HARRODSBURG FIRST FINANCIAL BANCORP, INC.
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Harrodsburg First Financial Bancorp, Inc., a Delaware corporation (the
"Company"), converted from a unitary savings and loan holding company to a bank
holding company effective July 15, 2001, and on the same date acquired a 56.27%
interest in Citizens Financial Bank, Inc. (Citizens), which is a newly organized
de novo Kentucky chartered commercial bank located in Glasgow, Kentucky. The
Company serves as the bank holding company for Citizens and for First Financial
Bank ("First Financial"), a federally chartered savings bank of which it is the
sole shareholder.
First Financial is subject to regulation by the Office of Thrift Supervision
("OTS") and Citizens is subject to examination and regulation by the Federal
Deposit Insurance Corporation and the Kentucky Department of Financial
Institutions. The primary activity of the Company is its investment in the stock
of First Financial and Citizens and monitoring their operations. Accordingly,
the information set forth in this report, including financial statements and
related data, relates primarily to the operations of the Bank and Citizens.
First Financial was formed in 1961 as a federal mutual savings and loan
association and obtained insurance of accounts and became a member of the
Federal Home Loan Bank ("FHLB") of Cincinnati at that time. Upon its conversion
to stock form in September 1995, the Bank adopted the name First Federal Savings
Bank of Harrodsburg. Effective January 1, 2000, the Bank's name was changed to
First Financial Bank. First Financial operates through one full service office
in Harrodsburg, Kentucky, and two full service branch offices in Lawrenceburg,
Kentucky.
The executive offices of the Company and First Financial are located at 000
Xxxxx Xxxxxx Xxxxxx, Xxxxxxxxxxx, Xxxxxxxx 00000, and its telephone number is
(000) 000-0000. The executive offices of Citizens are located at 000 Xxxx Xxxxxx
Xxxxxx, Xxxxxxx, Xxxxxxxx, 00000 and its telephone number is (000) 000-0000.
MARKET AND DIVIDEND INFORMATION
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Market for the Common Stock
Since October 4, 1995, the Common Stock of the Company has been listed for
trading under the symbol "HFFB" on the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market. As of December 6,
2001, there were 1,343,416 shares of the Common Stock issued and outstanding,
held by approximately 457 stockholders of record, not including beneficial
owners in nominee or street name.
Dividends
The Company maintains a policy whereby it will pay a semi-annual cash dividend
payable as of the 15th day of each April and October or the first business day
thereafter if such day is not a business day, to stockholders of record as of
the last business day of the month following the end of such semi-annual period.
The regular semi-annual dividend of $0.30 per share was payable on October 15,
2001 to stockholders of record on September 28, 2001. The Board of Directors of
the Company periodically reviews its dividend policy. Any change in the
Company's dividend policy, as determined by the Board of Directors, will depend
on the Company's debt and equity structure, earnings, regulatory capital
requirements, and other factors, including economic conditions, regulatory
restrictions, and tax considerations. See Note 9 of Notes to Consolidated
Financial Statements for restrictions on the payment of cash dividends. For
further information on stock prices and dividends, see Stock Prices and
Dividends (page 3).
SELECTED FINANCIAL AND OTHER DATA
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Financial Condition Data
At September 30,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in Thousands)
Total Amount of:
Assets ........................... $136,541 $117,393 $110,416 $109,919 $109,638
Loans receivable, net ............ 105,081 100,881 89,062 85,272 81,261
Investments (1) .................. 17,450 10,994 11,240 14,966 14,382
Cash and interest-bearing deposits 10,896 3,031 8,350 8,074 12,621
Deposits ......................... 102,961 86,473 82,018 78,996 78,629
FHLB advances .................... 7,000 3,500
Minority interests ............... 1,849
Stockholders' equity ............. 22,305 25,241 26,220 28,982 29,773
---------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding ...... 1,559 1,587 1,532 1,601 1,668
Deposit accounts ................... 10,535 10,026 9,574 9,590 9,594
Full service offices ............... 4 3 2 2 2
(1) Includes FHLB stock, and term deposits with the FHLB.
Operating Data
For the year ended September 30,
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in Thousands)
Interest income ................ $ 8,744 $ 8,051 $ 7,745 $ 7,778 $ 7,699
Interest expense ............... 5,187 4,150 3,813 3,897 3,835
------- ------- ------- ------- -------
Net interest income ........ 3,557 3,901 3,932 3,881 3,864
Provision for loan losses ...... 39 15 35 96 11
------- ------- ------- ------- -------
Net interest income after
provision for loan losses . 3,517 3,886 3,897 3,785 3,853
Non-interest income ............ 178 113 116 122 95
Non-interest expense ........... 2,679 2,261 1,728 1,679 1,701
------- ------- ------- ------- -------
Income before income tax expense
and minority interests ..... 1,016 1,738 2,285 2,228 2,247
Income tax expense ............. (394) (591) (777) (799) (771)
Minority interests ............. 63
------- ------- ------- ------- -------
Net income ..................... $ 685 $ 1,147 $ 1,508 $ 1,429 $ 1,476
======= ======= ======= ======= =======
Basic earnings per share ....... $ .52 $ .76 $ .94 $ .79 $ .78
======= ======= ======= ======= =======
Diluted earnings per share ..... $ .52 $ .76 $ .94 $ .79 $ .78
======= ======= ======= ======= =======
2
Key Operating Ratios
At or for the year ended September 30,
--------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets) ... .56% 1.02% 1.36% 1.31% 1.36%
Return on average equity (net income
divided by average equity) ......... 3.06 4.49 5.49 4.98 5.12
Average interest-earning assets to
average interest-bearing liabilities 123.25 128.80 133.86 136.40 136.34
Net interest rate spread ............... 1.95 2.46 2.43 2.30 2.32
Net yield on average interest-
earning assets ..................... 2.95 3.55 3.63 3.63 3.64
Dividend payout ........................ 108.63 113.08 87.74 102.38 45.26
Capital Ratios:
Average equity to average assets
(average equity divided by
average total assets) .............. 18.16 22.64 24.80 26.31 26.64
Equity to assets at period end ......... 16.34 21.50 23.75 26.37 27.14
Asset Quality Ratios:
Net interest income after provision for
loan losses to total other expenses 131.28 171.87 225.58 225.43 226.51
Non-performing loans to total loans .... .21 .51 .32 .57 .64
Non-performing loans to total assets ... .16 .44 .25 .44 .47
Stock Prices and Dividends
The following table sets forth the range of high and low sales prices for the
common stock as reported by the Wall Street Journal as well as dividends
declared in each quarter for 2001 and 2000. Such over-the-counter market
quotations reflect inter-dealer prices, without retail xxxx-up, xxxx-down, or
commission and may not necessarily represent actual transactions.
Quarterly Stock Information
Fiscal 2001 Fiscal 2000
---------------------------- -----------------------------
Stock Price Range Stock Price Range
----------------- Per Share ----------------- Per Share
Quarter Low High Dividend Low High Dividend
-------------------------------------------------------------------------
1st $ 9.69 $12.88 $ $11.38 $14.00 $ .25
2nd 10.75 14.50 .30 10.50 13.38 .30
3rd 11.00 13.00 9.69 13.00 --
4th 10.00 13.00 .30 9.50 12.38 .30
-------------------------------------------------------------------------
Total $ .60 $ .85
======== ========
3
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions. Harrodsburg First Financial
Bancorp, Inc. undertakes no obligation to publicly release the results of any
revisions to those forward looking statements, which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Harrodsburg First Financial Bancorp, Inc. ("Company") is a bank holding company
headquartered in Harrodsburg, Kentucky, which provides a full range of deposits
and traditional mortgage loan products through its wholly owned subsidiary,
First Financial Bank ("First Financial"), a federally chartered savings bank,
and Citizens Financial Bank, Inc. ("Citizens"), a state chartered commercial
bank, in which the Company has a 56.27% interest. All references to the Company
generally refer to the consolidated entity including First Financial and
Citizens, unless the context indicates otherwise. "Banks" refers to the combined
operations of First Financial and Citizens, unless the context indicates
otherwise.
Overview
On July 15, 2001, the Company converted from a unitary savings bank holding
company to a bank holding company, and on the same date acquired a 56.27%
interest in Citizens Financial Bank, Inc., which is a Kentucky chartered
commercial bank. The Company paid a cash price of $2,816,300 for its controlling
interest in Citizens. The acquisition was accounted for under the purchase
method of accounting. As a result of the transaction, the Company recorded
goodwill of $356,064 for the excess cost over the net assets acquired.
