EXHIBIT 13
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
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Harrodsburg First Financial Bancorp, Inc., a Delaware corporation (the
"Company"), is a unitary savings and loan holding company whose only
subsidiaries are First Financial Bank ("Bank") and its subsidiary. On September
29, 1995, the Bank converted from mutual to stock form as a wholly owned
subsidiary of the Company. In connection with the conversion, the Company issued
2,182,125 shares of its common stock (the "Common Stock") to the public.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
of the Department of the Treasury. The primary activity of the Company is
holding the stock of the Bank and operating the Bank. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank and its subsidiary. The Bank was formed in
1961 as a federal mutual savings and loan association and obtained insurance of
accounts and became a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati at that time. Upon its conversion to stock form in September 1995,
the Bank adopted the name First Federal Savings Bank of Harrodsburg. Effective
January 1, 2000, the Bank's name was changed to First Financial Bank. The Bank
operates through one full service office in Harrodsburg, Kentucky, and two full
service branch offices in Lawrenceburg, Kentucky.
The executive offices of the Company and the Bank are located at 104 South
Chiles Street, Harrodsburg, Kentucky 40330, and its telephone number is (859)
734-5452.
MARKET AND DIVIDEND INFORMATION
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Market for the Common Stock
Since October 4, 1995, the Common Stock of the Company has been listed for
trading under the symbol "HFFB" on the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market. As of December 6,
2000, there were 1,514,875 shares of the Common Stock issued and outstanding,
held by approximately 476 stockholders of record, not including beneficial
owners in nominee or street name.
Dividends
The Company maintains a policy whereby it will pay a semi-annual cash dividend
payable as of the 15th day of each April and October or the first business day
thereafter if such day is not a business day, to stockholders of record as of
the last business day of the month following the end of such semi-annual period.
The regular semi-annual dividend of $0.30 per share was payable on October 13,
2000 to stockholders of record on September 29, 2000. The Board of Directors of
the Company periodically reviews its dividend policy. Any change in the
Company's dividend policy, as determined by the Board of Directors, will depend
on the Company's debt and equity structure, earnings, regulatory capital
requirements, and other factors, including economic conditions, regulatory
restrictions, and tax considerations. See Note 8 of Notes to Consolidated
Financial Statements for restrictions on the payment of cash dividends. For
further information on stock prices and dividends, see Stock Prices and
Dividends (page 3).
TABLE OF CONTENTS
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Harrodsburg First Financial Bancorp, Inc................................. Inside Front Cover
Market and Dividend Information.......................................... Inside Front Cover
Letter to Stockholders................................................................... 1
Selected Financial and Other Data........................................................ 2
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 4
Financial Statements..................................................................... 14
Corporate Information.................................................... Inside Back Cover
SELECTED FINANCIAL AND OTHER DATA
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Financial Condition Data
At September 30,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(Dollars in Thousands)
Total Amount of:
Assets .................... $117,393 $110,416 $109,919 $109,638 $108,953
Loans receivable, net ..... 100,881 89,062 85,272 81,261 77,502
Investments (1) ........... 10,994 11,240 14,966 14,382 14,884
Cash and cash equivalents . 3,031 8,350 8,074 12,621 15,065
Deposits .................. 86,473 82,018 78,996 78,629 76,946
FHLB advances ............. 3,500
Stockholders' equity ...... 25,241 26,220 28,982 29,773 30,222
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Number of:
Real estate loans outstanding 1,587 1,532 1,601 1,668 1,710
Deposit accounts .......... 10,026 9,574 9,590 9,594 9,524
Full service offices ...... 3 2 2 2 2
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(1) Includes FHLB stock, and term deposits with the FHLB.
Operating Data
For the year ended September 30,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
Interest income ................ $8,051 $7,745 $7,778 $7,699 $7,712
Interest expense ............... 4,150 3,813 3,897 3,835 3,901
------ ------ ------ ------ ------
Net interest income ........ 3,901 3,932 3,881 3,864 3,811
Provision for loan losses ...... 15 35 96 11 8
------ ------ ------ ------ ------
Net interest income after
provision for loan losses . 3,886 3,897 3,785 3,853 3,803
Non-interest income ............ 113 116 122 95 101
Non-interest expense1 .......... 2,261 1,728 1,679 1,701 2,225
------ ------ ------ ------ ------
Income before income tax expense 1,738 2,285 2,228 2,247 1,679
Income tax expense ............. 591 777 799 771 589
------ ------ ------ ------ ------
Net income ..................... $1,147 $1,508 $1,429 $1,476 $1,090
====== ====== ====== ====== ======
Basic earnings per share ....... $ .76 $ .94 $ .79 $ .78 $ .55
====== ====== ====== ====== ======
Diluted earnings per share ..... $ .76 $ .94 $ .79 $ .78 $ .55
====== ====== ====== ====== ======
- -----------------
(1) Reflects one-time special AIF assessment of $536,063 in fiscal year 1996.
2
Key Operating Ratios
At or for the year ended September 30,
----------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Performance Ratios:
Return on average assets (net income
divided by average total assets) .... 1.02% 1.36% 1.31% 1.36% 1.00%
Return on average equity (net income
divided by average equity) .......... 4.49 5.49 4.98 5.12 3.56
Average interest-earning assets to
average interest-bearing liabilities 128.80 133.86 136.40 136.34 139.15
Net interest rate spread ................ 2.46 2.43 2.30 2.32 2.14
Net yield on average interest-
earning assets ...................... 3.55 3.63 3.63 3.64 3.57
Dividend payout ......................... 113.08 87.74 102.38 45.26 72.71
Capital Ratios:
Average equity to average assets
(average equity divided by
average total assets) ............... 22.64 24.80 26.31 26.64 28.18
Equity to assets at period end .......... 21.50 23.75 26.37 27.14 27.74
Asset Quality Ratios:
Net interest income after provision for
loan losses to total other expenses . 171.87 225.58 225.43 226.51 170.92
Non-performing loans to total loans ..... .51 .32 .57 .64 1.12
Non-performing loans to total assets .... .44 .25 .44 .47 .79
Stock Prices and Dividends
The following table sets forth the range of high and low sales prices for the
common stock as reported by the Wall Street Journal as well as dividends
declared in each quarter for 2000 and 1999. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
Quarterly Stock Information
Fiscal 2000 Fiscal 1999
------------------------------- ----------------------------------
Stock Price Range Stock Price Range
------------------ Per Share ------------------ Per Share
Quarter Low High Dividend Low High Dividend
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1st $11.38 $14.00 $ .25 $13.75 $15.38 $ .30
2nd 10.50 13.38 .30 13.00 15.06 .20
3rd 9.69 13.00 -- 12.00 13.56 --
4th 9.50 12.38 .30 12.63 14.00 .30
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Total $ .85 $ .80
======== =========
3
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, year 2000 issues and general economic conditions. Harrodsburg
First Financial Bancorp, Inc. undertakes no obligation to publicly release the
results of any revisions to those forward looking statements, which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Harrodsburg First Financial Bancorp, Inc. ("Company") is a bank holding company
headquartered in Harrodsburg, Kentucky, which provides a full range of deposits
and traditional mortgage loan products through its wholly owned banking
subsidiary, First Financial Bank (the "Bank"). All references to the Bank refer
collectively to the Company and the Bank.
Overview
In fiscal 2000, due to the rise in interest rates by the Federal Reserve, the
expansion of the Bank's operations of an additional branch office in
Lawrenceburg, Kentucky, and the addition of a Chief Executive Officer, net
income decreased by approximately 24%. For the fiscal year ended September 30,
2000, net income was $1.1 million, or $.76 per diluted share, as compared to
$1.5 million, or $.94 per diluted share, for the fiscal year ended September 30,
1999. However, assets increased $7.0 million to $117.4 million over last year.
Net loans outstanding grew by 13.2%, reflecting strong performance by the loan
production staff. Asset quality continues to remain excellent.
Asset/Liability Management
Quantitative Aspects of Market Risk. The Bank does not maintain a trading
account for any class of financial instrument. Further, it is not currently
subject to foreign currency exchange rate risk or commodity price risk. The
stock in the FHLB of Cincinnati does not have equity price risk because it is
issued only to members and is redeemable for its $100 par value. The following
table illustrates quantitative sensitivity to interest rate risk for financial
instruments other than non-interest earning cash balances, FHLB stock and demand
deposit accounts for the Bank as of September 30, 2000.
4
Market Rate Analysis - September 30, 2000
Expected Maturity Date
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Year ended September 30,
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(Dollars in Thousands)
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
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Assets:
Loans-fixed:
Balance $53 $146 $140 $394 $2,427 $21,633 $24,793 $24,310
Interest rate 9.00% 8.79% 8.86% 8.89% 8.48% 7.80% 7.89%
Loans-variable:
Balance 42,843 7,033 8,758 9,555 8,310 372 76,871 75,391
Interest rate 7.47% 7.50% 7.41% 7.27% 7.95% 8.25% 7.50%
Investments:
Balance 6,634 1,540 3,565 134 11,873 11,779
Interest rate 3.97% 6.46% 6.09% 5.73% 4.95%
Liabilities:
Deposits:
Balance 15,639 15,639 15,639
Interest rate 2.70% 2.70%
Deposits-certificates
Balance 47,487 15,094 4,347 3,416 70,344 69,847
Interest rate 5.73% 6.36% 6.12% 6.27% 5.92%
Qualitative Aspects of Market Risk. Net interest income, the primary component
of the Bank's net earnings, is derived from the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities. One of the
Bank's principal financial objectives is to achieve long-term profitability
while reducing its exposure to fluctuations in interest rates. The Bank has
sought to reduce exposure of its earnings to changes in market interest rates by
managing the mismatch between asset and liability maturities and interest rates.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Bank's assets
mature or reprice more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If the Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, as is the case with most savings institutions, the Bank's
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. The Bank's policy has been to mitigate the interest rate risk inherent in
the historical savings institution business of originating long-term loans
funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes in
interest rates.
