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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended June 30, 1999.
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______to_______
Commission File Number: 0-18832
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Kentucky 61-1168311
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2323 Ring Road, Elizabethtown, Kentucky 42701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 765-2131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant, based on the closing sales price of the
Registrant's Common Stock as quoted on the National Association of Securities
Dealers, Inc. Automated Quotation National Market System on September 15, 1999,
was $97,368,912. Solely for purposes of this calculation, the shares held by
directors and executive officers of the registrant and by any stockholder
beneficially owning more than 5% of the registrant's outstanding common stock
are deemed to be shares held by affiliates.
As of September 15, 1999, there were issued and outstanding 4,057,038
shares of the registrant's common stock, of which directors and executive
officers held 458,358 shares and more than 5% beneficial owners held 225,889
shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
PART I
ITEM 1. BUSINESS
The Corporation
First Federal Financial Corporation of Kentucky (the "Corporation") was
incorporated in August 1989 under the laws of the Commonwealth of Kentucky for
the purpose of becoming the holding company for First Federal Savings Bank of
Elizabethtown ("First Federal" or the "Bank") pursuant to the Bank's
reorganization into the holding company form of ownership, which was consummated
on June 1, 1990. Prior to its acquisition of all the outstanding stock of the
Bank in connection with the Bank's holding company reorganization, the
Corporation had no assets or liabilities and engaged in no business activities.
Since its acquisition of First Federal, the Corporation has engaged in no
significant activity other than holding the stock of First Federal and operating
the business of a savings bank through First Federal. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to First Federal and its subsidiary.
The Bank
First Federal is a federally-chartered savings bank headquartered in
Elizabethtown, Kentucky. The business of First Federal consists primarily of
attracting deposits from the general public and originating mortgage loans on
single family residences, and to a lesser extent on multi-family housing and
commercial property. First Federal also makes home improvement loans, consumer
loans and commercial business loans and through its subsidiary offers insurance
products and brokerage services to its customers. In April 1993 the Bank
established a full service trust department to serve the fiduciary needs of its
customers. The principal sources of funds for First Federal's lending activities
include deposits received from the general public, borrowings from the Federal
Home Loan Bank of Cincinnati, principal amortization and prepayment of loans.
First Federal's primary sources of income are interest and origination fees on
loans and interest on investments. First Federal also invests in various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations. First Federal's principal expenses are interest
paid on deposit accounts and operating expenses.
First Federal was originally founded in 1923 as a state-chartered
institution and became federally-chartered in 1940. In 1987, the Bank converted
to a federally-chartered savings bank and converted from mutual to stock form.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati and is subject to regulation, examination and supervision by the
Office of Thrift Supervision ("OTS"). The Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation("FDIC").
LENDING ACTIVITIES
GENERAL. The principal lending activity of First Federal is the
origination of conventional first mortgage loans secured by residential
property. Residential mortgage loans are generally underwritten according to
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) guidelines. To a lesser extent the Bank engages in
commercial real estate, consumer and commercial business lending. Residential
mortgage loans made by First Federal are secured primarily by single family
homes and include construction loans. The majority of First Federal's mortgage
loan portfolio is secured by real estate located in Hardin, Nelson, Hart, Meade,
LaRue, and Bullitt counties in the state of Kentucky.
2
The following table presents a summary of the Bank's loan portfolio by
category for each of the last five years. The Bank has no foreign loans in its
portfolio and other than the categories noted, there is no concentration of
loans in any industry exceeding 10% of total loans.
June 30,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
Type of Loan:
Real Estate:
Mortgage $325,099 78.93% $304,443 82.38% $283,926 83.73% $267,425 84.55% $254,406 87.07%
Construction 18,104 4.39 15,689 4.25 15,444 4.55 15,766 4.98 8,159 2.79
Commercial 7,956 1.93 3,254 .88 2,246 .66 2,406 .76 2,004 .69
Consumer and
home equity 49,043 11.91 45,136 12.21 35,528 10.48 28,892 9.15 26,485 9.06
Commercial,
other 11,692 2.84 1,020 .28 1,953 .58 1,785 .56 1,138 .39
-------- ------ -------- ------- -------- ------ ------- ------- -------- -------
Total loans $411,894 100.00% $369,542 100.00% $339,097 100.00% $316,274 100.00% $292,192 100.00%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
June 30, 1999, regarding the dollar amount of loans maturing in the Bank's loan
portfolio based on their contractual terms to maturity.
Due after
Due during 1 through Due after 5
The year ended 5 years after Years after
June 30, June 30, June 30, Total
2000 1999 1999 Loans
---- ---- ---- -----
(Dollars in thousands)
Real estate mortgage $ 1,060 $10,485 $313,554 $325,099
Real estate construction (1) 0 0 18,104 18,104
Consumer 7,278 40,169 1,596 49,043
Commercial, financial and
agricultural 5,018 9,978 4,652 19,648
----- ------ ------ ------
Total $13,356 $60,632 $337,906 $411,894
======= ======= ======== ========
- ----------------------------
(1) These loans will become permanent real estate loans upon completion of
construction.
The following table reflects a breakdown of loans maturing after one
year, by fixed and adjustable rates.
Floating or
Fixed Rates Adjustable Rates Total
(Dollars in thousands)
Real estate mortgage $241,227 $ 82,812 $324,039
Real estate construction 16,329 1,775 18,104
Consumer 4,537 37,228 41,765
Commercial, financial and
Agricultural 3,477 11,153 14,630
------ ------ ------
Total $265,570 $132,968 $398,538
======== ======== ========
RESIDENTIAL REAL ESTATE LENDING. The Bank's primary lending activity is
the origination of loans on single family residences, which consist of
one-to-four individual dwelling units. Fixed rate residential real estate loans
originated by the Bank have terms ranging from ten to thirty years. Interest
rates are competitively priced within the primary geographic lending market, and
vary according to the term for which they are fixed.
3
In recent years, the Bank has emphasized the origination of
adjustable-rate mortgage loans ("ARMs"). The Bank offers an ARM with an annual
adjustment which is tied to various national indeces with a maximum adjustment
of 2% annually and a lifetime cap of 15%. As of June 30, 1999, approximately 26%
of the Bank's real estate loans were adjustable rate loans with adjustment
periods ranging from one to five years and balloon loans of seven years or less.
The origination of these mortgage loans can be more difficult in a low interest
rate environment where there is a significant demand for fixed rate mortgages.
The Bank limits the maximum loan-to-value ratio on one-to-four-family
residential first mortgages to 80% of the appraised value and 95% on certain
mortgages, with the requirement that private mortgage insurance be obtained for
loans with loan-to-value ratios in excess of 80%. The Bank generally limits the
loan-to-value ratio to 80% on second mortgages on one-to-four-family dwellings.
First Federal's residential lending activities also include loans
secured by multi-family residential property, consisting of properties with more
than four separate dwelling units. These loans amounted to $4.8 million of the
loan portfolio at June 30, 1999. First Federal generally does not lend above 75%
of the appraised values of multi-family residences on first mortgage loans. The
mortgage loans First Federal currently offers on multi-family dwellings are
generally one or five year ARMs with maturities of 25 years or less.
The Bank maintains a secondary mortgage operation designed to make
qualified VA and FHA loans for sale to investors, thereby providing necessary
liquidity to the Bank and needed loan products to the Bank's customers. During
fiscal 1999, the Bank's secondary mortgage operations originated $43.4 million
in loans and sold $42 million to investors. Conventional mortgage loans
originated by the Bank do not meet certain guidelines, therefore, they do not
qualify for sale on the secondary market.