In fiscal 2001, due to an increase in the average rates paid on deposits and
borrowed funds, a slight decline in the yield on interest earning assets, and
the operations of Citizens as a new subsidiary, plus increased costs from an
additional branch office that opened in February of 2000, net income for fiscal
2001 decreased by approximately 40% from fiscal 2000. For the fiscal year ended
September 30, 2001, net income was $685,000, or $.52 per diluted share, as
compared to $1.1 million, or $.76 per diluted share, for the fiscal year ended
September 30, 2000. However, assets increased $19.1 million to $136.5 million
over last year. Net loans outstanding grew by 4.2%, and asset quality continues
to remain excellent.
Asset/Liability Management
Market Risk Analysis. The Banks, like many other financial institutions, are
vulnerable to an increase in rates to the extent that interest-bearing
liabilities generally mature or reprice more rapidly than interest-earning
assets. Historically, the lending activities of savings institutions, such as
First Financial, emphasized the origination of long-term, fixed rate loans
secured by single family residences, and the primary source of funds has been
deposits with substantially shorter maturities. While having interest-bearing
liabilities that reprice more frequently than interest-earning assets is
generally beneficial to net interest income during a period of declining
interest rates, such an asset/liability mismatch is generally detrimental during
periods of rising interest rates.
Historically, the lending activities of commercial banks, such as Citizens,
emphasized the origination of short to intermediate variable rate loans, secured
by various types of collateral that are more closely matched with the deposit
maturities and repricing of interest-earning assets occurs closer to the same
general time period.
4
To reduce the effect of interest rate changes on net interest income the Banks
have adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include:
o Originate one to four family residential mortgage loans with adjustable
rate features or fixed rate loans with short maturities;
o Lengthen the maturities of our liabilities when it would be cost effective
through the pricing and promotion of higher rate certificates of deposit
and utilization of FHLB advances or other borrowings;
o Attract low cost checking and transaction accounts, which tend to be less
interest rate sensitive when interest rates rise;
o Maintain interest-bearing deposits, federal funds, and U.S. government
securities with short to intermediate terms to maturities; and
o Maintain an investment portfolio that provides a stable cash flow, thereby
providing investable funds in varying interest rate cycles.
The Banks also monitor its interest rate sensitivity through the use of a model,
which estimates the change in its net portfolio value ("NPV") in the event of a
range of assumed changes in market interest rates. Net portfolio value is
defined as the current market value of assets, less the current market value of
liabilities, plus or minus the current value of off-balance sheet items. The
change in NPV measures the Banks' vulnerability to changes in interest rates by
estimating the change in the market value of its assets, liabilities, and
off-balance sheet items as a result of an instantaneous change in the general
level of interest rates.
As market interest rates decrease, the average maturities of loans and
investment securities shorten due to quicker prepayments, causing an increase in
their value. Deposit accounts have only relatively minor movements in a
declining interest rate environment since they are primarily short-term in
nature, resulting in the value of deposits decreasing more quickly than the
value of assets increase.
The NPV models used by the OTS and the FDIC has certain shortcomings. Based on
the models, certain assumptions are made that may or may not actually reflect
how actual yields, and costs will react to market interest rates. For example,
the NPV models assume that the makeup of the Banks' interest rate sensitive
assets, and liabilities will remain constant over the period being measured.
Thus, although using such models can be instructive in providing an indication
of the Banks exposure to interest rate risk, the Banks cannot precisely forecast
the effects of a change in market interest rates. Additionally, the results
indicated by the models are likely to differ from actual results.
First Financial and Citizens measure their interest rate risks, using the Office
of Thrift Supervision and Federal Deposit Insurance ("FDIC"), respectively, NPV
method. The OTS and FDIC define the sensitivity measure as the change in the NPV
ratio with a 200 basis point shock. At September 30, 2001, if interest rates
increased by 200 basis points, First Financial's NPV ratio would be 13.67% based
on a 143 basis point decrease in its NPV. Additionally, if interest rates
decline by 200 basis points, First Financial's NPV ratio would be 15.48% based
on a 74 basis point increase in its NPV.
Citizens began operations on July 17, 2001, and the FDIC estimate of the net
portfolio value using the NPV method is not available. The interest-earning
assets and interest-bearing liabilities of Citizens at September 30, 2001
amounted to $11.5 million and $7.4 million, respectively. Management's principal
strategy in managing the interest rate risk is to match maturities of interest
sensitive assets and liabilities, which is accomplished by maintaining an
investment and loan portfolio with short to intermediate-term maturities, and
using a tiered pricing program for its certificates of deposits. Citizens' loan
portfolio at September 30, 2001 did not have any loan maturities greater than
five years.
5
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 and 2000
The Company's consolidated assets increased $19.1 million, or 16.3%, to $136.5
million at September 30, 2001 compared to $117.4 million at September 30, 2000.
The increase in assets is primarily due to Citizens. At September 30, 2001, the
assets of Citizens totaled $11.9 million, which consisted of $7.5 million in
securities available-for-sale and loans receivable of $2.9 million.
Additionally, cash and cash equivalents (which consisted of cash and due from
banks, federal funds sold, and interest-bearing deposits) increased $7.9 million
from September 30, 2000. Such an increase in cash and cash equivalents was
primarily the result of the lack of loan demand and the decline in investment
yields.
Securities available-for-sale increased $8.3 million due to the purchase of a
short-term U.S. Government Treasury Xxxx totaling $7.5 million, plus an increase
in the fair value of such securities totaling $800,000. Securities
held-to-maturity decreased $1.9 million due to the call of debt securities
backed by U.S. Government Agencies offset in part by the purchase of debt
securities backed by U.S. Government Agencies.
Loans receivable increased $4.2 million or 4.2% to $105.1 million at September
30, 2001 from $100.9 million at September 30, 2000. The growth in the loan
portfolio was primarily due to the increase in loans of $2.9 million from the
growth of Citizens' loan portfolio. The increase in loans includes $1.6 million
in loans secured by commercial properties and a $1.3 million increase in
consumer commercial loans.
Liabilities of the Company increased $20.2 million, or 22.0%, to $112.4 million
at September 30, 2001 compared to $92.2 million at September 30, 2000. The
increase in liabilities was primarily due to the increase in deposits of $16.5
million, reflecting management's success in attracting depositors. The deposit
growth includes $7.5 million related to the Citizens' acquisition. Additionally,
FHLB advances increased $3.5 million to $7 million at September 30, 2001 from
$3.5 million at September 30, 2000.
Stockholder's equity was $22.3 million at September 30, 2001 and decreased
approximately $2.9 million from the balance at September 30, 2000. The decrease
was due primarily to the repurchase of common stock totaling $3.6 million plus
the declaration of dividends totaling $743,000 offset by net income of $685,000,
an increase of $557,000 in accumulated other comprehensive income, plus an
increase of $129,000 due to ESOP shares released from collateral in 2001.
Average Balances, Interest, and Average Yields
Net interest income is affected by (i) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. Banks have traditionally used
interest rate spreads as a measure of net interest income. Certificates of
deposit constitute approximately 82.3% of the total deposits of the Banks and
generally pay higher rates of interest than core deposits. The emphasis on
certificates of deposits may result in a higher average cost of deposits which
may adversely affect the interest rate spread. Another indication of an
institution's net interest income is its "net yield on interest-earning assets"
which is net interest income divided by average interest-earning assets. The
following table sets forth certain information relating to the average
interest-earning assets and interest-bearing liabilities of the Banks and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, nonaccruing loans are
included in the net loan category. Average balances are derived from month-end
average balances. Management does not believe that the use of month-end average
balances instead of average daily balances has caused any material difference in
the information presented.
6
Year Ended September 30,
-------------------------------------------------------------------
2001 2000
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $102,989 $8,068 7.83% $ 95,726 $7,340 7.67%
Investment securities (1) 17,600 676 3.84 14,253 711 5.00
-------- ------ -------- ------
Total interest-earning assets 120,589 8,744 7.25 109,979 8,051 7.32
------ ------
Non-interest earning assets 2,723 2,973
-------- --------
Total assets $123,312 $112,952
======== ========
Interest-bearing liabilities:
Deposits 91,671 4,848 5.29 84,345 4,111 4.87
Borrowings 6,167 339 5.50 1,042 39 3.74
-------- ------ -------- ------
Total interest-bearing liabilities 97,838 5,187 5.30 85,387 4,150 4.86
------ ------
Non-interest bearing liabilities: 2,618 1,997
-------- --------
Total liabilities 100,456
87,384
Minority interests 464
Stockholders' equity 22,392 25,568
-------- --------
Total liabilities & stockholders' equity $123,312 $112,952
======== ========
Net interest income $3,557 $3,901
====== ======
Interest rate spread (2) 1.95% 2.46%
====== ======
Net yield on interest-earning assets (3) 2.95% 3.55%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 123.25% 128.80%
====== ======
----------------
(1) Includes interest-bearing overnight deposits and term deposits with FHLB.
