SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended June 30, 1997.
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from___________to_________
Commission 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: (502) 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 National Association of Securities
Dealers, Inc. Automated Quotation National Market System on August 29, 1997, was
$89,680,714. 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 August 29, 1997, there were issued and outstanding 4,171,196
shares of the registrant's common stock, of which directors and executive
officers held 473,603 shares and more than 5% beneficial owners held 307,595
shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
PART I
Item 1. Business
The Corporation
First Federal Financial Corporation of Kentucky (the "Corporation") 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") pursuant to the Bank's
reorganization into the holding company form of ownership, which was consummated
on June 1, 1990. Prior to its acquisition of all the outstanding stock of the
Bank in connection with the Bank's holding company reorganization, the
Corporation had no assets or liabilities and engaged in no business activities.
Since its acquisition of First Federal, 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 subsidiary.
The Corporation's executive offices are located at 2323 Ring Road,
Elizabethtown, Kentucky. Its telephone number is (502) 765-2131.
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, and to a lesser extent on multi-family housing and
commercial property. First Federal also makes home improvement loans, consumer
loans and commercial business loans and through its subsidiary offers insurance
products and brokerage services to its customers. In April 1993 the Bank
established a full service trust department to serve the fiduciary needs of its
customers. The principal sources of funds for First Federal's lending activities
include deposits received from the general public, borrowings from the Federal
Home Loan Bank of Cincinnati, principal amortization and prepayment of loans.
First Federal's primary sources of income are interest and origination fees on
loans and interest on investments. First Federal also invests in various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations. First Federal's principal expenses are interest
paid on deposit accounts and operating expenses.
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 Federal Home Loan Bank ("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") administered by the Federal Deposit
Insurance Corporation("FDIC").
Lending Activities
General. The principal lending activity of First Federal is the origination
of conventional first mortgage loans secured by residential property. To a
lesser extent the Bank 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
1
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.
Loan Underwriting Policies. During the loan approval process, First
Federal assesses both the borrower's ability to repay the loan and the adequacy
of the underlying security. Potential residential borrowers complete an
application which is submitted to a salaried loan officer. As part of the loan
application process, qualified fee appraisers inspect and appraise the property
which is offered to secure the loan. The Bank also obtains information
concerning the income, financial condition, employment and credit history of the
applicant. First Federal's loan committee, consisting of certain officers of the
Bank, analyzes the loan application and the property to be used as collateral
and subsequently approves or denies the loan request. If the mortgage loan
amount is less than $250,000, it must be approved by a loan committee consisting
of certain members of management. The Board of Directors must approve all
mortgage loans in excess of $250,000. All consumer loans under $25,000 may be
approved by authorized loan officers under Board approved lines of authority and
all loans under $100,000 may be approved by an officer loan committee. Consumer
loans in excess of $100,000 must be approved by the President. In connection
with the origination of single family residential adjustable rate mortgage
loans, borrowers are qualified at a rate of interest equal to the fully accrued
index rate. It is the policy of management to make loans to borrowers who not
only qualify at the low initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
2
Loan Portfolio Analysis. Set forth below is selected data relating to the
composition of the Bank's loan portfolio by type of loan and type of security on
the date indicated.
June 30,
1997 1996 1995 1994 1993
------ ------ ------- ------- ------
Amount % Amount % Amount % Amount % Amount %
-------- --- ------- --- -------- -- -------- --- -------- ---
(Dollars in thousands)
Type of Loan:
Conventional real estate
loans:
Interim construction
loans ................... $ 15,444 4.71% $ 15,766 2.88% $ 8,159 2.88% $ 7,007 3.03% $ 8,227 3.79%
Loans on existing
property.......................217,759 66.43 204,301 69.06 195,424 69.06 146,228 63.35 136,047 62.78
Loans refinanced..................67,693 20.65 65,681 21.48 60,765 21.48 62,724 27.17 57,010 26.30
Commercial loans secured by
real estate........................2,246 .69 2,406 .71 2,004 .71 3,234 1.40 4,551 2.10
Commercial lines of credit...........1,953 .60 1,785 .40 1,138 .40 721 .31 1,140 .52
Home equity loans...................10,377 3.16 4,959 1.35 3,802 1.35 3,675 1.59 3,120 1.44
Consumer loans:
Mobile home loans.................... 18 .01 49 .02 51 .02 47 .02 125 .06
Education loans..................... 0 .00 0 .00 0 .00 0 .00 14 .01
Savings account loans..............1,667 .51 1,597 .48 1,357 .48 823 .35 1,424 .66
Home improvement loans................ 2 .00 108 .01 44 .01 107 .04 405 .19
Automobile, boat and
recreational vehicle
loans.............................. 338 .10 805 .35 980 .35 1,019 .44 1,363 .63
Other.............................22,390 6.83 19,649 6.89 19,504 6.89 14,298 6.19 11,818 5.45
Accrued interest
receivable..........................179 .05 187 .05 146 .05 133 .05 83 .04
Less:
Loans in process...................7,098 2.17 10,156 2.00 5,671 2.00 5,503 2.38 4,894 2.26
Discounts and other...................61 .02 184 .10 272 .10 285 .12 549 .25
Loan loss reserve..................1,715 .52 1,613 .59 1,661 .59 1,406 .61 1,415 .65
Deferred loan fees................ 2,672 .81 2,329 .72 2,052 .72 1,804 .78 1,586 .73
Escrow deposits..................... 683 .21 618 .26 730 .26 225 .10 160 .07
Interest reserves (91 days
or more delinquent)..................46 .01 30 .01 34 .01 13 .01 28 .01
------- ------ -------- ------ ------- ------ -------- ------- ------ ------
Total.....................$327,791 100.00% $302,363 100.00% $282,954 100.00% $230,793 100.00% $216,695 100.00%
======= ====== ======== ======= ======== ====== ======= ======= ======= ======
3
June 30,
1997 1996 1995 1994 1993
---------------- ----------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ------ -------- ----- -------- ---
(Dollars in thousands)
Type of Security:
Residential
Single family................. $267,839 81.71% $249,161 82.40% $230,672 81.52% $188,559 81.70% $173,741 80.17%
2-to-4 family.................. 5,983 1.82 6,554 2.17 5,846 2.07 5,268 2.28 5,843 2.70
Other dwelling................. 6,055 1.85 6,332 2.09 6,296 2.22 5,662 2.45 6,138 2.83
Commercial or industrial......... 24,482 7.47 30,169 9.98 25,570 9.03 21,768 9.43 21,774 10.04
Home equity...................... 10,377 3.16 4,959 1.64 3,802 1.35 3,675 1.59 3,120 1.44
Savings Accounts................. 1,667 .51 1,597 .52 1,357 .48 823 .36 1,424 .66
Mobile Homes..................... 18 .01 49 .02 51 .02 47 .02 125 .06
Automobile, boats and
recreational vehicles.......... 338 .10 805 .27 980 .35 1,019 .44 1,363 .63
Other............................ 23,128 7.06 17,480 5.78 18,654 6.59 13,075 5.67 11,716 5.40
Accrued interest
receivable.................... 179 .05 187 .06 146 .05 133 .06 83 .04
Less:
Loans in process............... 7,098 2.17 10,156 3.36 5,671 2.00 5,503 2.38 4,894 2.26
Discounts and other............ 61 .02 184 .06 272 .10 285 .12 549 .25
Loan loss reserve.............. 1,715 .52 1,613 .53 1,661 .59 1,406 .61 1,415 .65
Deferred loan fees............. 2,672 .81 2,329 .77 2,052 .72 1,804 .78 1,586 .73
Escrow deposits................ 683 .21 618 .20 730 .26 225 .10 160 .07
Interest Reserves (91
days or more
delinquent)................ 46 .01 30 .01 34 .01 13 .01 28 .01
------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total.....................$327,791 100.00% $282,954 100.00% $230,793 100.00% $230,793 100.00% $216,695 100.00%
======= ====== ======== ====== ======== ====== ======== ====== ======== ======
Loan Maturity Schedule. The following table sets forth certain
information at June 30, 1997, 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,
1998 1997 1997
(Dollars in thousands)
Real estate mortgage.......... $ 1,557 $ 9,024 $274,111
Real estate construction (1)......... 0 0 8,435
Installment......................... 133 542 1
Commercial, financial and
agricultural................... 7,922 30,325 918
-------- -------- --------
Total.................... $ 9,612 $ 39,891 $283,465
======== ======== ========
<FN>
(1) These loans will become permanent real estate loans upon completion of
construction.
</FN>
4
The following table reflects a breakdown of loans maturing after one year, by
predetermined rates and adjustable rates.
Predetermined Floating or
Rates Adjustable Rates Total
(Dollars in thousands)
Real estate mortgage ................ $177,946 $105,166 $283,112
Real estate construction.................3,979 4,457 8,436
Installment................................543 0 543
Commercial, consumer and
agricultural..........................17,228 14,037 31,265
------- ------- -------
Total.........................$199,696 $123,660 $323,356
======= ======= =======
Residential Real Estate Lending. The Bank's primary lending activity is
the origination of loans on single family residential units, which are units
consisting of one-to-four individual dwelling units. Fixed rate residential real
estate loans originated by the Bank have terms ranging from ten to thirty years.
Interest rates are competitively priced within the primary geographic lending
market, and vary according to the term for which they are fixed.
In recent years, the Bank has emphasized the origination of
adjustable-rate mortgage loans ("ARMs"). The Bank offers an ARM with an annual
adjustment which is tied to various national indeces with a maximum adjustment
of 2% annually and a lifetime cap of 15%. As of June 30, 1997, approximately 37%
of the Bank's real estate loans were adjustable rate loans with adjustment
periods ranging from one to five years and balloon loans of seven years or less.
The Bank limits the maximum loan-to-value ratio on one-to-four-family
residential first mortgages to 80% of the appraised value and 95% on certain
mortgages, with the requirement that private mortgage insurance be obtained for
loans with loan-to-value ratios in excess of 80%. The Bank generally limits the
loan-to-value ratio to 80% on second mortgages on one-to-four-family dwellings.
First Federal's residential lending activities also include loans
secured by multi-family residential property, consisting of properties with more
than four separate dwelling units. These loans amounted to $6.1 million or 1.9%
of the loan portfolio at June 30, 1997. 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.
The Bank maintains a secondary mortgage operation designed to make
qualified VA and FHA loans for sale to investors, thereby providing necessary
liquidity to the Bank and needed loan products to the Bank's customers. During
fiscal 1997, the Bank's secondary mortgage operations originated $18.2 million
in loans for sale to investors.
Construction and Commercial Real Estate Lending. First Federal
originates loans secured by existing commercial properties and construction
loans primarily on residential real estate. The loans are secured by real estate
located in Kentucky. Substantially all of the commercial real estate loans
originated by First Federal have adjustable interest rates with maturities of 25
years or less or are loans with fixed interest rates and maturities of five
years or less. At June 30, 1997, the Bank had $15.4 million in outstanding
interim construction loans. The security for commercial real estate loans
includes retail businesses, warehouses and motels. Commercial real estate loans
originated by the Bank range in size from $80,000 to $215,000.
5
Commercial real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers and may also involve higher loan
principal amount to security property appraisal value ratios as compared to
loans secured by residential real estate. In addition, the payment experience of
loans secured by income producing properties is typically dependent on the
successful operation of the related real estate project and thus may be more
vulnerable to adverse conditions in the real estate market or in the economy
generally. 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 residential mortgage lending.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing or a takeout commitment to
the borrower; the reputation of the borrower and his or her financial condition;
the amount of the borrower's equity in the project; independent appraisals and
cost estimates; preconstruction sale and leasing information; and cash flow
projections of the borrower.
Consumer Loans. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans of up to 30% 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
education loans, loans secured by savings accounts, home improvement loans, and
unsecured lines of credit. As of June 30, 1997, consumer loans outstanding were
$39.0 million or approximately 11.8% of the Bank's total gross loan portfolio.
These loans involved a higher risk of default than loans secured by one-to-four-
family residential loans. The Bank believes, however, that the shorter term and
the normally higher interest rates available on various types of consumer loans
have been helpful in maintaining a profitable spread between the Bank's average
loan yield and its cost of funds.
In view of the riskier nature of consumer lending, the Bank has
developed what management believes are conservative underwriting standards. In
applying these standards, the Bank obtains detailed financial information and
credit bureau reports concerning each applicant. In addition, the relationship
of the loans to the value of the collateral is considered.
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, 1997, these
loans totaled $10.4 million which is a 112% increase over the prior fiscal year.
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. First Federal has offered business loans secured
by real estate since 1982 and it has not been a material part of the Bank's
activities to date. The Bank may become more active in this type of lending in
the future.
6
The Bank offers a commercial line of credit, which is a revolving line
of credit secured by the equity in the property, primarily real estate, of a
business. As of June 30, 1997, these loans totaled approximately $2.0 million.
Origination, Purchases and Sales. Historically, all residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations are generally attributable
to referrals from real estate brokers and builders, depositors and walk-in
customers. Commercial real estate and construction loan origination have been
obtained by direct solicitation, and consumer loan origination by walk-in
customers in response to the Bank's advertising, as well as by direct
solicitation.
The following table shows loans originated and sold during the periods
indicated. No loans were purchased by the Bank during the last five fiscal
years.
Year Ended June 30,
1997 1996 1995 1994 1993
------- ------ ----- ------ -----
(Dollars in thousands)
Loans originated:
Conventional real estate
loans:
Construction loans................... $ 16,664 $ 16,078 $12,632 $15,093 $15,664
Loans on existing property...............47,256 61,349 38,235 33,216 35,834
Loans refinanced.........................15,846 16,436 5,271 17,923 18,172
Insured and guaranteed loans................2,286 2,472 1,936 1,705 2,679
Commercial loans........................... 2,769 3,267 2,331 5,129 3,493
Consumer loans.............................29,440 21,071 18,548 14,199 12,009
------- ------- ------- ------- -------
Total Loans Originated..............$114,261 $120,673 $78,953 $87,265 $87,851
======= ======= ======= ======= =======
Total Loans Sold.......................... $ 16,199 $ 23,178 $ 8,822 $ 4,121 $ 3,176
======= ======== ======= ======= =======
Loan Commitments. Conventional loan commitments by the Bank are granted
for periods of 30 days. The total amount of the Bank's outstanding commitments
to originate real estate loans at June 30, 1997, was approximately $6.2 million.
It has been the Bank's experience that few commitments expire unfunded.
Loan Fees. In addition to interest earned on loans, certain fees are
received for committing to and ultimately originating loans. The Bank also
receives other fees and charges relating to existing loans, which include
prepayment penalties, late charges and fees for loan modifications. Management
believes that these fees and charges do not materially affect operating results.
