UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-18832
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
-----------------------------------------------
(Exact Name of Registrant as specified in its charter)
KENTUCKY 61-1168311
------------ --------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2323 Ring Road
ELIZABETHTOWN, KENTUCKY 42701
(Address of principal executive offices)
(Zip Code)
(270) 765-2131
(Registrant's telephone number, including area code)
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____
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF JANUARY 31, 2000
----------- --------------------------------------
Common Stock 3,754,997 shares
This document is comprised of 23 pages.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
INDEX
PART I - FINANCIAL INFORMATION Page Number
Item 1 -Consolidated Financial Statements and Notes to Consolidated
Financial Statements 3-11
Item 2 -Management's Discussion and Analysis of the Consolidated
Statements of Financial Condition and Results of Operations 12-20
Item 3 -Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION 21-22
SIGNATURES 23
2
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DECEMBER 31, JUNE 30,
ASSETS 2000 2000
---- ----
(DOLLARS IN THOUSANDS)
Cash and due from banks $ 11,468 $ 11,310
Interest bearing deposits 4,238 3,669
------ ------
Total cash and cash equivalents 15,706 14,979
Securities available-for-sale 1,940 2,048
Securities held-to-maturity (fair value of $42,562
and $41,195 at December and June 2000) 42,951 43,134
Loans receivable, less allowance for loan losses
of $2,541 (Dec.) and $2,252 (June) 511,425 471,231
Federal Home Loan Bank stock 5,641 4,081
Premises and equipment 11,740 11,709
Real estate owned:
Acquired through foreclosure 17 -
Held for development 721 446
Repossessed assets 74 -
Excess of cost over net assets acquired 9,631 10,047
Accrued interest receivable 2,395 2,032
Other assets 1,477 1,078
------ ------
TOTAL ASSETS $603,718 $560,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 18,611 $ 16,822
Interest bearing 417,333 406,937
------- -------
Total Deposits 435,944 423,759
Advances from Federal Home Loan Bank 110,837 80,339
Accrued interest payable 1,027 1,129
Accounts payable and other liabilities 1,108 1,962
Deferred income taxes 1,886 1,915
------- ------
TOTAL LIABILITIES 550,802 509,104
------- -------
STOCKHOLDERS' EQUITY:
Serial preferred stock, 5,000,000 shares
authorized and unissued - -
Common stock, $1 par value per share;
authorized 10,000,000 shares; issued and
outstanding, 3,756,000 shares in June and
3,755,000 shares in December 3,755 3,756
Additional paid-in capital - -
Retained earnings 48,802 47,481
Accumulated other comprehensive
income, net of tax 359 444
------- ------
TOTAL STOCKHOLDERS' EQUITY 52,916 51,681
------- ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $603,718 $560,785
======== ========
See notes to consolidated financial statements.
3
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME:
Interest and fees on loans $10,435 $ 8,640 $20,412 $16,930
Interest and dividends on investments
and deposits 866 797 1,707 1,611
------ ------ ----- -----
Total interest income 11,301 9,437 22,119 18,541
------ ------ ------ ------
INTEREST EXPENSE:
Deposits 5,475 4,334 10,673 8,574
Federal Home Loan Bank advances 1,702 659 3,107 1,051
----- ------ ----- ------
Total interest expense 7,177 4,993 13,780 9,625
----- ------ ------ ------
Net interest income 4,124 4,444 8,339 8,916
Provision for loan losses 306 90 501 180
------ ------ ------ ------
Net interest income after provision
for loan losses 3,818 4,354 7,838 8,736
----- ------ ----- -----
NON-INTEREST INCOME:
Customer service fees on deposit accounts 621 492 1,199 942
Secondary mortgage market closing fees 115 95 226 225
Gain on sale of investments 351 152 696 305
Brokerage and insurance commissions 198 124 323 233
Other income 179 138 333 269
----- ----- ----- -----
Total non-interest income 1,464 1,001 2,777 1,974
----- ----- ----- -----
NON-INTEREST EXPENSE:
Employee compensation and benefits 1,571 1,446 3,068 2,732
Office occupancy expense and equipment 357 328 723 679
FDIC insurance premium 21 59 43 116
Marketing and advertising 125 114 250 257
Outside services and data processing 342 305 664 606
State franchise tax 103 99 206 199
Amortization of intangibles 208 208 416 416
Other expense 622 633 1,234 1,200
----- ----- ----- -----
Total non-interest expense 3,349 3,192 6,604 6,205
----- ----- ----- -----
Income before income taxes 1,933 2,163 4,011 4,505
Income taxes 628 698 1,317 1,467
------ ----- ----- -----
NET INCOME $1,305 $1,465 $2,694 $3,038
====== ====== ====== ======
Earnings per share:
Basic $ 0.35 $ 0.37 $ 0.72 $ 0.76
Diluted $ 0.35 $ 0.37 $ 0.72 $ 0.76
See notes to consolidated financial statements.
