SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
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- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission Number: 0-26570
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
Delaware 61-1284899
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
104 South Chiles Street, Harrodsburg, Kentucky 40330-1620
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (859) 734-5452
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $9.2 million.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the average bid and ask price of the Registrant's
Common Stock as quoted on the National Association of Securities Dealers, Inc.,
Automated Quotations System on December 6, 2002, was approximately $11.1
million.
As of December 6, 2002 there were issued and outstanding 1,334,016 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2002. (Part II)
2. Portions of the Proxy Statement for the 2002 Annual Meeting of
Stockholders. (Part III)
PART I
Harrodsburg First Financial Bancorp, Inc. (the "Company" or
"Registrant") may from time to time make written or oral "forward-looking
statements," including statements contained in the Company's filings with the
Securities and Exchange Commission (including this Annual Report on Form 10-KSB
and the exhibits thereto), in its reports to Stockholders and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "Safe Harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System ("FRB"), inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and savings habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the company.
Item 1. Business
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General
The Registrant is a bank holding company that serves as the holding
company for First Financial Bank ("First Financial"), a federally-chartered
stock savings bank of which it is the sole shareholder, and for Citizens
Financial Bank, Inc. ("Citizens Financial"), a state-chartered commercial bank
in which it holds a 55.80% interest at September 30, 2002. The Registrant
completed its acquisition of Citizens Financial on July 15, 2001. First
Financial and Citizens Financial are referred to herein as the "Banks." The
Company conducts no significant business or operations of its own other than
holding all or a majority of the outstanding stock of the Banks. References to
the Company or Registrant generally refers to the consolidated entity including
the Banks, unless the context indicates otherwise.
On October 15, 2002, the Registrant entered into an agreement to
acquire approximately 200,000 shares, or approximately 23%, of Independence
Bancorp, New Albany, Indiana. Such transaction is contingent upon receipt of
regulatory approval, which is pending and the closing of the transaction on or
before December 31, 2002.
1
First Financial is a federally chartered stock savings bank
headquartered in Harrodsburg, Kentucky. It is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). First Financial is a member of and owns capital stock in the Federal
Home Loan Bank ("FHLB") in Cincinnati, which is one of the 12 regional banks in
the FHLB System.
Citizens Financial, a newly organized de novo Kentucky-chartered
commercial bank located in Glasgow, Kentucky, commenced operations on July 17,
2001. It is subject to examination and regulation by the Federal Deposit
Insurance Corporation ("FDIC") and the Kentucky Department of Financial
Institutions, and its deposits are insured by the Bank Insurance Fund ("BIF").
Citizens Financial is also a member of and owns capital stock in the FHLB in
Cincinnati.
First Financial operates a traditional savings bank business,
attracting deposit accounts from the general public and using those deposits,
together with other funds, primarily to originate and invest in loans secured by
one- to four-family residential real estate, non-residential real estate, and
commercial loans. To a lesser extent, First Financial also originates
multi-family real estate loans and consumer loans.
Citizens operates as a commercial bank, attracting deposit accounts
from the general public and using these deposits, together with other funds
primarily to originate residential and non-residential, commercial and consumer
loans.
Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Registrant's market area of Mercer, Anderson
and Barren Counties, Kentucky. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
2
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Registrant's loan portfolio in dollar amounts
and in percentages of the total loan portfolio (before deductions for loans in
process, deferred loan origination fees and costs and allowance for loan losses)
as of the dates indicated.
At September 30,
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2002 2001
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Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Type of Loans:
Real Estate:
One-to four-family residential....... $ 75,991 65.52% $ 80,153 73.79%
Multi-family......................... 2,419 2.09 2,541 2.34
Agricultural......................... 7,283 6.28 3,865 3.56
Commercial........................... 14,217 12.26 8,783 8.09
Construction......................... 5,433 4.68 7,286 6.70
Consumer:
Home equity.......................... 2,666 2.30 1,879 1.73
Other(1)............................. 7,227 6.23 3,612 3.33
Savings account...................... 741 .64 498 .46
------- ------ ------- ------
Total loans receivable........... 115,977 100.00% 108,617 100.00%
====== ======
Less:
Loans in process..................... 1,554 2,687
Deferred loan origination fees
and costs, net...................... 439 438
Allowance for loan losses............ 632 411
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Loans receivable, net.................. $113,352 $105,081
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(1) Includes home improvement, personal loans, auto and commercial loans.
Loan Maturity Tables
The following table sets forth the maturity of the Banks' loan
portfolio at September 30, 2002. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totaled approximately $40.0 million for the year ended September 30,
2002. Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
-------- -------- -------- --------
(In Thousands)
One- to four-family residential ............. $ 80 $ 3,877 $ 74,965 $ 78,922
Multi-family, agricultural and commercial.... 2,257 4,167 19,286 25,710
Construction ................................ 815 51 4,873 5,739
Consumer .................................... 3,553 2,042 11 5,606
-------- -------- -------- --------
Total ....................................... $ 6,705 $ 10,137 $ 99,135 $115,977
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The following table sets forth as of September 30, 2002 the dollar
amount of all loans, which have fixed rates of interest and floating or
adjustable interest rates. Citizens Financial accounting records do
3
not currently provide loan maturity information by fixed, floating or adjustable
rates. At September 30, 2002, of the total loan maturity due within one year of
$6.7 million, Citizens Financial loan maturity was approximately $2.4 million.
