SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number -0-25536
FIRST ASHLAND FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 61-1276770
- - ------------------------------- -------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification Number)
incorporation or organization)
1640 Carter Avenue, Ashland, Kentucky 41101
--------------------------------------- ----------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 324-5138
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Check here whether the issuer (1) has filed all reports required to be
filed by Section 13 of 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 [ ]
As of May 13, 1996, there were 1,463,039 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
1
FIRST ASHLAND FINANCIAL CORPORATION
FORM 10-QSB
MARCH 31, 1996
TABLE OF CONTENTS
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at September 30, 1995 (Audited) and
March 31, 1995 (Unaudited) 3
Consolidated Statements of Operation for the Three and
Six Months Ended March 31, 1996 and 1995 (Unaudited) 4
Consolidated Statement of Changes in Stockholders'
Equity for the Year Ended September 30, 1995 (Audited)
and the Six Months Ended March 31, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows for the Six
Months ended March 31, 1996 and 1995 (Unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
PART II OTHER INFORMATION 16
Signatures 17
********
2
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995 (AUDITED)
(Amounts in Thousands)
- - -------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
1996 1995
-------- -------------
ASSETS
Cash and amounts due from depository
institutions $ 2,712 $ 2,049
Certificates of deposit in other financial
institutions 197 197
Investment securities - held to maturity 5,768 13,008
Investment securities - available for sale 5,207 1,487
Mortgage-backed securities - held to maturity 7,242 7,652
Loans receivable - net 62,536 61,641
Real estate acquired in settlement of loans -
net 186 46
Federal Home Loan Bank Stock 662 640
Accrued interest receivable 676 651
Office properties and equipment - net 1,369 1,414
Other assets 305 103
------- -------
$86,860 $88,888
======= =======
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $60,646 $59,915
Advances from Federal Home Loan Bank 2,003 5,017
Advance payments by borrowers for
taxes and insurance 60 88
Accrued income taxes 10 --
Deferred income taxes 47 52
Accrued interest on deposits 63 73
Accounts payable and accrued expenses 378 243
Other liabilities 22 16
------- -------
Total liabilities 63,229 65,404
------- -------
Capital stock 15 14
Paid in capital 14,347 13,539
Unearned employee stock ownership
plan shares ( 938) ( 1,016)
Unearned recognition and retention
plan shares ( 709) --
Retained earnings, substantially restricted 10,951 10,963
Minimum pension liability adjustment ( 7) --
Net unrealized gain (loss) on available
for sale securities ( 28) ( 16)
------- -------
Total Stockholders Equity 23,631 23,484
------- -------
$86,860 $88,888
======= =======
See notes to unaudited consolidated financial statements.
3
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
THREE AND SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
(Amounts in Thousands)
- - -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ------------------------
1996 1995 1996 1995
INTEREST INCOME:
Loans $1,236 $1,099 $2,453 $2,173
Mortgage backed securities 131 144 267 287
Investment securities 174 70 375 150
Other interest earning assets 53 27 99 53
--------- --------- --------- ---------
Total interest income 1,594 1,340 3,194 2,663
--------- --------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 771 704 1,548 1,367
Interest on FHLB advances 41 92 113 162
--------- --------- --------- ---------
Total interest expense 812 796 1,661 1,529
--------- --------- --------- ---------
NET INTEREST INCOME 782 544 1,533 1,134
PROVISION FOR
LOSS ON LOANS 15 0 20 7
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOSS ON LOANS 767 544 1,513 1,127
--------- --------- --------- ---------
NONINTEREST INCOME:
Service charge 7 4 14 10
Gain/(Loss) on sale of securities 10 -- 7 --
Insurance commissions 3 3 6 6
Late charges and other
fees on loans 14 8 21 15
Other 1 2 1 3
--------- --------- --------- ---------
Total noninterest income 35 17 49 34
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Compensation and benefits 242 201 503 389
Occupancy and equipment 42 36 78 77
Deposit insurance premiums 41 40 82 81
Loss (gain) on foreclosed
real estate 5 ( 10) 5 ( 12)
Other general and
administrative expenses 155 112 303 206
--------- --------- --------- ---------
Total noninterest expenses 485 379 971 741
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 317 182 591 420
INCOME TAX EXPENSE 92 62 181 142
--------- --------- --------- ---------
NET INCOME $ 225 $ 120 $ 410 $ 278
========= ========= ========= =========
EARNINGS PER SHARE $ 0.17 * $ 0.31 *
========= ========= ========= =========
WEIGHTED AVERAGE SHARES 1,318,816 * 1,313,868 *
========= ========= ========= =========
* NOT MEANINGFUL DUE TO FACT THAT SHARES WERE NOT ISSUED UNTIL APRIL 7, 1995
See note to unaudited consolidated financial statements.