Management's principal strategy in managing the Bank's interest rate risk has
been to maintain short and intermediate-term assets in the portfolio, including
locally originated adjustable rate mortgage loans. The Bank does not actively
offer long-term fixed rate loans. All fixed rate loans that are offered are
secured by one to four-family owner-occupied dwellings for terms of up to 30
years. Likewise, the interest rate charged on the Bank's adjustable rate loans
typically reprice after one, three, or five years with maximum periodic interest
rate adjustment limits ("caps"). At September 30, 2000, the Bank had no
adjustable rate loans that reprice after five years from that date. In managing
its investment portfolio, the Bank seeks to purchase investments that mature on
a basis that approximates the estimated maturities of the Bank's liabilities.
In addition to shortening the average repricing of its assets, management has
attempted to lengthen the average maturity of its liabilities by adopting a
tiered pricing program for its certificates of deposit. The Bank offers market
5
rates of interest on its certificates of deposit, which are typically higher on
its longer term certificates, in order to encourage depositors to invest in
certificates with longer maturities.
There have been no significant changes in the Bank's primary market risk
exposures or methods for managing those exposures since September 30, 2000.
The Bank also measures its interest rate risks using the Office of Thrift
Supervision net present value method ("NPV"). NPV measures interest rate risk by
computing estimated changes in the net portfolio value of cash flows from
assets, liabilities, and off-balance sheet items in the event of a range of
assumed changes in market interest rates. The Office of Thrift Supervision
defines the sensitivity measure as the change in the NPV ratio with a 200 basis
point shock. At September 30, 2000, if interest rates increased by 200 basis
points, the Bank's NPV ratio would be 19.00% based on a 214 basis point decrease
in its NPV. Additionally, if interest rates decline by 200 basis points, the
Bank's NPV ratio would be 21.71%, based on a 57 basis point increase in its NPV.
Although the NPV calculation provides an indication of the Bank's interest rate
risk at a particular point in time, such measurements are not intended to and do
not provide a precise forecast of the effect of changes in market interest rates
on the Bank's net interest income and will differ from actual results.
Average Balances, Interest, and Average Yields
Net interest income is affected by (i) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Savings institutions have
traditionally used interest rate spreads as a measure of net interest income.
Certificates of deposit constitute approximately 81% of the Bank's total
deposits and generally pay higher rates of interest than core deposits. The
Bank's emphasis on certificates of deposits may result in a higher average cost
of deposits which may adversely affect the Bank's interest rate spread. Another
indication of an institution's net interest income is its "net yield on
interest-earning assets" which is net interest income divided by average
interest-earning assets. The following table sets forth certain information
relating to the Bank's average interest-earning assets and interest-bearing
liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans are included in the net loan category. Average
balances are derived from month-end average balances. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
6
Year Ended September 30,
-----------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ----------------------------- ------------------------------
Average Yield Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable.............. $ 95,726 $7,340 7.67% $ 86,754 $ 6,757 7.79% $ 83,637 $ 6,550 7.83%
Investment securities(1)...... 14,253 711 5.00 21,701 988 4.55 23,335 1,228 5.26
-------- ------ -------- ------- -------- -------
Total interest-
earning assets............ 109,979 8,051 7.32 108,455 7,745 7.14 106,972 7,778 7.27
------ ------- -------
Non-interest earning assets...... 2,973 2,409 2,118
-------- -------- --------
Total assets.................. $112,952 $110,864 $109,090
======== ======== ========
Interest-bearing liabilities:
Deposits...................... $ 84,345 4,111 4.87 $ 81,022 3,813 4.71 $ 78,425 3,897 4.97
Borrowings.................... 1,042 39 3.74
-------- ------ -------- ------- -------- -------
Total interest-
bearing liabilities......... 85,387 4,150 4.86 81,022 3,813 4.71 78,425 3,897 4.97
------ ------- -------
Non-interest bearing
liabilities:................... 1,997 2,351 1,965
-------- ----------- --------
Total liabilities............. 87,384 83,373 80,390
Stockholders' equity............. 25,568 27,491 28,700
-------- ----------- --------
Total liabilities &
stockholders' equity........ $112,952 $ 110,864 $109,090
======== =========== ========
Net interest income.............. 3,901 3,932 3,881
===== ===== =====
Interest rate spread(2).......... 2.46% 2.43% 2.30%
==== ==== ====
Net yield on interest-
earning assets(3).............. 3.55% 3.63% 3.63%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabilities............ 128.80% 133.86% 136.40%
====== ====== ======
- ---------------------------
(1) Includes interest-bearning overnight deposits and term deposits with FHLB.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-bearing assets represents net interest income as a
percentage of average interest-earning assets.
7
The net interest margin is a key measure in determining the Bank's income
performance. The Bank's net interest margin was 3.55% for the year ended
September 30, 2000 compared to 3.63% for the same period in 1999. Net interest
income decreased $31,000 or .8% for the year ended September 30, 2000 as
compared to the same period in 1999. Interest income increased $306,000 or 4.0%
while interest expense increased $337,000 or 8.8% for the 2000 period compared
to the 1999 period.
The Bank's net interest margin was 3.63% for the years ended September 30, 1999
and 1998. Net interest income increased $51,000 or 1.3% for the year ended
September 30, 1999 as compared to the same period in 1998. Interest expense
decreased $84,000 or 2.2% while interest income decreased $33,000 or .4% for the
1999 period compared to the 1998 period.
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume). Average balances
are derived from month-end balances. Management does not believe that the use of
month-end balances instead of average daily balances has caused any material
difference in the information presented.
8
Year Ended September 30,
----------------------------------------------------------------------
2000 vs 1999 1999 vs 1998
--------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
Interest-earning assets:
Loans receivable $ 698 $(104) $ (12) $ 582 $ 241 $ (33) $ (1) $ 207
Investment securities1 (339) 97 (34) (276) (86) (166) 12 (240)
----- ----- ----- ----- ----- ----- ----- -----
Total $ 359 $ (7) $ (46) $ 306 $ 155 $(199) $ 11 $ (33)
===== ===== ===== ===== ===== ===== ===== =====
Interest expense:
Deposits $ 156 $ 137 $ 5 $ 298 $ 126 $(204) $ (6) $ (84)
Borrowings 39 39
----- ----- ----- ----- ----- ----- ----- -----
Total $ 156 $ 137 $ 44 $ 337 $ 126 $(204) $ (6) $ (84)
===== ===== ===== ===== ===== ===== ===== =====
Net change in interest income $ 203 $(144) $ (90) $ (31) $ 29 $ 5 $ 17 $ 51
===== ===== ===== ===== ===== ===== ===== =====
- ------------------------
(1) Includes interest-earning overnight deposits and term deposits with FHLB of
Cincinnati.
9
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 2000 AND 1999
Net Income. Net income decreased by $361,000, or 23.95% to $1,147,000 for the
year ended September 30, 2000 as compared to $1,508,000 for the year ended
September 30, 1999. The net decrease was due to a decrease in net interest
income of $31,000, a decrease of $3,000 in non-interest income, and an increase
of $533,000 in non-interest expense offset by a decrease in the provision for
loan losses of $20,000 and a decrease in income tax expense of $186,000.
Net Interest Income. Net interest income for the year ended September 30, 2000
was $3.9 million. The decrease in net interest income in fiscal 2000 compared to
1999 of $31,000 was due to an increase in interest expense of $337,000 offset by
an increase in interest income of $306,000. Interest income in 2000 was $8.0
million with an average yield of 7.32% compared to $7.7 million with an average
yield of 7.14% in 1999. The average balance of interest bearing liabilities in
2000 was $85.4 million with an average cost of funds of 4.86% compared to
average balances of interest bearing liabilities in 1999 of $81.0 million with
an average cost of funds of 4.71%.
Interest Income. Interest income was $8.0 million, or 7.32% of average
interest-earning assets, for the year ended September 30, 2000 as compared to
$7.7 million, or 7.14% of average interest-earning assets, for the year ended
September 30, 1999. Interest income increased $306,000 or 4.0% from 2000 to
1999. The increase was due primarily to an increase of $1.5 million in the
average balance of interest earning assets.
Interest Expense. Interest expense was $4.1 million, or 4.86% of average
interest-bearing liabilities, for the year ended September 30, 2000 as compared
to $3.8 million, or 4.71% of average interest-bearing liabilities, for the
corresponding period in 1999. The increase in interest expense of $337,000 was
the result of a 15 basis point increase in the average rate paid on the
deposits, primarily certificates of deposits, in addition to, an increase of
$4.4 million in the average balance of interest bearing deposits for the year
ended September 30, 2000 compared to the same period in 1999.
Provision for Loan Losses. The provision for loan losses was $15,000 and $35,000
for the years ended September 30, 2000 and 1999, respectively. Management
considers many factors in determining the necessary levels of the allowance for
loan losses, including an analysis of specific loans in the portfolio, estimated
value of the underlying collateral, assessment of general trends in the real
estate market, delinquency trends, prospective economic and regulatory
conditions, inherent loss in the loan portfolio, and the relationship of the
allowance for loan losses to outstanding loans. At September 30, 2000 and 1999
the allowance for loan losses represented .37% and .41% of total loans,
respectively.
Non-Interest Income. Non-interest income amounted to $113,000 and $116,000 for
the years ended September 30, 2000 and 1999, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $93,000 and $99,000 for 2000 and 1999, respectively.
Non-Interest Expense. Non-interest expense increased approximately $533,000, or
30.8%, to $2.3 million for the year ended September 30, 2000. Non-interest
expense was 2.0% and 1.6% of average assets for the years ended September 30,
2000 and 1999, respectively. The increase of $533,000 was primarily due to an
increase of $276,000 in compensation and benefits, an increase of $58,000 in
occupancy expenses, an increase of $42,000 in data processing expenses, an
increase of $7,000 in state franchise taxes, and an increase of $173,000 in
other operating expenses offset by a decrease of $23,000 in federal and other
insurance premiums. The increase of $276,000 in compensation and benefits is due
to the addition of a new Chief Executive Officer effective October 1, 1999, four
additional employees hired for the new branch office in Lawrenceburg, Kentucky
and normal salary increases. The increase of $58,000 in occupancy expenses,
$42,000 in data processing expense and $173,000 in other operating
10
expenses was due to the opening of a new branch office effective February 14,
2000 and expenses incurred in changing the name of the Bank effective January 1,
2000.