Non-Performing Loans and Asset Classification. 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.
7
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired it is recorded at the lower of the
unpaid principal balance of the related loan or its fair market value. Any
write-down of the property is charged to the allowance for loan losses.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
At June 30,
1997 1996 1995 1994 1993
------ ------ ------- ------ -----
(Dollars in thousands)
Non-Performing loans which are
contractually past due
90 days or more:
Real Estate:
Residential.....................$ 1,172 $ 940 $ 649 $ 254 $ 610
Commercial......................... -- -- -- -- --
Consumer............................. 378 312 512 333 343
------ ------- ------- ------- ------
Total...................... $ 1,550 $ 1,252 $ 1,161 $ 587 $ 953
======= ======= ======= ======= ======
Total 90 days past
due loans................$ 1,550 $ 1,252 $ 1,161 $ 587 $ 953
======= ======= ======= ======= ======
Percentage of Total Loans................ 0.47% 0.41% 0.41% 0.25% 0.44%
Other Non-Performing Assets $ 184 $ 375 $ 260 $ 267 $ 500
======= ======= ======= ======= ======
(1)..............................................
<FN>
(1) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. This property is carried at the
lower of its fair value or the principal balance of the related loan.
</FN>
8
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
Year Ended June 30,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at Beginning of Period...... $1,613 $1,662 $1,406 $1,415 $1,127
------ ------ ------ ------ ------
Loans Charged-Off:
Real Estate--Mortgage:
Residential..........................17 0 14 0 10
Commercial............................0 0 16 10 0
Commercial Business.................... 0 24 0 0 0
Consumer..............................114 50 21 35 15
------- ------ ------ ------ ------
Total Charge-Offs..................... 131 74 51 45 25
------ ------ ------ ------ ------
Recoveries:
Real Estate-Mortgage:
Residential...........................0 1 0 0 12
Commercial............................0 23 16 0 0
Consumer...............................33 1 6 6 6
------ ------ ------ ------ ------
Total Recoveries........................ 33 25 22 6 18
------ ------ ------ ------ ------
Net Loans Charged-Off................... 98 49 29 39 7
------ ------ ------ ------ ------
Reserve associated with loans
acquired in merger...................... -- -- 185 -- --
Provision for Possible Loan
Losses..................................200 0 100 30 295
------ ------ ------ ------ ------
Balance at End of Period.............$1,715 $1,613 $1,662 $1,406 $1,415
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to
Average Loans Outstanding
During the Period................... 0.031% 0.017% 0.010% 0.017% 0.003%
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
further losses and does not restrict the use of the allowance to absorb losses
in any category.
At June 30,
1997 1996 1995 1994 1993
------ ------- ------ ------ -----
(Dollars in thousands)
Real estate loans:
Residential Loans.........$1,178 $1,277 $1,289 $1,043 $1,012
Commercial Loans.............146 142 128 103 112
Non-real estate loans...........391 194 245 260 291
------ ------ ------ ------ ------
Total allowance for
possible loan
losses.................... $1,715 $1,613 $1,662 $1,406 $1,415
====== ====== ====== ====== ======
It is management's policy to provide for estimated losses on loans and
investments in real estate when it determines that losses are expected to be
incurred on the underlying assets. Management also establishes general
allowances based on the amount and types of loans in the Bank's portfolio.
Subsequent adjustments to allowances are made if current circumstances differ
substantially from the assumptions used in making the initial estimates.
At June 30, 1997, there were no concentrations of loans in any types of
industry which exceeded 10% of total loans that were not otherwise disclosed as
a loan category above. In addition, there were no loans which were not
classified as non-accrual or restructured at June 30, 1997 which may be so
classified in the near future because of management concerns as to the ability
9
of the borrowers to comply with repayment terms.
Federal regulations require insured institutions to classify their own
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, classify them. The regulations provide for three
classifications of asset categories -- substandard, doubtful and loss. The
regulations also contain a special mention category, defined as assets which do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specified allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or charge off
such amount.
At June 30, 1997, on the basis of management's review of the Bank's
loan portfolio, the Bank had $1.7 million of assets classified substandard, no
assets classified doubtful, and $18,000 of assets classified as loss.
Investment Activities
Interest on investment securities provides the largest source of income
for First Federal after interest on loans, constituting 6.1% of the total
interest income for fiscal year 1997. First Federal maintains its liquid assets
above the minimum requirements imposed by regulation at a level believed
adequate to meet requirements of normal banking activities and potential savings
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is provided. As of June 30, 1997, First Federal's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 7.72%.
First Federal has the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, certificates of deposit at insured savings and
loans and banks, bankers' acceptances, and federal funds. The Bank may also
invest a portion of its assets in certain commercial paper and corporate debt
securities. First Federal is also authorized to invest in mutual funds and
stocks whose assets conform to the investments that First Federal is authorized
to make directly. See Note 3 of Notes to Consolidated Financial Statements for
further information concerning the Bank's investment portfolio.
As a member of the Federal Home Loan Bank System, First Federal must
maintain minimum levels of liquid assets specified by the OTS which vary from
time to time. See "Regulation - Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to return on loans.
The table on the following page sets forth the carrying value of the
Bank's investment securities portfolio at the dates indicated. At June 30, 1997,
the market value of the Bank's investment securities portfolio was $23 million.
10
At June 30,
1997 1996 1995
-------- -------- ------
(Dollars in thousands)
Held-to-maturity securities:
U.S. Treasury and agencies..........$15,335 $ 9,225 $ 9,132
Mortgage-backed securities............2,149 2,769 3,202
Tax exempt bond........................ 0 0 33
------- ------- -------
Total held-to-maturity
securities.........................$17,484 $11,994 $12,367
======= ======= =======
Securities available-for-sale:
Equity securities................. $ 5,192 $ 4,748 $ 4,701
======= ======= =======
The following table sets forth the scheduled maturities, amortized
cost, and average yields for the Bank's debt securities at June 30, 1997, all of
which were classified as held-to-maturity.
Amortized Average
Cost Yield
(Dollars in thousands)
Debt securities:
Due in one year or less.................... $ 735 5.73%
Due after one year through five years........12,852 6.79
Due after five years through ten years........1,748 5.64
Mortgage-backed securities................... 2,149 6.90
------
$17,484
=======
11
Sources of Funds
General. Savings accounts and other types of deposits have
traditionally been an important source of the Bank's funds for use in lending
and for other general business purposes. In addition to deposit accounts, the
Bank derives funds from loan repayments, FHLB advances, other borrowings and
operations. Borrowings may be used on a short-term basis to compensate for
reductions in deposits or deposit inflows at less than projected levels and may
be used on a longer term basis to support expanded lending activities.
Deposits. First Federal attracts both short-term and long-term deposits
from the general public by offering a wide range of deposit accounts and
interest rates. In recent years the Bank has been required by market conditions
to rely increasingly on short-term certificate accounts and other deposit
alternatives that are more responsive to market interest rates. First Federal
offers regular passbook accounts, NOW accounts, money market accounts and
fixed-interest-rate certificates with varying maturities. First Federal also
offers tax-deferred individual retirement accounts.
As of June 30, 1997, approximately 30.1% of First Federal's deposits
consisted of various savings and demand deposit accounts from which customers
are permitted to withdraw funds at any time without penalty.
Interest earned on passbook 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. The interest rate on these accounts is established by
First Federal's management.
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.
12
The following table sets forth the change in dollar amount of savings deposits
in the various types of savings accounts offered by the Bank between the dates
indicated.
Balance Balance Balance Balance
June 30, % of Increase June 30, % of Increase June 30, % of Increase June 30, % of
1997 Deposits (Decrease) 1996 Deposits (Decrease) 1995 Deposits (Decrease) 1994 Deposits
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Passbook and
Regular Savings.....$ 31,186 11.08% $ (112) $ 31,298 11.81% $ (2,340) $ 33,638 12.91% $ 4,567 $ 29,071 14.75%
NOW commercial
accounts.............. 9,813 3.49 833 8,980 3.39 1,447 7,533 2.89 4,086 3,447 1.75
NOW Demand Accounts...33,140 11.78 2,702 30,438 11.49 735 29,703 11.40 9,598 20,105 10.20
Money Market
deposit accounts..... 10,460 3.72 191 10,269 3.88 1,629 8,640 3.32 (950) 9,590 4.86
Three month CD's.......1,033 .37 (64) 1,097 .41 (253) 1,350 .52 (514) 1,864 .95
Six month CD's....... 12,399 4.41 (5,132) 17,531 6.62 2,051 15,480 5.94 3,604 11,876 6.02
Fixed rate CD's
- 12 months........53,713 19.09 5,140 48,573 18.33 9,394 39,179 15.04 28,636 10,543 5.35
Variable rate CD's
- 12 months........ 3,119 1.11 (1,205) 4,324 1.63 (814) 5,138 1.97 (4,528) 9,666 4.90
Fixed Rate CD's
- 18 months........35,503 12.62 27,905 7.598 2.87 (6,929) 14,527 5.58 4,093 10,434 5.29
Fixed Rate CD's
- 24 months........24,985 8.88 (8,673) 33,658 12.70 5,004 28,654 11.00 5,494 23,160 11.75
Fixed Rate CD's
- 30 months........ 3,170 1.13 (605) 3,775 1.42 (3,861) 7,636 2.93 (616) 8,252 4.19
Fixed Rate CD's
- 36 months........11,702 4.16 (26) 11,728 4.43 (1,473) 13,201 5.07 7,142 6,059 3.07
Fixed Rate CD's
- 48 months........16,796 5.97 (5,502) 22,298 8.42 (1,278) 23,576 9.05 (2,635) 26,211 13.29
Variable Rate CD's
- 48 months.......... 28 .01 (7) 35 .01 (20) 55 .02 (38) 93 .05
IRA accounts..........23,046 8.19 1,242 21,804 8.23 1,267 20,537 7.88 4,645 15,892 8.06
Other accounts -
6 to 8 year CD's...11,249 3.99 (291) 11,540 4.36 (116) 11,656 4.48 776 10,880 5.52%
------- ------ ------- -------- ------ --------- -------- ------ ------ -------- -----
Total........$281,342 100.00% $16,396 $264,946 100.00% $ 4,443 $260,503 100.00% $ 63,360 $197,143 100.00%
======= ====== ======= ======== ====== ======== ======== ====== ======== ======== =======
13
The variety of deposit accounts offered by First Federal has permitted it
to be more competitive in obtaining funds and has allowed it to respond with
more flexibility to disintermediation (the flow of funds away from depository
institutions such as savings 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 money market conditions.
The following table sets forth the amount of deposits as of June 30, 1997
by various interest rate categories.
Weighted
Average Percent
Interest Minimum Minimum of Total
Rate Term Category Amount Balances(1) Savings
2.65% NONE Passbook Savings Account $ 1 $ 31,186 11.08%
.20 NONE NOW Commercial Accounts 300 9,813 3.49
1.31 NONE NOW Demand Accounts 1,000 33,140 11.78
3.38 NONE Money Market Deposit Accounts 500 10,460 3.72
3.45 91 days 3 Month Certificate 500 1,033 0.37
4.41 182 days 6 Month Certificate 500 12,399 4.41
5.33 12 months Fixed Rate 500 53,713 19.09
4.88 12 months Variable Rate 500 3,119 1.11
6.05 18 months Fixed Rate 500 35,503 12.62
5.56 24 months Fixed Rate 500 24,985 8.88
5.79 30 months Fixed Rate 500 3,170 1.13
5.96 36 months Fixed Rate 500 11,702 4.16
5.74 48 months Fixed Rate 500 16,796 5.97
4.65 48 months Variable Rate 500 28 0.01
5.75 18 months Individual Retirement Accounts 500 23,046 8.19
6.30 6-8 years Other Certificates 500 11,249 3.99
------- ------
$281,342 100.00%
======== =======
<FN>
(1) Dollars in thousands.
</FN>
14
The following table indicates at June 30, 1997 the amount of the Bank's
certificates of deposit of $100,000 or more by time remaining until maturity.
Maturity Period Certificates
of Deposit
(In Thousands)
Three months or less.................... $7,226
Three through six months................ 5,249
Six through twelve months............... 8,756
Over twelve months...................... 22,695
------
Total.............................. $43,926
======
The following table sets forth the average balances and interest rates
based on month-end balances for various deposit categories during the periods
indicated.
Year Ended June 30,
1997 1996 1995
--------------- --------------- ----------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
(Dollars in thousands)
Non interest-bearing
accounts...................$ 9,104 --% $ 8,376 --% $ 10,591 --%
Interest-bearing
demand deposits............. 42,343 1.70 37,489 1.65 29,020 1.58
Savings deposits...............31,259 2.62 31,885 2.65 31,224 2.59
Certificates of
deposit....................187,974 5.52 180,959 5.68 157,579 5.19
Borrowings. Savings deposits are the primary source of funds for First
Federal's lending and investment activities and for its general business
purposes. The Bank can also use advances (borrowings) from the FHLB of
Cincinnati to supplement its supply of lendable funds, meet deposit withdrawal
requirements and to extend the term of its liabilities. Advances from the FHLB
are typically secured by the Bank's stock in the FHLB and a portion of the
Bank's first mortgage loans. At June 30, 1997 First Federal had $41.5 million in
advances outstanding from the FHLB of Cincinnati.
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.
The folling table sets forth certain information regarding the Bank's
FHLB advances during the periods indicated.
Year Ended June 30,
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
Average balance outstanding $ 41,482 $ 31,825 $ 15,379
Maxium amount outstanding at
any month-end during the period 47,716 35,051 21,238
Year end balance 41,514 34,979 21,238
Weighted average interest rate:
At end of year 5.62% 5.54% 6.09%
During the year 5.61% 5.73% 5.78%
15
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. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented.
