-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UzdLz/V1Ww6NzkGvRcK9jOPWo7ndnVsfkIfRluiCHrL6bgDmErT+kFjy2CfS+kGi 2A5v/CrSbKuZ1QNSUUa0Nw== 0000854395-00-000005.txt : 20000516 0000854395-00-000005.hdr.sgml : 20000516 ACCESSION NUMBER: 0000854395-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY CENTRAL INDEX KEY: 0000854395 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 611168311 STATE OF INCORPORATION: KY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18832 FILM NUMBER: 631626 BUSINESS ADDRESS: STREET 1: 2323 RING ROAD CITY: ELIZABETHTOWN STATE: KY ZIP: 42701 BUSINESS PHONE: 5027652131 MAIL ADDRESS: STREET 1: 2323 RING ROAD CITY: ELIZABETHTOWN STATE: KY ZIP: 42701 10-Q 1 MARCH 2000 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (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, 2000 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 0-18832 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 2000 ----- -------------------------------- Common Stock 3,768,533 shares This document is comprised of 15 pages. FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY INDEX PART I - Financial Information Page Number Item 1- Consolidated Financial Statements Consolidated Statement of Financial Condition as of March 31, 2000 (Unaudited) and June 30, 1999. 3 Consolidated Statement of Income for the Three Months and Nine Months Ended March 31, 2000 and 1999 (Unaudited). 4 Consolidated Statement of Comprehensive Income for the Three Months and Nine Months Ended March 31, 2000 and 1999 (Unaudited). 5 Consolidated Statement of Cash Flows for the Nine Months Ended March 31, 2000 and 1999 (Unaudited). 6 Notes to Consolidated Financial Statements 7 Item 2- Management's Discussion and Analysis of the Consolidated Statements of Financial Condition and Results of Operations 9 Item 3- Market Risk Disclosure 13 PART II - Other Information 14 SIGNATURES 15 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Consolidated Statements of Financial Condition
March 31, June 30, ASSETS 2000 1999 ---- ---- (unaudited) Cash and due from banks $ 11,030,600 $ 10,257,162 Interest bearing deposits 3,729,542 1,634,475 ------------ ------------ Total cash and cash equivalents 14,760,142 11,891,637 Securities available-for-sale 2,009,372 2,935,979 Securities held-to-maturity 43,152,113 44,404,392 Loans receivable, less allowance for loan losses of $2,303,840 (March) and $2,107,994 (June) 448,992,800 400,360,402 Federal Home Loan Bank stock 3,315,800 3,200,000 Premises and equipment 11,489,367 11,594,369 Real estate owned: Acquired through foreclosure 210,852 108,610 Held for development 445,683 445,683 Excess of cost over net assets acquired 10,255,122 10,878,972 Accrued interest 1,406,039 1,603,514 Other assets 875,204 880,216 ------------ ------------ TOTAL ASSETS $536,912,494 $488,303,774 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Non-interest bearing $ 17,058,430 $ 15,223,267 Interest bearing 409,638,838 384,220,172 ------------ ------------ Total Deposits 426,697,268 399,443,439 Advances from Federal Home Loan Bank 53,587,252 25,894,127 Accrued interest payable 899,345 868,840 Accounts payable and other liabilities 1,915,099 2,336,503 Deferred income taxes 1,789,832 1,898,703 ------------ ------------ TOTAL LIABILITIES 484,888,796 430,441,612 ------------ ------------ 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, 4,121,112 shares in June and 3,797,855 shares in March 3,797,855 4,121,112 Additional paid-in capital - 3,055,644 Retained earnings 47,736,139 49,587,422 Accumulated other comprehensive income, net of tax 489,704 1,097,984 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 52,023,698 57,862,162 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $536,912,494 $488,303,774 ============ ============
See notes to consolidated financial statements. 3 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- Interest Income: Interest and fees on loans $8,945,775 $8,107,831 $25,858,333 $23,884,427 Interest and dividends on investments and deposits 798,328 859,225 2,409,275 2,757,814 --------- --------- ---------- ---------- Total interest income 9,744,103 8,967,056 28,267,608 26,642,241 --------- --------- ---------- ---------- Interest Expense: Deposits 4,614,711 4,264,242 13,189,071 12,972,532 Federal Home Loan Bank advances 753,063 291,491 1,804,389 1,000,216 ---------- ---------- ----------- ----------- Total interest expense 5,367,774 4,555,733 14,993,460 13,972,748 ---------- ---------- ----------- ----------- Net interest income 4,376,329 4,411,323 13,274,148 12,669,493 Provision for loan losses 89,505 60,000 269,500 180,000 ---------- ---------- ----------- ----------- Net