CONSTRUCTION AND COMMERCIAL REAL ESTATE LENDING. First Federal
originates loans secured by existing commercial properties and construction
loans primarily on residential real estate. The loans are secured by real estate
located in Kentucky. Substantially all of the commercial real estate loans
originated by First Federal have adjustable interest rates with maturities of 25
years or less or are loans with fixed interest rates and maturities of five
years or less. At June 30, 1999, the Bank had $18.1 million in outstanding
interim construction loans. The security for commercial real estate loans
includes retail businesses, warehouses and motels. Commercial real estate loans
originated by the Bank range in size from $40,000 to $1.9 million.
Commercial real estate loans typically involve large loan balances to
single borrowers or groups of related borrowers and may also involve higher loan
principal amount to security property appraisal value ratios as compared to
loans secured by residential real estate. In addition, the payment experience of
loans secured by income producing properties is typically dependent on the
successful operation of the related real estate project and thus may be more
vulnerable to adverse conditions in the real estate market or in the economy
generally. Construction loans involve additional risks as a result of the fact
that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, and related
loan-to-value ratios. The analysis of prospective construction loan projects
thus requires an expertise that varies in significant respects from that which
is required for residential mortgage lending.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing or a takeout commitment to
the borrower; the reputation of the borrower and his or her financial condition;
the amount of the borrower's equity in the project; independent appraisals and
cost estimates; pre-construction sale and leasing information; and cash flow
projections of the borrower.
CONSUMER LOANS. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans of up to 35% of their
assets. This limit may be exceeded for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and loans secured by
savings accounts. The consumer loans granted by the Bank have included loans on
automobiles, boats, recreational vehicles and other consumer goods, as well as
loans secured by savings accounts, home improvement loans, and unsecured lines
of credit. As of June 30, 1999, consumer loans outstanding were $28.3 million or
approximately 6.9% of the Bank's total gross loan portfolio. These loans
involved a higher risk of default than loans secured by one-to-four-family
residential loans. The Bank believes, however, that the shorter term and the
normally higher interest rates available on various types of consumer loans have
been helpful in maintaining a profitable spread between the Bank's average loan
yield and its cost of funds.
4
In view of the riskier nature of consumer lending, the Bank has
developed what management believes are conservative underwriting standards. In
applying these standards, the Bank obtains detailed financial information and
credit bureau reports concerning each applicant. In addition, the relationship
of the loans to the value of the collateral is considered. The Bank offers a
home equity line of credit, which is a revolving line of credit secured by the
equity in a customer's home. As of June 30, 1999, these loans totaled $14.1
million.
COMMERCIAL BUSINESS LENDING. The Bank is permitted to make secured and
unsecured loans for commercial, corporate, business, and agricultural purposes,
including issuing letters of credit and engaging in inventory financing and
commercial leasing activities. Commercial loans generally are made to
small-to-medium size businesses located within the Bank's defined market area.
Commercial loans are considered to involve a higher degree of risk than
residential real estate loans. However, commercial loans generally carry a
higher yield and are made for a shorter term than real estate loans. The Bank
offers a commercial line of credit, which is a revolving line of credit secured
by the equity in the property, primarily real estate, of a business. As of June
30, 1999, these loans totaled approximately $7 million.
LOAN UNDERWRITING POLICIES. During the loan approval process, First
Federal assesses both the borrower's ability to repay the loan and the adequacy
of the underlying security. Potential residential borrowers complete an
application which is submitted to a salaried loan officer. As part of the loan
application process, qualified fee appraisers inspect and appraise the property
which is offered to secure the loan. The Bank also obtains information
concerning the income, financial condition, employment and credit history of the
applicant. First Federal's loan committee, consisting of certain officers of the
Bank, analyzes the loan application and the property to be used as collateral
and subsequently approves or denies the loan request. If the mortgage loan
amount is less than $250,000, it must be approved by a loan committee consisting
of certain members of management. The Board of Directors must approve all
mortgage loans in excess of $250,000. All consumer loans under $25,000 may be
approved by authorized loan officers under Board approved lines of authority and
all loans under $100,000 may be approved by an officer loan committee. Consumer
loans in excess of $100,000 must be approved by the President. In connection
with the origination of single family residential adjustable rate mortgage
loans, borrowers are qualified at a rate of interest equal to the fully accrued
index rate. It is the policy of management to make loans to borrowers who not
only qualify at the low initial rate of interest, but who would also qualify
following an upward interest rate adjustment.
ORIGINATION, PURCHASES AND SALES. Historically, all residential and
commercial real estate loans have been originated directly by the Bank through
salaried loan officers. Residential loan originations are generally attributable
to referrals from real estate brokers and builders, depositors and walk-in
customers. Commercial real estate and construction loan origination have been
obtained by direct solicitation, and consumer loan origination by walk-in
customers in response to the Bank's advertising, as well as by direct
solicitation.
LOAN COMMITMENTS. Conventional loan commitments by the Bank are granted
for periods of 30 days. The total amount of the Bank's outstanding commitments
to originate real estate loans at June 30, 1999, was approximately $19.6
million. It has been the Bank's experience that few commitments expire unfunded.
LOAN FEES. In addition to interest earned on loans, certain fees are
received for committing to and ultimately originating loans. The Bank also
receives other fees and charges relating to existing loans, which include
prepayment penalties, late charges and fees for loan modifications. Management
believes that these fees and charges do not materially affect operating results.
NON-PERFORMING ASSETS. Non-performing assets consist of loans on which
interest is no longer accrued and real estate acquired through foreclosure. The
Bank does not have any loans greater than 90 days past due still on accrual. All
loans considered impaired under SFAS 114 are included in non-performing loans.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require
increase, such increase is reported in the provision for loan losses. Loans are
reviewed on a regular basis and normal collection procedures are implemented
when a borrower fails to make a required payment on a loan. If the delinquency
on a mortgage loan exceeds 90 days and is not cured through normal collection
procedures or an acceptable arrangement is not worked out with the borrower, the
Bank institutes measures to remedy the default, including commencing a
foreclosure action. Consumer loans generally are charged off when a loan is
deemed uncollectible by management and any available collateral has been
disposed of. Commercial business and real estate loan delinquencies are handled
on an individual basis by management with the advice of the Bank's legal
counsel. The Bank anticipates that the increase in non-performing real estate
loans will continue due to the growth of the Bank's loan portfolio.
5
Interest income on loans is recognized on the accrual basis except for
those loans in a nonaccrual of income status. The accrual of interest on
impaired loans is discontinued when management believes, after consideration of
economic and business conditions and collection efforts, that the borrowers'
financial condition is such that collection of interest is doubtful. When
interest accrual is discontinued, interest income is subsequently recognized
only to the extent cash payments are received.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired it is recorded at the lower of the
unpaid principal balance of the related loan or its fair market value. Any
write-down of the property is charged to the allowance for loan losses.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
At June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Loans on non-accrual status (1)(2) $2,529 $2,057 $1,550 $1,252 $1,161
------ ------ ------ ------ ------
Total non-performing loans 2,529 2,057 1,550 1,252 1,161
Real estate acquired
through foreclosure 109 134 184 375 260
Total non-performing assets $2,638 $2,191 $1,734 $1,627 $1,421
====== ====== ====== ====== ======
Ratios: Non-performing
loans to loans .63% .58% .47% .41% .41%
Non-performing
assets to total assets .54% .53% .46% .46% .43%
- -------------------------------------------
(1) Loans on non-accrual status include impaired loans
(2) The interest income that would have been earned and
received on non-accrual loans was not material.
ALLOWANCE AND PROVISION FOR LOAN LOSSES. The allowance for loan losses is
regularly evaluated by management and maintained at a level believed to be
adequate to absorb loan losses in the Bank's lending portfolios. Periodic
provisions to the allowance are made as needed. The amount of the provision for
loan losses necessary to maintain an adequate allowance is based upon an
assessment of current economic conditions, analysis of periodic internal loan
reviews, delinquency trends and ratios, changes in the mixture and levels of the
various categories of loans, historical charge-offs, recoveries, and other
information. Management believes, based on information presently available, that
it has adequately provided for loan losses at June 30, 1999. Although management
believes it uses the best information available to make allowance provisions,
future adjustments which could be material may be necessary if management's
assumptions differ significantly from the loan portfolio's actual performance.