(2) Interest-rate spread represents the differnce between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-bearing assets represents net interest income as a
percentage of average interest-earning assets.
7
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in
interest income and interest expense of the Banks for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume). Average balances
are derived from month-end balances. Management does not believe that the use of
month-end balances instead of average daily balances has caused any material
difference in the information presented.
Year Ended September 30,
2001 vs 2000
-------------------------------------
Increase (Decrease)
Due to
-------------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(In Thousands)
Interest-earning assets:
Loans receivable $ 557 $ 154 $ 17 $ 728
Investment securities(1) 167 (164) (38) (35)
------- ------- ------- -------
Total $ 724 $ (10) $ (21) $ 693
======= ======= ======= =======
Interest expense:
Deposits $ 356 $ 351 $ 30 $ 737
Borrowings 192 18 90 300
------- ------- ------- -------
Total $ 548 $ 369 $ 120 $ 1,037
======= ======= ======= =======
Net change in interest income $ 176 $ (379) $ (141) $ (344)
======= ======= ======= =======
-------------
(1) Includes interest-earning overnight deposits and term deposits with FHLB of
Cincinnati.
8
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS
ENDED SEPTEMBER 30, 2001 and 2000
Net Income. Net income decreased by $462,000, or 40.3% to $685,000 for the year
ended September 30, 2001 as compared to $1.1 million for the year ended
September 30, 2000. The net decrease was due to a decrease in net interest
income of $344,000, an increase in the provision for loan losses of $24,000, and
an increase of $418,000 in non-interest expense, offset by an increase in
non-interest income of $65,000, a decrease in income tax expense of $196,000,
and an allocation of $63,000 of the net operating loss of Citizens Financial
Bank, Inc. to the minority interest.
Net Interest Income. Net interest income for the year ended September 30, 2001
was $3.5 million. The decrease in net interest income in fiscal 2001 compared to
2000 of $344,000 was due to an increase in interest expense of $1.0 million
offset by an increase in interest income of $693,000. Interest income in 2001
was $8.7 million with an average yield of 7.25% compared to $8.0 million with an
average yield of 7.32% in 2000. The average balance of interest-earning assets
for 2001 was $120.6 million compared to $110.0 million in 2000. The average
balance of interest bearing liabilities in 2001 was $97.8 million with an
average cost of funds of 5.30% compared to average balances of interest bearing
liabilities in 2000 of $85.4 million with an average cost of funds of 4.86%.
Interest Income. Interest income was $8.7 million, or 7.25% of average
interest-earning assets, for the year ended September 30, 2001 as compared to
$8.0 million, or 7.32% of average interest-earning assets, for the year ended
September 30, 2000. Interest income increased $693,000 or 8.6% from 2001 to
2000. The increase was due primarily to an increase of $10.6 million in the
average balance of interest earning assets in year 2001 compared to 2000.
Interest Expense. Interest expense was $5.2 million, or 5.30% of average
interest-bearing liabilities, for the year ended September 30, 2001 as compared
to $4.1 million, or 4.86% of average interest-bearing liabilities, for the
corresponding period in 2000. The increase in interest expense of $1.0 million
was the result of a 44 basis point increase in the average rate paid on the
deposits, primarily certificates of deposits, in addition to, an increase of
$12.4 million in the average balance of interest bearing deposits for the year
ended September 30, 2001 compared to the same period in 2000.
Provision for Losses on Loans. The provision for loan losses is charged to
operations to bring the total allowance for loan losses to a level that
represents management's best estimates of the losses inherent in the portfolio,
based on:
o historical experience;
o volume;
o type of lending conducted by the Banks;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Banks' lending areas; and
o other factors affecting the collectibility of the loans in the portfolio.
For the year ended September 30, 2001, the provision for loan losses increased
$24,500 to $39,500 compared to $15,000 for the comparable 2000 period. The
increase in the provision for loan losses was precipitated by a $1.6 million
increase in loans secured by commercial properties and a $1.3 million increase
in consumer commercial loans.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses, which may be realized in the future and that
additional provisions for losses will not be required.
9
Non-Interest Income. Non-interest income amounted to $178,000 and $113,000 for
the years ended September 30, 2001 and 2000, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $136,000 and $93,000 for 2001 and 2000, respectively.
Non-Interest Expense. Non-interest expense increased approximately $418,000, or
18.5%, to $2.7 million for the year ended September 30, 2001. The increase of
$418,000 was primarily due to an increase of $268,000 in compensation and
benefits, an increase of $47,000 in occupancy expenses, an increase of $78,000
in data processing expenses, an increase of $46,000 in other operating expenses
offset by a decrease of $6,000 in federal and other insurance premiums, and a
decrease of $15,000 in state franchise taxes. The increase of $268,000 in
compensation and benefits is due to the additional expense from the operations
of Citizens of $86,000, four additional employees hired for the new branch
office in Lawrenceburg, Kentucky, which opened for operations in February of
2000, and normal salary increases. The increases in occupancy expenses, data
processing expense, and in other operating expenses are primarily attributable
to the increase in operating expense related to the acquisition of Citizens
amounting to approximately $90,000 for these categories and additional expenses
in 2001 due to the opening of a new branch office effective February 14, 2000.
Income Tax Expense. The provision for income tax expense amounted to
approximately $395,000 and $591,000 for the years ended September 30, 2001 and
2000, respectively. The provision for income tax expense as a percentage of
income before income tax expenses amounted to 38.8% for the year ended September
30, 2001 and 34% for the year ended September 30, 2000.
Liquidity
The liquidity of the Company depends primarily on the dividends paid to it by
its bank subsidiaries. The payment of cash dividends by the Banks on their
common stock is limited by regulations of the OTS and the FDIC, which are tied
to their level of compliance with their regulatory capital requirements.
The Banks' primary source of funds are deposits and proceeds from principal and
interest payments of loans. Additional sources of liquidity are advances from
the FHLB of Cincinnati and other borrowings, such as Federal Funds purchased. At
September 30, 2001, First Financial had $7.0 million in advances from FHLB.
First Financial utilizes FHLB of Cincinnati borrowings during periods when
management believes that such borrowings provide a source of funds at a lower
cost than deposit accounts, and when they desire liquidity in order to help
expand the loan portfolio.
The Company's operating activities produced positive cash flows for the fiscal
years ended September 30, 2001 and 2000. Net cash from operating activities for
2001 totaled $679,000, as compared to $1.1 million for 2000. The decline in
operating cash flows in year 2001 results from the 40.2% decline in net income
during this period.
Net cash used by investing activities for 2001 totaled $10.3 million, as
compared to $12.0 million for 2000.
Net cash from financing activities for the year ended September 30, 2001 totaled
$17.5 million, as compared to $5.6 million for 2000. The increase of $11.9
million in cash from financing activities for 2001 was a result of a $12.0
million increase in deposits, and additional borrowings of $3.5 million, offset
by stock repurchases of $3.6 million.
The Banks' most liquid assets are cash and cash-equivalents, which include
investments in highly liquid, short-term investments. At September 30, 2001 and
2000, cash and cash equivalents totaled $10.8 million and $3.0 million,
respectively.
10
At September 30, 2001, the Banks had $59.6 million in certificates of deposits
due within one year and $21.1 million due between one and three years.
Management believes, based on past experience, that the Banks will retain much
of the deposits or replace them with new deposits or borrowings. At September
30, 2001, the Banks had $715,000 million in outstanding commitments to originate
mortgages. The Banks intend to fund these commitments with short-term
investments and proceeds from loan repayments.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
New Accounting Pronouncements
In June of 2001 the Financial Accounting Standards Board (FASB) issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 141 pertains to business combinations
initiated after June 30, 2001 and requires all business combinations after this
date to be accounted for using the purchase method of accounting. Statement No.
142 pertains to the accounting for goodwill and other intangible assets and is
effective for the Company beginning July 1, 2001. Under Statement No. 142,
goodwill recorded in Business Combinations after July 1, 2001 must be evaluated
for impairment at least on an annual basis. If it is determined that the
goodwill has been impaired, then the carrying value of goodwill must be reduced
for the impairment. The Company does not anticipate the effect of implementing
these statements to be material to its financial position or results of
operations.
11
MILLER, MAYER, XXXXXXXX & XXXXXXX LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"(sm)
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harrodsburg First Financial Bancorp, Inc.