4
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
NET INCOME $1,305 $1,465 $2,694 $3,038
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities 169 (103) 374 (232)
Reclassification of realized amount (231) (100) (459) (201)
----- ----- ----- -----
Net unrealized gain (loss) recognized in
Comprehensive income (62) (203) (85) (433)
----- ----- ----- -----
COMPREHENSIVE INCOME $1,243 $1,262 $2,609 $2,605
====== ====== ====== ======
See notes to consolidated financial statements.
5
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED OTHER
ADDITIONAL COMPREHENSIVE
PAID - IN RETAINED INCOME,
SHARES AMOUNT CAPITAL EARNINGS NET OF TAX TOTAL
------ ------ ---------- -------- ------------- -----
BALANCE, JUNE 30, 2000 3,756 $ 3,756 $ - $47,481 $ 444 $51,681
Net income - - - 2,694 - 2,694
Exercise of stock options 1 1 6 - - 7
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (85) (85)
Cash dividends declared
($.18 per share) - - - (1,351) - (1,351)
Stock repurchased (2) (2) (6) (22) - (30)
----- ------- ------ ------- ------ -------
BALANCE, DECEMBER 31, 2000 3,755 $ 3,755 $ - $48,802 $ 359 $52,916
====== ======= ======= ======= ====== =======
See notes to consolidated financial statements.
6
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31,
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income $ 2,694 $ 3,038
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 501 180
Depreciation of premises and equipment 567 499
Net change in deferred loan fees and costs 174 173
Federal Home Loan Bank stock dividends (180) (58)
Amortization of acquired intangible assets 416 416
Amortization and accretion on securities (31) (31)
Gain on sale of investments available-for-sale (696) (305)
Gain on sale of real estate held for development (6) -
Deferred taxes 14 189
Changes in:
Interest receivable (363) (188)
Other assets (399) 87
Interest payable (102) 21
Accounts payable and other liabilities (848) (1,132)
----- ------
Net cash provided by operating activities 1,741 2,889
----- ------
INVESTING ACTIVITIES:
Proceeds on sales of securities available-for-sale 708 306
Purchases of securities available-for-sale (32) -
Purchases of securities held-to-maturity - (5,000)
Maturities of securities held-to-maturity 214 6,148
Net increase in loans (40,960) (31,137)
Purchase of Federal Home Loan Bank stock (1,380) -
Net purchases of premises and equipment (598) (320)
Purchase of real estate held for development (275) -
------- -------
Net cash used in investing activities ( 42,323) (30,003)
------- -------
FINANCING ACTIVITIES:
Net increase in deposits 12,185 7,396
Advances from Federal Home Loan Bank 30,544 33,645
Repayments on FHLB advances (46) (5,070)
Dividends paid (1,351) (1,433)
Proceeds from stock options exercised 7 -
Common stock repurchased (30) (5,562)
------ ------
Net cash provided by financing activities 41,309 28,976
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 727 1,862
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,979 11,892
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $15,706 $13,754
======= =======
See notes to consolidated financial statements.
7
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of First Federal Financial Corporation of Kentucky (the
Corporation) and its wholly owned subsidiary, First Federal Savings
Bank of Elizabethtown (the Bank), and its wholly owned subsidiaries,
First Service Corp. of Elizabethtown and First Heartland Mortgage. All
significant intercompany transactions and balances have been
eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month and six-month periods
ending December 31, 2000 are not necessarily indicative of the results
that may be expected for the year ended June 30, 2001. For further
information, refer to the consolidated financial statements and
footnotes thereto included in First Federal's annual report on Form
10-K for the year ended June 30, 2000.
NEW ACCOUNTING PRONOUNCEMENTS - On July 1, 2000, the Corporation
adopted a new accounting standard that will require all derivatives to
be recorded at fair value. Unless designated as hedges, changes in
these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair value
of the hedged item is not otherwise recorded. The adoption of this new
standard did not have a material effect on the Corporation's financial
statements.
RECLASSIFICATIONS - Certain amounts have been reclassified in the prior
financial statements to conform to the current period classifications.
The reclassifications have no effect on net income or stockholders'
equity as previously reported.