Income Tax Expense. The provision for income tax expense amounted to
approximately $591,000 and $777,000 for the years ended September 30, 2000 and
1999, respectively. The provision for income tax expense as a percentage of
income before income tax expenses amounted to 34.0% for both years.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 1999 AND 1998
Net Income. Net income increased by $79,000, or 5.58% to $1,508,000 for the year
ended September 30, 1999 as compared to $1,429,000 for the year ended September
30, 1998. The net increase was due to an increase in net interest income of
$51,000, a decrease in the provision for loan losses of $61,000, and a decrease
in income tax expense of $23,000 offset by a decrease of $7,000 in non-interest
income and an increase of $49,000 in non-interest expense.
Net Interest Income. Net interest income for the year ended September 30, 1999
was $3.9 million. The increase in net interest income in fiscal 1999 compared to
1998 of $51,000 was due to a decrease in interest expense of $84,000 offset by a
decrease in interest income of $33,000. Interest income in 1999 was $7.7 million
with an average yield of 7.14% compared to $7.8 million with an average yield of
7.27% in 1998. The decrease in interest expense of $84,000 was primarily due to
the decrease in the average rate paid on interest bearing liabilities. The
average balance of interest bearing liabilities in 1999 was $81.0 million with
an average cost of funds of 4.71% compared to average balances of interest
bearing liabilities in 1998 of $78.4 million with an average cost of funds of
4.97%.
Interest Income. Interest income was $7.7 million, or 7.14% of average
interest-earning assets, for the year ended September 30, 1999 as compared to
$7.8 million, or 7.27% of average interest-earning assets, for the year ended
September 30, 1998. Interest income decreased $33,000 or .4% from 1999 to 1998.
The decrease was due to a decline of 13 basis points in the rate earned on the
average balance of interest earning assets offset by an increase of $1.5 million
in the average balance of interest earning assets.
Interest Expense. Interest expense was $3.8 million, or 4.71% of average
interest-bearing liabilities, for the year ended September 30, 1999 as compared
to $3.9 million, or 4.97% of average interest-bearing liabilities, for the
corresponding period in 1998. The decrease in interest expense of $84,000 was
the result of a 26 basis point decrease in the average rate paid on the deposits
offset by the increase of $2.6 million in the average balance of interest
bearing deposits for the year ended September 30, 1999 compared to the same
period in 1998.
Provision for Loan Losses. The provision for loan losses was $35,000 and $96,000
for the years ended September 30, 1999 and 1998, respectively. Management
considers many factors in determining the necessary levels of the allowance for
loan losses, including an analysis of specific loans in the portfolio, estimated
value of the underlying collateral, assessment of general trends in the real
estate market, delinquency trends, prospective economic and regulatory
conditions, inherent loss in the loan portfolio, and the relationship of the
allowance for loan losses to outstanding loans. At September 30, 1999 and 1998
the allowance for loan losses represented .41% and .38% of total loans,
respectively.
Non-Interest Income. Non-interest income amounted to $116,000 and $123,000 for
the years ended September 30, 1999 and 1998, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $99,000 for 1999 and 1998.
11
Non-Interest Expense. Non-interest expense increased approximately $49,000, or
2.93%, to $1.7 million for the year ended September 30, 1999. Non-interest
expense was 1.6% and 1.5% of average assets for the years ended September 30,
1999 and 1998, respectively. The increase of $49,000 was primarily due to an
increase of $15,000 in data processing expenses, $6,000 in franchise tax, and
$28,000 in other operating expenses. The increase of $15,000 in data processing
expenses is due to increased services from the provider related to Y2K changes
and item processing. The increase of $28,000 in other operating expenses was due
to increases in advertising, transfer agent fees, ATM expense and accounting
fees.
Income Tax Expense. The provision for income tax expense amounted to
approximately $777,000 and $800,000 for the years ended September 30, 1999 and
1998, respectively. The provision for income tax expense as a percentage of
income before income tax expenses amounted to 34.0% and 35.9% for 1999 and 1998,
respectively.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND 1999
The Company's consolidated assets increased $7.0 million, or 6.3%, to $117.4
million at September 30, 2000 compared to $110.4 million at September 30, 1999.
Cash and cash equivalents decreased $5.3 million, securities available-for-sale
increased $159,000, securities held-to-maturity decreased $405,000, loans
increased $11.8 million, and other non-interest earning assets increased by
$722,000.
Securities classified as available-for-sale are carried at market value in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Securities available-for-sale increased $159,000 due to the
increase in fair value of such securities. Securities held-to-maturity decreased
$405,000 due to the call of three debt securities backed by a U.S. Government
Agency offset by the purchase of two debt securities backed by a U.S. Government
Agency.
Loans receivable increased $11.8 million or 13.3% to $100.9 million at September
30, 2000 from $89.1 million at September 30, 1999. The growth in interest
bearing deposits of $4.5 million, the decrease of $5.3 million of
interest-bearing deposits in banks, and FHLB advances of $3.5 million were
primarily used to fund the growth in the loan portfolio. The growth in the loan
portfolio was primarily due to the increase of one to four-family mortgage loan
of $9.2 million, construction loans of $1.3 million, and commercial loans of
$2.1 million. The growth in the loan portfolio was primarily the result of
strong performance by the loan production staff.
Liabilities of the Company increased $8.0 million, or 9.4%, to $92.2 million at
September 30, 2000 compared to $84.2 million at September 30, 1999. The increase
in liabilities was primarily due to the increase in deposits of $4.5 million,
reflecting management's success in attracting depositors within the local market
area, plus a $3.5 million increase in FHLB advances. The most significant area
of increase in deposits was in the Certificate of Deposits, which reached $70.3
million at September 30, 2000, an increase of $5.8 million, from $64.5 million
at September 30, 1999.
Stockholder's equity was $25.2 million at September 30, 2000 and decreased
approximately $980,000 from the balance at September 30, 1999. The decrease was
due to the repurchase of common stock totaling $1.1 million plus the declaration
of dividends totaling $1.3 million offset by net income of $1.1 million, an
increase of $105,000 in accumulated other comprehensive income, plus an increase
of $139,000 due to ESOP shares released from collateral in 2000.
Liquidity
The liquidity of the Company depends primarily on the dividends paid to it as
the sole shareholder of the Bank. The payment of cash dividends by the Bank on
its common stock is limited by regulations of the OTS, which are tied to the
Bank's level of compliance with its regulatory capital requirements.
12
The Bank's primary sources of funds are deposits and proceeds from principal and
interest payments of loans. Additional sources of liquidity are advances from
the FHLB of Cincinnati and other borrowings. At September 30, 2000, the Bank had
$3.5 million in advances from FHLB. The Bank utilizes FHLB of Cincinnati
borrowings during periods when management of the Bank believes that such
borrowings provide a source of funds at a lower cost than deposit accounts, and
when the Bank desires liquidity in order to help expand its loan portfolio.
The Company's operating activities produced positive cash flows for the fiscal
years ended September 30, 2000, 1999, and 1998. Net cash from operating
activities for 2000 totaled $1.1 million, as compared to $1.7 million for 1999
and $1.6 million for 1998.
Net cash used by investing activities for 2000 totaled $12.0 million, as
compared to $21,000 for 1999 and $3.7 million for 1998. The increase of $12.0
million for 2000 was mainly attributed to net increases in loans. The decrease
of $3.7 million for 1999 was mainly attributed to a net decrease in purchases of
investment securities held-to-maturity.
Net cash from financing activities for the year ended December 31, 2000 totaled
$5.6 million, as compared to cash used by financing activities of $1.4 million
for 1999 and $2.4 million for 1998. The increase of $7.0 million in cash from
financing activities for 2000 was a result of a $1.4 million increase in
deposits, additional short-term debt of $3.5 million, and a $2.1 million
decrease in stock repurchases. The increase of $1.0 million in cash from
financing activities for 1999 was a result of a $2.6 million increase in
deposits offset by a $1.6 million increase in stock repurchases.
The Bank's most liquid assets are cash and cash-equivalents, which include
investments in highly liquid, short-term investments. At September 30, 2000 and
1999, cash and cash equivalents totaled $3.0 million and $8.4 million,
respectively.
At September 30, 2000, the Bank had $47.5 million in certificates of deposits
due within one year and $19.4 million due between one and three years.
Management believes, based on past experience, that the Bank will retain much of
the deposits or replace them with new deposits or borrowings. At September 30,
2000, the Bank had $1.1 million in outstanding commitments to originate
mortgages. The Bank intends to fund these commitments with short-term
investments and proceeds from loan repayments.
OTS regulations require that the Bank maintain specified levels of liquidity.
Liquidity is measured as a ratio of cash and certain investments to deposits
subject to withdrawal. The minimum level of liquidity required by regulation is
presently 4.0%. The Bank's liquidity ratio at September 30, 2000, 1999, and 1998
was 11.08%, 23.21%, and 27.34%, respectively.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
13
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"(sm)
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harrodsburg First Financial Bancorp, Inc.
Harrodsburg, Kentucky
We have audited the accompanying consolidated balance sheets of Harrodsburg
First Financial Bancorp, Inc. and Subsidiary as of September 30, 2000 and 1999
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three year period ended September 30,
2000. These consolidated financial statements are the responsibility of the
management of Harrodsburg First Financial Bancorp, Inc. (Company). Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harrodsburg First
Financial Bancorp, Inc. and Subsidiary as of September 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three year period ended September 30, 2000 in conformity with generally
accepted accounting principles.