Harrodsburg, Kentucky
We have audited the accompanying consolidated balance sheets of Harrodsburg
First Financial Bancorp, Inc. and Subsidiaries as of September 30, 2001 and 2000
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the management of Harrodsburg First Financial Bancorp,
Inc. (Company). Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harrodsburg First
Financial Bancorp, Inc. and Subsidiaries as of September 30, 2001 and 2000, and
the results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
/s/ Miller, Mayer, Xxxxxxxx, & Xxxxxxx, LLP
Lexington, Kentucky
November 16, 2001
(859) 223-3095
0000 XXXXXXXXXXX XXXX XXXXXXXXX, XXXXXXXX 00000-0000 FAX: (000) 000-0000
12
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and 2000
--------------------------------
ASSETS 2001 2000
------------- -------------
Cash and due from banks $ 1,180,469 $ 564,340
Federal funds sold 964,000
Interest bearing deposits 8,751,379 2,466,827
Securities available-for-sale at fair value 12,508,751 4,167,377
Securities held-to-maturity, fair value of $4,985,867 and
$6,731,799 for 2001 and 2000, respectively 4,941,100 6,826,520
Loans receivable, net 105,081,309 100,881,267
Accrued interest receivable 730,500 656,057
Premises and equipment, net 1,896,931 1,735,162
Other assets 486,922 95,092
------------- -------------
Total assets $ 136,541,361 $ 117,392,642
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 102,961,466 $ 86,473,131
Advances from Federal Home Loan Bank 7,000,000 3,500,000
Advance payments by borrowers for taxes and insurance 1,215 87,979
Deferred Federal income tax 1,904,364 1,488,806
Dividends payable 404,150 445,902
Other liabilities 115,969 155,973
------------- -------------
Total liabilities 112,387,164 92,151,791
------------- -------------
Minority interests 1,848,807
------------- -------------
Stockholders' equity
Common stock, $0.10 par value, 5,000,000 shares authorized;
1,238,834 and 1,498,015 shares issued and outstanding at
September 30, 2001 and 2000, respectively. 218,213 218,213
Additional paid-in capital 21,237,991 21,215,999
Retained earnings, substantially restricted 10,978,953 11,038,055
Accumulated other comprehensive income 3,257,257 2,700,651
Treasury stock, 837,959 and 568,050 shares, at cost, for 2001 (12,333,701) (8,771,467)
and 2000, respectively
Unallocated employee stock ownership plan (ESOP) shares (1,053,323) (1,160,600)
------------- -------------
Total stockholders' equity 22,305,390 25,240,851
------------- -------------
Total liabilities and stockholders' equity $ 136,541,361 $ 117,392,642
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
13
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 2001 and 2000
--------------------------------
2001 2000
----------- -----------
Interest income:
Interest on loans $ 8,067,540 $ 7,339,869
Interest and dividends on securities 439,413 499,807
Other interest income 237,171 211,530
----------- -----------
Total interest income 8,744,124 8,051,206
----------- -----------
Interest expense:
Interest on deposits 4,848,316 4,111,095
Interest on other borrowings 338,688 38,613
----------- -----------
Total interest expense 5,187,004 4,149,708
----------- -----------
Net interest income 3,557,120 3,901,498
Provision for loan losses 39,500 15,000
----------- -----------
Net interest income after provision for loan losses 3,517,620 3,886,498
----------- -----------
Non-interest income:
Loan and other service fees, net 133,076 93,373
Other 44,638 19,518
----------- -----------
177,714 112,891
----------- -----------
Non-interest expense:
Compensation and benefits 1,478,947 1,210,783
Occupancy expenses, net 249,891 202,531
Federal and other insurance premiums 19,306 25,731
Data processing expenses 254,906 177,088
State franchise tax 115,694 130,920
Other operating expenses 560,707 514,145
----------- -----------
2,679,451 2,261,198
----------- -----------
Income before income tax expense and minority interests 1,015,883 1,738,191
Income tax expense (394,519) (590,951)
Minority interests 63,176
----------- -----------
Net income $ 684,540 $ 1,147,240
=========== ===========
Basic earnings per common share $ .52 $ .76
=========== ===========
Diluted earnings per common share $ .52 $ .76
=========== ===========
Weighted average common shares outstanding during the year 1,307,002 1,512,921
=========== ===========
Weighted average common shares after dilutive
effect outstanding during the year 1,307,002 1,512,921
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
14
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 2001 and 2000
--------------------------------
Accumulated
Additional Other Unallocated Total
Common Paid-In Retained Comprehensive Treasury ESOP Stockholders'
Stock Capital Earnings Income Stock Shares Equity
--------- -------------- --------------------------------- -------------- -----------------------------
Balance,
September 30, 1999 $218,213 $21,194,168 $11,187,966 $2,595,842 $(7,698,625) $(1,277,330) $26,220,234
------------
Comprehensive income: 1,147,240 1,147,240
Net income
Other comprehensive
income, net of tax
unrealized gains
on securities 104,809 104,809
------------
Total comprehensive
income 1,252,049
Dividend declared (1,297,151) (1,297,151)
ESOP shares earned
in 2000 21,831 116,730 138,561
Purchase of 86,800
shares of common
stock (1,072,842) (1,072,842)
-------- ----------- ----------- ---------- ------------ ----------- -----------
Balance,
September 30, 2000 218,213 21,215,999 11,038,055 2,700,651 (8,771,467) (1,160,600) 25,240,851
Comprehensive income: 684,540 684,540
Net income
Other comprehensive
income, net of tax
unrealized gains
on securities 556,606 556,606
------------
Total comprehensive
income 1,241,146
Dividend declared (743,642) (743,642)
ESOP shares earned
in 2001 21,992 107,277 129,269
Purchase of 269,909
shares of common
stock (3,562,234) (3,562,234)
-------- ----------- ----------- ---------- ------------ ----------- -----------
Balance,
September 30, 2001 $218,213 $21,237,991 $10,978,953 $3,257,257 $(12,333,701) $(1,053,323) $22,305,390
======== =========== =========== ========== ============ =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
15
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2001 and 2000
--------------------------------
2001 2000
------------ ------------
Operating activities
Net income $ 684,540 $ 1,147,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 39,500 15,000
Provision for depreciation 126,675 101,988
ESOP benefit expense 129,271 138,561
Amortization of loan fees (99,355) (74,267)
Amortization of investment premium (discount) (128) (128)
Loss on sale of fixed asset 896
FHLB stock dividend (118,000) (109,400)
Minority interest (63,176)
Change in:
Interest receivable (74,443) (37,204)
Interest payable 33,919 2,952
Accrued liabilities 45,380 (94,171)
Prepaid expense (35,766) (5,253)
Income taxes payable 9,519 53,992
------------ ------------
Net cash provided by operating activities 678,832 1,139,310
------------ ------------
Investing activities
Net increase in loans (4,140,187) (11,760,389)
Purchase of securities, available-for-sale (7,498,031)
Purchase of securities held-to-maturity (3,500,000) (1,000,000)
Calls of securities held-to-maturity 5,500,000 1,500,000
Principle repayments - mortgage back securities 3,548 14,753
Purchase of CD (100,000)
Purchase of goodwill (356,065)
Purchase of fixed assets (289,340) (781,955)
------------ ------------
Net cash provided (used) by investing activities (10,380,075) (12,027,591)
------------ ------------
(Continued)
The accompanying notes are an integral part of the
consolidated financial statements.
16
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended September 30, 2001 and 2000
--------------------------------
2001 2000
------------ ------------
Financing activities
Minority interests 1,911,983
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 8,040,121 (1,355,666)
Net increase in certificates of deposit 8,448,214 5,810,478
Net increase (decrease) in custodial accounts (86,764) 7,114
Purchase of treasury stock (3,562,234) (1,072,842)
Proceeds from FHLB borrowings 24,500,000 3,500,000
Payments of FHLB borrowings (21,000,000)
Payments of dividends (785,396) (1,319,949)
------------ ------------
Net cash provided (used) by financing activities 17,465,924 5,569,135
------------ ------------
Increase (decrease) in cash and cash equivalents 7,764,681 (5,319,146)
Cash and cash equivalents, beginning of year 3,031,167 8,350,313
------------ ------------
Cash and cash equivalents, end of year $ 10,795,848 $ 3,031,167
============ ============
Supplemental Disclosures
Cash payments for:
Interest on deposits $ 4,831,557 $ 4,146,756
Income taxes $ 383,000 $ 630,000
The accompanying notes are an integral part of the
consolidated financial statements.
17
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Harrodsburg First Financial Bancorp, Inc. is a corporation organized
under the laws of Delaware. The Company's articles of incorporation
authorize the issuance of up to 500,000 shares of preferred stocks,
which may be issued with certain rights and preferences. As of
September 30, 2001, no preferred stock has been issued.