6
The following table sets forth an analysis of the Bank's loan loss
experience for the periods indicated.
Year Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $1,853 $1,715 $1,613 $1,662 $1,406
------ ------ ------ ------ ------
Loans charged-off:
Real estate mortgage 42 16 17 0 14
Consumer 248 132 114 50 21
Commercial 0 0 0 24 16
--- --- --- --- ---
Total charge-offs 290 148 131 74 51
--- --- --- --- ---
Recoveries:
Real estate mortgage 5 0 0 1 0
Consumer 21 21 33 1 6
Commercial 0 0 0 23 16
--- --- --- --- ---
Total recoveries 26 21 33 25 22
--- --- --- --- ---
Net loans charged-off 264 127 98 49 29
--- --- --- --- ---
Acquired reserves 205 0 0 0 185
Provision for loan losses 314 265 200 0 100
--- --- --- --- ---
Balance at end of period $2,108 $1,853 $1,715 $1,613 $1,662
------ ------ ----- ------ ------
Net charge-offs to average
loans outstanding
.068% .037% .031% .017% .010%
Allowance for loan losses to
total non-performing assets
80% 85% 99% 99% 117%
The following table is management's allocation of the allowance for loan
losses by loan type. Allowance funding and allocation is based on management's
current evaluation of risk in each category, economic conditions, past loss
experience, loan volume, past due history and other factors. Since these factors
are subject to change, the allocation is not necessarily predictive of future
portfolio performance.
At June 30,
--------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total loans Amount Total loans Amount Total loans
(Dollars in thousands)
Real estate mortgage $1,546 73% $1,340 72% $1,267 74%
Consumer 472 22 451 24 391 23
Commercial 90 5 62 4 57 3
----- ------ ------- ------- ------ ------
Total $2,108 100.00% $1,853 100.00% $1,715 100.00%
====== ======= ======= ======= ====== =======
There were no material changes in estimation methods or assumptions
affecting allowance allocation. Any reallocation to the allowance is primarily
indicative of changes in loan portfolio mix, not changes in loan concentrations
or terms.
Federal regulations require insured institutions to classify their own
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, classify them. The regulations provide for three
classifications of asset categories -- substandard, doubtful and loss. The
regulations also contain a special mention category, defined as assets which do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
7
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specified allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or charge off
such amount.
At June 30, 1999, on the basis of management's review of the Bank's loan
portfolio, the Bank had $2.6 million of assets classified substandard, no assets
classified as doubtful and $53,000 of assets classified as loss.
SECURITIES
Interest on securities provides the largest source of income for First
Federal after interest on loans, constituting 10% of the total interest income
for fiscal year 1999. First Federal maintains its liquid assets above the
minimum requirements imposed by regulation at a level believed adequate to meet
requirements of normal banking activities and potential savings outflows. Cash
flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of June 30, 1999, First Federal's liquidity ratio
(liquid assets as a percentage of deposits and short-term borrowings) was 8.85%.
First Federal has the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, certificates of deposit at insured savings and
loans and banks, bankers' acceptances, and federal funds. The Bank may also
invest a portion of its assets in certain commercial paper and corporate debt
securities. First Federal is also authorized to invest in mutual funds and
stocks whose assets conform to the investments that First Federal is authorized
to make directly. See Note 3 of Notes to Consolidated Financial Statements for
further information concerning the Bank's investment portfolio.
As a member of the Federal Home Loan Bank System, First Federal must
maintain minimum levels of liquid assets specified by the OTS which vary from
time to time. See "Regulation Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to return on loans.
The table on the following page sets forth the carrying value of the
Bank's securities portfolio at the dates indicated. At June 30, 1999, the market
value of the Bank's securities portfolio was $46.5 million.
At June 30,
-----------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Securities available-for-sale:
Equity securities $ 1,948 $ 1,934 $ 5,192
Obligations of states and political
subdivisions 988 - -
------ ------ ------
Total available-for-sale $ 2,936 $ 1,934 $ 5,192
======= ======= =======
Securities held-to-maturity:
U.S. Treasury and agencies $42,814 $22,693 $15,335
Mortgage-backed securities 1,590 1,946 2,149
------ ------ ------
Total held-to-maturity $44,404 $24,639 $17,484
======= ======= =======
8
The following table sets forth the scheduled maturities, amortized
cost, fair value and weighted average yields for the Bank's securities at
June 30, 1999.
Weighted
Amortized Fair Average
Cost Value Yield
(Dollars in thousands)
Securities available-for-sale:
Due in one year or less $ - $ - - %
Due after one year through five years - - -
Due after five years through ten years 785 772 4.33
Due after ten years 225 216 4.60
Equity securities 262 1,948 1.39
---- ------
Total available-for-sale $1,272 $2,936
====== ======
Securities held-to-maturity:
Due in one year or less $ 1,000 $ 1,001 6.00%
Due after one year through five years 6,834 6,933 6.43
Due after five years through ten years 33,980 33,029 6.34
Due after ten years 1,000 951 6.75
Mortgage-backed securities 1,590 1,611 6.50
Total held-to-maturity $44,404 $43,525
======= =======
SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposit accounts, the Bank derives
funds from loan repayments, FHLB advances, other borrowings and operations.
Borrowings may be used on a short-term basis to compensate for reductions in
deposits or deposit inflows at less than projected levels and may be used on a
longer term basis to support expanded lending activities.
DEPOSITS. First Federal attracts both short-term and long-term deposits
from the general public by offering a wide range of deposit accounts and
interest rates. In recent years the Bank has been required by market conditions
to rely increasingly on short-term certificate accounts and other deposit
alternatives that are more responsive to market interest rates. First Federal
offers regular savings accounts, NOW accounts, money market accounts and
fixed-interest-rate certificates with varying maturities. First Federal also
offers tax-deferred individual retirement accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in interest
rates and competition. The Bank relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits.
As of June 30, 1999, approximately 32.9% of First Federal's deposits
consisted of various savings and demand deposit accounts from which customers
are permitted to withdraw funds at any time without penalty.
Interest earned on savings accounts is paid from the date of deposit to
the date of withdrawal and compounded quarterly. Interest earned on NOW accounts
is paid from the date of deposit to the date of withdrawal, compounded and
credited monthly. Interest rates paid, maturity terms, service fees and
withdrawal penalties are established by First Federal's management on a periodic
basis.
First Federal also makes available to its depositors a number of
certificates of deposit with various terms and interest rates to be competitive
in its market area. These certificates have minimum deposit requirements as
well.
