 30, 2002,
total loans under the indirect consumer loan program totaled $19.6 million.
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. The risks associated with commercial business lending include potentially
greater volatility in the value of the assigned collateral, the need for more
technical analysis of the borrower's financial position, the potentially greater
impact of changing economic conditions may have on the borrower's ability to
retire debt, and the additional expertise required for commercial lending
personnel. The Bank has developed a new commercial lending policy and hired a
Chief Lending Officer to reduce these risks and coordinate the Bank's plans to
increase its emphasis on commercial lending. The Chief Lending Officer has
developed guidelines for the Bank's lending staff to assist this process.
However, commercial loans generally carry a higher yield and are made for a
shorter term than real estate loans. Commercial business loans outstanding at
June 30, 2002 totaled $21.0 million
INVESTMENT SECURITIES
Interest on securities provides the largest source of interest income for First
Federal after interest on loans, constituting 4.66% of the total interest income
for fiscal year 2002. First Federal has the authority to invest in various types
of liquid assets, including short-term United States Treasury obligations and
securities of various federal agencies, certificates of deposit at insured
savings and loans and banks, bankers' acceptances, and federal funds. The Bank
may also invest a portion of its assets in certain commercial paper and
corporate debt securities. First Federal is also authorized to invest in mutual
funds and stocks whose assets conform to the investments that First Federal is
authorized to make directly. Securities held-to-maturity decreased in fiscal
year 2001 due to redemptions of bonds held in the Bank's investment portfolio.
As interest rates declined, these bonds ceased to be an attractive funding
vehicle for the issuer and were called for redemption in accordance with their
terms. See Note 2 of Notes to Consolidated Financial Statements for further
information concerning the Bank's investment portfolio.
The following table sets forth the carrying value of the Bank's securities
portfolio at the dates indicated. At June 30, 2002, the market value of the
Bank's securities portfolio was $23.7 million.
AT JUNE 30
----------------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Equity securities $ 930 $ 996 $ 1,105
Obligations of states and political
Subdivisions 1,048 1,017 943
----- -------
Total available-for-sale $ 1,978 $ 2,013 $ 2,048
======= ======= =======
Securities held-to-maturity:
U.S. Treasury and agencies $20,964 $19,917 $41,860
Mortgage-backed securities 751 1,004 1,274
------- ------- -------
Total held-to-maturity $21,715 $20,921 $43,134
======= ======= =======
The following table sets forth the scheduled maturities, amortized cost, fair
value and weighted average yields for the Bank's securities at June 30, 2002.
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD*
---- ----- -----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Due after one year through five years $ 777 $ 810 4.39%
Due after five years through ten years 233 238 4.46
Equity securities 385 930 3.57
------ -------
Total available-for-sale $1,395 $ 1,978
====== =======
6
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD*
(DOLLARS IN THOUSANDS)
Securities held-to-maturity:
Due in one year or less $ 1,964 $ 2,000 6.09%
Due after one year through five years 15,000 15,020 4.49
Due after ten years 4,000 4,002 5.33
Mortgage-backed securities 751 728 5.24
------- -------
Total held-to-maturity $21,715 $21,750
======= =======
*The weighted average yields are calculated on amortized cost on a non
tax-equivalent basis.
DEPOSITS
First Federal attracts both short-term and long-term deposits from the general
public by offering a wide range of deposit accounts and interest rates. In
recent years the Bank has been required by market conditions to rely
increasingly on short-term certificate accounts and other deposit alternatives
that are more responsive to market interest rates. The Bank uses forecasts based
on interest rate risk simulations to assist management in monitoring the Bank's
use of certificates of deposit and other deposit products as funding sources and
the impact of their use on interest income and net interest margin in various
rate environments.
During the fiscal year ended June 30, 2001, the Bank relied on certificates of
deposit for much of its funding needs. During that period, the stock market
remained an attractive investment option for depositors, and rates being paid by
competitors on deposit products had yet to decrease significantly in response to
substantial interest rate reductions in 2001. During the fiscal year ended June
30, 2002, equity investments have become much less attractive, resulting in a
substantial shift of investment funds from the stock market to deposit products,
specifically savings and money market accounts. The steady decline in rates paid
on certificates of deposit has led to increased balances for transactional and
immediate availability products. To evaluate the funding needs of the Bank in
light of deposit trends resulting from these changing conditions, management and
Board committees evaluate simulated performance reports that forecast changes in
margins. The Bank is offering attractive certificate rates for longer terms to
allow the Bank to retain deposit customers and reduce interest rate risk during
the current low-rate environment, while protecting the margin when interest
rates increase as the economy recovers.
First Federal offers statement and passbook savings accounts, NOW accounts,
money market accounts and fixed and variable rate certificates with varying
maturities. First Federal also offers tax-deferred individual retirement
accounts. The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. 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, 2002, approximately 41.3% of the Bank's deposits consisted of
various savings and demand deposit accounts from which customers are permitted
to withdraw funds at any time without penalty. Interest earned on savings
accounts is paid from the date of deposit to the date of withdrawal and
compounded quarterly. Interest earned on NOW accounts is paid from the date of
deposit to the date of withdrawal, compounded and credited monthly. Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established by management on a periodic basis.
First Federal also makes available to its depositors a number of certificates of
deposit with various terms and interest rates to be competitive in its market
area. These certificates have minimum deposit requirements as well. The variety
of deposit accounts by First Federal has permitted it to be more competitive in
obtaining funds and has allowed it to respond with more flexibility to the flow
of funds away from depository institutions into direct investment vehicles such
as government and corporate securities. However, the ability of the Bank to
attract and maintain deposits and its cost of funds have been, and will continue
to be, significantly affected by market conditions.
The holders of the Bank's certificates of deposits in amounts of $100,000 or
more are all non-brokered depositors, most of who reside within our service
areas. The Bank does not accept brokered deposits, which are funds deposited by
an investment dealer on behalf of a third-party investor. The Bank's policy is
to maintain certificate of deposit accounts in amounts of $100,000 or more, to
the extent practical, only when the depositor uses other bank products to
increase the total customer relationship. The objective is to provide the Bank
with a stable deposit base of large account balances while increasing the fee
income and lower funding costs through other products and services.
7
The following table sets forth the breakdown of the Bank's deposits as of June
30, 2002.
DOLLARS IN THOUSANDS
PERCENT
OF
CATEGORY BALANCES DEPOSITS
-------- -------- --------
Non-interest bearing demand accounts $ 28,341 5.35%
NOW demand accounts 64,479 12.17
Savings accounts 78,143 14.75
Money market deposit accounts 47,936 9.05
Certificates of deposit 274,305 51.77
Individual Retirement Accounts 36,678 6.91
-------- ------
$529,882 100.00%
======== =======
The following table indicates at June 30, 2002 the amount of the Bank's
certificates of deposit of $100,000 or more by time remaining until maturity.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Three months or less $ 23,061
Three through six months 8,246
Six through twelve months 28,747
Over twelve months 40,015
--------
Total $100,069
========
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 secured by the Bank's stock in
the FHLB and substantially all of the Bank's first mortgage loans. At June 30,
2002 First Federal had $77.8 million in advances outstanding from the FHLB and
the capacity to increase its borrowings an additional $153.7 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,
------------------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Average balance outstanding $77,709 $91,418 $52,419
Maximum amount outstanding at
any month-end during the period 80,377 111,026 80,339
Year end balance 77,778 77,298 80,339
Weighted average interest rate:
At end of year 4.94% 4.97% 5.44%
During the year 4.81% 5.80% 5.34%
8
SUBSIDIARY ACTIVITIES
In 1978, the Bank formed First Service Corporation of Elizabethtown ("First
Service"). First Service acts as a broker for the purpose of selling mortgage
life, credit life and accident and disability insurance to the Bank's customers.
In January 1999 First Service entered into a contract with Raymond James
Financial Services, Inc. to provide investment services to the Bank's customers
in the area of tax-deferred annuities, government securities and stocks and
bonds. First Service employs 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 $165,000 during fiscal year 2002.
In July 1999, the Bank formed First Heartland Mortgage Company of Elizabethtown
("First Heartland") through which the secondary market lending department
originates qualified VA loans on the behalf of the investors, thereby providing
necessary liquidity to the Bank and needed loan products to the Bank's
customers. The Bank has continued to experience good growth in the level of
mortgages being processed by First Heartland. As of June 30, 2002, First
Heartland originated $41.5 million in loans on the behalf of investors. The net
income of First Heartland Mortgage was $91,000 during fiscal year 2002.
COMPETITION
First Federal experiences substantial competition both in attracting and
retaining deposits and in the making of mortgage and other loans. Direct
competition for deposits comes from 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
product mix, pricing strategies and banking center locations. In addition,
Kentucky's interstate banking statute, which permits banks in all states to
enter the Kentucky market if they have reciprocal interstate banking statutes,
has further increased competition for the Bank. It is anticipated that
competition from both bank and non-bank entities will continue to remain strong
in the near future.
The following table sets forth the Bank's market share and rank in terms of
deposits in the Kentucky county where it has offices. The Bank has one office in
Jefferson County, which is Louisville, Kentucky, with a population of more than
650,000.
NUMBER OF
COUNTY INSTITUTIONS FFKY MARKET SHARE % FFKY RANK
------ ------------ ------------------- ---------
Hardin 14 18.45 1
Nelson 7 10.37 3
Hart 3 19.45 3
Bullitt 5 16.95 4
Meade 2 55.82 1
Jefferson 1 <1.00 N/M
EMPLOYEES
As of June 30, 2002, the Bank had 218 employees of which 200 were full-time and
18 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.
9
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, 2002, of $6.2 million.
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, 2002, First Federal had $77.8 million in
advances outstanding from the FHLB. For further information regarding advances
from the FHLB see Note 6 of the Notes to Consolidated Financial Statements in
the Annual Report.
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, 2002, approximately
91.60% 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, 2002, the Bank complied with its regulatory lending limits.
The aggregate amount of loans 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 various different capital requirements. Specifically, savings
associations must maintain a 6% Tier I leverage ratio, a 6% Tier I risk-based
capital ratio and a 10% total risk-based capital ratio to be considered well
capitalized. OTS regulations restrict savings associations that have capital
below these amounts. As of June 30, 2002, the Bank's ratio of Total risk-based
capital to total risk-weighted assets was 11.5%, Tier I capital to total
risk-weighted assets was10.6%, and Tier I capital to total average assets was
7.4%. For additional information see Note 9 of the Notes to Consolidated
Financial Statements in the Annual Report.
For purposes of the OTS's regulatory capital regulations, Tier I 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 I 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.
10
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.
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.
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. At June
30, 2002, 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 $788,000. Accordingly, on June 30, 2002, 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, 2002 is an analysis of the Bank's interest rate
risk ("IRR") as measured by changes in NPV for instantaneous and sustained
parallel shifts of upward 300 basis points to downward 100 basis points in
market interest rates.
AS OF JUNE 30, 2002
-------------------
NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
------------------- ------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------- -------- -------- -------- --------- ------
+300 bp 61,692 (19,365) (24) 9.22 (233 bp)
+200 bp 69,604 (11,453) (14) 10.23 (133 bp)
+100 bp 76,457 (4,600) (6) 11.05 (50 bp)
0 bp 81,056 11.55
-100 bp 81,635 579 1 11.53 (3 bp)
11
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.