On July 15, 2001, the Company converted from a unitary savings and loan
holding company to a bank holding company. The activities of the
Company are primarily limited to holding stock in two Banks, First
Financial Bank (First Financial), a wholly owned subsidiary, and
Citizens Financial Bank, Inc. (Citizens), in which the Company acquired
a 56.27% interest on July 15, 2001.
Citizens is a newly organized de novo Kentucky chartered commercial
bank, located in Glasgow, Kentucky, and is subject to examination and
regulation by the Federal Deposit Insurance Corporation and the
Kentucky Department of Financial Institutions. First Financial is a
federally chartered stock savings bank and a member of the Federal Home
Loan Bank System. As a member of this system, First Financial is
required to maintain an investment in capital stock of the Federal Home
Loan Bank of Cincinnati (FHLB) in an amount equal to at least the
greater of 1% of its outstanding loans and mortgage-backed securities,
or 5% of outstanding FHLB advances. First Financial met this
requirement at September 30, 2001 and 2000.
First Financial and Citizens conduct a general banking business in
central Kentucky and western Kentucky, respectively, which primarily
consists of attracting deposits from the general public and applying
those funds to the origination of loans for residential, consumer, and
nonresidential purposes. The Banks' profitability is significantly
dependent on net interest income, which is the difference between
interest income generated from interest-earning assets (i.e. loans and
investments) and the interest expense paid on interest-bearing
liabilities (i.e. customer deposits and borrowed funds). Net interest
income is affected by the relative amount of interest-earning assets
and interest-bearing liabilities and the interest received or paid on
these balances. The level of interest rates paid or received by the
Banks can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of
management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles
(GAAP) and general accounting practices within the financial services
industry. In preparing consolidated financial statements in accordance
with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
18
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
The following is a summary of the Company's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company, First Financial, Citizens, and
First Financial's wholly owned subsidiary, Harrodsburg Savings & Loan
Service Corporation. All significant intercompany accounts and
transactions have been eliminated.
Loan Origination Fees. Loan origination fees are accounted for in
accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Cost of Leases." Pursuant to the provisions of SFAS No. 91, origination
fees received from loans, net of direct origination costs, are deferred
and amortized to interest income using the level-yield method, giving
effect to actual loan prepayments. Additionally, SFAS No. 91 generally
limits the definition of loan origination costs to the direct costs
attributable to originating a loan, i.e., principally actual personnel
costs. Fees received for loan commitments that are expected to be drawn
upon, based on the experience of the Banks with similar commitments,
are deferred and amortized over the life of the loan using the
level-yield method. Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line basis.
Investment Securities. Investment securities that management has the
intent and ability to hold to maturity are classified as
held-to-maturity, and carried at cost, adjusted for amortization of
premium or accretion of discount over the term of the security, using
the level yield method. Included in this category of investments is the
FHLB stock which is a restricted stock carried at cost. Securities
available-for-sale are carried at market value. Adjustments from
amortized cost to market value are recorded in stockholders' equity net
of deferred income tax until realized. The identified security method
is used to determine gains or losses on sales of securities.
Federal Home Loan Mortgage Corporation Stock. On December 6, 1984, the
Federal Home Loan Mortgage Corporation created a new class of
participating preferred stock. The preferred stock was distributed to
the twelve district banks of the Federal Home Loan Banking System for
subsequent distribution to their member institutions. First Financial
received 1,606 shares of the stock and recorded it at its fair value of
$40 per share as of December 31, 1984. The fair value of the stock
recognized as of December 1984 became its cost. The stock has been
subsequently classified as available-for-sale and carried at fair
value.
Office Properties and Equipment. Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
using the straight line method and the double declining balance method
over the estimated useful lives of the related assets. The gain or loss
on the sales of property and equipment is recorded in the year of
disposition.
Real Estate Owned. Real estate owned is generally comprised of property
acquired through foreclosure or deed in lieu of foreclosure. Foreclosed
real estate is initially recorded at fair value, net of selling
expenses, establishing a new cost basis. Expenses relating to holding
property, including interest expense, are not capitalized. These
expenses are charged to operations as incurred.
(Continued)
19
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
After foreclosure, valuations are periodically performed by
management, and the real estate is carried at the lower of carrying
amount or fair value less estimated selling expenses.
Loans Receivable. Loans receivable are stated at the principal amount
outstanding less the allowance for loan losses and net deferred loan
fees. First Financial and Citizens have adequate liquidity and capital,
and it is generally management's intention to hold such assets to
maturity.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the past loan
loss experience of the Banks, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
pay, estimated value of any underlying collateral, and current economic
conditions. While management uses the best information available,
future adjustments may be necessary if conditions differ substantially
from assumptions used in management's evaluation. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require
additions to the allowances based on their judgment about information
available to them at the time of their examination.
Interest earned on loans receivable is recorded in the period earned.
Uncollectible interest on loans that are contractually past due is
charged off or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received
until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
Impairment of loans are accounted for in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS
No. 118 as to certain income recognition and disclosure provisions.
These accounting standards require that impaired loans be measured
based upon the present value of expected future cash flows discounted
at the loan's effective interest rate, or as an alternative, at the
loan's observable market price or fair value of the collateral. A loan
is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, investment
in one-to-four family residential loans and consumer installment loans
are considered to be homogenous and therefore excluded from separate
identification for evaluation of impairment. With respect to investment
in impaired multi-family and nonresidential loans, such loans are
collateral dependent, and as a result, are carried as a practical
expedient at the lower of cost or fair value. Collateral dependent
loans when put in non-accrual status are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
Deposits. First Financial's deposits are insured by the Savings
Association Insurance Fund ("SAIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC"). Citizens deposits are
insured by the FDIC.
Income Taxes. The Company accounts for federal income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 established financial accounting
(Continued)
20
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
and reporting standards for the effects of income taxes that result
from the Company's activities within the current and previous years.
Pursuant to the provisions of SFAS No. 109, a deferred tax liability
or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible differences between the tax
basis of an asset or liability and its reported amount in the
financial statements that will result in taxable or deductible amounts
in future periods. Deferred tax assets are recorded only to the extent
that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period
earnings, carried back against prior years earnings, offset against
taxable temporary differences reversing in future periods, or utilized
to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent
that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes
payable on future taxable income. Deferred tax liabilities are
provided on the total amount of net temporary differences taxable in
the future.
The Company files a consolidated federal income tax return with First
Financial. Citizens files a separate federal income tax return. The
current income tax expense or benefit is allocated to each Corporation
included in the consolidated tax return based on their tax expense or
benefit computed on a separate return basis.
Employee Stock Ownership Plan. Shares of common stock issued to the
Company's employee stock ownership plan (ESOP) are initially recorded
as unearned ESOP shares in the stockholders' equity at the fair value
of the shares at the date of the issuance of the plan. As shares are
committed to be released as compensation to employees, the Company
reduces the carrying value of the unearned shares and records
compensation expense equal to the current value of the shares.
Cash and Cash Equivalents. For purposes of reporting consolidated cash
flows, the Company considers cash, balances with banks, and interest
bearing deposits in other financial institutions with original
maturities of three months or less to be cash equivalents.
Earnings Per Share. Earnings per common share is computed by dividing
income available to common shareholders by the weighted average number
of common shares outstanding during the period. Earnings per common
share - assuming dilution reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance
of common stock, that then shared in the earnings of the Company.
Reclassification. Certain presentations of accounts previously
reported have been reclassified in these consolidated financial
statements. Such reclassifications had no effect on net income or
retained income as previously reported.
(Continued)
21
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
2. Business Acquisition
On July 15, 2001, the Company acquired 56.27% of the voting shares of
Citizens Financial Bank, Inc. in Glasgow, Kentucky for a cash price of
$2,816,300. Citizens is a newly organized de novo bank, which began
operations on July 17, 2001. The acquisition of the controlling
interest in Citizens was accounted for under the purchase method of
accounting. The excess of the purchase price over the fair value of the
underlying net assets acquired of $356,604 was allocated to goodwill.