9
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
Balance Balance Balance Balance
June 30, % of Increase June 30, % of Increase June 30, % of Increase June 30, % of
1999 Deposits (Decrease) 1998 Deposits (Decrease) 1997 Deposits (Decrease) 1996 Deposits
---- -------- -------- ---- -------- -------- ------ -------- --------- ------ --------
(Dollars in thousands)
Non-interest bearing
demand accounts $38,257 9.58% $ 8,075 $12,743 4.15% $ (617) $ 9,813 3.49% $ 833 $ 8,980 3.39%
NOW demand accounts 15,223 3.81 6,027 33,468 10.92 3,875 33,140 11.78 2,702 30,438 11.49
Savings accounts 54,896 13.74 17,881 30,182 9.84 (1,004) 31,186 11.08 (112) 31,298 11.81
Money marketdeposit
accounts 22,984 5.75 13,128 9,856 3.21 (604) 10,460 3.72 191 10,269 3.88
Certificate accounts:
3 month CD's 1,398 .35 473 925 .30 (108) 1,033 .37 (64) 1,097 .41
6 month CD's 24,898 6.23 (798) 25,696 8.38 13,297 12,399 4.41 (5,132) 17,531 6.62
12 month CD's 80,617 20.18 37,162 43,455 14.17 (13,377) 56,832 20.20 3,935 52,897 19.96
18 month CD's 9,097 2.28 (29,041) 38,138 12.43 2,635 35,503 12.62 27,905 7,598 2.87
24 month CD's 76,536 19.16 22,852 53,684 17.50 28,699 24,985 8.88 (8,673) 33,658 12.70
30 month CD's 1,788 .45 (307) 2,095 .68 (1,075) 3,170 1.13 (605) 3,775 1.42
36 month CD's 10,987 2.75 2,786 8,201 2.67 (3,501) 11,702 4.16 (26) 11,728 4.43
48 month CD's 16,238 4.07 3,883 12,355 4.04 4,469 16,824 5.98 5,509 22,333 8.43
6 to 8 year CD's 14,743 3.69 3,276 11,467 3.74 218 11,249 3.99 (291) 11,540 4.36
IRA accounts 31,781 7.69 7,343 24,438 7.97 1,392 23,046 8.19 1,242 21,804 8.23
-------- ------- ------- -------- ------- ------- ------- ------- ------- -------- -------
Total $399,443 100.00% $92,740 $306,703 100.00% $25,361 $281,342 100.00% $16,396 $264,946 100.00%
======== ======= ======= ======== ======= ======= ======== ======= ======= ======== =======
The variety of deposit accounts by First Federal has permitted it to be
more competitive in obtaining funds and has allowed it to respond with more
flexibility to disintermediation (the flow of funds away from depository
institutions such as savings institutions into direct investment vehicles such
as government and corporate securities). However, the ability of the Bank to
attract and maintain deposits and its cost of funds have been, and will continue
to be, significantly affected by money market conditions.
10
The following table sets forth the amount of deposits as of June 30,
1999 by various interest rate categories.
Weighted
Average Percent
Interest Minimum of
Rate Category Amount Balances(1) Deposits
- % Non-interest bearing demand accounts $1,000 $ 15,223 3.81%
1.53 NOW demand accounts 1,000 54,896 13.74
2.56 Savings accounts 100 38,257 9.58
3.67 Money market deposit accounts 1,000 22,984 5.75
3.18 3 month certificate 1,000 1,398 .35
4.27 6 month certificate 1,000 24,898 6.23
5.03 12 month certificate 1,000 80,617 20.18
4.68 18 month certificate 1,000 9,097 2.28
5.54 24 month certificate 1,000 76,536 19.16
5.65 30 month certificate 1,000 1,788 .45
5.46 36 month certificate 1,000 10,987 2.75
5.75 48 month certificate 1,000 16,238 4.07
6.02 Other certificates 1,000 14,743 3.69
5.64 IRA accounts 1,000 31,781 7.96
-------- ------
$399,443 100.00%
(1) Dollars in thousands. ======== =======
The following table indicates at June 30, 1999 the amount of the Bank's
certificates of deposit of $100,000 or more by time remaining until maturity.
Certificates
Maturity Period of Deposit
--------------- ------------
(In Thousands)
Three months or less $12,100
Three through six months 10,651
Six through twelve months 22,747
Over twelve months 29,514
-------
Total $75,012
=======
The following table sets forth the average balances and interest rates
based on month-end balances for various deposit categories during the periods
indicated.
Year Ended June 30,
------------------------------------------------------
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
Non-interest bearing
demand accounts $ 14,651 - % $ 12,289 - % $ 9,104 - %
Demand deposit accounts 51,174 1.53 34,171 1.52 32,056 1.57
Savings deposits 38,494 2.56 30,696 2.64 31,259 2.62
Money market accounts 21,050 3.67 9,424 3.31 10,287 3.38
Certificates of deposit 266,575 5.50 207,333 5.78 187,974 5.52
11
BORROWINGS. Deposits are the primary source of funds for First Federal's
lending and investment activities and for its general business purposes. The
Bank can also use advances (borrowings) from the FHLB of Cincinnati to
supplement its supply of lendable funds, meet deposit withdrawal requirements
and to extend the term of its liabilities. Advances from the FHLB are typically
secured by the Bank's stock in the FHLB and a portion of the Bank's first
mortgage loans. At June 30, 1999 First Federal had $25.9 million in advances
outstanding from the FHLB and the capacity to increase its borrowings an
additional $167 million.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings banks and certain other member financial institutions. As a
member, First Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to credit-worthiness have been met.
The following table sets forth certain information regarding the Bank's
FHLB advances during the periods indicated.
At June 30,
-------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Average balance outstanding $23,560 $41,990 $41,482
Maximum amount outstanding at
any month-end during the period 25,894 43,441 47,716
Year end balance 25,894 43,249 41,514
Weighted average interest rate:
At end of year 5.25% 5.39% 5.62%
During the year 5.52% 5.68% 5.61%
12
AVERAGE BALANCE SHEET
The following table sets forth information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented
Year Ended June 30,
----------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
ASSETS
Interest earning assets:
Equity securities $ 2,109 $ 28 1.33% $ 2,492 $ 73 2.93% $ 4,856 $ 228 4.70%
State and political
subdivision securities 992 45 4.54 - - - - - -
U.S. Treasury and agencies 40,506 2,730 6.74 16,475 1,058 6.42 15,133 976 6.45
Mortgage-backed securities 1,786 124 6.94 2,090 147 7.03 2,514 178 7.08
Loans receivable (1) (2) 386,132 31,896 8.26 343,822 29,339 8.53 319,187 26,945 8.44
FHLB stock 3,082 216 7.01 2,875 207 7.20 2,674 188 7.03
Interest bearing deposits 8,635 457 5.29 6,689 358 5.35 4,895 267 5.45
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest earning assets 443,242 35,496 8.01 374,443 31,182 8.33 349,259 28,782 8.24
Less: Allowance for loan
losses (2,071) (1,725) (1,622)
Non-interest earning assets 37,636 21,284 18,892
-------- -------- --------
TOTAL ASSETS $478,807 $394,002 $366,529
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings accounts $38,494 $ 984 2.56% $30,696 $ 809 2.64% $31,259 $ 818 2.62%
NOW and money market
accounts 72,224 1,522 2.11 43,595 887 2.03 42,343 875 2.07
Certificates of deposit and
other time deposits 266,575 14,674 5.50 207,333 11,980 5.78 187,974 10,376 5.52
FHLB Advances 23,560 1,301 5.52 41,990 2,383 5.68 41,482 2,306 5.56
------- ------ ---- ------- ------ ---- ------- ------
Total interest bearing
liabilities 400,853 18,481 4.61 323,614 16,059 4.96 303,058 14,375 4.74
Non-interest bearing
liabilities:
Non-interest bearing
deposits 14,651 12,289 9,104
Other liabilities 6,542 4,697 3,879
------- ------- -------
Total liabilities 422,046 340,600 316,041
Stockholders' equity 56,761 53,402 50,488
------- ------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $478,807 $394,002 $366,529
======== ======== ========
NET INTEREST INCOME $17,015 $15,123 $14,407
======= ======= =======
NET INTEREST SPREAD 3.40% 3.37% 3.50%
===== ===== =====
NET INTEREST MARGIN 3.84% 4.04% 4.13%
===== ===== =====
Ratio of average interest
earning assets to average
interest bearing liabilities 110.57% 115.71% 115.24%
======= ======= =======
- ------------------------------------------------------
(1) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
(2) Calculations include non-accruing loans in the average loan amounts
outstanding.
13
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by old volume); (2) changes in volume (change in volume
multiplied by old rate); and (3) changes in rate-volume (change in rate
multiplied by change in volume). Changes in rate-volume are proportionately
allocated between rate and volume variance.