/s/Miller, Mayer, Sullivan & Stevens, LLP
Lexington, Kentucky
November 9, 2000
(859) 223-3095
2365 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40504-3399 FAX: (859) 223-2143
14
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and 1999
------------------------
ASSETS 2000 1999
----------------- --------------
Cash and due from banks $ 564,340 $ 541,527
Interest bearing deposits 2,466,827 7,808,786
Securities available-for-sale at fair value 4,167,377 4,008,576
Securities held-to-maturity, fair value of $6,731,799 and
$7,150,839 for 2000 and 1999, respectively 6,826,520 7,231,745
Loans receivable, net 100,881,267 89,061,610
Accrued interest receivable 656,057 618,854
Premises and equipment, net 1,735,162 1,055,196
Other assets 95,092 89,837
----------------- --------------
Total assets $117,392,642 $110,416,131
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 86,473,131 $ 82,018,317
Advances from Federal Home Loan Bank 3,500,000
Advance payments by borrowers for taxes and insurance 87,979 80,865
Deferred Federal income tax 1,488,806 1,395,875
Dividends payable 445,902 468,701
Other liabilities 155,973 232,139
----------------- --------------
Total liabilities 92,151,791 84,195,897
----------------- --------------
Stockholders' equity
Common stock, $0.10 par value, 5,000,000 shares authorized;
1,498,015 and 1,573,142 shares issued and outstanding at
June 30, 2000 and 1999, respectively. 218,213 218,213
Additional paid-in capital 21,215,999 21,194,168
Retained earnings, substantially restricted 11,038,055 11,187,966
Accumulated other comprehensive income 2,700,651 2,595,842
Treasury stock, 568,050 and 481,250 shares, at cost, for 2000 (8,771,467) (7,698,625)
and 1999, respectively
Unallocated employee stock ownership plan (ESOP) shares (1,160,600) (1,277,330)
----------------- --------------
Total stockholders' equity 25,240,851 26,220,234
----------------- --------------
Total liabilities and stockholders' equity $ 117,392,642 $110,416,131
================= ==============
The accompanying notes are an integral part of the
consolidated financial statements.
15
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 2000, 1999, and 1998
------------------------
2000 1999 1998
--------------- -------------- ----------------
Interest income:
Interest on loans $7,339,869 $6,757,256 $6,549,702
Interest and dividends on securities 499,807 552,243 769,604
Other interest income 211,530 435,817 459,484
--------------- -------------- ----------------
Total interest income 8,051,206 7,745,316 7,778,790
--------------- -------------- ----------------
Interest expense:
Interest on deposits 4,111,095 3,812,626 3,897,383
Interest on other borrowings 38,613
--------------- -------------- ----------------
Total interest expense 4,149,708 3,812,626 3,897,383
--------------- -------------- ----------------
Net interest income 3,901,498 3,932,690 3,881,407
Provision for loan losses 15,000 35,000 96,631
--------------- -------------- ----------------
Net interest income after provision for loan losses 3,886,498 3,897,690 3,784,776
--------------- -------------- ----------------
Non-interest income:
Loan and other service fees, net 93,373 99,932 99,189
Other 19,518 16,330 23,594
--------------- -------------- ----------------
112,891 116,262 122,783
--------------- -------------- ----------------
Non-interest expense:
Compensation and benefits 1,210,783 934,838 940,119
Occupancy expenses, net 202,531 144,784 138,310
Federal and other insurance premiums 25,731 48,297 51,062
Data processing expenses 177,088 135,063 119,365
State franchise tax 130,920 124,034 117,096
Other operating expenses 514,145 341,400 313,313
--------------- -------------- ----------------
2,261,198 1,728,416 1,679,265
--------------- -------------- ----------------
Income before income tax expense 1,738,191 2,285,536 2,228,294
Income tax expense 590,951 777,074 799,620
--------------- -------------- ----------------
Net income $1,147,240 $1,508,462 $1,428,674
=============== ============== ================
Basic earnings per common share $ .76 $ .94 $ 0.79
=============== ============== ================
Diluted earnings per common share $ .76 $ .94 $ 0.79
=============== ============== ================
Weighted average common shares outstanding during the year 1,512,921 1,609,855 1,811,551
=============== ============== ================
Weighted average common shares after dilutive
effect outstanding during the year 1,512,921 1,609,855 1,813,229
=============== ============== ================
The accompanying notes are an integral part of the
consolidated financial statements.
16
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 2000, 1999, and 1998
------------------------
Accumulated
Additional Other Unallocated Total
Common Paid-In Retained Comprehensive Treasury ESOP Stockholders'
Stock Capital Earnings Income Stock Shares Equity
--------- -------------- ------------- -------------- -------------- -----------------------------
Balance, September 30, 1997 $218,213 $21,077,239 $11,037,504 $1,743,634 $(2,790,826) $(1,512,940) $29,772,824
---------------
Comprehensive income:
Net income 1,428,674 1,428,674
Other comprehensive income,
net of tax unrealized
gains on securities 731,373 731,373
---------------
Total comprehensive income 2,160,047
Dividend declared (1,462,999) (1,462,999)
ESOP shares earned in 1998 76,890 121,540 198,430
Purchase of 101,238 shares
of common stock (1,686,689) (1,686,689)
--------- -------------- ------------- -------------- -------------- -----------------------------
Balance, September 30, 1998 218,213 21,154,129 11,003,179 2,475,007 (4,477,515) (1,391,400) 28,981,613
---------------
Comprehensive income:
Net income 1,508,462 1,508,462
Other comprehensive income,
net of tax unrealized
gains on securities 120,835 120,835
---------------
Total comprehensive income 1,629,297
Dividend declared (1,323,675) (1,323,675)
ESOP shares earned in 1999 40,039 114,070 154,109
Purchase of 222,643 shares
of common stock (3,221,110) (3,221,110)
--------- -------------- ------------- -------------- -------------- -----------------------------
Balance, September 30, 1999 218,213 21,194,168 11,187,966 2,595,842 (7,698,625) (1,277,330) 26,220,234
---------------
Comprehensive income:
Net income 1,147,240 1,147,240
Other comprehensive income,
net of tax unrealized
gains on securities 104,809 104,809
---------------
Total comprehensive income 1,252,049
Dividend declared (1,297,151) (1,297,151)
ESOP shares earned in 2000 21,831 116,730 138,561
Purchase of 86,800 shares
of common stock (1,072,842) (1,072,842)
--------- -------------- ------------- -------------- -------------- -----------------------------
Balance, September 30, 2000 $218,213 $21,215,999 $11,038,055 $2,700,651 $(8,771,467) $(1,160,600) $25,240,851
========= ============== ============= ============== ============== =============================
The accompanying notes are an integral part of the
consolidated financial statements.
17
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 2000, 1999, and 1998
------------------------
2000 1999 1998
------------ ------------ ------------
Operating activities
Net income $ 1,147,240 $ 1,508,462 $ 1,428,674
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 15,000 35,000 96,631
Provision for depreciation 101,988 68,042 70,809
ESOP benefit expense 138,561 154,109 198,430
Amortization of loan fees (74,267) (66,649) (65,361)
Amortization of investment premium (discount) (128) (3,055) 4,349
Loss on sale of fixed asset 3,397
FHLB stock dividend (109,400) (99,900) (95,400)
Change in:
Interest receivable (37,204) 41,944 (19,474)
Interest payable 2,952 1,004 (437)
Accrued liabilities (94,171) 113,602 (48,615)
Prepaid expense (5,253) 4,209 (17,275)
Income taxes payable 53,992 (64,567) 17,790
------------ ------------ ------------
Net cash provided by operating activities 1,139,310 1,695,598 1,570,121
------------ ------------ ------------
Investing activities
Net (increase) decrease in loans (11,760,389) (3,758,057) (4,041,896)
Maturity of certificates of deposit 600,000
Purchase of securities held-to-maturity (1,000,000) (2,500,000) (5,000,000)
Call of security held-to-maturity 1,500,000 6,500,000 5,000,000
Principle repayments - mortgage back securities 14,753 12,018 14,847
Purchase of fixed assets (781,955) (274,512) (266,735)
------------ ------------ ------------
Net cash provided (used) by investing activities (12,027,591) (20,551) (3,693,784)
------------ ------------ ------------
(Continued)
The accompanying notes are an integral part of the
consolidated financial statements.
18
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 2000, 1999, and 1998
------------------------
2000 1999 1998
------------ ------------ ------------
Financing activities
Net increase (decrease) in demand deposits, (1,355,666) 1,191,312 (378,672)
NOW accounts and savings accounts
Net increase (decrease) in certificates of deposit 5,810,478 1,831,362 745,111
Net increase (decrease) in custodial accounts 7,114 9,017 5,779
Purchase of treasury stock (1,072,842) (3,221,110) (1,686,689)
Proceeds from FHLB borrowings 3,500,000
Payment of dividends (1,319,949) (1,209,420) (1,108,554)
------------ ------------ ------------
Net cash provided (used) by financing activities 5,569,135 (1,398,839) (2,423,025)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (5,319,146) 276,208 (4,546,688)
Cash and cash equivalents, beginning of year 8,350,313 8,074,105 12,620,793
------------ ------------ ------------
Cash and cash equivalents, end of year $ 3,031,167 $ 8,350,313 $ 8,074,105
============ ============ ============
Supplemental Disclosures
Cash payments for:
Interest on deposits $ 4,146,756 $ 3,811,622 $ 3,897,821
Income taxes $ 630,000 $ 745,000 $ 830,000
The accompanying notes are an integral part of the
consolidated financial statements.
19
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
1. Summary of Significant Accounting Policies
On September 29, 1995, Harrodsburg First Financial Bancorp, Inc. sold
through a public offering 2,182,125 shares of common stock at a price
of $10 per share in connection with the conversion of Harrodsburg
First Federal Savings and Loan Association from a federally chartered
mutual savings and loan association to a federally chartered stock
savings bank, and the simultaneous formation of a savings and loan
holding company. In the conversion, Harrodsburg First Federal Savings
and Loan Association changed its name to First Federal Savings Bank
of Harrodsburg. Effective January 1, 2000, the Bank name was changed
to First Financial Bank (Bank).
The Company's articles of incorporation authorize the issuance of up
to 500,000 shares of preferred stock, which may be issued with
certain rights and preferences. As of September 30, 2000, no
preferred stock has been issued.
The Company is a corporation organized under the laws of Delaware.