12
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 these 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, 2002, a
reserve of $5.1 million was required as deposits with the Federal Reserve or as
cash on hand.
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.
13
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.
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
14
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 which 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 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 8 of the Notes to Consolidated Financial
Statements in the Annual Report.
15
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
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, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information captioned "MARKET AND DIVIDEND INFORMATION" included in the
Corporation's Annual Report to Shareholders for the fiscal year ended June 30,
2002 is incorporated on page 29 of the Form 10-K.
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. 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.
16
ITEM 6. SELECTED FINANCIAL DATA
The information captioned "Selected Consolidated Financial and Other Data"
included in the Corporation's Annual Report to Shareholders for the fiscal year
ended June 30, 2002 is incorporated on page 18 of the Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Corporation's Annual Report to Shareholders for the
fiscal year ended June 30, 2002 is incorporated on pages 19-29 of the Form-10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included under the caption "ASSET/LIABILITY MANAGEMENT AND
MARKET RISK" included in the Corporation's Annual Report to Shareholders for the
fiscal year ended June 30, 2002 is incorporated on pages 27-28 of the Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
TABLE OF CONTENTS
Selected Consolidated Financial and Other Data 18
Management Discussion & Analysis 19-29
Audited Consolidated Financial Statements:
o Report of Independent Auditors 30
o Consolidated Statements of Financial Condition 31
o Consolidated Statements of Income 32
o Consolidated Statements of Comprehensive Income 33
o Consolidated Statements of Changes in Stockholders' Equity 34
o Consolidated Statements of Cash Flows 35
o Notes to Consolidated Financial Statements 36-53
17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT JUNE 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (Dollars in thousands)
Total assets $679,110 $606,726 $560,785 $488,304 $409,651
Net loans outstanding (1) 520,261 517,145 471,231 400,360 354,935
Interest bearing deposits 64,000 - - - -
Investments 23,693 22,934 45,182 47,340 26,574
Deposits 529,882 468,825 423,759 399,443 306,703
Borrowings 87,493 77,298 80,339 25,894 43,249
Stockholders' equity 58,615 54,592 51,681 57,862 54,688
Number of:
Real estate loans outstanding 7,577 7,618 7,154 6,968 6,709
Deposit accounts 49,726 49,615 47,238 45,425 37,764
Offices 13 13 13 12 8
Full time equivalent employees 227 203 170 155 110
YEAR ENDED JUNE 30,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
OPERATIONS DATA: (Dollars in thousands)
Interest income $44,100 $45,392 $38,542 $35,496 $31,182
Interest expense 21,426 27,429 20,873 18,481 16,059
Net interest income 22,674 17,963 17,669 17,015 15,123
Provision for loan losses 1,604 1,086 400 314 265
Non-interest income 5,398 5,145 3,877 3,954 2,860
Non-interest expense (2) 15,281 13,570 12,691 11,706 8,082
Income tax expense 3,729 2,803 2,792 2,970 3,302
Net income 7,458 5,649 5,663 5,979 6,334
Earnings per share:
Basic 1.99 1.50 1.45 1.45 1.53
Diluted 1.98 1.50 1.44 1.44 1.52
Book value per share 15.72 14.53 13.76 14.04 13.24
Dividends paid per share 0.72 0.72 0.72 0.63 0.56
Dividend payout ratio 36% 48% 49% 43% 37%
Return on average assets 1.19% .95% 1.08% 1.25% 1.60%
Average equity to average
assets 9.10% 8.97% 10.28% 11.85% 13.55%
Return on average equity 13.08% 10.62% 10.52% 10.53% 11.81%
(1) Includes loans held for sale.
(2) Non-interest expense in 1999 includes one time acquisition and conversion
costs in the amount of $789,000, pretax.
18
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of First Federal Financial Corporation of
Kentucky are in accordance with accounting principles generally accepted in the
United State and conform to general practices within the banking industry. The
accounting policy relating to the allowance for loan losses is critical to the
understanding of the Corporation's results of operations since the application
of this policy requires significant management assumptions and estimates that
could result in materially different amounts to be reported if conditions or
underlying circumstances were to change. See "ALLOWANCE AND PROVISION FOR LOAN
LOSSES" herein for a complete discussion of the First Federal Financial
Corporation's accounting methodologies related to the allowance. Also refer to
Note 1 in the "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" for details regarding
all of the Corporation's critical and significant accounting policies.
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
The Bank reported net income of $7.5 million during 2002 compared with $5.6
million for 2001, an increase of 32%. Diluted earnings per share also increased
32% from $1.50 during 2001 to $1.98 for 2002. The increase in earnings for 2002
was primarily attributable to increased net interest income, service charges on
deposit accounts and gain on sale of mortgage loans. The Bank's 2001
restructuring of $75 million of its Federal Home Loan Bank advances from
overnight to 10-year maturities at lower interest rates coupled with declines in
interest rates will continue to have a positive impact on future earnings. The
Bank's book value per common share increased from $14.53 at June 30, 2001 to
$15.72 at June 30, 2002. Net income for 2002 generated return on average assets
of 1.19% and return on average equity of 13.08%. These compare with return on
average assets of .95% and return on average equity of 10.62% for the 2001
period.
The Bank's total assets at June 30, 2002 grew to $679.1 million compared to
$606.7 million at June 30, 2001. The increase in assets was due to the increase
in the Bank's interest bearing deposits, a direct result of the growth in retail
deposits. Net loans (including loans held for sale) increased $3.1 million from
June 30, 2001 to $520.3 million at June 30, 2002. Residential mortgage loans
decreased by $21.2 million during the 2002 period as declining market interest
rates caused an increase in 1-4 family refinancing activity into fixed-rate,
secondary market loan products. The commercial real estate portfolio remained
strong, increasing by $23.6 million to $112.5 million at June 30, 2002. This
growth is a result of the Bank's continued emphasis on the active pursuit of
lending opportunities.
Deposits increased by $61.1 million to $529.9 million at June 30, 2002 compared
to $468.8 million at June 30, 2001. The growth in retail deposits was primarily
in savings and money market accounts caused in part by a shift during recent
quarters in funds from the stock market to more conservative investments such as
bank deposits. FHLB advances increased from $77.3 million at June 30, 2001 to
$77.8 million at June 30, 2002. On March 26, 2002, the Corporation issued $10.0
million of Trust Preferred Securities through First Federal Statutory Trust I, a
subsidiary of the Corporation. The Corporation undertook the issuance of these
securities to enhance its regulatory capital position. The Corporation intends
to utilize the capital for general business purposes and to support the Bank's
future opportunities for growth.
The Bank experienced remarkable technological innovations during 2002 to improve
operating efficiency and to enhance customer service. The Bank implemented a
check imaging service for its customers. Imaged checks are also integrated with
the Bank's internet banking service to allow customers the benefit of reviewing
their canceled checks online. Customers also have the option of receiving their
bank statements through e-mail, a service delivery improvement to the customer
and an operational efficiency to the Bank. "Powerdraft", an overdraft privilege
plan, was introduce in February 2002, and has been widely accepted by the Bank's
retail customer base.
19
For the past four years, the Bank has implemented the strategic goal of
transitioning to a commercial bank by making operational enhancements, expanding
its product mix, and developing a sales-oriented culture. Total assets grew in
response to increased commercial and consumer lending using a variety of new
product lines. For fiscal year 2001, increased interest rates created margin
decreases due to the Bank's substantial balances in fixed rate mortgages.
Additional margin pressures resulted from increased deposit and wholesale
funding rates. The restructuring of the Bank's loan portfolio had not yet
positioned the Bank to absorb the higher rates. During the same period, new
deposit products were developed to attract more transactional, low-cost
customers. The Bank continued to offer higher certificate of deposit rates from
time to time to retain deposits for funding loan growth and maintaining market
share in our service areas. The Bank's strategy has been to offer higher rates
on certificates of deposit as a means to cross-sell additional products and
services that would eventually provide fee income and low yielding deposit
accounts.
RESULTS OF OPERATIONS
NET INTEREST INCOME - The principal source of the Bank's revenue is net interest
income. Net interest income is the difference between interest income on
interest-earning assets, such as loans and securities and the interest expense
on liabilities used to fund those assets, such as interest-bearing deposits and
borrowings. Net interest income is impacted by both changes in the amount and
composition of interest-earning assets and interest-bearing liabilities as well
as market interest rates.
For 2002, net interest income was $22.7 million, up $4.7 million from the $18.0
million attained during 2001. The Bank was able to increase its net interest
income through an improved interest rate margin compared to 2001. The Bank's net
interest margin increased from 3.22% during 2001 to 3.83% for the 2002 period.
The net interest rate spread increased from 2.81% during 2001 to 3.48% in 2002.
The net interest spread and margin benefited from a significant decline in the
Bank's cost of funds due to a reduction in short-term market interest rates by
the Federal Reserve which occurred principally during calendar 2001.
Substantially all categories of interest income and interest expense declined as
a result, but more so with interest-bearing liabilities. During the 2002 period,
average interest-earning assets were $593.4 million, an increase of $35.7
million over the same period in 2001. Total average interest bearing liabilities
increased from $514.8 million during 2001 to $540.9 million for the same period
in 2002. The 2002 period includes Trust Preferred Securities which were issued
in March 2002.
For 2001, net interest income increased by $293,000 to $18.0 million as compared
to $17.7 million in 2000 in spite of a declining net interest margin. The Bank's
net interest margin declined to 3.22% for the year ended June 30, 2001 compared
to 3.61% for the 2000 period. An increase in the cost of funds over the past
fiscal year, offset by an increase in the average earning assets of commercial
real estate and residential mortgage loans, reduced the net interest margin.
Average interest earning assets increased by $68.2 million from $489.5 million
for the 2000 period to $557.7 million for the 2001 period due to the large
growth of the Bank's loan portfolio. Average loans, which comprise 90% of the
total interest earning assets, were $66.8 million higher and averaged $504.4
million during 2001, while the average yield on loans increased by 26 basis
points to 8.33%. Average interest-bearing liabilities increased by $68.1 million
to an average balance of $514.8 million for 2001. Customer deposits averaged
$423.4 million during 2001, a $29.1 million increase from the 2000 average
balance of $394.3 million. Average Federal Home Loan Bank advances increased
$39.0 million for the 2001 period to fund the Bank's increased lending activity
that exceeded its deposit growth during certain periods throughout the year. The
Bank's cost of funds averaged 5.33% during 2001 which was an increase of 66
basis points from the 2000 average cost of funds of 4.67% due to higher rates
paid on short-term customer deposits.
