Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission File Number: 0-18832

FIRST FEDERAL FINANCIAL CORPORATION
OF KENTUCKY
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (270) 765-2131

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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        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. o

        The aggregate market value of the outstanding voting stock held by non-affiliates of the registrant based on a June 30, 2003 closing price of $32.47 as quoted on the NASDAQ National Market was $95,967,877. 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 February 27, 2004 there were issued and outstanding 3,705,438 shares of the registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Portions of the Registrant's Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be held May 12, 2004 are incorporated by reference into Part III of this Form 10-K

FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
2003 ANNUAL REPORT AND FORM 10-K

TABLE OF CONTENTS

2

PART I

Preliminary Note Regarding Forward-Looking Statements

        Statements by First Federal Financial Corporation of Kentucky (the "Corporation") contained in "Item 1—Business," "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations," and other sections of this report that are not statements of historical fact constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). In addition, the Corporation may make forward-looking statements in future filings with the Securities and Exchange Commission ("SEC"), in press releases, and in oral and written statements made by or with the approval of the Corporation. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital and other financial items; (2) statements of plans and objectives of the Corporation or its management or Board of Directors; (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "plans," "targeted," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

        Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those indicated by the forward-looking statements. Some of the events or circumstances that could cause such difference include the following: changes in general economic conditions and economic conditions in Kentucky and the markets served by the Corporation any of which may affect, among other things, the level of non-performing assets, charge-offs, and provision expense; changes in the interest rate environment which may reduce interest margins and impact funding sources; changes in market rates and prices which may adversely impact the value of financial products including securities, loans and deposit; changes in tax laws, rules and regulations; various monetary and fiscal policies and regulations, including those established by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions; competition with other local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions; ability to grow core businesses; ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance of such products; and management's ability to manage these and other risks.

Item 1.    Business

General Description

The Corporation

        First Federal Financial Corporation of Kentucky was incorporated in August 1989 under the laws of the Commonwealth of Kentucky and became the holding company for First Federal Savings Bank of Elizabethtown ("First Federal" or the "Bank"), effective on June 1, 1990. Since that date, the Corporation has engaged in no significant activity other than holding the stock of First Federal and directing, planning and coordinating the business of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to First Federal and its subsidiaries.

        On January 8, 2003, First Federal converted to a Kentucky chartered commercial bank from a federally chartered savings bank. In connection with the conversion, both the Corporation and First Federal changed to a fiscal year ending on December 31. This report covers the year ended December 31, 2003.

3

The Bank

        First Federal is headquartered in Elizabethtown, Kentucky. First Federal was originally founded in 1923 as a state-chartered institution and became federally chartered in 1940. In 1987, the Bank converted to a federally chartered savings bank and converted from mutual to stock form. The Bank is a member of the FHLB of Cincinnati and, since converting to a state charter, is subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation ("FDIC") and Kentucky Department of Financial Institutions ("KDFI"). The Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF") and administered by the FDIC.

        The Bank serves the needs and caters to the economic strengths of the local communities in which it operates and strives to provide a high level of personal and professional customer service. The Bank offers a variety of financial services to its retail and commercial banking customers. These services include personal and corporate banking services, trust and estate planning, and personal investment financial counseling services.

        Our full complement of lending services includes:

•

a broad array of residential mortgage products, both fixed and adjustable rate;



•

consumer loans, including home equity lines of credit, auto loans, recreational vehicle, and other secured and unsecured loans;



•

specialized financing programs to support community development;



•

mortgages for multi-family real estate;



•

commercial real estate loans;



•

commercial loans to businesses, including revolving lines of credit and term loans;



•

real estate development;



•

construction lending; and



•

agricultural lending.

        The Bank also provides a broad selection of deposit instruments. These include:

•

multiple checking and NOW accounts for both personal and business accounts;



•

various savings accounts, including those for minors;



•

money market accounts;



•

tax qualified deposit accounts such as Individual Retirement Accounts; and



•

a broad array of certificate of deposit products.

        The Bank also supports its customers by providing services such as:

•

functioning as a federal tax depository;



•

providing access to merchant bankcard services;



•

supplying various forms of electronic funds transfer;



•

providing debit cards and credit cards; and



•

providing telephone and Internet banking.

        Through the Bank's trust and estate planning and our personal investment financial counseling services, it offers a wide variety of mutual funds, equity investments, and fixed and variable annuities.

4

        The Bank participates in the wholesale capital markets through the management of its security portfolio and its use of various forms of wholesale funding. The security portfolio contains a variety of instruments, including callable debentures, taxable and non-taxable debentures, fixed and adjustable rate mortgage backed securities, and collateralized mortgage obligations.

        The Bank's results of operations depend primarily on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. The Bank's operations are also affected by non-interest income, such as service charges, insurance agency revenue, loan fees, gains and losses from the sale of mortgage loans and gains from the sale of real estate held for development. Its principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data processing expense and provisions for loan losses.