3. Investment Securities
The cost and estimated fair value of securities held as of September
30, 2001 and 2000 are summarized as follows:
2001
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ----------- ----------
Securities, available-for-sale:
Federal Home Loan Mortgage, capital $ 75,482 $4,935,238 $ $ 5,010,720
stock, 77,088 shares
U.S. Government and Federal Agencies 7,498,031 7,498,031
---------- ---------- ----------- ----------
$7,573,513 $4,935,238 $ $12,508,751
========== ========== =========== ===========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $3,000,000 $ 37,065 $ $ 3,037,065
Municipal bonds 213,724 6,588 220,312
---------- ---------- ----------- ----------
3,213,724 43,653 3,257,377
---------- ---------- ----------- ----------
Mortgage-backed Securities 21,576 1,114 22,690
---------- ---------- ----------- ----------
Federal Home Loan
Bank of Cincinnati,
capital stock - 17,058 shares 1,705,800 1,705,800
---------- ---------- ----------- ----------
$4,941,100 $ 44,767 $ $4,985,867
========== ========== =========== ==========
2000
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- --------------------------
Securities, available-for-sale:
Federal Home Loan Mortgage, capital
stock, 77,088 shares $ 75,482 $4,091,895 $ $4,167,377
========== ========== =========== ==========
Securities, held-to-maturity:
Debt Securities:
U.S. Government and Federal Agencies $5,000,000 $ $ 90,240 $4,909,760
Municipal bonds 213,595 4,899 208,696
---------- ---------- ----------- ----------
5,213,595 95,139 5,118,456
---------- ---------- ----------- ----------
Mortgage-backed Securities 25,125 418 25,543
---------- ---------- ----------- ----------
Federal Home Loan
Bank of Cincinnati,
capital stock - 15,878 shares 1,587,800 1,587,800
---------- ---------- ----------- ----------
$6,826,520 $ 418 $ 95,139 $6,731,799
========== ========== =========== ==========
(Continued)
22
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
The amortized cost and estimated fair value of debt securities at
September 30, 2001, by contractual maturity, are as follows:
Estimated
Amortized Fair
Cost Value
---------- -----------
Due after one year through five years $1,104,909 $1,120,845
Due after five through ten years 2,108,815 2,136,332
---------- -----------
$3,213,724 $3,257,377
========== ==========
In accordance with the requirements of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities," the unrealized gain
on securities available-for-sale of $4,935,238 net of deferred income
taxes of $1,677,981 has been recorded as a separate component of
stockholders' equity as of September 30, 2001.
For the year ended September 30, 2001, $5,500,000 was received from the
call of eleven debt securities backed by U.S. Government Agencies,
which were classified as held-to-maturity. For the year ended September
30, 2000, $1,500,000 was received from the maturity of three debt
securities backed by a U.S. Government Agency, which were classified as
held-to-maturity.
Accrued interest on investment securities at September 30, 2001 and
2000 totaled $38,341 and $70,115, respectively.
(Continued)
23
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
4. Loans Receivable
Loans receivable, net at September 30, 2001 and 2000 consists of the
following:
2001 2000
------------- -------------
Loans secured by first lien mortgages on real estate:
One-to-four residential property $ 80,152,688 $ 79,826,008
Multi-family residential property 2,540,563 2,941,035
Commercial properties 8,783,410 7,296,226
Construction 7,286,230 6,318,800
Agricultural 3,864,562 4,244,881
Consumer loans:
Home equity 1,879,047 1,775,453
Home improvement and personal 1,760,723 1,220,487
Auto loans 155,445 100,107
Commercial 1,696,775 337,215
Loans secured by savings deposits 497,591 550,870
------------- -------------
108,617,034 104,611,082
Loans in process (2,686,523) (2,947,154)
Provisions for loan losses (411,000) (371,500)
Deferred loan origination fees (438,202) (411,161)
------------- -------------
Loans receivable, net $ 105,081,309 $ 100,881,267
============= =============
First Financial has concentrated its lending activity within a 45 mile
radius of Harrodsburg, Kentucky. Therefore, a substantial portion of its
debtors' ability to honor their contracts is dependent on the economy of
this area.
First Financial and Citizens provide an allowance to the extent
considered necessary to provide for losses that may be incurred upon the
ultimate realization of loans. The changes in the allowance for loan
losses is analyzed as follows:
Year Ended September 30,
-----------------------------
2001 2000
--------- ---------
Balance at beginning or period $ 371,500 $ 370,000
Additions charged to operations 39,500 15,000
Charge-offs (13,500)
Recoveries
--------- ---------
Balance at end of period $ 411,000 $ 371,500
========= =========
(Continued)
24
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
The following is a summary of non-performing loans (in thousands) at
September 30, 2001 and 2000, respectively:
September 30,
----------------------
2001 2000
---- ----
Non-accrual loans $ $
Loans past due 90 days or more 222 517
---- ----
Total non-performing loan balances $222 $517
==== ====
At September 30, 2001 and 2000, the Company had identified no impaired
loans as defined by SFAS No. 114. There were no loans in non-accrual
status, and as such, all interest income earned for the years ended
September 30, 2001 and 2000 on the loans outstanding has been included in
income.
Accrued interest on loans at September 30, 2001 and 2000 totaled $692,159
and $585,942, respectively.
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal owners,
and loans to members of the immediate family of such persons at September
30, 2001 and 2000 are summarized as follows:
September 30,
------------------------------
2001 2000
--------- ---------
Balance at beginning of period $ 462,040 $ 166,707
Additions during year 34,301 333,116
Repayments (175,282) (37,783)
--------- ---------
Balance at end of period $ 321,059 $ 462,040
========= =========
5. Premises and Equipment
Office premises and equipment included the following:
Description Useful Life 2001 2000
--------------------------------------- -------------- ----------- -----------
Land, buildings and improvements 30-45 years $1,607,527 $1,602,754
Furniture, fixtures and equipment 5-10 years 1,266,228 1,021,929
----------- -----------
2,873,755 2,624,683
Less accumulated depreciation (976,824) (889,521)
---------- ----------
$1,896,931 $1,735,162
========== ==========
Depreciation expense for the years ended September 30, 2001 and 2000
amounted to $126,675 and $101,988, respectively.
(Continued)
25
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
6. Deposits
Deposit account balances as of the dates indicated are summarized as
follows:
September 30,
---------------------------
2001 2000
------------ ------------
Demand deposit accounts, non-interest bearing $ 3,276,514 $ 490,399
Passbook accounts with a weighted average rate of 2.79% and 2.79% at 6,776,358 6,753,354
September 30, 2001 and 2000, respectively
NOW and MMDA deposits with a weighted average rate of 2.52% and 2.63% at
September 30, 2001 and 2000, respectively 8,139,392 8,885,193
------------ ------------
18,192,264 16,128,946
Certificate of deposits with a weighted average interest rate of 5.61%
and 5.92% at September 30, 2001 and 2000, respectively 84,769,202 70,344,185
------------ ------------
Total Deposits $102,961,466 $ 86,473,131
============ ============
Jumbo certificates of deposit (minimum denomination of $100,000) $ 16,549,734 $ 9,796,720
============ ============
Certificates of deposit by maturity at September 30, 2001 and 2000 (in
thousands) are as follows:
September 30,
--------------------------------
2001 2000
-------------- ---------------
Within one year $ $59,623 $ 47,487
Over 1 to 3 years 21,078 19,441
Maturing in years thereafter 4,068 3,416
-------------- ---------------
$ 84,769 $ 70,344
============== ===============
Certificates of deposit by maturity and interest rate category at
September 30, 2001 (in thousands) are as follows:
Amount Due
--------------------------------------------------------------
Less Than
One Year 1-2 Years 2-3 Years After 3 Years Total
---------- ---------- ----------- -------------- --------
2.01--4.00% $ 4,921 $ 72 $ $ $ 4,993
4.01--6.00% 33,759 11,493 1,217 1,514 47,983
6.01--8.00% 20,943 6,747 1,549 2,554 31,793
---------- ---------- ----------- -------------- --------
$ 59,623 $ 18,312 $2,766 $ $4,068 $ 84,769
========== ========== =========== ============== ========
(Continued)
26
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
Interest expense on deposits for the periods indicated is summarized as
follows:
Years Ended September 30,
----------------------------
2001 2000
---------- ----------
Money market and NOW account $ 247,728 $ 246,525
Savings Accounts 181,584 198,158
Certificates 4,419,004 3,666,412
---------- ----------
$4,848,316 $4,111,095
========== ==========
First Financial maintains arrangements for clearing NOW and MMDA accounts
with the Federal Home Loan Bank of Cincinnati, and is required to maintain
adequate collected funds in its Demand Account to cover average daily
clearings. First Financial was in compliance with this requirement at
September 30, 2001 and 2000. In addition, at September 30, 2001, First
Financial had pledged $1,975,000 of its overnight deposits held by the
FHLB of Cincinnati to secure certain customer deposit balances.
7. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
Maturity Interest September 30,
Date Rate 2001
--------------- ----------------- -------------
10/9/01 3.52% $1,000,000
10/24/01 3.52% 1,500,000
11/6/01 3.52% 1,000,000
11/13/01 3.52% 1,500,000
11/15/01 3.52% 1,000,000
3/7/11 5.20% 1,000,000
----------
$7,000,000
==========
A schedule of the principle payments due over the remaining term of the
notes as of September 30, 2001 follows:
Year Amount
---------------------------- -------------
2002 $ 6,000,000
Due after five years 1,000,000
-------------
$ 7,000,000
=============
These borrowings are collateralized by qualified real estate first
mortgages and Federal Home Loan Bank stock held by First Financial, which
had a book value of $10,455,800 at September 30, 2001.