20
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,
-------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2002 2001 2000
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
Interest earning assets:
Equity securities $ 952 $ 34 3.57% $ 1,005 $ 34 3.38% $ 1,432 $ 43 3.00%
State and political subdivision
securities (1) 1,022 71 6.95 980 67 6.84 960 67 6.98
U.S. Treasury and agencies 10,741 589 5.48 37,207 2,552 6.86 41,507 2,711 6.53
Mortgage-backed securities 854 54 6.32 1,115 83 7.44 1,403 93 6.63
Loans receivable (2) (3) (4) 523,559 42,045 8.03 504,404 41,996 8.33 437,640 35,317 8.07
FHLB stock 5,995 325 5.42 5,257 385 7.32 3,354 237 7.07
Interest bearing deposits 50,260 1,006 2.00 7,736 297 3.84 3,221 97 3.01
------- ------ ---- ------- ------ ---- ------- ------ ----
TOTAL INTEREST EARNING ASSETS 593,383 44,124 7.44 557,704 45,414 8.14 489,517 38,565 7.88
------ ---- ------ ---- ------ ----
Less: Allowance for loan losses (3,273) (2,537) (2,221)
Non-interest earning assets 36,371 37,457 36,383
-------- -------- --------
TOTAL ASSETS $626,481 $592,624 $523,679
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings accounts $ 54,165 $ 1,190 2.20% $33,964 $ 925 2.72% $ 36,115 $ 1,047 2.90%
NOW and money market accounts 97,339 1,764 1.81 79,792 2,161 2.71 78,222 1,871 2.39
Certificates of deposit and
other time deposits 308,747 14,585 4.72 309,651 19,039 6.15 279,941 15,155 5.41
FHLB Advances 77,709 3,741 4.81 91,418 5,304 5.80 52,419 2,800 5.34
Trust Preferred Securities 2,987 146 4.89 - - - - - -
------- ----- ---- ------- ------ ---- ------- ------ ----
TOTAL INTEREST BEARING
LIABILITIES 540,947 21,426 3.96 514,825 27,429 5.33 446,697 20,873 4.67
------ ---- ------ ---- ------ ----
Non-interest bearing liabilities:
Non-interest bearing deposits 22,996 18,427 16,896
Other liabilities 5,531 6,195 6,231
------ ----- -----
TOTAL LIABILITIES 569,474 539,447 469,824
Stockholders' equity 57,007 53,177 53,855
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $626,481 $592,624 $523,679
======= ======== ========
NET INTEREST INCOME $22,698 $17,985 $17,692
======= ======= =======
NET INTEREST SPREAD 3.48% 2.81% 3.21%
===== ===== =====
NET INTEREST MARGIN 3.83% 3.22% 3.61%
===== ===== =====
Ratio of average interest earning
assets to average interest bearing
liabilities 109.69% 108.33% 109.59%
======= ======= =======
- --------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax
rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
(3) Calculations include non-accruing loans in the average loan amounts
outstanding.
(4) Includes loans held for sale.
21
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,
----------------------------------------------------------------------------------------------
2002 VS. 2001 2001 VS. 2000 2000 VS. 1999
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:
Equity securities $ 2 $ (2) $ - $ 5 $(14) $ (9) $ 26 $ (11) $ 15
State and political subdivision
securities 1 3 4 (1) 1 - 1 (2) (1)
U.S. Treasury and agencies (432) (1,531) (1,963) 131 (290) (159) (86) 67 (19)
Mortgage-backed securities (11) (18) (29) 11 (21) (10) (5) (26) (31)
Loans (1,517) 1,566 49 1,150 5,529 6,679 (750) 4,171 3,421
FHLB stock (109) 49 (60) 9 139 148 2 19 21
Interest bearing deposits (205) 914 709 33 167 200 (147) (213) (360)
------- ------ ------- ------ ------ ------ ------- ------ -------
TOTAL INTEREST EARNING ASSETS $(2,271) $ 981 $(1,290) $1,338 $5,511 $6,849 $ (959) $4,005 $3,046
======= ====== ======= ====== ====== ====== ======= ====== ======
INTEREST EXPENSE:
Savings accounts $ (205) $ 470 $ 265 $ (62) $ (60) $ (122) $ 126 $ (63) $ 63
NOW and money market accounts (809) 412 (397) 252 38 290 216 133 349
Certificates of deposit and
other time deposits (4,399) (55) (4,454) 2,180 1,704 3,884 (246) 727 481
FHLB advances (831) (732) (1,563) 260 2,244 2,504 (44) 1,543 1,499
Trust preferred securities - 146 146 - - - - - -
------- ------ ------- ------ ------ ------ ---- ------ ------
TOTAL INTEREST BEARING
LIABILITIES $(6,244) $ 241 $(6,003) $2,630 $3,926 $6,556 $ 52 $2,340 $2,392
======= ====== ======= ====== ====== ====== ======= ====== ======
NET INTEREST INCOME $ 3,973 $ 740 $ 4,713 $(1,292) $1,585 $ 293 $(1,011) $1,665 $ 645
======= ====== ======= ======= ====== ====== ======= ====== ======
NON-INTEREST INCOME - Non-interest income was $5.4 million during 2002, $5.1
million during 2001, and $3.9 million during 2000. The increased level of
non-interest income during 2002 was primarily due to increased service fees on
deposit accounts and to a lesser extent, gain on sale of mortgage loans. The
increase from 2000 to 2001 occurred in all categories with the most significant
increases in service fees on deposit accounts and gains from investment sales.
Service charges on deposit accounts increased by $715,000 or 28% during 2002 due
to growth in fee-related customer transactions and growth in deposits, a result
of the general shift in funds from the stock market to bank deposits. Service
charges on deposit accounts were positively affected by the Bank's new
"Powerdraft" program. The "Powerdraft" program permits selected clients to
overdraft their accounts up to $600 for the Bank's customary fee. At June 30,
2002, the Bank had nearly 14,000 accounts eligible for the "Powerdraft" program.
22
Gain on sale of mortgage loans increased by $125,000 or 24% for 2002 compared to
2001 as declining market interest rates prompted an increase in consumer
refinance activity of 1-4 family fixed-rate residential loans, which the Bank
sells into the secondary market through its subsidiary, First Heartland Mortgage
Company. Mortgage banking income is dependent upon loan demand and refinance
volume which management anticipates will continue at or near current levels for
at least the next quarter. During 2002 the Bank did not report any gains from
investment sales compared to reported gains of $696,000 for 2001. Income from
brokerage commissions and insurance sales decreased $96,000 as a result of a
decline in demand for these products.
The increase in non-interest income from 2000 to 2001 was $1.3 million or 33%.
Gains from investment sales were $696,000 in 2001 compared to $457,000 for 2000,
an increase of $239,000. Gains on sale of mortgage loans increased by $172,000
or 48% during the fiscal year due to increased refinancing activity. Customer
service fees charged on deposit accounts increased by $610,000 or 31% during
2001 due to several operational changes made by the Bank, the most significant
of which was an increase in overdraft fees from $20 to $25 per occurrence.
Commercial checking accounts became subject to fees assessed on the basis of
account analysis. Insufficient funds, foreign ATM transactions, returned checks,
and daily overdraft fees were all increased during 2001. Brokerage and insurance
commissions increased by $175,000 or 38% during the 2001 period due as a result
of increased demand and an improved emphasis on insurance sales within the
Bank's lending area. Other sources of income such as trust, and other customer
transaction fees also increased during the 2001 period by $104,000.
NON-INTEREST EXPENSE - Non-interest expense increased by $1.7 million or 13%
during 2002 compared to 2001. Significant factors impacting this increase
included an increase in staffing levels, increased marketing efforts for the
Bank's promotional products as well as increases in other expense. Non-interest
expense increased from $12.7 million in 2000 to $13.6 million in 2001. The
increase in 2001 was primarily attributable to compensation and employee
benefits. Moderate increases in non-interest expense are likely to continue
going forward as the Bank anticipates future remodeling and expansion of its
banking centers. Non-interest expense levels are often measured using an
efficiency ratio (non-interest expense divided by the sum of net interest income
and non-interest income). A lower efficiency ration is indicative of higher bank
performance. The Bank's efficiency ratio was 54% in 2002 compared to 59% in 2001
and 59% in 2000.
Employee compensation and benefits increased $845,000 or 13% for 2002. The
increase reflects growth in the overall staffing level from 203 full-time
equivalent employees at June 30, 2001 to 227 at June 30, 2002. The Bank's
continued emphasis on building its commercial and retail staff to reflect its
commercial bank philosophy was the largest contributing factor.
Marketing and advertising costs increased during 2002 by $107,000 or 21%. The
increase is attributable to the Bank's television marketing campaign for the
"Simply Free Checking" product, enhanced marketing for the Bank's new
"Powerdraft" program and the Bank's commercial business campaign.
Data processing costs increased during 2002 by $125,000 or 9%. The increase
reflects the implementation of the Bank's cash management product, internet
banking, the creation of the Bank's new imaging department and processor charges
relating to an increase in the number of users.
The remainder of non-interest expense categories increased by a net of $556,000
or 23% during 2002. The increase is primarily attributable to increases in costs
associated with the new "Powerdraft" program, costs associated with postage,
stationary and supplies and other customer account expenses.
The increase in non-interest expense from 2000 to 2001 was primarily related to
employee compensation and benefits. The increase includes inflationary salary
adjustments and reflects growth in the overall staffing level from 170 at June
30, 2000, to 203 at June 30, 2001. Additional staffing was required to achieve a
new strategic plan adopted by the Bank in 1999 to develop a bank-wide service
and sales culture. The plan emphasizes expanding account relationships, which
requires increasing the number of associates in banking centers, relationship
bankers, business development officers, stockbrokers, and loan officers. The
transition has been responsible for much of the renewed growth in lending and
certificates of deposit. Office occupancy and equipment expense increased by
$94,000 in 2001 compared to 2000 due to costs associated with the Bank's new
Customer Service Center, which became operational in July 2000 and the second
Bardstown, Kentucky banking center, which reopened in early 2000.
23
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is evaluated quarterly by the Executive Loan
Committee and maintained at a level that is considered sufficient to absorb
probable incurred credit losses existing in the loan portfolio. Periodic
provisions to the allowance are made as needed. An appropriate level of the
general allowance is determined based on the application of loss percentages to
graded loans by categories. In addition, specific reserves are established for
individual loans when deemed necessary. The amount of the provision for loan
losses necessary to maintain an adequate allowance is based upon an analysis of
various factors, including changes in lending policies and procedures;
underwriting standards; collection; charge-off and recovery history; changes in
national and local economic business conditions and developments; changes in the
characteristics of the portfolio; ability and depth of lending management and
staff; changes in the trend of the volume and severity of past due, non-accrual
and classified loans; troubled debt restructuring and other loan modifications;
and results of regulatory examinations.
The methodology for allocating the allowance for loan and lease losses has taken
into account the Bank's strategic plan to increase its emphasis on commercial
and consumer lending. The Bank has increased the amount of the reserve allocated
to commercial in 2002 and consumer loans in 2001 in response to the growth of
the commercial and consumer loan portfolios and management's recognition of the
higher risks and loan losses in these lending areas. The indirect consumer loan
program was a new product in 1999 and is comprised of new and used automobile,
motorcycle and all terrain vehicle loans originated on the behalf of the Bank by
a select group of auto dealers within the service area. The indirect loan
program involves a greater degree of risk and is evaluated quarterly and
monitored by the Board of Directors. In light of the greater charge-offs from
indirect consumer loans compared to direct consumer loans, proportionally more
of the allowance for consumer loans is allocated for indirect loans than direct
loans. As the indirect loan program has evolved, dealer analysis and
underwriting standards have been refined to improve the loan loss experience of
the program. Estimating the reserve is a continuous process. In this regard, the
Executive Loan Committee continues to monitor the performance of indirect
consumer loans as well as the Bank's other loan products and updates its
estimates as the evidence warrants.
