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 SEPTEMBER 30, 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
of incorporation or organization) Identification No.)
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 October 31, 2001
----------- --------------------------------------
Common Stock 3,758,491 shares
This document is comprised of 22 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 19-20
PART II - OTHER INFORMATION 21
SIGNATURES 22
2
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
ASSETS 2001 2001
---- ----
(DOLLARS IN THOUSANDS)
Cash and due from banks $ 12,699 $ 14,927
Interest bearing deposits 28,230 20,537
------ ------
Total cash and cash equivalents 40,929 35,464
Securities available-for-sale 1,971 2,013
Securities held-to-maturity: fair value of $8,989
(Sep.) and $20,954 (June) 2001 8,881 20,921
Loans receivable, less allowance for loan losses
of $2,975 (Sep.) and $2,906 (June) 2001 525,504 517,145
Federal Home Loan Bank stock 5,948 5,845
Premises and equipment 11,580 11,454
Real estate owned:
Acquired through foreclosure 160 296
Held for development 721 721
Repossessed assets 74 70
Acquisition intangibles 9,007 9,215
Accrued interest receivable 1,783 2,025
Other assets 655 1,557
-------- --- -----
TOTAL ASSETS $607,213 $606,726
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 25,029 $ 21,208
Interest bearing 443,317 447,617
------- -------
Total Deposits 468,346 468,825
Advances from Federal Home Loan Bank 77,261 77,298
Accrued interest payable 900 1,970
Accounts payable and other liabilities 3,731 2,476
Deferred income taxes 1,335 1,565
------- -------
TOTAL LIABILITIES 551,573 552,134
------- -------
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, 3,758,491 shares in June and
3,758,491 shares in September 3,758 3,758
Additional paid-in capital 21 21
Retained earnings 51,481 50,405
Accumulated other comprehensive
income, net of tax 380 408
------ ------
TOTAL STOCKHOLDERS' EQUITY 55,640 54,592
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $607,213 $606,726
======== ========
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
SEPTEMBER 30,
2001 2000
---- ----
INTEREST INCOME:
Interest and fees on loans $10,873 $ 9,977
Interest and dividends on investments
and deposits 613 841
------- ------
Total interest income 11,486 10,818
------ ------
INTEREST EXPENSE:
Deposits 5,222 5,198
Federal Home Loan Bank advances 944 1,405
------ -----
Total interest expense 6,166 6,603
----- -----
Net interest income 5,320 4,215
Provision for loan losses 300 195
----- -----
Net interest income after provision for loan losses 5,020 4,020
----- -----
NON-INTEREST INCOME:
Customer service fees on deposit accounts 702 578
Secondary mortgage market closing fees 161 111
Gain on sale of investments - 345
Brokerage and insurance commissions 150 126
Other income 221 153
----- -----
Total non-interest income 1,234 1,313
----- -----
NON-INTEREST EXPENSE:
Employee compensation and benefits 1,744 1,499
Office occupancy expense and equipment 379 367
FDIC insurance premium 22 22
Marketing and advertising 132 125
Outside services and data processing 382 322
State franchise tax 107 103
Amortization of acquisition intangibles 208 208
Other expense 649 610
----- ---
Total non-interest expense 3,623 3,256
----- -----
Income before income taxes 2,631 2,077
Income taxes 879 688
----- ------
NET INCOME $1,752 $1,389
====== ======
Earnings per share:
Basic $ 0.47 $ 0.37
Diluted $ 0.47 $ 0.37
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
SEPTEMBER 30,
2001 2000
---- ----
NET INCOME $1,752 $1,389
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities (28) 205
Reclassification of realized amount - (228)
------ ------
Net unrealized (loss) recognized in
Comprehensive income (28) (23)
------ ------
COMPREHENSIVE INCOME $1,724 $1,366
====== ======
See notes to consolidated financial statements.
5
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS 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, 2001 3,758 $ 3,758 $ 21 $50,405 $ 408 $54,592
Net income - - - 1,752 - 1,752
Net change in unrealized
gains (losses) on
securities available-
for-sale, net of tax - - - - (28) (28)
Cash dividends declared
($.18 per share) - - - (676) - (676)
----- ------- ----- ------- ------ -------
BALANCE, SEPTEMBER 30, 2001 3,758 $ 3,758 $ 21 $51,481 $ 380 $55,640
===== ======= ===== ======= ====== =======
See notes to consolidated financial statements.
