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 March 31, 2001
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 April 30, 2001
----------- ------------------------------------
Common Stock 3,755,235 shares
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 12-22
Item 3 -Quantitative and Qualitative Disclosures about Market Risk 20-22
PART II - OTHER INFORMATION 23
SIGNATURES 24
2
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Financial Condition
(Unaudited)
March 31, June 30,
ASSETS 2001 2000
---- ----
(Dollars in thousands)
Cash and due from banks $ 13,874 $ 11,310
Interest bearing deposits 12,184 3,669
------ ------
Total cash and cash equivalents 26,058 14,979
Securities available-for-sale 1,907 2,048
Securities held-to-maturity (fair value of $30,080
and $41,195 at March 2001 and June 2000) 29,935 43,134
Loans receivable, less allowance for loan losses
of $2,716 (March) and $2,252 (June) 513,464 471,231
Federal Home Loan Bank stock 5,741 4,081
Premises and equipment 11,571 11,709
Real estate owned:
Acquired through foreclosure 107 -
Held for development 721 446
Repossessed assets 77 -
Excess of cost over net assets acquired 9,423 10,047
Accrued interest receivable 1,782 2,032
Other assets 1,092 1,078
------- --------
TOTAL ASSETS $601,878 $560,785
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 19,017 $ 16,822
Interest bearing 444,997 406,937
------- -------
Total Deposits 464,014 423,759
Advances from Federal Home Loan Bank 78,963 80,339
Accrued interest payable 1,890 1,129
Accounts payable and other liabilities 1,358 1,962
Deferred income taxes 2,030 1,915
------- -------
TOTAL LIABILITIES 548,255 509,104
------- -------
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 March 3,755 3,756
Additional paid-in capital - -
Retained earnings 49,530 47,481
Accumulated other comprehensive
income, net of tax 338 444
------ ------
TOTAL STOCKHOLDERS' EQUITY 53,623 51,681
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $601,878 $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 Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
Interest Income:
Interest and fees on loans $10,759 $ 8,946 $31,171 $25,858
Interest and dividends on investments
and deposits 903 798 2,610 2,409
------ ----- ------ ------
Total interest income 11,662 9,744 33,781 28,267
------ ----- ------ ------
Interest Expense:
Deposits 5,666 4,615 16,339 13,189
Federal Home Loan Bank advances 1,267 753 4,374 1,804
----- ----- ------ ------
Total interest expense 6,933 5,368 20,713 14,993
----- ----- ------ ------
Net interest income 4,729 4,376 13,068 13,274
Provision for loan losses 285 90 786 270
----- ----- ------ ------
Net interest income after provision
for loan losses 4,444 4,286 12,282 13,004
----- ----- ------ ------
Non-interest Income:
Customer service fees on deposit accounts 663 467 1,862 1,409
Secondary mortgage market closing fees 117 56 343 280
Gain on sale of investments - 152 696 457
Brokerage and insurance commissions 175 119 498 352
Other income 157 191 490 460
----- ---- ----- -----
Total non-interest income 1,112 985 3,889 2,958
----- ---- ----- -----
Non-interest Expense:
Employee compensation and benefits 1,658 1,490 4,726 4,222
Office occupancy expense and equipment 366 323 1,089 1,002
FDIC insurance premium 21 21 64 137
Marketing and advertising 125 128 376 385
Outside services and data processing 372 303 1,035 908
State franchise tax 109 102 315 301
Amortization of intangibles 208 208 624 624
Other expense 588 549 1,822 1,731
----- ----- ----- -----
Total non-interest expense 3,447 3,124 10,051 9,310
----- ----- ------ -----
Income before income taxes 2,109 2,147 6,120 6,652
Income taxes 705 744 2,022 2,211
------ ------ ----- -----
Net income $1,404 $1,403 $4,098 $4,441
====== ====== ====== ======
Earnings per share:
Basic $ 0.37 $ 0.36 $ 1.09 $ 1.12
Diluted $ 0.37 $ 0.36 $ 1.09 $ 1.12
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 Nine Months Ended
March 31, March 31,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
Net Income $1,404 $1,403 $4,098 $4,441
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities (21) (76) 353 (306)
Reclassification of realized amount - (100) (459) (302)
------ ------ ----- -----
Net unrealized gain (loss) recognized in
Comprehensive income (21) (176) (106) (608)
------ ------ ----- ------
Comprehensive Income $1,383 $1,227 $3,992 $3,833
====== ====== ====== ======
See notes to consolidated financial statements.