8
2. SECURITIES
The amortized cost basis and fair values of securities at December 31
are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
December 31, 2000:
Equity securities $ 385 $ 612 $ (48) $ 949
Obligation of states and political
subdivisions 1,010 - (19) 991
------- ----- -------
Total available-for-sale $ 1,395 $ 612 $ (67) $ 1,940
======= ===== ===== =======
Securities held-to-maturity:
December 31, 2000:
U.S. Treasury and agencies $41,884 $ 123 $ (497) $41,510
Mortgage-backed securities 1,067 5 (20) 1,052
------- ----- ------ -------
Total held-to-maturity $42,951 $ 128 $ (517) $42,562
======= ===== ====== =======
3. LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31, JUNE 30,
2000 2000
---- ----
(DOLLARS IN THOUSANDS)
Commercial $ 18,670 $ 15,769
Real estate commercial 82,324 65,244
Real estate construction 8,617 8,367
Real estate mortgage 321,391 311,756
Consumer and home equity 64,553 59,744
Indirect consumer 20,877 15,186
------- -------
Total loans 516,432 476,066
------- -------
Less:
Net deferred loan origination fees (2,466) (2,583)
Allowance for loan losses (2,541) (2,252)
-------- --------
(5,007) (4,835)
-------- --------
Loans, net $511,425 $471,231
======== ========
9
The following table sets forth the changes in the allowance for loan
losses:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Allowance for loan losses:
Balance, beginning of period $ 2,311 $ 2,157 $ 2,252 $ 2,108
Provision for loan losses 306 90 501 180
Charge-offs (96) (7) (239) (52)
Recoveries 20 1 27 5
------- ------- ------- -------
Balance, end of period $ 2,541 $ 2,241 $ 2,541 $ 2,241
======= ======= ======= =======
Investment in impaired loans is summarized below. There were no impaired
loans for the periods presented without an allowance allocation.
DECEMBER 31, JUNE 30,
2000 2000
---- ----
(DOLLARS IN THOUSANDS)
End of period impaired loans $2,685 $1,562
Amount of allowance for loan
loss allocated 188 117
4. BORROWINGS
Deposits are the primary source of funds for First Federal's lending
and investment activities and for its general business purposes. The
Bank can also use advances (borrowings) from the FHLB of Cincinnati
to supplement its supply of lendable funds, meet deposit withdrawal
requirements and to extend the term of its liabilities. Advances from
the FHLB are secured by the Bank's stock in the FHLB and substantially
all of the Bank's residential first mortgage loans under a blanket
pledge agreement. At December 31, 2000 First Federal had $110.8
million in advances outstanding from the FHLB and the capacity to
increase its borrowings an additional $191 million.
10
5. EARNINGS PER SHARE
Earnings Per Common Share - Basic earnings per common share is net
income divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share
include the dilutive effect of additional potential common shares
issuable under stock options. A reconciliation of the numerators and
denominators of the basic and diluted EPS is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
(IN THOUSANDS)
Net income available
to common shareholders $1,305 $1,465 $2,694 $3,038
====== ====== ====== ======
Basic EPS:
Weighted average common shares 3,755 3,923 3,755 3,999
===== ===== ====== ======
Diluted EPS:
Weighted average common shares 3,755 3,923 3,755 3,999
Dilutive effect of stock options 5 17 7 19
----- ----- ----- -----
Weighted average common and
incremental shares 3,760 3,940 3,762 4,018
===== ===== ===== =====
Earnings Per Share:
Basic $0.35 $0.37 $0.72 $0.76
===== ===== ===== =====
Diluted $0.35 $0.37 $0.72 $0.76
===== ===== ===== =====
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Federal Financial Corporation of Kentucky ("Corporation") is the parent to
its wholly owned subsidiary, First Federal Savings Bank of Elizabethtown
("Bank"). The Bank has operations in the Kentucky communities of Elizabethtown,
Radcliff, Bardstown, Munfordville, Shepherdsville, Mt. Washington, Brandenburg,
Flaherty, and Hillview. The Bank's activities include the acceptance of deposits
for checking, savings and time deposit accounts, making secured and unsecured
loans, investing in securities and trust services. The Bank's lending services
include the origination of real estate, commercial and consumer loans. Operating
revenues are derived primarily from interest and fees on domestic real estate,
commercial and consumer loans, and from interest on securities of the United
States Government and Agencies, states, and municipalities. The primary
regulator for First Federal is the Office of Thrift Supervision (OTS).