Floating or
Fixed Rates Adjustable Rates Total
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(In Thousands)
One- to-four family residential.............. $22,518 $56,404 $ 78,922
Multi-family, agricultural and commercial.... 3,060 22,650 25,710
Construction................................. 509 5,230 5,739
Consumer..................................... 4,025 1,581 5,606
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Total........................................ $30,112 $85,865 $115,977
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One- to- Four Family Residential Loans. First Financial's primary
lending activity consists of the origination of one- to- four family residential
mortgage loans secured by property located in their primary market area. First
Financial generally originates one- to- four family residential mortgage loans
without private mortgage insurance in amounts up to 85% of the lesser of the
appraised value or selling price of the mortgaged property. Loans in excess of
85% of the value of the mortgaged property typically require private mortgage
insurance in the amount of 25% to 30% of the loan amount.
First Financial offers three types of residential adjustable rate
mortgage loans, all of which use the index value of the National Monthly Median
Cost of Funds Ratio to SAIF-Insured Institutions plus a set margin added to it.
The interest rates on these loans have an initial adjustment period of between
one and five years, and generally adjust annually thereafter, with a maximum
adjustment of 2% per year and a maximum increase of 5% over the life of the
loan. The index margin on a non owner-occupied one- to- four family property
loan is .50% higher than on an owner-occupied property loan. First Financial's
adjustable-rate one-to- four family mortgage loans are for terms of up to 30
years, amortized on a monthly basis, with principal and interest due each month.
Borrowers may refinance or prepay loans at their option without penalty. First
Financial originates, to a limited extent, 10 year, 15 year, 20 and 30 year term
fixed-rate mortgages on one- to four-family, owner-occupied homes with loan to
value ratios of 85% or less.
Loan originations are generally obtained from existing and walk-in
customers, members of the local community, and referrals from realtors,
depositors and borrowers within the Bank's lending area. Mortgage loans
originated and held by First Financial in its portfolio generally include
due-on-sale clauses which provide First Financial with the contractual right to
deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Registrant's consent.
During periods of rising interest rates, the risk of default on
adjustable-rate loans may increase due to increases in interest costs to
borrowers. Further, adjustable-rate loans which provide for initial rates of
interest below the fully indexed rates may be subject to increased risk of
delinquency or default as the higher, fully indexed rate of interest
subsequently replaces the lower, initial rate.
Construction Loans. The Banks engage in construction lending involving
loans to qualified borrowers for construction of one- to-four family dwellings,
multi-family residential units, commercial buildings and churches, with the
intent of such loans converting to permanent financing upon completion of
construction. All construction loans are secured by a first lien on the property
under construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant.
4
Construction/permanent loans generally have adjustable or fixed interest rates
and are underwritten in accordance with the same terms and requirements as
permanent mortgages, except the loans generally provide for disbursement in
stages during a construction period of up to twelve months, during which the
borrower is not required to make monthly payments. If construction improvements
are not completed at the end of six months, accrued interest must be paid to
date. Accrued interest must be paid at completion of construction to the first
day of the following month, and monthly payments start the first day of the
following month if the loan is converted to permanent financing. Borrowers must
satisfy all credit requirements which would apply to permanent mortgage loan
financing for the subject property and must execute a construction loan
agreement.
Construction financing generally is considered to involve a higher
degree of risk of loss than long term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, the Banks may be required to advance funds beyond the amount
originally committed to permit completion of the development. The Banks have
sought to minimize this risk by requiring precise construction cost estimates,
specifications, and drawing plans from qualified borrowers in their market area.
Multi-Family and Commercial Real Estate Loans. In order to serve its
community and enhance yields on its assets, the Banks originate loans secured by
commercial real estate and multi-family properties. The multi-family and
commercial real estate loans originated have generally been made to individuals,
small businesses and partnerships. They have primarily been secured by first
mortgages on apartment buildings, office buildings, churches and other
properties. The Banks benefit from originating such loans due to higher
adjustable interest rates. Adjustable-rate loans for this type of lending have a
margin that is .50% higher than the margin added to single family owner-occupied
property loan. First Financial's multi-family residential and commercial real
estate loans are adjustable-rate loans with terms of 25 years or less, with
loan-to-value ratios not exceeding 80%. Citizens multi-family residential and
commercial real estate loans are adjustable rate loans with a maximum maturity
of twenty years, and loan- to-value ratios not exceeding 85%. As of September
30, 2002, loans on multi-family residential and commercial real estate
properties constituted approximately $16.6 million, or 14.34% of the Banks total
loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one- to- four family residential lending. For
example, such loans typically involve large loans to single borrowers or related
borrowers, the payment experience on such loans is typically dependent on the
successful operation of the project, and these risks can be significantly
affected by the supply and demand conditions in the market for commercial
property and multi-family residential units.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. To minimize these risks, the Banks generally
limits loans of this type to its market area and to borrowers with which it has
substantial experience or who are otherwise well known to them. The Banks'
underwriting procedures
5
require verification of the borrower's credit history, income, financial
statements, banking relationships, credit references, and income projections for
the property. It is their current practice to obtain personal guarantees from
all principals obtaining this type of loan. For the small total dollar amount of
loans secured by church real estate that are originated by the Banks, repayment
is dependent upon the continuing financial support of the church's members. The
Banks also obtain appraisals on each property. All appraisals on commercial and
multi-family real estate are reviewed by the Banks' management.