5
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended March 31, 2001
(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 $51,681
Net income - - - 4,098 - 4,098
Exercise of stock options 1 1 7 - - 8
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (106) (106)
Cash dividends declared
($.54 per share) - - - (2,028) - (2,028)
Stock repurchased (2) (2) (7) (21) - (30)
----- ------- ------- ------- ------ -------
Balance, March 31, 2001 3,755 $ 3,755 $ - $49,530 $ 338 $53,623
===== ======= ======= ======= ====== =======
See notes to consolidated financial statements.
6
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
March 31,
2001 2000
---- ----
Operating Activities:
Net income $ 4,098 $ 4,441
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 786 270
Depreciation of premises and equipment 841 757
Net change in deferred loan fees and costs 232 112
Federal Home Loan Bank stock dividends (281) (116)
Amortization of acquired intangible assets 624 624
Amortization and accretion on securities (45) (46)
Gain on sale of investments available-for-sale (696) (457)
Gain on sale of real estate held for development (9) -
Deferred taxes 170 204
Changes in:
Interest receivable 250 197
Other assets (14) 5
Interest payable 761 30
Accounts payable and other liabilities (595) (421)
----- -----
Net cash provided by operating activities 6,122 5,600
----- -----
Investing Activities:
Sales of securities available-for-sale 708 462
Purchases of securities available-for-sale (32) -
Purchases of securities held-to-maturity - (5,000)
Maturities of securities held-to-maturity 13,244 6,299
Net increase in loans (43,435) (49,116)
Purchase of Federal Home Loan Bank stock (1,379) -
Net purchases of premises and equipment (703) (652)
Purchase of real estate held for development (275) -
------- -------
Net cash used in investing activities (31,872) (48,007)
------- -------
Financing Activities:
Net increase in deposits 40,255 27,254
Advances from Federal Home Loan Bank 32,590 52,844
Repayments to Federal Home Loan Bank (33,966) (25,151)
Dividends paid (2,028) (2,127)
Proceeds from stock options exercised 8 5
Common stock repurchased (30) (7,549)
------- ------
Net cash provided by financing activities 36,829 45,276
------ ------
Increase in cash and cash equivalents 11,079 2,869
Cash and cash equivalents, beginning of period 14,979 11,891
------ ------
Cash and cash equivalents, end of period $26,058 $14,760
======= =======
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 nine-month periods
ending March 31, 2001 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 are as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Dollars in thousands)
Securities available-for-sale:
March 31, 2001:
Equity securities $ 385 $ 560 $ (53) $ 892
Obligation of states and political
subdivisions 1,010 5 - 1,015
------- ----- ----- ------
Total available-for-sale $ 1,395 $ 565 $ (53) $ 1,907
======= ===== ===== ======
Securities held-to-maturity:
March 31, 2001:
U.S. Treasury and agencies $28,894 $ 183 $ (26) $29,051
Mortgage-backed securities 1,041 4 (16) 1,029
------- ----- ---- -------
Total held-to-maturity $29,935 $ 187 $ (42) $30,080
======= ===== ===== =======
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Dollars in thousands)
Securities available-for-sale:
June 30, 2000:
Equity securities $ 365 $ 807 $ (67) $ 1,105
Obligation of states and political
subdivisions 1,010 - (67) 943
------- ----- -------- -------
Total available-for-sale $ 1,375 $ 807 $ (134) $ 2,048
======= ===== ======== =======
Securities held-to-maturity:
June 30, 2000:
U.S. Treasury and agencies $41,860 $ 65 $(1,989) $39,936
Mortgage-backed securities 1,274 7 (23) 1,258
------- ---- -------- -------
Total held-to-maturity $43,134 $ 72 $(2,012) $41,194
======= ==== ======= =======