        On July 1, 2003, the Corporation joined the Russell 3000 Index and will remain in place for one year in the small-cap Russell 2000 Index. Annual reconstitution of the Russell indexes identifies the 3,000 largest U.S. stocks as of the end of May, ranking them by total market capitalization to create the Russell 3000. The largest 1,000 companies in the ranking comprise the Russell 1000 Index, while the remaining 2,000 companies become the widely used Russell 2000 Index. Membership in Russell's 21 U.S. equity indexes is determined primarily by market capitalization rankings and style attributes. Russell indexes are widely used by managers for index funds and as benchmarks for both passive and active investment strategies. Management anticipates that the Corporation will remain in the Russell 2000 Index until the next annual reconstitution in May 2004.

Market Area Served

        The Bank's primary market area consists of six counties in Central Kentucky: Hardin; Hart; Nelson; Bullitt; Meade; and Jefferson. The following table provides demographic and economic information by county as of December 31, 2003.

(1)

Percent change as compared to data as of 12/31/2002.

General and Operating Strategies

        The Bank's operating strategy is to serve the needs and cater to the economic strengths of the local communities in which it operates and strives to provide a high level of personal and professional customer service. The Bank offers a variety of financial services to our retail and commercial banking customers.

        Our growth strategy is focused on a combination of acquisitions and expansion in our existing markets through internal growth as well as establishing new branches.

        Acquisitions.    Management believes that the consolidation in the banking industries, along with the easing of branch banking, as well as increased regulatory burdens, concerns about technology and marketing, are likely to lead owners of community banks and agencies within the Bank's market areas

5

to explore the possibility of sale or combination with a broader-based financial service companies such as ourselves.

        In addition, branching opportunities have arisen from time to time as a result of divestiture of branches by large national and regional bank holding companies of certain overlapping branches resulting from consolidations. As a result, branch locations have become available for purchase.

        Management's strategy in assimilating acquisitions is to emphasize revenue growth as well as to continuously review the operations of the acquired entities and streamline operations where feasible. Management does not believe that implementing wholesale administrative cost reductions in acquired institutions are beneficial to our long-term growth, because significant administrative changes in community banks can have an adverse impact on customer satisfaction in the acquired institution's community. However, management has determined that certain human resource, processing, and accounting functions can be consolidated immediately upon acquisition to achieve higher productivity levels without compromising customer service. Increases in revenue growth are emphasized by offering customers a broader product line consistent with full service banking.

        Branch Expansion.    Management continues to consider markets for branch expansion. Because of the economic growth in the Bank's markets over the past several years, management may consider further branch expansion in its current or surrounding market areas. However, the Bank does not rule out branch expansion in other areas experiencing economic growth. As discussed above, we anticipate opening two new branches in Jefferson County in early 2004.

        The Bank considers a variety of criteria when evaluating potential acquisition candidates or branching opportunities. These include:

•

the market location of the potential acquisition target or branch and demographics of the surrounding community;



•

the financial soundness of a potential acquisition target;



•

opportunities to improve the efficiency and/or asset quality of an acquisition target;



•

the effect of the acquisition on earnings per share and book value. The Bank seeks to undertake acquisitions that will be accretive to earnings within 18 months of the acquisition;



•

whether we have sufficient management and other resources to integrate or add the operations of the target or branch; and



•

the investment required for, and opportunity costs of, the acquisition or branch.

        Internal Growth.    Management believes that its largest source of internal growth is through our ongoing solicitation program conducted by branch managers and lending officers, followed by referrals from customers. The primary reason for referrals is positive customer feedback regarding our customer service and response time.

        The Bank's goal in continuing its expansion is to maintain a profitable, customer-focused financial institution. The Bank believes that its existing structure, management, data and operational systems are sufficient to achieve further internal growth in asset size, revenues and capital without proportionate increases in operating costs. This growth should also allow us to increase the lending limits, thereby enabling the Bank to increase our ability to serve the needs of existing and new customers. The Bank's operating strategy has always been to provide high quality community banking services to our customers and increase market share through active solicitation of new business, repeat business and referrals from customers, and continuation of selected promotional strategies.

        For the most part, the Bank's customers seek a banking relationship with a service-oriented community banking organization. Our operational systems have been designed to facilitate personalized

6

service. Management believes its banking locations have an atmosphere which facilitates personalized services and decision-making, yet are of sufficient financial size with broad product lines to meet customers' needs. Management also believes that economic expansion in the Bank's market areas will continue to contribute to internal growth. Through our primary emphasis on customer service and our management's banking experience, the Bank intends to continue internal growth by attracting customers and primarily focusing on the following:

•

Products Offered—The Bank offers personal and corporate banking services, trust and estate planning, mortgage origination, mortgage servicing, personal investment, and financial counseling services as well as internet and telephone banking. The Bank offers a full range of commercial banking services, checking accounts, ATM's, checking accounts with interest, savings accounts, money market accounts, certificates of deposit, NOW accounts, Individual Retirement Accounts, brokerage and residential mortgage services, branch banking, and debit and credit cards. The Bank also offers installment loans, including auto, recreational vehicle, and other secured and unsecured loans sourced directly by our branches. See "Lending Activities" below for a discussion of products we provide to commercial accounts.