Agricultural Loans. The Banks engage in lending on improved farm land
with no dwelling, building lots and building acreage sites. The Banks benefit
from originating such loans due to higher origination fees and adjustable
interest rates. These properties must have good road access. The loan to value
ratio for this type of loan is generally 85% or less with a maximum loan term of
15 years for First Financial and 20 years for Citizens Financial . An
adjustable- rate loan for this type of lending has a margin that is .50% higher
than the margin added to one- to four-family owner-occupied property loans.
The Banks also engage in loans for improved farm land with dwelling.
The loan to value ratio for this type of loan is generally 85% or less with a
maximum term of 25 years for First Financial and 20 years for Citizens
Financial. These loans can be set up with payment of interest collected
semi-annually and principal yearly as well as monthly principal and interest
payments.
Consumer Lending. The Banks originate consumer loans on either a
secured or unsecured basis. These loans generally require a pre-existing
relationship with the Banks. The Banks generally make certificate of deposit
loans for terms of up to six months in amounts up to the face amount of the
certificate. The interest rate charged on these loans is up to 2% higher than
the rate paid on the certificate, and interest is billed on a quarterly basis.
These loans are payable on demand and the account must be assigned to the Banks
as collateral for the loan.
Consumer loans may entail greater risk than residential loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. First Financial has
established various lending limits for its officers and maintains a loan
committee. The loan committee consists of Arthur L. Freeman, Chairman of the
Board and Chief Executive Officer, Jack D. Hood, Treasurer and Chief Financial
Officer, and Wickliffe T. Asbury, Executive Vice President, Charles W. Graves,
Jr., Senior Vice President, and Vice Presidents Gay Gaines and James Baxter.
Messrs. Freeman, Hood, and Asbury, each have the authority to approve secured
loan applications up to $300,000 and unsecured loans of up to $30,000. Messrs.
Graves and Gaines, each have the authority to approve secured loan applications
up to $200,000 and unsecured loans of $20,000, and Mr. Baxter has the authority
to approve secured applications up to $150,000 and unsecured loans of $15,000.
Any two officers may join together to approve loans, but only to the limit of
the higher authority of the two officers. The loan committee approves loans that
exceed the limits established for individual officers and may approve secured
loans of up to $500,000 and unsecured loans of $50,000. The Board of Directors
must approve all loans that exceed the lending limit of the loan committee.
For all loans originated by First Financial, upon receipt of a
completed loan application from a prospective borrower, a credit report is
generally ordered, income and certain other information is verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to be used as security for the proposed loan is obtained.
All appraisals are reviewed by officers of First
6
Financial designated by the Board of Directors. An independent appraiser
designated and approved by the Board of Directors of First Financial is utilized
for all real estate mortgage loans. For construction/permanent loans, the funds
advanced during the construction phase are held in a loan-in- process account
and disbursed based upon various stages of completion in accordance with the
results of inspection reports that are based upon physical inspection of the
construction by an independent contractor hired by First Financial or in some
cases by an officer of the Bank. For real estate loans First Financial will
require either title insurance or a title opinion. Borrowers must also obtain
fire and casualty, hazard or flood insurance (for loans on property located in a
flood zone, flood insurance is required) prior to the closing of the loan.
Citizens has established various lending limits for its officers and
maintains an officers loan committee. The officers loan committee consists of
Terry Bunnell, President, Larry Ramey, Chief Operating Officer, Nancy Hale, Vice
President Loans, and Jennie Wilson. Mr. Bunnell has the authority to approve
secured and unsecured loans up to $250,000, Mr. Ramey has the authority to
approve secured and unsecured loans up to $200,000. Ms. Hale has the authority
to approve secured and unsecured loans up to $100,000 and Ms. Wilson has the
authority to approve secured and unsecured loans up to $2,500.
Officers may not join authorities to approve loans but officers may
have an officer with higher authority approve loans up to the limit of that
officer. The loan committee approves loans exceeding officer limits up to the
loan committee limit of $500,000. The loan committee consists of Officers
Bunnell, Ramey, Hale and Wilson. The Board loan committee consists of Terry
Bunnell, Larry Ramey, Henry H. Dickinson, Chairman of the Board, Thomas K.
Lyons, Samuel D. Dickinson, Philip J. Rutledge and Arthur Freeman and approves
loans in excess of $500,000.
The Board of Directors approves all insider loans and other loans as
presented by the Board loan committee for full board approval.
For all loans originated by Citizens, upon receipt of a completed loan
application from a prospective borrower, a credit report is generally ordered,
income and certain other information is verified and, if necessary additional
financial information is requested. An appraisal of the real estate intended to
be used as security for the proposed loan is obtained as required by
regulations. For loans for which appraisals are not required, written
evaluations of the real estate collateral are prepared. Officers of Citizens
review all appraisals or written evaluations prepared. Independent appraisers as
approved by the Board of Directors are utilized. For construction/permanent
loans a line of credit is established and advances are drawn against the line
based upon various stages of completion in accordance with the results of
inspection reports based on physical inspection of the construction by an
independent contractor or bank officer. For real estate loans Citizens requires
either title insurance or a title opinion. Borrowers must also obtain fire and
casualty, hazard or flood insurance if in a flood zone prior to closing the
loan.