(Continued)
27
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
8. Income Taxes
The provision for income taxes for the periods indicated consist of the
following:
Years ended September 30,
-------------------------
2001 2000
-------- --------
Federal income tax expense:
Current expense $265,699 $545,863
Deferred expense (benefit) 128,820 45,088
-------- --------
$394,519 $590,951
======== ========
Deferred income taxes result from temporary differences in the recognition
of income and expenses for tax and financial statement purposes. The
source of these temporary differences and the tax effect of each are as
follows:
Years ended September 30,
-------------------------
2001 2000
--------- ---------
Section 481 adjustment for bad debt recapture $ 97,233 $
Deferred loan fee income (9,194) (368)
Depreciation 21,247 18,823
FHLB stock 40,120 37,196
Allowance for loan losses (10,363) (510)
Other, net (ESOP loan) (10,223) (10,053)
--------- ---------
Net deferred tax expense (benefit) $ 128,820 $ 45,088
========= =========
For the periods indicated, total income tax expense differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
income before income taxes as follows:
Years ended September 30,
-------------------------
2001 2000
--------- ---------
Expected income tax expense at federal tax rate $ 366,880 $ 590,985
Valuation allowance 27,639
Other, net (34)
--------- ---------
Total income tax expense $ 394,519 $ 590,951
========= =========
Effective income tax rate 38.8% 34.0%
========= =========
(Continued)
28
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
Deferred tax assets and liabilities as of September 30, 2001 and 2000
consisted of the following:
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carry over for Citizens Financial Bank $ 27,639 $
Deferred loan fee income 148,989 139,795
ESOP loan 81,853 71,631
Allowance for loan losses 131,207 120,845
-------- --------
Total deferred tax assets 389,688 332,271
-------- --------
Deferred tax liabilities:
Section 481 adjustment for bad debt recapture 97,233
FHLB stock 383,520 343,400
Fixed asset basis over tax basis 107,679 86,433
-------- --------
Total deferred tax liabilities 588,432 429,833
-------- --------
Valuation allowance on net operating loss of Citizens
Financial Bank 27,639 -0-
-------- --------
Net deferred tax liability $226,383 $ 97,562
======== ========
In addition to the net deferred tax liability at September 30, 2001 of
$226,383 outlined in the preceding table, the financial statements include
a deferred tax liability of $1,677,981 that was charged against the
unrealized gain on securities available-for-sale of $4,935,238. The net
unrealized gain totals $3,257,257 and is recorded as a separate component
of stockholders' equity.
Effective for tax years ending December 31, 1996 or after, fiscal year
September 30, 1997 for First Financial, all thrift institutions are taxed
as other banking institutions. Institutions under $500 million in assets
are allowed to use the reserve method of determining their bad debt
deduction based on their actual experience, while larger institutions
(over $500 million) must use the specific charge off method in determining
their deduction. Tax bad debt reserves accumulated since September 30,
1988 must be included in taxable income of First Financial prorated over a
six year period, beginning in the tax year effected by the change. This
change did not have a material impact as a deferred tax liability was
provided for these accumulated reserves. The accumulated tax bad debt
reserves as of September 30, 1988, which amounts to approximately
$2,134,000 is only subject to being taxed at a later date under certain
circumstances, such as converting to a type of institution that is not
considered a bank for tax purposes. These financial statements do not
include any deferred tax liability related to the accumulated tax bad debt
reserves as of September 30, 1988.
(Continued)
29
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
9. Stockholders' Equity and Regulatory Capital
Regulatory Capital. First Financial's actual capital and its statutory
required capital levels at September 30, 2001 and 2000 are as follows (in
thousands):
September 30, 2001
--------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------ ------------------------ -------------------------
Actual Required Required
------------------------ ------------------------ -------------------------
Amount % Amount % Amount %
------------------------ ------------------------ -------------------------
Core capital $12,905 10.80% $4,780 4.0% $7,170 6.0%
Tangible capital $12,905 10.80% $1,792 1.5% N/A N/A
Total Risk based capital $13,312 19.35% $5,504 8.0% $6,881 10.0%
Leverage $12,905 10.80% N/A N/A $5,975 5.0%
September 30, 2000
--------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------ ------------------------ -------------------------
Actual Required Required
------------------------ ------------------------ -------------------------
Amount % Amount % Amount %
------------------------ ------------------------ -------------------------
Core capital $19,824 17.5% $4,532 4.0% $6,798 6.0%
Tangible capital $19,824 17.5% $1,700 1.5% N/A N/A
Total Risk based capital $20,196 19.0% $8,528 8.0% $10,659 10.0%
Leverage $19,824 17.5% N/A N/A $5,665 5.0%
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to implement prompt
corrective actions for institutions that it regulates. In response to this
requirement, OTS adopted final rules based upon FDICIA's five capital
tiers. The rules provide that a savings bank is "well capitalized" if its
total risk-based capital ratio is 10% or greater, its Tier 1 risk-based
capital ratio is 6% or greater, its leverage is 5% or greater and the
institution is not subject to a capital directive. Under this regulation,
First Financial was deemed to be "well capitalized" as of September 30,
2001 and 2000 based upon the most recent notifications from its
regulators. There are no conditions or events since those notifications
that management believes would change its classifications.
(Continued)
30
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
Citizens' actual and required capital amounts and ratios are as follows
(dollars in thousands):
September 30, 2001
--------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------ ------------------------ --------------------------
Actual Required Required
------------------------ ------------------------ --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------ ------------------------ --------------------------
Total risk-based capital
(to risk-weighted assets) $4,233 94.34% $359 8.0% $449 10.0%
Tier I capital (to
risk-weighted assets) $4,228 94.23% $179 4.0% $269 6.0%
Tier I capital (to adjusted
total assets) $4,228 48.99% $345 4.0% $432 5.0%
Citizens is subject to various regulatory capital requirements administered
by its primary federal regulator, the Federal Deposit Insurance Corporation
(FDIC). Failure to meet the minimum regulatory capital requirements can
initiate certain mandatory, and possible additional discretionary actions
by regulators, that if undertaken, could have a direct material affect on
Citizens and the consolidated financial statements. Under the regulatory
capital adequacy guidelines and the regulatory framework for prompt
corrective action, Citizens must meet specific capital guidelines involving
quantitative measures of Citizens' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. Citizens' capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Citizens to maintain minimum amounts and ratios of total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of September 30, 2001, that Citizens meets all the
capital adequacy requirements to which it is subject.
Retained Earnings Restriction. Retained earnings at September 30, 2001
includes tax bad debt reserves of approximately $2,134,000 accumulated
prior to September 30, 1988, for which no Federal income tax has been
provided. These tax bad debt reserves are only taxable in certain
circumstances, such as if First Financial converted to an institution that
did not qualify as a bank for tax purposes (see Note 8).
Liquidation Account. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts
were granted priority in the event of the future liquidation of First
Financial through the establishment of a special "Liquidation Account" in
an amount equal to the consolidated net worth of First Financial at March
31, 1995. The liquidation account was $10,236,488 at March 31, 1995 and is
reduced in proportion to reductions in the balance of eligible
(Continued)
31
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
account holders as determined on each subsequent fiscal year end. The
existence of the liquidation account will not restrict the use or
application of net worth except with respect to the cash payment of
dividends. The Bank may not declare or pay a cash dividend on or repurchase
any of its common stock if the effect thereof would cause its regulatory
capital to be reduced below the amount required for the liquidation
account.
Dividend Restrictions. The payment of cash dividends by First Financial and
Citizens on their Common Stock is limited by regulations of the OTS and
FDIC. Interest on savings accounts will be paid prior to payments of
dividends on common stock. Additional limitation on dividends declared or
paid, or repurchases of their stock are tied to both the Bank's and
Citizens' level of compliance with its regulatory capital requirements.
10. Retirement Benefits
Retirement Benefits. First Financial maintains a dormant noncontributory
defined benefit pension plan (Pension Trust). The multi-employer pension
plan covers all full-time employees with one year of service who have
attained the age of 21. There was no pension expense for the years ended
September 30, 2001 and 2000.
Effective April 1, 1993, the Board of Directors of First Financial adopted
an employee pension benefit plan (referred to as a "401K Plan") as
described under the Employees' Retirement Income Security Act of 1974.
Under the Plan, First Financial is required to match 25% of employee
contributions up to a maximum of 1.5% of eligible compensation. The Plan
covers all full-time employees. First Financial contributed $12,950 and
$9,792 to the Plan for the years ended September 30, 2001 and 2000,
respectively.
