UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 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 January 31, 2002
----------- --------------------------------------
Common Stock 3,758,491 shares
This document is comprised of 23 pages.
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
INDEX
Page Number
PART I - FINANCIAL INFORMATION -----------
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 12-21
Item 3 -Quantitative and Qualitative Disclosures about Market Risk 20-21
PART II - OTHER INFORMATION 22
SIGNATURES 23
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Financial Condition
(Unaudited)
December 31, June 30,
ASSETS 2001 2001
---- ----
(Dollars in thousands)
Cash and due from banks $ 11,861 $ 14,927
Interest bearing deposits 36,019 20,537
------ ------
Total cash and cash equivalents 47,880 35,464
Securities available-for-sale 1,964 2,013
Securities held-to-maturity: fair value of $7,892
(Dec.) and $20,954 at (June) 2001 7,812 20,921
Loans receivable, less allowance for loan losses
of $3,284 (Dec.) and $2,906 (June) 2001 522,534 517,145
Federal Home Loan Bank stock 6,031 5,845
Premises and equipment 11,475 11,454
Real estate owned:
Acquired through foreclosure 380 296
Held for development 721 721
Repossessed assets 145 70
Acquisition intangibles 8,799 9,215
Accrued interest receivable 1,516 2,025
Other assets 1,244 1,557
----- -----
TOTAL ASSETS $610,501 $606,726
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing $ 20,328 $ 21,208
Interest bearing 452,164 447,617
------- -------
Total Deposits 472,492 468,825
Advances from Federal Home Loan Bank 77,208 77,298
Accrued interest payable 793 1,970
Accounts payable and other liabilities 1,561 2,476
Deferred income taxes 1,509 1,565
------- -------
TOTAL LIABILITIES 553,563 552,134
------- -------
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, 3,758,000 shares in June and
3,758,000 shares in December 3,758 3,758
Additional paid-in capital 21 21
Retained earnings 52,783 50,405
Accumulated other comprehensive
income, net of tax 376 408
------ -------
TOTAL STOCKHOLDERS' EQUITY 56,938 54,592
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $610,501 $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 Six Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Interest Income:
Interest and fees on loans $10,683 $10,435 $21,556 $20,412
Interest and dividends on investments
and deposits 363 866 976 1,707
------ ------ ------ ------
Total interest income 11,046 11,301 22,532 22,119
------ ------ ------ ------
Interest Expense:
Deposits 4,428 5,475 9,650 10,673
Federal Home Loan Bank advances 940 1,702 1,883 3,107
----- ----- ------ ------
Total interest expense 5,368 7,177 11,533 13,780
----- ----- ------ ------
Net interest income 5,678 4,124 10,999 8,339
Provision for loan losses 460 306 760 501
----- ----- ------ -----
Net interest income after provision for loan losses 5,218 3,818 10,239 7,838
----- ----- ------ -----
Non-interest Income:
Customer service fees on deposit accounts 725 621 1,428 1,199
Secondary mortgage market closing fees 193 115 354 226
Gain on sale of investments - 351 - 696
Brokerage and insurance commissions 126 198 276 323
Other income 363 179 584 333
----- ----- ----- -----
Total non-interest income 1,407 1,464 2,642 2,777
----- ----- ----- -----
Non-interest Expense:
Employee compensation and benefits 1,719 1,571 3,463 3,068
Office occupancy expense and equipment 366 357 745 723
FDIC insurance premium 21 21 43 43
Marketing and advertising 131 125 263 250
Outside services and data processing 369 342 752 664
State franchise tax 107 103 214 206
Amortization of intangibles 208 208 416 416
Other expense 736 622 1,385 1,234
----- ----- ----- -----
Total non-interest expense 3,657 3,349 7,281 6,604
----- ----- ----- -----
Income before income taxes 2,968 1,933 5,600 4,011
Income taxes 990 628 1,869 1,317
------ ------ ----- -----
Net income $1,978 $1,305 $3,731 $2,694
====== ====== ====== ======
Earnings per share:
Basic $ 0.53 $ 0.35 $ 0.99 $ 0.72
Diluted $ 0.53 $ 0.35 $ 0.99 $ 0.72
See notes to consolidated financial statements.