interest income after provision for loan losses 4,286,824 4,351,323 13,004,648 12,489,493 ---------- ---------- ----------- ----------- Noninterest Income: Customer service fees on deposit accounts 467,128 431,810 1,409,544 1,267,713 Secondary mortgage market closing fees 55,491 167,999 279,967 484,657 Gain on sale of investments 151,765 - 456,926 203,200 Brokerage and insurance commissions 118,735 99,239 351,639 264,325 Other income 191,382 170,550 460,084 452,126 ---------- ---------- ----------- ----------- Total other noninterest income 984,501 869,598 2,958,160 2,672,021 ---------- ---------- ----------- ----------- Noninterest Expense: Employee compensation and benefits 1,489,603 1,260,228 4,222,004 3,500,529 Office occupancy expense and equipment 323,440 310,644 1,002,276 941,783 FDIC insurance premium 21,187 47,544 137,169 140,167 Marketing and advertising 128,094 225,009 385,302 395,784 Outside services and data processing 302,748 354,003 908,317 956,158 State franchise tax 101,974 99,531 301,037 258,245 Acquisition related expense - - - 291,869 Data and equipment conversion expense - 290,934 - 290,934 Amortization of intangibles 207,950 207,950 623,849 573,397 Other expense 548,806 526,518 1,730,858 1,458,220 ---------- ---------- ---------- ---------- Total other noninterest expense 3,123,802 3,322,361 9,310,812 8,807,085 ---------- ---------- ---------- ---------- Income before income taxes 2,147,523 1,898,560 6,651,996 6,354,428 Income taxes 744,495 624,146 2,211,185 2,169,614 ---------- ---------- ---------- ---------- Net income $1,403,028 $1,274,414 $4,440,811 $4,184,814 ========== ========== ========== ========== Earnings per share: Basic $ 0.36 $ 0.31 $ 1.12 $ 1.01 Diluted $ 0.36 $ 0.31 $ 1.12 $ 1.01
See notes to consolidated financial statements. 4 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- Net Income $1,403,028 $1,274,414 $4,440,811 $4,184,814 Other comprehensive income (loss), net of tax: Change in unrealized gain (loss)on securities (75,396) (161,682) (306,709) 241,946 Reclassification of realized amount (100,165) - (301,571) (134,112) ---------- --------- ---------- ---------- Net unrealized gain (loss) recognized in comprehensive income (175,561) (161,682) (608,280) 107,834 ---------- ---------- ---------- ---------- Comprehensive Income $1,227,467 $1,112,732 $3,832,531 $4,292,648 ========== ========== ========== ========== See notes to consolidated financial statements. 5 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended March 31, ------------------- 2000 1999 ------ ------ Operating Activities: Net income $ 4,440,811 $ 4,184,814 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 269,500 180,000 Depreciation of premises and equipment 756,924 590,072 Net change in deferred loan fees and costs 112,000 167,336 Federal Home Loan Bank stock dividends (115,800) (161,400) Amortization of acquired intangible assets 623,849 573,397 Amortization and accretion on securities (46,482) (50,538) Gain on sale of investments available-for-sale (456,926) (203,200) Gain on sale of real estate held for development - (254,688) Interest receivable 197,475 91,074 Other assets 5,012 614,632 Interest payable 30,505 474,265 Accounts payable and other liabilities (421,404) (121,321) Deferred taxes 204,486 102,036 ----------- ----------- Net cash provided by operating activities 5,599,950 6,186,479 ----------- ----------- Investing Activities: Sales of securities available-for-sale 462,012 211,237 Purchases of securities available-for-sale - (1,010,000) Purchases of securities held-to-maturity (5,000,000) (59,855,000) Maturities of securities held-to-maturity 6,298,646 40,109,865 Net increase in loans (49,116,140) (25,904,525) Net purchases of premises and equipment (651,922) (1,160,428) Sales of real estate held for development - 451,496 Net cash received in acquisition - 52,456,754 ----------- ----------- Net cash used in investing activities (48,007,404) 5,299,399 ----------- ----------- Financing Activities: Net increase in deposits 27,253,829 17,042,367 Net advances from (repayments to) Federal Home Loan Bank 27,693,125 (20,251,088) Dividends paid (2,126,796) (1,857,520) Proceeds from stock options exercised 5,184 - Common stock repurchased (7,549,383) (70,792) ----------- ----------- Net cash provided by financing activities 45,275,959 (5,137,033) ----------- ----------- Increase (decrease) in cash and cash equivalents 2,868,505 6,348,845 Cash and cash equivalents, beginning of year 11,891,637 9,149,712 ----------- ----------- Cash and cash equivalents, end of period $14,760,142 $15,498,557 =========== ===========