The following discussion and analysis covers any significant changes in the
financial condition since June 30, 2000 and any material changes in the results
of operations for the three-month and six-month periods ending, December 31,
2000. This discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the 2000 Annual Report to Shareholders.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not statements of
historical fact constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
forward-looking statements may be made in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of the Company. Forward-looking
statements include, but are not limited to: (1) projections of revenues, income
or loss, earnings or loss per share, capital structure and other financial
items; (2) statements of plans and objectives of the Company or its management
or Board of Directors; (3) statements regarding future events, actions or
economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"plans," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those indicated by such statements. Some of
the events or circumstances that could cause actual results to differ from those
indicated by forward-looking statements include, but are not limited to, changes
in economic conditions in the markets served by the Corporation, in Kentucky and
the surrounding region, or in the nation as a whole; changes in interest rates;
the impact of legislation and regulation; the Corporation's ability to offer
competitive banking products and services; competition from other providers of
financial services, the continued growth of the markets in which the Corporation
operates; and the Corporation's ability to expand into new markets and to
maintain profit margins in the face of pricing pressure. All of these events and
circumstances are difficult to predict and many of them are beyond the
Corporation's control.
OVERVIEW
Net income for the quarter ended December 31, 2000 was $1.3 million or $0.35 per
share diluted down from $1.5 million or $0.37 per share diluted for the same
period in 1999. The decline in earnings is a direct result of the decreasing net
interest margin. The Bank's customer deposits and borrowings are shorter in term
than the loan and investment portfolio. During the rapidly rising interest rate
environment of 1999 and the first half of 2000, the Bank's cost of funds
increased much faster than its yield on interest earning assets. The impact of
the weakening net interest margin was partially offset by the continued robust
growth in lending.
Net income for the six months ended December 31, 2000 was $2.7 million or $0.72
per share diluted compared to $3.0 million or $0.76 per share diluted for the
same period in 1999. The Bank's book value per common share increased from
$13.73 at December 31, 1999 to $14.09 at December 31, 2000. In January 2001, the
Bank restructured $75 million of its Federal Home Loan Bank advances to secure
longer term financing at lower interest rates. The effective interest rate on
this debt declined sharply from 6.6% to 4.93%, resulting in anticipated future
interest savings of approximately $313,000 per quarter, compared to the interest
costs during the six months ended December 31, 2000. Management expects that the
restructuring of $75 million of the Bank's debt, coupled with the reductions in
the federal discount rate by the Federal Open Market Committee, will enhance
future earnings.
12
The Bank's total assets at December 31, 2000 grew to $603.7 million compared to
$560.8 million at June 30, 2000. Net loans increased $40.2 million from June 30,
2000 to $511.4 million at December 31, 2000. Real estate lending remained strong
across all product lines, particularly commercial real estate. The commercial
real estate portfolio increased $17.1 million while the residential real estate
portfolio grew $9.6 million. This growth is a result of the Bank's continued
emphasis on the active pursuit of lending opportunities. The Bank's dealer loan
program increased $5.7 million while consumer and home equity loans increased
$4.8 million. While loan growth remained strong, the percentage or
non-performing loans to total loans remained low at 0.52%, as the Bank
maintained its underwriting standards and continued its emphasis on secured real
estate lending.
Funding for the growth in the loan portfolio was derived from deposits and
Federal Home Loan Bank advances. Deposits increased to $435.9 million as of
December 31, 2000 compared to $423.8 million at June 30, 2000. The growth in
retail deposits was primarily in short-term certificate of deposits and money
market accounts. FHLB advances increased from $80.3 million at June 30, 2000 to
$110.8 million at December 31, 2000.
RESULTS OF OPERATIONS
NET INTEREST INCOME-For the quarter ended December 31, 2000, net interest income
was $4.1 million, down $320,000 from the $4.4 million attained during the 1999
quarter. The net interest rate spread decreased from 3.27% during 1999 quarter
to 2.53% in the comparable quarter of 2000. The Bank's net interest margin
decreased from 3.67% during the quarter ended December 31, 1999 to 2.94% for the
2000 period. The decrease in net interest spread and margin occurred because the
yield on interest earning assets increased 25 basis points while the rate paid
on liabilities increased 99 basis points. During the 2000 quarter, average
interest-earning assets were $557.7 million, an increase of $76.8 million over
the same period in 1999. Total average interest bearing liabilities increased
from $438.5 million during the quarter ended December 31, 1999 to $516.5 million
for the same period in 2000.
While market interest rates have increased over the past year, short-term rates
have increased more than long-term rates during that time period. This has
caused interest-bearing liabilities, which are generally tied to shorter-term
market indices to reprice at higher rates than interest earning assets, which
are generally tied to longer-term indexes. Also, the Bank's interest bearing
liabilities have a shorter repricing frequency and are subject to repricing at a
faster pace than its interest earning assets.