The following table sets forth an analysis of the Bank's loan loss experience
for the periods indicated.
YEAR ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance at beginning of period $2,906 $2,252 $2,108 $1,853 $1,715
------ ------ ------ ------ ------
Loans charged-off:
Real estate mortgage 25 2 36 42 16
Consumer 635 482 147 248 132
Commercial 256 15 82 - -
--- --- --- --- ---
Total charge-offs 916 499 265 290 148
--- --- --- --- ---
Recoveries:
Real estate mortgage 6 4 1 5 -
Consumer 97 63 8 21 21
Commercial 38 - - - -
Total recoveries 141 67 9 26 21
--- --- --- --- ---
Net loans charged-off 775 432 256 264 127
--- --- --- ---- ---
Acquired reserves - - - 205 -
Provision for loan losses 1,604 1,086 400 314 265
----- ----- --- --- ---
Balance at end of period $3,735 $2,906 $2,252 $2,108 $1,853
====== ====== ====== ====== ======
Allowance for loan losses to net loans .72% .56% .48% .52% .52%
Net charge-offs to average
loans outstanding .15% .09% .06% .07% .04%
Allowance for loan losses to
total non-performing loans 100% 88% 130% 68% 87%
24
The provision for loan losses was $1.6 million during 2002 compared to $1.1
million during 2001. The total allowance for loan losses increased $829,000 to
$3.7 million from June 30, 2001 to June 30, 2002. Management increased the
provision and allowance for loan losses due to the increase in non-performing
loans and charge-offs for the period, continued strong growth in commercial real
estate lending and the increase in charge-offs and non-performing loans which is
commensurate with the generally recognized slowing in the U.S. economy. Net loan
charge-offs increased $343,000 to $775,000 during 2002 compared to $432,000
during 2001. The increase in charge-offs is primarily related to charge-offs of
indirect consumer loans and commercial real estate loans during the 2002 period.
The following table shows management's allocation of the allowance for loan
losses by loan type. Allowance funding and allocation is based on management's
current evaluation of risk in each category, economic conditions, past loss
experience, loan volume, past due history and other factors. Since these factors
and management's assumptions are subject to change, the allocation is not
necessarily predictive of future portfolio performance.
2002 2001 2000
---- ---- ----
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
(DOLLARS IN THOUSANDS)
Residential mortgage $ 738 61% $ 884 65% $1,116 67%
Consumer 930 14 953 15 603 16
Commercial 2,067 25 1,069 20 533 17
------ --- ------ --- ------ ---
Total $3,735 100% $2,906 100% $2,252 100%
====== === ====== === ====== ===
Federal regulations require insured institutions to classify their own assets on
a regular basis. The regulations provide for three categories of classified
loans -- substandard, doubtful and loss. The regulations also contain a special
mention and a specific allowance category. Special mention is defined as loans
that do not currently expose an insured institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Specific allowance is defined
as loans for which the Bank has designated specific reserves to cover
specifically identified losses. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified as loss, the insured institution must
either establish specified allowances for loan losses in the amount of 100% of
the portion of the asset classified loss, or charge off such amount. At June 30,
2002, on the basis of management's review of the Bank's loan portfolio, the Bank
had $3.5 million of assets classified substandard, $206,000 classified as
specific allowance, and $100,000 of assets classified as loss. There were no
assets classified as doubtful.
Classified loan ranges of estimated loss are as follows: Substandard-2.5% to
35%; Doubtful-5% to 50%; Loss-100%; Special Mention-2% to 6%; and Specific
Allowance-50% to 100%. The Bank additionally provides a reserve estimate for
incurred losses in non-classified loans ranging from .20% to 2.00%. Allowance
estimates are developed by the Bank in consultation with regulatory authorities,
actual loss experience and peer group loss experience and are adjusted for
current economic conditions. Allowance estimates are considered a prudent
measurement of the risk of the Bank's loan portfolio and are applied to
individual loans based on loan type.
NON-PERFORMING ASSETS
Non-performing assets consist of 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.
25
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, typically after the
loan becomes 90 days delinquent. When interest accrual is discontinued, interest
income is subsequently recognized only to the extent cash payments are received.
Real estate acquired by the Bank as a result of foreclosure or by deed in lieu
of foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value. Any write-down
of the property at the time of acquisition is charged to the allowance for loan
losses. Subsequent gains and losses are included in non-interest income.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
AT JUNE 30
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Restructured $3,350 $ - $ - $ - $ -
Past due 90 days still on accural - - - - -
Loans on non-accrual status 386 3,309 1,728 3,082 2,128
----- ----- ----- ----- -----
Total non-performing loans 3,736 3,309 1,728 3,082 2,128
Real estate acquired through
foreclosure 660 296 - 109 134
Other repossessed assets 119 70 - - -
------ ------ ------ ------ ------
Total non-performing assets $4,515 $3,675 $1,728 $3,191 $2,262
====== ====== ====== ====== ======
Interest income that would have
been earned on non-accrual loans $ 300 $ 276 $ 139 $ 255 $ 182
Interest income recognized
on non-accrual loans 32 26 7 29 16
Ratios: Non-performing loans
to net loans .72% .64% .37% .77% .60%
Non-performing assets
to net loans .86% .71% .37% .80% .64%
LIQUIDITY
The Bank maintains sufficient liquidity to fund loan demand and routine deposit
withdrawal activity. Liquidity is managed by retaining sufficient liquid assets
such as cash and cash equivalents, interest-bearing deposits, principal and
interest payments from loans and securities. If large certificate depositors
shift to the Bank's competitors or the stock market in response to interest rate
changes, the Bank has the ability to replenish them through alternative funding
sources. While the Bank utilizes numerous funding sources in order to meet
liquidity requirements, FHLB borrowings remain a material component of
management's balance sheet strategy. Also, the proceeds of trust preferred
securities held by the Corporation are on deposit with a third party and
available to the Corporation or Bank if needed. At June 30, 2002, the Bank had
an unused approved line of credit in the amount of $45 million and sufficient
collateral to borrow an additional $153.7 million in advances from the FHLB.
26
CAPITAL
In November 2001 the Corporation's Board of Directors authorized the
establishment of an additional stock repurchase program pursuant to which 10% of
the Corporation's outstanding stock may be repurchased from time to time in the
open market. The programs, which began in 1995, have repurchased a total of
645,321 shares. The Board will continue to evaluate earnings per share and
monitor the success of the repurchase plan to maintain an attractive return to
stockholders. The current plan expires in May 2003, when the Board will analyze
the Bank's capital position and future earnings potential.
On March 26, 2002, First Federal Statutory Trust I, a trust subsidiary of First
Federal Financial Corporation of Kentucky (the "Corporation"), completed the
private placement of 10,000 shares of cumulative trust preferred securities with
a liquidation preference of $1,000 per security. The proceeds of the offering
were loaned to the Corporation in exchange for floating rate junior subordinated
deferrable interest debentures. Distributions on the securities are payable
quarterly at a rate per annum equal to the 3-month LIBOR plus 3.60%. The
Corporation undertook the issuance of these securities to enhance its regulatory
capital position as they are considered as Tier I capital under current
regulatory guidelines. The Corporation intends to utilize the proceeds for
general business purposes and to support the Bank's future opportunities for
growth.
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. The Corporation on a consolidated basis and the Bank
continue to exceed the regulatory requirements for Tier I, Tier I leverage and
total risk-based capital. Management intends to maintain a capital position that
meets or exceeds the "well capitalized" requirements as defined by the FDIC. The
Bank's average stockholders' equity to average assets ratio was 9.10% during
2002 compared to 8.97% during 2001.
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 remained liability sensitive from June
30, 2001 to June 30, 2002. 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 .56% at June 30, 2002 compared to an
increase of 3.92% at June 30, 2001. Given a 100 basis point increase in the
yield curve the Bank's base net interest income would decrease by an estimated
4.89% at June 30, 2002 compared to a decrease of 4.30% at June 30, 2001.
27
The interest sensitivity of the Corporation at any point in time will be
affected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative pricing schedules. It
is also influenced by market interest rates, deposit growth, loan growth, and
decay rates and prepayment speed assumptions. Based on simulations for the
current balance sheet, the Bank continues to be liability sensitive. Savings
products have increased dramatically over the past year due to the shift of
funds from the stock market to immediate availability and re-pricing savings
products. The Bank's loan portfolio retains a level of fixed rate products for
both mortgages and commercial real estate that does not provide the
corresponding movement in interest income as rates change. Strategic goals of
moving to variable rate loan products and comparing wholesale funding with
savings products will be the emphasis for management to accomplish a less
liability sensitive balance sheet. The table below is representative only and is
not a precise measurement of the effect of changing interest rates on the
Corporation's net interest income in the future.
JUNE 30, 2002
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 $37,225 $38,685 $40,926 $40,881 $41,889
Investments 2,918 3,118 3,509 3,906 3,992
------ ------ ------- ------ ------
TOTAL INTEREST INCOME 40,143 41,803 44,435 44,787 45,881
PROJECTED INTEREST EXPENSE
Deposits 10,630 12,497 15,259 16,822 18,471
Borrowed funds 4,336 4,342 4,350 4,354 4,361
------ ------ ------- ------ ------
TOTAL INTEREST EXPENSE 14,966 16,839 19,609 21,176 22,832
NET INTEREST INCOME $25,177 $24,964 $24,826 $23,611 $23,049
Change from base $351 $138 $(1,215) $(1,777)
% Change from base 1.41% .56% (4.89)% (7.16)%
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)%
28
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.
MARKET AND DIVIDEND INFORMATION
The Common Stock of the Corporation is traded on the Nasdaq National Market
System (NASDAQ) under the symbol "FFKY". The following table sets forth the high
and low closing prices of the Corporation's Common Stock and the dividends paid
during the last two years.
QUARTER ENDED
FISCAL 2002: 9/30 12/31 3/31 6/30
---- ----- ---- ----
High $ 18.50 $ 18.00 $ 20.50 $ 23.85
Low 14.95 16.10 17.25 20.25
Cash dividends 0.18 0.18 0.18 0.18
FISCAL 2001: 9/30 12/31 3/31 6/30
---- ----- ---- ----
High $ 17.63 $ 16.50 $ 15.50 $ 18.25
Low 15.00 13.25 14.25 13.50
Cash dividends 0.18 0.18 0.18 0.18
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.
29
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, 2002 and 2001
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity and cash flows for each of the three years in the period
ending June 30, 2002. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Federal
Financial Corporation of Kentucky as of June 30, 2002 and 2001 and the results
of its operations and its cash flows for each of the three years in the period
ending June 30, 2002 in conformity with accounting principles generally accepted
in the United States of America.
