-----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, JUW3wK8Mn6ZIaoH1iI2Gia36Y3BTIyPx5AC1Tb2eF9g7F5JhYTm96A1WIGj4JUhq OamXq9+8nz/Dxi0296QaFA== 0000854395-01-000001.txt : 20010214 0000854395-01-000001.hdr.sgml : 20010214 ACCESSION NUMBER: 0000854395-01-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 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: 1535772 BUSINESS ADDRESS: STREET 1: 2323 RING ROAD CITY: ELIZABETHTOWN STATE: KY ZIP: 42701 BUSINESS PHONE: 2707652131 MAIL ADDRESS: STREET 1: 2323 RING ROAD CITY: ELIZABETHTOWN STATE: KY ZIP: 42701 10-Q 1 0001.txt DECEMBER 2000 FORM 10-Q 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, 2000 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, 2000 ----------- -------------------------------------- Common Stock 3,754,997 shares This document is comprised of 23 pages. FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY INDEX PART I - FINANCIAL INFORMATION Page Number Item 1 -Consolidated Financial Statements and Notes to Consolidated Financial Statements 3-11 Item 2 -Management's Discussion and Analysis of the Consolidated Statements of Financial Condition and Results of Operations 12-20 Item 3 -Quantitative and Qualitative Disclosures about Market Risk 20 PART II - OTHER INFORMATION 21-22 SIGNATURES 23 2 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) DECEMBER 31, JUNE 30, ASSETS 2000 2000 ---- ---- (DOLLARS IN THOUSANDS) Cash and due from banks $ 11,468 $ 11,310 Interest bearing deposits 4,238 3,669 ------ ------ Total cash and cash equivalents 15,706 14,979 Securities available-for-sale 1,940 2,048 Securities held-to-maturity (fair value of $42,562 and $41,195 at December and June 2000) 42,951 43,134 Loans receivable, less allowance for loan losses of $2,541 (Dec.) and $2,252 (June) 511,425 471,231 Federal Home Loan Bank stock 5,641 4,081 Premises and equipment 11,740 11,709 Real estate owned: Acquired through foreclosure 17 - Held for development 721 446 Repossessed assets 74 - Excess of cost over net assets acquired 9,631 10,047 Accrued interest receivable 2,395 2,032 Other assets 1,477 1,078 ------ ------ TOTAL ASSETS $603,718 $560,785 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Non-interest bearing $ 18,611 $ 16,822 Interest bearing 417,333 406,937 ------- ------- Total Deposits 435,944 423,759 Advances from Federal Home Loan Bank 110,837 80,339 Accrued interest payable 1,027 1,129 Accounts payable and other liabilities 1,108 1,962 Deferred income taxes 1,886 1,915 ------- ------ TOTAL LIABILITIES 550,802 509,104 ------- ------- STOCKHOLDERS' EQUITY: Serial preferred stock, 5,000,000 shares authorized and unissued - - Common stock, $1 par value per share; authorized 10,000,000 shares; issued and outstanding, 3,756,000 shares in June and 3,755,000 shares in December 3,755 3,756 Additional paid-in capital - - Retained earnings 48,802 47,481 Accumulated other comprehensive income, net of tax 359 444 ------- ------ TOTAL STOCKHOLDERS' EQUITY 52,916 51,681 ------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $603,718 $560,785 ======== ======== See notes to consolidated financial statements. 3 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ---- ---- ---- ---- INTEREST INCOME: Interest and fees on loans $10,435 $ 8,640 $20,412 $16,930 Interest and dividends on investments and deposits 866 797 1,707 1,611 ------ ------ ----- ----- Total interest income 11,301 9,437 22,119 18,541 ------ ------ ------ ------ INTEREST EXPENSE: Deposits 5,475 4,334 10,673 8,574 Federal Home Loan Bank advances 1,702 659 3,107 1,051 ----- ------ ----- ------ Total interest expense 7,177 4,993 13,780 9,625 ----- ------ ------ ------ Net interest income 4,124 4,444 8,339 8,916 Provision for loan losses 306 90 501 180 ------ ------ ------ ------ Net interest income after provision for loan losses 3,818 4,354 7,838 8,736 ----- ------ ----- ----- NON-INTEREST INCOME: Customer service fees on deposit accounts 621 492 1,199 942 Secondary mortgage market closing fees 115 95 226 225 Gain on sale of investments 351 152 696 305 Brokerage and insurance commissions 198 124 323 233 Other income 179 138 333 269 ----- ----- ----- ----- Total non-interest income 1,464 1,001 2,777 1,974 ----- ----- ----- ----- NON-INTEREST EXPENSE: Employee compensation and benefits 1,571 1,446 3,068 2,732 Office occupancy expense and equipment 357 328 723 679 FDIC insurance premium 21 59 43 116 Marketing and advertising 125 114 250 257 Outside services and data processing 342 305 664 606 State franchise tax 103 99 206 199 Amortization of intangibles 208 208 416 416 Other expense 622 633 1,234 1,200 ----- ----- ----- ----- Total non-interest expense 3,349 3,192 6,604 6,205 ----- ----- ----- ----- Income before income taxes 1,933 2,163 4,011 4,505 Income taxes 628 698 1,317 1,467 ------ ----- ----- ----- NET INCOME $1,305 $1,465 $2,694 $3,038 ====== ====== ====== ====== Earnings per share: Basic $ 0.35 $ 0.37 $ 0.72 $ 0.76 Diluted $ 0.35 $ 0.37 $ 0.72 $ 0.76