4
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1995 (AUDITED) AND THE SIX MONTHS ENDED
MARCH 31, 1996 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
- - -------------------------------------------------------------------------------
MINIMUM
CAPITAL PAID-IN RETAINED PENSION
STOCK CAPITAL EARNINGS LIABILITY
----- ------- -------- ---------
Balance at September 30, 1994 $ -- $ -- $10,247 $ --
Net income for the year
ended September 30, 1995 -- -- 716 --
Common stock issued in
conversion, net of cost 14 13,501 -- --
Contribution for unearned
ESOP shares -- -- -- --
ESOP shares earned -- 38 -- --
Net change in unrealized
gain/(loss) on securities
available for sale -- -- -- --
--- ------ ------ ----
Balance at September 30, 1995 14 13,539 10,963 --
Net income for the six months
ended March 31, 1996 -- -- 410 --
Dividends paid -- -- ( 423) --
ESOP shares earned -- 35 -- --
RRP shares issued 1 773 -- --
RRP shares earned -- -- -- --
Effect of recording minimum
pension liability for
directors retirement plan
in excess of unrecognized
prior service cost -- -- -- ( 7)
Net change in unrealized gain/
(loss) on securities
available for sale -- -- -- --
---- ------ ------ ----
Balance at March 31, 1996 $ 15 $14,347 $10,950 ($ 7)
==== ====== ====== ====
See notes to unaudited consolidated financial statements
UNREALIZED COMMON COMMON
LOSS ON STOCK STOCK
SECURITIES ACQUIRED ACQUIRED
AVAILABLE BY BY
FOR SALE ESOP RRP TOTAL
-------- ---- ---- -----
Balance at September 30, 1994 ($41) $ -- $ -- $10,206
Net income for the year
ended September 30, 1995 -- -- -- 716
Common stock issued in
conversion, net of cost -- -- -- 13,515
Contribution for unearned
ESOP shares -- ( 1,127) -- ( 1,127)
ESOP shares earned -- 111 -- 149
Net change in unrealized
gain/(loss) on securities
available for sale 25 -- -- 25
-- ----- --- ------
Balance at September 30, 1995 ( 16) ( 1,016) -- 23,484
Net income for the six months
ended March 31, 1996 -- -- -- 410
Dividends paid -- -- -- ( 423)
ESOP shares earned -- 79 -- 114
RRP shares issued -- -- ( 774) --
RRP shares earned -- -- 65 65
Effect of recording minimum
pension liability for
directors retirement plan
in excess of unrecognized
prior service cost -- -- -- ( 7)
Net change in unrealized gain/
(loss) on securities
available for sale ( 12) -- -- ( 12)
-- ----- --- ------
Balance at March 31, 1996 ($28) ($ 937) ($709) $23,631
== ===== === ======
5
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
(Amounts in Thousands)
- - ------------------------------------------------------------------------------
1996 1995
OPERATING ACTIVITIES
Net income $ 410 $ 278
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loss on loans and other real estate 20 7
Provision for depreciation and amortization 45 45
Amortization (accretion) of investment and
mortgage related securities premiums
(discounts), net ( 13) ( 8)
Stock dividends received ( 23) ( 20)
Loss/(Gain) on sale of foreclosed real estate 5 ( 12)
Gain on sale of securities ( 51) --
Loss on sale of securities 44 --
ESOP and RRP shares earned 171 --
Decrease (increase) in:
Interest receivable ( 25) ( 18)
Prepaid expenses and other assets ( 202) 710
Increase (decrease) in:
Accounts payable and accrued expenses 136 28
Accrued interest payable ( 10) --
Accrued income taxes 10 18
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 517 1,028
-------- -------
INVESTING ACTIVITIES
Investment securities:
Held to maturity or for investment:
Proceeds from maturing investment securities 1,750 --
Available for sale:
Proceeds from sale of investment securities 1,786 --
Purchased ( 19) ( 15)
Mortgage-backed and related securities:
Principal payments on mortgage backed securities 415 325
Loan:
Originations and principal payment, net ( 1,141) ( 1,631)
Proceeds from sale of foreclosed real estate 105 65
Purchased of investment property -- ( 52)
Improvements to real estate owned ( 16) --
Purchase of office properties and equipment -- ( 11)
-------- -------
NET CASH USED BY INVESTING ACTIVITIES 2,880 ( 1,319)
-------- -------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
now accounts, passbook savings accounts
and certificates of deposit 730 ( 2,199)
Proceeds from FHLB advances -- 1,250
Federal Home Loan Bank - principal payments
on advances ( 3,013) ( 13)
Increase (decrease) in advance payments from
borrowers for taxes and insurance ( 28) ( 6)
Dividends paid ( 423) --
Deposits received for stock subscriptions -- 13,487
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES ( 2,734) 12,519
-------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 663 12,228
Cash and cash equivalents at beginning of period 2,049 1,295
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,712 $13,523
======== =======
Cash paid during the period for:
Interest on deposits and advances $ 1,671 $1,533
Income taxes $ 156 $ 124
Non-cash investing activities:
Real estate acquired in settlement
of loans $ 229 $ --
Unrealized gain (loss) on securities
available for sale ($ 12) $ 2
See notes to unaudited consolidated financial statements.
6
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
In the opinion of management the unaudited consolidated financial
statements of First Ashland Financial Corporation and its subsidiary,
included herein reflect all adjustments (consisting only of normal
recurring adjustments), necessary to present fairly the consolidated
financial condition of First Ashland Financial Corporation as of March
31, 1996, and the consolidated results of operations for all interim
periods presented.
The consolidated results of operations for the six months ended March
31, 1996 are not necessarily indicative of the results which may be
expected for the entire fiscal year ending September 30, 1996.
2. REGULATORY CAPITAL REQUIREMENT
Pursuant to Financial Institution Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), as implemented by rules promulgated by the Office
of Thrift Supervision, savings institutions must meet three separate
minimum capital-to-asset requirements. The following table summarizes,
as of March 31, 1996, the capital requirements of First Federal Bank
for Savings (the "Bank") and its actual capital ratio's. As of March
31, 1996, the Bank exceeded all current regulatory capital standards.
Regulatory Bank only
Capital Requirement Actual Capital
------------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Amounts in thousands)
Tangible capital $ 1,220 1.50% $ 16,408 20.15%
Core capital 2,441 3.00 16,408 20.15
Risk-based capital 3,234 8.00 16,517 40.85
3. CHANGE IN ACCOUNTING PRINCIPLE
On October 1, 1994, the Bank adopted SFAS No. 115, "Accounting For
Certain Investments in Debt and Equity Securities". The Bank classified
all securities, except marketable equity securities, as
"held-to-maturity" and as a result, there was no initial effect.