Year Ended June 30,
1997 1996 1995
----------------------------- ----------------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- -------- --------- -------- -------- ------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Loans-receivable, net......... $317,565 $ 26,945 8.48% $295,657 $ 25,173 8.51% $256,659 $ 21,287 8.29%
Debt securities................. 15,133 976 6.45 8,011 527 6.25 6,629 498 7.51
Equity securities.................4,856 228 4.70 4,536 225 4.96 4,260 173 4.06
Mortgage-backed securities........2,514 178 7.08 3,042 222 7.30 1,688 107 6.34
FHLB stock........................2,674 188 7.03 2,495 174 6.97 2,138 137 6.41
Interest-bearing deposits.........1,805 98 5.43 9,981 605 6.06 7,746 489 6.31
Total interest-earning -------- ------- ------ ------- -------- ----- -------- ------- ------
assets...................... 344,548 28,613 8.30 323,722 26,926 8.32 279,120 22,691 8.13
------- -------- -------
Non-interest-earning assets........21,981 18,906 15,761
------- -------- --------
Total assets................ $366,529 $342,628 $294,881
======= ======== ========
Interest-bearing liabilities:
Passbook accounts............. $ 31,259 $ 818 2.62% $ 31,885 $ 846 2.65% $ 31,224 $ 808 2.59%
NOW and money market accounts... 51,447 875 1.70 45,865 759 1.65 39,611 627 1.58
Certificate accounts........... 187,974 10,377 5.52 180,959 10,271 5.68 157,579 7,345 5.19
FHLB advances................... 41,482 2,306 5.56 31,825 1,800 5.66 15,379 8,186 5.81
------- ------- ------- -------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities................ 312,162 14,376 4.61 290,534 13,676 4.71 243,793 10,515 4.31
------- -------- --------
Non-interest-bearing liabilities....3,879 3,198 2,815
------- -------- --------
Total liabilities............ 316,041 293,732 246,608
Stockholders' equity...............50,488 48,896 48,273
------- -------- --------
Total liabilities and
stockholders' equity....... $366,529 $342,628 $294,881
======= ======== ========
Net interest income........................ $ 14,237 $ 13,250 $12,176
======= ======== =======
Interest rate spread....................... 3.70% 3.61% 3.82%
====== ====== ======
Net yield on interest-earning
assets.................................... 4.13% 4.09% 4.36%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities.............. 110.37% 111.42% 114.49%
======= ====== =======
16
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 (change 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,
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
------------------------------ ------------------------------ -------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Rate Volume Total Rate Volume Total Rate Volume Total
------ ------ ------- ------ ------ ------- ------ ------ ------
(Dollars in Thousands)
Interest income:
Loans-receivable, net... $ (89) $ 1,860 $ 1,771 $ 578 $ 3,308 $ 3,886 $ (623) $ 2,545 $1,922
Debt securities...............(11) 460 449 (67) 96 29 80 184 264
Equity securities........... (15) 12 (3) 40 12 52 28 100 128
Mortgaged-back
securities................... (7) (39) (46) 18 97 115 0 107 107
FHLB stock.................... 2 12 14 13 24 37 31 17 48
Interest-bearing deposits.....(57) (450) (507) (18) 134 116 185 20 205
------ -------- -------- -------- ------- -------- ------- ------ ------
Total interest-earning
assets................... $ (177) $ 1,855 $ 1,678 $ 564 $ 3,671 $ 4,235 $ (299) $ 2,973 $2,674
====== ======= ======== ======== ======== ======== ======= ======= ======
Interest expense:
Passbook accounts........ $ (9) $ (15) $ (24) $ 20 $ 18 $ 38 $ 17 $ 55 $ 72
Now & money market
accounts.................... 16 100 116 29 103 132 (96) 137 41
Certificate accounts.........(756) (70) (826) 811 1,274 2,085 868 1,317 2,185
FHLB advances................ (32) 538 506 (24) 930 906 12 37 49
------ ------ ------- -------- ------- ------- ------- ------- ------
Total interest-bearing
liabilities.............. $ (781) $ 553 $ (228) $ 836 $ 2,325 $ 3,161 $ 801 $ 1,546 $2,347
====== ======= ======= ======== ======= ======== ======= ======= ======
17
Subsidiary Activities
As a federally-chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
intercity, and community development purposes. Under such limitations, on June
30, 1997, the Bank was authorized to invest up to approximately $11.3 million in
the stock of or loans to subsidiaries. In addition, institutions meeting
regulatory capital requirements, which the Bank does, may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock. As of June 30, 1997, the Bank's
investment in and loans to its subsidiaries was approximately $698,000
consisting of investment in common stock and earnings.
In 1978, the Bank formed First Service Corporation of Elizabethtown
("First Service") which holds an equity interest in Intrieve, Inc.,the company
performing the Bank's data processing. First Service also acts as a broker for
the purpose of selling mortgage life, credit life and accident and disability
insurance to the Bank's customers.
In April, 1988 First Service entered into a contract with Marketing One
Securities, Inc. to provide investment services to the Bank's customers in the
area of tax deferred annuities, government securities and stocks and bonds.
First Service employs three full-time employees to perform these services. This
investment function operates under licenses held by First Service. The net
earnings of First Service was $97,259 during fiscal year 1997.
Savings associations, in determining compliance with capital
requirements, are required to deduct from capital an increasing percentage of
their debt and equity investments in, and extensions of credit to, service
corporations in activities not permissible for a national bank. Certain
activities of the Bank's service corporations are not permissible for national
banks. Accordingly, on June 30, 1997, the Bank deducted 100% of its investment
in its service corporation from its core and tangible capital. See "Regulation
- -- Regulatory Capital Requirements." Because the Bank's investment in its
subsidiary is insignificant, management does not believe that the required
deductions from capital will have a material effect on the Bank's regulatory
capital position.
Competition
First Federal experiences substantial competition both in attracting
and retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings institutions,
commercial banks, and credit unions located in north-central Kentucky.
Additional significant competition for savings 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. First Federal is able to compete effectively
in its primary market area.
First Federal has offices in six cities in four 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 which are substantially larger
than First Federal's. 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.
18
Employees
The Corporation and subsidiaries had 97 full-time employees and 12
part-time employees as of June 30, 1997. None of these employees is represented
by a collective bargaining agreement and the Corporation believes that it enjoys
good relations with its personnel.
Regulation
General. As a federally chartered savings association, First Federal is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. 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
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. As a savings
and loan holding company, the Corporation is subject to the OTS' regulation,
examination, supervision and reporting requirements.
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 ("FHLB"). The Federal Home Loan
Banks provide a Central Credit facility primarily for member institutions. As a
member of the FHLB of Cincinnati, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Cincinnati 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 of Cincinnati, whichever is greater. First
Federal was in compliance with this requirement with investment in the FHLB of
Cincinnati stock at June 30, 1997, of $2.8 million.
The FHLB of Cincinnati 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 of Cincinnati. As
of June 30, 1997, First Federal had $41.5 million in advances outstanding from
the FHLB of Cincinnati. See "Business - Sources of Funds - Borrowings."
Liquidity Requirements. As a member of the FHLB System, the Bank has
been required to maintain average daily balances of liquid assets (cash,
deposits maintained pursuant to Federal Reserve Board requirements, time and
savings deposits in certain institutions, obligations of states and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt, and mortgage loans and mortgage-related
securities with less than one year to maturity or subject to purchase within one
year) equal to the monthly average of not less than a specified percentage of
its net withdrawable savings deposits plus short-term borrowings. This liquidity
requirement, which is currently 5%, may be changed from time to time by the OTS
to any amount within the range of 4% to 10% depending upon economic conditions
and the savings flows of member institutions. Member institutions have also been
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of their net withdrawable
savings accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet liquidity requirements. The average liquidity
and short-term liquidity ratios of First Federal for June 1997 were 7.72% and
6.78%, respectively.
19
Qualified Thrift Lender Test. The Bank is currently subject to OTS
regulations which use the concept of a qualified thrift lender ("QTL") 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 intangibles, property used by a savings association
in its business and liquidity investments in an amount not exceeding 20% of
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, 1997, approximately 97.66% 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 shall not
exceed 15% of the unimpaired capital, surplus and the loan loss allowance of the
savings association. Loans and extensions of credit fully secured by readily
marketable collateral (as defined) may comprise an additional 10% of unimpaired
capital and surplus. At June 30, 1997, the Bank complied with its regulatory
lending limits.
The aggregate amount of loans which a federally chartered savings
association may make on the security of liens on non-residential real property
may not exceed 400% of the institution's capital, though the Director of OTS has
the authority to permit savings associations to exceed the 400% of capital limit
in certain circumstances.
Regulatory Capital Requirements. OTS regulations require savings
associations to satisfy three different capital requirements. Specifically,
savings associations must maintain "tangible" capital equal to 1.5% of adjusted
total assets, "core" capital equal to 3% of adjusted total assets and a
combination of core and "supplementary" capital equal to 8.0% of "risk-weighted"
assets. OTS regulations impose certain restrictions on savings associations that
have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1
capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated
composite 1 under the OTS examination rating system). For purposes of these
regulations, Tier 1 capital has the same definitions as core capital. See "--
Prompt Corrective Regulatory Action."
For purposes of the OTS's regulatory capital regulations, core 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." Core 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
associating. Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's
20
intangible assets with only a limited exception for purchased mortgage servicing
rights.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts, and increased by a pro rata portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments against capital, as
well as a pro rata portion of the assets of other subsidiaries for which netting
is not fully required under the phase-in rules. Adjusted total assets are
reduced by the amount of assets that have been deducted from capital, the
portion of savings association's investments in subsidiaries that must be netted
against capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core 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 loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. The risk-based capital requirement is 8% of
risk-weighted assets.
In determining compliance with capital standards, all of a savings
association's investments in, and extensions of credit to, any subsidiary
engaged in activities not permissible for a national bank are also to be
deducted from the savings association's capital. Certain subsidiaries are
exempted from this treatment, including any subsidiary engaged in impermissible
activities solely as agent for its customers (unless the FDIC determined
otherwise), subsidiaries engaged solely in mortgage banking, and depository
institution subsidiaries acquired prior to May 1, 1989. In addition, the capital
deduction is not applied to federal savings associations existing as of August
9, 1989 that were either chartered as a state savings bank or state cooperative
bank prior to October 10, 1982 or that acquired their principal assets from such
an association. The required reduction of capital for this purpose is being
phased in over a period of approximately five years. At June 30, 1997, 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
$698,000. Accordingly, on June 30, 1997, the Bank deducted 100% of this
investment from its core and tangible capital.
21
The tables below present the Bank's capital position relative to its
various minimum regulatory capital requirements at June 30, 1997.
June 30, 1997
Percent of
Amount Assets (1)
(Dollars in thousands)
Tangible capital.............................. $ 45,817 12.3%
Tangible capital requirement.................. 5,599 1.5
-------- ----
Excess........................................ $ 40,218 10.8%
======== ====
Tier 1/Core capital........................... $ 45,817 12.3%
Tier 1/Core capital
requirement.................................. 11,197 3.0
-------- ----
Excess........................................ $ 34,620 9.3%
======== ====
Tier 1/Risk-based capital..................... $ 45,817 18.9%
Tier 1/Risk-based capital
requirement.................................. 9,712 4.0
-------- ----
Excess....................................... $ 36,105 14.9%
======== ====
Risk-based capital............................ $ 47,532 19.6%
Risk-based capital
requirement.................................. 19,423 8.0
-------- ----
Excess........................................ $ 28,109 11.6%
======== ====
<FN>
(1) Based upon adjusted total assets for purposes of the tangible capital
and core capital requirements, and risk-weighted assets for purposes of
the risk-based capital requirements.
</FN>
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 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
22
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, 1997, is an analysis of the Bank's
interest rate risk ("IRR") as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates.
AS OF JUNE 30, 1997
-------------------
Net Portfolio Value NPV as % of PV of Assets
Change ------------------- ------------------------
in Rates $ Amount $Change % Change NPV Ratio Change
- --------- -------- ------- -------- --------- -------
+400 bp 34,229 -28,497 -45% 9.68% -651 bp
+300 bp 41,612 -21,115 -34% 11.49% -470 bp
+200 bp 49,080 -13,647 -22% 13.23% -296 bp
+100 bp 56,313 -6,413 -10% 14.84% -136 bp
0 bp 62,726 16.19%
-100 bp 67,244 4,518 +7% 17.09% +90 bp
-200 bp 69,028 6,302 +10% 17.39% +120 bp
-300 bp 70,366 7,639 +12% 17.60% +141 bp
-400 bp 73,680 10,954 +17% 18.20% +201 bp
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 is directed to 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.
23
Prompt Corrective Regulatory Action
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action if an insured depository institution fails to satisfy certain
minimum capital requirements. All institutions, regardless of their capital
levels, are restricted from making any capital distribution or paying any
management fees if the institution would thereafter fail to satisfy the minimum
levels for any of its capital requirements. An institution that fails to meet
the minimum level for any relevant capital measure (an "undercapitalized
institution") may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
restoration plan within 45 days; (iii) subject to asset growth limits; and (iv)
required to obtain prior regulatory approval for acquisitions, branching and new
lines of businesses. The capital restoration plan must include a guarantee by
the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could also be required
to divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. If a savings association is in
compliance with an approved capital plan on the date of enactment of FDICIA,
however, it will not be required to submit a capital restoration plan if it is
undercapitalized or become subject to the statutory prompt corrective action
provisions applicable to significantly and critically undercapitalized
institutions prior to July 1, 1995.
Under FDICIA, regulations implementing the prompt corrective action
provisions of a depository institution's capital adequacy is measured on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
association that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1
risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" savings association is a savings
association that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or
greater (or 3.0% or greater if the savings association has a composite of 1
MACRO rating). An "undercapitalized institution" is a savings association that
has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the association has a composite 1 MACRO rating). A
"significantly undercapitalized" institution is defined as a savings association
that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier
1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less
than 3.0%. A "critically undercapitalized" savings association defined as a
savings association that has a ratio of core capital to total assets of less
than 2.0%. The OTS may reclassify a well capitalized savings association as
adequately capitalized and may require an adequately capitalized or
undercapitalized
association to comply with the supervisory actions applicable to associations in
the next lower opportunity for a hearing, that the savings association is in an
unsafe or unsound condition or that the association has received and not
corrected a less than satisfactory rating for any MACRO rating category. First
Federal is classified as "well capitalized" under the new regulations.
24
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. Well capitalized institutions are institutions satisfying the
following capital ratio standards; (i) total risk-based capital ratio of 10.0%
or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well capitalized
institutions but which satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Undercapitalized institutions consist of institutions that do not qualify as
either "well capitalized" or "adequately capitalized." 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 institutions
financial condition and the risk posed to the deposit insurance fund. Subgroup A
consists of financially sound institution's 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. 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.
Well capitalized institutions are institutions satisfying the following capital
ratio standards; (i) total risk-based capital ratio of 10.0% or greater; (ii)
Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage
ratio of 5.0% or greater. Adequately capitalized institutions are institutions
that do not meet the standards for well capitalized institutions but which
satisfy the following capital ratio standards: (i) total risk-based capital
ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or
greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Undercapitalized
institutions consist of institutions that do not qualify as either "well
capitalized" or "adequately capitalized." 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 institutions
financial condition and the risk posed to the deposit insurance fund. Subgroup A
consists of financially sound institution's 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.