6
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 1,752 $ 1,389
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 300 195
Depreciation of premises and equipment 290 279
Net change in deferred loan fees and costs 108 97
Federal Home Loan Bank stock dividends (103) (82)
Amortization of acquired intangible assets 208 208
Amortization and accretion on securities (18) (15)
Gain on sale of investments available-for-sale - (345)
Gain on sale of real estate held for development (3) (3)
Deferred taxes (216) (3)
Changes in:
Interest receivable 242 345
Other assets 902 (749)
Interest payable (1,070) (98)
Accounts payable and other liabilities 1,258 710
----- ----
Net cash from operating activities 3,650 1,928
----- -----
INVESTING ACTIVITIES:
Sales of securities available-for-sale - 351
Purchases of securities available-for-sale - (31)
Maturities of securities held-to-maturity 12,058 34
Net increase in loans (8,635) (19,512)
Purchase of Federal Home Loan Bank stock - (686)
Net purchases of premises and equipment (416) (530)
----- -------
Net cash from investing activities 3,007 (20,374)
----- -------
FINANCING ACTIVITIES:
Net decrease in deposits (479) 5,851
Advances from Federal Home Loan Bank - 14,825
Repayments to Federal Home Loan Bank (37) (22)
Dividends paid (676) (676)
Proceeds from stock options exercised - 6
Common stock repurchased - (30)
------ ------
Net cash from financing activities (1,192) 19,954
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 5,465 1,508
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,464 14,979
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $40,929 $16,487
======= =======
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 Corporation of Elizabethtown and First Heartland Mortgage
Company. All significant intercompany transactions and balances have
been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America 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 accounting principles generally accepted in the United
States of America 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 period ending September 30, 2001
are not necessarily indicative of the results that may be expected for
the year ended June 30, 2002. 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,
2001.
NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards
Board issued SFAS No. 141 "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangibles" in June 2001. As a result and
effective immediately, the purchase method is the only allowable method
for accounting for prospective business combinations. Effective July 1,
2002 for the Corporation, acquisition intangibles must be separated
into goodwill and identifiable intangibles. Identifiable intangibles
will continue to be amortized while amortization of goodwill will
cease. Annual impairment testing will be required for goodwill with
impairment charges to be recorded if the carrying amount is in excess
of its fair value. The Corporation's acquisition intangibles as
currently reported include both core deposit and goodwill, the amounts
of which and therefore the financial statement impact, have not yet
been determined.
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:
SEPTEMBER 30, 2001:
Equity securities $ 385 $ 570 $ (18) $ 937
Obligation of states and political
subdivisions 1,010 24 - 1,034
------ ------ ------ ------
Total available-for-sale $ 1,395 $ 594 $ (18) $ 1,971
====== ====== ====== ======
Securities held-to-maturity:
SEPTEMBER 30, 2001:
U.S. Treasury and agencies $ 7,932 $ 128 $ - $ 8,060
Mortgage-backed securities 949 4 (24) 929
------- ----- ------ -------
Total held-to-maturity $ 8,881 $ 132 $ (24) $ 8,989
======= ===== ====== =======
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
JUNE 30, 2001:
Equity securities $ 385 $ 617 $ (5) $ 997
Obligation of states and political
subdivisions 1,010 6 - 1,016
------- ----- ------ -------
Total available-for-sale $ 1,395 $ 623 $ (5) $ 2,013
======= ===== ====== =======
Securities held-to-maturity:
JUNE 30, 2001:
U.S. Treasury and agencies $19,917 $ 150 $ (104) $19,963
Mortgage-backed securities 1,004 4 (17) 991
------- ----- ------ -------
Total held-to-maturity $20,921 $ 154 $ (121) $20,954
======= ===== ====== =======
9
3. LOANS RECEIVABLE
Loans receivable are summarized as follows:
SEPTEMBER 30, JUNE 30,
2001 2001
---- ----
(DOLLARS IN THOUSANDS)
Commercial $ 16,273 $ 17,844
Real estate commercial 100,403 88,938
Real estate construction 7,378 9,079
Real estate mortgage 332,558 330,488
Consumer and home equity 52,023 54,189
Indirect consumer 22,053 21,822
------- -------
Total loans 530,688 522,360
------- -------
Less:
Net deferred loan origination fees (2,209) (2,309)
Allowance for loan losses (2,975) (2,906)
-------- --------
(5,184) (5,215)
-------- --------
Loans, net $525,504 $517,145
======== ========
The following table sets forth the changes in the allowance for loan
losses:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Allowance for loan losses:
Balance, beginning of period $ 2,906 $ 2,252
Provision for loan losses 300 195
Charge-offs (252) (143)
Recoveries 21 7
------- -------
Balance, end of period $ 2,975 $ 2,311
======= =======
Investment in impaired loans is summarized below. There were no impaired
loans for the periods presented without an allowance allocation.