Year Ended June 30,
---------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
Increase (decrease) Increase (decrease) Increase (decrease)
Due to change in Due to change in Due to change in
Net Net Net
Rate Volume Change Rate Volume Change Rate Volume Change
(Dollars in Thousands)
INTEREST INCOME:
Loans $(885) $3,442 $2,557 $159 $2,288 $2,447 $(89) $2,038 $1,949
Equity securities (35) (10) (45) (104) (135) (239) (15) 12 (3)
State and political
subdivision securities 13 32 45 - - - - - -
U.S. Treasury and agencies 55 1,617 1,672 (5) 87 82 (11) 460 449
Mortgage-backed securities (2) (21) (23) (1) (31) (32) (7) (39) (46)
FHLB stock (5) 14 9 5 14 19 2 12 14
Interest bearing deposits (4) 103 99 45 78 123 (57) (450) (507)
----- ------ ------ --- ------ ------ ------ ------ ------
Total interest earning assets $(863) $5,177 $4,314 $99 $2,301 $2,400 $(177) $2,033 $1,856
===== ====== ====== === ====== ====== ====== ====== ======
INTEREST EXPENSE:
Savings accounts $(24) $199 $175 $7 $(14) $(7) $(9) $(15) $(24)
NOW and money market
accounts 36 599 635 (77) 48 (29) 16 100 116
Certificates of deposit
and other time deposits (550) 3,244 2,694 503 1,136 1,639 (4) 105 101
FHLB advances (65) (1,017) (1,082) 52 29 81 (32) 538 506
----- ------ ------ ---- ------ ------ ---- ---- ----
Total interest bearing
liabilities $(603) $3,025 $2,422 $485 $1,199 $1,684 $(29) $728 $699
====== ====== ====== ==== ====== ====== ==== ==== ====
SUBSIDIARY ACTIVITIES
As a federally-chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
intercity, and community development purposes. Under such limitations, on June
30, 1999, the Bank was authorized to invest up to approximately $14.6 million in
the stock of or loans to subsidiaries. In addition, institutions meeting
regulatory capital requirements, which the Bank does, may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock. As of June 30, 1999, the Bank's
investment in and loans to its subsidiary was approximately $1.4 million
consisting of investment in common stock and earnings.
In 1978, the Bank formed First Service Corporation of Elizabethtown
("First Service"). First Service acts as a broker for the purpose of selling
mortgage life, credit life and accident and disability insurance to the Bank's
customers. In March, 1998 First Service entered into a contract with Robert
Thomas Securities, Inc. to provide investment services to the Bank's customers
in the area of tax deferred annuities, government securities and stocks and
bonds. First Service employs three full-time employees to perform these
services. This investment function operates under licenses held by First
Service. The net earnings of First Service was $209,000 during fiscal year 1999.
14
Savings associations, in determining compliance with capital
requirements, are required to deduct from capital an increasing percentage of
their debt and equity investments in, and extensions of credit to, service
corporations in activities not permissible for a national bank. Certain
activities of the Bank's service corporations are not permissible for national
banks. Accordingly, on June 30, 1999, the Bank deducted 100% of its investment
in its service corporation from its core and tangible capital. See
"Regulation--Regulatory Capital Requirements." Because the Bank's investment in
its subsidiary is insignificant, management does not believe that the required
deductions from capital will have a material effect on the Bank's regulatory
capital position.
COMPETITION
First Federal experiences substantial competition both in attracting and
retaining deposits and in the making of mortgage and other loans. Direct
competition for deposits comes from other savings institutions, commercial
banks, and credit unions located in north-central Kentucky. Additional
significant competition for deposits comes from money market mutual funds and
corporate and government debt securities.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from other savings institutions, commercial banks, mortgage bankers, mortgage
brokers, and insurance companies. First Federal is able to compete effectively
in its primary market area.
First Federal has offices in nine cities in six contiguous counties. In
addition to the financial institutions which have offices in these counties,
First Federal competes with several commercial banks and savings institutions in
surrounding counties, many of which have assets which are substantially larger
than First Federal's. In addition, Kentucky's interstate banking statute, which
permits banks in all states to enter the Kentucky market if they have reciprocal
interstate banking statutes, has further increased competition for the Bank.
EMPLOYEES
The Corporation and its subsidiary had 143 full-time employees and 23
part-time employees as of June 30, 1999. None of these employees are represented
by a collective bargaining agreement and the Corporation believes that it enjoys
good relations with its personnel.
REGULATION
GENERAL. As a federally chartered savings association, First Federal is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. The OTS periodically examines the Bank for compliance with various
regulatory requirements and the FDIC also has the authority to conduct special
examinations of institutions insured by the SAIF. The Bank must file reports
with the OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of depositors. As a savings
and loan holding company, the Corporation is subject to the OTS' regulation,
examination, supervision and reporting requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of 12 regional Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHLB"). The Federal Home Loan
Banks provide a Central Credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of capital
stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. First Federal was in compliance with this
requirement with investment in the FHLB stock at June 30, 1999, of $3.2 million.
The FHLB serves as a reserve or central bank for its member institutions
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB. As of June 30, 1999, First Federal had $25.9
million in advances outstanding from the FHLB. See "Business Sources of Funds -
Borrowings."
15
LIQUIDITY REQUIREMENTS. As a member of the FHLB System, the Bank has
been required to maintain average daily balances of liquid assets (cash,
deposits maintained pursuant to Federal Reserve Board requirements, time and
savings deposits in certain institutions, obligations of states and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt, and mortgage loans and mortgage-related
securities with less than one year to maturity or subject to purchase within one
year) equal to the monthly average of not less than a specified percentage of
its net withdrawable savings deposits plus short-term borrowings. This liquidity
requirement, which is currently 4%, may be changed from time to time by the OTS
to any amount within the range of 4% to 10% depending upon economic conditions
and the savings flows of member institutions. Member institutions have also been
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of their net withdrawable
savings accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet liquidity requirements. The Bank's average
liquidity ratio for June 1999 was 8.85% which exceeded the applicable liquidity
requirements. The Bank's average liquidity ratio for June 1999 was 8.85% which
exceeded the applicable liquidity requirement. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
QUALIFIED THRIFT LENDER TEST. The Bank is currently subject to OTS
regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for Federal Home Loan Bank advances and for certain other
purposes. To qualify as a QTL, a savings association must maintain at least 65%
of its "portfolio" assets in qualified thrift investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings association
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified thrift investments consist of: (i) loans, equity positions, or
securities related to domestic, residential real estate or manufactured housing,
credit card and education loans; (ii) property used by the savings association
in the conduct of its business; and (iii) stock in a Federal Home Loan Bank or
the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. Qualified thrift investments may also include liquidity investments
and 50% of the dollar amount of residential mortgage loans subject to sale under
certain conditions. To qualify as a QTL, a savings association must maintain its
status as a QTL on a monthly basis in nine out of every 12 months. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the Federal Home Loan Bank System. Upon
failure to qualify as a QTL for two years, a savings association must convert to
a commercial bank. At June 30, 1999, approximately 93.44% of the Bank's assets
were invested in qualified thrift investments.
LENDING LIMITS. Under regulations of the OTS, loans and extensions of
credit to a person outstanding at one time and not fully secured shall not
exceed 15% of the unimpaired capital, surplus and the loan loss allowance of the
savings association. Loans and extensions of credit fully secured by readily
marketable collateral (as defined) may comprise an additional 10% of unimpaired
capital and surplus. At June 30, 1999, the Bank complied with its regulatory
lending limits.
The aggregate amount of loans which a federally chartered savings
association may make on the security of liens on non-residential real property
may not exceed 400% of the institution's capital, though the Director of OTS has
the authority to permit savings associations to exceed the 400% of capital limit
in certain circumstances.