•

Operational Efficiencies—The Bank seeks to maximize operational and support efficiencies consistent with maintaining high quality customer service. Where feasible, the Bank shares a common information system designed to enhance customer service and improve efficiencies by providing system-wide voice and data communication connections. The Bank has consolidated loan processing, bank balancing, financial reporting, investment management, information systems, payroll and benefit management, loan review, and audits.



•

Marketing Activities—The Bank focuses on a proactive solicitation program for new business, as well as identifying and developing products and services that satisfy customer needs. The Bank actively sponsors community events within our branch areas. The Bank believes that active community involvement contributes to our long-term success.

Lending Activities

        Residential Real Estate & Construction 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 in Hardin, Nelson, Hart, Meade, and Bullitt counties. 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.

        The Bank generally emphasizes the origination of adjustable-rate mortgage loans ("ARMs") when possible. The Bank offers six ARM products with an annual adjustment, which is tied to a national index with a maximum adjustment of 2% annually, and a lifetime maximum adjustment cap of 6%. As of December 31, 2003, approximately 38.4% of the Bank's residential real estate loans were adjustable rate loans with adjustment periods ranging from one to five years and balloon loans of seven years or less. The origination of these ARMs can be more difficult in a low interest rate environment where there is a significant demand for fixed rate mortgages. The Bank limits the maximum loan-to-value ratio on one-to-four-family residential first mortgages to 90% of the appraised value and generally limits the loan-to-value ratio on second mortgages on one-to-four-family dwellings to 90%.

        Construction loans involve additional risks because loan funds are advanced upon the security of the project under construction, which is of uncertain value before the completion of construction. The uncertainties inherent in estimating construction costs, delays arising from labor problems, material shortages, and other unpredictable contingencies, make it relatively difficult to evaluate accurately the total loan funds required to complete a project, and related loan-to-value ratios. The analysis of

7

prospective construction loan projects requires significantly different expertise from that required for permanent 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.

        Commercial Real Estate Lending.    The largest portion of the Bank's lending activity is the origination of commercial loans that are primarily secured by real estate and are generated at banking centers primarily in the Bank's market area. In recent years, First Federal has put greater emphasis on small business lending, originating loans for small and medium-sized businesses from its various locations.    The Bank makes commercial loans to a variety of industries. Substantially all of the commercial real estate loans originated by First Federal have adjustable interest rates with maturities of 25 years or less or are loans with fixed interest rates and maturities of five years or less. At December 31, 2003, the Bank had $239.4 million outstanding in commercial real estate loans. The security for commercial real estate loans includes retail businesses, warehouses, churches, apartment buildings and motels. In addition, the payment experience of loans secured by income producing properties typically depends on the success 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.

        Loans secured by multi-family residential property, consisting of properties with more than four separate dwelling units amounted to $18.6 million of the loan portfolio at December 31, 2003. 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.

        Consumer Lending.    The Bank's consumer loans include 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 December 31, 2003, consumer loans outstanding were $81.8 million or approximately 14.8% of the Bank's total gross loan portfolio. These loans involve a higher risk of default than loans secured by one-to-four-family residential loans. The Bank believes, however, that the shorter term and the normally higher interest rates available on various types of consumer loans helps maintain a profitable spread between the Bank's average loan yield and its cost of funds. Home equity lines of credit as of December 31, 2003, totaled $38.4 million.

        The Bank's underwriting standards reflect the greater risk in consumer lending than in residential real estate lending. Among other things, the capacity of individual borrowers to repay can change rapidly, particularly during an economic downturn, collection costs can be relatively higher for smaller loans, and the value of collateral may be more likely to depreciate. The Consumer Lending Policy establishes the appropriate consumer lending authority for all loan officers based on experience, training, and past performance for approving high quality loans. Loans beyond individual authorities must be approved by additional officers, the Executive Loan Committee or the Board of Directors, based on the size of the loan. The Bank requires detailed financial information and credit bureau reports for each consumer loan applicant to establish the applicant's credit history, the adequacy of income for debt retirement, and job stability based on the applicant's employment records. Co-signers are required for applicants who are determined marginal or who fail to qualify individually under these standards. Adequate collateral is required on the majority of consumer loans. The Executive Loan Committee monitors and evaluates unsecured lending activity by each loan officer.

        In 1999, the Bank developed an indirect consumer loan program. The indirect consumer loan portfolio is comprised of new and used automobile, motorcycle and all terrain vehicle loans originated on the behalf of the Bank by a select group of auto dealers within the service area. Indirect consumer

8

loans are considered to have greater risk of loan losses than direct consumer loans due to, among other things: borrowers may have no existing relationship with the Bank; borrowers may not be residents of the lending area; less detailed financial statement information may be collected at application; collateral values can be more difficult to determine; and the condition of vehicles securing the loan can deteriorate rapidly. To address the additional risks associated with indirect consumer lending, the Executive Loan Committee continually evaluates data regarding the dealers enrolled in the program, including monitoring turn down and delinquency rates. All applications are approved by specific lending officers, selected based on experience in this field, who obtain credit bureau reports on each application to assist in the decision. Aggressive collection procedures encourage more timely recovery of late payments. At December 31, 2003, total loans under the indirect consumer loan program totaled $28.3 million.