SEPTEMBER 30, JUNE 30,
2001 2001
---- ----
(DOLLARS IN THOUSANDS)
End of period impaired loans $3,024 $2,720
Amount of allowance for loan
loss allocated 400 268
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 September 30,
2001 First Federal had $77.3 million in advances outstanding from the
FHLB and the capacity to increase its borrowings an additional $39.2
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
SEPTEMBER 30,
2001 2000
---- ----
(IN THOUSANDS)
Net income available
to common shareholders $1,752 $1,389
====== ======
Basic EPS:
Weighted average common shares 3,758 3,756
===== =====
Diluted EPS:
Weighted average common shares 3,758 3,756
Dilutive effect of stock options 7 9
----- ------
Weighted average common and
incremental shares 3,765 3,765
===== =====
Earnings Per Share:
Basic $0.47 $0.37
===== =====
Diluted $0.47 $0.37
===== =====
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 the Bank is the Office of Thrift Supervision (OTS).
The following discussion and analysis covers any significant changes in the
financial condition since June 30, 2001 and any material changes in the results
of operations for the three-month period ending, September 30, 2001. 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 2001 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, the Corporation may
make forward-looking statements in future filings with the Securities and
Exchange Commission, in press releases, and in oral and written statements.
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 Corporation
or its management or Board of Directors; (3) statements regarding future events,
actions or economic performance; and (4) statements of assumptions underlying
such statements. Words such as "believes," "anticipates," "expects," "intends,"
"plans," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those indicated by 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 September 30, 2001 was $1.8 million or $0.47
per share diluted compared to $1.4 million or $0.37 per share diluted for the
same period in 2000. Excluding gains from investment transactions during the
2000 quarter, earnings would have been $1.2 million or $0.31 per share diluted.
The Bank's increased earnings were primarily due to increases in net interest
income and loan and deposit fee income.
In January 2001, the Bank restructured $75 million of its Federal Home Loan Bank
advances to secure longer term financing at lower interest rates. Management
expects that the restructuring of advances coupled with Federal Open Market
Committee's interest rate reductions will continue to have a positive impact on
future earnings. The Bank's book value per common share increased from $13.94 at
September 30, 2000 to $14.80 at September 30, 2001. Net income for the 2001
period generated return on average assets of 1.15% and return on average equity
of 12.68%. These compare with return on average assets of .97% and return on
average equity of 10.66% for the 2000 period.
12
The Bank's total assets at September 30, 2001 grew to $607.2 million compared to
$606.7 million at June 30, 2001. Net loans increased $8.4 million from June 30,
2001 to $525.5 million at September 30, 2001. The commercial real estate
portfolio increased $11.5 million while the residential real estate portfolio
grew $2.1 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 $231,000 while consumer and home equity loans decreased $2.2 million.
While loan growth remained strong, the percentage of non-performing loans to
total loans remained low at .57%, as the Bank maintained it's underwriting
standards and continued its emphasis on secured real estate lending.
RESULTS OF OPERATIONS
NET INTEREST INCOME-For the quarter ended September 30, 2001, net interest
income was $5.3 million, up $1.1 million from the $4.2 million attained during
the 2000 period. The net interest rate spread increased from 2.75% during the
2000 quarter to 3.30% in the comparable quarter of 2001. The Bank's net interest
margin increased from 3.15% during the quarter ended September 30, 2000 to 3.71%
for the 2001 period. The increase in net interest spread and margin occurred
because the yield on interest earning assets decreased only 7 basis points,
while the rate paid on liabilities decreased 62 basis points. During the 2001
period, average interest-earning assets were $574.6 million, an increase of
$37.9 million over the same period in 2000. Total average interest bearing
liabilities increased from $496.1 million during the quarter ended September 30,
2000 to $524.5 million for the same period in 2001.
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 September 30, 2001 and 2000.