REGULATORY CAPITAL REQUIREMENTS. OTS regulations require savings
associations to satisfy three different capital requirements. Specifically,
savings associations must maintain a 3% Tier 1 leverage ratio, a 4% Tier 1
capital ratio and an 8% risk-based capital standard. OTS regulations impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). As of June 30, 1999, the Bank's actual capital
percentages for Tier 1 leverage of 9.0%, Tier 1 capital of 13.9%, and current
risk-based capital of 14.6%, significantly exceed the regulatory requirement for
each category. For additional information See Note 9 of the Notes to
Consolidated Financial Statements in the Annual Report.
For purposes of the OTS's regulatory capital regulations, core capital
is defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill held by an eligible savings
association.
16
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts, and increased by a pro rata portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments against capital, as
well as a pro rata portion of the assets of other subsidiaries for which netting
is not fully required under the phase-in rules. Adjusted total assets are
reduced by the amount of assets that have been deducted from capital, the
portion of savings association's investments in subsidiaries that must be netted
against capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both Tier 1 capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's Tier 1 capital. Supplementary capital is defined to
include certain preferred stock issues, nonwithdrawable accounts and pledged
deposits that do not qualify as Tier 1 capital, certain approved subordinated
debt, certain other capital instruments and a portion of the savings
association's general loss allowances. Total Tier 1 and supplementary capital
are reduced by an amount equal to the savings association's high loan-to-value
ratio land loans and non-residential construction loans and the amount of
capital instruments held by other depository institutions pursuant to reciprocal
arrangements as well as by an increasing percentage of the savings association's
equity investments.
The risk-based capital requirement is measured against risk-weighted
assets which equals the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighted system, one-to four-family first mortgages not more
than 90 days past due with loan-to-value ratios under 80% are assigned a risk
weight of 50%. Consumer loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. The risk-based capital requirement is 8% of
risk-weighted assets.
In determining compliance with capital standards, all of a savings
association's investments in, and extensions of credit to, any subsidiary
engaged in activities not permissible for a national bank are also to be
deducted from the savings association's capital. Certain subsidiaries are
exempted from this treatment, including any subsidiary engaged in impermissible
activities solely as agent for its customers (unless the FDIC determined
otherwise), subsidiaries engaged solely in mortgage banking, and depository
institution subsidiaries acquired prior to May 1, 1989. In addition, the capital
deduction is not applied to federal savings associations existing as of August
9, 1989 that were either chartered as a state savings bank or state cooperative
bank prior to October 10, 1982 or that acquired their principal assets from such
an association. The required reduction of capital for this purpose is being
phased in over a period of approximately five years. At June 30, 1999, the
Bank's investment in First Service, a wholly owned subsidiary of the Bank
engaged in activities which are not permitted for a national bank, amounted to
$1.4 million. Accordingly, on June 30, 1999, the Bank deducted 100% of this
investment from its core and tangible capital.
The OTS risk-based capital requirements require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS will calculate the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, for any quarter is based on the institution's Thrift Financial Report filed
three quarters earlier. The Bank does not have more than a normal level of
interest rate risk under the new rule and is not required to increase its total
capital as a result of the rule.
17
Presented below as of June 30, 1999 is an analysis of the Bank's
interest rate risk ("IRR") as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates.
As of June 30, 1999
Net Portfolio Value NPV as % of PV of Assets
Change ------------------- ------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
+300 bp 35,951 (23,286) (39) 7.85 (430 bp)
+200 bp 44,082 (15,155) (26) 9.41 (273 bp)
+100 bp 52,123 (7,114) (12) 10.90 (125 bp)
0 bp 59,237 12.15
-100 bp 64,333 5,096 9 12.99 84 bp
-200 bp 68,072 8,835 15 13.57 142 bp
-300 bp 71,824 12,587 21 14.12 198 bp
While the Bank complies with its currently applicable capital
requirements and expects to continue to comply with the requirements, any
failure to comply with the capital requirements in the future would result in
severe penalties. In addition to requiring generally applicable capital
standards for savings associations, applicable regulations authorize the
Director of OTS to establish the minimum level of capital for a savings
institution at such amount or at such ratio of capital-to-assets as the Director
determines to be necessary or appropriate for such institution in light of the
particular circumstances of the institution. The Director of OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
The OTS staff policies specify that savings institutions failing any one
of their minimum regulatory capital requirements may not increase their total
assets during any quarter in excess of an amount equal to net interest credited
during the quarter. Under these policies, institutions that have submitted
capital plans that are rejected by the District Director or that have had
capital plans approved but do not meet the targets or requirements of the
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will only be granted
when the proposed loan or investment is reasonable in the context of the
institution's operations and does not significantly increase the risk profile of
the savings institution.
The Director of OTS must restrict the asset growth of savings
associations not in regulatory capital compliance, subject to a limited
exception for growth not exceeding interest credited. In addition, savings
associations not in full compliance with applicable capital standards are
subject to a capital directive which may include such restrictions, including
restrictions on the payment of dividends and on compensation, as deemed
appropriate by the Director of OTS. The Director of OTS is directed to treat as
an unsafe and unsound practice any material failure by a savings association to
comply with a capital plan or capital directive. The sanctions and penalties
that could be imposed range from restrictions on branching or on the activities
of the institution, to restrictions on the ability to obtain FHLB advances, to
termination of insurance of accounts following appropriate proceedings, to the
appointment of a conservator or receiver.
PROMPT CORRECTIVE REGULATORY ACTION
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action if an insured depository institution fails to satisfy certain
minimum capital requirements. All institutions, regardless of their capital
levels, are restricted from making any capital distribution or paying any
management fees if the institution would thereafter fail to satisfy the minimum
levels for any of its capital requirements. An institution that fails to meet
the minimum level for any relevant capital measure (an "undercapitalized
institution") may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
18
restoration plan within 45 days; (iii) subject to asset growth limits; and (iv)
required to obtain prior regulatory approval for acquisitions, branching and new
lines of businesses. The capital restoration plan must include a guarantee by
the institution's holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters, under which the holding company would be liable up to the lesser of 5%
of the institution's total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to comply with its
capital restoration plan. A "significantly undercapitalized" institution, as
well as any undercapitalized institution that did not submit an acceptable
capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution could also be required
to divest the institution or the institution could also be required to divest
subsidiaries. The senior executive officers of a significantly undercapitalized
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt. In their discretion, the federal banking
regulators may also impose the foregoing sanctions on an undercapitalized
institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective action provisions. If an institution's
ratio of tangible capital to total assets falls below a "critical capital
level," the institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that forbearance from
such action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized. If a savings association is in compliance with an approved
capital plan on the date of enactment of FDICIA, however, it will not be
required to submit a capital restoration plan if it is undercapitalized or
become subject to the statutory prompt corrective action provisions applicable
to significantly and critically undercapitalized institutions prior to July 1,
1995.
Under FDICIA, regulations implementing the prompt corrective action
provisions of a depository institution's capital adequacy is measured on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
association that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1
risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" savings association is a savings
association that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or
greater (or 3.0% or greater if the savings association has a composite of 1
MACRO rating). An "undercapitalized institution" is a savings association that
has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the association has a composite 1 MACRO rating). A
"significantly undercapitalized" institution is defined as a savings association
that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier
1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less
than 3.0%. A "critically undercapitalized" savings association defined as a
savings association that has a ratio of core capital to total assets of less
than 2.0%. The OTS may reclassify a well capitalized savings association as
adequately capitalized and may require an adequately capitalized or
undercapitalized association to comply with the supervisory actions applicable
to associations in the next lower opportunity for a hearing, that the savings
association is in an unsafe or unsound condition or that the association has
received and not corrected a less-than-satisfactory rating for any MACRO rating
category. First Federal is classified as "well capitalized" under the new
regulations.