Loan Commitments. First Financial issues written commitments to
prospective borrowers on all approved real estate loans. Generally, the
commitment requires acceptance within 20 days of the date of issuance. At
September 30, 2002, First Financial had approximately $6.2 million of
commitments to cover originations, undisbursed funds for loans-in-process and
unused lines of credit.
Citizens issues written commitments to prospective borrowers on all
approved real estate loans. Generally, the commitment requires acceptance within
20 days of the date of issuance. At September 30, 2002, Citizens had
approximately $1.5 million of commitments to cover unused lines of credit.
7
Non-Performing and Problem Assets
Loan Delinquencies. First Financial monitors delinquencies on all types
of loans closely. If such loans later become delinquent, First Financial
contacts and works with the borrower to resolve the delinquency before
initiating foreclosure proceedings. First Financial's collection procedures
provide that when a mortgage loan is 10 days past due, a notice of nonpayment is
sent. Delinquent notices are sent if the loan becomes delinquent for more than
30 days. If payment is still delinquent after 60 days, the customer will receive
a letter and/or telephone call and may receive a visit from a representative of
the Registrant. If the delinquency continues, similar subsequent efforts are
made to eliminate the delinquency. If the loan continues in a delinquent status
for 90 days past due and no repayment plan is in effect, management will
generally initiate legal proceedings.
Loans are reviewed on a monthly basis by management and are generally
placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non- accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
Citizens monitors delinquencies on all types of loans closely. If such
loans later become delinquent, Citizens contacts and works with the borrower to
resolve the delinquency before initiation of foreclosure proceedings. Citizens
collection procedures provide that when a mortgage loan is 15 days past due (10
days for other loans), a notice of nonpayment is sent. Delinquent notices are
sent if the loan becomes delinquent for more than 30 days. At 30 days past due,
the customer also receives a letter, phone call or officer visit to discuss the
loan status. If the delinquency continues, similar subsequent efforts are made
to eliminate the delinquency. If the loan continues in a delinquent status for
up to 90 days past due and no repayment plan is in effect, management will
generally initiate legal proceedings.
Loans are reviewed on a monthly basis by management and will be placed
on non-accrual status when the loan becomes more than 90 days past due and, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent interest payments, if any, are
either applied to principal then to interest that would have been contractually
accrued.
8
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned and certain other repossessed
assets and loans. As of the dates indicated, the Registrant had no loans
categorized as troubled debt restructuring within the meaning of Statement of
Financial Accounting Standards ("SFAS") 15 and no impaired loans within the
meaning of meaning of SFAS 114, as amended by SFAS 118.
At September 30,
------------------------
2002 2001
---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Total.............................................. $ 41 $ --
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Construction loans............................... -- --
Permanent loans secured by 1 to 4 family
dwelling units................................. 217 166
All other mortgage loans......................... 5 6
Non-mortgage loans:
Commercial....................................... -- --
Consumer......................................... 112 50
---- ----
Total.............................................. 334 222
---- ----
Total non-accrual and accrual loan................. 375 222
Real estate owned.................................. 233 --
---- ----
Total non-performing assets........................ $608 $222
==== ====
Total non-performing loans to net loans............ .33% .21%
==== ====
Total non-performing loans to total assets......... .25% .16%
==== ====
Total non-performing assets to total assets........ .40% .16%
==== ====
Classified Assets. Federal regulations provide for a classification
system for problem assets of insured institutions which covers all problem
assets. Under this classification system, problem assets of insured institutions
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
9
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. First Financial and Citizens Financial determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, respectively, which may order the
establishment of additional general or specific loss allowances. A portion of
general loss allowances established to cover possible losses related to assets
classified as substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
The following table sets forth the Registrant's classified assets in
accordance with its classification system:
At September 30, 2002
---------------------
(In Thousands)
Special Mention.................. $ 5
Substandard...................... 486
Doubtful......................... --
Loss............................. --
----
Total............................ $491
====
Allowance for Loan Losses. It is management's policy to provide for
losses on loans in its loan portfolio. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Registrant's loan portfolio. Such evaluation, which includes a review of
all loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Registrant's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
current economic conditions, and the relationship of the allowance for loan
losses to outstanding loans.
10
The following table sets forth information with respect to the
Registrant's allowance for loan losses at the dates and for the periods
indicated:
At or For the Year
Ended September 30,
------------------------
2002 2001
-------- --------
(Dollars in Thousands)
Total loans outstanding............................ $115,977 $108,617
======== ========
Average loans outstanding.......................... $109,011 $102,989
======== ========
Allowance balances (at beginning of period)....... $ 411 $ 372
Provision (credit):
Residential...................................... 241 39
Consumer......................................... -- --
Net Charge-offs (recoveries):
Residential...................................... 20 --
Consumer......................................... -- --
-------- --------
Allowance balance (at end of period)............... $ 632 $ 411
======== ========
Allowance for loan losses as a percent
of total loans outstanding....................... .54% .38%
Net loans charged off as a percent of
average loans outstanding........................ .02% --%
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for loan losses
will be adequate to cover losses which may in fact be realized in the future and
that additional provisions for losses will not be required.