Crowe, Chizek and Company LLP
Louisville, Kentucky
July 19, 2002
30
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
ASSETS 2002 2001
---- ----
Cash and cash equivalents $ 40,016,230 $ 35,464,388
Interest bearing deposits 64,000,000 -
Securities available-for-sale 1,977,794 2,013,107
Securities held-to-maturity: fair value of
$21,750,149 (2002) and $20,954,198 (2001) 21,715,391 20,920,760
Loans held for sale 1,511,285 632,321
Loans receivable, less allowance for loan losses
of $3,734,752 (2002) and $2,906,356 (2001) 518,749,701 516,512,836
Federal Home Loan Bank stock 6,169,600 5,845,000
Premises and equipment 11,486,617 11,453,601
Real estate owned:
Acquired through foreclosure 659,966 295,989
Held for development 720,683 720,683
Other repossessed assets 119,504 70,050
Acquisition intangibles 8,383,574 9,215,373
Accrued interest receivable 1,925,331 2,024,554
Other assets 1,674,181 1,557,078
------------ ------------
TOTAL ASSETS $679,109,857 $606,725,740
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 28,340,904 $ 21,208,411
Interest bearing 501,541,338 447,616,786
------------ -----------
Total Deposits 529,882,242 468,825,197
Advances from Federal Home Loan Bank 77,778,070 77,297,658
Trust Preferred Securities 9,714,500 -
Accrued interest payable 516,122 1,969,545
Accounts payable and other liabilities 1,573,944 2,475,687
Deferred income taxes 1,030,424 1,565,376
----------- -----------
TOTAL LIABILITIES 620,495,302 552,133,463
----------- -----------
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, 3,729,400 shares in 2002 and
3,758,491 shares in 2001 3,729,400 3,758,491
Additional paid-in capital 18,015 20,527
Retained earnings 54,482,567 50,405,481
Accumulated other comprehensive
income, net of tax 384,573 407,778
---------- ------------
TOTAL STOCKHOLDERS' EQUITY 58,614,555 54,592,277
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $679,109,857 $606,725,740
============ ============
See notes to consolidated financial statements.
31
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30,
---------------------------------------------
2002 2001 2000
---- ---- ----
INTEREST INCOME:
Interest and fees on loans $42,044,646 $41,996,226 $35,316,819
Interest and dividends on investments and deposits 2,055,097 3,395,588 3,225,633
---------- ----------- ---------
Total interest income 44,099,743 45,391,814 38,542,452
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 17,538,838 22,125,115 18,073,392
Federal Home Loan Bank advances 3,740,701 5,304,192 2,800,076
Trust Preferred Securities 146,284 - -
---------- ---------- ----------
Total interest expense 21,425,823 27,429,307 20,873,468
---------- ---------- ----------
Net interest income 22,673,920 17,962,507 17,668,984
Provision for loan losses 1,603,887 1,086,100 399,500
---------- ---------- ----------
Net interest income after provision for loan losses 21,070,033 16,876,407 17,269,484
---------- ---------- ----------
NON-INTEREST INCOME:
Customer service fees on deposit accounts 3,282,865 2,567,780 1,957,445
Gain on sale of mortgage loans 651,045 526,304 354,391
Gain on sale of investments - 696,041 456,926
Brokerage and insurance commissions 543,250 639,637 464,388
Other income 921,043 715,715 643,973
--------- --------- ---------
Total non-interest income 5,398,203 5,145,477 3,877,123
--------- --------- ---------
NON-INTEREST EXPENSE:
Employee compensation and benefits 7,261,772 6,416,848 5,644,270
Office occupancy expense and equipment 1,487,896 1,456,721 1,362,424
FDIC insurance premiums 84,726 84,653 158,117
Marketing and advertising 612,496 505,418 524,349
Outside services and data processing 1,544,970 1,420,324 1,259,148
State franchise tax 472,016 424,663 403,869
Amortization of acquisition intangibles 831,799 831,799 831,799
Other expense 2,985,060 2,429,330 2,506,928
---------- ---------- ---------
Total non-interest expense 15,280,735 13,569,756 12,690,904
---------- ---------- ----------
Income before income taxes 11,187,501 8,452,128 8,455,703
Income taxes 3,729,085 2,802,693 2,792,361
---------- --------- ---------
NET INCOME $7,458,416 $5,649,435 $5,663,342
========== ========== ==========
Earnings per share:
Basic $ 1.99 $ 1.50 $ 1.45
Diluted $ 1.98 $ 1.50 $ 1.44
See notes to consolidated financial statements.
32
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED JUNE 30,
2002 2001 2000
---- ---- ----
NET INCOME $7,458,416 $5,649,435 $5,663,342
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities (23,205) 422,994 (352,242)
Reclassification of realized amount - (459,387) (301,571)
---------- ----------- ----------
Net unrealized gain (loss) recognized in
comprehensive income (23,205) (36,393) (653,813)
---------- ---------- ----------
COMPREHENSIVE INCOME $7,435,211 $5,613,042 $5,009,529
========== ========== ==========
See notes to consolidated financial statements.
33
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDING JUNE 30, 2002, 2001, AND 2000
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON STOCK PAID - IN RETAINED INCOME,
SHARES AMOUNT CAPITAL EARNINGS NET OF TAX TOTAL
------ ------ ------- -------- ---------- -----
BALANCE, JUNE 30, 1999 4,121,112 $4,121,112 $3,055,644 $49,587,422 $1,097,984 $57,862,162
Net income - - - 5,663,342 - 5,663,342
Exercise of stock
options, net of redemptions 1,553 1,553 4,209 - - 5,762
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (653,813) (653,813)
Cash dividends declared
($.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
($.72 per share) - - - (2,704,364) - (2,704,364)
Stock repurchased (2,000) (2,000) (7,261) (20,739) - (30,000)
--------- --------- --------- ---------- --------- ----------
BALANCE, JUNE 30, 2001 3,758,491 3,758,491 20,527 50,405,481 407,778 54,592,277
Net income - - - 7,458,416 - 7,458,416
Exercise of stock
options, net of redemptions 2,549 2,549 (2,512) - - 37
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (23,205) (23,205)
Cash dividends declared
($.72 per share) - - - (2,700,917) - (2,700,917)
Stock repurchased (31,640) (31,640) - (680,413) - (712,053)
--------- ---------- --------- ---------- ---------- -----------
BALANCE, JUNE 30, 2002 3,729,400 $3,729,400 $ 18,015 $ 54,482,567 $ 384,573 $58,614,555
========= ========== ========= ============ ========== ===========
See notes to consolidated financial statements.
34
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net income $7,458,416 $5,649,435 $5,663,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,603,887 1,086,100 399,500
Depreciation on premises and equipment 1,052,329 1,136,143 1,022,327
Federal Home Loan Bank stock dividends (324,600) (384,600) (237,300)
Amortization of acquired intangible assets 831,799 831,799 831,799
Net accretion (42,037) (71,922) (61,435)
Gain on sale of investments available-for-sale - (696,041) (456,926)
Gain on sale of mortgage loans (651,045) (526,304) (354,391)
Origination of loans held for sale (41,461,141) (29,515,839) (23,607,548)
Proceeds on sale of loans held for sale 41,233,222 30,150,248 24,610,167
Deferred taxes (522,998) (330,781) 353,014
Changes in:
Interest receivable 99,223 7,323 (428,363)
Other assets 379,841 (122,810) (197,941)
Interest payable (1,453,423) 840,755 259,950
Accounts payable and other liabilities (901,743) 513,144 (373,960)
---------- --------- ---------
Net cash provided by operating activities 7,301,730 8,566,650 7,422,235
---------- --------- ---------
INVESTING ACTIVITIES:
Change in interest bearing deposits (64,000,000) - -
Sales of securities available-for-sale - 707,607 461,782
Purchases of securities available-for-sale - (32,325) (107,300)
Purchases of securities held-to-maturity (24,000,000) - (5,000,000)
Maturities of securities held-to-maturity 23,263,876 22,285,284 6,332,014
Net increase in loans (4,751,127) (47,830,192) (71,810,035)
Purchase of Federal Home Loan Bank stock - (1,379,600) (643,500)
Net purchases of premises and equipment (1,085,345) (880,476) (1,137,226)
Purchase of real estate held for development - (275,000) -
----------- ----------- -----------
Net cash used in investing activities (70,572,596) (27,404,702) (71,904,265)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 61,057,045 45,066,242 24,315,516
Advances from Federal Home Loan Bank 723,712 76,090,434 79,647,360
Repayments to Federal Home Loan Bank (243,300) (79,131,326) (25,202,937)
Proceeds from stock options exercised 37 32,518 5,762
Net proceeds from issuance of trust preferred securities 9,698,184 - -
Dividends paid (2,700,917) (2,704,364) (2,802,833)
Common stock repurchased (712,053) (30,000) (8,393,539)
---------- ---------- ----------
Net cash provided by financing activities 67,822,708 39,323,504 67,569,329
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 4,551,842 20,485,452 3,087,299
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 35,464,388 14,978,936 11,891,637
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $40,016,230 $35,464,388 $14,978,936
=========== =========== ===========
See notes to consolidated financial statements.
35
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
which First Federal Financial Corporation of Kentucky follows in
preparing and presenting its consolidated financial statements:
PRINCIPLES OF CONSOLIDATION AND BUSINESS - The consolidated
financial statements include the accounts of First Federal
Financial Corporation of Kentucky (the Corporation) and its
wholly-owned subsidiaries, First Federal Savings Bank of
Elizabethtown (the Bank) and First Federal Statutory Trust I. The
Bank has two wholly-owned subsidiaries, First Service 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, secondary mortgage market fees, 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 an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents include cash on hand,
amounts due from banks, and certain interest bearing deposits. Net
cash flows are reported for loans and deposits.
INTEREST BEARING DEPOSITS - Deposits with original maturities of
greater than 90 days are reported separately. At June 30, 2002,
interest-bearing deposits included time deposits with the Federal
Home Loan Bank with original maturities of 60 to 180 days at rates
of 1.65 % to 2.03%.
SECURITIES - The Corporation classifies its investments into
held-to-maturity and available-for-sale. Debt securities in which
the Corporation has a positive intent and ability to hold are
classified as held-to-maturity and are carried at cost adjusted
for the amortization of premiums and discounts using the interest
method over the terms of the securities.
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.
36
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.
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral,
and current economic conditions.
Loans are considered impaired if full principal or interest
payments are not anticipated in accordance with the contractual
loan terms. Impaired loans are carried at the present value of
expected future cash flows discounted at the loan's effective
interest rate or at the fair value of the collateral if the loan
is collateral dependent. A portion of the allowance for loan
losses is allocated to impaired loans if the value of such loans
is less than the unpaid balance. If these allocations cause the
allowance for loan losses to require an increase, such increase is
reported in the provision for loan losses.
Interest income on loans is recognized on the accrual basis except
for those loans in nonaccrual status. The accrual of interest is
discontinued when a loan becomes 90 or more days delinquent. When
interest accrual is discontinued, interest income is subsequently
recognized only to the extent cash payments are received.