4
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------ -------------
2001 2000 2001 2000
---- ---- ---- ----
Net Income $1,978 $1,305 $3,731 $2,694
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss)
on securities (4) 169 (32) 374
Reclassification of realized amount - (231) - (459)
------ ------- ------ ------
Net unrealized gain (loss) recognized in
Comprehensive income (4) (62) (32) (85)
------ ------ ------ ------
Comprehensive Income $1,974 $1,243 $3,699 $2,609
====== ====== ====== ======
See notes to consolidated financial statements.
5
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended December 31, 2001
(Unaudited)
(In thousands)
Accumulated Other
Additional Comprehensive
Common Stock Paid - in Retained Income,
Shares Amount Capital Earnings Net of Tax Total
------ ------ ------- -------- ---------- -----
Balance, June 30, 2001 3,758 $ 3,758 $ 21 $50,405 $ 408 $54,592
Net income - - - 3,731 - 3,731
Net change in unrealized
gains (losses) on
securities available
for-sale, net of tax - - - - (32) (32)
Cash dividends declared
($.36 per share) - - - (1,353) - (1,353)
----- ------- ----- ------- ------ -------
Balance, December 31, 2001 3,758 $ 3,758 $ 21 $52,783 $ 376 $56,938
===== ======= ===== ======= ====== =======
See notes to consolidated financial statements.
6
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
December 31,
2001 2000
---- ----
Operating Activities:
Net income $ 3,731 $ 2,694
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 760 501
Depreciation of premises and equipment 535 567
Net change in deferred loan fees and costs 190 174
Federal Home Loan Bank stock dividends (186) (180)
Amortization of acquired intangible assets 416 416
Amortization and accretion on securities (33) (31)
Gain on sale of investments available-for-sale - (696)
Gain on sale of real estate held for developmen (6) (6)
Deferred taxes (40) 14
Changes in:
Interest receivable 509 (363)
Other assets 313 (399)
Interest payable (1,177) (102)
Accounts payable and other liabilities (909) (848)
----- -----
Net cash from operating activities 4,103 1,741
----- -----
Investing Activities:
Sales of securities available-for-sale - 708
Purchases of securities available-for-sale - (32)
Purchases of securities held-to-maturity (5,000) -
Maturities of securities held-to-maturity 18,143 214
Net increase in loans (6,498) (40,960)
Purchase of Federal Home Loan Bank stock - (1,380)
Net purchases of premises and equipment (556) (598)
Purchase of real estate held for development - (275)
----- -------
Net cash from investing activities 6,089 (42,323)
----- -------
Financing Activities:
Net increase in deposits 3,667 12,185
Advances from Federal Home Loan Bank - 30,544
Repayments to Federal Home Loan Bank (90) (46)
Dividends paid (1,353) (1,351)
Proceeds from stock options exercised - 7
Common stock repurchased - (30)
----- ------
Net cash from financing activities 2,224 41,309
----- ------
Increase in cash and cash equivalents 12,416 727
Cash and cash equivalents, beginning of period 35,464 14,979
------ ------
Cash and cash equivalents, end of period $47,880 $15,706
======= =======
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 six-month period ending December 31, 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 the Corporation'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:
December 31, 2001:
Equity securities $ 385 $ 570 $ (6) $ 949
Obligation of states and political
subdivisions 1,010 10 (5) 1,015
------- ----- ----- -------
Total available-for-sale $ 1,395 $ 580 $ (11) $ 1,964
======= ===== ===== =======
Securities held-to-maturity:
December 31, 2001:
U.S. Treasury and agencies $ 6,942 $ 105 $ - $ 7,047
Mortgage-backed securities 870 2 (27) 845
------- ----- ----- -------
Total held-to-maturity $ 7,812 $ 107 $ (27) $ 7,892
======= ===== ===== =======
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:
December 31, June 30,
2001 2001
---- ----
(Dollars in thousands)
Commercial $ 17,864 $ 17,844
Real estate commercial 104,571 88,938
Real estate construction 7,658 9,079
Real estate mortgage 326,660 330,488
Consumer and home equity 50,898 54,189
Indirect consumer 20,288 21,822
------- -------
Total loans 527,939 522,360
------- -------
Less:
Net deferred loan origination fees (2,121) (2,309)
Allowance for loan losses (3,284) (2,906)
------ ------
(5,405) (5,215)
-------- --------
Loans, net $522,534 $517,145
======== ========
The following table sets forth the changes in the allowance for loan
losses:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period $ 2,975 $ 2,311 $ 2,906 $ 2,252
Provision for loan losses 460 306 760 501
Charge-offs (174) (96) (426) (239)
Recoveries 23 20 44 27
------- ------- ------- --------
Balance, end of period $ 3,284 $ 2,541 $ 3,284 $ 2,541
======= ======= ======= =======
Investment in impaired loans is summarized below. There were no impaired
loans for the periods presented without an allowance allocation.