The Company is a savings and loan holding company whose activities
are primarily limited to holding the stock of the Bank. The Bank is a
federally chartered stock savings bank and a member of the Federal
Home Loan Bank System. As a member of this system, the Bank is
required to maintain an investment in capital stock of the Federal
Home Loan Bank of Cincinnati (FHLB) in an amount equal to at least
the greater of 1% of its outstanding loan and mortgage-backed
securities, or 5% of outstanding FHLB advances. The Bank met this
requirement at December 31, 2000 and 1999.
The Bank conducts a general banking business in central Kentucky
which primarily consists of attracting deposits from the general
public and applying those funds to the origination of loans for
residential, consumer, and nonresidential purposes. The Bank's
profitability is significantly dependent on net interest income,
which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits
and borrowed funds). Net interest income is affected by the relative
amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of
interest rates paid or received by the Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles
(GAAP) and general accounting practices within the financial services
industry. In preparing consolidated financial statements in
accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from such
estimates.
20
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------
The following is a summary of the Company's significant accounting
policies which have been consistently applied in the preparation of
the accompanying consolidated financial statements.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company, the Bank, and the Bank's wholly
owned subsidiary, Harrodsburg Savings & Loan Service Corporation. All
significant intercompany accounts and transactions have been
eliminated.
Loan Origination Fees. The Bank accounts for loan origination fees in
accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial
Direct Cost of Leases." Pursuant to the provisions of SFAS No. 91,
origination fees received from loans, net of direct origination
costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for
loan commitments that are expected to be drawn upon, based on the
Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method.
Fees for other loan commitments are deferred and amortized over the
loan commitment period on a straight-line basis.
Investment Securities. Investment securities that management has the
intent and ability to hold to maturity are classified as
held-to-maturity, and carried at cost, adjusted for amortization of
premium or accretion of discount over the term of the security, using
the level yield method. Included in this category of investments is
the FHLB stock which is a restricted stock carried at cost.
Securities available-for-sale are carried at market value.
Adjustments from amortized cost to market value are recorded in
stockholders' equity net of deferred income tax until realized. The
identified security method is used to determine gains or losses on
sales of securities.
Regulations require the Bank to maintain an amount of cash and U.S.
government and other approved securities equal to a prescribed
percentage (4% at September 30, 2000 and 1999) of deposit accounts
(net of loans secured by deposits) plus short-term borrowings. At
September 30, 2000 and 1999, the Bank met these requirements.
Federal Home Loan Mortgage Corporation Stock. On December 6, 1984,
the Federal Home Loan Mortgage Corporation created a new class of
participating preferred stock. The preferred stock was distributed to
the twelve district banks of the Federal Home Loan Banking System for
subsequent distribution to their member institutions. The Bank
received 1,606 shares of the stock and recorded it at its fair value
of $40 per share as of December 31, 1984. The fair value of the stock
recognized as of December 1984 became its cost. The stock has been
subsequently classified as available-for-sale and carried at market
value.
Office Properties and Equipment. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is
computed using the straight line method and the double declining
balance method over the estimated useful lives of the related assets.
The gain or loss on the sales of property and equipment is recorded
in the year of disposition.
Real Estate Owned. Real estate owned is generally comprised of
property acquired through foreclosure or deed in lieu of foreclosure.
Foreclosed real estate is initially recorded at fair value,
(Continued)
21
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------
net of selling expenses, establishing a new cost basis. Expenses
relating to holding property, including interest expense, are not
capitalized. These expenses are charged to operations as incurred.
After foreclosure, valuations are periodically performed by
management, and the real estate is carried at the lower of carrying
amount or fair value less estimated selling expenses.
Loans Receivable. Loans receivable are stated at the principal amount
outstanding less the allowance for loan losses and net deferred loan
fees. The Bank has adequate liquidity and capital, and it is
generally management's intention to hold such assets to maturity.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to pay,
estimated value of any underlying collateral, and current economic
conditions. While management uses the best information available,
future adjustments may be necessary if conditions differ
substantially from assumptions used in management's evaluation. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan
losses and may require additions to the allowances based on their
judgment about information available to them at the time of their
examination.
Interest earned on loans receivable is recorded in the period earned.
Uncollectible interest on loans that are contractually past due is
charged off or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
The Bank accounts for the impairment of a loan in accordance with
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118 as to certain income recognition and
disclosure provisions. These accounting standards require that
impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate,
or as an alternative, at the loan's observable market price or fair
value of the collateral. A loan is defined under SFAS No. 114 as
impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, the Bank considers its investment in
one-to-four family residential loans and consumer installment loans
to be homogenous and therefore excluded from separate identification
for evaluation of impairment. With respect to the Bank's investment
in impaired multi-family and nonresidential loans, such loans are
collateral dependent, and as a result, are carried as a practical
expedient at the lower of cost or fair value. Collateral dependent
loans when put in non-accrual status are considered to constitute
more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
Deposits. The Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC").
Income Taxes. The Company accounts for federal income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 established financial accounting
(Continued)
22
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------
and reporting standards for the effects of income taxes that result
from the Company's activities within the current and previous years.
Pursuant to the provisions of SFAS No. 109, a deferred tax liability
or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible differences between the tax
basis of an asset or liability and its reported amount in the
financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax assets are recorded only to
the extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period
earnings, carried back against prior years earnings, offset against
taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable
income. A valuation allowance is provided for deferred tax assets to
the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes
payable on future taxable income. Deferred tax liabilities are
provided on the total amount of net temporary differences taxable in
the future.
The Company files a consolidated federal income tax return with the
Bank. The current income tax expense or benefit is allocated to each
Corporation included in the consolidated tax return based on their
tax expense or benefit computed on a separate return basis.
Employee Stock Ownership Plan. Shares of common stock issued to the
Company's employee stock ownership plan (ESOP) are initially recorded
as unearned ESOP shares in the stockholders' equity at the fair value
of the shares at the date of the issuance of the plan. As shares are
committed to be released as compensation to employees, the Company
reduces the carrying value of the unearned shares and records
compensation expense equal to the current value of the shares.
Cash and Cash Equivalents. For purposes of reporting consolidated
cash flows, the Bank considers cash, balances with banks, and
interest bearing deposits in other financial institutions with
original maturities of three months or less to be cash equivalents.
Earnings Per Share. Earnings per common share is computed by dividing
income available to common shareholders by the weighted average
number of common shares outstanding during the period. Earnings per
common share - assuming dilution reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock, that then shared in the earnings of the
Company.
Effect of Implementing New Accounting Standards. In October 1998, the
FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 amends accounting and
reporting standards for certain activities of mortgage banking
enterprises that were established by SFAS No. 65. This statement is
effective for the first fiscal quarter beginning after December 15,
1998. The Company adopted SFAS No. 134 on January 1, 1999 with no
material affect on the Company's financial position or operating
results.
The Corporation adopted SFAS 130, Reporting Comprehensive Income, as
of October 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains
(Continued)
23
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
and losses on available-for-sale securities, are reported as a
separate component of the equity section of the balance sheet, such
items, along with net income are components of comprehensive income.
The adoption of SFAS 130 had no effect on the Corporation's net
income or shareholder's equity.The components of other comprehensive
income is presented in the consolidated statements of stockholders'
equity.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 (as
amended by SFAS No. 137) established a new model for accounting for
derivatives and hedging activities and supersedes and amends a number
of existing standards. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000, but earlier application is permitted
as of the beginning of any fiscal quarter subsequent to June 15,
1998. Upon the statement's initial application, all derivatives are
required to be recognized in the statement of financial condition as
either assets or liabilities and measured at fair value. In addition,
all hedging relationships must be designated, reassessed, and
documented pursuant to the provisions of SFAS No. 133. Adoption of
SFAS No. 133 is not expected to have a material financial statement
impact on the Company's financial condition or operating results as
the Company did not hold derivative securities at September 30, 2000.
Reclassification. Certain presentations of accounts previously
reported have been reclassified in these consolidated financial
statements. Such reclassifications had no effect on net income or
retained income as previously reported.
(Continued)
24
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
2. Investment Securities
The cost and estimated fair value of securities held by the Bank as
of September 30, 2000 and 1999 are summarized as follows:
2000
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- ----------
Securities, available-for-sale:
Federal Home Loan Mortgage, capital
stock, 77,088 shares $ 75,482 $4,091,895 $ $4,167,377
============= ========== ========== ==========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $5,000,000 $ $ 90,240 $4,909,760
Municipal bonds 213,595 4,899 208,696
------------- ---------- ---------- ----------
5,213,595 95,139 5,118,456
------------- ---------- ---------- ----------
Mortgage-backed Securities 25,125 418 25,543
------------- ---------- ---------- ----------
Federal Home Loan
Bank of Cincinnati, capital stock - 15,878
shares 1,587,800 1,587,800
------------- ---------- ---------- ----------
$6,826,520 $ 418 $ 95,139 $6,731,799
============= ========== ========== ==========
(Continued)
25
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ------------- -----------
Securities, available-for-sale:
Federal Home Loan Mortgage, capital
stock, 77,088 shares $ 75,482 $3,933,094 $ $4,008,576
============= ========== ============= ===========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $5,500,000 $ $ 77,896 $5,422,104
Municipal bonds 213,467 3,724 209,743
------------- ---------- ------------- -----------
5,713,467 81,620 5,631,847
------------- ---------- ------------- -----------
Mortgage-backed Securities 39,878 714 40,592
------------- ---------- ------------- -----------
Federal Home Loan
Bank of Cincinnati, capital stock - 14,784
shares 1,478,400 1,478,400
------------- ---------- ------------- -----------
$7,231,745 $ 714 $ 81,620 $7,150,839
============= ========== ============= ===========
The amortized cost and estimated market value of debt securities at
September 30, 2000, by contractual maturity, are as follows:
Estimated
Amortized Market
Cost Value
----------------- -----------------
Due after one year through five years $5,104,864 $5,012,727
Due after five through ten years 108,731 105,729
----------------- -----------------
$5,213,595 $5,118,456
================= =================
In accordance with the requirements of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities," the unrealized
gain on securities available-for-sale of $4,091,895 net of deferred
income taxes of $1,391,244 has been recorded as a separate component
of stockholders' equity as of September 30, 2000.