11
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
At September 30,
------------------------------------------------
2002 2001
-------------------- ----------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
Real estate mortgage:
One- to four-family residential......... $414 65.52% $302 73.79%
Multi-family............................ 13 2.09 10 2.34
Agricultural............................ 40 6.28 15 3.56
Commercial.............................. 77 12.26 33 8.09
Residential construction................ 30 4.68 28 6.70
Consumer.................................. 58 9.17 23 5.52
---- ------ ---- ------
Total allowance for loan
losses.............................. $632 100.00% $411 100.00%
==== ====== ==== ======
Investment Activities
The Registrant is required under federal regulations to maintain a
sufficient amount of liquid assets which may be invested in specified short-term
securities and certain other investments. However, neither the OTS nor the FDIC
prescribes by regulation to a minimum or percentage of liquid assets. The level
of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
(iii) expectation of future yield levels, and (iv) management's projections as
to the short-term demand for funds to be used in loan origination and other
activities. Investment securities, including mortgage-backed securities, are
classified at the time of purchase, based upon management's intentions and
abilities, as securities held to maturity or securities available for sale. Debt
securities acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using the
level yield method and recognized as adjustments of interest income. All other
debt securities are classified as available for sale to serve principally as a
source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Registrant to
categorize securities as "held to maturity," "available for sale" or "trading."
As of September 30, 2002, Registrant had securities (including mortgage-backed
securities) classified as "held to maturity" and "available for sale" in the
amount of $2.3 million and $17.3 million, respectively and had no securities
classified as "trading." Securities classified as "available for sale" are
reported for financial reporting purposes at the fair market value with net
changes in the fair market value
12
from period to period included as a separate component of stockholders' equity,
net of income taxes. At September 30, 2002, the Registrant's securities
available for sale had an amortized cost of $12.9 million and fair market value
of $17.3 million. Changes in the fair market value of securities available for
sale do not affect the Company's income. In addition, changes in the fair market
value of securities available for sale do not affect the Bank's regulatory
capital requirements or its loan-to-one borrower limit.
At September 30, 2002, the Registrant's investment portfolio policy
allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii)
U.S. federal agency or federally sponsored agency obligations, (iii) local
municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, and (vii) investment grade corporate
bonds, and commercial paper. The board of directors may authorize additional
investments.
As a source of liquidity and to supplement Registrant's lending
activities, the Registrant has invested in residential mortgage-backed
securities. Mortgage-backed securities can serve as collateral for borrowings
and, through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type of
mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities to
investors. The quasi- governmental agencies guarantee the payment of principal
and interest to investors and include FreddieMac, GinnieMae, and FannieMae.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FreddieMac, GinnieMae, and FannieMae, make
up a majority of the pass-through certificates market.
At September 30, 2002, the Registrant's securities portfolio did not
contain securities of any issuer, other than those issued by U.S. government or
its agencies, with an aggregate book value in excess of 10% of the Registrant's
equity.
13
Investment Portfolio. The following table sets forth the carrying value
of the Registrant's investment securities at the dates indicated.
At September 30,
----------------
2002 2001
---- ----
(In Thousands)
Investment Securities available for sale:
U.S. government and federal agencies securities......... $ 4,932 $ 7,498
FHLMC stock ............................................ 4,309 5,011
Mortgaged-backed securities ............................ 8,034 --
------- -------
Total..................................................... 17,275 12,509
------- -------
Investment securities held to maturity:
U.S. government and federal agencies debt securities .. 2,007 3,037
Municipal bonds ....................................... 214 220
Mortgaged-backed securities ........................... -- 23
------- -------
Total...................................................... 2,221 3,280
------- -------
Total investment securities................................ $19,496 $15,789
======= =======
14
Investment Portfolio Maturities. The following table sets forth
information regarding the scheduled maturities, carrying values, market value
and weighted average yields for the Registrant's investment securities portfolio
at September 30, 2002. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
As of September 30, 2002
--------------------------------------------------------------------------------------------------
More Than One More Than Five More than
One Year or Less to Five Years to Ten Years Ten Years Total Investment Securities
----------------- ---------------- ---------------- ---------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ----- ------ ---- ------ ---- ---- ----- ------- ----- -------
(Dollars in Thousands)
Investments securities available
for sale:
U.S. government and federal
agencies debt securities...... $ 3,699 1.63% $1,030 4.63% $ 203 5.15% $ -- --% $ 4,932 2.38% $ 4,932
FHLMC stock ...................... 4,309 1.42 -- -- -- -- -- -- 4,309 1.42 4,309
Mortgage-backed securities........ 8,034 5.16 -- -- -- -- -- -- 8,034 5.85 8,034
------- ------ ------ ---- ------- -------
Total........................ 16,042 3.55 1,030 4.63 203 5.15 -- -- 17,275 3.63 17,275
------- ---- ------ ---- ------ ---- ---- ---- ------- ---- -------
Investment securities held to
maturity:
U.S. government and federal
agencies debt securities....... -- -- 1,000 4.15 1,007 4.0 -- -- 2,007 4.08 2,032
Municipal bonds................... 40 4.15 65 4.25 -- -- 109 5.38 214 4.15 229
------- ------ ------ ---- ------- -------
Total........................... 40 4.15 1,065 4.16 1,007 4.0 109 5.38 2,221 4.15 2,261
------- ---- ------ ---- ------ ---- ---- ---- ------- ---- -------
Total investment securities....... $16,082 3.55% $2,095 4.52% $1,210 4.19% $109 5.38% $19,496 3.69% $19,536
======= ==== ====== ==== ====== ==== ==== ==== ======= ==== =======
15
Sources of Funds
General. Deposits are the major external source of the Registrant's
funds for lending and other investment purposes. The Registrant derives funds
from amortization and prepayment of loans and, to a much lesser extent,
maturities of investment securities, borrowings, mortgage-backed securities and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Registrant's primary market area through the offering of a
selection of deposit instruments including regular savings accounts, money
market accounts, and term certificate accounts. Deposit account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate, among other factors. At September 30, 2002,
the Registrant had no brokered accounts.