        Commercial Business Lending.    The commercial business loan portfolio has grown in recent years as a result of the Bank's focus on small business lending. The Bank makes 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 generally carry a higher yield and are made for a shorter term than real estate loans. Commercial loans, however, involve a higher degree of risk than residential real estate loans due to potentially greater volatility in the value of the assigned collateral, the need for more technical analysis of the borrower's financial position, the potentially greater impact that changing economic conditions may have on the borrower's ability to retire debt, and the additional expertise required for commercial lending personnel.    Commercial business loans outstanding at December 31, 2003 totaled $30.3 million.

Subsidiary Activities

        In 1978, the Bank formed First Service Corporation of Elizabethtown ("First Service"). First Service acts as a broker for the purpose of selling mortgage life, credit life and accident and disability insurance to the Bank's customers. As well as investment services to the Bank's customers in the area of tax-deferred annuities, government securities and stocks and bonds. First Service employs four full-time employees to perform these services. This investment function operates under licenses held by First Service. The net income of First Service was $47,000 for the year ended December 31, 2003.

        In July 1999, the Bank formed First Heartland Mortgage Company of Elizabethtown ("First Heartland") through which the secondary market lending department originates qualified VA, KHC, RHC and conventional secondary market loans on the behalf of the investors, thereby providing necessary liquidity to the Bank and needed loan products to the Bank's customers. The loans are sold with servicing released. The Bank has continued to experience good growth in the level of mortgages being processed by First Heartland. During 2003, First Heartland originated $87.5 million in loans on the behalf of investors. The net income of First Heartland Mortgage was $516,000 for the year ended December 31, 2003.

        In March 2003, the Bank formed First Federal Office Park, LLC, a direct result of the charter conversion. The subsidiary holds commercial lots adjacent to the Bank's home office on Ring Road in Elizabethtown, which are available for sale. During the year ended December 31, 2003 the Bank sold two lots resulting in a $452,000 gain.

        In March 2003, the Bank also formed First Heartland Title, LLC, through which the Bank provides title insurance coverage for mortgage borrowers. The subsidiary is a joint venture with a local title insurance company in which the Bank holds a 48% interest. The new LLC generated $250,000 in net income for the year ended December 31, 2003 of which the Bank's portion was $120,000.

9

Competition

        First Federal faces substantial competition both in attracting and retaining deposits and in lending. Direct competition for deposits comes from commercial banks, savings institutions, and credit unions located in north-central Kentucky, and less directly from money market mutual funds and from sellers of corporate and government debt securities.

        The primary competitive factors in lending 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 commercial banks, savings institutions, mortgage bankers, mortgage brokers, and insurance companies. Retail establishments effectively compete for loans by offering credit cards and retail installment contracts for the purchase of goods and merchandise. Management believes that First Federal has been 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, with offices in these counties, First Federal competes with several commercial banks and savings institutions in surrounding counties, many of which have assets substantially greater than First Federal. These competitors attempt to gain market share through their financial product mix, pricing strategies, internet banking and banking center locations. In addition, Kentucky's interstate banking statute, which permits banks in all states to enter the Kentucky market if they have reciprocal interstate banking statutes, has further increased competition for the Bank. We believe that competition from both bank and non-bank entities will continue to remain strong in the near future.

        The following table sets forth the Bank's market share and rank in terms of deposits in each Kentucky county where it has offices. The Bank has one office in Jefferson County, which is Metro Louisville, Kentucky, with a population of more than 650,000.

Employees

        As of December 31, 2003, the Bank had 247 employees of which 227 were full-time and 20 part-time. None of the Bank's employees are subject to a collective bargaining agreement, and the Bank believes that it enjoys good relations with its personnel.

Regulation

        General Regulatory Matters.    On January 8, 2003, First Federal converted from a federally chartered savings bank to a Kentucky chartered commercial bank. Before the conversion, First Federal was subject to the regulation of the Office of Thrift Supervision. As a Kentucky chartered commercial bank, First Federal is now subject to supervision and regulation, which involves regular bank examinations, by both the Federal Deposit Insurance Corporation ("FDIC") and the Kentucky Department of Financial Institutions ("KDFI"). The deposits of First Federal are insured by the FDIC. Kentucky's banking statutes contain a "super-parity" provision that permits a well-rated Kentucky banking corporation to engage in any banking activity in which a national bank operating in any state; a state bank, thrift or savings bank operating in any other state; or a federal chartered thrift or federal savings association meeting the qualified thrift lender test and operating in any state could engage,

10

provided it first obtains a legal opinion specifying the statutory or regulatory provisions that permit the activity.

        In connection with the conversion, the Corporation registered to become a bank holding company under the Bank Holding Company Act of 1956, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). As a bank holding company, the Corporation is required to file with the Federal Reserve Board annual and quarterly reports and other information regarding its business operations and the business operations of its subsidiaries. The Corporation is also subject to examination by the Federal Reserve Board and to operational guidelines established by the Federal Reserve Board. The Corporation is subject to the Bank Holding Company Act and other federal laws on the types of activities in which it may engage, and to other supervisory requirements, including regulatory enforcement actions for violations of laws and regulations.