Net interest income for the six months ended December 31, 2000 was $8.3 million,
down from $8.9 million attained during the same period of 1999. The Bank's net
interest spread decreased 70 basis points and net interest margin decreased 71
basis points for the six months ended December 31, 2000 compared to the same
period in 1999. The decrease in the net interest spread and margin occurred
because the yield on interest earning assets increased 24 basis points while the
rate paid on liabilities increased 94 basis points. The same factors
contributing to the decline in the quarterly net interest margin and spread also
affected the results for the six-month period.
13
AVERAGE BALANCE SHEET
The following table provides detailed information as to average balance,
interest income/expense, and rates by major balance sheet categories for the
three months ended December 31, 2000 and 1999.
THREE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
ASSETS (DOLLARS IN THOUSANDS)
Interest earning assets:
Equity securities $ 1,045 $ 8 3.04% $ 1,518 $ 6 1.57%
State and political subdivision
Securities (1) 969 17 6.96 965 17 6.99
U.S. Treasury and agencies 41,891 684 6.48 41,832 675 6.40
Mortgage-backed securities 1,163 22 7.50 1,464 24 6.50
Loans receivable (2) (3) 503,202 10,435 8.23 428,763 8,640 7.99
FHLB stock 5,281 99 7.44 3,259 57 6.94
Interest bearing deposits 4,138 42 4.03 3,077 23 2.97
------- ------ ---- ------- ----- ----
TOTAL INTEREST EARNING ASSETS 557,689 11,307 8.04 480,878 9,442 7.79
Less: Allowance for loan losses (2,410) (2,212)
Non-interest earning assets 37,368 37,244
-------- -------
TOTAL ASSETS $592,647 $515,910
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $32,432 $ 324 3.96% $ 37,720 $ 320 3.37%
NOW and money market
Accounts 78,394 471 2.38 76,282 438 2.28
Certificates of deposit and
other time deposits 301,313 4,680 6.16 271,790 3,576 5.22
FHLB Advances 104,365 1,702 6.38 52,713 659 4.89
------- ----- ---- ------- ----- ----
TOTAL INTEREST BEARING LIABILITIES 516,504 7,177 5.51 438,505 4,993 4.52
Non-interest bearing liabilities:
Non-interest bearing deposits 18,010 16,542
Other liabilities 5,369 6,995
------- -------
TOTAL LIABILITIES 539,883 462,042
Stockholders' equity 52,764 53,868
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $592,647 $515,910
======== ========
NET INTEREST INCOME $4,130 $4,450
====== ======
NET INTEREST SPREAD 2.53% 3.27%
===== =====
NET INTEREST MARGIN 2.94% 3.67%
===== =====
- -----------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax
rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. (3) Calculations include non-accruing loans in
the average loan amounts outstanding.
14
AVERAGE BALANCE SHEET
The following table provides detailed information as to average balance,
interest income/expense, and rates by major balance sheet categories for the six
months ended December 31, 2000 and 1999.
SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2000 1999
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
ASSETS (DOLLARS IN THOUSANDS)
Interest earning assets:
Equity securities $ 1,071 $ 16 2.96% $ 1,677 $ 11 1.30%
State and political subdivision
Securities (1) 958 34 7.04 974 34 6.92
U.S. Treasury and agencies 41,883 1,363 6.45 41,158 1,349 6.50
Mortgage-backed securities 1,204 44 7.25 1,494 48 6.37
Loans receivable (2) (3) 492,961 20,412 8.21 420,449 16,930 7.99
FHLB stock 4,855 180 7.35 3,239 116 7.10
Interest bearing deposits 4,310 82 3.77 3,945 65 3.27
-------- ------ ---- ------- ------ ----
TOTAL INTEREST EARNING ASSETS 547,242 22,131 8.02 472,936 18,553 7.78
Less: Allowance for loan losses (2,353) (2,173)
Non-interest earning assets 37,249 36,348
-------- --------
TOTAL ASSETS $582,138 $507,111
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $33,897 $ 591 3.46% $ 36,207 $ 525 2.88%
NOW and money market
Accounts 78,398 969 2.45 78,386 867 2.19
Certificates of deposit and
other time deposits 297,827 9,113 6.07 270,177 7,182 5.27
FHLB Advances 96,040 3,107 6.33 43,345 1,051 4.75
------ ------ ---- ------- ----- ----
TOTAL INTEREST BEARING LIABILITIES 506,162 13,780 5.40 428,115 9,625 4.46
Non-interest bearing liabilities:
Non-interest bearing deposits 17,820 16,861
Other liabilities 5,696 6,760
------ -------
TOTAL LIABILITIES 529,678 451,736
Stockholders' equity 52,460 55,375
------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $582,138 $507,111
======== ========
NET INTEREST INCOME $8,351 $8,927
====== ======
NET INTEREST SPREAD 2.62% 3.32%
===== =====
NET INTEREST MARGIN 3.03% 3.74%
===== =====
- -----------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax
rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. (3) Calculations include non-accruing loans in
the average loan amounts outstanding.