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, ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- NET INCOME $1,305 $1,465 $2,694 $3,038 Other comprehensive income (loss), net of tax: Change in unrealized gain (loss) on securities 169 (103) 374 (232) Reclassification of realized amount (231) (100) (459) (201) ----- ----- ----- ----- Net unrealized gain (loss) recognized in Comprehensive income (62) (203) (85) (433) ----- ----- ----- ----- COMPREHENSIVE INCOME $1,243 $1,262 $2,609 $2,605 ====== ====== ====== ======
See notes to consolidated financial statements. 5 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE PAID - IN RETAINED INCOME, SHARES AMOUNT CAPITAL EARNINGS NET OF TAX TOTAL ------ ------ ---------- -------- ------------- ----- BALANCE, JUNE 30, 2000 3,756 $ 3,756 $ - $47,481 $ 444 $51,681 Net income - - - 2,694 - 2,694 Exercise of stock options 1 1 6 - - 7 Net change in unrealized gains (losses) on securities available- for-sale, net of tax - - - - (85) (85) Cash dividends declared ($.18 per share) - - - (1,351) - (1,351) Stock repurchased (2) (2) (6) (22) - (30) ----- ------- ------ ------- ------ ------- BALANCE, DECEMBER 31, 2000 3,755 $ 3,755 $ - $48,802 $ 359 $52,916 ====== ======= ======= ======= ====== =======
See notes to consolidated financial statements. 6 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) SIX MONTHS ENDED DECEMBER 31, 2000 1999 ---- ---- OPERATING ACTIVITIES: Net income $ 2,694 $ 3,038 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 501 180 Depreciation of premises and equipment 567 499 Net change in deferred loan fees and costs 174 173 Federal Home Loan Bank stock dividends (180) (58) Amortization of acquired intangible assets 416 416 Amortization and accretion on securities (31) (31) Gain on sale of investments available-for-sale (696) (305) Gain on sale of real estate held for development (6) - Deferred taxes 14 189 Changes in: Interest receivable (363) (188) Other assets (399) 87 Interest payable (102) 21 Accounts payable and other liabilities (848) (1,132) ----- ------ Net cash provided by operating activities 1,741 2,889 ----- ------ INVESTING ACTIVITIES: Proceeds on sales of securities available-for-sale 708 306 Purchases of securities available-for-sale (32) - Purchases of securities held-to-maturity - (5,000) Maturities of securities held-to-maturity 214 6,148 Net increase in loans (40,960) (31,137) Purchase of Federal Home Loan Bank stock (1,380) - Net purchases of premises and equipment (598) (320) Purchase of real estate held for development (275) - ------- ------- Net cash used in investing activities ( 42,323) (30,003) ------- ------- FINANCING ACTIVITIES: Net increase in deposits 12,185 7,396 Advances from Federal Home Loan Bank 30,544 33,645 Repayments on FHLB advances (46) (5,070) Dividends paid (1,351) (1,433) Proceeds from stock options exercised 7 - Common stock repurchased (30) (5,562) ------ ------ Net cash provided by financing activities 41,309 28,976 ------ ------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 727 1,862 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,979 11,892 ------- ------ CASH AND CASH EQUIVALENTS, END OF PERIOD $15,706 $13,754 ======= ======= See notes to consolidated financial statements. 7 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements include the accounts of First Federal Financial Corporation of Kentucky (the Corporation) and its wholly owned subsidiary, First Federal Savings Bank of Elizabethtown (the Bank), and its wholly owned subsidiaries, First Service Corp. of Elizabethtown and First Heartland Mortgage. All significant intercompany transactions and balances have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ending December 31, 2000 are not necessarily indicative of the results that may be expected for the year ended June 30, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in First Federal's annual report on Form 10-K for the year ended June 30, 2000. NEW ACCOUNTING PRONOUNCEMENTS - On July 1, 2000, the Corporation adopted a new accounting standard that will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. The adoption of this new standard did not have a material effect on the Corporation's financial statements. RECLASSIFICATIONS - Certain amounts have been reclassified in the prior financial statements to conform to the current period classifications. The reclassifications have no effect on net income or stockholders' equity as previously reported. 