        Acquisitions and Change in Control.    As a bank holding company, the Corporation must obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of more than 5% of the voting stock of a bank, and before engaging, or acquiring a company that is not a bank but is engaged in certain non-banking activities. In approving these acquisitions, the Federal Reserve Board considers a number of factors, and weighs the expected benefits to the public such as greater convenience, increased competition and gains in efficiency, against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board also considers the financial and managerial resources of the bank holding company, its subsidiaries and any company to be acquired, and the effect of the proposed transaction on these resources. It also evaluates compliance by the holding company's financial institution subsidiaries and the target institution with the Community Reinvestment Act. The Community Reinvestment Act generally requires each financial institution to take affirmative action to ascertain and meet the credit needs of its entire community, including low and moderate income neighborhoods.

        Federal law also prohibits a person or group of persons from acquiring "control" of a bank holding company without notifying the Federal Reserve Board in advance, and then only if the Federal Reserve Board does not object to the proposed transaction. The Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of the voting stock of a bank holding company with a class of securities registered under the Securities Exchange Act of 1934 would constitute an acquisition of control of the bank holding company. In addition, any company is required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of any class of a bank holding company's voting securities, or otherwise obtaining control or a "controlling influence" over a bank holding company.

        The Gramm-Leach-Bliley Act.    The Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), signed into law on November 12, 1999, amended a number of Federal banking laws that affect the Corporation and First Federal. The provisions of the GLB Act believed to be of most significance to the Corporation and First Federal are discussed below. In particular, the GLB Act permits a bank holding company to elect to become a financial holding company, which permits the holding company to conduct activities that are "financial in nature." To become and maintain its status as a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating. The Corporation has not filed an election to became a financial holding company.

        The GLB Act also repeals most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. In particular, the GLB Act repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations between banks and securities firms. The GLB Act also provides that, while the states continue to have the authority to regulate insurance

11

activities, in most instances they are prohibited from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in areas identified in the GLB Act. Federal bank regulatory agencies adopted insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures that became effective April 1, 2001.

        The GLB Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. The GLB Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLB Act allows the states to adopt stricter customer privacy protections. The Act also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. The GLB Act also contains requirements for the posting of notices by operators of automated teller machines regarding fees charged for the use of such machines.

        Other Holding Company Regulations.    Federal law substantially restricts transactions between financial institutions and their affiliates. As a result, a bank is limited in extending credit to its holding company (or any non-bank subsidiary), in investing in the stock or other securities of the bank holding company or its non-bank subsidiaries, and/or in taking such stock or securities as collateral for loans to any borrower. Moreover, transactions between a bank and a bank holding company (or any non-bank subsidiary) must generally be on terms and under circumstances at least as favorable to the bank as those prevailing in comparable transactions with independent third parties or, in the absence of comparable transactions, on terms and under circumstances that in good faith would be available to nonaffiliated companies.

        Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to, and to commit resources to support, its bank subsidiaries. This support may be required at times when, absent such a policy, the bank holding company may not be inclined to provide it. In addition, any capital loans by the bank holding company to its bank subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary banks will be assumed by the bankruptcy trustee and entitled to a priority of payment.

        Capital Requirements.    The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to the banking organizations they supervise. Under the risk-based capital requirements, the Corporation and First Federal are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles ("Tier 1 capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance ("Tier 2 capital" which, together with Tier 1 capital, composes "total capital"). To be considered well-capitalized under the risk-based capital guidelines, an institution must maintain a total risk-weighted capital ratio of at least 10% and a Tier 1 risk-weighted ratio of 6% or greater.

12

        In addition, each of the federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization's overall safety and soundness. The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for the Corporation and First Federal as of December 31, 2003.

Capital Adequacy Ratios as of
December 31, 2003

(1)

Shareholders' equity plus corporation-obligated mandatory redeemable capital securities, less unrealized gains (losses) on debt securities available for sale, net of deferred income taxes, less nonqualifying intangible assets; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.

(2)

Tier 1 capital plus qualifying loan loss allowance and subordinated debt; computed as a ratio of risk-weighted assets, as defined in the risk-based capital guidelines.

(3)

Tier 1 capital computed as a percentage of fourth quarter average assets less nonqualifying intangibles.

        The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Corporation and First Federal are classified as "well-capitalized." FDICIA also requires the bank regulatory agencies to implement systems for "prompt corrective action" for institutions that fail to meet minimum capital requirements within these five categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Failure to meet capital requirements can also cause an institution to be directed to raise additional capital. FDICIA also mandates that the agencies adopt safety and soundness standards relating generally to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.