December 31, June 30,
2001 2001
---- ----
(Dollars in thousands)
End of period impaired loans $ 2,347 $2,720
Amount of allowance for loan
loss allocated 415 268
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
December 31, 2001 First Federal had $77.2 million in advances outstanding from
the FHLB and the capacity to increase its borrowings an additional $23.7
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 Six Months Ended
December 31, December 31,
------------ ------------
2001 2000 2001 2000
---- ---- ----- -----
(In thousands)
Net income available
To common shareholders $1,978 $1,305 $3,731 $2,694
====== ====== ====== ======
Basic EPS:
Weighted average common shares 3,758 3,755 3,758 3,755
===== ===== ====== ======
Diluted EPS:
Weighted average common shares 3,758 3,755 3,758 3,755
Dilutive effect of stock options 7 5 7 7
----- ----- ----- ------
Weighted average common and
incremental shares 3,765 3,760 3,765 3,762
===== ===== ===== =====
Earnings Per Share:
Basic $0.53 $0.35 $0.99 $0.72
===== ===== ===== =====
Diluted $0.53 $0.35 $0.99 $0.72
===== ===== ===== =====
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Federal Financial Corporation of Kentucky ("Corporation") is the holding
company for 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 and six-month periods ending, December 31,
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, and readers are cautioned not to place undue reliance on
the forward-looking statements in this report. The forward-looking statements
speak as of the date of this report, and except as required by law, the
Corporation makes no undertaking to revise the forwared-looking statements to
reflect developments after the date of theis report.
OVERVIEW
Net income for the quarter ended December 31, 2001 was $2.0 million or $0.53 per
share diluted compared to $1.3 million or $0.35 per share diluted for the same
period in 2000. During the 2000 quarter, the Corporation sold investments with
gains of $351,000. Excluding this gain, earnings would have been $1.1 million or
$0.29 per share diluted. The Bank's increased earnings were primarily due to
increases in net interest income and loan and deposit fee income.
Net income for the six months ended December 31, 2001 was $3.7 million or $0.99
per share diluted compared to $2.7 million or $0.72 per share diluted for the
same period in 2000. In January 2001, the Bank restructured $75 million of its
Federal Home Loan Bank advances to secure longer term financing at lower
interest rates. Management expects that the restructuring of advances coupled
with the 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 $14.09 at December 31, 2000 to $15.15 at December 31, 2001.
Net income for the 2001 period generated return on average assets of 1.23% and
return of average equity of 13.35%. These compare with return on average assets
of .93% and return on average equity of 10.27% for the 2000 period.
12
The Bank's total assets at December 31, 2001 grew to $610.5 million compared to
$606.7 million at June 30, 2001. Net loans increased $5.4 million from June 30,
2001 to $522.5 million at December 31, 2001. Residential real estate loans
decreased during 2001 as declining market interest rates caused an increase in
1-4 family refinancing activity into fixed-rate, secondary market loan products.
The commercial real estate portfolio remained strong, increasing by $15.6
million to $104.6 million at December 31, 2001. This growth is a result of the
Bank's continued emphasis on the active pursuit of commercial lending
opportunities. While overall loan volume remained strong, the percentage of
non-performing loans to total loans remained low at 0.45%, as the Bank
maintained its underwriting standards and continued its emphasis on secured real
estate lending.