See notes to consolidated financial statements. 6 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Notes to Consolidated Financial Statements 1. Interim Financial Statements First Federal Financial Corporation of Kentucky ("Corporation") is the parent to its wholly owned subsidiary, First Federal Savings Bank of Elizabethtown ("Bank"). The Corporation has no material income, other than that generated by the Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ending March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended June 30, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in First Federal's annual report on Form 10-K for the year ended June 30, 1999. New Accounting Pronouncements-In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This new standard requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. Depending on the use of the derivative and whether it qualifies for hedge accounting, gains or losses resulting from changes in the values of those derivatives would either be recorded as a component of net income or as a change in stockholders' equity. First Federal is required to adopt this new standard July 1, 2000. Management has not yet determined the impact of this standard. Reclassifications - Certain amounts have been reclassified in the prior financial statements to conform with the current period classifications. The reclassifications have no effect on net income or stockholders' equity as previously reported. 2. 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. The reconciliation of the numerators and denominators of the basic and diluted EPS is as follows: 7 Three Months Ended Nine Months Ended March 31, March 31, ------------- ------------ 2000 1999 2000 1999 ------ ------ ------ ------ Net income available to common shareholders $1,403,028 $1,274,414 $4,440,811 $4,184,814 ========== ========== ========== ========== Basic EPS: Weighted average common shares 3,849,403 4,127,112 3,950,055 4,128,476 ========== ========== ========== ========== Diluted EPS: Weighted average common shares 3,849,403 4,127,112 3,950,055 4,128,476 Dilutive effect of stock options 15,022 20,503 29,762 21,141 ---------- ---------- ---------- ---------- Weighted average common and incremental shares 3,864,425 4,147,615 3,979,817 4,149,617 ========== ========== ========== ========== Earnings Per Share: Basic $0.36 $0.31 $1.12 $1.01 ===== ===== ===== ===== Diluted $0.36 $0.31 $1.12 $1.01 ===== ===== ===== ===== 8 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Federal Financial Corporation of Kentucky ("Corporation") is the parent to its wholly owned subsidiary, First Federal Savings Bank of Elizabethtown ("Bank"). The Bank has operations in the Kentucky communities of Elizabethtown, Radcliff, Bardstown, Munfordville, Shepherdsville, Mt. Washington, Brandenburg, Flaherty, and Hillview. The Bank's activities include the acceptance of deposits for checking, savings and time deposit accounts, making secured and unsecured loans, investing in securities and trust services. The Bank's lending services include the origination of real estate, commercial and consumer loans. Operating revenues are derived primarily from interest and fees on domestic real estate, commercial and consumer loans, and from interest on securities of the United States Government and Agencies, states, and municipalities. Regulators for First Federal include the Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System (and the Federal Reserve Bank of St. Louis). The following discussion and analysis covers any significant changes in the financial condition since June 30, 1999 and any material changes in the results of operations for the three month and nine month periods ending, March 31, 2000. This discussion and analysis should be read in conjunction with "Managements Discussion and Analysis of Financial Condition and Results of Operations" included in the 1999 Annual Report to Shareholders. PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The information set forth in this report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Although the Corporation believes that the forward-looking statements are based upon reasonable assumptions, the statements are subject to certain risks and uncertainties that could cause the Corporation's actual results to differ materially from those indicated by the forward-looking statements. Among the key factors that may have a direct bearing on the Corporation's operating results are fluctuations in the economy; the relative strengths and weakness in the consumer and commercial credit sectors and in the real estate market; the actions taken by the Federal Reserve for the purpose of managing the economy; the Corporation's success