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2001 2000
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------- -------- ---------- ------- -------- ----------
ASSETS (DOLLARS IN THOUSANDS)
Interest earning assets:
Equity securities $ 982 $ 7 2.85% $ 1,098 $ 8 2.91%
State and political subdivision
Securities (1) 1,021 17 6.66 947 17 7.18
U.S. Treasury and agencies 14,449 265 7.34 41,876 678 6.48
Mortgage-backed securities 953 17 7.14 1,251 22 7.03
Loans receivable (2) (3) 526,166 10,873 8.27 482,627 9,977 8.27
FHLB stock 5,871 103 7.02 4,427 82 7.41
Interest bearing deposits 25,198 210 3.33 4,523 40 3.54
------- ------ ----- ------- ------ ----
TOTAL INTEREST EARNING ASSETS 574,640 11,492 8.00 536,749 10,824 8.07
Less: Allowance for loan losses (2,976) ------ ----- (2,285) ------ ----
Non-interest earning assets 36,937 37,305
-------- --------
TOTAL ASSETS $608,601 $571,769
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $36,384 $ 210 2.31% $ 35,199 $267 3.03%
NOW and money market
Accounts 87,461 466 2.13 78,480 499 2.54
Certificates of deposit and
other time deposits 322,550 4,546 5.64 294,904 4,432 6.01
FHLB Advances 78,056 944 4.84 87,490 1,405 6.42
------- ----- ---- ------- ----- ----
TOTAL INTEREST BEARING LIABILITIES 524,451 6,166 4.70 496,073 6,603 5.32
----- ---- ----- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 21,991 17,569
Other liabilities 6,899 5,999
------- -------
TOTAL LIABILITIES 553,341 519,641
Stockholders' equity 55,260 52,128
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $608,601 $571,769
======== ========
NET INTEREST INCOME $5,326 $4,221
====== ======
NET INTEREST SPREAD 3.30% 2.75%
===== =====
NET INTEREST MARGIN 3.71% 3.15%
===== =====
- --------------------------------------------------------------------------------
(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
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
SEPTEMBER 30,
2001 VS. 2000
INCREASE (DECREASE)
DUE TO CHANGE IN
(DOLLARS IN THOUSANDS)
NET
RATE VOLUME CHANGE
INTEREST INCOME: ---- ------ ------
Loans $ (4) $900 $896
Equity securities - (1) (1)
State and political subdivision
securities (1) 1 -
U.S. Treasury and agencies 80 (493) (413)
Mortgage-backed securities - (5) (5)
FHLB stock (5) 26 21
Interest bearing deposits (3) 173 170
--- --- ---
NET CHANGE IN INTEREST INCOME 67 601 668
--- --- ---
INTEREST EXPENSE:
Savings accounts (66) 9 (57)
NOW and money market accounts (86) 53 (33)
Certificates of deposit and other
time deposits (286) 400 114
FHLB advances (321) (140) (461)
----- ---- ----
NET CHANGE IN INTEREST EXPENSE (759) 322 (437)
----- ---- ----
INCREASE IN NET INTEREST INCOME $827 $278 $ 1,105
==== ==== =======
NON-INTEREST INCOME-Non-interest income was $1.2 million for the quarter ended
September 30, 2001, as compared to $1.3 million for the 2000 period, a decrease
of $79,000. During the September 2001 quarter the Bank did not report any gains
from investment sales compared to reported gains of $345,000 for the 2000
period. Fee income from secondary market lending operations increased by $50,000
or 45% during 2001 compared to 2000. Customer service fees charged on deposit
accounts increased by $124,000 or 21% during the 2001 quarter due to growth in
accounts, deposit relationships with existing customers and the Bank's continued
efforts to expand its product line. Other sources of income such as brokerage
commissions, loan fees, and other customer transaction fees also increased
$92,000 or 33% during the 2001 period as compared to the 2000 period.
NON-INTEREST EXPENSE- Non-interest expense was $3.6 million for the 2001 quarter
compared to $3.3 million for the 2000 quarter, an increase of $367,000 or 11%.
Compensation and employee benefits, the largest component of non-interest
expense, increased by $245,000 or 16% in 2001 compared to 2000. The increase
reflects growth in the overall staffing level from 192 at September 30, 2000 to
216 at September 30, 2001. The Bank's continued emphasis on building its
commercial and retail staff was the largest contributing factor.