LOANS HELD FOR SALE - Loans held for sale include mortgage loans
originated and intended for sale in the secondary market and are
carried at the lower of aggregate cost or market value. The
Corporation controls its interest rate risk with respect to
mortgage loans held for sale and loan commitments expected to
close by entering into "best efforts" forward sales contracts on a
loan for loan basis. The aggregate market value of mortgage loans
held for sale considers the sales prices of such agreements. The
Corporation also provides for any losses on uncovered commitments
to lend or sell. Gain on sale of loans is recognized when the loan
is delivered to the investor and is sold with servicing released.
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.
OTHER REPOSSESSED ASSETS - Consumer assets acquired through
repossession and in settlement of loans, typically automobiles,
are carried at lower of cost or fair value at the date of
repossession. The excess cost over fair value at time of
repossession is charged to the allowance for loan losses.
37
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
BROKERAGE AND INSURANCE COMMISSIONS - Brokerage commissions
are recognized as income on settlement date. Insurance
commissions on loan products (credit life, mortgage life,
accidental death, and guaranteed auto protection) are
recognized as income over the life of the loan.
STOCK OPTION PLANS - Employee compensation expense under stock
option plans is reported if options are granted below market
price at grant date. Pro-forma disclosures of net income and
earnings per share are shown using the fair value method of
SFAS No. 123 to measure expense, using an option pricing model
to estimate fair value.
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 - A new accounting standard
requires all business combinations to be recorded using the
purchase method of accounting for any transaction initiated
after June 30, 2001. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of
the acquired company must be recorded at fair value at date of
acquisition, and the excess of cost over fair value of net
assets acquired is recorded as goodwill. Identifiable
intangible assets must be separated from goodwill.
Identifiable intangible assets with finite useful lives will
be amortized under the new standard, whereas goodwill, both
amounts previously recorded and future amounts purchased, will
cease being amortized starting July 1, 2002. Annual impairment
testing will be required for goodwill with impairment being
recorded if the carrying amount of goodwill exceeds its
implied fair value. As a result of adopting this standard, on
July 1, 2002, the Corporation ceased annual amortization of
$240,000 on remaining goodwill assets of $1.8 million. A
separately identified core deposit intangible and other
unidentified intangible assets of $6.6 million will continue
to be amortized over their remaining lives. The new accounting
standard requires the lives of existing intangibles be
reevaluated upon adoption. Collectively, these amounts are
reported together on the balance sheet as acquisition
intangibles.
INDUSTRY SEGMENTS - Segments are parts of a company evaluated
by management with separate financial information. The
Corporation's internal information is reported and evaluated
in three lines of business-banking, mortgage banking, and
brokerage and insurance. These segments are dominated by
banking at a magnitude for which separate individual segment
disclosures are not required.
RECLASSIFICATIONS - Certain amounts for 2001 and 2000 have
been reclassified to conform to the presentation for 2002.
38
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, 2002:
Equity securities $ 385,484 $ 544,607 $ - $ 930,091
Obligation of states and political
subdivisions 1,009,619 38,084 - 1,047,703
---------- --------- --------- ----------
Total available-for-sale $1,395,103 $ 582,691 $ - $1,977,794
========== ========= ========= ==========
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
========== ========= ======== ==========
Securities held-to-maturity:
June 30, 2002:
U.S. Treasury and agencies $20,964,000 $ 58,060 $ - $21,022,060
Mortgage-backed securities 751,391 7,188 (30,490) 728,089
----------- --------- --------- -----------
Total held-to-maturity securities $21,715,391 $ 65,248 $ (30,490) $21,750,149
=========== ========= ========= ==========
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
=========== ========= ========= ===========
The amortized cost and fair value of securities at June 30, 2002, by
contractual maturity, are shown below.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ - $ - $ 1,964,000 $ 1,999,880
Due after one year through five years 776,365 809,628 15,000,000 15,020,300
Due after five years through ten years 233,254 238,075 - -
Due after ten years - - 4,000,000 4,001,880
Mortgage-backed securities - - 751,391 728,089
Equity securities 385,484 930,091 - -
---------- ---------- ----------- -----------
$1,395,103 $1,977,794 $21,715,391 $21,750,149
========== ========== =========== ===========
39
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:
2002 2001 2000
---- ---- ----
Proceeds from sales $ - $707,607 $461,782
Gross realized gains - 696,041 456,926
Investment securities having an amortized cost of $1,964,000 and fair
value of $1,999,880 at June 30, 2002 were pledged to secure public
deposits.
3. LOANS RECEIVABLE:
Loans receivable at June 30 are summarized as follows:
2002 2001
---- ----
Commercial $ 21,129,501 $ 17,843,459
Real estate commercial 112,528,113 88,937,849
Real estate construction 10,662,026 9,079,184
Residential mortgage 308,689,702 329,855,679
Consumer and home equity 51,796,395 54,189,225
Indirect consumer 19,640,208 21,822,325
----------- -----------
524,445,945 521,727,721
Less:
Net deferred loan origination fees (1,961,492) (2,308,529)
Allowance for loan losses (3,734,752) (2,906,356)
----------- ----------
(5,696,244) (5,214,885)
---------- ----------
Loans Receivable $518,749,701 $516,512,836
============ ============
The Bank utilizes eligible real estate loans to collateralize advances
and letters of credit from the Federal Home Loan Bank. At June 30, 2002
and 2001, the Bank had approximately $292 million and $313 million in
one-to-four family residential mortgage loans pledged under this
arrangement.
The allowance for losses on loans is summarized as follows:
YEAR ENDED JUNE 30,
------------------------------------------
2002 2001 2000
---- ---- ----
Balance, beginning of year $2,906,356 $2,252,062 $2,107,994
Provision for loan losses 1,603,887 1,086,100 399,500
Charge-offs (916,543) (498,796) (265,302)
Recoveries 141,052 66,990 9,870
---------- ---------- ----------
Balance, end of year $3,734,752 $2,906,356 $2,252,062
========== ========== ==========
40
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,
-----------------------------------------
2002 2001 2000
---- ---- ----
Year-end impaired loans $3,736,000 $3,309,000 $1,728,000
Amount of allowance for loan
loss allocated 511,000 324,000 117,000
Average impaired loans outstanding 3,507,000 2,499,000 2,688,000
Interest income recognized 201,000 93,000 111,000
Interest income received 201,000 93,000 111,000
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
JUNE 30,
-------------------------------
2002 2001
---- ----
Land $ 953,765 $ 953,765
Buildings 10,205,523 10,055,266
Furniture, fixtures and equipment 6,854,502 5,924,356
--------- ---------
18,013,790 16,933,387
Less accumulated depreciation (6,527,173) (5,479,786)
---------- ----------
$11,486,617 $11,453,601
=========== ===========
Certain premises are leased under various operating leases. Rental
expense was $263,000, $256,000 and $259,600 for the years ended June
30, 2002, 2001, and 2000, respectively. Future minimum commitments
under these leases are:
YEAR ENDED
JUNE 30
-------
2003 $ 266,028
2004 269,228
2005 242,728
2006 242,728
Thereafter 1,224,017
---------
$2,244,729
==========
5. DEPOSITS
Time Deposits of $100,000 or more were $100,069,000 and $102,577,000 at
June 30, 2002 and 2001, respectively. At June 30, 2002, scheduled
maturities of time deposits are as follows:
AMOUNT
------
2003 $183,016,089
2004 80,040,668
2005 32,738,582
2006 4,451,563
Thereafter 9,782,100
------------
$310,029,002
============
41
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (FHLB) of Cincinnati are
collateralized by FHLB stock and a blanket pledge of one-to-four family
residential mortgage loans equivalent to 125 percent of the outstanding
advances and letters of credit. At June 30, 2002, the Bank has
available collateral to borrow an additional $153.7 million from the
FHLB. During January 2001, the Bank entered into $75 million in
convertible fixed rate advances with a maturity of ten years. These
advances are fixed for periods of two to three years. At the end of the
fixed term and quarterly thereafter, the FHLB has the right to convert
these advances to variable rate advances tied to the three-month LIBOR
index. At June 30, 2002 and 2001, the Bank had $22,160,000 and $0 in
letters of credit from the FHLB issued to collateralize public
deposits. Advances from the FHLB at year-end are as follows:
JUNE 30,
-------------------------------------------------------------
2002 2001
---- ----
WEIGHTED- WEIGHTED-
AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------------ ------ ------------ ------
Fixed rate advances:
Mortgage matched advances
with interest rates from
5.30% to 7.80% 6.36% 384,738 6.52% 559,864
Convertible fixed rate advances 4.92% 75,000,000 4.92% 75,000,000
Other fixed rate advances 5.45% 2,393,332 6.76% 1,737,794
--------- -----------
Total borrowings $77,778,070 $77,297,658
=========== ===========
The aggregate minimum annual repayments of borrowings as of June 30,
2002 is as follows:
2003 $ 448,495
2004 134,577
2005 138,928
2006 143,570
2007 144,710
Thereafter 76,767,790
----------
$77,778,070
===========
7. TRUST PREFERRED SECURITIES
On March 26, 2002, the Corporation issued $10.0 million of Floating
Rate Capital Securities (Trust Preferred Securities) through First
Federal Statutory Trust I (Trust), a subsidiary of the Corporation. The
proceeds of the offering were loaned by the Trust to the Corporation in
exchange for subordinated debentures with terms that are similar to the
Trust Preferred Securities and is the sole asset of the Trust. Issuance
costs of $301,816 paid from the proceeds are being amortized to
maturity. The Corporation has guaranteed that the Trust will make
distributions to the holders of the Trust Preferred Securities if the
Trust has available funds to make such distribution which is reflected
as a liability on the balance sheet net of issuance costs.
Distributions on the Trust Preferred Securities are payable quarterly
in arrears at the annual rate (adjusted quarterly) of three-month LIBOR
plus 3.60% (5.47% as of the last adjustment), and are included in
interest expense. The annual rate cannot exceed 11% prior to March 26,
2007.
42
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. TRUST PREFERRED SECURITIES - (CONTINUED)
The Trust Preferred Securities, which mature March 26, 2032, are
subject to mandatory redemption, in whole or in part, upon repayment of
the subordinated debentures at maturity or their earlier redemption at
the liquidation preference. The subordinated debentures are redeemable
prior to the maturity date at the option of the Corporation on or after
March 26, 2007 at their principal amount plus accrued interest. The
subordinated debentures are also redeemable in whole or in part from
time to time, upon the occurrence of specific events defined within the
trust debenture. The Corporation has the option to defer distributions
on the subordinated debentures from time to time for a period not to
exceed 20 consecutive quarters.
Trust Preferred Securities are considered as Tier I capital for the
Corporation under current regulatory guidelines.
8. INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income
tax return and income tax is apportioned among all companies based on
their taxable income or loss.