15
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by old volume); (2) changes in volume (change in volume
multiplied by old rate); and (3) changes in rate-volume (change in rate
multiplied by change in volume). Changes in rate-volume are proportionately
allocated between rate and volume variance.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 VS. 1999 2000 VS. 1999
--------------- -------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
(DOLLARS IN THOUSANDS)
NET NET
RATE VOLUME CHANGE RATE VOLUME CHANGE
---- ------ ------ ---- ------ ------
INTEREST INCOME:
Loans $227 $1,568 $1,795 $411 $$3,072 $3,483
Equity securities 1 1 2 4 1 5
State and political subdivision
securities 0 0 0 0 0 0
U.S. Treasury and agencies 4 5 9 (51) 64 13
Mortgage-backed securities (4) 2 (2) (10) 6 (4)
FHLB stock 4 38 42 4 60 64
Interest bearing deposits 6 13 19 6 11 17
---- ----- ----- ---- ----- -----
TOTAL INTEREST EARNING ASSETS 238 1,627 1,865 364 3,214 3,578
---- ----- ----- ---- ----- -----
INTEREST EXPENSE:
Savings accounts 4 0 4 41 25 66
NOW and money market accounts 12 21 33 51 51 102
Certificates of deposit and other
time deposits 407 698 1,105 697 1,233 1,930
FHLB advances 168 875 1,043 299 1,757 2,056
--- ----- ----- --- ----- -----
TOTAL INTEREST BEARING LIABILITIES 591 1,594 2,185 1,088 3,066 4,154
--- ----- ----- ----- ----- -----
NET CHANGE IN NET INTEREST INCOME $(353) $ 33 $ (320) $ (724) $ 148 $ (576)
==== ====== ====== ====== ====== ======
NON-INTEREST INCOME-Non-interest income was $1.5 million for the quarter ended
December 31, 2000, as compared to $1.0 million for the 1999 period, an increase
of $463,000. Gains on investment sales were $351,000 during the 2000 period
compared to $152,000 for the 1999 quarter, and increase of $199,000. Fee income
from secondary market lending operations increased by $20,000 or 21% during the
2000 period compared to 1999. Customer service fees charged on deposit accounts
increased by $129,000 or 26% during the 2000 quarter due to growth in accounts
and deposit relationships with existing customers. Other sources of income such
as brokerage commissions, loan fees, and other customer transaction fees also
increased during the 2000 period as compared to the 1999 period.
Non-interest income was $2.8 million for the six months ended December 31, 2000,
as compared to $2.0 million for the same period last year. Gains on investment
sales were $696,000 during the 2000 period compared to $305,000 for the 1999
period, an increase of $391,000. Customer service fees charged on deposit
accounts increased by $257,000 or 27% during the 2000 period. Other sources of
income such as brokerage commissions, loan fees, and other customer transaction
fees also increased during the 2000 period as compared to the 1999 period.
16
NON-INTEREST EXPENSE- Total non-interest expense was $3.3 million for the 2000
quarter compared to $3.2 million for the 1999 quarter. Non-interest expense
increased from $6.2 million for the six months ended December 31, 1999 to $6.6
million for the comparable period in 2000. The increases for both the three and
six months ended December 31, 2000 were primarily attributable to costs
associated with salaries, employee benefits and occupancy and equipment.
Compensation and employee benefit expenses increased $125,000 for the 2000
quarter compared to the 1999 quarter, and $336,000 for the six months ended
December 31, 2000 compared to December 31, 1999. The increase includes
inflationary salary adjustments and reflects growth in the overall staffing
level from 168 full-time equivalent employees at December 31, 1999 to 198
full-time equivalent employees at December 31, 2000. Additional staffing was
required to achieve a new strategic plan adopted by the Bank in 1999 through the
development of a bank-wide service and sales culture. The culture's success
relies on expanding account relationships and required increasing the number of
associates in banking centers, relationship bankers, business development
officers, stockbrokers, and loan officers. A Senior Vice President and Retail
Banking Officer was also hired to implement management's strategic plan. The
transition has been responsible for much of the renewed growth in the lending
area of the Bank and has made the certificate special promotions a success in
all offices. Increased staffing also resulted from the re-opening of a
Bardstown, Kentucky office and a new Customer Service Center.