RESULTS OF OPERATIONS
Net Interest Income-For the quarter ended December 31, 2001, net interest income
was $5.7 million, up $1.6 million from the $4.1 million attained during the 2000
quarter. The net interest rate spread increased from 2.55% during the 2000
quarter to 3.59% in the comparable quarter of 2001. The Bank's net interest
margin increased from 2.96% during the quarter ended December 31, 2000 to 3.96%
for the 2001 period. The net interest spread and margin benefited from a
significant decline in the Bank's cost of funds due to a reduction in short-term
market interest rates. During the 2001 period, average interest-earning assets
were $574.4 million, an increase of $16.7 million over the same period in 2000.
Total average interest bearing liabilities increased from $516.5 million during
the quarter ended December 31, 2000 to $522.8 million for the same period in
2001.
Net interest income for the six months ended December 31, 2001 was $11.0
million, an increase of $2.7 million from the $8.3 million attained during the
same period of 2000. The Bank's net interest spread increased 80 basis points
while the net interest margin increased 78 basis points for the six months ended
December 31, 2001 compared to the same period in 2000.
13
Average Balance Sheet
The following table provides detailed information as to average balance,
interest income/expense, and rates by major balance sheet categories for the
three months ended December 31, 2001 and 2000.
Three Months Ended December 31,
------------------------------------------------------------------------------------
2001 2000
---- ----
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
ASSETS (Dollars in thousands)
Interest earning assets:
Equity securities $ 940 $ 10 4.26% $ 1,045 $ 8 3.06%
State and political subdivision
Securities (1) 1,029 18 7.00 969 17 7.02
U.S. Treasury and agencies 4,716 58 4.92 41,891 684 6.53
Mortgage-backed securities 889 15 6.75 1,163 22 7.57
Loans receivable (2) (3) 526,649 10,683 8.11 503,202 10,435 8.29
FHLB stock 5,969 83 5.56 5,281 99 7.50
Interest bearing deposits 34,191 186 2.18 4,138 42 4.06
------- ------ ---- ------- ------ ----
Total interest earning assets 574,383 11,053 7.70 557,689 11,307 8.11
------ ---- ------ ----
Less: Allowance for loan losses (3,115) (2,410)
Non-interest earning assets 35,920 37,368
-------- --------
Total assets $607,188 $592,647
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $44,138 $ 231 2.09% $ 32,432 $ 249 3.07
NOW and money market
accounts 93,254 532 2.28 78,394 546 2.79
Certificates of deposit and
other time deposits 308,218 3,665 4.76 301,313 4,680 6.21
FHLB Advances 77,236 940 4.87 104,365 1,702 6.52
------- ----- ---- ------- ----- ----
Total interest bearing liabilities 522,846 5,368 4.11 516,504 7,177 5.56
----- ---- ------- ----- ----
Non-interest bearing liabilities:
Non-interest bearing deposits 22,220 18,010
Other liabilities 5,645 5,369
------- -------
Total liabilities 550,711 539,883
Stockholders' equity 56,477 52,764
-------- -------
Total liabilities and
stockholders' equity $607,188 $592,647
======== ========
Net interest income $5,685 $4,130
====== ======
Net interest spread 3.59% 2.55%
===== =====
Net interest margin 3.96% 2.96%
===== =====
- ------------------------------------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax
rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. (3) Calculations include non-accruing loans
in the average loan amounts outstanding.
14
Average Balance Sheet
The following table provides detailed information as to average balance,
interest income/expense, and rates by major balance sheet categories for the six
months ended December 31, 2001 and 2000.