        In addition, the Federal Reserve Board and the FDIC have each adopted risk-based capital standards that explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by each agency in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization's capital adequacy. The agencies also jointly adopted a regulation, effective January 1, 2002, amending their regulatory capital standards to change the treatment of certain recourse obligations, direct credit subsidies, residual interest and other positions in securitized transactions that expose banking organizations to credit risk. The regulation amends the agencies' regulatory capital standards to align more closely the risk-based capital treatment of recourse obligations and direct credit subsidies, to vary the capital requirements for positions in securitized transactions (and certain other credit exposures) according to their relative risk, and to require capital commensurate with the risks associated with residual interests.

13

        In addition to the "prompt corrective action" directives, failure to meet capital guidelines can subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC, and under some conditions the appointment of a conservator or receiver.

        Deposit Insurance.    First Federal's deposits are insured by the FDIC up to the statutory maximum limit of $100,000 per depositor through the Savings Association Insurance Fund. For this protection, First Federal must pay semiannual assessments to the FDIC. 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.

        Dividends.    The Corporation is a legal entity separate and distinct from First Federal. The majority of the Corporation's revenue is from dividends paid to it by First Federal. First Federal is subject to laws and regulations that limit the amount of dividends they can pay. If, in the opinion of a federal regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the agency may require, after notice and hearing, that the institution cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under FDICIA, an insured institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current operating earnings.

        Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. Before any dividend may be declared for any period (other than with respect to preferred stock), a bank must increase its capital surplus by at least 10% of the net profits of the bank for the period until the bank's capital surplus equals the amount of its stated capital attributable to its common stock. Moreover, the KDFI Commissioner must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the bank's total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. First Federal is also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or its becoming unable to pay debts as they come due.

Available Information

        The Corporation files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports with the Securities and Exchange Commission. These reports are available at the SEC's website at http://www.sec.gov. The Corporation's reports are available on its website at http://www.ffsbky.com. You may obtain electronic or paper copies of the Corporation's reports free of charge by contacting Rebecca Bowling, Corporate Secretary-Treasurer, First Federal Savings Bank, 2323 Ring Road, Elizabethtown, Kentucky 42701 (telephone) 270-765-2131.

14

Item 2.    Properties

        The Corporation's executive offices, principal support and operational functions are located at 2323 Ring Road in Elizabethtown, Kentucky. All of First Federal's banking centers are located in Kentucky. The location of the 13 banking centers, whether owned or leased, and their respective approximate square footage is set forth in the following table.

Item 3.    Legal Proceedings

        Although the Bank is, from time to time, involved in various legal proceedings in the normal course of business, there are no material pending legal proceedings to which the Corporation, the Bank, or its subsidiaries is a party, or to which any of their property is subject.

Item 4.    Submission of Matters to a Vote of Security Holders

        No matters were submitted for shareholder approval during the fourth quarter of 2003.

15

PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters

(a)

Market Information

        The Common Stock of the Corporation is traded on the NASDAQ National Market System (NASDAQ) under the symbol "FFKY". The following table shows the high and low closing prices of the Corporation's Common Stock and the dividends paid.

(1)

Adjusted to reflect a 10% stock dividend declared April 16, 2003.

(b)

Holders

        At February 27, 2004 the number of registered shareholders was approximately 716. Because shares are often registered in the broker's name rather than the owner, the exact number of shareholders is not readily available. Management estimates that the number of beneficial owners is significantly greater.

(c)

Dividends

        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.

(d)

Securities Authorized for Issuance Under Equity Compensation Plans

16

        Of the options outstanding at December 31, 2003, 1,100 were granted under a previous plan. See Note 11 of the Notes to Consolidated Financial Statements for additional information required by this item.

Item 6.

        Selected Consolidated Financial and Other Data

(1)

Includes loans held for sale.

(2)

Non-interest expense in 1999 includes acquisition and conversion costs in the amount of $789,000, pretax.

(3)

Amounts adjusted to reflect a 10% stock dividend declared April 16, 2003.

17

Item 7.    Management Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

        The Corporation, through its subsidiary, First Federal Savings Bank conducts operations in 13 full-service banking centers in six contiguous counties in Kentucky along the Interstate 65 corridor. The Corporation's market presence ranges from the major metropolitan market of Louisville in Jefferson County, Kentucky approximately 40 miles North of its headquarters in Elizabethtown, Kentucky to approximately 30 miles South to Hart County, Kentucky. The Corporation's core markets have experienced a solid compound annual growth rate of 7% in deposits for the past four years. Management anticipates a similar growth rate of its markets for the next few years and believes it is well positioned to benefit from this continued growth.

        The Corporation has positioned itself as a leader in the markets it operates in holding a 21% market share in the five counties south of Jefferson County, significantly above the next competitor holding just 8% of the market. The Corporation's presence in Jefferson County currently remains under 1%. However, management believes it can increase its presence in the county, as the primarily market share is held by 6 large out of state holding companies. We believe that many customers will prefer a banking relationship with an institution headquartered in its region even though many of our competitors in the Jefferson County market area have greater resources than we do. The Corporations current branch in Jefferson County has achieved a compound annual growth of approximately 140% over the past four years. In addition, approximately $90 million in commercial loans, primarily commercial real estate, were closed in 2002 and 2003, as a result of the customer contacts made within Jefferson County. The Corporation's flexibility in loan products, rapid credit approval, and efficient loan closing process has been received with great success. Building upon the success of the commercial lending operations will be the development of a retail presence. Accordingly, the Corporation anticipates opening two additional branches in Jefferson County by April of 2004. Although preliminary results have been positive, we are still early in the process. As is the case in any branch expansion, start-up costs will impact the financial performance of the Bank for a period of time but we are optimistic that our expansion strategy for Jefferson County will minimize this period of time and the long-term benefits will outweigh the initial investment.