Management deems it prudent to review each security purchased on a case
by case basis and classifies each security based on management's
7
intent to hold the security to maturity or available for sale to allow
for greater flexibility to manage future interest rate risk and
liquidity. In accordance with the revised provisions of SFAS No. 115
which were in effect for part of the six month period ended March 31,
1996, the Company and Bank reclassified certain investment securities
to be held to maturity to the available for sale category. The effect
of this reclassification resulted in a net unrealized gain on available
for sale securities totaling $83,205 net of deferred income taxes of
$42,863. For the six month period ended March 31, 1996, net unrealized
losses on available for sale securities totaled $11,543 net of deferred
income taxes of $4,822.
Effective October 1, 1995, the Bank adopted the provisions of SFAS No.
114, "Accounting by creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." Under SFAS No. 114, loans individually
and specifically evaluated for impairment, uncollateralized as well as
collateralized, except loans that are measured at fair value or at the
lower of cost or fair value, are measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, at the loan's observable market price or fair value of the
collateral. The Bank considers a loan to be impaired when, based on
current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement on a timely basis. Groups of similar small balance
loans, such as residential and consumer loans, are excluded from the
provisions of SFAS No. 114 and 118. The adoption of SFAS No. 114 and
118 did not have any material effect on the Bank's financial position
or results of operations.
4. HOLDING COMPANY
On April 7, 1995, First Federal Savings and Loan Association of Ashland
converted from a federal mutual savings and loan association to a
federal stock savings bank with a concurrent name change to First
Federal Bank For Savings. First Ashland Financial Corporation (the
"Holding Company") acquired all of the outstanding stock of the Bank.
At that date, 1,408,750 shares of the Holding Company stock were issued
at a price of $10 per share of which 112,700 shares were issued to an
Employee Stock Ownership Plan. The net proceeds from the offering after
deducting related conversion costs were approximately $12,387,000.
5. BENEFIT PLANS
In conjunction with the Bank's conversion, the company formed an ESOP
which covers substantially all employees with more than one year of
employment and who have attained the age of 21. The ESOP borrowed
$1,127,000 from the company and purchased 112,700 common shares, equal
to 8% of the total number of shares issued in the conversion. The Bank
will make scheduled discretionary contributions to the ESOP sufficient
to service the debt. In accordance with generally accepted accounting
principles, the unpaid balance of the ESOP loan on the Bank's books and
the related receivable on the company's books has been eliminated in
the consolidated statement of financial condition. The cost of unearned
shares, which is comparable to unearned compensation, is reported as a
reduction of stockholders equity. Likewise the calculation of earnings
per share (EPS) for the three and six months ended March 31, 1996, was
made using the weighted average shares outstanding of 1,318,816 and
1,313,868 respectively, after the elimination of unearned ESOP shares.
As of March 31, 1996 the Bank considered 7,798 shares committed to be
released and 93,764 as unearned ESOP shares.
8
Total ESOP expense was $56,237 and $106,756, for the three and six
month periods ended March 31, 1996, respectively, and $0.00 for the
same periods ended March 31, 1995, under the shares allocated method of
calculating ESOP expense.
In conjunction with the conversion, the Board of Directors approved a
Stock Option Plan and a Recognition and Retention Plan (RRP). The plans
were approved by the Company's stockholders on October 25, 1995. Under
the Sock Option Plan, stock options and stock appreciation rights
covering shares representing an aggregate of up to 10% of the common
stock sold in the conversion may be granted to directors, officers and
employees of the Company or Bank. Restricted stock awards covering up
to 4% of the common stock sold in the conversion may be awarded to the
Company's or Bank's directors, directors emeritus, advisory directors,
executive officers or employees under the RRP. On March 22, 1996, the
Company issued 54,289 shares of common stock from authorized but
unissued shares to fund the RRP. The market value of the Company's
common stock on October 25, 1995, the RRP approval date, was $14.25 per
share and was the per share amount used to record the total unearned
RRP shares of $773,618. The market value of the Company's common stock
on March 22, 1996, was $16.00 per share. The unearned RRP shares
represents deferred compensation and is being amortized over the
vesting period of five years. Compensation expense charged to
operations applicable to the RRP was $25,106 and $64,468 for the three
and six months ended March 31, 1996.