9
3. LOANS RECEIVABLE
Loans receivable are summarized as follows:
March 31, June 30,
2001 2000
---- ----
(Dollars in thousands)
Commercial $ 15,360 $ 15,769
Real estate commercial 89,106 65,244
Real estate construction 10,337 8,367
Real estate mortgage 317,121 311,756
Consumer and home equity 65,051 59,744
Indirect consumer 21,611 15,186
------- -------
Total loans 518,586 476,066
------- -------
Less:
Net deferred loan origination fees (2,406) (2,583)
Allowance for loan losses (2,716) (2,252)
-------- ------
(5,122) (4,835)
-------- ------
Loans, net $513,464 $471,231
======== ========
The following table sets forth the changes in the allowance for loan losses:
Three Months Ended Nine Months Ended
March 31, March 31,
-----------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period $ 2,541 $ 2,241 $ 2,252 $ 2,108
Provision for loan losses 285 90 786 270
Charge-offs (122) (29) (361) (81)
Recoveries 12 2 39 7
------- ------- ------- -------
Balance, end of period $ 2,716 $ 2,304 $ 2,716 $ 2,304
======= ======= ======= =======
Investment in impaired loans is summarized below. There were no impaired loans
for the periods presented without an allowance allocation.
March 31, June 30,
2001 2000
---- ----
(Dollars in thousands)
End of period impaired loans $ 739 $1,562
Amount of allowance for loan
loss allocated 59 117
10
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 typically secured by the Bank's
stock in the FHLB and substantially all of the Bank's first mortgage loans. At
March 31, 2001 First Federal had $78.9 million in advances outstanding from the
FHLB and the capacity to increase its borrowings an additional $222 million.
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 Nine Months Ended
March 31, March 31,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Net income available
to common shareholders $1,404 $1,403 $4,098 $4,441
====== ====== ====== ======
Basic EPS:
Weighted average common shares 3,755 3,849 3,755 3,950
===== ===== ===== ======
Diluted EPS:
Weighted average common shares 3,755 3,849 3,755 3,950
Dilutive effect of stock options 6 15 7 30
----- ----- ----- -----
Weighted average common and
incremental shares 3,761 3,864 3,762 3,980
===== ===== ===== =====
Earnings Per Share:
Basic $0.37 $0.36 $1.09 $1.12
===== ===== ===== =====
Diluted $0.37 $0.36 $1.09 $1.12
===== ===== ===== =====
11
MANAGEMENT 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 nine-month periods ending, March 31, 2001.
This discussion and analysis should be read in conjunction with "Managements
Discussion and Analysis of Financial Condition and Results of Operations"
included in the 2000 Annual Report to Shareholders.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 March 31, 2001 was $1.4 million or $0.37 per
share diluted compared to $1.4 million or $0.36 per share diluted for the same
period in 2000. During the 2000 quarter, the Corporation sold investments with
gains of $152,000. Excluding this gain, earnings per share for the 2000 quarter
would have been $0.34 per share diluted compared to the recently completed 2001
quarter of $0.37 per share diluted.
Net income for the nine months ended March 31, 2001 was $4.1 million or $1.09
per share diluted compared to $4.4 million or $1.12 per share diluted for the
same period in 2000. 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.
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 cost during the six months ended December 31, 2000.
Management anticipates that the restructuring of advances coupled with the
Federal Open Market Committee's interest rate reductions occurring during the
March 31, 2001 quarter will have a positive impact on future earnings. The
Bank's book value per common share increased from $13.70 at March 31, 2000 to
$14.28 at March 31, 2001.