Six Months Ended December 31,
------------------------------------------------------------------------------------
2001 2000
---- ----
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
ASSETS (Dollars in thousands)
Interest earning assets:
Equity securities $ 964 $ 17 3.53% $ 1,071 $ 16 2.99%
State and political subdivision
Securities (1) 1,024 35 6.84 958 34 7.10
U.S. Treasury and agencies 9,814 323 6.58 41,883 1,363 6.51
Mortgage-backed securities 920 32 6.96 1,204 44 7.31
Loans receivable (2) (3) 526,111 21,556 8.19 492,961 20,412 8.28
FHLB stock 5,916 186 6.29 4,855 180 7.42
Interest bearing deposits 29,904 396 2.65 4,310 82 3.81
Total interest earning assets 574,653 22,545 7.85 547,242 22,131 8.09
------ ---- ------ ----
Less: Allowance for loan losses (3,056) (2,353)
Non-interest earning assets 36,393 37,249
-------- --------
Total assets $607,990 $582,138
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts $ 40,655 $ 441 2.17% $ 33,897 $ 591 3.49%
NOW and money market
Accounts 90,419 998 2.21 78,398 969 2.47
Certificates of deposit and
other time deposits 315,046 8,211 5.21 297,827 9,113 6.12
FHLB Advances 77,701 1,883 4.85 96,040 3,107 6.47
------- ------ ---- ------- ------ ----
Total interest bearing liabilities 523,821 11,533 4.40 506,162 13,780 5.44
------ ---- ------ ----
Non-interest bearing liabilities:
Non-interest bearing deposits 21,954 17,820
Other liabilities 6,315 5,696
------- -------
Stockholders' equity 55,900 52,460
------- -------
Total liabilities and
stockholders' equity $607,990 $582,138
======== ========
Net interest income $11,012 $ 8,351
======= =======
Net interest spread 3.45% 2.65%
===== =====
Net interest margin 3.83% 3.05%
===== =====
- ------------------------------------------------------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income tax
rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. (3) Calculations include non-accruing loans
in the average loan amounts outstanding.
15
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (changes
in rate multiplied by old volume); (2) changes in volume (change in volume
multiplied by old rate); and (3) changes in rate-volume (change in rate
multiplied by change in volume). Changes in rate-volume are proportionately
allocated between rate and volume variance.
Three Months Ended Six Months Ended
December 31, December 31,
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 $(231) $479 $248 $(216) $1,360 $1,144
Equity securities 3 (1) 2 3 (2) 1
State and political subdivision
securities - 1 1 (2) 3 1
U.S. Treasury and agencies (136) (490) (626) 16 (1,056) (1,040)
Mortgage-backed securities (2) (5) (7) (2) (10) (12)
FHLB stock (28) 12 (16) (30) 36 6
Interest bearing deposits (28) 172 144 (32) 346 314
---- --- --- ---- --- ---
Total interest earning assets (422) 168 (254) (263) 677 414
---- --- --- ---- --- ---
Interest expense:
Savings accounts (93) 75 (18) (253) 103 (150)
NOW and money market accounts (108) 94 (14) (110) 139 29
time deposits (1,119) 105 (1,015) (1,406) 504 (902)
FHLB advances (377) (386) (762) (695) (529) (1,224)
------ ---- ------ ------ ---- ------
Total interest bearing liabilities (1,697) (112) (1,809) (2,464) 217 (2,247)
------ ---- ------ ------ ---- ------
Net change in net interest income $1,275 $ 280 $ 1,555 $ 2,201 $ 460 $ 2,661
====== ===== ======= ======= ====== =======
Non-Interest Income-Non-interest income was $1.4 million for the quarter ended
December 31, 2001, as compared to $1.5 million for the 2000 period, a decrease
of $57,000. During the December 2001 quarter the Bank did not report any gains
from investment sales compared to reported gains of $351,000 for the 2000
period. Fee income from secondary market lending operations increased by $78,000
or 68% during the 2001 period compared to 2000 due to increased secondary market
residential loan originations from a higher level of refinancing activity.
Customer service fees charged on deposit accounts increased by $104,000 or 17%
during the 2001 quarter due to growth in fee-related customer transactions and
deposit relationships with existing customers. Other sources of income such as
loan fees and other customer transaction fees also increased during the 2001
period as compared to the 2000 period.