in assimilating acquired branches and operations into the Bank's existing operations; the Bank's success in converting its systems to integrate new hardware and software without material disruption; the Corporation's ability to offer competitive banking products and services; the continued growth of the markets in which the Corporation operates consistent with recent historical experience; the enactment of federal legislation affecting the operations of the Corporation; and the Corporation's ability to expand into new markets and to maintain profit margins in the face of pricing pressure. Acquisition On July 24, 1998, the Bank completed its acquisition of three bank branches located in Meade County, Kentucky from Bank One, Kentucky, N.A. Two of the branches are located in Brandenburg, Kentucky and the third branch is in Flaherty, Kentucky. In the transaction, the Bank acquired certain assets and assumed certain liabilities associated with the acquisition of the Meade County banking centers. The transaction resulted in recording of approximately $11,000,000 of loans and $72,000,000 of deposits. The net deposits assumed exceeded the cash received by $8,670,000. Any ratios or analysis comparing years before acquisition will not be comparable. 9 Stock Repurchase Plan In October 1999 the Corporation's Board of Directors authorized the establishment of a stock repurchase program pursuant to which 10% of the Corporation's outstanding stock may be repurchased from time to time in the open market. The Corporation's previous stock repurchase programs have been very successful. The programs, which began in 1995, have repurchased a total of 605,545 shares and have resulted in an enhancement to earnings per share. The Board will continue to evaluate earnings per share and monitor the success of the repurchase plan to maintain an attractive return to stockholders. The current plan expires in April 2001, when the Board will analyze the Bank's capital position and future earnings potential. Results of Operations Three Month Period Ended March 2000 vs. 1999 - Net income was $1,403,000 or $0.36 per share for the three-month period ended March 31, 2000, as compared to $1,274,000 or $0.31 per share for the same period in 1999. During the quarter ended March 31, 1999, the Bank incurred computer conversion costs in the amount of $192,000 (net of tax). Excluding these costs, net earnings for the three-month period ended March 31, 1999 would have been $1,466,000 or $.36 per share. The following discussion outlines the significant differences in income and expenses for the quarter ended March 31, 2000, as compared to 1999. Net interest income decreased by $35,000 in 2000 to $4,376,000 compared to $4,411,000 in 1999. Rising interest rates resulted in a decline in the net interest margin of 46 basis points from 4.00% for 1999 to 3.54% for 2000. This decline in net interest margin can be largely attributed to the rise in certificate of deposit rates on specials offered by the Bank over the past five months. To maintain our customer base in the midst of fierce rate competition, the Bank offered both short and long term certificate specials to retain maturing accounts renewing at much lower rates. These promotions were also necessary to assist in funding the loan growth in the Bank driven by the transition to a sales culture for retail associates. Home equity lines of credit at low introductory rates were also a focus of the retail promotions for increasing loan relationships with our home mortgage portfolio customers. For the short term, these introductory rates contributed to the margin declines. In order to offset the narrowing margin, the Bank developed a dealer loan program in our Meade County banking center that would serve all the areas of operation for the Bank. The program is producing a large volume of consumer loans at higher yields than our mortgage portfolio. A commercial loan program composed of shorter-term fixed and variable rate loans is responsible for much of the Bank's loan growth and management's ability to manage rate risk during the rising rate environment. Realizing that both these programs represent products with added credit risk, the Bank has in place loan processing review procedures to monitor loan underwriting and documentation. A formal process of application presentation to the Executive Loan Committee has been developed to assure the accuracy of lending policies. Monthly reporting requirements and internal auditing practices have been developed to provide additional control over delinquencies and foreclosures. Average interest-bearing liabilities increased by $38 million to an average balance