Jumbo Certificates of Deposit. The following table indicates the amount
of the Registrant's certificates of deposit of $100,000 or more by time
remaining until maturity as of September 30, 2002.
Certificates
of Deposit
----------
Maturity Period (In Thousands)
Three months or less............................. $ 4,115
More than three through six months............... 10,671
More than six through twelve months.............. 4,544
Over twelve months............................... 4,158
-------
Total......................................... $23,488
=======
The following table sets forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
Year Ended September 30,
-------------------------------------------
2002 2001
-------------------- ------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
(Dollars in Thousands)
Deposit Category:
Demand Accounts(1)............. $ 16,173 1.41% $11,500 2.36%
Passbook Accounts.............. 6,982 2.01 6,765 2.79
Certificates................... 92,385 3.98 73,406 5.98
-------- ---- ------- ----
$115,540 3.50% $91,671 5.29%
======== ==== ======= ====
-------------
(1) Includes non-interest bearing accounts, which represent less than 10% of
total deposits.
Borrowings. Deposits are the primary source of funds of First
Financial's lending and investment activities and for its general business
purposes. First Financial may obtain advances from the FHLB of Cincinnati to
supplement its supply of lendable funds. Advances from the FHLB of Cincinnati
are
16
typically secured by a pledge of First Financial's stock in the FHLB of
Cincinnati and a portion of their first mortgage loans and certain other assets.
First Financial and Citizens, if the need arises, may also access the Federal
Reserve Bank discount window to supplement its supply of lendable funds and to
meet deposit withdrawal requirements. At September 30, 2002, the Registrant
borrowings totaled $5.0 million, which $4.0 million was short-term and $1.0
million was long-term.
Personnel
As of September 30, 2002, the Registrant had 34 full-time employees and
2 part-time employees. None of the Registrant's employees are represented by a
collective bargaining group. The Registrant believes that its relationship with
its employees is good.
Regulation of the Company
General. The Company is a registered bank holding company subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). In addition, the Company is subject to the provisions of Kentucky's
banking laws regulating bank acquisitions and various activities of controlling
bank shareholders. As a bank holding company, the Company is subject to
regulation, supervision, and examination by the Board of Governors of the
Federal Reserve System (the "FRB") and is required to file periodic reports with
the FRB. The Kentucky Department of Financial Institutions may also conduct
examinations of the Company to determine whether it is in compliance with
applicable Kentucky banking laws and regulations. In addition, the FRB has
enforcement authority over the Company and any non- financial institution
subsidiaries of the Company. This regulation and oversight is intended primarily
for the protection of the depositors of the Banks and not for the benefit of the
Company's stockholders.
Regulatory Capital Requirements. The FRB has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the Bank Holding Company Act. The FRB's capital adequacy guidelines are similar
to those imposed on the Banks by the OTS and the FDIC. See "Regulation of the
Banks - Regulatory Capital Requirements."
Restrictions on Dividends. The FRB has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the FRB's
view that a bank holding company should pay cash dividends only to the extent
that the holding company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the federal prompt corrective action regulations, the FRB may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Acquisition of Banks. The BHC Act also requires a bank holding company
to obtain prior approval from the FRB before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank which is
not already majority owned or controlled by that bank holding company.
Acquisition of any additional banks would require prior approval from both the
FRB and the Kentucky Department of Financial Institutions.
17
Non-Banking Activities. The business activities of the Company, as a
bank holding company, are restricted by the BHC Act. The Company is authorized
by the BHC Act and the FRB's Regulation Y to acquire ownership or control of
non-banking companies, provided the activities of the non-banking companies are
so closely related to banking or managing or controlling banks that the FRB
considers the activities to be proper to the operation and control of banks.
Regulation Y sets forth a lengthy list of activities (including the operation of
a savings institution such as First Financial) that the FRB has determined to be
so closely related to the business of banking as to be a proper incident thereto
regarded as closely related to banking or managing or controlling banks and,
thus, are permissible activities for bank holding companies.
The Gramm-Leach-Bliley Act, which became effective in March 2001,
permits greater affiliation among banks, securities firms, insurance companies,
and other companies under a new type of financial services company known as a
"financial holding company." A financial holding company essentially is a bank
holding company with significantly expanded powers. Financial holding companies
are authorized by statute to engage in a number of financial activities
previously impermissible for bank holding companies, including securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; and merchant banking activities.
The act also permits the FRB and the Treasury Department to authorize additional
activities for financial holding companies if they are "financial in nature" or
"incidental" to financial activities. A bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized,
well managed, and has at least a "satisfactory" CRA rating. A financial holding
company must provide notice to the FRB within 30 days after commencing
activities previously determined by statute or by the FRB and the Department of
the Treasury to be permissible. The Company has not submitted notice to the FRB
of its intent to be deemed a financial holding company.