12
The Bank's total assets at March 31, 2001 grew to $601.9 million compared to
$560.8 million at June 30, 2000. Net loans increased $42.3 million from June 30,
2000 to $513.5 million at March 31, 2001. Real estate lending remained strong
across all product lines, particularly commercial real estate. The commercial
real estate portfolio increased $23.9 million while the residential real estate
portfolio grew $5.4 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 $6.4 million while consumer and home equity loans increased
$5.3 million. While loan growth remained strong, the percentage of
non-performing loans to total loans remained low at 0.14%, 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. Deposits
increased by $40.2 million to $464 million as of March 31, 2001 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 caused in part by a
shift during recent quarters in funds from the stock market to more conservative
investments. FHLB advances decreased from $80.3 million at June 30, 2000 to
$78.9 million at March 31, 2001.
RESULTS OF OPERATIONS
Net Interest Income-For the quarter ended March 31, 2001, net interest income
was $4.7 million, up $353,000 from the $4.4 million attained during the 2000
quarter. The net interest rate spread decreased from 3.15% during the 2000
quarter to 2.93% in the comparable quarter of 2001. The Bank's net interest
margin decreased from 3.53% during the quarter ended March 31, 2000 to 3.32% for
the 2001 period. The decrease in net interest spread and margin occurred because
the yield on interest earning assets increased 33 basis points while the rate
paid on liabilities increased 55 basis points. During the 2001 quarter, average
interest-earning assets were $569.6 million, an increase of $73.5 million over
the same period in 2000. Total average interest bearing liabilities increased
from $455.6 million during the quarter ended March 31, 2000 to $527.5 million
for the same period in 2001.
Net interest income for the nine months ended March 31, 2001 was $13.1 million,
down from $13.3 million attained during the same period of 2000. The Bank's net
interest spread decreased 54 basis points as well as the net interest margin for
the nine months ended March 31, 2001 compared to the same period in 2000. The
decrease in the net interest spread and margin occurred because the yield on
interest earning assets increased 28 basis points while the rate paid on
liabilities increased 82 basis points.
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. Management expects that with the
Federal Open Market Committee's interest rate reductions occurring during the
March 31, 2001 quarter, the Bank's overall net interest margin and spread are
likely to improve. These improvements in spread and in margin would, in turn,
increase net interest income, even if there was no growth in the Bank's overall
loan portfolio.
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 March 31, 2001 and 2000.
Three Months Ended March 31,
-----------------------------------------------------------------------------
2001 2000
---- ----
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
ASSETS (Dollars in thousands)
Interest earning assets:
Equity securities $ 935 $ 8 3.42% $ 1,242 $ 8 2.58%
State and political subdivision
Securities (1) 997 17 6.82 947 17 7.18
U.S. Treasury and agencies 38,656 710 7.35 41,848 674 6.44
Mortgage-backed securities 1,037 19 7.33 1,348 23 6.82
Loans receivable (2) (3) 516,392 10,759 8.33 444,474 8,945 8.05
FHLB stock 5,666 101 7.13 3,316 58 7.00
Interest bearing deposits 5,959 54 3.62 2,923 24 3.28
------- ------ ---- ------- ----- ----
Total interest earning assets 569,642 11,668 8.19 496,098 9,749 7.86
------ ---- ----- ----
Less: Allowance for loan losses (2,641) (2,273)
Non-interest earning assets 37,493 36,809
-------- --------
Total assets $604,494 $530,634
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $33,151 $ 225 2.71% $ 34,938 $ 222 2.54%
NOW and money market
accounts 80,509 550 2.73 77,973 530 2.72
Certificates of deposit and
other time deposits 314,915 4,891 6.21 289,774 3,863 5.33
FHLB Advances 98,957 1,267 5.12 52,899 753 5.69
------- ------ ---- ------- ----- ----
Total interest bearing
liabilities 527,532 6,933 5.26 455,584 5,368 4.71
----- ---- ----- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 17,982 16,915
Other liabilities 5,558 5,300
------- ------
Total liabilities 551,072 477,799
Stockholders' equity 53,422 52,835
------- -------
Total liabilities and
stockholders' equity $604,494 $530,634
======== ========
Net interest income $4,735 $4,381
====== ======
Net interest spread 2.93% 3.15%
===== =====
Net interest margin 3.32% 3.53%
===== =====
- -----------------------------------------------------
(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
nine months ended March 31, 2001 and 2000.