of $456 million for the 2000 quarter compared to $418 million during the 1999 quarter. Customer deposits averaged $403 million during 2000, an increase of $8 million compared to the 1999 quarter. Federal Home Loan Bank advances increased $31 million for the period ending March 2000 to fund the Bank's increased lending activity that exceeded the quarter's deposit growth. The Bank's cost of funds increased by 31 basis points for the 2000 quarter as compared to the 1999-quarter as CD rates repriced to the higher market rates during the 2000 year. Total other income was $985,000 for the three months ended March 31, 2000, as compared to $870,000 for the 1999 period, an increase of $115,000. Gains on investment sales were $152,000 during the 2000 period while no sales of securities were recorded during the 1999-quarter. Other sources of income such as brokerage commissions, loan fees, and other customer transaction fees increased by $76,000 or 11% due to growth in deposit relationships. Fee income relating to loans originated for the secondary market declined $113,000 or 67% due to rising mortgage rates that slowed the new originations and refinancing activity in home loans. 10 Total other expense was $3,124,000 for the three-month period ended March 31, 2000, as compared to $3,322,000 for the 1999 period, a decrease of $198,000. Other expense for the 1999 period includes computer conversion costs of $291,000 relating to the Bank's conversion to a new data processor. Compensation and benefits increased by $230,000 in 2000 as compared to 1999. The increase includes inflationary salary adjustments and reflects growth in the number of full time equivalent employees to 163 on March 31, 2000 from 149 on March 31, 1999. Half of the staffing increase was required to staff two new offices that included an in-store banking center in Hillview, Kentucky just South of the Louisville, Jefferson County area. A second office in the downtown Bardstown, Kentucky area of Nelson County was also opened as a transaction facility. Additional staffing was also required to establish a bank-wide service and sales culture. During 1999, management adopted a new strategic plan for growing the Bank. This plan includes the development of a bank-wide service and sales culture. The Bank now takes a more proactive approach in expanding account relationships with existing and new customers. A prerequisite to the success of this transition is the need to expand the number of retail associates at many of the banking centers, such as relationship bankers, business development officers, stock brokers and loan officers. Further, a Senior Vice President and Retail Banking Officer has been hired to implement management's strategic transition to the bank-wide service and sales culture. The transition has been responsible for much of the renewed growth in the lending area of the Bank and has made the certificate special promotions a success in all offices. In addition to compensation and benefits, marketing and advertising expense decreased $97,000 or 43% in 2000 compared to 1999 due to a decline in special events, radio advertisements and promotional items. A series of television ads were completed in the quarter ended March 1999 that accounted for much of the difference in marketing expenditures. Annual marketing expense will be fairly consistent but will vary for seasonal events and special advertising promotions. All other expenses decreased $40,000, which included expenses directly related to customers' accounts, postage, telephone, supplies, and data processing costs. Nine Month Period Ended March 31, 2000 vs. 1999 - Net income was $4,441,000 or $1.12 per share for the nine month period ended March 31, 2000 compared to $4,185,000, or $1.01 per share for March 31, 1999. Acquisition-related costs in connection with the purchase of three banking centers during the quarter ended September 30, 1998, in the amount of $193,000 (net of tax) were charged against earnings for that quarter. Also, during the quarter ended March 31, 1999, the Bank incurred computer conversion costs of $192,000 (net of tax). Excluding these costs, net earnings for the nine-month period ended March 31, 1999, would have been $4,570,000 or $1.11 per share. The following discussion outlines the significant differences in income and expenses for nine months ending March 31, 2000, as compared to 1999. Net interest income increased by $605,000 in 2000 as compared to 1999 in spite of the declining net interest margin which was 3.67% for the 2000 period as compared to 3.86% for the 1999 period. The positive growth in net interest income resulted in the first six months when the