Occupancy and equipment expense increased for both the three and six months
ended December 31, 2000. The increase is largely attributable to the costs
associated with the Bank's new Customer Service Center, which became operational
in July 2000 and the second Bardstown, Kentucky banking center, which opened in
early 2000.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is regularly evaluated by management and
maintained at a level believed to be adequate to absorb loan losses in the
Bank's lending portfolios. Periodic provisions to the allowance are made as
needed. An appropriate level of the general allowance is determined based on the
application of projected risk percentages to graded loans by categories. In
addition, specific reserves are established for individual loans when deemed
necessary by management. The amount of the provision for loan losses necessary
to maintain an adequate allowance is based upon an assessment of loan quality,
changes in the size and character of the loan portfolio, consultation with
regulatory authorities, delinquency trends, economic conditions and industry
trends. Management believes, based on information presently available, that it
has adequately provided for loan losses at December 31, 2000. Although
management believes it uses the best information available to make allowance
provisions, future adjustments, which could be material, may be necessary if
management's assumptions differ significantly from the loan portfolio's actual
performance.
The provision for loan losses was $306,000 for the three months ended December
31, 2000 compared to $90,000 for the 1999 quarter. The provision for loan losses
also increased for the six months ended December 31, 2000 to $501,000 compared
to $180,000 for the 1999 period. The increase in the provision is a result of an
increase in charge-offs and non-performing loans for the period and to
compensate for the Bank's continued strong loan growth in indirect consumer
loans. Net loan charge-offs increased $165,000 to and commercial loans secured
by real estate. $212,000 for the six months ended December 31, 2000 compared to
$47,000 for the same period in 1999. The increase in charge-offs is primarily
related to charge-offs of indirect consumer loans during the 2000 period.
17
The following table sets forth an analysis of the Bank's loan loss experience
for the three and six months ended December 31, 2000 and 1999.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance-beginning of period $2,311 $2,157 $2,252 $2,108
------ ------ ------ ------
Loans charged-off:
Real estate mortgage 0 0 (2) (36)
Consumer (96) (7) (237) (16)
Commercial 0 0 0 0
------ ------ ------ ------
Total charge-offs (96) (7) (239) (52)
------ ------ ------ ------
Recoveries:
Real estate mortgage 0 0 0 0
Consumer 20 1 27 5
Commercial 0 0 0 0
------ ------ ------ ------
Total recoveries 20 1 27 5
------ ------ ------ ------
Net loans charged-off (76) (6) (212) (47)
------ ------ ------ ------
Provision for loan losses 306 90 501 180
------ ------ ------ ------
Balance-end of period $2,541 $2,241 $2,541 $2,241
------ ------ ------ ------
Net charge-offs to average
loans outstanding .043% .011%
Allowance for loan losses to
total non-performing loans 185% 171%
Allowance for loan losses to
to net loans outstanding .48% .50%
NON-PERFORMING ASSETS
The Bank's non-performing assets consist of loans on which interest is no longer
accrued, real estate acquired through foreclosure and repossessed assets. The
Bank does not have any loans greater than 90 days past due still on accrual. All
loans considered impaired under SFAS 114 are included in non-performing loans.
Loans are considered impaired if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are
carried at the present value of expected future cash flows discounted at the
loans effective interest rate or at the fair value of the collateral if the loan
is collateral dependent. A portion of the allowance for loan losses is allocated
to impaired loans if the value of such loans is less than the unpaid balance. If
these allocations cause the allowance for loan losses to require increase, such
increase is reported in the provision for loan losses.
Loans are reviewed on a regular basis and normal collection procedures are
implemented when a borrower fails to make a required payment on a loan. If the
delinquency on a mortgage loan exceeds 90 days and is not cured through normal
collection procedures or an acceptable arrangement is not worked out with the
borrower, the Bank institutes measures to remedy the default, including
commencing a foreclosure action. Consumer loans generally are charged off when a
loan is deemed uncollectible by management and any available collateral has been
disposed of. Commercial business and real estate loan delinquencies are handled
on an individual basis by management with the advice of the Bank's legal
counsel. Management does not consider the overall increase in non-performing
assets during the period to be material or indicative of any adverse change in
overall asset quality. The Bank anticipates that the increase in non-performing
real estate loans will continue due to the growth of the Bank's loan portfolio.
18
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
DECEMBER 31, JUNE 30,
2000 2000
------------ --------
(DOLLARS IN THOUSANDS)
Loans on non-accrual status (1)(2) $2,685 $1,562
Real estate acquired
through foreclosure 17 -
Repossessed assets 74 -
Total non-performing
assets $2,776 $1,562
====== ======
Ratios: Non-performing loans
to total loans .52% .33%
Non-performing assets
to total assets .46% .28%
- -----------------------------------------------------
(1) Loans on non-accrual status include impaired loans.