For the year ended September 30, 2000, the Bank received $1,500,000
from the maturity of three debt securities backed by a U.S.
Government Agency, which were classified as held-to-maturity. For the
year ended September 30, 1999, the Bank received $6,500,000 from the
call of thirteen debt securities backed by a U.S. Government Agency,
which were classified as held-to-maturity. For the year ended
September 30, 1998, the Bank received $5,000,000 from the call of ten
debt securities backed by a U.S. Government agency, which were
classified as held-to-maturity.
Accrued interest on investment securities at September 30, 2000 and
1999 totaled $70,115 and $84,798, respectively.
(Continued)
26
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
3. Loans Receivable
Loans receivable, net at September 30, 2000 and 1999 consists of the
following:
2000 1999
----------------- -----------------
Loans secured by first lien mortgages on real estate:
One-to-four residential property $79,826,008 $70,638,534
Multi-family residential property 2,941,035 3,720,015
Commercial properties 7,296,226 5,148,023
Construction 6,318,800 4,121,550
Agricultural 4,244,881 4,541,585
Consumer loans:
Home equity 1,775,453 1,830,682
Home improvement and personal 1,220,487 1,398,978
Auto loans 100,107
Commercial 337,215
Loans secured by savings deposits 550,870 484,317
----------------- -----------------
104,611,082 91,883,684
Loans in process (2,947,154) (2,041,995)
Provisions for loan losses (371,500) (370,000)
Deferred loan origination fees (411,161) (410,079)
----------------- -----------------
Loans receivable, net $100,881,267 $89,061,610
================= =================
The Bank has concentrated its lending activity within a 45 mile radius
of Harrodsburg, Kentucky. Therefore, a substantial portion of its
debtors' ability to honor their contracts is dependent on the economy
of this area.
The Bank provides an allowance to the extent considered necessary to
provide for losses that may be incurred upon the ultimate realization
of loans. The changes in the allowance for loan losses is analyzed as
follows:
Year Ended September 30,
-----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Balance at beginning or period $370,000 $335,000 $308,250
Additions charged to operations 15,000 35,000 96,631
Charge-offs (13,500) (73,084)
Recoveries 3,203
-------------- -------------- --------------
Balance at end of period $371,500 $370,000 $335,000
============== ============== ==============
(Continued)
27
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following is a summary of non-performing loans (in thousands) at
September 30, 2000, 1999, and 1998, respectively:
September 30,
-----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Non-accrual loans $ $ $
Loans past due 90 days or more 517 281 489
-------------- -------------- --------------
Total non-performing loan balances $ 517 $ 281 $ 489
============== ============== ==============
At September 30, 2000 and 1999, the Bank had identified no impaired
loans as defined by SFAS No. 114. There were no loans in non-accrual
status, and as such, all interest income earned for the years ended
September 30, 2000 and 1999 on the loans outstanding has been included
in income.
Accrued interest on loans at September 30, 2000 and 1999 totaled
$585,942 and $534,056, respectively.
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal
owners, and loans to members of the immediate family of such persons at
September 30, 2000 and 1999 are summarized as follows:
September 30,
-------------------------------
2000 1999
-------------- --------------
Balance at beginning of period $166,707 $182,796
Additions during year 333,116
Repayments (37,783) (16,089)
-------------- --------------
Balance at end of period $462,040 $166,707
============== ==============
4. Premises and Equipment
Office premises and equipment included the following:
Description Useful Life 2000 1999
- ------------------------------------------------------------ -------------- --------------- ----------------
Land, buildings and improvements 30-45 years $1,602,754 $1,186,965
Furniture, fixtures and equipment 5-10 years 1,021,929 656,874
--------------- ----------------
2,624,683 1,843,839
Less accumulated depreciation (889,521) (788,643)
--------------- ----------------
$1,735,162 $1,055,196
=============== ================
Depreciation expense for the years ended September 30, 2000, 1999 and
1998 amounted to $101,988, $68,042, and $70,809, respectively.
(Continued)
28
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
5. Deposits
Deposit account balances as of the dates indicated are summarized as
follows:
September 30,
----------------------------------
2000 1999
---------------- ----------------
Demand deposit accounts, non-interest bearing $ $490,399 $ 743,944
Passbook accounts with a weighted average rate of 2.79% and 2.82% at
September 30, 2000 and 1999, respectively 6,753,354 7,485,269
NOW and MMDA deposits with a weighted average rate of 2.63% and 2.45% at
September 30, 2000 and 1999, respectively 8,885,193 9,255,397
---------------- ----------------
16,128,946 17,484,610
Certificate of deposits with a weighted average interest rate of 5.92% and
5.16% at September 30, 2000 and 1999, respectively 70,344,185 64,533,707
---------------- ----------------
Total Deposits $86,473,131 $82,018,317
================ ================
Jumbo certificates of deposit (minimum denomination of $100,000) $ 9,796,720 $ 5,780,668
================ ================
Certificates of deposit by maturity at September 30, 2000 and 1999 (in
thousands) are as follows:
September 30,
----------------------------------
2000 1999
---------------- ----------------
Within one year $47,487 $48,310
Over 1 to 3 years 19,441 13,232
Maturing in years thereafter 3,416 2,992
---------------- ----------------
$70,344 $64,534
================ ================
Certificates of deposit by maturity and interest rate category at September
30, 2000 (in thousands) are as follows:
Amount Due
---------------------------------------------------------------------------------
Less Than 1-2 Years 2-3 Years After 3 Years Total
One Year
-------------- -------------- --------------- -------------- --------------
4.01--6.00% $34,073 $ 4,471 $2,192 $ 933 $41,669
6.01--8.00% 13,414 10,623 2,155 2,483 28,675
-------------- -------------- --------------- -------------- --------------
$47,487 $15,094 $4,347 $3,416 $70,344
============== ============== =============== ============== ==============
(Continued)
29
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Interest expense on deposits for the periods indicated is summarized as
follows:
Years Ended September 30,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Money market and NOW account $ 246,525 $ 222,707 $ 202,576
Savings Accounts 198,158 207,735 211,923
Certificates 3,666,412 3,382,184 3,482,884
--------------- --------------- ---------------
$4,111,095 $3,812,626 $3,897,383
=============== =============== ===============
The Bank maintains arrangements for clearing NOW and MMDA accounts with
the Federal Home Loan Bank of Cincinnati. The Bank is required to
maintain adequate collected funds in its Demand Account to cover average
daily clearings. The Bank was in compliance with this requirement at
September 30, 2000 and 1999. At September 30, 2000, the Bank had pledged
$1,775,000 of its overnight deposits held by the FHLB of Cincinnati to
secure certain customer deposit balances.
6. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
Maturity Interest September 30,
Date Rate 2000
------------------ -------------------- ------------------
10/17/00 6.90 $1,000,000
11/13/00 6.90 1,000,000
11/20/00 6.90 1,500,000
---------
$3,500,000
==========
A schedule of the principle payments due over the remaining term of the
notes as of September 30, 2000 follows:
Year Amount
- ------------------- ----------------------
2001 $3,500,000
======================
These borrowings are collateralized by qualified real estate first
mortgages and Federal Home Loan Bank stock held by the Bank, which had a
book value of $5,962,800 at September 30, 2000.
7. Income Taxes
The provision for income taxes for the periods indicated consist of the
following:
Years ended September 30,
-------------------------------------------
2000 1999 1998
------------- ------------- ------------
Federal income tax expense:
Current expense $545,863 $847,787 $781,830
Deferred expense (benefit) 45,088 (70,713) 17,790
------------- ------------- ------------
$590,951 $777,074 $799,620
============= ============= ============
(Continued)
30
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Deferred income taxes result from temporary differences in the
recognition of income and expenses for tax and financial statement
purposes. The source of these temporary differences and the tax effect
of each are as follows:
Years ended September 30,
---------------------------------------------
2000 1999 1998
------------- -------------- ---------------
Deferred loan fee income $ (368) $(37,492) $(21,605)
Depreciation 18,823 2,036 (4,739)
FHLB stock 37,196 33,966 32,436
Allowance for loan losses (510) (7,646) (9,095)
Other, net (10,053) (61,577) 20,793
------------- -------------- ---------------
Net deferred tax expense (benefit) $ 45,088 $(70,713) $ 17,790
============= ============== ===============
For the periods indicated, total income tax expense differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as follows:
Years ended September 30,
---------------------------------------------
2000 1999 1998
------------- ------------- --------------
Expected income tax expense at federal tax rate $590,985 $777,082 $757,619
Other, net (34) (8) 42,001
------------- ------------- --------------
Total income tax expense $590,951 $777,074 $799,620
============= ============= ==============
Effective income tax rate 34.0% 34.0% 35.9%
============= ============= ==============
Deferred tax assets and liabilities as of September 30, 2000 and 1999
consisted of the following:
2000 1999
------------ --------------
Deferred tax assets:
Deferred loan fee income $139,795 $139,427
ESOP loan 71,631 61,577
Allowance for loan losses 120,845 120,335
------------ --------------
332,271 321,339
------------ --------------
Deferred tax liabilities:
FHLB stock 343,400 306,204
Fixed asset basis over tax basis 86,433 67,610
------------ --------------
429,833 373,814
------------ --------------
Net deferred tax liability $97,562 $52,475
============ ==============
In addition to the net deferred tax liability at September 30, 2000 of
$97,562 outlined in the preceding table, the financial statements
include a deferred tax liability of $1,391,244 that was charged against
the unrealized gain on securities available-for-sale of $4,091,895. The
net unrealized gain totals $2,700,651 and is recorded as a separate
component of stockholders' equity.
(Continued)
31
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Effective for tax years ending December 31, 1996 or after, fiscal year
September 30, 1997 for the Bank, all thrift institutions are taxed as
other banking institutions. Institutions under $500 million in assets
are allowed to use the reserve method of determining their bad debt
deduction based on their actual experience, while larger institutions
(over $500 million) must use the specific charge off method in
determining their deduction. Tax bad debt reserves accumulated since
September 30, 1988 must be included in taxable income of the Bank
prorated over a six year period, beginning in the tax year effected by
the change. This change did not have a material impact on the Bank as a
deferred tax liability was provided for these accumulated reserves. The
accumulated tax bad debt reserves as of September 30, 1988, which
amounts to approximately $2,134,000 is only subject to being taxed at a
later date under certain circumstances, such as the Bank converting to a
type of institution that is not considered a bank for tax purposes.