net interest margin was more favorable. With the likelihood of additional interest rate increases evident, the margin for the Bank will continue to narrow. Maintaining a growth in net interest margin will only be achieved by increasing the current lending practices of focusing on commercial and consumer lending. Average interest-earning assets increased by $43 million from $437 million for the 1999 period to $481 million for the 1999 period. Loans averaged $428 million during 2000, an increase of $46 million, while the average yield on loans decreased by .31% to 8.01% Average interest-bearing liabilities increased by $25 million to an average balance of $437 million for 2000. Customer deposits averaged $391 million during 2000 compared to $389 million for 1999. Federal Home Loan Bank Advance increased $23 million for the period ending March 2000. This increase funded the Bank's outstanding loan growth during the period that exceeded a nominal deposit growth. This same lending growth will determine future Bank investments that will be decreasing in balance in the near future, given the need for all deposit dollars to fund lending activity. The Bank's cost of funds increased by 4 basis points during the 2000 period as compared to the 1999 period due to higher rates paid on short-term customer deposits. 11 Total other income was $2,958,000 for the nine months ended March 31, 2000, as compared to $2,672,000 for the 1999 period, an increase of $286,000. Gains on investment sales were $457,000 for the 2000 period as compared to gains of $203,000 for the 1999 period. Customer service fees charged on deposit accounts increased by $142,000 or 11% during 2000 due to growth in customer accounts. Other sources of income such as loan fees, other customer transaction fees, and brokerage commissions increased by $95,000 due to growth in deposit relationships with existing and new customers. Income from secondary market lending operations declined by $205,000, or 42% due to an increase in interest rates that slowed activity in home mortgage lending. Total other expense was $9,311,000 for the nine months ended March 31, 2000. In the first quarter of 1998 the Bank had a one-time expense of $292,000 for the acquisition of three branches in Meade County and computer conversion costs of $291,000 during the quarter ended March 31, 1999. Excluding the above expenses, the total other expense was $8,224,000, representing an increase of $1,087,000. Compensation and benefits increased by $721,000 or 21% as compared to 1999. The increase includes inflationary salary increases and reflects an increase in the number of full time equivalent employees to 163 at March 31, 2000 from 149 at March 31, 1999. The increased staffing is a result of the Bank adopting a strategic plan to develop a sales and service culture to promote retail growth which added an additional seven employees and the opening of the new Hillview and Bardstown banking centers which also added seven new full time employees. Beyond compensation and benefits, office occupancy and equipment expenses increased by $60,000 in 2000 as compared to 1999 due to inflationary increases in other occupancy and equipment related expenses. These costs relate to the opening of an additional in-store facility, remodeling an existing office, and installing three new ATM's. All other expenses increased by $306,000 in 2000 compared to 1999 including postage, telephone, data processing, supplies and customer account expenses. Non-Performing Assets Non-performing assets consist of loans on which interest is no longer accrued and real estate acquired through foreclosure. The Bank does not have any loans greater than 90 days past due still on accrual. Management periodically evaluates the adequacy of the allowance for loan losses based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay and other factors. During the quarter ended March 31, 2000 management chose to add $90,000 to the reserve for loan losses. Although current loan charge-offs and delinquencies are consistent with previous years, the reserve was increased to compensate for increased lending in commercial and consumer loan products that traditionally require higher reserves. The Bank experienced an insignificant amount of uncollectible loans during the periods indicated in the table below. Approximately 36% of the Bank's non-performing assets are collateralized by one-to-four family residences at March 31, 2000. Three Months Ended Nine Months Ended March 31, March 31, -------------------- -------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in thousands) Allowance for loan losses: Balance, beginning of period $2,241 $ 2,002 $ 2,108 $ 1,853 Balance acquired in merger - - - 205 Provision for loan losses 90 60 270 180 Charge-offs (29) (13) (81) (210) Recoveries 2 3 7 24 ------ ------- --------- ------- Balance, end of period $ 2,304 $ 2,052 $ 2,304 $ 2,052 Loans outstanding at quarter end-gross loans $ 451,297 $393,643 Non-performing loans at quarter end: Collateralized by one-to-four family homes $ 457 $ 1,020 Other non-performing loans 619 713 --------- -------- Total non-performing loans 1,076 1,733 Real estate acquired through foreclosure 211 256 --------- -------- Total non-performing assets $ 1,287 $ 1,989 ========= ======== Ratios: Non performing loans to loans .24% .44% Allowance for loans losses to non-performing loans 214% 118% Allowance for loan losses to net loans .51% .52% Non-performing assets to total assets .24% .41% 12 Liquidity & Capital Resources Loan demand continued to be strong during the nine months ended March 31, 2000, as net loans increased by $48.6 million to $449 million, a 16% annualized growth. In spite of strong competition from other financial institutions, mutual funds and the stock market, customer deposits increased by $27.3 million during the period. The Bank's loan growth was funded by additional borrowings of $27.7 million from the Federal Home Loan Bank. Current regulations require the Corporation's subsidiary, First Federal Savings Bank, to maintain minimum specific levels of liquid assets, (currently 4%) of cash and eligible investments to deposits and short-term borrowings. At March 31, 2000, the Bank's liquid assets were 7.71% of its liquidity base. The Bank intends to continue to fund loan growth (outstanding loan commitments were $8.9 million at March 31, 2000) and any declines in customer deposits through additional advances from the FHLB. Daily variable rates on advances average 100 basis points more than the average cost of funds, but 50 to 100 basis points less than many new deposits that are in the form of certificate of deposit specials. At March 31, 2000, the Bank had an unused approved line of credit in the amount of $25.9 million, and the potential to significantly increase its indebtedness with the FHLB, if necessary, due to its additional available collateral. The Office of Thrift Supervision's capital regulations require savings institutions to meet three capital standards: a 3% Tier I leverage ratio; a 4% Tier I capital ratio; and an 8% risk-based capital standard. As of March 31, 2000, the Bank's actual capital percentages for Tier I leverage of 7.79%, Tier I capital of 11.48%, and current risk-based capital of 12.12%, significantly exceed the regulatory requirement for each category. Quantitative and Qualitative Disclosures About Market Risk The Bank currently does not engage in any derivative or hedging activity. Refer to the Bank's 1999 10-K for analysis of the interest rate sensitivity. 13 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Part II - Other Information Item 1. Legal Proceedings Not Applicable Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits: Not Applicable Reports on Form 8-K: Not Applicable 14 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: May 12, 2000 BY: (S) B. Keith Johnson ----------------------------- B. Keith Johnson President and Chief Executive Officer DATE: May 12, 2000 BY: (S) Charles E. Chaney ----------------------------- Charles E. Chaney Senior Vice President 15 EX-27 2 FINANCIAL DATA SCHEDULE
9 (This schedule contains summary financial information extracted from the registrant's unaudited consolidated financial statements for the nine months ended March 31, 2000 and is qualified in its entirety by reference to such financial statements.) 0000854395 FIRST FEDERAL FINANCIAL CORP. OF KENTUCKY 1,000 U.S.DOLLARS 9-MOS 9-MOS JUN-30-2000 JUN-30-1999 JUL-01-1999 JUL-01-1998 MAR-31-2000 MAR-31-1999 1.000 1.000 11,030,600 9,367,233 3,729,542 6,131,324 0 0 0 0 2,009,372 3,099,456 43,152,113 44,506,060 41,137,000 44,220,035 451,296,640 391,589,777 2,303,840 2,052,000 536,912,494 481,652,661 426,697,268 396,239,762 53,587,252 22,997,767 4,604,276 5,466,358 0 0 0 0 0 0 3,797,855 4,127,112 48,225,843 53,127,394 536,912,494 481,652,661 25,858,333 23,884,427 2,409,275 2,757,814 0 0 28,267,608 26,642,241 13,189,071 12,972,532 14,993,460 13,972,748 13,274,148 12,669,493 269,500 180,000 456,926 203,200 9,310,812 8,807,085 6,651,996 6,354,428 6,651,996 6,354,428 0 0 0 0 4,440,811 4,184,814 1.12 1.01 1.12 1.01 7.81 8.11 1,076,000 1,733,000 0 0 210,852 255,667 1,946,000 2,702,000 2,108,000 1,853,000 81,000 210,000 7,000 24,000 2,304,000 2,052,000 0 0 0 0 2,304,000 2,052,000
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