(2) The interest income that would have been earned and
received on non-accrual loans was approximately $220,000
for the six month period ending December 31, and $126,000
for the year ending June 30.
LIQUIDITY
The Bank is required to maintain minimum specific levels of liquid assets as
defined by the Office of Thrift Supervision's regulations. This requirement is
based on a percentage of cash and eligible investments to deposits and
short-term borrowings and is currently 4%. At December 31, 2000, the Bank's
liquid assets were 5.63% of its liquidity base. The Bank's primary source of
funds for meeting its liquidity needs are customer deposits, borrowings from the
Federal Home Loan Bank, principal and interest payments from loans and
mortgage-backed securities, and earnings from operations retained by the Bank.
The Bank intends to continue to fund loan growth (outstanding loan commitments
were $2.3 million at December 31, 2000) with customer deposits and additional
advances from the FHLB. At December 31, 2000, the Bank had an unused approved
line of credit in the amount of $32.1 million and sufficient collateral to
borrow an additional $196 million in advances from the FHLB.
CAPITAL
Savings institutions insured by the FDIC must meet various regulatory capital
requirements. The Bank continues to exceed the regulatory requirements for Tier
I, Tier I leverage and total risk-based capital. The Bank expects to maintain a
capital position that meets or exceeds the "well capitalized" requirements as
defined by the FDIC. The Bank's actual and required capital amounts and ratios
at December 31, 2000 are presented below:
TO BE CONSIDERED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTION
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-----------------------------------------------------------------
AS OF DECEMBER 31, 2000: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-
weighted assets) $44,428 10.13% $33,449 8.0% $41,812 10.0%
Tier I capital (to risk-weighted
assets) 41,889 9.55 16,725 4.0 25,087 6.0
Tier I leverage capital (to
average assets) 41,889 7.07 22,871 4.0 28,588 5.0
19
STOCK REPURCHASE PLAN-In October 1999 the Corporation's Board of Directors
authorized the establishment of an additional stock repurchase program pursuant
to which 10% of the Corporation's outstanding stock may be repurchased from time
to time in the open market. The programs, which began in 1995, have repurchased
a total of 613,681 shares. The Board will continue to evaluate earnings per
share and monitor the success of the repurchase plan to maintain an attractive
return to stockholders. The current plan expires in April 2001, at which time
the Board will reanalyze the Bank's capital position and future earnings
potential and if appropriate, initiate a new repurchase plan.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank currently does not engage in any derivative or hedging activity. Refer
to the Bank's 2000 10-K for analysis of the interest rate sensitivity.
20
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Although the Bank is, from time to time, involved in various
legal proceedings in the normal course of business, there are no
material pending legal proceedings to which the Corporation, the Bank,
or its subsidiaries is a party, or to which any of their property is
subject.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation's 2000 Annual Meeting of Shareholders was held on
November 8, 2000. At the meeting, the directors listed below were
elected as directors of the Corporation for terms expiring at the
annual meeting in the year set forth to each of their names.
NAME TERM EXPIRES
---- ------------
B. Keith Johnson 2003
Diane E. Logsdon 2003
John L. Newcomb, Jr. 2003
In addition, the following directors will continue in office
until the annual meeting of the year set forth beside each of their
names.
NAME TERM EXPIRES
---- ------------
Robert M. Brown 2001
Wreno M. Hall 2002
Walter D. Huddleston 2002
J. Stephen Mouser 2002
Burlyn Pike 2001
J. Alton Rider 2001
Michael L. Thomas 2002
21
The voting results for the matters brought before the 2000 Annual Meeting
are as follows:
1. Election of Directors. Cumulative voting applied in the election of
directors.
NAME VOTES FOR ABSTENTIONS BROKER NONVOTES
B. Keith Johnson 2,577,086.827 0 0
Diane E. Logsdon 2,559,441.827 0 0
John L. Newcomb, Jr. 2,563,586.827 0 0
Item 5. Other Information
Not Applicable
Item 6. Exhibits: Not Applicable
Reports on Form 8-K: Not Applicable
22
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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.
DATE: February 12, 2001 BY: (S) B. KEITH JOHNSON
----------------------
B. Keith Johnson
President and Chief Executive Officer
DATE: February 12, 2001 BY: (S) CHARLES E. CHANEY
----------------------
Charles E. Chaney
Senior Vice President
Chief Operating Officer
23