The Bank insures its customers' deposits through the Savings Association
Insurance Fund ("SAIF"). On September 30, 1996, Federal Deposit Insurance
Corporation ("FDIC") legislation was signed into law to recapitalize the SAIF
due to a substantial disparity that existed between the premiums assessed by the
SAIF as compared to premiums assessed to commercial banks. All SAIF-insured
savings institutions were required to pay a one-time special assessment of $.657
for every $100 of customer deposits held as of March 31, 1995. This has resulted
in a charge to earnings of $1,095,000, net of tax, during the first quarter of
fiscal 1997. On January 1, 1997, the Bank began paying insurance premiums of
$.064 per $100 of deposits as compared to a previous premium of $.23 per $100 of
deposits. The reduced premium contributed approximately $143,000, net of tax, to
1997 earnings.
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,
1997, the Bank met its reserve requirements.
25
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. 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. Additionally, 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
26
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
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,
27
(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.
The Small Business Job Protection Act passed by Congress in August 1996
included a provision that repealed the percentage of taxable income bad debt
deduction for federal income tax purposes. The Bank used this method to
determine its bad debt deduction when computing federal taxes in applicable
years. This new legislation also requires recapture of the excess of bad debt
reserves over the base year reserve as of December 31, 1987. For years
subsequent to the base year, deferred taxes have been recorded; thus, no
additional tax provision is required as a result of this legislation. Under the
new legislation, the Bank is required to use the specific charge-off method to
calculate the bad debt deduction for federal income tax purposes. The new
legislation is effective for tax years beginning after December 31, 1995.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction will not be allowable for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), without payment of federal income taxes on such dividends or
distributions by the Bank at the then current tax rates on the amount deemed
removed to the Bank would include not only the amount actually distributed, but
would also be increased (subject to certain limitations) by the amount of the
tax payable by reason of such distribution.
The Corporation adopted Statement of Financial Accounting Standard No. 109
(SFAS No. 109), "Accounting for Income Taxes," on July 1, 1993.
SFAS No. 109 calculates taxes on the liability method, thus requiring the
recognition of current and deferred tax liabilities and assets for the expected
28
future tax consequences of events that have been recognized in the financial
statements or tax return. This statement's emphasis on the balance sheet is
consistent with SFAS No. 96 but is a change from APB No. 11's emphasis on the
expense calculation. Under SFAS No. 109, the tax expense or benefit in the
statement of operations will be the current tax liability plus the change in the
deferred tax liabilities and assets occurring during the year. SFAS No. 109
changes the treatment of loan loss provisions in the calculation of taxes. Tax
bad debt reserves that arose prior to 1988 will require recognition of deferred
tax liabilities only if it becomes apparent that those temporary differences
will reverse in the foreseeable future. Other differences between financial and
tax reserves will create temporary differences for which deferred tax assets or
liabilities will be computed.
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 Federal's 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.
29
Item 2. Properties
The following table sets forth the location of the Bank's offices, as well
as certain additional information relating to these offices at June 30, 1997.
All of the properties are owned by the Bank.
Year Approximate
Facility Square
Office Location Opened Net Book Value Footage
(Dollars in thousands)
Home Office 1993 $6,314 55,000
2323 Ring Road
Elizabethtown, Kentucky
Radcliff Office 1975 575 2,728
475 West Lincoln Trail
Radcliff, Kentucky
Bardstown Office (1) 1973 659 1,271
315 North Third Street
Bardstown, Kentucky
Munfordville Office 1976 263 2,928
925 Main Street
Munfordville, Kentucky
Elizabethtown Office 1985 292 1,764
325 West Dixie Avenue
Elizabethtown, Kentucky
Shepherdsville Office 1995 1,156 7,600
395 North Buckman Street
Shepherdsville, Kentucky
Mt. Washington Office 1995 613 2,500
279 Bardstown Road
Mt. Washington, Kentucky
Wal-Mart Office 1996 341 984
101 Wal-Mart Drive
Elizabethtown, Kentucky
<FN>
(1) On August 1, 1996, the Bank leased land under a five-year operating lease
agreement for $2,350 per month. This lease contains options to renew the terms
of the lease for an additional forty-five years. The land lease is to be the
site of a new Bardstown branch location which is currently under construction.
Total construction costs are estimated to be approximately $1.1 million of which
$550,000 has been funded through June 30, 1997.
</FN>
As of June 30, 1997, the net book value of office properties and
equipment owned by the Bank and its subsidiaries was $10.2 million. For further
information, see Note 5 of the Notes to Consolidated Financial Statements in the
Annual Report.
The Bank utilizes the services of an outside data processing center for
most of its savings and loan operations. All accounting and internal record
keeping functions are handled by the Bank's in-house computer system.
30
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 subsidiary 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, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Quarterly Stock Prices* Two
Quarter Ended Months Ended
Fiscal 1997: 9/30 12/31 3/31 6/30 8/31/97
High* $21.25 $21.25 $21.00 $20.25 $22.75
Low* $19.75 $18.75 $19.75 $18.00 $20.75
Cash dividends* $0.12 $0.12 $0.13 $0.13
Fiscal 1996:
High* $15.38 $16.75 $18.25 $22.25
Low* $14.38 $15.38 $16.25 $20.00
Cash dividends* $0.11 $0.11 $0.12 $0.12
There were 818 stockholders of record on August 30, 1997.
<FN>
*All per share information has been adjusted to reflect the effect of a 2-for-1
stock split effective June 10, 1996.
</FN>
31
Item 6. Selected Financial Data
At June 30,
Financial Condition Data: 1997 1996 1995 1994 1993
(Dollars in Thousands)
Total assets $377,380 $352,671 $331,375 $262,457 $244,044
Interest bearing deposits 481 7,753 6,601 11,001 8,485
Net loans outstanding 327,791 302,363 282,954 230,792 216,695
Investments 22,677 16,742 17,068 7,058 4,563
Savings deposits 281,342 264,946 260,503 197,143 188,733
Borrowings 41,514 34,979 21,238 16,126 11,355
Net worth, substantially
restricted 51,716 49,946 47,310 47,119 41,465
------- ------- ------- ------- -------
Number of:
Real estate loans
outstanding 6,380 5,914 5,858 4,525 4,717
Deposit accounts 36,378 5,140 35,933 26,436 25,516
Offices 8 8 7 5 5
Year Ended June 30,
Operations Data: 1997 1996 1995 1994 1993
(Dollars in Thousands)
Interest income $28,782 $26,926 $22,635 $20,017 $19,883
Interest expense (14,375) (13,676) (10,515) (8,168) (8,389)
------- ------- ------- -------- -------
Net interest income 14,407 13,250 12,120 11,849 11,494
Provision for loan losses (200) 0 (100) (30) (295)
Other income 2,468 2,648 2,464 1,213 1,009
General and administrative
expense (1) (9,472) (7,547) (6,428) (5,145) (4,767)
Income tax expense (2,429) (2,864) (2,626) (2,518) (2,495)
------- ------- ------- ------- -------
Net income $4,774 $5,487 $5,430 $5,369 $4,946
======= ======= ======= ======= =======
Earnings per share** 1.14 1.30 1.24 1.22 1.15
Book value per share** 12.39 11.87 11.17 10.65 9.58
Dividends paid per share** 0.50 0.46 0.41 0.39 0.38
Return payout ratio per 44% 35% 33% 0.30% 33%
share**
Return on average assets 1.30% 1.60% 1.85% 2.11% 2.13%
Average equity to average 13.77% 14.27% 16.37% 17.80% 17.17%
assets
Return on average equity 9.46% 11.22% 11.30% 11.87% 12.39%
<FN>
(1) 1997 general and administrative expenses include the non-recurring special
assessment paid to the FDIC in the amount of $1.7 million.
** All per share information has been adjusted for 2-for-1 stock splits which
were effective July 20, 1993 and June 10, 1996.
</FN>
Financial data for 1993, 1994 and six months of 1995 do not reflect results of
operations from Shepherdsville and Mt. Washington offices, (See"Management
Discussion & Analysis").
32
Quarterly Financial Data
(Unaudited) (Dollars in thousands except per share data)
Fiscal 1997: September 30 December 31 March 31 June 30
Total interest income $6,953 $7,133 $7,250 $7,447
Total interest expense 3,484 3,582 3,595 3,715
Net interest income 3,469 3,551 3,655 3,732
Provision for loan 200 0 0 0
losses
Net income 287 1,387 1,529 1,573
Earnings per share* $0.07 $0.33 $0.37 $0.38
Fiscal 1996:
Total interest income $6,538 $6,715 $6,824 $6,849
Total interest expense 3,333 3,479 3,451 3,413
Net interest income 3,205 3,236 3,373 3,436
Provision for loan 0 0 0 0
losses
Net income 1,434 1,378 1,394 1,281
Earnings per share* $0.34 $0.33 $0.33 $0.30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
First Federal Financial Corporation of Kentucky ("Corporation") is the parent to
its wholly owned subsidiary, First Federal Savings Bank of Elizabethtown
("Bank"). The Corporation has no other material income other than that generated
by the Bank.
Results of Operations
Net income was $4,774,000, or $1.14 per share in 1997, compared with $5,487,000,
or $1.30 per share in 1996. The decrease in earnings is attributable to the
one-time special assessment of $1.7 million ($1.1 million, net of tax) to
recapitalize the Savings Association Insurance Fund ("SAIF") and a $200,000
addition to provision for loan losses. Net earnings for the period would have
been approximately $5.87 million or $1.40 per share had it not been for the
special assessment. See further discussion under "Regulatory Matters."
33
Net Interest Income - Net interest income increased by $1,157,000 during 1997 to
$14,407,000 as compared to $13,250,000, in 1996. This increase was due to the
strong growth of the Bank's loan portfolio and a 4 basis point improvement in
the net interest margin. The Bank's net interest margin for the 1997 period
increased to 4.13% as compared to 4.09% during 1996. Also, interest and dividend
income on investments and deposits increased by $85,000, due to higher average
investment balances.
Average loan balances, which comprise 92% of the total interest-earning assets,
were $317.6 million during 1997 as compared to $295.7 million during 1996, or an
increase of $21.9 million. The average yield on loans decreased by 3 basis
points to 8.48% during 1997 as compared to 8.51% during 1996, resulting in a
$1.8 million growth in loan interest income.
Customer deposit balances averaged $270.7 million during 1997, a $12 million
increase from the 1996 average balance of $258.7 million. The cost of funds on
these deposit balances averaged 4.46% during 1997, which was an increase of 13
basis points from the 1996 average cost of funds of 4.59%. This decrease was
primarily attributable to customers' transferring deposits from long-term
maturities to short-term.
Provision for Loan Losses-Management periodically evaluates the adequacy of the
34
allowance for loan losses based on the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may effect the
borrower's ability to repay and other factors.
The provision for loan losses was $200,000 for 1997. Net charge-offs were
$98,115 during 1997 as compared to $49,054 during 1996. The Bank's allowance for
loan losses was $1.7 million or .52% of loans outstanding at June 30, 1997
compared to $1.6 million or .53% of loans outstanding at June 30, 1996.
Non-performing loans represented .47% of the loans outstanding at June 30, 1997.
As demonstrated in the summary table below, 68% of the Bank's non-performing
assets are collateralized by one-to-four family residential mortgages on real
estate located in Central Kentucky. Management chose not to add to the reserve
during 1996 due to their assessment as to its adequacy.
Year Ended June 30,
(Dollars in thousands)
1997 1996 1995
------ ------ -----
Allowance for loans losses:
Balance, July 1 $ 1,613 $ 1,662 $ 1,406
Balance acquired in merger - - 185
Provision for loans losses 200 - 100
Charge-offs (131) (74) (51)
Recoveries 33 25 22
-------- -------- --------
Balance, June 30 $ 1,715 $ 1,613 $ 1,662
======== ======== ========
Net loans outstanding at year end $ 327,791 $ 302,363 $ 282,954
Nonperforming loans at year end:
Collateralized by one-to-four
family homes $1,172 $940 $649
Other non-performing loans $378 $312 $512
Ratios: Non-performing loans to
total loans .47% .41% .41%
Allowance for loan losses
to non-performing loans 111% 128% 143%
Allowance for loan losses to
net loans .52% .53% .59%
Non-performing assets to
total assets .46% .46% .43%
Non-Interest Income and Expense - Non-interest income was $2,468,000 in 1997, a
decrease of $180,000 over 1996. The decrease in income is due to reduced sales
of available-for-sale securities. In 1997, the Bank reported gains from
investment sales of $317,000 as compared to $754,000 in 1996. Service fees
charged on customer checking accounts increased by $170,000 or 16% from 1997 to
1996, due to a growth in customer checking accounts and an increase in customer
35
service fees. Trust account fees increased from $58,000 in 1996 to $80,000 in
1997, as the Trust Department completed another successful year of operations.
Other sources of miscellaneous income, such as safety deposit box rental, loan
fees, and other customer transaction fees increased by $66,000 due to growth in
deposit relationships with existing customers.
Non-interest expense was $9,472,000 in 1997, an increase of $1,925,000 over
1996. The increase is a result of the SAIF special assessment recorded in the
first quarter of 1997, resulting in a $1,685,000 charge against earnings.
Compensation and benefits increased by $217,000 or 6.6% in 1997 as compared to
1996. Compensation costs deferred under SFAS No. 91 in connection with loan
originations resulted in an increase of $29,000 in costs in 1997 as compared to
1996. The remaining increase of $188,000 or 5.7%, reflects inflationary salary
raises and new employees added to service the normal customer growth of the
Bank.
Office occupancy and equipment expenses increased by $56,000 or 6.6% in 1997 as
compared to 1996 due to costs attributable to the opening of a new branch office
in the Elizabethtown Wal-Mart Supercenter and inflationary increases in other
occupancy and equipment related expenses.
Due to the SAIF recapitalization, on January 1, 1997, the Bank began paying
federal insurance premiums of $.064 per $100 of deposits as compared to a
previous premium of $.23 per $100 of deposits, resulting in a $230,000 decrease.
See further discussion under "Regulatory Matters."
All other expenses increased by $224,000, or 8%, in 1997 as compared to 1996.
Expenses directly related to customer checking accounts increased due to a
higher volume of accounts. Expenses directly related to postage, telephone, data
processing costs, marketing and supplies increased due to asset growth, new
services provided by the Bank, and general inflation.
Liquidity and Capital Resources
The Bank is required to maintain levels of liquid assets as defined by the
Office of Thrift Supervision regulations. This requirement is based on a
percentage of deposits and short-term borrowings and is currently 5%. The Bank's
liquidity ratio was 7.72% at June 30, 1997.