Beyond compensation and benefits, data processing expense increased due to an
increase in processor charges relating to an increase in the number of users,
training expenses and the implementation of cash management, internet banking
and imaging. Other expenses increased by $39,000 in 2001 compared to 2000
including postage, supplies and customer account expenses.
15
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, historical charge-offs, recoveries, and other information. Management
monitors the commercial real estate portfolio closely, recognizing that
commercial 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 September 30, 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 following table sets forth an analysis of the Bank's loan loss experience
for the three months ended September 30, 2001 and 2000.
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Balance-beginning of period $2,906 $2,252
------ ------
Loans charged-off:
Real estate mortgage 0 (2)
Consumer (104) (141)
Commercial (148) 0
----- ----
Total charge-offs (252) (143)
---- ----
Recoveries:
Real estate mortgage 1 0
Consumer 20 7
Commercial 0 0
---- ----
Total recoveries 21 7
---- ----
Net loans charged-off (231) (136)
---- ----
Provision for loan losses 300 195
---- ---
Balance-end of period $2,975 $2,311
------ ------
Net charge-offs to average
loans outstanding .044% .028%
Allowance for loan losses to
total non-performing loans 98% 122%
Allowance for loan losses to
to net loans outstanding .57% .47%
The provision for loan losses was $300,000 for the three months ended September
30, 2001 compared to $195,000 for the 2000 quarter. The increase in the
provision is primarily to compensate for the Bank's strong loan growth in the
commercial loan portfolio. Net loan charge-offs increased $95,000 to $231,000
for the three months ended September 30, 2001 compared to $136,000 for the same
period in 2000. The increase in charge-offs is primarily related to the
charge-off of a commercial real estate loan during the 2001 period.
16
Federal regulations require insured institutions to classify their own assets on
a regular basis. In addition, in connection with examinations of insured
institutions, OTS examiners have authority to identify problem assets and, if
appropriate, classify them. The regulations provide for three classifications of
asset categories -- substandard, doubtful and loss. The regulations also contain
a special mention category, defined as assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification but
do possess credit deficiencies or potential weaknesses deserving management's
close attention. Assets classified as substandard or doubtful require the
institution to establish general allowances for loan losses. If an asset or
portion thereof is classified as loss, the insured institution must either
establish specified allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount. At September
30, 2001, on the basis of management's review of the Bank's loan portfolio, the
Bank had $3.0 million of assets classified substandard, $122,000 of assets
classified as doubtful and $166,000 of assets classified as loss.
Each element of the allowance was determined by applying the following risk
percentages to each grade of loan: Substandard-2.5% to 25%; Doubtful-5% to 50%;
Loss-100%; and Special Mention-2% to 6%. The risk percentages are developed by
the Bank in consultation with regulatory authorities, actual loss experience,
peer group loss experience and are adjusted for current economic conditions. The
risk percentages are considered a prudent measurement of the risk of the Bank's
loan portfolio. Such risk percentages are applied to individual loans based on
loan type.
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.
Interest income on loans is recognized on the accrual basis except for those
loans in a nonaccrual of income status. The accrual of interest on impaired
loans is discontinued when management believes, after consideration of economic
and business conditions and collection efforts that the borrowers' financial
condition is such that collection of interest is doubtful. When interest accrual
is discontinued, interest income is subsequently recognized only to the extent
cash payments are received.
Real estate acquired by the Bank as a result of foreclosure or by deed in lieu
of foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value. Any write-down
of the property is charged to the allowance for loan losses.
17
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated.
SEPTEMBER 30, JUNE 30,
2001 2001
------------- -------
(DOLLARS IN THOUSANDS)
Past due 90 days still on accural $ - $ -
Loans on non-accrual status (1)(2) 3,024 2,720
Real estate acquired
through foreclosure 160 296
Repossessed assets 74 70
------ ------
Total non-performing assets $3,258 $3,086
====== ======
Ratios: Non-performing loans
to total loans .57% .52%
Non-performing assets
to total assets .54% .51%
- ---------------------------------------------------------
(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 $62,500
for the three month period ending September 30, and $227,000
for the year ending June 30.