Nine Months Ended March 31,
-----------------------------------------------------------------------------------
2001 2000
---- ----
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
ASSETS (Dollars in thousands)
Interest earning assets:
Equity securities $ 1,029 $ 25 3.24% $ 1,532 $ 34 2.96%
State and political subdivision
Securities (1) 970 50 6.87 965 50 6.91
U.S. Treasury and agencies 40,591 2,071 6.80 41,388 2,027 6.53
Mortgage-backed securities 1,152 64 7.41 1,445 71 6.55
Loans receivable (2) (3) 500,234 31,171 8.31 428,457 25,858 8.05
FHLB stock 5,101 281 7.35 3,265 174 7.11
Interest bearing deposits 4,976 136 3.64 3,605 70 2.59
------- ------ ---- ------- ------
Total interest earning assets 554,053 33,798 8.13 480,657 28,284 7.85
------ ---- ------ ----
Less: Allowance for loan losses (2,449) (2,206)
Non-interest earning assets 37,318 36,501
------- --------
Total assets $588,922 $514,952
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $33,791 $ 816 3.22% $ 35,561 $ 745 2.79%
NOW and money market
accounts 78,984 1,519 2.56 78,471 1,398 2.38
Certificates of deposit and
other time deposits 304,007 14,004 6.14 276,709 11,046 5.32
FHLB Advances 95,727 4,374 6.09 46,530 1,804 5.17
------- ------ ---- ------- ------ ----
Total interest bearing
liabilities 512,509 20,713 5.39 437,271 14,993 4.57
------ ---- ------ ----
Non-interest bearing liabilities:
Non-interest bearing deposits 17,806 16,879
Other liabilities 5,808 6,273
------ ------
Total liabilities 536,123 460,423
Stockholders' equity 52,799 54,529
------ ------
Total liabilities and
stockholders' equity $588,922 $514,952
======== ========
Net interest income $13,085 $13,291
======= =======
Net interest spread 2.74% 3.28%
===== =====
Net interest margin 3.15% 3.69%
===== =====
- -----------------------------------------------------
(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 Nine Months Ended
March 31, March 31,
2001 vs. 2000 2001 vs. 2000
--------------- -------------
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 $266 $1,548 $1,814 $722 $ 4,591 $5,313
Equity securities (14) (9)
State and political subdivision
securities 0 0 0 0 0 0
U.S. Treasury and agencies 26 10 36 29 15 44
Mortgage-backed securities 3 (7) (4) (28) 21 (7)
FHLB stock 1 42 43 6 101 107
Interest bearing deposits 2 28 30 20 46 66
--- ----- ----- --- ----- -----
Total interest earning assets 298 1,621 1,919 754 4,760 5,514
--- ----- ----- --- ----- -----
Interest expense:
Savings accounts 2 1 3 44 27 71
NOW and money market accounts 2 18 20 56 65 121
Certificates of deposit and other
time deposits 394 634 1,028 1,081 1,877 2,958
FHLB advances (88) 602 514 285 2,285 2,570
--- --- ----- ----- ----- -----
Total interest bearing liabilities 310 1,255 1,565 1,466 4,254 5,720
--- ----- ----- ----- ----- -----
Net change in net interest income $(12) $ 366 $ 354 $ (712) $ 506 $ (206)
==== ====== ====== ====== ====== ======
Non-Interest Income-Non-interest income was $1.1 million for the quarter ended
March 31, 2001, as compared to $1.0 million for the 2000 period, an increase of
$127,000. During the March 2001 quarter the Bank did not report any gains from
investment sales compared to reported gains of $152,000 for the 2000 period. Fee
income from secondary market lending operations increased by $61,000 or 109%
during the 2001 period compared to 2000. Customer service fees charged on
deposit accounts increased by $196,000 or 42% during the 2001 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 2001 period by $22,000 or 7% as
compared to the 2000 period.