Provision for income taxes for the years ended June 30, are as follows:
2002 2001 2000
---- ---- ----
Current $4,252,083 $3,133,474 $2,439,347
Deferred (522,998) (330,781) 353,014
---------- ----------- -----------
Total income tax expense $3,729,085 $2,802,693 $2,792,361
========== ========== ==========
The provision for income taxes differs from the amount computed at the
statutory rates as follows:
2002 2001 2000
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
Tax-exempt interest income (.2) (.2) (.2)
Acquisition intangibles .7 1.0 1.0
Dividends to ESOP (.4) (.6) (.6)
Other (.8) (1.0) (1.2)
----- ---- -----
Effective rate 33.3% 33.2% 33.0%
===== ===== =====
Temporary differences between the financial statements carrying amounts
and tax bases of assets and liabilities that give rise to significant
portions of deferred income taxes at June 30, relate to the following:
2002 2001
---- ----
Deferred tax assets:
Allowance for loan losses $ 966,137 $ 532,644
Investment securities 12,240 26,928
Accrued liabilities and other 284,468 262,244
--------- --------
1,262,845 821,816
--------- --------
43
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. INCOME TAXES - (CONTINUED)
2002 2001
---- ----
Deferred tax liabilities:
Depreciation $ 905,056 $ 872,006
Net unrealized gain on securities
available-for-sale 198,118 210,072
Federal Home Loan Bank stock 955,283 844,919
Other 234,812 460,195
---------- ----------
2,293,269 2,387,192
---------- ----------
Net deferred tax liability $1,030,424 $1,565,376
========== ==========
Federal income tax laws provided savings banks with additional bad debt
deductions through 1987, totaling $9.3 million for the Bank. Accounting
standards do not require a deferred tax liability to be recorded on
this amount, which would otherwise total $3.2 million at June 30, 2002
and 2001. If the Bank was liquidated or otherwise ceased to be a bank
or if tax laws were to change, the $3.2 million would be recorded as
expense.
9. 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 $728,208 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 - The Corporation and the Bank
must meet various regulatory capital requirements. If a
requirement is not met, regulatory authorities may take legal
or administrative actions, including restrictions on growth or
operations or, in extreme cases, seizure. As of June 30, 2002,
both the Corporation on a consolidated basis and Bank were
categorized as well capitalized. The actual and required
capital amounts and ratios are presented below:
TO BE CONSIDERED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTION
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------ ---------
AS OF JUNE 30, 2002: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-
weighted assets)
Consolidated $62,770,000 13.5% $37,216,000 8.0% $46,520,000 10.0%
Bank 53,049,000 11.5 37,012,000 8.0 46,265,000 10.0
Tier I capital (to risk-weighted
assets)
Consolidated 58,773,000 12.6 18,608,000 4.0 27,912,000 6.0
Bank 49,082,000 10.6 18,506,000 4.0 27,759,000 6.0
Tier I capital (to average assets)
Consolidated 58,773,000 8.9 26,485,000 4.0 33,106,000 5.0
Bank 49,082,000 7.4 26,191,000 4.0 32,739,000 5.0
44
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. STOCKHOLDERS' EQUITY - (CONTINUED)
AS OF JUNE 30, 2001:
Total risk-based capital (to risk-
weighted assets)
Consolidated $47,534,000 11.1% $34,334,000 8.0% $42,918,000 10.0%
Bank 46,945,000 11.0 34,280,000 8.0 42,850,000 10.0
Tier I capital (to risk-weighted
assets)
Consolidated 44,347,000 10.3 17,167,000 4.0 25,751,000 6.0
Bank 43,722,000 10.2 17,140,000 4.0 25,710,000 6.0
Tier I capital (to average assets)
Consolidated 44,347,000 7.3 24,168,000 4.0 30,210,000 5.0
Bank 43,722,000 7.3 23,925,000 4.0 29,907,000 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 the two highest examination ratings and has "capital"
equal to its fully phased-in regulatory capital requirements
(a "tier one 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, 2002, the Bank was
able to declare $10.3 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.
45
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the basic
and diluted EPS is as follows:
YEAR ENDED JUNE 30,
2002 2001 2000
---- ---- ----
Net income available to common
shareholders $7,458,416 $5,649,435 $5,663,342
========== ========== ==========
Basic EPS:
Weighted average common shares 3,752,937 3,755,688 3,906,197
========== ========= =========
Diluted EPS:
Weighted average common shares 3,752,937 3,755,688 3,906,197
Dilutive effect of stock options 16,533 5,348 16,766
---------- ---------- ---------
Weighted average common and
incremental shares 3,769,470 3,761,036 3,922,963
========== ========= =========
Earnings Per Share:
Basic $1.99 $1.50 $1.45
========== ========= =========
Diluted $1.98 $1.50 $1.44
========== ========= =========
Stock options for 60,000, 79,500, and 65,000 shares of common
stock were not included in the 2002, 2001, and 2000
computation of diluted earning per share because their impact
was anti-dilutive.
11. EMPLOYEE BENEFIT PLANS:
(A) PENSION PLANS - The Bank is a participant in the Financial
Institutions Retirement Fund, a multiple-employer defined
benefit pension plan covering 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 2002,
2001 and 2000 totaled $6,501, $0, and $5,418, 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 2002, 2001 and 2000 were $222,645, $184,331,
and $166,577, 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 are acquired in
non-leveraged transactions. At the time of purchase, the
shares are released and allocated to eligible employees
determined by a formula specified in the plan agreement.
Shares in the plan at June 30 and the fair value of shares
released during the year charged to compensation expense were
as follows:
2002 2001 2000
---- ---- ----
ESOP shares 199,464 207,045 211,503
Compensation expense $54,000 $56,000 $66,000
46
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. EMPLOYEE BENEFIT PLANS - (CONTINUED)
(C) STOCK OPTION PLAN - Under the 1998 Stock Option and Incentive
Plan, the Corporation may grant either incentive or non-qualified
stock options to key employees for an aggregate of 166,000 shares
of the Corporation's common stock at not less than fair market
value at the date such options are granted. The option to purchase
shares vest over periods of one to five years and expire ten years
after the date of grant. At June 30, 2002 options available for
future grant under the 1998 Stock Option Plan totaled 79,000. Of
the options outstanding at June 30, 2002, 18,000 were granted
under a previous plan. A summary of option transactions is as
follows:
JUNE 30,
---------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ------- ------- ------- ------- --------
Outstanding, beginning of year 104,500 $19.18 102,230 $19.13 55,064 $15.52
Granted during year 10,000 16.23 12,000 17.00 52,500 22.53
Forfeited during year - - (5,000) 24.50 (500) 17.13
Exercised during the year (9,500) 14.32 (4,730) 6.88 (4,834) 15.10
------- ------- -------
Outstanding, end of year 105,000 $19.34 104,500 $19.18 102,230 $19.13
======= ======= =======
Eligible for exercise at year end 57,300 47,900 32,230
Weighted average fair value of
options granted during the year $ 3.79 $ 4.71 $ 7.06
The following table summarizes information about stock options
outstanding at June 30, 2002:
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 20,000 1.2 years $12.50 20,000 $ 12.50
$16.00 to $17.00 25,000 8.1 16.57 7,800 16.62
$22.38 to $22.63 52,500 7.6 22.53 25,000 22.58
$24.50 7,500 6.8 24.50 4,500 24.50
------- ------
105,000 6.4 $19.34 57,300 $18.40
======= ======
47
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. EMPLOYEE BENEFIT PLANS - (CONTINUED)
The pro-forma effect on net income and earnings per share is
as follows:
YEAR ENDED JUNE 30,
-------------------
2002 2001 2000
---- ---- ----
Net income: As reported $7,458,416 $5,649,435 $5,663,342
Pro-forma 7,340,473 5,544,858 5,600,975
Earnings per share:
Basic As reported $ 1.99 $ 1.50 $ 1.45
Pro-forma 1.96 1.48 1.43
Diluted As reported $ 1.98 $ 1.50 $ 1.44
Pro-forma 1.95 1.47 1.43
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 2002: 1) expected
dividend yields at 4.44%, 2) risk-free interest rates at
4.94%, 3) expected volatility at 28%, 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.
12. CASH FLOW ACTIVITIES
The following information is presented as supplemental
disclosures to the statement of cash flows for the year ended
June 30.
(a) Cash paid for:
2002 2001 2000
---- ---- ----
Interest expense $22,879,246 $26,588,552 $20,613,518
=========== =========== ===========
Income taxes $ 4,257,000 $ 3,127,940 $ 2,973,347
=========== =========== ===========
(b) Supplemental disclosure of non-cash activities:
2002 2001 2000
---- ---- ----
Loans to facilitate sales of
real estate owned $ 508,889 $120,766 $783,075
========== ======== ========
Transfers from loans to
real estate acquired through
foreclosure and repossessed
assets $1,419,264 $842,915 $674,465
========== ======== ========
48
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statements summarize the financial position,
operating results and cash flows of First Federal Financial Corporation
of Kentucky (Parent Company only).
CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
----------------------
2002 2001
---- ----
ASSETS
Cash and interest bearing deposits $ 9,363,205 $ 312,275
Investment in subsidiary 58,619,520 54,003,275
Securities available-for-sale 405,362 396,355
Receivable from Bank 266,241 260,426
Other assets 38,019 6,685
----------- -----------
$68,692,347 $54,979,016
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trust Preferred Securities $ 9,714,500 $ -
Deferred income taxes 363,292 386,739
Stockholders' equity 58,614,555 54,592,277
---------- ----------
$68,692,347 $54,979,016
=========== ===========
CONDENSED STATEMENTS OF INCOME
YEAR ENDED JUNE 30,
----------------------------------------------
2002 2001 2000
---- ---- ----
Dividend from subsidiary $2,940,000 $4,900,000 $7,000,000
Interest income 69,733 20,916 52,695
Interest expense (146,284) - -
Other expenses (197,360) (169,816) (164,893)
--------- --------- ----------
Income before income tax benefit 2,666,089 4,751,100 6,887,802
Income tax benefit 146,932 104,764 93,942
--------- --------- ----------
Income before equity in undistributed
net income of subsidiary 2,813,021 4,855,864 6,981,744
Equity in undistributed net income of
subsidiary (distributions in excess
of net income) 4,645,395 793,571 (1,318,402)
---------- ---------- ----------
Net income $7,458,416 $5,649,435 $5,663,342
========== ========== ==========
49
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
------------------------------------------------
2002 2001 2000
---- ---- ----
Operating Activities:
Net income $7,458,416 $5,649,435 $5,663,342
Adjustments to reconcile net income to
cash provided by operating activities:
(Equity in undistributed net income
from subsidiary) distributions in
excess of net income (4,645,395) (793,571) 1,318,402
Amortization 16,316 - -
Decrease (increase) in other assets (31,334) (25,252) 22,344
(Decrease) increase in deferred income taxes (26,509) 250,995 135,744
--------- --------- ---------
Net cash provided by operating activities 2,771,494 5,081,607 7,139,832
--------- --------- ---------
Investing Activities:
Purchases of securities available-for-sale - (32,325) (107,300)
Net change in receivable from Bank (5,815) - -
-------- --------- ---------
Net cash provided (used) by investing
activities (5,815) (32,325) (107,300)
-------- --------- ---------
Financing Activities:
Proceeds from stock options exercised 37 32,518 5,762
Net proceeds from issuance of
Trust Preferred Securities 9,698,184 - -
Dividends paid (2,700,917) (2,704,364) (2,802,833)
Common stock repurchases (712,053) (30,000) (8,393,539)
Net change in payable to Bank - (2,246,261) 3,773,540
-- ---------- ----------
Net cash used by financing activities 6,285,251 (4,948,107) (7,417,070)
- --------- ---------- ----------
Net increase (decrease) in cash 9,050,930 101,175 (384,538)
Cash and interest bearing deposits,
beginning of year 312,275 211,100 595,638
----- ------- ---------- -----------
Cash and interest bearing deposits,
end of year $ 9,363,205 $ 312,275 $ 211,100
============ ========== ===========
50
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Corporation's financial instruments are
as follows:
JUNE 30, 2002 JUNE 30, 2001
-------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 40,016,230 $ 40,016,000 $ 35,464,388 $ 35,464,000
Interest bearing deposits 64,000,000 64,000,000 - -
Investment securities:
Securities available-for-sale 1,977,794 1,978,000 2,013,107 2,013,000
Securities held-to-maturity 21,715,391 21,750,000 20,920,760 20,954,000
Loans held for sale 1,511,285 1,534,000 632,321 642,000
Loans, net 518,749,701 533,665,000 516,512,836 526,238,000
Federal Home Loan Bank stock 6,169,600 6,170,000 5,845,000 5,845,000
Accrued interest receivable 1,925,331 1,925,000 2,024,554 2,025,000
Financial liabilities:
Deposits (529,882,242) (535,586,000) (468,825,197) (469,719,000)
Advances from Federal
Home Loan Bank (77,778,070) (79,105,000) (77,297,658) (81,923,000)
Trust Preferred Securities (9,714,500) (10,000,000) - -
Accrued interest payable (516,122) (516,000) (1,969,545) (1,970,000)
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, interest bearing deposits, Federal Home Loan Bank stock,
accrued interest receivable and payable, demand deposits, and variable
rate loans or deposits that reprice frequently and fully. Security fair
values are based on market prices or dealer quotes, and if no such
information is available, on the rate and term of the security and
information about the issuer. The value of loans held for sale is based
on the underlying sale commitments. For fixed rate loans or deposits
and for variable rate loans or deposits with infrequent repricing or
repricing limits, fair value is based on discounted cash flows using
current market rates applied to the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow
analysis or underlying collateral values. Fair values of advances from
Federal Home Loan Bank is based on current rates for similar financing.