Non-interest income was $2.6 million for the six months ended December 31, 2001,
as compared to $2.8 million for the same period last year. During the December
2001 period the Bank did not report any gains from investment sales compared to
reported gains of $696,000 for the 2000 period. Fee income from secondary market
lending operations increased by $128,000 or 57% during the 2001 period compared
to 2000. Customer service fees charged on deposit accounts increased by $229,000
or 19% during the 2001 period due to the Bank's continued efforts to expand its
product line.
16
Non-Interest Expense-Non-interest expense increased during the quarter and
six-month period ended December 31, 2001 compared to the same period in 2000.
The most significant factors comprising the increase in non-interest expense for
the quarter and six-months ended December 31, 2001 were increases in employee
compensation and benefits, data processing expense and other expense.
Compensation and employee benefits, the largest component of non-interest
expense, increased $148,000 for the 2001 quarter compared to the 2000 quarter,
and $395,000 for the six months ended December 31, 2001 compared to December 31,
2000. The increase reflects growth in the overall staffing level from 198
full-time equivalent employees at December 31, 2000 to 219 full-time equivalent
employees at December 31, 2001. The Bank's continued emphasis on building its
commercial and retail staff because of shifting its focus to a commercial bank
philosophy was the largest contributing factor.
Data processing expense increased for both the three and six months ended
December 31, 2001 due to an increase in processor charges relating to an
increase in the number of users, training expenses, the implementation of cash
management, internet banking and the creation of the Bank's new imaging
department. Other expense increased during the 2001 period including postage,
stationary and supplies and customer account expenses.
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 December 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 $460,000 for the three months ended December
31, 2001 compared to $306,000 for the 2000 quarter. The provision for loan
losses also increased for the six months ended December 31 2001 to $760,000
compared to $501,000 for the 2000 period. The increase in the provision is to
compensate for the Bank's strong growth in commercial real estate lending, a
slowing U.S. economy during the quarter and an increase in charge-offs for the
period. Net loan charge-offs increased $75,000 to $151,000 for the three months
ended December 31, 2001 compared to $76,000 for the same period in 2000. Net
loan charge-offs also increased for the six-month period ended December 31, 2001
to $382,000 compared to $212,000 for the same period in 2000. The increase in
charge-offs is related to charge-offs of indirect consumer loans and a
commercial real estate loan during the 2001 period.
17
The following table sets forth an analysis of the Bank's loan loss experience
for the three and six months ended December 31, 2001 and 2000.
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands)
Balance-beginning of period $2,975 $2,311 $2,906 $2,252
Loans charged-off: ------ ------ ------ ------
Real estate mortgage - - - (2)
Consumer (174) (96) (278) (237)
Commercial - - (148) -
---- --- ---- ----
Total charge-offs (174) (96) (426) (239)
---- --- ---- ----
Recoveries:
Real estate mortgage 4 - 5 -
Consumer 12 20 32 27
Commercial 7 - 7 -
-- -- -- --
Total recoveries 23 20 44 27
-- -- -- --
Net loans charged-off (151) (76) (382) (212)
---- ------ ---- ----
Provision for loan losses 460 306 760 501
------ ------ ---- ----
Balance-end of period $3,284 $2,541 $3,284 $2,541
------ ------ ------ ------
Net charge-offs to average
loans outstanding .073% .043%
Allowance for loan losses to
total non-performing loans 140% 95%
to net loans outstanding .50% .63%
Federal regulations require insured institutions to classify their own assets on
a regular basis. 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 December 31,
2001, on the basis of management's review of the Bank's loan portfolio, the Bank
had $2.3 million of assets classified substandard, $318,000 of assets classified
as doubtful and $88,000 of assets classified as loss.
The amount of the loan loss allowance is based on the percentage of each
classified loan considered to be at risk, based on the following ranges:
Substandard-2.5% to 35%; 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.
18
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. An impaired loan is
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 require an increase to the allowance for loan
losses, 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. The following table
presents information with respect to the Bank's non-performing assets for the
periods indicated.