Employee Stock Ownership Plan. In connection with the stock conversion
September 30, 1995, the Company established an internally leveraged
Employee Stock Ownership Plan (the "ESOP") which covers substantially all
full time employees. The ESOP borrowed $1,745,700 from the Company and
purchased 174,570 shares of common stock of the Company at the date of
conversion. The loan is to be repaid in annual installments over a 15 year
period with interest, which is based on the published prime rate per the
Wall Street Journal as determined annually on September 30 of each year.
First Financial makes annual contributions to the ESOP Trust equal to the
ESOP's debt service requirement less dividends, if any, received by the
ESOP which are used for debt service. The ESOP shares are pledged as
collateral on the debt. As the debt is repaid, shares are released from
collateral and allocated to active participants based on a formula
specified in the ESOP agreement.
ESOP compensation was $129,271 for the year ended September 30, 2001. For
fiscal year 2001, 10,728 shares were released from collateral. At September
30, 2001, there were 105,332 unallocated ESOP shares having a fair value of
$1,253,450. ESOP compensation was $138,561 for the year ended September 30,
2000. For 2000, 11,673 shares were released from collateral. At September
30, 2000, there were 116,060 unallocated ESOP shares having a fair value of
$1,399,683.
(Continued)
32
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
Option Plan. On January 21, 1997, the stockholders of the Company approved
the establishment of the Harrodsburg First Financial Bancorp, Inc. 1996
Stock Option Plan. Under the Option Plan, the Company may grant either
incentive or non-qualified stock options to Directors and key employees for
an aggregate of 200,000 shares of the Company's common stock, with an
exercise price equal to the fair market value of the stock at the date of
the award. Upon exercise of the options, the Company may issue stock out of
authorized shares or purchase the stock in the open market. The option to
purchase shares expires ten years after the date of the grant. Effective
with the approval of the Option Plan, options to purchase 190,000 shares of
common stock were awarded to key employees and directors with an exercise
price of $16.50 per share. The options vest, and thereby become
exercisable, at the rate of 20% on the date of grant, January 21, 1997, and
20% annually thereafter. The Options become vested immediately in the case
of death or disability, or upon a change in the control of the Company.
A summary of option transactions for the years indicated are as follows:
Year ended September 30,
------------------------------------------------------
2001 2000
------------------------ ------------------------
Option Number Option Number
Price of Units Price of Units
------------- -------- ------------- --------
Balance outstanding at beginning of year $13.00-$16.50 195,000 $16.50 190,000
Granted 10,000 13.00 5,000
Released (20,000)
-------- ------- -------
Balance outstanding at end of year $13.00-$16.50 185,000 $13.00-$16.50 195,000
======= =======
Shares exercisable 184,000 157,000
======= =======
Shares available for grant 15,000 5,000
======= =======
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation," which was effective
for fiscal years beginning after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and similar
equity instruments. Under the fair value method, compensation cost is
measured at the grant date, based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Companies are not required to adopt the fair value method of accounting
for employee stock-based transactions, and may continue to account for
such transactions under Accounting Principles Based (APB) Opinion No. 25
"Accounting for Stock Issued to Employees." Under this method the
compensation cost is measured by the difference between the fair value
of the Company's stock at the date of the award, and the exercise price
to be paid by the employee. If a company chooses to report stock based
compensation under APB 25, they must disclose the pro forma net income
and earnings per share as if the Company had applied the new method of
accounting. Accordingly, the following table shows the Company's net
income and earnings per share on a pro forma basis as if
(Continued)
33
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
the
compensation cost for the stock options awarded were accounted for in
accordance with SFAS No. 123 for the year ended September 30, 2001 and
2000, respectively.
Reported Per Consolidated
Financial Statements Pro Forma Amount
2001 2000 2001 2000
-------- ---------- -------- -----------
Net income $684,580 $1,147,240 $560,565 $ 1,023,225
======== ========== ======== ===========
Earnings per common share $ .52 $ .76 $ .43 $ .68
======== ========== ======== ===========
Earnings per common share
assuming dilution $ .52 $ .76 $ .43 $ .68
======== ========== ======== ===========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2001 2000
---- ----
Dividend yield 2.4% 2.4%
Expected volatility .03% .03%
Expected life 10 10
Free interest rate 5.3% 5.3%
Employee Recognition Plan. On January 21, 1997, the stockholders of
the Company approved the establishment of the First Federal Savings
Bank of Harrodsburg Restricted Stock Plan (RSP). The objective of the
RSP is to enable First Financial to attract and retain personnel of
experience and ability in key positions of responsibility. Those
eligible to receive benefits under the RSP will be such employees as
selected by members of a committee appointed by the Company's Board of
Directors. The RSP is a non-qualified plan that is managed through a
separate trust. First Financial can contribute sufficient funds to the
RSP Trust for the purchase of up to 85,000 shares of common stock.
Awards made to employees will vest 20% on each anniversary date of the
award. Shares will be held by the trustee and are voted by the RSP
trustee as directed by the participant for those shares earned or by the
Committee for those shares held, but unearned or unawarded. Any assets
of the trust are subject to the general creditors of the Company. All
shares awarded vest immediately in the case of a participant's death,
disability, or upon a change in control of the Company. The Company
intends to expense RSP awards over the years during which the shares are
payable, based on the fair market value of the common stock at the date
of the grant to the employee. As of September 30, 2001, no awards had
been made under the RSP.
11. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk
First Financial and Citizens are parties to financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
mortgage commitments outstanding which amounted to approximately
$715,450 plus unused lines of credit granted to customers totaling
$5,313,000 at September 30, 2001. Of the mortgage loan commitments at
September 30, 2001 approximately $223,200 were for fixed rate loans. At
September
(Continued)
34
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
30, 2000 mortgage commitments outstanding amounted to approximately
$1,051,450, and unused lines of credit amounted to $2,703,027.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and consumer
lines of credit are represented by the contractual amount of those
instruments. First Financial and Citizens use the same credit policies
in making commitments and conditional obligations as they do for
on-balance sheet instruments. Since many of the loan commitments may
expire without being drawn upon, the total commitment amount does not
necessarily represent future requirements. They evaluate each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit
evaluation of the counter party. Collateral held varies, but primarily
includes residential real estate.
12. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
extends the existing fair value disclosure practices for some
instruments by requiring all entities to disclose the fair value of
financial instruments (as defined), both assets and liabilities
recognized and not recognized in the statements of financial condition,
for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as
they relate only to specific data based on relevant information at that
time. As a significant percentage of the Bank's financial instruments do
not have an active trading market, fair value estimates are necessarily
based on future expected cash flows, credit losses, and other related
factors. Such estimates are accordingly, subjective in nature,
judgmental and involve imprecision. Future events will occur at levels
different from that in the assumptions, and such differences may
significantly affect the estimates.
The statement excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Company. Additionally, the tax impact of the
unrealized gains or losses has not been presented or included in the
estimates of fair value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the
statement of financial condition for cash and short-term instruments
approximate those assets' fair values.
Investment Securities. Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
comparable instruments. No active market exists for the Federal Home
Loan Bank capital stock. The carrying value is estimated to be fair
value since if First Financial withdraws membership in the Federal Home
Loan Bank, the stock must be redeemed for face value.
(Continued)
35
HARRODSBURG FIRST FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
Loans Receivable. The fair value of loans was estimated by discounting
the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposits. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Loan Commitments and Unused Home Equity Lines of Credit. The fair value
of loan commitments and unused lines of credit is estimated by taking
into account the remaining terms of the agreements and the present
credit-worthiness of the counter parties.
The estimated fair value of the Company's financial instruments at
September 30, 2001 and 2000 are as follows:
September 30, 2001 September 30, 2000
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------ -----------
Assets
Cash and cash equivalents $10,795,848 $10,795,848 $3,031,167 $3,031,167
Securities available-for-sale 12,508,751 12,508,751 4,167,377 4,167,377
Securities held-to-maturity 4,941,100 4,985,867 6,826,520 6,731,799
Loans receivable, net 105,081,309 102,016,039 100,881,267 98,918,071
Liabilities
Deposits 102,961,466 103,912,471 86,473,131 85,976,241
FHLB advances 7,000,000 7,000,000 3,500,000 3,500,000
Unrecognized Financial Instruments
Loan commitments 715,450 1,051,450
Unused lines of credit 5,313,000 2,703,027
13. Stock Purchase
In fiscal years 2001 and 2000, the Company repurchased 269,909 shares of
common stock at a cost of $3,652,233 and 86,800 shares of common stock at
a cost of $1,072,842, respectively.
36