        The Corporation is focused on expanding its leadership role in its markets emphasizing both the retail and commercial lines of business. In addition to expanding its leadership position, the Corporation is also focused on maintaining a high level of profitability. This focus led to the adoption of a strategic initiative to improve return on equity in 1999. The Corporation identified several key factors to support the initiative including:

•

Emphasize commercial lending



•

Expand our retail base in our current branches as well as in growing markets within our region



•

Sustain its excellent credit quality



•

Grow non-interest income



•

Maintain an operationally efficient organization.

        Since 1999, the Corporation has increased its return on equity from 10.8% in 1999, to 14.4% in 2003. The increase in return on equity was accompanied by a compound annual growth rate of 20% in diluted earning per share over the same period of time. While management believes opportunities for improvement exist, it attributes much of the improvement in return on equity to various components of the factors of its initiative.

18

Emphasize commercial lending:

        The Corporation's emphasis on commercial lending continued to produce positive results generating a $91 million, or 50% increase in commercial loans to $273 million at December 31, 2003, compared to $182 million at December 31, 2002. This favorable trend has resulted in a $144 million, or 112% increase in commercial loans from December 31, 2001, and a $172 million, or 170% increase in commercial loans from December 31, 2000. The percentage of commercial loans in the Bank's portfolio has increased from 35% at December 31, 2002, to 49% at December 31, 2003 while residential loans declined from 49% at December 31, 2002, to 35% at December 31, 2003. The portfolio mix also changed significantly during 2003 as commercial loans grew to 49% of the total loan portfolio. Management intends to continue this commercial lending emphasis and anticipates continued increases in the commercial and commercial real estate portfolios.

Expand our retail base in our current branches as well as in growing markets within our region:

        In January 2003, the Corporation implemented an effort to develop a bank-wide service and sales culture emphasizing expanded account relationships. To achieve this goal, the corporation increased the number of associates in banking centers, relationship bankers, business development officers, stockbrokers, and loan officers with experience in commercial lending. The results of this effort have contributed to the growth on the Corporation as well as aided it in the transition from a Federally chartered thrift to a State-Chartered commercial bank in January of 2003. The increase in staff also contributed to a $1.6 million, or 21% increase in employee compensation expense for the year ended December 31, 2003, compared to the year ended December 31, 2002. Management expects a continued increase in employee compensation expense in the 2004 calendar year as it continues its expansion into Jefferson County.

Maintain an operationally efficient organization:

        Despite the increase in employee compensation expense for 2003, the Corporation still maintained an efficiency ratio of 56% for the year ended December 31, 2003, an increase from 54% in 2002, but comparable to 56% in 1999.

        The following discussion and analysis covers the primary factors affecting the Corporation's performance and financial condition. It should be read in conjunction with the accompanying audited consolidated financial statements included in this report.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

        The Corporation's accounting and reporting policies comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The accounting policy relating to the allowance for loan losses is critical to the understanding of the Corporation's results of operations since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. See "Allowance and Provision for Loan Losses" herein for a complete discussion of the First Federal Financial Corporation's accounting methodologies related to the allowance. Also refer to Note 1 in the "Notes to Consolidated Financial Statements" for details regarding all of the Corporation's critical and significant accounting policies.

RESULTS OF OPERATIONS

        The Corporation reported net income of $8.0 million during the year ended December 31, 2003 compared with $8.1 million for the 2002 period. Diluted earnings per share increased 6% from $1.98 during 2002 to $2.10 for 2003. Earnings remained relatively constant for the comparative periods. Favorable increases in non-interest income generated from the gain on sale of mortgage loans, service

19

charges on deposit accounts, and two lots held for sale were offset with a decline in net interest income as well as an increase in non-interest expense. The Bank's book value per common share increased from $14.88 at December 31, 2002 to $15.20 at December 31, 2003. Net income for 2003 generated return on average assets of 1.18% and return on average equity of 14.32%. These compare with return on average assets of 1.24% and return on average equity of 13.87% for the 2002 period.

        The Corporation reported net income of $4.4 million during the six months ended December 31, 2002 compared with $3.7 million for the same period ended 2001, an increase of 17%. Diluted earnings per share increased 20% from $.90 during 2001 to $1.08 for 2002. The increase in earnings for 2002 was primarily attributable to increased net interest income, and an absence of goodwill amortization, service charges on deposit accounts and gain on sale of mortgage loans. The Bank's book value per common share increased from $13.77 at December 31, 2001 to $14.88 at December 31, 2002. Net income for 2002 generated a return on average assets of 1.31% and a return on average equity of 14.89%. These compare with a return on average assets of 1.23% and a return on average equity of 13.35% for the 2001 period.