The Bank's primary source of funds for meeting its liquidity needs are customer
deposits, borrowings from the Federal Home Loan Bank of Cincinnati, principal
and interest payments from loans and mortgage-backed securities, proceeds from
the sale of investments, and earnings from operations retained by the
Corporation.
At June 30, 1997, the Bank had outstanding loan commitments, including
undisbursed portions of loans in process, standby letters of credit and lines of
credit in the amount of $22.7 million. It is anticipated that these demands on
liquidity will be net through growth in customer deposits and additional
borrowings from the Federal Home Loan Bank of Cincinnati.
The Office of Thrift Supervision's capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard;
a 3% leverage (core capital) ratio; and an 8% risk-based capital standard. As of
June 30, 1997, the Bank's actual capital percentages for tangible capital of
12.1%, core capital of 12.1%, and current risk-based capital of 19.9%,
significantly exceed the regulatory requirement for each category.
36
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.
Regulatory Matters
The Bank insures its customers' deposits through the Savings Association
Insurance Fund ("SAIF"). On September 30, 1996, Federal Deposit Insurance
Corporation ("FDIC") legislation was signed into law to recapitalize the SAIF.
As was anticipated, all SAIF-insured savings institutions were required to pay a
one-time special assessment of $.657 for every $100 of customer deposits. This
has resulted in a charge to earning of $1,095,000, net of tax, during the first
quarter of 1997. On January 1, 1997, the Bank began paying insurance premiums of
$.064 per $100 of deposits as compared to a previous premium of $.23 per $100 of
deposits. The reduced premium contributed approximately $143,000, net of tax, to
1997 earnings.
Recent legislation required the Bank to change its method of computing bad debt
deductions for income tax purposes, effective July 1, 1996. Formerly, the Bank
was permitted a bad debt deduction in the amount of 8% of its pretax income. The
annual deductions created a bad debt reserve for income tax purposes. This
reserve resulted in a restriction upon retained earnings which subjected the
reserve to tax recapture. Although the new law requires the recapture of
post-1987 reserves, the Bank has previously deferred the related tax
consequences and therefore will have no material effect on the future earnings
of the Bank.
Comparison of Fiscal 1996 to 1995
Acquisition
On January 4, 1995, the Bank completed its acquisition of Bullitt Federal
Savings Bank ("Bullitt"). Bullitt's main office (Shepherdsville, Kentucky) and
branch office (Mt. Washington, Kentucky) are located within a 40-mile radius of
the Bank's headquarters. Like the Bank, the primary business of Bullitt was the
origination of residential real estate mortgage loans. Simultaneous with the
acquisition, Bullitt was merged into the bank. The acquisition was accounted for
using the purchase method of accounting and, accordingly, Bullitt's results of
operations prior to the acquisition date have not been included in the
accompanying consolidated statements of income. Therefore any ratios or analyses
comparing years before the acquisition will not be comparable.
Net income for the fiscal year ended June 30, 1996, was $5,487,000, or $1.30 per
share, as compared to net income of $5,430,000, or $1.24 per share for the same
period in 1995, an increase of 4.8%. Factors contributing to the 1996 earnings
increase are primarily due to the Bullitt acquisition completed during the third
quarter of fiscal 1995 and continued favorable interest margins experienced in
1996. The favorable impact of the above factors was partially offset by higher
operating costs. Where referenced as such, the following discussion includes
estimated income and expenses attributable to the Shepherdsville and Mt.
Washington offices prior to the acquisition and merger.
37
Total interest income increased by $4,291,000 from fiscal 1995 to 1996, due to
higher average loan balances resulting from the Bullitt acquisition. Interest
income on loans account for a majority of the Bank's interest income as average
loans for 1996 were $295.7 million or 91% of the total average interest-earning
assets. The average yield on loans increased from 8.29% to 8.51% from fiscal
1995 to fiscal 1996. Average loan balances increased by $39 million resulting in
an overall increase in interest income on loans of $3.9 million. .
Total interest expense increased by $3,160,000 from fiscal 1995 to 1996. The
weighted average interest rate paid on customer deposits increased to 4.59%
during 1996 as compared to 4.21% during 1995. Customer deposit balances averaged
$258.7 million during 1996, a $30.3 million increase from the 1995 average
balance of $228.4 million. Interest expense paid on deposits increased by
$2,254,000 while interest expense paid on Federal Home Loan Bank advances
increased by $906,000.
As a result of the foregoing discussion, net interest income increased by
$1,130,000 to $13,250,000 in 1996 from $12,120,000 in 1995.
Management periodically evaluates the adequacy of the reserve for loan losses
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may effect the borrower's ability to repay
and other factors. In fiscal 1996, management chose not to add to the reserve
based on their assessment as to its adequacy. The allowance for loan losses was
$1.6 million or .53% of loans outstanding at June 30, 1996, compared to $1.7
million or .59% of loans outstanding at June 30, 1995. During fiscal 1995, the
Bank's provision for loan losses was $100,000. Net loan charge-offs have been
$49,054 and $29,427 for fiscal 1996 and 1995, respectively.
Other income increased by $184,000 during fiscal 1996 to $2,648,000. The
increase would have been $75,000 or 2.91% if non-interest income for the 1995
year had included income attributable to Bullitt from July, 1995 to December,
1995. Gains from the sale of available-for-sale securities were $754,000 in 1996
versus $1,104,000 in 1995.
Other expense for fiscal 1996 increased by $1,119,000 or 16% from fiscal 1995.
The increase would have been $642,000 or 9.3% if other expenses for 1995 had
included expenses attributable to Bullitt from July, 1995 to December, 1995.
Associate compensation and benefits increased by $242,000 in 1996 (including
Bullitt costs) as compared to 1995 due to the addition of new associates
required to offer expanded services to the Bank's customers. Office occupancy
and equipment expenses increased by $119,000 in 1996 (including Bullitt costs)
as compared to 1995 due to inflationary increases in other occupancy and
equipment related expenses. All other expenses increased by $350,000 in 1996
(including Bullitt expenses) as compared to 1995 due to expanded services
offered to customers, asset growth, and general inflation.
38
Item 7A. Disclosures About 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 policies of the Corporation, which include managing
the sensitivity repricing characteristics of the balance sheet components
consistent with maintaining acceptable levels of changes in net portfolio value
("NPV") and net interest income. A primary purpose of the Corporation's ALCO is
to manage interest rate risk to effectively invest the Corporation's capital and
to preserve the value created by its core business operations. As such, certain
management monitoring processes are designed to minimize the impact of sudden
and sustained changes in interest rates on NPV and net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Corporation's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Banks assets and liabilities. The table,
presented on page 23, under Item 1 "Regulatory Capital Requirements", presents
the Corporation's projected change in NPV for the various rate shock levels as
of June 30, 1997. All market risk sensitive instruments presented in this table
are held to maturity or available for sale. The Corporation has no trading
securities.
NPV is calculated by the Corporation pursuant to guidelines estimated by
the OTS. The calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent broker quotations and other public sources
as of June 30, 1997, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate. Computation of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan prepayments, and deposits decay, and
should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions the ALCO could undertake in response
to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of NPV. Actual values may differ from those projections
presented, should market conditions vary from assumptions used in the
calculation of the NPV. Certain assets, such as adjustable rate loans, which
represent one of the Corporation's primary loan products, have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. In addition, the proportion of adjustable rate loans in the
Corporation's portfolio could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
NPV. Finally, the ability of many borrowers to repay their adjustable-rate
mortgage loans may decrease in the event of interest rate increases.
Another tool of evaluating the institution's sensitivity to net interest
income to changes in interest rates is to examine the extent to which its assets
and liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
39
The following interest rate sensitivity table sets forth the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1997, which
are anticipated to reprice or mature in each of the future time periods shown.
Interest Rate Sensitivity (Gap Analysis)
As of June 30, 1997
0-3 4-6 7-12 1-3 3-5 Over 5
(Dollars in thousands) Total Months Months Months Years Years Years
----- ------ ------ ------ ------- ------- --------
Interest-Earning Assets:
Loans $329,463 $38,509 $23,196 $44,334 $111,249 $34,957 $77,219
Debt and equity securities 20,956 5,672 750 1,000 6,534 7,000
Mortgage-backed securities 2,200 61 59 114 404 330 1,231
------- ------- ------- ------- ------- ------ ------
Total rate sensitive assets 352,619 44,242 23,255 45,198 112,653 41,821 85,450
------- ------- ------- ------- ------- ------ ------
Interest-Bearing Liabilities:
Money market deposits 26,130 2,489 2,252 3,881 9,648 4,331 3,529
Passbook accounts 31,273 2,979 2,696 4,645 11,547 5,184 4,222
Demand deposit accounts 33,812 3,221 2,914 5,022 12,484 5,604 4,565
Certificates of deposit 181,074 36,529 35,388 37,385 66,503 5,269 --
Borrowed funds 42,128 40,614 -- -- -- -- 1,514
------- ------ ------ ------ ------- ------ ------
Total rate sensitive liabilites 314,417 85,833 43,250 50,934 100,183 20,388 13,828
------- ------ ------ ------ ------- ------ ------
Interest sensitivity gap 38,202 (41,591) (19,996) (5,735) 12,470 21,433 71,622
======= ====== ====== ====== ======= ====== ======
Cumulative interest sensitivity gap $(41,591) $(61,587) $(67,322) $(54,852) $(33,419) $38,203
====== ====== ====== ======= ====== ======
Cumulative interest sensitivity gap
as a percentage of total assets -11.00% -16.29% -17.81% -14.51% -8.84% 10.12%
====== ====== ====== ======= ====== ======
As the preceding table indicates, the Bank has a moderate negative
cumulative gap for assets and liabilities maturing or repricing within one year
in the amount of $(67,322) million or 17.81 percent of total assets. Thus,
decreases in interest rates during this time period would generally increase net
interest income, while increases in interest rates would generally decrease net
interest income. However, even though the periodic gap analysis provides
management with a method of measuring current interest rate risk, it only
measures rate sensitivity at a specific point in time. Gap analysis does not
take into consideration that assets and liabilities with similar repricing
characteristics may not reprice at the same time or to the same degree and,
therefore, does not necessarily predict the impact of changes in general levels
of interest rates on net interest income. Additionally, certain assets such as
adjustable rate mortgage loans have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
event of changes in interest rates, prepayment and decay rates may deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to afford the payments on their adjustable rate mortgage loans
may decrease in the event of an interest rate increase.
40
Item 8. Financial Statements and Supplementary Data
Board of Directors
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 and Subsidiaries as of June
30, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Financial
Corporation of Kentucky and Subsidiaries as of June 30, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Whelan, Doerr, Pike & Pawley, PSC
Elizabethtown, Kentucky
August 13, 1997
41
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
--------------------------
ASSETS 1997 1996
----------- -----------
Cash $ 8,694,283 $ 8,407,735
Interest bearing deposits 481,430 7,752,537
Securities (Note 3)
Securities held-to-maturity 17,484,427 11,993,796
Securities available-for-sale
(Total securities fair value: $22,992,346
at June 30, 1997; $17,086,603 at June 30, 1996) 5,192,323 4,748,417
Loans receivable, net (Notes 1 and 4) 327,791,495 302,363,297
Real estate owned (Note 1):
Acquired through foreclosure 183,569 375,392
Held for development 687,261 505,261
Investment in Federal Home Loan Bank stock 2,777,200 2,589,900
Premises and equipment (Notes 1 and 5) 10,221,228 9,684,167
Other assets 842,656 986,260
Excess of cost over net assets of affiliates
purchased (Note 2) 3,024,481 3,264,553
------------ -----------
TOTAL ASSETS $377,380,353 $352,671,315
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Savings deposits (Note 6) $281,342,174 $264,945,744
Advances from Federal Home Loan Bank (Note 7) 41,514,194 34,979,079
Accrued interest payable 202,982 218,284
Accounts payable and other liabilities 706,892 1,099,293
Deferred income taxes (Note 8) 1,949,361 1,482,470
------------- -----------
TOTAL LIABILITIES 325,715,603 302,724,870
COMMITMENTS (Note 4) - -
STOCKHOLDERS' EQUITY (Notes 8, 9, and 10):
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, 4,170,003 shares in 1997 and
4,208,490 shares in 1996 4,170,003 4,208,490
Additional paid-in capital 4,330,548 5,466,700
Retained earnings-substantially restricted 42,193,609 39,509,189
Net unrealized holding gain on securities
available-for-sale, net of tax 970,590 762,066
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 51,664,750 49,946,445
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $377,380,353 $352,671,315
=========== ===========
See notes to consolidated financial statements.
42
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30,
1997 1996 1995
INTEREST INCOME:
Interest on loans $26,944,715 $25,173,320 $21,287,154
Interest and dividends on investments and deposits 1,837,661 1,752,590 1,348,244
---------- ---------- ----------
Total interest income 28,782,376 26,925,910 22,635,398
---------- ---------- ----------
INTEREST EXPENSE:
Savings deposits 12,069,782 11,875,423 9,621,015
Federal Home Loan Bank advances 2,305,725 1,800,194 894,247
----------- ---------- -----------
Total interest expense 14,375,507 13,675,617 10,515,262
---------- ---------- ----------
Net interest income 14,406,869 13,250,293 12,120,136
Provision for loan losses 200,000 - 100,000
---------- ---------- ----------
Net interest income after provision for loan losses 14,206,869 13,250,293 12,020,136
OTHER INCOME:
Customer service fees on deposit accounts 1,231,149 1,061,102 661,858
Other income 919,943 832,381 697,185
Gain on sale of investments 316,927 754,409 1,104,492
---------- ---------- ----------
Total other income 2,468,019 2,647,892 2,463,535
OTHER EXPENSE:
Employee compensation and benefits 3,522,340 3,305,384 2,901,055
Office occupancy expense and equipment 899,855 843,969 646,595
Federal insurance premiums 2,014,218 586,428 498,454
Marketing and advertising 373,117 342,710 278,653
Outside services and data processing 600,167 609,906 688,143
State franchise tax 292,880 279,914 240,106
Other expense 1,769,357 1,579,128 1,174,840
---------- ---------- ----------
Total other expense 9,471,934 7,547,439 6,427,846
---------- ---------- ----------
Income before income taxes 7,202,954 8,350,746 8,055,825
Income taxes (Note 8) 2,428,892 2,864,122 2,625,839
---------- ---------- ----------
NET INCOME $ 4,774,062 $ 5,486,624 $ 5,429,986
=========== =========== ===========
Net income per share of common stock (Note 9) $ 1.14 $ 1.30 $ 1.24
=========== =========== ===========
See notes to consolidated financial statements.