December 31, June 30,
2001 2001
---- ----
(Dollars in thousands)
Past due 90 days still on accrual $ - $ -
Loans on non-accrual status (1)(2) 2,347 2,720
Real estate acquired
through foreclosure 380 296
Repossessed assets 145 70
------ ------
Total non-performing assets $2,872 $3,086
====== ======
Ratios: Non-performing loans
to loans .45% .52%
Non-performing assets
to total assets .47% .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 $96,000
for the six month period ending December 31, and $227,000
for the year ending June 30.
19
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 $3.2 million at December
31, 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 December 31, 2001, the Bank had an unused approved line of credit
in the amount of $36.8 million and sufficient collateral to borrow an additional
$23.7 million in advances from the FHLB.
Capital
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. The Bank continues to exceed the regulatory requirements
for Tier I, Tier I leverage and total risk-based capital. The Bank intends to
maintain a capital position that meets or exceeds the "well capitalized"
requirements as defined by the FDIC. The Bank's average stockholders' equity to
average assets ratio was 9.19% at December 31, 2001 compared to 8.97% at June
30, 2001. The Bank's actual and required capital amounts and ratios at December
31, 2001 are presented below:
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------
As of December 31, 2001: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total risk-based capital (to risk-
weighted assets) $49,988 11.3% $35,359 8.0% $44,199 10.0%
Tier I capital (to risk-weighted
assets) 46,456 10.5 17,679 4.0 26,519 6.0
Tier I leverage capital (to
average assets) 46,456 7.6 24,287 4.0 30,359 5.0
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.
20
The Bank's interest sensitivity profile changed from June 30, 2001 to December
31, 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 2.10% at
December 31, 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 3.93% at December 31, 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.
December 31, 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 $49,004 $51,582 $53,742 $55,515 $57,122
Investments 2,460 2,528 2,553 2,569 2,605
------ ------ ------ ------ ------
Total interest income 51,464 54,110 56,295 58,084 59,727
Projected interest expense
Deposits 16,676 19,457 22,257 25,197 28,444
Borrowed funds 4,664 4,666 4,668 4,670 4,682
------ ------ ------ ------ ------
Total interest expense 21,340 24,123 26,925 29,867 33,126
Net interest income $30,124 $29,987 $29,370 $28,217 $26,601
Change from base $754 $617 $(1,153) $(2,769)
% Change from base 2.57% 2.10% (3.93)% (9.43)%
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)%
21
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Part II - Other Information
Item 1. Legal Proceedings
Although the Bank is, from time to time, involved in various
legal proceedings in the normal course of business, there are no
material pending legal proceedings to which the Corporation, the
Bank, or its subsidiaries is a party, or to which any of their
property is subject.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation's 2001 Annual Meeting of Shareholders was held
on November 14, 2001. At the meeting , the directors listed
below were elected as directors of the Corporation for terms
expiring at the annual meeting in the year set forth to each
of their names.
Name Term Expires
---- ------------
Robert M. Brown 2004
Gail L. Schomp 2004
J. Alton Rider 2004
In addition, the following directors will continue in office
until the annual meeting of the year set forth beside each of
their names.
The voting results for the matters brought before the 2001
Annual Meeting are as follows:
Name Term Expires
---- ------------
Wreno M. Hall 2002
Walter D. Huddleston 2002
B. Keith Johnson 2003
Diane E. Logsdon 2003
J. Stephen Mouser 2002
John L. Newcomb, Jr. 2003
Michael L. Thomas 2002
1. Election of Directors. Cumulative voting applied in the election
of directors.
Name Votes For Abstentions Broker Nonvotes
---- --------- ----------- ---------------
Robert M. Brown 3,174,510 0 0
Gail L. Schomp 3,418,387 0 0
J. Alton Rider 3,086,909 0 0
Item 5. Other Information
Not Applicable
Item 6. Exhibits: Not Applicable
Reports on Form 8-K: Not Applicable
22
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATE: February 12, 2002 BY: (S) B. Keith Johnson
---------------------------
B. Keith Johnson
President and Chief Executive Officer
DATE: February 12, 2002 BY: (S) Charles E. Chaney
---------------------------
Charles E. Chaney
Senior Vice President
Chief Operating Officer
23