DEPOSIT INSURANCE
Under FDICIA, the FDIC has established a risk-based assessment system
for insured depository institutions. Under the system, the assessment rate for
an insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC which will be determined by the
institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups; well capitalized, adequately
capitalized or undercapitalized, based on the data reported to regulators for
date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well capitalized institutions are institutions satisfying the
following capital ratio standards; (i) total risk-based capital ratio of 10.0%
or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well capitalized
institutions but which satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Undercapitalized institutions consist of institutions that do not qualify as
either "well capitalized" or "adequately capitalized." Within each capital
group, institutions are assigned to one of the three subgroups on the basis of
19
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The Bank insures its customers' deposits through the Savings Association
Insurance Fund ("SAIF"). On September 30, 1996, Federal Deposit Insurance
Corporation ("FDIC") legislation was signed into law to recapitalize the SAIF
due to a substantial disparity that existed between the premiums assessed by the
SAIF as compared to premiums assessed to commercial banks. All SAIF-insured
savings institutions were required to pay a one-time special assessment of $.657
for every $100 of customer deposits held as of March 31, 1995. This has resulted
in a charge to earnings of $1,095,000, net of tax, during the first quarter of
fiscal 1997. On January 1, 1997, the Bank began paying insurance premiums of
$.064 per $100 of deposits as compared to a previous premium of $.23 per $100 of
deposits.
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3% on the first $51.9
million of transaction accounts, plus 10% on the remainder. This percentage is
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. As of June 30,
1999, the Bank met its reserve requirements.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS. The Corporation is a
savings and loan holding company within the meaning of the Home Owners' Loan
Act, as amended. As such, it is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, First Federal is subject to
certain restrictions in its dealings with the Corporation and affiliates
thereof.
The Home Owners' Loan Act, as amended, generally prohibits a savings and
loan holding company, without prior approval of the Director of OTS, from (i)
acquiring control of any other savings institution or savings and loan holding
company or controlling the assets thereof or (ii) acquiring or retaining more
than 5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Additionally, under certain circumstances, a savings
and loan holding company is permitted to acquire, with the approval of the
Director of OTS, up to 15% of previously unissued voting shares of an
under-capitalized savings association for cash without that savings association
being deemed controlled by the holding company. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution or any other savings and loan holding company.
The Bank Holding Company Act of 1956 specifically authorizes the Federal
Reserve Board and the Director of the OTS to approve an application by a bank
holding company to acquire control of any savings institution. Pursuant to rules
promulgated by the Federal Reserve Board, owning, controlling or operating a
savings institution is a permissible activity for bank holding companies, if the
savings institution engages only in deposit-taking activities and lending and
other activities that are permissible for the bank holding companies. In
approving such as application, the Federal Reserve Board may not impose any
restriction on transaction between the savings institution and its holding
company affiliates except as required by Sections 23A and 23B of the Federal
Reserve Act.
A bank holding company that controls a savings institution may merge or
consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
Transactions between savings associations and any affiliate are governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
association is any company or entity which controls, is controlled by or is
under common control with the savings association. In a holding company context,
the parent holding company of a savings association (such as the Corporation)
and any companies which are controlled by such parent holding company are
affiliates of the savings association. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries may engage in
20
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. Additionally, in addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association.
Savings associations are also subject to the restrictions contained in
Section 22 (h) of the Federal Reserve Act on loans to executive officers,
directors and principal shareholders. Under Section 22 (h), loans to an
executive officer and to a greater than 10% shareholder of a savings association
(18% in the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed together
with all other outstanding loans to such person and affiliated entities the
association's loan to one borrower limit as established by FIRREA (generally
equal to 15% of the institution's unimpaired capital and surplus, for loans
fully secured by certain readily marketable collateral, an additional 10% of the
institution's unimpaired capital and surplus). Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% shareholders of savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal shareholders be made on terms
substantially the same as offered in comparable transactions to other persons.
The Board of Directors of the Corporation presently intends to operate
the Corporation as a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
company. However, if the director of OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the Director of OTS may impose
such restrictions as deemed necessary to address such risk and limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet (in three out to every four
quarters and two out of every three years) the QTL test, see "Qualified Thrift
Lender Test" above, then such unitary holding company shall also become subject
to the activities restrictions applicable to multiple holding companies
(additional restrictions on securing advances from the FHLB also apply).
If the Corporation were to acquire control of another savings
institution other than through merger or other business combinations with First
Federal, the Corporation would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, the activities of the Corporation and any of its
subsidiaries (other than First Federal or other subsidiary savings institutions)
would thereafter be subject to further restrictions. The Home Owners' Loan Act,
as amended, provides that, among other things, no multiple savings and loan
holding company or subsidiary thereof which is not a savings institution shall
commence or continue for more than a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
FSLIC by regulations as of March 5, 1987 to be engaged in by multiple holding
companies or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the Director of OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of OTS prior to being engaged in by a multiple holding company.
21
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state, if the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office in the state of the institution to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institution to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The Director of OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings institutions
in more than one state in the case of certain emergency thrift acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of OTS 30 day advance notice of such declaration and
payment. Any dividend declared during such period or without the giving of such
notice shall be invalid.
FEDERAL AND STATE TAXATION
The Corporation and the Bank currently file consolidated federal income
tax returns based on a fiscal year ending June 30.
The Small Business Job Protection Act passed by Congress in August 1996
included a provision that repealed the percentage of taxable income bad debt
deduction for federal income tax purposes. The Bank used this method to
determine its bad debt deduction when computing federal taxes in applicable
years. This new legislation also requires recapture of the excess of bad debt
reserves over the base year reserve as of December 31, 1987. For years
subsequent to the base year, deferred taxes have been recorded; thus, no
additional tax provision is required as a result of this legislation. Under the
new legislation, the Bank is required to use the specific charge-off method to
calculate the bad debt deduction for federal income tax purposes. The new
legislation is effective for tax years beginning after December 31, 1995.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction will not be allowable for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), without payment of federal income taxes on such dividends or
distributions by the Bank at the then current tax rates on the amount deemed
removed to the Bank would include not only the amount actually distributed, but
would also be increased (subject to certain limitations) by the amount of the
tax payable by reason of such distribution.
The Commonwealth of Kentucky imposes no income tax on savings
institutions. Nonetheless, First Federal must pay a Kentucky ad valorem tax.
This tax is 1/10th of 1% of First Federal's total savings accounts, common
stock, capital and retained income with certain deductions for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. The Bank's subsidiary must pay a state income tax, as well as a
tax on capital. The tax on income is 4% for the first $25,000 of taxable income,
5% for the next $25,000, 6% for the next $50,000, 7% for the next $150,000 and
8.25% for all income over $250,000. The tax on capital is .0021 times the
capital employed with a credit of .0014 times the first $350,000 of capital for
those corporations with gross income of under $500,000.
For information regarding federal income taxes, see Note 8 of the Notes
to Consolidated Financial Statements in the Annual Report.
22
ITEM 2. PROPERTIES
The Corporation's executive offices, principal support and operational
functions are located at 2323 Ring Road in Elizabethtown, Kentucky. All of First
Federal's banking centers are located in Kentucky. The location of the 12
banking centers, their form of occupancy and their respective approximate square
footage is set forth in the following table.
Approximate
Square
Banking Centers Owned or Leased Footage
--------------- --------------- -----------
ELIZABETHTOWN
2323 Ring Road Owned 55,000
325 West Dixie Avenue Owned 1,764
101 Wal-Mart Drive Leased 984
RADCLIFF, 475 West Lincoln Trail Owned 2,728
BARDSTOWN, 401 East John Rowan Blvd. Leased 4,500
MUNFORDVILLE, 925 Main Street Owned 2,928
SHEPHERDSVILLE, 395 N. Buckman Street Owned 7,600
MT. WASHINGTON, 279 Bardstown Road Owned 2,500
BRANDENBURG
416 East Broadway Leased 4,395
50 Old Mill Road Leased 575
FLAHERTY, 4055 Flaherty Road Leased 1,216
LOUISVILLE, 11901 Standiford Plaza Drive Leased 650
As of June 30, 1999, the net book value of office properties and
equipment owned or leased by the Bank and its subsidiary was $11.6 million. For
further information, see Note 5 of the Notes to Consolidated Financial
Statements in the Annual Report.