These financial statements do not include any deferred tax liability
related to the accumulated tax bad debt reserves as of September 30,
1988.
8. Stockholders' Equity and Regulatory Capital
Regulatory Capital. The Bank's actual capital and its statutory required
capital levels at September 30, 2000 and 1999 are as follows (in
thousands):
September 30, 2000
--------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------ ------------------------ -------------------------
Actual Required Required
------------------------ ------------------------ -------------------------
Amount % Amount % Amount %
------------------------ ------------------------ -------------------------
Core capital $19,824 17.5% $4,532 4.0% $6,798 6.0%
Tangible capital $19,824 17.5% $1,700 1.5% N/A N/A
Total Risk based capital $20,196 19.0% $8,528 8.0% $10,659 10.0%
Leverage $19,824 17.5% N/A N/A $5,665 5.0%
September 30, 1999
--------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------ ------------------------ -------------------------
Actual Required Required
------------------------ ------------------------ -------------------------
Amount % Amount % Amount %
------------------------ ------------------------ -------------------------
Core capital $22,556 21.2% $4,260 4.0% $6,390 6.0%
Tangible capital $22,556 21.2% $1,598 1.5% N/A N/A
Total Risk based capital $22,906 36.9% $4,961 8.0% $6,201 10.0%
Leverage $22,556 21.2% N/A N/A $5,325 5.0%
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to implement prompt
corrective actions for institutions that it regulates. In response to
this requirement, OTS adopted final rules based upon FDICIA's five
capital tiers. The rules provide that a savings bank is "well
capitalized" if its total risk-based capital ratio is 10% or greater,
(Continued)
32
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
its Tier 1 risk-based capital ratio is 6% or greater, its leverage is 5%
or greater and the institution is not subject to a capital directive.
Under this regulation, the Bank was deemed to be "well capitalized" as
of September 30, 2000 and 1999 based upon the most recent notifications
from its regulators. There are no conditions or events since those
notifications that management believes would change its classifications.
Retained Earnings Restriction. Retained earnings at September 30, 2000
includes tax bad debt reserves of approximately $2,134,000 accumulated
prior to September 30, 1988, for which no Federal income tax has been
provided. These tax bad debt reserves are only taxable in certain
circumstances, such as if the Bank converted to an institution that did
not qualify as a bank for tax purposes (see Note 7).
Liquidation Account. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit
accounts in the Bank were granted priority in the event of the future
liquidation of the Bank through the establishment of a special
"Liquidation Account" in an amount equal to the consolidated net worth
of the Bank at March 31, 1995. The liquidation account was $10,236,488
at March 31, 1995 and is reduced in proportion to reductions in the
balance of eligible account holders as determined on each subsequent
fiscal year end. The existence of the liquidation account will not
restrict the use or application of net worth except with respect to the
cash payment of dividends. The Bank may not declare or pay a cash
dividend on or repurchase any of its common stock if the effect thereof
would cause its regulatory capital to be reduced below the amount
required for the liquidation account.
Dividend Restrictions. The payment of cash dividends by the Bank on its
Common Stock is limited by regulations of the OTS. Interest on savings
accounts will be paid prior to payments of dividends on common stock.
Additional limitation on dividends declared or paid, or repurchases of
the Bank stock are tied to the Bank's level of compliance with its
regulatory capital requirements.
9. Retirement Benefits
Retirement Benefits. The Bank maintained a noncontributory defined
benefit pension plan (Pension Trust) for the year ended September 30,
1993, which covered all full-time employees with one year of service who
had attained the age of 21. Effective October 1, 1993, the Bank's Board
of Directors terminated the Pension Trust, and effective the same date
approved the Bank's participation in the Pentegra Retirement Fund
("Pentegra"), a multi-employer defined benefit retirement plan. Net
assets of the Pension Trust were transferred to the Pentegra Plan on
October 1, 1993.
The multi-employer pension plan covers all full-time employees with one
year of service who have attained the age of 21. Under a multi-employer
defined benefit plan, pension expense is the amount of the annual
required contribution, and a liability will be recognized only for
contributions which are due but unpaid at the end of the accounting
period. There was no pension expense for the years ended September 30,
2000, 1999, and 1998.
Effective April 1, 1993, the Board of Directors adopted an employee
pension benefit plan (referred to as a "401K Plan") as described under
the Employees' Retirement Income Security Act of 1974. Under the Plan,
the Bank is required to match 25% of employee contributions up to a
maximum of 1.5% of
(Continued)
33
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
eligible compensation. The Plan covers all full-time employees. The Bank
contributed $9,792, $9,428, and $8,614 to the Plan for the years ended
September 30, 2000, 1999, and 1998, respectively.
Employee Stock Ownership Plan. In connection with the stock conversion
September 30, 1995, the Company established an internally leveraged
Employee Stock Ownership Plan (the "ESOP") which covers substantially
all full time employees. The ESOP borrowed $1,745,700 from the Company
and purchased 174,570 shares of common stock of the Company at the date
of conversion. The loan is to be repaid in annual installments over a 15
year period with interest, which is based on the published prime rate
(currently 9.50%) per the Wall Street Journal.
The Bank makes annual contributions to the ESOP Trust equal to the
ESOP's debt service requirement less dividends, if any, received by the
ESOP which are used for debt service. Dividends of $108,573 and $111,312
were used in fiscal year 2000 and 1999, respectively, to pay ESOP debt
service. The ESOP shares are pledged as collateral on the debt. As the
debt is repaid, shares are released from collateral and allocated to
active participants based on a formula specified in the ESOP agreement.
ESOP compensation was $138,561 for the year ended September 30, 2000.
For fiscal year 2000, 11,673 shares were released from collateral. At
September 30, 2000, there were 116,060 unallocated ESOP shares having a
fair value of $1,399,683. ESOP compensation was $154,109 for the year
ended September 30, 1999. For 1999, 11,407 shares were released from
collateral. At September 30, 1999, there were 127,733 unallocated ESOP
shares having a fair value of $1,692,462. ESOP compensation was $198,430
for the year ended September 30, 1998.
Option Plan. On January 21, 1997, the stockholders of the Company
approved the establishment of the Harrodsburg First Financial Bancorp,
Inc. 1996 Stock Option Plan. Under the Option Plan, the Company may
grant either incentive or non-qualified stock options to Directors and
key employees for an aggregate of 200,000 shares of the Company's common
stock, with an exercise price equal to the fair market value of the
stock at the date of the award. Upon exercise of the options, the
Company may issue stock out of authorized shares or purchase the stock
in the open market. The option to purchase shares expires ten years
after the date of the grant. Effective with the approval of the Option
Plan, options to purchase 190,000 shares of common stock were awarded to
key employees and directors with an exercise price of $16.50 per share.
The options vest, and thereby become exercisable, at the rate of 20% on
the date of grant, January 21, 1997, and 20% annually thereafter. The
Options become vested immediately in the case of death or disability, or
upon a change in the control of the Company.
(Continued)
34
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
A summary of option transactions for the years indicated are as follows:
Year ended September 30,
-------------------------------------------------
2000 1999
---------------------- -----------------------
Option Number Option Number
Price of Units Price of Units
----- -------- ----- --------
Balance outstanding at beginning of year 16.50 190,000 $ 16.50 190,000
Granted 13.00 5,000
Exercised
--------- --------
Balance outstanding at end of year $13.00-$16.50 195,000 $ 16.50 190,000
========= ========
Shares exercisable 157,000 118,000
========= ========
Shares available for grant 5,000 10,000
========= ========
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation," which was effective
for fiscal years beginning after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and
similar equity instruments. Under the fair value method, compensation
cost is measured at the grant date, based on the fair value of the
award and is recognized over the service period, which is usually the
vesting period.
Companies are not required to adopt the fair value method of
accounting for employee stock-based transactions, and may continue to
account for such transactions under Accounting Principles Based (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees." Under this
method the compensation cost is measured by the difference between the
fair value of the Company's stock at the date of the award, and the
exercise price to be paid by the employee. If a company chooses to
report stock based compensation under APB 25, they must disclose the
pro forma net income and earnings per share as if the Company had
applied the new method of accounting. Accordingly, the following table
shows the Company's net income and earnings per share on a pro forma
basis as if the compensation cost for the stock options awarded were
accounted for in accordance with SFAS No. 123 for the year ended
September 30, 2000, 1999, and 1998, respectively.
Reported Per Consolidated
Financial Statements Pro Forma Amount
-------------------------------------- -------------------------------------
2000 1999 1998 2000 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 1,147,240 $ 1,508,462 $ 1,428,674 $ 1,023,225 $ 1,391,102 $ 1,283,604
=========== =========== =========== =========== =========== ===========
Earnings per common share $ .76 $ .94 $ .79 $ .68 $ .86 $ .71
=========== =========== =========== =========== =========== ===========
Earnings per common share
assuming dilution $ .76 $ .94 $ .79 $ .68 $ .86 $ .71
=========== =========== =========== =========== =========== ===========
(Continued)
35
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2000 1999 1998
-------- -------- --------
Dividend yield 2.4% 2.4% 2.4%
Expected volatility .03% .03% .03%
Expected life 10 10 10
Free interest rate 5.3% 5.3% 5.3%
Employee Recognition Plan. On January 21, 1997, the stockholders of
the Company approved the establishment of the First Federal Savings
Bank of Harrodsburg Restricted Stock Plan (RSP). The objective of the
RSP is to enable the Bank to attract and retain personnel of
experience and ability in key positions of responsibility. Those
eligible to receive benefits under the RSP will be such employees as
selected by members of a committee appointed by the Company's Board of
Directors. The RSP is a non-qualified plan that is managed through a
separate trust. The Bank can contribute sufficient funds to the RSP
Trust for the purchase of up to 85,000 shares of common stock.