On October 25, 1995, shareholders approved the implementation of the
Company's Stock Option and Incentive Plan. Pursuant to such plan
129,598, options were granted to Directors, Advisory Directors and
Officers at a purchase price of $14.25. These options will vest over a
five year period, with the first installment vesting on October 25,
1996.
********
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS
First Ashland Financial Corporation (the "Company") was formed to be the holding
company of First Federal Bank for Savings (the "Bank") in connection with the
Bank's conversion to stock form. The Company completed its initial public
offering on April 7, 1995, with the sale of 1,408,750 shares at $10.00 per
share. The primary activity of the Company is to act as a holding company for
the Bank. As a result, unless otherwise noted, the following discussion relates
primarily to the Bank. The primary business of savings banks, including First
Federal Bank for Savings, has historically consisted of attracting deposits from
the general public and providing financing for the purchase of residential
properties. The Bank also, to a lesser extent, makes consumer and commercial
loans. The operations of the Bank are significantly affected by prevailing
economic conditions as well as by government policies and regulations relating
to monetary and fiscal affairs, housing and financial institutions.
Net income is primarily dependent upon the difference (or "spread") between the
average yield earned on loans, securities and investments, and the average rate
paid on deposits and borrowings, as well as the relative amounts of such assets
and liabilities. The interest rate spread is affected by regulatory, economic
and competitive factors that influence interest rates, loan demand and deposit
flows. The Bank, like other thrift institutions, is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
Net income is also affected by, among other things, gains and losses on sales of
real estate and investments, mortgage-backed and related securities, investment
securities and foreclosed assets, provisions for loan losses, service charges
and other fees, operating expenses and income taxes.
FINANCIAL CONDITION
MARCH 31, 1996 COMPARED TO SEPTEMBER 30, 1995:
Total assets decreased $2.0 million, or 2.3%, to $86.9 million at March 31, 1996
from $88.9 million at September 30, 1995. The decrease was primarily
attributable to a net decrease in investments of 24.3% or $3.5 million,
partially offset by an increase in loans receivable - net, of $895,000 and an
increase in cash of $663,000.
Cash and cash equivalents increased $663,000, or 32.4%, to $2.7 million at March
31, 1996 from $2.0 million at September 30, 1995. This increase was the result
of increased deposits and decreased investment securities, each of which will be
discussed separately.
Mortgage-backed securities decreased $410,000, or 5.4%, to $7.2 million at March
31, 1996 from $7.7 million at September 30, 1995, through normal principal
repayments. Investment securities held to maturity and available for sale
decreased $3.5 million, to $10.9 million at March 31, 1996 from $14.5 million at
September 30, 1995. This decline was due to the maturity of a U.S. Treasury
security of $1.75 million and the sale of certain available for securities of
$1.8 million. The proceeds from the maturity and the sale of investment
securities were used to fund loan growth and to provide additional liquidity.
Net deposits increased $731,000, or 1.2%, to $60.6 million at March 31, 1996
from $59.9 million at September 30, 1995. The increase in deposits was primarily
attributable to a special deposit program which offered increased rates for a
limited term.
10
Advances from Federal Home Loan Bank of Cincinnati ("FHLB") decreased
$3,014,000, or 60.1%, to $2.0 million at March 31, 1996 from $5.0 million at
September 30, 1995. This decrease was the result of scheduled principle payments
as well as payoffs of adjustable rate advances.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1996 AND 1995:
GENERAL
The Company reported net income before income taxes of $317,000 during the
quarter ended March 31, 1996 compared to $182,000 during the quarter ended March
31, 1995. The increase in income between the three months ended March 31, 1996
and 1995 was the result of the net effect of an increase in net interest income
of $223,000 after provision for loss on loans, and an increase in other income
of $18,000 partially offset by an increase in other expenses of $106,000. The
Company reported net income of $225,000 and $120,000 for the quarters ended
March 31, 1996 and 1995, respectively. Increases in other expenses were
primarily attributable to the cost of employee benefit plans and administrative
cost of operations associated with the conversion from mutual to stock form of
organization.