Non-interest income was $3.9 million for the nine months ended March 31, 2001,
as compared to $3.0 million for the same period last year. Gains on investment
sales were $696,000 during the 2001 period compared to $457,000 for the 2000
period, an increase of $239,000. Customer service fees charged on deposit
accounts increased by $453,000 or 32% during the 2001 period. Other sources of
income such as brokerage commissions, secondary market lending operations, loan
fees, and other customer transaction fees also increased during the 2001 as
compared to the 2000 period.
16
Non-Interest Expense-Total non-interest expense was $3.4 million for the 2001
quarter compared to $3.1 million for the 2000 quarter. Non-interest expense
increased from $9.3 million for the nine months ended March 31, 2000 to $10
million for the comparable period in 2001. The increases for both the three and
nine months ended March 31, 2001 were attributable to costs associated with
salaries and employee benefits, primarily health insurance.
Compensation and employee benefit expenses increased $168,000 for the 2001
quarter compared to the 2000 quarter, and $504,000 for the nine months ended
March 31, 2001 compared to March 31, 2000. The increase includes inflationary
salary adjustments and reflects growth in the overall staffing level from 163
full-time equivalent employees at March 31, 2000 to 196 full-time equivalent
employees at March 31, 2001. Additional staffing was required to achieve a new
strategic plan adopted by the Bank in 1999 to develop a bank-wide service and
sales culture. The plan emphasizes expanding account relationships, which
requires 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 lending and certificates of deposit. Increased staffing also
resulted from the re-opening of a Bardstown, Kentucky office due to customer
requests and the opening of a new Customer Service Center to better assist
customers with questions or problems and as an additional service, employees are
able to cross sell products to customers while they are on the line.
Occupancy and equipment expense increased for both the three and nine months
ended March 31, 2001. The increase is largely attributable to 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. Data processing expense increased for both the three and nine months ended
March 31, 2001 due to an increase in processor charges relating to an increase
in the number of users, training expenses, and the implementation of internet
banking.
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, industry
trends, historical charge-offs, recoveries, and other information. Management is
monitoring the commercial real estate loan portfolio closely, recognizing that
commercial real estate loans carry a greater risk of loss than residential real
estate loans, and believes it has, based on information presently available,
adequately provided for loan losses at March 31, 2001. 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 $285,000 for the three months ended March 31,
2001 compared to $90,000 for the 2000 quarter. The provision for loan losses
also increased for the nine months ended March 31, 2001 to $786,000 compared to
$270,000 for the 2000 period. The increase in the provision is a result of the
increase in charge-offs for the period and to compensate for the Bank's
continued strong loan growth. Net loan charge-offs increased $83,000 to $110,000
for the three months ended March 31, 2001 compared to $27,000 for the same
period in 2000. Net loan charge-offs also increased for the nine months ended
March 31, 2001 to $322,000 compared to $74,000 for the same period in 2000. The
increase in charge-offs is primarily related to charge-offs of indirect consumer
loans during the 2001 period.
17
The following table sets forth an analysis of the Bank's loan loss experience
for the three and nine months ended March 31, 2001 and 2000.