Awards made to employees will vest 20% on each anniversary date of the
award. Shares will be held by the trustee and are voted by the RSP
trustee as directed by the participant for those shares earned or by
the Committee for those shares held, but unearned or unawarded. Any
assets of the trust are subject to the general creditors of the
Company. All shares awarded vest immediately in the case of a
participant's death, disability, or upon a change in control of the
Company. The Company intends to expense RSP awards over the years
during which the shares are payable, based on the fair market value of
the common stock at the date of the grant to the employee. As of
September 30, 2000, no awards had been made under the RSP.
10. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include mortgage commitments
outstanding which amounted to approximately $1,051,450 plus unused
lines of credit granted to customers totaling $2,703,027 at September
30, 2000. Of the mortgage loan commitments at September 30, 2000
approximately $487,650 were for fixed rate loans. At September 30,
1999 mortgage commitments outstanding amounted to approximately
$1,467,100 and unused lines of credit amounted to $2,479,469. Of the
mortgage loan commitments at September 30, 1999, approximately $12,000
were in fixed rate loans. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and
consumer lines of credit are represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments. Since many of the loan commitments may expire
without being drawn upon, the total commitment amount does not
necessarily represent future requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained upon extension of credit is based on
(Continued)
36
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
management's credit evaluation of the counter party. Collateral held
varies, but primarily includes residential real estate.
11. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
extends the existing fair value disclosure practices for some
instruments by requiring all entities to disclose the fair value of
financial instruments (as defined), both assets and liabilities
recognized and not recognized in the statements of financial
condition, for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as
they relate only to specific data based on relevant information at
that time. As a significant percentage of the Bank's financial
instruments do not have an active trading market, fair value estimates
are necessarily based on future expected cash flows, credit losses,
and other related factors. Such estimates are accordingly, subjective
in nature, judgmental and involve imprecision. Future events will
occur at levels different from that in the assumptions, and such
differences may significantly affect the estimates.
The statement excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. Additionally, the tax
impact of the unrealized gains or losses has not been presented or
included in the estimates of fair value. The following methods and
assumptions were used by the Company in estimating its fair value
disclosures for financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the
statement of financial condition for cash and short-term instruments
approximate those assets' fair values.
Investment Securities. Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments. No active market exists for the Federal Home
Loan Bank capital stock. The carrying value is estimated to be fair
value since if the Bank withdraws membership in the Federal Home Loan
Bank, the stock must be redeemed for face value.
Loans Receivable. The fair value of loans was estimated by discounting
the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposits. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Loan Commitments and Unused Home Equity Lines of Credit. The fair
value of loan commitments and unused lines of credit is estimated by
taking into account the remaining terms of the agreements and the
present credit-worthiness of the counter parties.
(Continued)
37
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The estimated fair value of the Company's financial instruments at
September 30, 2000 and 1999 are as follows:
September 30, 2000 September 30, 1999
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ----------- ---------- -----------
Assets
Cash and cash equivalents $3,031,167 $3,031,167 $8,350,313 $8,350,313
Securities available-for-sale 4,167,377 4,167,377 4,008,576 4,008,576
Securities held-to-maturity 6,826,520 6,731,799 7,231,745 7,150,839
Loans receivable, net 100,881,267 98,918,071 89,061,610 89,317,215
Liabilities
Deposits 86,473,131 85,976,241 82,018,317 82,115,268
Unrecognized Financial Instruments
Loan commitments 1,051,450 1,467,100
Unused lines of credit 2,703,027 2,479,469
(Continued)
38
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
12. Harrodsburg First Financial Bancorp, Inc. Financial Information (Parent
Company Only)
The parent company's principal assets are its investment in the Bank
and cash balances on deposit with the Bank. The following are condensed
financial statements for the parent company.
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Financial Condition
September 30,
2000 1999
------------ ------------
Assets:
Cash and due from banks $ 2,925,328 $ 1,321,727
Investment in subsidiary 22,524,212 25,152,122
Other assets 242,901 216,532
------------ ------------
Total assets $ 25,692,441 $ 26,690,381
============ ============
Liabilities and Stockholders Equity:
Accounts payable $ 5,688 $ 1,446
Dividends payable 445,902 468,701
------------ ------------
Total liabilities 451,590 470,147
------------ ------------
Stockholders equity
Common stock 218,213 218,213
Additional paid-in capital 21,215,999 21,194,168
Retained earnings 11,038,055 11,187,966
Accumulated other comprehensive income 2,700,651 2,595,842
Treasury stock, 568,050 and 481,250 shares, respectively, at cost (8,771,467) (7,698,625)
Unearned ESOP shares (1,160,600) (1,277,330)
------------ ------------
Total stockholders' equity 25,240,851 26,220,234
------------ ------------
Total liabilities and stockholders' equity $ 25,692,441 $ 26,690,381
============ ============
(Continued)
39
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Income
For the years ended September 30,
2000 1999 1998
------------- -------------- ------
Income:
Dividends from First Financial Bank $ 1,227,337 $ 1,569,145 $ -
------------- -------------- ----------
Expense:
Legal fees 26,859 11,940 10,588
Franchise and license tax 36,837 35,650 31,372
Transfer agent fees 11,372 15,465 9,126
Accounting fees 8,150 5,550 6,550
Other operating expenses 30,188 23,339 26,252
------------- -------------- ----------
113,406 91,944 83,888
------------- -------------- ----------
Net income (loss) before tax benefit 1,113,931 1,477,201 (83,888)
Income tax benefit 33,309 31,261 28,522
------------- -------------- ----------
Net income (loss) before equity in undistributed net
income of subsidiary 1,147,420 1,508,462 (55,366)
Equity in undistributed net income of subsidiary 1,484,040
------------- -------------- ----------
Net income $ 1,147,240 $ 1,508,462 $1,428,674
============= ============== ==========
(Continued)
40
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Harrodsburg First Financial Bancorp, Inc.
Condensed Statement of Cash Flows
For the years ended September 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 1,147,240 $ 1,508,462 $ 1,428,674
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,484,040)
Excess distributions from consolidated subsidiary 2,772,663 2,430,855
Decrease (increase) in other receivables (26,369) 28,546 92,057
Decrease in other liabilities 102,858 115,619 (1,281)
----------- ----------- -----------
Net cash provided (used) by operating activities 3,996,392 4,083,482 35,410
----------- ----------- -----------
Cash flows from investing activities:
Net cash provided (used) by investing activities - - -
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (1,319,949) (1,209,420) (1,108,554)
Purchase of common stock (1,072,842) (3,221,110) (1,686,689)
----------- ----------- -----------
Net cash used by financing activities (2,392,791) (4,430,530) (2,795,243)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,603,601 (347,048) (2,759,833)
Cash and cash equivalents at beginning of period 1,321,727 1,668,775 4,428,608
----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,925,328 $ 1,321,727 $ 1,668,775
=========== =========== ===========
(Continued)
41
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
13. Harrodsburg Savings and Loan Service Corporation
In 1978, the Bank formed Harrodsburg Savings and Loan Service
Corporation, a wholly owned subsidiary, by purchasing its stock for
$15,000. The Subsidiary was created to hold stock in a not for profit
corporation that provides on line computer processing and inquiry
service for the Bank and other savings and loan institutions.
Summary balance sheets for the wholly owned subsidiary are as follows:
Harrodsburg Savings & Loan Service Corporation
Balance Sheets, September 30, 2000 and 1999
---------------------------
Assets 2000 1999
-------------- --------------
Investments $15,000 $15,000
============== ==============
Stockholders' Equity
Common stock $15,000 $15,000
============== ==============
The Service Corporation did not receive income nor did it incur expense during
the years ended September 30, 2000, 1999, and 1998.
14. Stock Purchase
In fiscal years 2000, 1999, and 1998, the Company repurchased 86,800
shares of common stock at a cost of $1,072,842, 222,643 shares of
common stock at a cost of $3,221,110, and 101,238 shares of common
stock at a cost of $1,686,689, respectively.
(Continued)
42
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
15. Condensed Consolidated Selected Quarterly Financial Data (Unaudited)
Quarters Ended for Fiscal Year 2000
December 31 March 31 June 30 September 30
----------- ------------------ ------------- ------------
Interest income $ 1,920,943 $ 1,998,438 $ 2,040,079 $2,091,746
Interest expense 953,332 991,959 1,056,619 1,147,798
------------- -------------- ------------- ----------
Net interest income 967,611 1,006,479 983,460 943,948
Provision for loan losses 15,000
Non-interest income 26,048 24,696 29,952 32,195
Non-interest expense 523,285 566,792 574,160 596,961
------------- -------------- ------------- ----------
Income before income taxes 470,374 449,383 439,252 379,182
Income tax expense 159,927 152,756 149,346 128,922
------------- -------------- ------------- ----------
Net income $ 310,447 $ 296,627 $ 289,906 $ 250,260
============= ============== ============= ==========
Earnings per common share $ .20 $ .20 $ .19 $ .17
============= ============== ============= ==========
Weighted average common
shares outstanding 1,566,741 1,537,144 1,506,709 1,496,517
============= ============== ============= ==========
Quarters Ended for Fiscal Year 1999
December 31 March 31 June 30 September 30
----------- ------------------ ------------- -------------
Interest income $ 1,946,982 $ 1,919,482 $ 1,946,499 $1,932,353
Interest expense 968,563 939,414 954,515 950,134
------------- -------------- ------------- ----------
Net interest income 978,419 980,068 991,984 982,219
Provision for loan losses 10,000 25,000
Non-interest income 25,781 28,257 30,051 32,173
Non-interest expense 430,269 444,315 428,110 425,722
------------- -------------- ------------- ----------
Income before income taxes 563,931 564,010 593,925 563,670
Income tax expense 191,736 191,764 201,935 191,639
------------- -------------- ------------- ----------
Net income $ 372,195 $ 372,246 $ 391,990 $ 372,031
============= ============== ============= ==========
Earnings per common share $ .22 $ .24 $ .24 $ .24
============= ============== ============= ==========
Weighted average common
shares outstanding 1,735,274 1,632,106 1,600,084 1,577,823
============= ============== ============= ==========
43