The Company reported net income before income taxes of $591,000 during the six
month ended March 31, 1996, compared to $420,000 during the six months ended
March 31, 1995. The increase in income between the six months ended March 31,
1996 and 1995 was the result of the net effect of a increase in net interest
income of $386,000 after provision for loss on loans, and an increase in other
income of $15,000, partially offset by an increase in other expenses of
$230,000. The Company reported net income of $410,000 and $278,000 for the six
month period ended March 31, 1996 and 1995, respectively. Increases in other
expenses were primarily attributable to the cost of employee benefit plans and
administrative cost of operations associated with the conversion from mutual to
stock form of organization.
The flattening of the yield curve has affected the results of operations of the
Bank. Due to the repricing of interest-bearing liabilities at a faster pace than
interest-earning assets, the Bank's net interest margin has continued to
decline. The Bank experienced increases in the average cost of interest-bearing
liabilities from 4.69% during the six month period ended March 31, 1995 to 5.16%
during the same period ended March 31, 1996. The yield earned on
interest-earning assets increased from 7.38% during the six month period ending
March 31, 1995 to 7.68% during the same period ended March 31, 1996.
INTEREST INCOME
Interest income increased $531,000, or 19.9%, from $2.7 million during the six
months ended March 31, 1995 to $3.2 million during the six months ended March
31, 1996. This increase resulted from the net effect of increases in interest on
loans of $280,000, investment securities of $225,000, and other interest-earning
assets of $46,000, offset by a decrease in interest income earned on
mortgage-backed securities of $20,000. The increases are the result of increased
average balances in loans as well as investment securities and other interest
earning assets.
Interest income increased $254,000, or 18.9%, from $1.3 million during the
quarter ended March 31, 1995 to $1.6 million during the quarter ended March 31,
1996. This increase resulted from the net effect of increases in interest on
loans of $137,000, investment securities of $104,000, and other interest-earning
assets of $26,000, offset by a decrease in interest income on mortgage-backed
securities of $13,000. The increases are the result of increased average
balances in loans as well as investment securities and other interest earning
assets.
11
The increase in interest income on loans resulted from the increase in the
average balance of net loans outstanding from $57.7 million in the six month
period for 1995 to $62.7 million in the 1996 period. Loan volume has increased
as a result of management's continuing efforts to stimulate loan demand.
The increase in interest income on investment securities resulted principally
from the increase in the average balance of such securities from $5.0 million
for the six month period ended March 31, 1995 to $12.1 million for the six month
period ended March 31, 1996. The decrease in interest income on mortgage-backed
securities for the six month period ended March 31, 1996 resulted from decreases
due to normal amortization of principal resulting in the decline of average
balance of such securities from $8.1 million for the six month period ended
March 31, 1995 to $7.5 million for the six month period ended March 31, 1996.
INTEREST EXPENSE
Interest expense increased $132,000, or 8.6%, for the six month period ended
March 31, 1996 from the six month period ended March 31, 1995. The increase
resulted primarily from an increase of $181,000 in the interest paid on
deposits, due to the increase in the average rates paid on deposits, and the
higher average balance of deposits for the period. Average deposits for the
period ended March 31, 1996, were $60.6 million, compared to $59.6 million for
the period ended March 31, 1995. Average rates paid on deposits increased from
4.59% for the period ended March 31, 1995 to 5.11% for the period ended March
31, 1996.