The principal amount of the Trust Preferred Securities is the estimated
fair value. The fair value of off-balance-sheet items is based on the
current fees or cost that would be charged to enter into or terminate
such arrangements and is not material.
15. CONTINGENCIES
In the normal course of business, there are various outstanding legal
proceedings and claims. In the opinion of management, after
consultation with legal counsel, the disposition of such legal
proceedings and claims will not materially affect the Corporation's
consolidated financial position, results of operations or liquidity.
51
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of the Bank's involvement in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. 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:
2002 2001
-------------------------- ----------------------------
FIXED VARIABLE FIXED VARIABLE
RATE RATE RATE RATE
---- ---- ---- ----
Commitments to make loans $ 627,667 $ - $ 4,231,215 $ 389,500
Unused lines of credit - 45,108,356 - 38,257,649
Standby letters of credit - 4,791,802 - 3,846,000
--------- ----------- ----------- -----------
$ 627,667 $49,900,158 $ 4,231,215 $42,493,149
========= =========== =========== ==========
Fixed rate loan commitments at June 30, 2002 were at current rates
ranging from 7.25% to 7.75%, 4.50% to 17.90% 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, 2002, a reserve of $5,138,000 was required as deposits with
the Federal Reserve or as cash on hand. The reserves do not earn
interest.
At June 30, 2002 and 2001, the Bank had $22,160,000 and $0 in letters
of credit from the Federal Home Loan Bank issued to collateralize
public deposits. These letters of credit are secured by a blanket
pledge of eligible one-to-four family residential mortgage loans. (For
additional information see Note 3 on Loans Receivable and Note 6 on
Advances from the Federal Home Loan Bank.)
At June 30, 2002 and 2001, the Corporation's mortgage banking
activities included commitments to extend credit, primarily
representing fixed rate mortgage loans, totaling approximately $3.4 and
$2.3 million. The commitments are generally for a period of 30 to 60
days and are at market rates. To deliver these loans to the secondary
market, the Corporation has entered into "best efforts" forward sales
contracts on a loan for loan basis. The Corporation provides for any
losses on uncovered loans and commitments to lend or sell. For all
periods presented, no such provisions were required.
52
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
17. RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders of the
Company, including associates of such persons, are loan and deposit
customers. Related party deposits at June 30, 2002 and 2001 were $2.9
million and $3.6 million. A summary of the related party loan activity,
for loans aggregating $60,000 or more to any one related party, is as
follows:
JUNE 30,
---------------------------------
2002 2001
---- ----
Beginning of year $1,389,460 $1,283,427
New loans 643,888 7,726
Repayments (548,452) (68,823)
Other changes (294,085) 167,130
---------- ----------
End of year $1,190,811 $1,389,460
========== ==========
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.
18. SUMMARY OF QUARTERLY FINANCIAL DATA - (UNAUDITED)
(Dollars in thousands except per share data)
FISCAL 2002: SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
Total interest income $11,486 $11,046 $10,735 $10,833
Total interest expense 6,166 5,368 4,883 5,009
Net interest income 5,320 5,678 5,852 5,824
Provision for loan losses 300 460 415 429
Non-interest income 1,234 1,407 1,328 1,429
Non-interest expense 3,623 3,657 3,913 4,088
Net income 1,752 1,978 1,925 1,803
Earnings per share:
Basic 0.47 0.53 0.51 0.48
Diluted 0.47 0.53 0.51 0.47
FISCAL 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
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 2002 Annual Meeting of Shareholders (the "Proxy
Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the sections captioned "Summary
Compensation Table," "Option Exercises and Year-end Value Table,"
"Directors Compensation," and "Retirement Plan" in the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the section captioned "Voting
Securities and Principal Holders Thereof" in the
Proxy Statement
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I - Election of Directors" and "Voting
Securities and Principal Holders Thereof" in the
Proxy Statement.
(c) Changes in Control
Management of the Corporation knows of no
arrangements, including any pledge by any person of
securities of the Corporation, the operation of which
may at a subsequent date result in a change of
control of the Corporation.
(d) Securities Authorized for Issuance Under Equity
Compensation Plans
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (1))
------------- ------------------- ------------------- ------------------------
Equity compensation
plans approved by
security holders 105,000 $19.34 79,000
Equity compensation
plans not approved by
security holders - - -
------- ------ ------
Total 105,000 $19.34 79,000
======= ====== ======
Additional information required by this item is
incorporated herein by reference to Note 11 of the
Notes to Consolidated Financial Statements in the
Annual Report.
54
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.
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, 2002 and 2001.
(c) Consolidated Statements of Income for the years ended
June 30, 2002, 2001, and 2000.
(d) Consolidated Statements of Comprehensive Income for
the years ended June 30, 2002, 2001, and 2000.
(e) Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 2002, 2001, and
2000.
(f) Consolidated Statements of Cash Flows for the years
ended June 30, 2002, 2001, and 2000.
(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**
(16) Letter re Change in Auditor***
(21) Subsidiaries of the Registrant
(23)(a) Consent of Crowe, Chizek and Company LLP, Certified
Public Accountants
(99)(a) Certification of Principal Executive Officer and
(99)(b) Principal Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act
4. The Registrant has filed no reports on Form 8-K for the
quarter ending June 30, 2002.
* 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: 9/17/02
By: /s/ B. Keith JOHNSON
-----------------------------
B. Keith Johnson
President and Chief Executive Officer
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ B. Keith Johnson By: /s/ Bob Brown
-------------------------- -----------------------
B. Keith Johnson Bob Brown
Principal Executive Officer Director
& Director
Date: 9/17/02 Date: 9/17/02
By: /s/ Wreno M. Hall By: /s/ Diane E. Logsdon
------------------------ -----------------------
Wreno M. Hall Diane E. Logsdon
Director Director
Date: 9/17/02 Date: 9/17/02
By: /s/ J. Alton Rider By: /s/ John L. Newcomb, Jr.
----------------------- ------------------------
J. Alton Rider John L. Newcomb, Jr.
Director Director
Date: 9/17/02 Date: 9/17/02
By: /s/ Walter D. Huddleston By: /s/ Michael Thomas, DVM
------------------------ ------------------------
Walter D. Huddleston Michael Thomas, DVM
Director Director
Date: 9/17/02 Date: 9/17/02
By: /s/ Stephen Mouser By: /s/ Charles Chaney
------------------------ ------------------------
Stephen Mouser Charles Chaney
Director Chief Operating Officer,
Chief Financial Officer &
Principal Accounting Officer
Date: 9/17/02 Date: 9/17/02
56
CERTIFICATIONS
Certification of Principal Executive Officer and Principal Financial Officer for
10-K for Fiscal Ending June 30, 2002
I, B. Keith Johnson, President & Chief Executive Officer of First
Federal Financial Corporation of Kentucky, certify that:
1. I have reviewed this annual report on Form 10-K of First Federal
Financial Corporation of Kentucky;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 27, 2002 By: /s/ B. Keith Johnson
----------------------
B. Keith Johnson
President and Chief Executive Officer
I, Charles Chaney, Chief Operating Officer, Chief Financial Officer & Principal
Accounting Officer of First Federal Financial Corporation of Kentucky, certify
that:
1. I have reviewed this annual report on Form 10-K of First Federal
Financial Corporation of Kentucky;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
Date: September 27, 2002 By: /s/ Charles Chaney
------------------------
Charles Chaney
Chief Operating Officer,
Chief Financial Officer &
Principal Accounting Officer
57
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
(99)(a) Certification of Principal Executive Officer and Principal
(99)(b) Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act
* Incorporated by reference to the Corporation's Form S-4 Registration
Statement (No. 33-30582).
** Incorporated by reference to Exhibit 10(b) of the Corporation's 1998
definitive proxy statement.
*** Incorporated by reference to the Corporation's Form 8-K filed
April 20, 1999.
58
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.
59
EXHIBIT 23(A) - CONSENT OF CROWE, CHIZEK AND COMPANY LLP
We hereby consent to the incorporation by reference in the Form S-8 Registration
Statement No. 33-30582 of First Federal Financial Corporation of Kentucky of our
report dated July 19, 2002 on the consolidated financial statements of First
Federal Financial Corporation of Kentucky as of June 30, 2002 and 2001 and for
each of the three years in the period ending June 30, 2002 as included in the
registrant's annual report on Form 10-K.
Crowe, Chizek and Company LLP
Louisville, Kentucky
September 27, 2002
60
CERTIFICATIONS
Certification of Principal Executive Officer and Principal Financial Officer
I, B. Keith Johnson, certify that:
1. I have reviewed this annual report on Form 10-K of First
Federal Financial Corporation of Kentucky;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of t he circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: September 27, 2002 By: /s/ B. Keith Johnson
---------------------------
B. Keith Johnson
President and Chief Executive Officer
61
CERTIFICATIONS
Certification of Principal Executive Officer and Principal Financial Officer
I, Charles Chaney, certify that:
1. I have reviewed this annual report on Form 10-K of First
Federal Financial Corporation of Kentucky;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of t he circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: September 27, 2002 By: /s/ Charles Chaney
-----------------------
Charles Chaney
Chief Operating Officer,
Chief Financial Officer &
Principal Accounting Officer
62