        The Corporation reported net income of $7.5 million during the fiscal year ended June 30, 2002 compared with $5.6 million for the 2001 period, an increase of 32%. Diluted earnings per share also increased 32% from $1.36 during 2001 to $1.80 for 2002. The increase in earnings for 2002 was primarily attributable to increased net interest income, service charges on deposit accounts and gain on sale of mortgage loans.    The Bank's book value per common share increased from $14.53 at June 30, 2001 to $15.72 at June 30, 2002. Net income for the six months ended December 31, 2002 generated return on average assets of 1.19% and return on average equity of 13.08%. These compare with return on average assets of .95% and return on average equity of 10.62% for the same period in 2001.

        Net Interest Income—The principal source of the Bank's revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities as well as market interest rates.

        Net interest income for the year ended December 31, 2003 declined to $23.0 million compared to $23.8 million for the 2002 period due to a narrowing net interest margin. The Bank's net interest margin declined from 3.84% for 2002 to 3.61% for 2003. The net interest rate spread decreased from 3.53% during 2002 to 3.37% in 2003. The net interest margin declined due to a reduction in short-term market interest rates by the Federal Reserve, which occurred in January 2003. Customer deposit interest rates did not adjust downward as quickly to offset declining interest yields on loans and investments. Additionally, lower interest rates encouraged a large volume of residential refinancing in favor of the secondary market loans, reducing the Bank's residential mortgage loan portfolio. During the 2003 period, residential mortgage loans held in the Bank's portfolio decreased by $75.7 million as a majority of the new and refinanced residential mortgage loan originations were sold during 2003. The substitution of commercial and commercial real estate loans for residential mortgage loans has resulted in a declining yield on the Bank's loan portfolio. However, the underlying benefits of this strategy have been to substantially reduce interest rate risk and position the Bank to improve its net interest margin should interest rates begin to rise. (For additional analysis on the effect of increasing and decreasing interest rates on the Corporation's net interest margin, see the interest rate sensitivity model under "Asset/Liability Management and Market Risk.")

        For the six months ended December 31, 2002, net interest income was $12.2 million, up $1.2 million from the $11.0 million attained during the comparable period of 2001. The Bank was able to increase its net interest income through growth in its interest-earning assets and declines in the cost of interest-bearing liabilities. The Bank's net interest margin remained steady at 3.82% for the six months ended December 31, 2002 as compared to 3.83% for the 2001 six month period. The net

20

interest rate spread increased from 3.45% during 2001 or 3.52% in 2002. The net interest spread and margin benefited from a significant decline in the Bank's cost of funds due to a reduction on short-term market interest rates by the Federal Reserve which occurred principally during calendar 2001. The Bank's cost of funds averaged 3.25% during 2002, a decrease of 115 basis points from the 2001 average cost of funds of 4.40% compared to a decrease of 108 basis points on interest earning assets from 7.85% to 6.77%. The 2002 period includes Trust Preferred Securities which were issued in March 2002. Although substantially all categories of interest income and interest expense declined during 2002, interest rates payable on deposit products generally declined more than rates on interest-bearing assets. During the 2002 period, average interest-earning assets were $637.3 million, an increase of $62.8 million over the same period in 2001. Total average interest bearing liabilities increased from $523.8 million during 2001 or $578.7 million for the same period in 2002.

        For fiscal year ended June 30, 2002, net interest income was $22.7 million, up $4.7 million from the $18.0 million attained during 2001. This was principally due to an improved interest rate margin compared to 2001. The Bank's net interest margin increased from 3.22% during 2001 to 3.83% for the 2002 period. The net interest rate spread increased from 2.81% during 2001 to 3.48% in 2002. The net interest spread and margin benefited from a significant decline in the Bank's cost of funds due to a reduction in short-term market interest rates by the Federal Reserve which occurred principally during calendar 2001. Although substantially all categories of interest income and interest expense declined during 2002, interest rates payable on deposit products generally declined more than rates on interest-bearing assets.    During the 2002 period, average interest-earning assets were $593.4 million, an increase of $35.7 million over the same period in 2003. Total average interest bearing liabilities increased from $514.8 million during 2001 to $540.9 million for the same period in 2002. The 2002 period includes Trust Preferred Securities which were issued in March 2002.

21

AVERAGE BALANCE SHEET

        The following table sets forth information relating to the Bank's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Dividing income or expense by the average monthly balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.

(1)

Taxable equivalent yields are calculated assuming a 34% federal income tax rate.'

(2)

Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

(3)

Calculations include non-accruing loans in the average loan amounts outstanding.

(4)

Includes loans held for sale.

22

AVERAGE BALANCE SHEET

        The following table sets forth information relating to the Bank's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Dividing income or expense by the average monthly balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.

(1)

Taxable equivalent yields are calculated assuming a 34% federal income tax rate.

(2)

Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

(3)

Calculations include non-accruing loans in the average loan amounts outstanding.

(4)

Includes loans held for sale.

23

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 vilume 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.