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Balance-beginning of period $2,541 $2,241 $2,252 $2,108
------ ------ ------ ------
Loans charged-off:
Real estate mortgage - - (2) (36)
Consumer (122) (29) (359) (45)
Commercial - - - -
Total charge-offs (122) (29) (361) (81)
------ ------ ----- -----
Recoveries:
Real estate mortgage 2 1 2 1
Consumer 10 1 37 6
Commercial - - - -
Total recoveries 12 2 39 7
------ ------ ------ ------
Net loans charged-off (110) (27) (322) (74)
------ ------ ------ ------
Provision for loan losses 285 90 786 270
------ ------ ------ ------
Balance-end of period $2,716 $2,304 $2,716 $2,304
------ ------ ------ ------
Net charge-offs to average
loans outstanding .064% .017%
Allowance for loan losses to
total non-performing loans 368% 214%
Allowance for loan losses to
to net loans outstanding .53% .51%
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
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is less than the unpaid
balance. If these allocations cause the allowance for loan losses to require
increase, the 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.
18
The following table presents information with respect to the Bank's
non-performing assets for the periods indicated.
March 31, June 30,
2001 2000
---- ----
(Dollars in thousands)
Loans on non-accrual status (1)(2) $739 $1,562
Real estate acquired
through foreclosure 107 -
Repossessed assets 77 -
---- ------
Total non-performing
assets $923 $1,562
==== ======
Ratios: Non-performing loans
to total loans .18% .33%
Non-performing assets
to total assets .15% .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 $61,000
for the nine month period ending March 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 March 31, 2001, the Bank's liquid
assets were 5.39% 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 $2.8 million at March 31, 2001) with customer deposits and additional
advances from the FHLB. At March 31, 2001, the Bank had an unused approved line
of credit in the amount of $35 million and sufficient collateral to borrow an
additional $222 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.
19
The Bank's actual and required capital amounts and ratios at March 31, 2001 are
presented below:
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------
As of March 31, 2001: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-
weighted assets) $45,471 10.62% $34,244 8.0% $42,805 10.0%
Tier I capital (to risk-weighted
assets) 42,755 9.99 17,122 4.0 25,683 6.0
Tier I leverage capital (to
Average assets) 42,755 7.07 24,180 4.0 30,225 5.0
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 May 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
To minimize the volatility of net interest income and exposure to economic loss
that may result from fluctuating interest rates, the Bank manages its exposure
to adverse changes in interest rates through asset and liability management
activities within guidelines established by its Asset Liability Committee
("ALCO"). The ALCO, which includes senior management representatives, has the
responsibility for approving and ensuring compliance with asset/liability
management policies of the Corporation, which include managing the sensitivity
repricing characteristics of the balance sheet components consistent with
maintaining acceptable levels of changes in net portfolio value ("NPV") and net
interest income. A primary purpose of the ALCO is to manage interest rate risk
to effectively invest the Corporation's capital and to preserve the value
created by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Corporation's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. Refer to the
Bank's 2000 10-K for analysis of the Corporation's projected change in NPV for
the various rate shock levels as of June 30, 2000. All market risk sensitive
instruments presented are held to maturity or available for sale. The
Corporation has no trading securities.
NPV is calculated by the Corporation pursuant to guidelines established by the
OTS. The calculation is based on the net present value of estimated discounted
cash flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources with
adjustments made to reflect the shift in the Treasury yield curve as
appropriate. Computation of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments, and deposits decay, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
20
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable rate loans, which represent one of the
Corporation's primary loan products, have features that restrict changes in
interest rates on a short-term basis and over the life of the assets. In
addition, the proportion of adjustable rate loans in the Corporation's portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the NPV. Finally, the ability of
many borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of interest rate increases.
Another tool for evaluating the institution's sensitivity to net interest income
to changes in interest rates is to examine the extent to which its assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period.
The following interest rate sensitivity tables set forth the Bank's
interest-earning assets and interest-bearing liabilities at March 31, 2001 and
June 30, 2000, which are anticipated to reprice or mature in each of the future
time periods shown.