The Bank utilizes the services of an outside data processing center for
most of its savings and loan operations. All accounting and internal record
keeping functions are handled by the Bank's in-house computer system.
ITEM 3. LEGAL PROCEEDINGS
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material pending
legal proceedings to which the Corporation, the Bank, or its subsidiary is a
party, or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1999.
23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of First Federal Financial Corporation of Kentucky is
traded over the counter and quoted on the NASDAQ system under the symbol "FFKY."
The stock began trading on July 20, 1987. The registered number of stockholders
as of September 15, 1999, was 808. It is currently the policy of the
Corporation's Board of Directors to continue to pay quarterly dividends, but any
future dividends are subject to the Board's discretion based on its
consideration of the Corporation's operating results, financial condition,
capital, income tax considerations, regulatory restrictions and other factors.
QUARTERLY STOCK PRICES TWO
MONTHS ENDED
QUARTER ENDED
FISCAL 1999: 9/30 12/31 3/31 6/30 8/31/99
High $ 28.50 $ 29.75 $ 28.50 $24.94 $25.00
Low 23.13 23.36 23.25 19.88 22.50
Cash dividends 0.15 0.15 0.15 0.18
FISCAL 1998: 9/30 12/31 3/31 6/30
High $ 23.25 $ 22.75 $ 23.00 $ 28.75
Low 21.00 22.00 20.50 21.50
Cash dividends 0.14 0.14 0.14 0.14
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated fianancial and other data of
the Corporation. This financial data is derived in part from, and should be read
in conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT JUNE 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
FINANCIAL CONDITION DATA: (Dollars in thousands)
Total assets $488,304 $409,651 $377,380 $352,671 $331,375
Interest bearing deposits 1,634 4,157 481 7,753 6,601
Net loans outstanding 400,360 354,935 327,502 301,987 282,399
Investments 47,340 26,574 22,677 16,742 17,068
Deposits 399,443 306,703 281,342 264,946 260,503
Borrowings 25,894 43,249 41,514 34,979 21,238
Stockholders' equity 57,862 54,688 51,665 49,946 47,310
Number of:
Real estate loans outstanding 6,968 6,709 6,380 5,914 5,858
Deposit accounts 45,425 37,764 36,378 35,140 35,933
Offices 12 8 8 8 7
24
YEAR ENDED JUNE 30,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATIONS DATA: (Dollars in thousands)
Interest income $35,496 $31,182 $28,782 $26,926 $22,635
Interest expense (18,481) (16,059) (14,375) (13,676) (10,515)
Net interest income 17,015 15,123 14,407 13,250 12,120
Provision for loan losses (314) (265) (200) 0 (100)
Other income 3,954 2,860 2,468 2,648 2,464
General and administrative
expense (1) (11,706) (8,082) (9,472) (7,547) (6,428)
Income tax expense (2,970) (3,302) (2,429) (2,864) (2,626)
Net income 5,979 6,334 4,774 5,487 5,430
Earnings per share:**
Basic 1.45 1.53 1.14 1.30 1.24
Diluted 1.44 1.52 1.13 1.29 1.23
Book value per share** 14.04 13.24 12.39 11.87 11.17
Dividends paid per share** 0.63 0.56 0.50 0.46 0.41
Dividend payout ratio 43% 37% 44% 35% 33%
Return on average assets 1.25% 1.60% 1.30% 1.60% 1.85%
Average equity to average
assets 11.85% 13.55% 13.77% 14.27% 16.37%
Return on average equity 10.53% 11.81% 9.46% 11.22% 11.30%
- --------------------------------------------
(1) 1997 general and administrative expenses include the non-recurring
special assessment paid to the FDIC in the amount of $1.7 million, pretax.
1999 general and administrative expenses include one time acquisition
and conversion costs in the amount of $789,000, pretax.
** All per share information has been adjusted for a 2-for-1 stock split which
was effective June 10, 1996.
QUARTERLY FINANCIAL DATA
(Unaudited) (Dollars in thousands except per share data)
FISCAL 1999: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $8,711 $8,964 $8,967 $8,854
Total interest expense 4,626 4,791 4,556 4,508
Net interest income 4,085 4,173 4,411 4,346
Provision for loan losses 60 60 60 134
Net income 1,373 1,538 1,476 1,592
Earnings per share:
Basic 0.33 0.37 0.36 0.39
Diluted 0.33 0.37 0.36 0.38
FISCAL 1998: September 30 December 31 March 31 June 30
------------ ----------- -------- -------
Total interest income $7,522 $7,693 $7,889 $8,078
Total interest expense 3,829 3,993 4,047 4,190
Net interest income 3,693 3,700 3,842 3,888
Provision for loan losses 60 30 30 145
Net income 1,604 1,452 1,650 1,628
Earnings per share:
Basic 0.39 0.35 0.40 0.39
Diluted 0.39 0.35 0.40 0.38
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis covers the primary factors affecting First
Federal Financial Corporation of Kentucky's (the "Corporation") performance and
financial condition. It should be read in conjunction with the accompanying
audited consolidated financial statements included in this report. The
Corporation is the parent to its wholly owned subsidiary, First Federal Savings
Bank of Elizabethtown (the "Bank"). All dollar amounts (except per share data)
are presented in thousands unless otherwise noted.
FORWARD - LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. The important factors include, but are not
limited to, fluctuations in the economy; changes in interest rates; government
legislation and regulation; the Corporation's success in assimilating acquired
branches and operations into its existing operations; the Corporation's ability
to offer competitive banking products and services; the continued growth of the
markets in which the Corporation operates; the Corporation's ability to expand
into new markets and to maintain profit margins in the face of pricing pressure,
all of which are difficult to predict and many of which are beyond the
Corporation's control.
ACQUISITION
On July 24, 1998, the Bank completed its acquisition of three bank branches
located in Meade County, Kentucky from Bank One Corporation. Two of the banking
centers are located in Brandenburg, Kentucky and the third banking center is in
Flaherty, Kentucky.
In the transaction, the Bank acquired certain assets and assumed certain
liabilities associated with the acquisition of the Meade County banking centers.
The transaction resulted in recording of approximately $11,000 of loans and
$72,000 of deposits. The net deposits assumed exceeded the cash received by
$8,670. Any ratios or analysis comparing years before acquisition will not be
comparable.
BRANCH EXPANSION
On April 26, 1999, the Bank opened a new banking center within the Hillview
Wal-Mart Supercenter. The cost of construction for the 650 square feet was
approximately $212. This new banking center is open 58 hours per week and adds
extended hours for our new and existing customers. In addition, our associates
are allowed to utilize the Wal-Mart's customers to create new sales
opportunities. Since opening in April, the new banking center has attracted
approximately $240 in new deposits from customers.
RESULTS OF OPERATIONS
Net income was $5,979 or $1.44 per share diluted in 1999 compared with $6,334 or
$1.52 per share diluted in 1998. Acquisition-related costs in connection with
the purchase of three banking centers during the quarter ended September 30,
1998, in the amount of $292 ($193, net of tax) were charged against earnings.
Also, the Corporation incurred data and computer conversion costs of $497 ($328,
net of tax) relating to its conversion to a new data processor. In addition to
these expenses, amortization of intangibles increased to $781 ($597, net of tax)
in 1999 from $240 ($240, net of tax) in 1998. Excluding these acquisition and
conversion costs and amortization of intangibles, net earnings for the 1999
period would have increased approximately $523 to $7,097 or $1.71 per share
diluted for the fiscal