Interest expense increased $16,000, or 2.0%, for the quarter ended March 31,
1996 from the quarter ended March 31, 1995. The increase resulted primarily from
an increase of $67,000 in the interest paid on deposits, due to the increase in
the average rates paid on deposits, and the higher average balance of deposits
for the quarter. Average deposits for the quarter ended March 31, 1996, were
$61.0 million, compared to $60.0 million for the quarter ended March 31, 1995.
Average rates paid on deposits increased from 4.69% for the quarter ended March
31, 1995 to 5.06% for the quarter ended March 31, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management as the amount to be
added to the allowance for loan losses after net charge-offs have been deducted
to bring the allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio in accordance with generally accepted accounting
principles. During the six month period ended March 31, 1996, the Bank recorded
a $20,000 provision for loan losses compared to $7,000 during the six month
period ended March 31, 1995. Loan losses have been minimal due to the Bank's
primary emphasis on single family residential lending and the relatively stable
economy in the Ashland area. During the six month period ended March 31, 1996,
non-performing loans increased $393,000, or 88.9%, from $442,000 at September
30, 1995 to $835,000 at March 31, 1996. No loans were charged off during the six
month period ended March 31, 1996, compared to $19,000 charged off during the
six month period ended March 31, 1995. Future additions to the Bank's allowance
for loan losses are dependent upon the performance of the Bank's loan portfolio,
the economy, changes in real estate values and interest rates, the view of the
regulatory authorities toward adequate reserve levels and inflation.
NONINTEREST EXPENSES
Noninterest expenses consist of compensation and benefits, occupancy and
equipment expense, federal deposit insurance premiums and other general and
administrative expenses. Noninterest expenses increased $230,000, or 31.1%,
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during the six month period ended March 31, 1996, primarily due to a increase in
compensation and benefits of $114,000 (as expenses associated with the
establishment of an employee stock ownership plan and Recognition and Retention
Plan in conjunction with the Bank's conversion were recorded in the first half
of fiscal 1996 with no charge for these plans in the previous year), an increase
in other general and administrative expenses of $99,000, and a decrease in gain
of foreclosed real estate.
INCOME TAXES
The provision for income tax expense increased $39,000 during the six month
period ended March 31, 1996 to $181,000, from $142,000 for the period ended
March 31, 1995. The increase during the period resulted primarily from a
increase in income before income taxes of $171,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents. The Company's
levels of these assets are dependent on the Bank's operating, financing, and
investing activities. At September 30, 1995 and March 31, 1996, cash and cash
equivalents totaled $2.0 million and $2.7 million, respectively. The Bank's
primary sources of funds include principal and interest payments on loans (both
scheduled and prepayments), maturities of investment securities and principal
payments from mortgage-backed securities.
While scheduled loan repayments and proceeds from maturing investing securities
and principal payments on mortgage-backed securities are relatively predictable,
deposit flows and early repayments are more influenced by interest rates,
general economic conditions and competition. The Bank attempts to price its
deposits to meet asset-liability objectives discussed above, consistent with
local market conditions.
Liquidity management is both a short- and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset/liability management program. Excess liquidity is generally invested in
interest-bearing overnight deposits and other short-term liquid asset fund. If
the Bank requires funds beyond its ability to generate them internally, it has
the ability to borrow funds from the FHLB. The Bank may borrow from the FHLB
under a blanket agreement which assigns all investments in FHLB stock as well as
qualifying first mortgage loans equal to 150% of the outstanding balance as
collateral to secure the amounts borrowed. At March 31, 1996, the Bank had
approximately $13.2 million available to it under the above-mentioned pledge
agreement. At March 31, 1996, the Bank had borrowings of $2.0 million from the
FHLB.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the direction of the
OTS depending upon economic conditions, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 5.0%. The Bank's
liquidity ratios have consistently been maintained at levels in excess of
regulatory requirements and at September 30, 1995 and March 31, 1996, were 16.4%
and 13.9%, respectively. Management of the Bank believes its liquidity ratio
will be maintained at or above 6.0%, in the future.