43
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Unrealized
Holding Gains
Common Additional Employee Stock on Securities
Stock Common Paid-in Retained Ownership Trust Available-
Shares Stock Capital Earnings Obligation for-sale Total
--------- ---------- ----------- ---------- --------------- -------------- ----------
BALANCE, July 1, 1994 2,212,247 $2,212,247 $11,048,733 $32,341,597 $(126,349) $1,643,186 $47,119,414
Net earnings - - - 5,429,986 - - 5,429,986
Principal repayments
on ESOP loan - - - - 126,349 - 126,349
Exercise of stock
options 11,038 11,038 97,627 - - - 108,665
Stock tendered as payment
for options exercised (1,804) (1,804) (53,173) - - - (54,977)
Change in unrealized holding
gains on securities avail-
able-for-sale, net of tax - - - - - 116,878 116,878
Gain realized on the sale
of securities available-
for-sale - - - - - (728,965) (728,965)
Cash dividends declared - - - (1,806,112) - - (1,806,112)
Stock repurchased (102,583) (102,583) (2,898,297) - - - (3,000,880)
--------- --------- ---------- ------------ ---------- ------------ ------------
BALANCE, June 30, 1995 2,118,898 2,118,898 8,194,890 35,965,471 - 1,031,099 47,310,358
Net earnings - - - 5,486,624 - - 5,486,624
Principal repayments
on ESOP loan - - - - - - -
Exercise of stock options 8,950 8,950 102,398 - - - 111,348
Stock tendered as payment
for options exercised (2,655) (2,655) (79,821) - - - (82,476)
Change in unrealized holding
gains on securities avail-
able-for-sale, net of tax - - - - - 228,877 228,877
Gain realized on the sale
of securities available-
for-sale - - - - - (497,910) 497,910)
Cash dividends declared - - - (1,942,906) - - (1,942,906)
Stock repurchased (20,898) (20,898) (646,572) - - - (667,470)
2-for-1 stock split
(Note 9) 2,104,195 2,104,195 (2,104,195) - - - -
----------- --------- ---------- ----------- ------------- ------------ ---------
BALANCE, June 30, 1996 4,208,490 4,208,490 5,466,700 39,509,189 - 762,066 49,946,445
Net earnings - - - 4,774,062 - - 4,774,062
Principal repayments
on ESOP loan - - - - - - -
Exercise of stock
options 26,930 26,930 92,576 - - - 119,506
Stock tendered as payment
for options exercised (3,018) (3,018) (55,937) - - - (58,955)
Change in unrealized holding
gains on securities avail-
able-for-sale, net of tax - - - - - 417,696 417,696
Gain realized on the sale
of securities available-
for-sale - - - - - (209,172) (209,172)
Cash dividends declared - - - (2,089,642) - - (2,089,642)
Stock repurchased (62,399) (62,399) (1,172,791) - - - (1,235,190)
--------- --------- ---------- ---------- ------------- ---------- ----------
BALANCE, June 30, 1997 4,170,003 $4,170,003 $ 4,330,548 $42,193,609 $ - $ 970,590 $51,664,750
========== ========= ========= ========== ============= ========== ==========
See notes to consolidated financial statements.
44
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
1997 1996 1995
-------------- ------------ ----------
OPERATING ACTIVITIES:
Net income $ 4,774,062 $ 5,486,624 $ 5,429,986
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses and real estate
owned 200,000 - 100,000
Provision for depreciation 550,488 462,621 368,412
Net change in deferred loan fees and costs 178,756 164,059 159,949
Federal Home Loan Bank stock dividends (187,300) (173,700) (136,500)
Amortization of acquired intangible assets 240,072 240,072 120,036
Amortization of discounts on securities
held-to-maturity (151,218) (125,833) (72,249)
Gain on sale of investments available-for-sale (316,927) (754,409) (1,104,492)
(Decrease) increase in interest payable (15,302) (30,533) 66,397
Decrease (increase) in other assets 143,604 45,245 (418,000)
Increase in accounts payable and other
liabilities 74,490 507,652 53,297
----------- ----------- -----------
Net cash provided by operating activities 5,490,725 5,821,798 4,566,836
INVESTING ACTIVITIES:
Sales of securities available-for-sale 455,831 793,308 3,642,085
Purchases of securities available-for-sale (221,543) (495,960) (142,638)
Purchases of securities held-to-maturity (5,993,995) (5,000,000) -
Principal collections on securities held-to-
maturity 654,582 5,499,137 141,652
Net increase in loans to customers (26,451,594) (19,832,353) (20,015,742)
Purchases of premises and equipment (1,087,549) (346,653) (888,368)
Sales of real estate acquired in settlement of
loans 698,405 103,000 31,600
Increase in real estate held for development (182,000) (12,102) (41,982)
Acquisition of Bullitt Federal Savings Bank,
net of cash and cash equivalents acquired - - (9,328,699)
----------- ---------- -----------
Net cash used in investing activities (32,127,863) (19,291,623 (26,602,092)
FINANCING ACTIVITIES:
Advances from Federal Home Loan Bank 6,535,115 13,740,731 2,953,737
Net increase in customer savings deposits 16,396,430 4,442,692 23,794,301
Proceeds from stock options exercised 60,551 28,872 53,688
Dividends paid (2,089,642) (1,942,906) (1,806,112)
Common stock repurchased (1,235,190) (667,470) (3,000,880)
Collection on advance to ESOP - 163,677 -
Advance to ESOP (14,685) - -
------------ ----------- -----------
Net cash provided by financing activities 19,652,579 15,765,596 21,994,734
------------ ----------- -----------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (6,984,559) 2,295,771 (40,522)
CASH AND CASH EQUIVALENTS, beginning of year 16,160,272 13,864,501 13,905,023
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 9,175,713 $ 16,160,272 $ 13,864,501
=========== ============ ============
See notes to consolidated financial statements.
45
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies which
First Federal Financial Corporation of Kentucky follows in preparing and
presenting its consolidated financial statements:
Principles of Consolidation - The consolidated financial statements include the
accounts of First Federal Financial Corporation of Kentucky (the Corporation)
and its wholly-owned subsidiary, First Federal Savings Bank of Elizabethtown
(the Bank), and its wholly-owned subsidiary, First Service Corp. of
Elizabethtown. All significant intercompany transactions and balances have been
eliminated.
Securities - The Corporation records securities under Statement of Financial
Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments
in Debt and Equity Securities", which requires the classification of securities
into three categories: held-to-maturity, available-for-sale, or trading. Based
upon a periodic review of the investment portfolio, debt securities in which the
Corporation has a positive intent and ability to hold are classified as
held-to-maturity and are carried at cost adjusted for the amortization of
premiums and discounts using the interest method over the terms of the
securities.
Debt and equity securities which do not fall into this category, nor held for
the purpose of selling in the near term are classified as available-for-sale.
Unrealized holding gains and losses, net of income tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity until realized.
Federal Home Loan Bank Stock - Investment in stock of Federal Home Loan Bank is
required by law of every federally insured savings and loan or savings bank. The
investment is carried at cost. No ready market exists for the stock, and it has
no quoted market value.
Real Estate Owned - Real estate properties acquired through foreclosure and in
settlement of loans are stated at the 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.
46
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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.
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.
Income Taxes - Deferred income taxes have been provided on income and expenses
reported for financial statement purposes in periods which differ from those in
which they are reported for income tax purposes.
Loans Receivable - Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, net deferred loan origination fees and
unearned discounts. The Bank defers loan origination fees and discounts net of
certain direct origination costs. These net deferred fees are amortized using
the level yield method on a loan-by-loan basis over the lives of the underlying
loans. Unearned discounts on consumer loans are recognized over the lives of the
loans using methods that approximate the interest method.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
cash payments are received until, in management's judgement, the borrower's
ability to make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
47
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 .SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 Bank's primary lending
activity is the origination of residential real estate loans secured by first
mortgage for the purpose of acquisition or construction of one-to-four family
residential properties.
Cash Flows - For purposes of the statement of cash flows, the Bank considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Cash and cash equivalents include cash on hand and
amounts due from banks.
Estimates and Assumptions - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles 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.
Advertising Costs - The Corporation expenses all advertising costs when they are
incurred.
Reclassifications - Certain amounts for 1996 and 1995 have been reclassified to
conform to the presentation for 1997.
2.ACQUISITION
On January 4, 1995, the Bank completed the acquisition of Bullitt Federal
Savings Bank ("Bullitt") for cash totaling $10,614,633. The acquisition was
accounted for using the purchase method of accounting, and, accordingly, the
results of operations of Bullitt prior to the acquisition date have not been
included in the accompanying consolidated statements of income. The excess of
cost over fair value of tangible net assets acquired was $3,606,805 and is being
amortized over a fifteen year period on a straight-line basis.
48
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.SECURITIES
The amortized cost basis and fair values of securities are as follows at June
30, 1997:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
Securities held-to-maturity:
U.S. Treasury and agencies $15,335,411 $ 234,624 $ - $15,570,035
Mortgage-backed securities 2,149,016 80,972 - 2,229,988
----------- -------- ---------- -----------
Total held-to-maturity- securities $17,484,427 $ 315,596 $ - $17,800,023
========== ======= ========= ==========
Securities available-for-sale:
Equity securities $ 3,721,730 $1,479,974 $ (9,381) $ 5,192,323
========== ========= ========= ===========
The amortized cost basis and fair values of securities are as follows at June
30, 1996:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
Securities held-to-maturity:
U.S. Treasury and agencies $ 9,225,316 $ 228,074 $ - $ 9,453,390
Mortgage-backed securities 2,768,480 116,316 - 2,884,796
----------- ------- ---------- -----------
Total held-to-maturity- securities $11,993,796 $ 344,390 $ - $ 12,338,186
========== ========= ========== ==========
Securities available-for-sale:
Equity securities $ 3,593,771 $1,154,646 $ - $ 4,748,417
=========== ========= ========== ===========
49
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.SECURITIES - (Continued)
The amortized cost and fair value of debt securities held-to-maturity at June
30, 1997, by contractual maturity, are shown below.
Amortized Market
Cost Value
Securities held-to-maturity:
Due in one year or less $ 735,298 $ 745,545
Due after one year through five years 12,852,113 12,995,450
Due after five years through ten years 1,748,000 1,829,040
Mortgage backed securities 2,149,016 2,229,988
---------- ----------
$17,484,427 $17,800,023
========== ==========
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:
1997 1996
-------- --------
Proceeds from sales $455,831 $793,308
Gross realized gains $316,927 $754,409
Realized gains, net of tax $209,172 $518,430
Change in net unrealized holding gains $632,873 $346,783
The average cost method was used for determining the basis of the securities in
computing the realized gains.
Investment securities of $4,126,362 at June 30, 1997 were pledged to secure
public deposits.
50
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4.LOANS RECEIVABLE
Loans receivable at June 30 are summarized as follows:
1997 1996
------------ ------------
First mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four family
residences $255,454,108 $236,210,054
Secured by other properties 28,535,596 31,584,126
Construction loans 15,444,350 15,766,465
Accrued interest 155,995 218,162
------------- ------------
299,590,049 283,778,807
Less:
Undisbursed portion of construction
loans 7,097,807 10,156,383
Interest reserves (90 days or more
delinquent) 45,677 29,724
Escrow deposits 683,258 618,445
Net deferred loan origination fees 2,672,040 2,329,118
----------- -----------
Total first mortgage loans 289,091,267 270,645,137
Consumer and other loans:
Automobile 338,320 804,929
Manufactured home 17,587 49,005
Home equity 10,377,025 4,959,476
Commercial 4,310,725 4,618,724
Secured by real estate and other
consumer loans 25,252,447 22,895,170
Accrued interest 179,157 187,201
----------- -----------
40,475,261 33,514,505
Less:
Unearned discounts 60,521 183,718
------------ -----------
Total consumer and other loans 40,414,740 33,330,787
------------ ------------
Total loans 329,506,007 303,975,924
Less allowance for loan losses 1,714,512 1,612,627
----------- -----------
$327,791,495 $302,363,297
=========== ===========
51
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS RECEIVABLE - (Continued)
The Bank did not materially participate in the servicing of loans for others on
any of the dates presented in these financial statements.
The allowance for losses on loans is summarized as follows:
Year Ended June 30,
1997 1996 1995
Balance, beginning of year $1,612,627 $1,661,681 $1,406,300
Provision charged to operations 200,000 - 100,000
Reserve associated with loans
acquired in merger - - 184,808
Charge-offs (131,132) (74,018) (51,347)
Recoveries 33,017 24,964 21,920
--------- --------- ---------
Balance, end of year $1,714,512 $1,612,627 $1,661,681
========= ========= =========
On July 1, 1995, the Corporation adopted Statement of Financial Accounting
Standards No. 114 (SFAS No. 114) "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118. SFAS No. 114 defines a loan as impaired when
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Management has defined
its population of impaired loans as residential mortgage, consumer and
commercial real estate loans which are classified as substandard, doubtful, or
loss, as defined by Office of Thrift Supervision (OTS) regulations. Interest
income is recognized on an impaired loan when earned.
Investment in impaired loans is summarized as follows:
June 30,
1997 1996
Impaired loans with no related allowances $1,739,000 $2,154,000
Impaired loans with related allowances - -
--------- ---------
Total impaired loans $1,739,000 $2,154,000
========= =========
Year Ended June 30,
1997 1996
Average impaired loans outstanding $1,983,000 $1,848,000
Interest income recognized $ 163,000 $ 147,000
Interest income received $ 163,000 $ 147,000
52
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS RECEIVABLE - (Continued)
At June 30, 1997, the Bank had loan commitments of approximately $6,239,300,
excluding undisbursed portions of loans in process. Commitments to fund fixed
rate loans included in the above amount were $4,584,500 with interest rates
ranging from 7.50% to 9.75%. The Bank also had standby letters of credit
totaling $514,250 and undisbursed lines of credit of $8,805,316 at June 30,
1997.
Non-performing loans were $1,540,000 and $1,252,000 at June 30, 1997 and 1996,
respectively. Interest income in the amount of $60,486 and $35,819 for 1997 and
1996, respectively, would have been recorded on non-performing loans if they had
been performing in accordance with their contractual terms.