LIQUIDITY
The Bank maintains sufficient liquidity to fund loan demand and routine deposit
withdrawal activity. 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 $3.9 million at September
30, 2001) with customer deposits and additional advances from the FHLB. While
the Bank utilizes other funding sources in order to meet its liquidity needs,
FHLB borrowings remain a material component of management's balance sheet
strategy. At September 30, 2001, the Bank had an unused approved line of credit
in the amount of $39.3 million and sufficient collateral to borrow an additional
$39.2 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 September 30, 2001 are presented below:
TO BE CONSIDERED
WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTION
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-----------------------------------------------------------
AS OF SEPTEMBER 30, 2001: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-
weighted assets) $48,214 11.0% $35,054 8.0% $43,818 10.0%
Tier I capital (to risk-weighted
assets) 44,992 10.3 17,527 4.0 26,291 6.0
Tier I leverage capital (to
average assets) 44,992 7.4 24,344 4.0 30,430 5.0
18
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 polices of the Corporation. Interest rate risk is the exposure to
adverse changes in the net interest income as a result of market fluctuations in
interest rates. The ALCO, on an ongoing basis, monitors interest rate and
liquidity risk in order to implement appropriate funding and balance sheet
strategies. Management considers interest rate risk to be the Bank's most
significant market risk.
The Bank utilizes an earnings simulation model to analyze net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effects on net interest income are then evaluated. The model projects the effect
of instantaneous movements in interest rates of both 100 and 200 basis points.
Assumptions based on the historical behavior of the Bank's deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model's simulated results due to timing, magnitude
and frequency of interest rate changes as well as changes in market conditions
and the application and timing of various management strategies.
The Bank's interest sensitivity profile changed from June 30, 2001 to September
30, 2001. Given a sustained 100 basis point downward shock to the yield curve
used in the simulation model, the Bank's base net interest income would increase
by an estimated 3.92% at June 30, 2001 compared to an increase of 4.86% at
September 30, 2001. Given a 100 basis point increase in the yield curve the
Bank's base net interest income would decrease by an estimated 4.30% at June 30,
2001 compared to a decrease of 5.37% at September 30, 2001.
The interest sensitivity profile of the Bank at any point in time will be
affected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative pricing schedules. It
is also influenced by market interest rates, deposit growth, loan growth, and
other factors. The table below is representative only and is not a precise
measurement of the effect of changing interest rates on the Bank's net interest
income in the future.
SEPTEMBER 30, 2001
DECREASE IN RATES INCREASE IN RATES
------------------ -----------------
200 100 100 200
BASIS POINTS BASIS POINTS BASE BASIS POINTS BASIS POINTS
(Dollars in thousands)
PROJECTED INTEREST INCOME
Loans $39,767 $41,998 $43,864 $45,410 $46,810
Investments 1,915 2,070 2,180 2,502 2,661
------ ------ ------ ------ ------
TOTAL INTEREST INCOME 41,682 44,068 46,044 47,912 49,471
PROJECTED INTEREST EXPENSE
Deposits 15,229 18,226 21,224 24,221 26,429
Borrowed funds 3,735 3,737 3,739 3,741 3,829
------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE 18,964 21,963 24,963 27,962 30,258
NET INTEREST INCOME $22,718 $22,105 $21,081 $19,950 $19,213
Change from base $1,637 $1,024 $(1,131) $(1,868)
% Change from base 7.77% 4.86% (5.37)% (8.86)%
19
JUNE 30, 2001
DECREASE IN RATES INCREASE IN RATES
------------------ -----------------
200 100 100 200
BASIS POINTS BASIS POINTS BASE BASIS POINTS BASIS POINTS
(Dollars in thousands)
PROJECTED INTEREST INCOME
Loans $40,259 $41,873 $43,221 $44,342 $45,361
Investments 2,068 2,184 2,271 2,507 2,628
------ ------ ------ ------- ------
TOTAL INTEREST INCOME 42,327 44,057 45,492 46,849 47,989
PROJECTED INTEREST EXPENSE
Deposits 16,858 19,092 21,326 23,560 25,149
Borrowed funds 3,734 3,735 3,736 3,738 3,785
------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE 20,592 22,827 25,062 27,298 28,934
NET INTEREST INCOME $21,735 $21,230 $20,430 $19,551 $19,055
Change from base $1,305 $800 $(879) $(1,375)
% Change from base 6.39% 3.92% (4.30)% (6.73)%
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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits: Not Applicable
Reports on Form 8-K: Not Applicable
21
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: November 13, 2001 BY: (S) B. Keith Johnson
----------------------
B. Keith Johnson
President and Chief Executive Officer
DATE: November 13, 2001 BY: (S) Charles E. Chaney
-----------------------
Charles E. Chaney
Senior Vice President
Chief Operating Officer
22