8 2. SECURITIES The amortized cost basis and fair values of securities at December 31 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Securities available-for-sale: December 31, 2000: Equity securities $ 385 $ 612 $ (48) $ 949 Obligation of states and political subdivisions 1,010 - (19) 991 ------- ----- ------- Total available-for-sale $ 1,395 $ 612 $ (67) $ 1,940 ======= ===== ===== ======= Securities held-to-maturity: December 31, 2000: U.S. Treasury and agencies $41,884 $ 123 $ (497) $41,510 Mortgage-backed securities 1,067 5 (20) 1,052 ------- ----- ------ ------- Total held-to-maturity $42,951 $ 128 $ (517) $42,562 ======= ===== ====== =======
3. LOANS RECEIVABLE Loans receivable are summarized as follows: DECEMBER 31, JUNE 30, 2000 2000 ---- ---- (DOLLARS IN THOUSANDS) Commercial $ 18,670 $ 15,769 Real estate commercial 82,324 65,244 Real estate construction 8,617 8,367 Real estate mortgage 321,391 311,756 Consumer and home equity 64,553 59,744 Indirect consumer 20,877 15,186 ------- ------- Total loans 516,432 476,066 ------- ------- Less: Net deferred loan origination fees (2,466) (2,583) Allowance for loan losses (2,541) (2,252) -------- -------- (5,007) (4,835) -------- -------- Loans, net $511,425 $471,231 ======== ======== 9 The following table sets forth the changes in the allowance for loan losses:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Allowance for loan losses: Balance, beginning of period $ 2,311 $ 2,157 $ 2,252 $ 2,108 Provision for loan losses 306 90 501 180 Charge-offs (96) (7) (239) (52) Recoveries 20 1 27 5 ------- ------- ------- ------- Balance, end of period $ 2,541 $ 2,241 $ 2,541 $ 2,241 ======= ======= ======= =======
Investment in impaired loans is summarized below. There were no impaired loans for the periods presented without an allowance allocation. DECEMBER 31, JUNE 30, 2000 2000 ---- ---- (DOLLARS IN THOUSANDS) End of period impaired loans $2,685 $1,562 Amount of allowance for loan loss allocated 188 117 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 secured by the Bank's stock in the FHLB and substantially all of the Bank's residential first mortgage loans under a blanket pledge agreement. At December 31, 2000 First Federal had $110.8 million in advances outstanding from the FHLB and the capacity to increase its borrowings an additional $191 million. 10 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, ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- (IN THOUSANDS) Net income available to common shareholders $1,305 $1,465 $2,694 $3,038 ====== ====== ====== ====== Basic EPS: Weighted average common shares 3,755 3,923 3,755 3,999 ===== ===== ====== ====== Diluted EPS: Weighted average common shares 3,755 3,923 3,755 3,999 Dilutive effect of stock options 5 17 7 19 ----- ----- ----- ----- Weighted average common and incremental shares 3,760 3,940 3,762 4,018 ===== ===== ===== ===== Earnings Per Share: Basic $0.35 $0.37 $0.72 $0.76 ===== ===== ===== ===== Diluted $0.35 $0.37 $0.72 $0.76 ===== ===== ===== =====
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL First Federal Financial Corporation of Kentucky ("Corporation") is the parent to its wholly owned subsidiary, First Federal Savings Bank of Elizabethtown ("Bank"). The Bank has operations in the Kentucky communities of Elizabethtown, Radcliff, Bardstown, Munfordville, Shepherdsville, Mt. Washington, Brandenburg, Flaherty, and Hillview. The Bank's activities include the acceptance of deposits for checking, savings and time deposit accounts, making secured and unsecured loans, investing in securities and trust services. The Bank's lending services include the origination of real estate, commercial and consumer loans. Operating revenues are derived primarily from interest and fees on domestic real estate, commercial and consumer loans, and from interest on securities of the United States Government and Agencies, states, and municipalities. The primary regulator for First Federal is the Office of Thrift Supervision (OTS). The following discussion and analysis covers any significant changes in the financial condition since June 30, 2000 and any material changes in the results of operations for the three-month and six-month periods ending, December 31, 2000. 