Regulation of the Banks
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Banks. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. First Financial, as a federal savings bank, is subject to
regulation, supervision and regular examination by the OTS. Citizens Financial,
as a Kentucky commercial bank that is not a member of the FRB, is subject to
regulation, supervision and regular examination both by the Kentucky Department
of Financial Institutions and the FDIC. The deposits of both Banks are insured
by the FDIC to the maximum extent provided by law (a maximum of $100,000 for
each insured depositor).
Federal and Kentucky banking laws and regulations control, among other
things, the Banks' required reserves, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends and other aspects
of the Banks' operations. The regulatory structure also gives the respective
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including polices with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Supervision, regulation and examination
of First Financial and Citizens Financial by the bank regulatory agencies are
intended primarily for the protection of depositors rather than for holders of
the Company's stock or for the Company as the holder of the stock of the Banks.
Insurance of Deposit Accounts. The deposit accounts held by First
Financial and Citizens Financial are insured by the SAIF and the BIF,
respectively, to a maximum of $100,000 for each insured member (as defined by
law and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound
18
condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC or the institution's primary
regulator.
The Banks are required to pay insurance premiums based on a percentage
of their insured deposits to the FDIC for insurance of their deposits by the
SAIF and the BIF. The FDIC's current deposit insurance assessment rates for SAIF
and BIF member institutions are in a range from 0% to .027% of insured deposits
on an annualized basis, with the assessment rate for most banks and thrifts set
at 0%.
In addition, all FDIC-insured institutions are required through 2017 to
pay assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. For calendar 2002, the average
annual assessment rate was .0190% of insured deposits and, for 2002, the average
annual assessment rate will be approximately .0175% of insured deposits.
Regulatory Capital Requirements. The OTS and the FDIC have adopted
regulations requiring institutions under their respective jurisdictions maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. Specifically, all savings institutions and banks must maintain the
following ratios: (1) "Tier 1" or "core" capital equal to at least 4% (3% if the
institution has received the highest rating, "composite 1 CAMELS," on its most
recent examination) of total adjusted assets; and (2) total capital (defined as
Tier 1 capital plus supplementary (Tier 2) capital) equal to 8% of total
risk-weighted assets. In addition, savings institutions are required under
applicable federal law to maintain tangible equity capital equal to at least
1.5% of total adjusted assets. The Banks were in compliance with the respective
capital requirements of the FDIC and the OTS as of September 30, 2002.
Dividend and Other Capital Distribution Limitations. The OTS and the
Kentucky Department of Financial Institutions impose restrictions on the ability
of federal savings institutions and Kentucky commercial banks, respectively, to
pay dividends and to make other capital distributions. In general, the Banks are
prohibited from paying any dividends or other capital distributions if, after
the distribution, they would be undercapitalized under applicable federal law.
The prior approval of the OTS would be required for any capital
distribution (including a dividend) by First Financial if: (i) the total of its
capital distributions, including the proposed distribution, were to exceed its
net income for the calendar year to date plus its retained net income for the
preceding two calendar years; (ii) First Financial was not eligible for
expedited treatment of applications under applicable OTS regulations; (iii)
First Financial would not remain adequately capitalized, as defined, after the
distribution; or (iv) the capital distribution would violate an agreement
between the OTS and First Financial or any OTS regulation. In addition, even if
the above application requirement were inapplicable, First Financial would be
required to give the OTS prior notice of any capital distribution if it would
not remain well capitalized after the distribution.
In addition, under applicable provisions of Kentucky law, the prior
approval of the Kentucky Department of Financial Institutions is required if the
total of all dividends declared by Citizens Financial in any calendar year
exceeds Citizens Financial's net profits, as defined, for that year combined
with its retained net profits for the preceding two calendar years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
Federal Home Loan Bank System. First Financial and Citizens Financial
are members of the FHLB of Cincinnati, which is one of 12 regional FHLBs that
administers the home financing credit function of savings associations. Each
FHLB serves as a reserve or central bank for its members within
19
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB.
As members, First Financial and Citizens Financial are required to
purchase and maintain stock in the FHLB of Cincinnati in an amount equal to at
least 1% of aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. At September 30, 2002,
the First Financial was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Properties
-------- -------------------------
(a) Properties
The Registrant operates from two main offices and two full service
branch offices. The following table sets forth information regarding the
Registrant's properties:
Original
Date
Leased Acquired
Location or Owned or Leased
-------- -------- ---------
First Financial
---------------
MAIN OFFICE:
104 South Chiles Street Owned 1964
Harrodsburg, Kentucky 40330
BRANCH OFFICE: Owned 1973
216 South Main Street
Lawrenceburg,Kentucky 40342 (1)
BRANCH OFFICE: Owned 1998
1015 Cross Road Drive
Lawrenceburg, Kentucky 40342
Citizens Financial
------------------
MAIN OFFICE: Leased 2001
113 West Public Square
Glasgow, Kentucky 42142
------------------
(1) As of December 27, 2002, this branch office was closed.
20
(b) Investment Policies. See "Item 1. Description of Business" above for a
general description of the Registrant's investment policies and any regulatory
or Board of Directors' percentage of assets limitations regarding certain
investments. The Registrant's investments are primarily acquired to produce
income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate.
See "Item 1. Description of Business - Lending Activities and - Regulation of
the Bank," and "Item 2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1.
Description of Business - Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See "Item 1. Description of
Business - Lending Activities and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data. Not Applicable.