At September 30, 1995 and March 31, 1996, the Bank had outstanding commitments
to originate loans of $1.2 million and $923,000, respectively. The Bank
anticipates that it will have sufficient funds available to meet its current
commitments principally through the use of current liquid assets and through its
borrowing capacity discussed above.
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The OTS's minimum capital standards generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as retained earnings less all intangible assets) equal
to 1.50% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3% of adjusted total
assets. The risk-based capital requirements provide for the maintenance of core
capital plus a portion of unallocated loss allowances equal to 8% of
risk-weighted assets. In computing risk-weighted assets the Bank multiplies the
value of each asset on its balance sheet by a defined risk-weighting factor
(e.g., one- to four-family residential loans carry a risk-weighted factor of
50%).
At March 31, 1996, the Bank's tangible capital totaled $16.4 million, or 20.15%
of the Bank's adjusted total assets, which exceeded the minimum 1.5% requirement
by $15.2 million. The Bank's core capital at March 31, 1996 totaled $16.4
million, or 20.15%, which was approximately $14.0 million above the minimum
requirement of 3.0%. The Bank's risk-based capital at that date totaled $16.5
million, which is $13.3 million above the 8.0% fully phased-in requirement.
The OTS has adopted a final rule that requires every savings association with
more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
OTS recently announced that it will delay the effectiveness of the rule until it
adopts the process by which savings associations may appeal an interest rate
risk deduction determination. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
EFFECT OF INFLATION AND CHANGING PRICES
The condensed consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike other industries, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
REGULATORY DEVELOPMENTS
The Bank is a member of the Savings Association Insurance Fund ("SAIF"), which
is administered by the FDIC. The FDIC is authorized to increase assessment
rates, on a semi-annual basis, if it determines that the reserve ratio of the
SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured
deposits.
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As in the case with SAIF, the FDIC is authorized to adjust the insurance premium
rates for banks that are insured by the Bank Insurance Fund (the"BIF") of the
FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured
deposits. The FDIC revised the premium schedule for BIF insured institutions to
provide a range of 0.04% to 0.31% of deposits in anticipation of the BIF
reaching the required reserve ratio. The revisions became effective in the third
quarter of 1995.
The FDIC also noted that the SAIF is not expected to attain the designated
reserve ratio until the year 2002 due to the shrinking deposit base for SAIF
assessments and the requirement that SAIF premiums be used to make the interest
payments on bonds issue by the Financing Corporation ("FICO") in order to
finance the costs of resolving thrift failures in the 1980's. As a result, SAIF
insured members will generally be subject to higher deposit insurance premiums
than banks until, all things being equal, the SAIF attains the required reserve
ratio.
The effect of this potential disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF-insured banks
to offer loan and deposit products on more attractive terms than SAIF members
due to the cost savings achieved through lower deposit premiums, thereby placing
SAIF members at a competitive disadvantage. Proposed legislation currently under
consideration in the Congress provides for a one-time assessment of 0.85% to
0.90% to be imposed on all SAIF insured deposits as of March 31, 1995, including
those held by commercial banks, and BIF deposit insurance premiums to be used to
pay the FICO bond interest on a pro-rata basis together with SAIF premiums.
Based upon the Bank's deposits at March 31, 1995 (the date currently utilized in
the proposed legislation) and assuming the legislation is adopted as proposed,
the Bank's assessment would be approximately $600,000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
8-K Filed January 30, 1996, announcing the declaration of
a cash dividend.
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SIGNATURES
Pursuant to the requirement 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.
FIRST ASHLAND FINANCIAL CORPORATION
Registrant
Date: May 13, 1996 /S/ Paul D. Leake
--------------------- ------------------
Paul D. Leake, President, Chief
Executive Officer and Director
(Duly Authorized Officer)
Date: May 13, 1996 /S/ Robert D. Edmonds
--------------------- ----------------------
Robert D. Edmonds, Assistant
Vice President and Chief Financial
Officer
(Principal Financial Officer)
17