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
June 30,
1997 1996
Land $ 816,266 $ 816,266
Buildings 8,205,723 7,375,643
Furniture, fixtures and equipment 4,172,502 4,283,618
----------- -----------
13,194,491 12,475,527
Less accumulated depreciation 2,973,263 2,791,360
----------- -----------
$10,221,228 $ 9,684,167
=========== ===========
On February 23, 1996, the Bank leased office space for its WalMart location
under a five year operating lease agreement for $2,917 per month with options to
extend the terms of the lease at the end of the original lease period. On August
1, 1996, the Bank leased land under a five-year operating lease agreement for
$2,350 per month. This lease contains options to renew the terms of the lease
for an additional forty-five years. Lease expense during the year ended June 30,
1997 was $65,458. Future minimum commitments under these leases are:
Year Ended
June 30,
1998 $ 63,200
1999 63,200
2000 63,200
2001 51,533
2002 2,350
-------
$243,483
=======
The above-mentioned land lease is to be the site of a new Bardstown branch
location which is currently under construction. Total construction costs are
estimated to be approximately $1,100,000 of which $550,000 has been funded
through June 30, 1997.
53
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. SAVINGS DEPOSITS
Deposits at June 30 are summarized as follows:
Weighted-
Average Rate 1997 1996
1997 1996 Amount Percent Amount Percent
NOW Accounts 1.51% 1.48% $ 42,952,707 15.27 $ 39,417,737 14.88
Money Market 3.38% 3.33% 10,460,267 3.72 10,269,596 3.88
Passbook Savings 2.65% 2.67% 31,185,601 11.08 31,298,130 11.81
----------- ------ ----------- ------
84,598,575 30.07 80,985,463 30.57
Certificates of
Deposit:
0.00% - 4.00% 1,128,044 .40 1,310,971 .49
4.01% - 6.00% 143,982,629 51.18 146,026,842 55.12
6.01% - 8.00% 51,632,926 18.35 36,617,468 13.82
8.01% - 10.00% - - 5,000 -
------------ ------ ------------ ------
196,743,599 69.93 183,960,281 69.43
------------ ------ ------------ ------
$281,342,174 100.00 $264,945,744 100.00
============ ====== ============ ======
At June 30, 1997, scheduled maturities of certificates of deposit are as
follows:
Average
Amount Rate Percent
1998 $116,794,556 5.35% 59.36
1999 63,252,227 6.01% 32.15
2000 11,428,248 5.69% 5.81
2001 4,245,325 5.98% 2.16
Thereafter 1,023,243 6.02% .52
--------------- ------
$ 196,743,599 100.00
=============== ======
The average interest rate on the savings deposit portfolio, computed without
effect of compounding daily interest, at June 30, 1997 and 1996 is 4.54% and
4.53%, respectively.
The Bank had certificates of deposit with balances of $100,000 or more of
$43,925,939 and $37,398,782 at June 30, 1997 and 1996, respectively.
54
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6.SAVINGS DEPOSITS - (Continued)
A summary of interest expense on deposits is as follows:
Year Ended June 30,
1997 1996 1995
--------- --------- ---------
Savings accounts $ 818,414 $ 845,727 $ 807,560
Money Market and NOW
accounts 874,464 759,117 627,422
Certificates of deposit 10,376,904 10,270,579 8,186,033
----------- ----------- -----------
$12,069,782 $11,875,423 $ 9,621,015
========== ========== =========
7.ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati are collateralized by
Federal Home Loan Bank stock and a blanket pledge of one-to-four family
residential mortgage loans equivalent to 150 percent of the outstanding
advances.
June 30,
1997 1996
-------------------- ----------------------
Weighted- Weighted-
Average Average
Rate Amount Rate Amount
---------- ---------- -------- -----------
Short-term borrowings from
Federal Home Loan Bank:
Variable rate advances 5.58% $40,000,000 5.41% $30,000,000
Long-term borrowings from
Federal Home Loan Bank:
Fixed rate advances - - 5.95% 3,000,000
Mortgage matched advances
payable monthly through
May, 2009 with interest
rates from 5.30% to 7.80% 6.75% 1,514,194 6.85% 1,979,079
------------ -----------
Total long-term borrowings 1,514,194 4,979,079
------------ -----------
Total borrowings $41,514,194 $34,979,079
========== ==========
55
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7.ADVANCES FROM FEDERAL HOME LOAN BANK - (Continued)
The aggregate minimum annual repayments of long-term borrowings as of June 30,
1997 is as follows:
1997 $ 102,414
1998 107,710
1999 115,248
2000 123,357
2001 132,036
Thereafter 933,429
---------
$1,514,194
=========
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.
The effective tax rate is below the statutory rate due to the following:
Year Ended June 30,
1997 1996 1995
------ ------ ------
Statutory tax rate 34.0% 34.0% 34.0%
Increase (reduction) in tax rate from:
Tax exempt income (2.6) (1.9) (1.6)
Purchase accounting 1.4 1.2 1.5
Other - net .9 1.0 (1.3)
------ ------ ------
33.7% 34.3% 32.6%
====== ====== ======
Provision for income taxes for the years ended June 30, are as follows:
1997 1996 1995
--------- --------- ---------
Current $2,321,803 $2,369,470 $2,460,201
Deferred 107,089 494,652 165,638
---------- ---------- ----------
Total income tax expense $2,428,892 $2,864,122 $2,625,839
========== ========== ==========
56
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8.INCOME TAXES - (Continued)
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:
1997 1996
---------- ----------
Deferred tax assets:
Loan fees deferred for financial
reporting purpose $ 344,518 $ 459,357
Accrued liabilities and other 44,855 182,843
Assets acquired, purchase price adjustments 251,368 301,124
---------- ----------
640,741 943,324
Deferred tax liabilities:
Depreciation differences 705,697 640,062
Basis difference in real estate 48,514 44,633
Difference in bad debt reserve 842,979 922,480
Unrealized appreciation on securities
available-for-sale 503,191 392,580
Basis difference in Federal Home Loan
Bank stock 489,721 426,039
---------- ----------
2,590,102 2,425,794
Net deferred tax liability $1,949,361 $1,482,470
========== ==========
The Bank's annual addition to its reserve for bad debts allowed under the
Internal Revenue Code may differ significantly from the bad debt experience used
for financial statement purposes. Such bad debt deductions for income tax
purposes are included in taxable income of later years only if the bad debt
reserves are used for purposes other than to absorb bad debt losses. Since the
Bank does not intend to use the reserve for purposes other than to absorb
losses, no deferred income taxes have been provided on the amount of bad debt
reserves for tax purposes that arose in tax years beginning before December 31,
1987, in accordance with SFAS No. 109. Therefore, retained earnings at June 30,
1997 includes approximately $12,100,000, representing such bad debt deductions
for which no deferred income taxes have been provided. In August, 1996,
legislation was passed by Congress that repealed the percentage of taxable
income bad debt deduction and requires recapture of the excess of bad debt
reserves over the base year reserve as of December 31, 1987. For years
subsequent to the base year, deferred taxes have been recorded; thus, no
additional tax provision is required as a result of this legislation.
57
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $1,916,000 for the
purpose of granting to eligible savings account holders a priority in
the event of future liquidation. Only in such an event, an eligible
account holder who continues to maintain a savings 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 savings account
balances of the eligible account holders.
(b) Dividend Restrictions - The Bank may not declare or pay a cash
dividend on any of its capital stock if the effect thereof would cause
the net worth of the Bank to be reduced below the amount required for
the liquidation account.
Additionally, federal regulations limit dividend and capital
distributions during a calendar year to the greater of: 100 percent of
the Bank's current net income plus the amount that would reduce by
one-half its surplus capital ratio at the beginning of the calendar
year; or 75 percent of its net income over the most recent
four-quarter period.
(c) Earnings Per Share - Net income per share of common stock is computed
by dividing net income by the weighted average number of shares of
common stock issued and outstanding for the period. Common stock
equivalents have not been used in computing net income per share
because their effect is not material. Net income per share for each
period reflects a 2-for-1 common stock split in the form of a 100%
stock dividend distributed on June 10, 1996.
(d) Regulatory Capital Requirements - The Bank is subject to various
regulatory capital requirements administered by the OTS. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by the OTS that, if
undertaken, could have a direct material effect on the Corporation's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, a bank must meet
specific capital guidelines that involve quantitative measures of a
bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The amounts and
classification of a bank's capital are also subject to qualitative
judgments by the OTS about components, risk weightings, and other
factors. Qualitative measures established by regulation to ensure
capital adequacy and to be classified as "well capitalized" require
the Bank to maintain minimum amounts and ratios of Total, Tier I, Core
and Tangible capital as set forth in the following table. In their
evaluation of capital adequacy, the regulators assess exposure to
declines in the economic value of the Bank's capital adequacy, as well
as exposure to declines in the economic value of capital due to
changes in interest rates.
58
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9.STOCKHOLDERS' EQUITY - (Continued)
As of June 30, 1997, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed
the Bank's category.
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of June 30, 1997:
Total risk-based capital (to risk-
weighted assets) $47,532,000 19.6% $19,423,000 8.0% $24,279,000 10.0%
Tier I capital (to risk-weighted
assets) $45,817,000 18.9% $ n/a n/a $14,567,000 6.0%
Core capital (to adjusted tangible
assets) $45,817,000 12.3% $11,197,000 3.0% $18,662,000 5.0%
Tangible capital (to tangible
assets) $45,817,000 12.3% $ 5,599,000 1.5% n/a n/a
As of June 30, 1996:
Total risk-based capital (to risk-
weighted assets) $45,639,000 21.4% $17,045,000 8.0% $21,306,000 10.0%
Tier I capital (to risk-weighted
assets) $44,043,000 20.7% $ n/a n/a $12,784,000 6.0%
Core capital (to adjusted tangible
assets) $44,043,000 12.6% $10,448,000 3.0% $17,413,000 5.0%
Tangible capital (to tangible
assets) $44,043,000 12.6% $ 5,224,000 1.5% n/a n/a
10.EMPLOYEE BENEFIT PLANS
(a) Pension Plans - The Bank is a participant in the Financial
Institutions Retirement Fund, a multiple-employer defined benefit
pension plan covering substantially all employees. Employees are 100%
vested at the completion of five years of participation in the plan.
The Bank's policy is to contribute annually the minimum funding
amounts. Employer contributions charged to operations for 1997, 1996
and 1995 were $56,475, $113,584, and $112,558, respectively.
59
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. EMPLOYEE BENEFIT PLANS - (Continued)
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 charged to
operations for 1997, 1996 and 1995 were $114,939, $103,107 and $99,741,
respectively.
(b) Employee Stock Ownership Plan - The Corporation has a non-contributory
employee stock ownership plan (ESOP) in which employees are eligible to
participate upon completion of one year of service. Employees are
vested in accordance with a schedule which provides for 100% vesting
upon completion of seven years of service.
Shares of the Corporation's common stock were acquired in a leveraged
transaction, and were initially held in an unallocated stock account.
Annually, the aggregate number of shares released and allocated to
eligible employees is determined by a formula specified in the plan
agreement, based on the total debt service for the year made on the
ESOP indebtedness. The indebtedness is repaid by the ESOP from Bank
contributions and dividends on the allocated and unallocated stock held
by the ESOP. The number of shares allocated and unallocated at June 30
is as follows:
1997 1996 1995
-------- -------- ------
Allocated 307,595 321,504 362,232
Unallocated - 860 11,044
-------- ------- -------
Total shares held by ESOP 307,595 322,364 373,276
======= ======= =======
The Corporation has elected not to adopt the accounting guidelines of
AICPA Statement of Position 93-6 "Employers Accounting for Employee
Stock Ownership Plans" (SOP 93-6), since all of the ESOP shares were
acquired prior to the transition date of December 31, 1992. Bank
contributions charged to employee compensation costs during the year
ended June 30, 1997, 1996, and 1995 were $30,000, $30,000, and $9,244,
respectively.
60
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10.EMPLOYEE BENEFIT PLANS - (Continued)
(c) Stock Option Plan - Under the 1987 Stock Option and Incentive Plan, the
Corporation may grant either incentive or non-qualified stock options
to key employees for an aggregate of 423,200 shares of the
Corporation's common stock at not less than fair market value at the
date such options are granted. The option to purchase shares expires
ten years after the date of grant. A summary of option transactions,
which has been adjusted to reflect the 2-for-1 stock split on June 10,
1996, is as follows:
June 30,
1997 1996 1995
-------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
Outstanding, beginning of year 98,244 $10.49 106,044 $ 9.42 113,120 $ 7.75
Granted during year - - 10,000 14.25 15,000 15.42
Exercised during the year (26,930) 4.44 (17,800) 6.25 (22,076) 4.92
------- ------- -------
Outstanding, end of year 71,314 12.77 98,244 10.49 106,044 9.42
======== ======= =======
Eligible for exercise at year
end 42,564 61,244 69,044
======= ======= =======
Weighted average fair value of
options granted during the year $ n/a $ 8.88
======== =======
61
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. EMPLOYEE BENEFIT PLANS - (Continued)
The Corporation applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation cost has been recognized for its plan.
Had compensation cost for the Corporation's Stock Option Plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS No. 123, "Accounting for Stock-Based Compensation", the
Corporation's net income and earnings per share would have been restated to the
pro-forma amounts indicated below:
Years Ended
June 30,
1997 1996
---------- ----------
Net income: As reported $4,774,062 $5,486,624
Pro-forma $4,762,347 $5,480,429
Earnings per share: As reported $ 1.14 $ 1.30
Pro-forma $ 1.14 $ 1.30
The following table summarizes information about stock options outstanding at
June 30, 1997:
Options Outstanding Options Exercisable
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
$ 6.88 15,564 4.4 years $ 6.88 15,564 $ 6.88
$12.50 25,000 6.7 $12.50 20,000 $12.50
$15.00 to $17.13 30,750 7.3 $15.98 7,000 $15.73
------ ------
71,314 6.5 $12.77 42,564 $10.97
====== ======
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 1996: 1) expected dividend yields at 2.5%, 2) risk-free interest rates
at 7.5%, 3) expected volatility at 6%, and 4) expected life of options at 10
years.
62
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. CASH FLOW ACTIVITIES
The following information is presented as supplemental disclosures to the
statement of cash flows, as required by Statement of Financial Accounting
Standards No. 95.
(a) Cash paid during the year ended June 30 for:
1997 1996 1995
---------- ---------- ----------
Interest expense $14,390,809 $13,706,150 $10,448,865
========== ========== ==========
Income taxes $ 2,482,000 $ 2,370,201 $ 2,560,000
========== ========== ==========
(b) Supplemental disclosure of non-cash activities:
Transfers from loans
to real estate
acquired through
foreclosure $ 505,579 $ 216,484 $ -
========== ========== =========
Change in unrealized
gains on securities
available-for-sale,
net of tax $ 208,524 $ (269,033) $ (612,087)
========== =========== ==========
12. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The following consolidating condensed financial statements summarize the
financial position and operating results of First Federal Financial
Corporation of Kentucky and its subsidiary, First Federal Savings Bank of
Elizabethtown, and the Bank's wholly-owned subsidiary, First Service Corp.
of Elizabethtown.