Item 3. Legal Proceedings
------- -----------------
The Registrant, from time to time, is a party to ordinary routine
litigation, which arises in the normal course of business, such as claims to
enforce liens, condemnation proceedings on properties in which the Registrant
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Registrant.
There were no material lawsuits pending or known to be contemplated against the
Banks or the Company at September 30, 2002.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
------- -----------------------------------------------------------------------
Matters
-------
The information contained under the section captioned "Market and
Dividends Information" in the 2002 Annual Report to Stockholders (the "Annual
Report") is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
------- ------------------------------------------------------------------------
of Operations
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
21
Item 7. Financial Statements
------- --------------------
The Registrant's financial statements listed under Item 13 herein are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
------- -----------------------------------------------------------------------
Financial Disclosure
--------------------
Information regarding the change in accountants is incorporated herein
to Form 8-K filed on August 26, 2002.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
------- -----------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
---------------------------------------
The information required under this item is incorporated herein by
reference to the Proxy Statement for the 2002 Annual Meeting (the "Proxy
Statement") contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance," "Proposal I - Election of Directors," and "-
Biographical Information."
Item 10. Executive Compensation
-------- ----------------------
The information required by this item is incorporated by reference to
the Proxy Statement contained under the section captioned "Director and
Executive Officer Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management
-------- --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated
herein by reference to the Proxy Statement contained under the
sections captioned "Principal Holders" and "Proposal I -
Election of Directors."
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
(d) Securities Authorized for Issuance Under Equity Compensation
Plans
22
Set forth below is information as of September 30, 2002 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
------------------- ---------- ------------------------
Equity compensation plans
approved by shareholders:
1996 Stock Option Plan.............. 185,000 $ 16.42 15,000
Restricted Stock Plan............... -- -- 85,000
Equity compensation plans
not approved by
shareholders(1)..................... n/a n/a n/a
------- ------- -------
TOTAL......................... 185,000 $ 16.42 100,000
======= ======= =======
-----------
(1) Not applicable.
Item 12. Certain Relationships and Related Transactions
-------- ----------------------------------------------
The information required by this item is incorporated herein by
reference to the Proxy Statement contained under the section captioned "Certain
Relationships and Related Transactions."
Item 13. Exhibits, Financial Statements, and Reports on Form 8-K
-------- -------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report, and are incorporated by reference.
1. The consolidated balance sheets of Harrodsburg First Financial
Bancorp, Inc. as of September 30, 2002 and 2001, and the
related consolidated statements of income, changes in
stockholders' equity and cash flows for the years then ended,
together with the related notes and the independent auditor's
report of EKW & Associates, llp, independent accountants.
2. Schedules omitted as they are not applicable.
23
3. Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Harrodsburg First Financial
Bancorp, Inc.*
3.2 Bylaws of Harrodsburg First Financial Bancorp, Inc.*
10.1 1996 Stock Option Plan**
10.2 Restricted Stock Plan and Trust Agreement**
10.3 Employment Agreement Arthur L. Freeman***
13.0 Portions of the 2002 Annual Report to Stockholders
21.0 Subsidiary Information (See Item 1 - Description of Business)
99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Report on Form 8-K, dated August 26, 2002 was filed to
disclose the change in Registrants' independent accountants.
---------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed on June 14, 1995,
Registration No. 33-93458.
** Incorporated herein by reference into this document from the Exhibits
to the Form 10-K filed on December 29, 1997.
*** Incorporated herein by reference to exhibit 10.4 to the Form 10-KSB
filed on December 20, 2001.
Item 14. Controls and Procedures
-------- -----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-KSB, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized as of December 23,
2002.
HARRODSBURG FIRST FINANCIAL BANCORP, INC.
By: /s/Arthur L. Freeman
------------------------------------
Arthur L. Freeman
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by December 23, 2002, by the following persons
on behalf of the Registrant and in the capacities indicated.
By: /s/Arthur L. Freeman By: /s/Jack D. Hood
---------------------------------------- ----------------------------------------
Arthur L. Freeman Jack D. Hood
President and Chief Executive Officer, Secretary, Treasurer and Director
and Chairman of the Board (Chief Financial and Accounting Officer)
(Duly Authorized Representative)
By: /s/Wickliffe T. Asbury, Sr. By: /s/Thomas Les Letton
---------------------------------------- ----------------------------------------
Wickliffe T. Asbury, Sr. Thomas Les Letton
Vice President and Director Director
By: Jack L. Coleman, Jr. By: /s/W. Dudley Shryock
---------------------------------------- ----------------------------------------
Jack L. Coleman, Jr. W. Dudley Shryock
Director Director
By: /s/James W. Dunn
----------------------------------------
James W. Dunn
Director
25
SECTION 302 CERTIFICATION
I, Arthur L. Freeman, President and Chief Executive Officer, certify
that:
1. I have reviewed this annual report on Form 10-KSB of Harrodsburg First
Financial Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 23, 2002 /s/Arthur L. Freeman
-------------------------------------
Arthur L. Freeman
President and Chief Executive Officer
SECTION 302 CERTIFICATION
I, Jack D. Hood, Treasurer, certify that:
1. I have reviewed this annual report on Form 10-KSB of Harrodsburg First
Financial Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 23, 2002 /s/Jack D. Hood
----------------------------------------
Jack D. Hood
Treasurer
(Chief Financial and Accounting Officer)