Interest Rate Sensitivity (Gap Analysis)
As of March 31, 2001
(Dollars in thousands)
0-3 4-12 1-5 Over 5
Months Months Years Years Total
------ ------ ----- ----- -----
Interest earning assets:
Loans $ 74,981 $125,449 $206,602 $111,583 $518,615
Securities 24,820 22,130 524 1,335 48,809
------ -------- -------- ------- -------
Total rate sensitive assets 99,801 147,579 207,126 112,918 567,424
------ -------- ------- ------- -------
Interest bearing liabilities:
NOW, money market and
Savings 20,329 60,983 40,232 17,207 138,751
Time deposits 87,675 191,368 45,178 2,474 326,695
Borrowed funds 35,601 10,173 22,460 10,729 78,963
------- ------- ------- ------- -------
Total rate sensitive
liabilities 143,605 262,524 107,870 30,410 544,409
------- ------- -------- ------- -------
Interest sensitivity gap $ (43,804) $(114,945) $ 99,256 $ 82,508 $ 23,015
========= ========= ======== ======== ========
Cumulative interest sensitivity
gap $ (43,804) $(158,749) $(59,493) $ 23,015
========= ========= ======== ========
Cumulative interest sensitivity gap
as a percentage of total assets (7.28)% (26.38)% (9.88)% 3.82%
======= ======== ======== =====
21
Interest Rate Sensitivity (Gap Analysis)
As of June 30, 2000
(Dollars in thousands)
0-3 4-12 1-5 Over 5
Months Months Years Years Total
------ ------ ----- ----- -----
Interest earning assets:
Loans $ 66,914 $121,661 $185,552 $101,981 $476,108
Securities 24,896 7,118 13,562 6,549 52,125
------ -------- -------- ------- -------
Total rate sensitive assets 91,810 128,779 199,114 108,530 528,233
------ -------- ------- ------- -------
Interest bearing liabilities:
NOW, money market and
Savings 19,856 59,568 38,499 16,824 134,747
Time deposits 45,128 158,102 86,614 1,270 291,114
Borrowed funds 79,018 54 328 941 80,341
------- ------- ------- ------- -------
Total rate sensitive
liabilities 144,002 217,724 125,441 19,035 506,202
------- ------- -------- ------- -------
Interest sensitivity gap $ (52,192) $ (88,945) $ 73,673 $ 89,495 $ 22,031
========= ========= ======== ======== ========
Cumulative interest sensitivity
gap $ (52,192) $(141,137) $(67,464) $ 22,031
========= ========= ======== ========
Cumulative interest sensitivity gap
as a percentage of total assets (9.31)% (25.17)% (12.03)% 3.93%
======= ======== ======== =====
As the preceding table indicates, the Bank has a negative cumulative gap for
assets and liabilities maturing or repricing within one year in the amount of
(158,749) million or 26.38% of total assets at March 31, 2001 compared to
($141,137) million or 25.17% of total assets at June 30, 2000. Thus, decreases
in interest rates during this time period would generally increase net interest
income, while increases in interest rates would generally decrease net interest
income. However, even though the periodic gap analysis provides management with
a method of measuring current interest rate risk, it only measures rate
sensitivity at a specific point in time. Gap analysis does not take into
consideration that assets and liabilities with similar repricing characteristics
may not reprice at the same time or to the same degree and, therefore, does not
necessarily predict the impact of changes in general levels of interest rates on
net interest income. Additionally, certain assets such as adjustable rate
mortgage loans have features, which restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, if interest rates
change, prepayment and decay rates may deviate significantly from those assumed
in calculating the table. Finally, the ability of many borrowers to afford the
payments on their adjustable rate mortgage loans may decrease if interest rates
increase.
22
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Part II - Other Information
Item 1. Legal Proceedings
Not Applicable
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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits: Not Applicable
Reports on Form 8-K: Not Applicable
23
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: May 11, 2001 BY: (S) B. Keith Johnson
------------------------------
B. Keith Johnson
President and Chief Executive Officer
DATE: May 11, 2001 BY: (S) Charles E. Chaney
-----------------------------
Charles E. Chaney
Senior Vice President
Chief Operating Officer
24