63
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12.CONSOLIDATING CONDENSED FINANCIAL INFORMATION - (Continued)
CONSOLIDATING CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997
Consolidated Consolidated
First First First First
Federal Federal Federal Federal
Savings First Service Savings Financial Financial
Bank of Corp. of Bank of Corporation Corporation
Elizabethtown Elizabethtown Eliminations Elizabethtown of Kentucky Eliminations of Kentucky
ASSETS
Cash $ 8,694,283 $ 31,900 $ (31,900) $ 8,694,283 $ 51,135 $ (51,135) $ 8,694,283
Interest bearing
deposits 362,904 - - 362,904 118,526 - 481,430
Securities held-to-
maturity 17,484,427 - - 17,484,427 - - 17,484,427
Securities available-
for-sale 4,964,241 - - 4,964,241 228,082 - 5,192,323
Loans receivable 327,791,495 - - 327,791,495 - 327,791,495
Real estate owned 183,569 687,261 - 870,830 - - 870,830
Investment in Federal
Home Loan Bank stock 2,777,200 - - 2,777,200 - - 2,777,200
Premises and equipment 10,221,228 - - 10,221,228 - - 10,221,228
Investment in sub-
sidiary 697,896 - (697,896) - 50,584,319 (50,584,319) -
Other assets 3,743,961 46,634 - 3,790,595 734,308 (657,766) 3,867,137
---------- ------- -------------- ------------ ---------- ---------- -----------
TOTAL ASSETS $376,921,204 $765,795 $(729,796 $376,957,203 $51,716,370 $51,293,220 $377,380,353
=========== ======= ======== =========== ========== ========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Savings deposits $281,425,209 $ - $ (31,900) $281,393,309 $ - $ (51,135) $281,342,174
Federal Home Loan
Bank Advances 41,514,194 - - 41,514,194 - - 41,514,194
Accrued interest
payable 202,982 - - 202,982 - - 202,982
Accounts payable and
other liabilities 1,241,950 67,899 - 1,309,849 51,620 (654,577) 706,892
Deferred income taxes 1,952,550 - - 1,952,550 - (3,189) 1,949,361
---------- ------- -------- ----------- ------------ ----------- ------------
TOTAL LIABILITIES 26,336,885 67,899 (31,900) 326,372,884 51,620 (708,901) 325,715,603
STOCKHOLDERS'
EQUITY 50,584,319 697,896 (697,896) 50,584,319 51,664,750 (50,584,319) 51,664,750
---------- ------- -------- ----------- ---------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY $376,921,204 $765,795 $(729,796) $376,957,203 $51,716,370 $(51,293,220) $377,380,353
=========== ======= ======== =========== ========== =========== ===========
64
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12.CONSOLIDATING CONDENSED FINANCIAL INFORMATION - (Continued)
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
YEAR ENDED JUNE 30, 1997
Consolidated Consolidated
First First First First
Federal Federal Federal Federal
Savings First Service Savings Financial Financial
Bank of Corp. of Bank of Corporation Corporation
Elizabethtown Elizabethtown Eliminations Elizabethtown of Kentucky Eliminations of Kentucky
Interest and
dividend income $ 28,745,961 $ - $ - $ 28,745,961 $ 57,162 $ (20,746) $ 28,782,377
Interest expense (14,396,254) - - (4,396,254) - 20,746 (14,375,508)
Provision for loan
losses (200,000) - - (200,000) - - (200,000)
----------- ------- -------- ----------- --------- --------- -----------
Net interest income
after provision for
loan losses 14,149,707 - - 14,149,707 57,162 - 14,206,869
Equity in earnings of
subsidiary 97,259 - (97,259) - 4,698,965 (4,698,965) -
Other income 2,232,911 353,764 (144,000) 2,442,675 25,344 - 2,468,019
Other expense 9,354,755) (214,135) 144,000 (9,424,890) (47,044) - (9,471,934)
----------- -------- -------- ----------- --------- ---------- -----------
Income before income
tax 7,125,122 139,629 (97,259) 7,167,492 4,734,427 (4,698,965) 7,202,954
Income tax (benefit) 2,426,157 42,370 - 2,468,527 (39,635) - 2,428,892
----------- -------- -------- ----------- --------- ---------- -----------
NET INCOME $ 4,698,965 $ 97,259 $ (97,259) $ 4,698,965 $4,774,062 $(4,698,965) $ 4,774,062
=========== ======== ========= =========== ========= ========== ===========
65
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
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,
1997 1996
Assets
Cash and interest bearing deposits $ 169,661 $ 240,042
Investment in subsidiary 50,584,319 48,670,638
Securities available-for-sale 228,082 301,400
Other assets 734,308 894,685
---------- ----------
$51,716,370 $50,106,765
========== ==========
Liabilities and Stockholders' Equity
Other liabilities $ 51,620 $ 108,700
Stockholders' equity 51,664,750 49,998,065
---------- ------------
$51,716,370 $50,106,765
========== ==========
Condensed Statements of Income
Year Ended June 30,
1997 1996 1995
Interest income $ 57,162 $ 68,183 $ 191,312
Gain on sale of investments 25,344 - -
Other expenses (47,044) (44,731) (70,593)
--------- --------- ---------
Net income before income tax benefit 35,462 23,452 120,719
Income tax benefit 39,635 20,480 3,856
---------- --------- ---------
Income before equity in undistributed
net income of subsidiaries 75,097 43,932 124,575
Equity in undistributed net income (excess
of dividends distributed) of subsidiaries 4,698,965 5,494,311 5,305,411
--------- --------- ---------
Net income $4,774,062 $5,538,243 $5,429,986
========= ========= =========
66
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13.CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (Continued)
Condensed Statements of Cash Flows
Year Ended June 30,
1997 1996 1995
Operating Activities:
Net income $ 4,774,062 $ 5,538,243 $ 5,429,986
Adjustments to reconcile net income to
cash provided by operating activities:
Earnings from investment in subsidiary (4,698,965) (5,494,311) (5,305,411)
Gain on sale of investments avail-
able-for-sale (25,344) - -
Decrease (increase) in other assets 51,531 (153,217) (42,196)
(Decrease) increase in other
liabilities (57,080) 37,550 21,150
---------- ----------- ----------
Net cash provided (used) by operating
activities 44,204 (71,735) 103,529
Investing Activities:
Sale of securities available-for-sale 152,064 - -
Purchases of securities available-for-sale (17,463) (301,400) -
Collections on note receivable from
subsidiary 3,029,780 2,851,275 4,660,116
---------- ---------- ----------
Net cash provided (used) by investing
activities 3,164,381 2,549,875 4,660,116
Financing Activities:
Proceeds from stock options exercised 60,551 28,872 53,688
Dividends paid (2,089,642) (1,942,906) (1,806,112)
Common stock repurchases (1,235,190) (667,470) (3,000,880)
Collection on advance to ESOP - 163,677 -
Advance to ESOP (14,685) - -
--------- ---------- ----------
Net cash used by financing activities (3,278,966) (2,417,827) (4,753,304)
---------- ---------- ----------
Net (decrease) increase in cash (70,381) 60,313 10,341
Cash, beginning of year 240,042 179,729 169,388
---------- ---------- ----------
Cash, end of year $ 169,661 $ 240,042 $ 179,729
========== ========== ==========
67
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases could not be
realized in immediate settlement of the instrument. Accordingly, the
aggregate fair value amounts presented are not intended to represent
the underlying value of the Corporation.
The methods and assumptions used by the Corporation in estimating its
fair value disclosures for financial instruments are presented below:
Cash and Interest Bearing Deposits - The carrying amounts for cash and
interest bearing deposits approximates their fair values.
Investment Securities - Fair values for investment securities are based
upon quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments.
Loans, net - For variable rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
amounts. The fair values of other types of loans are estimated by
discounting the future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit quality
and for the same remaining maturities.
Deposits - The fair values for demand deposits, savings accounts and
certain money market deposits are the amounts payable on demand at the
reporting date. The carrying amounts for variable-rate, money market
accounts and certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
68
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. FAIR VALUES OF FINANCIAL INSTRUMENTS - (Continued)
Advances from Federal Home Loan Bank - The fair values for long-term
debt are estimated using discounted cash flow analyses, based on the
Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Commitments to Extend Credit and Standby Letters of Credit - The fair
values of commitments to extend credit is estimated using fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness
of the customer. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair values of standby letters of credit are
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations
with the counter parties at the reporting date. The value of these
financial instruments was not material at June 30, 1997 and 1996.
The estimated fair values of the Corporation's financial instruments
are as follows:
June 30, 1997 June 30, 1996
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and interest bearing deposits $ 9,175,713 $ 9,175,000 $ 16,160,272 $ 16,160,000
Investment securities:
Securities held-to-maturity 17,484,427 17,800,000 11,993,796 12,338,000
Securities available-for-sale 5,192,323 5,192,000 4,748,417 4,748,000
Loans, net 327,791,495 329,094,000 302,363,297 301,502,000
Financial liabilities:
Deposits 281,342,174 283,863,000 264,945,744 267,471,000
Advances from Federal Home Loan Bank 41,514,194 41,630,000 34,979,079 35,253,000
69
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. CONTINGENCIES
In the normal course of business, there are various outstanding legal
proceedings and claims. In the opinion of management, after
consultation with legal counsel, the disposition of such legal
proceedings and claims will not materially affect the Corporation's
consolidated financial position, results of operations or liquidity.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit. Those instruments involve, to varying degrees, elements
of credit and interest-rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
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 counterpart.
The Bank's only financial instruments with off-balance-sheet risk at
June 30, 1997 and 1996 are outlined in Note 4.
70
FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. CONTRIBUTIONS
Effective July 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 116, "Accounting for Contributions Received
and Contributions Made", (SFAS 116), on a prospective basis. On May 10,
1994, the Bank pledged $100,000 to a local non-profit organization
payable over 5 years at $20,000 per year. As a result, the remaining
pledge payable of $40,000 has been accrued and included in accounts
payable and other liabilities at June 30, 1997 in accordance with SFAS
116. The cumulative effect of this change in accounting principle is
properly reflected in the June 30, 1997 balance of stockholders'
equity. Also, for purposes of SFAS 107, the carrying amount of the
pledge approximates the fair value at June 30, 1997.
18. CONCENTRATION OF CREDIT RISK FOR CASH HELD IN BANK
The Corporation maintains a certificate of deposit in excess of
$100,000 in another financial institution which is insured by the
Federal Deposit Insurance Corporation up to $100,000. At June 30, 1997,
the Corporation's uninsured cash balance totaled $18,526.
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
For information concerning the Board of Directors of the Corporation,
the information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
Item 11. Executive Compensation
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
71
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders
Thereof" in the Proxy
Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent date
result in a change of control of the Corporation.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" in the
Proxy Statement.
72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements Filed
The following documents are filed as part of this report in
Part II, Item 8
(a) Report of Independent Certified Public Accountants
(b) Consolidated Statements of Financial Condition at
June 30, 1997 and 1996.
(c) Consolidated Statements of Earnings for the Years
ended June 30, 1997, 1996, and 1995.
(d) Consolidated Statements of Stockholders' Equity for
the Years ended June 30, 1997, 1996, and 1995.
(e) Consolidated Statements of Cash Flows for the Years
ended June 30, 1997, 1996, and 1995.
(f) Notes to Consolidated Financial Statements
2. All financial statement schedules have been omitted as the
required information is either inapplicable or included in the
financial statements or related notes.
3. Exhibits
(3) (a) Articles of Incorporation **
(3) (b) Bylaws **
10 (b) First Federal Savings Bank of Elizabethtown
Stock Option and Incentive Plan, as amended***
(21) Subsidiaries of the Registrant
(99) Undertakings
(23) Consent of Whelan, Doerr, Pike & Pawley, PSC,
Certified Public Accountants
(27) Financial Data Schedule
4. No reports on Form 8-K have been filed during the last quarter
of the fiscal year covered by this report.
** 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 Form
10-K for the fiscal year ended June 30, 1994.
73
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: 9/24/97 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/ Irene B. Lewis
--------------------------- -----------------------
B. Keith Johnson Irene B. Lewis
Principal Executive Officer Director
and Director
Date: 9/24/97 Date: 9/24/97
By: /s/ Wreno M. Hall By: /s/ Bob Brown
--------------------------- ----------------------
Wreno M. Hall Bob Brown
Director Director
Date: 9/24/97 Date: 9/24/97
By: /s/ J. Alton Rider By: /s/ Kennard Peden
--------------------------- ----------------------
J. Alton Rider Kennard Peden
Director Director
Date: 9/24/97 Date: 9/24/97
By: /s/ Burlyn Pike By: /s/ Van E. Allen
--------------------------- ----------------------
Burlyn Pike Van E. Allen
Director Director
Date: 9/24/97 Date: 9/24/97
By: /s/ Walter D. Huddleston By: /s/ Richard L. Muse
--------------------------- ----------------------
Walter D. Huddleston Richard L. Muse
Director Comptroller
Date: 9/24/97 Date: 9/24/97
74
INDEX TO EXHIBITS
Exhibit No. Description
(3) (a) Articles of Incorporation *
(3) (b) Bylaws*
(10)(b) First Federal Savings Bank of Elizabethtown Stock Option and
Incentive Plan, as amended **
(21) Subsidiaries of the Registrant
(99) Undertakings
(23) Consent of Whelan, Doerr, Pike & Pawley, PSC, Certified Public
Accountants
(27) Financial Data Schedule
* 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 Form
10-K for the fiscal year ended June 30, 1994.
75
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 Federal Service Corporation Kentucky 100%
of Elizabethtown (a)
(a) Wholly-owned subsidiary of First Federal Savings Bank of Elizabethtown.
76
EXHIBIT 99 - UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendment to its Form S-8 registration
statement No. 33-30582
(i) To include any prospectus required by section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statements;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's Annual Report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of
the Securities Exchange of 1934) that is incorporated by reference in the
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
77
EXHIBIT 23
EXHIBIT 23 - Consent of Whelan, Doerr,Pike, & Pawley, P.S.C.
The Board of Directors
First Federal Financial Corporation of Kentucky
We consent to the filing of our report dated August 13, 1997, relating to the
consolidated balance sheets of First Federal Financial Corporation of Kentucky
and Subsidiaries as of June 30, 1997 and 1996, and related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1997, which reports appear
in the June 30, 1997 annual report on Form 10-K of First Federal Financial
Corporations of Kentucky.
Whelan, Doerr, Pike & Pawley, P.S.C.
/s/ Whelan, Doerr, Pike & Pawley, P.S.C.
Elizabethtown, Kentucky 42701
September 24, 1997
78