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 2000 Annual Report to Shareholders. PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this report that are not statements of historical fact constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In addition, forward-looking statements may be made in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial items; (2) statements of plans and objectives of the Company or its management or Board of Directors; (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "plans," "targeted," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those indicated by such statements. Some of the events or circumstances that could cause actual results to differ from those indicated by forward-looking statements include, but are not limited to, changes in economic conditions in the markets served by the Corporation, in Kentucky and the surrounding region, or in the nation as a whole; changes in interest rates; the impact of legislation and regulation; the Corporation's ability to offer competitive banking products and services; competition from other providers of financial services, the continued growth of the markets in which the Corporation operates; and the Corporation's ability to expand into new markets and to maintain profit margins in the face of pricing pressure. All of these events and circumstances are difficult to predict and many of them are beyond the Corporation's control. OVERVIEW Net income for the quarter ended December 31, 2000 was $1.3 million or $0.35 per share diluted down from $1.5 million or $0.37 per share diluted for the same period in 1999. The decline in earnings is a direct result of the decreasing net interest margin. The Bank's customer deposits and borrowings are shorter in term than the loan and investment portfolio. During the rapidly rising interest rate environment of 1999 and the first half of 2000, the Bank's cost of funds increased much faster than its yield on interest earning assets. The impact of the weakening net interest margin was partially offset by the continued robust growth in lending. Net income for the six months ended December 31, 2000 was $2.7 million or $0.72 per share diluted compared to $3.0 million or $0.76 per share diluted for the same period in 1999. The Bank's book value per common share increased from $13.73 at December 31, 1999 to $14.09 at December 31, 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. The effective interest rate on this debt declined sharply from 6.6% to 4.93%, resulting in anticipated future interest savings of approximately $313,000 per quarter, compared to the interest costs during the six months ended December 31, 2000. Management expects that the restructuring of $75 million of the Bank's debt, coupled with the reductions in the federal discount rate by the Federal Open Market Committee, will enhance future earnings. 12 The Bank's total assets at December 31, 2000 grew to $603.7 million compared to $560.8 million at June 30, 2000. Net loans increased $40.2 million from June 30, 2000 to $511.4 million at December 31, 2000. Real estate lending remained strong across all product lines, particularly commercial real estate. The commercial real estate portfolio increased $17.1 million while the residential real estate portfolio grew $9.6 million. This growth is a result of the Bank's continued emphasis on the active pursuit of lending opportunities. The Bank's dealer loan program increased $5.7 million while consumer and home equity loans increased $4.8 million. While loan growth remained strong, the percentage or non-performing loans to total loans remained low at 0.52%, as the Bank maintained its underwriting standards and continued its emphasis on secured real estate lending. Funding for the growth in the loan portfolio was derived from deposits and Federal Home Loan Bank advances. Deposits increased to $435.9 million as of December 31, 2000 compared to $423.8 million at June 30, 2000. The growth in retail deposits was primarily in short-term certificate of deposits and money market accounts. FHLB advances increased from $80.3 million at June 30, 2000 to $110.8 million at December 31, 2000. RESULTS OF OPERATIONS NET INTEREST INCOME-For the quarter ended December 31, 2000, net interest income was $4.1 million, down $320,000 from the $4.4 million attained during the 1999 quarter. The net interest rate spread decreased from 3.27% during 1999 quarter to 2.53% in the comparable quarter of 2000. The Bank's net interest margin decreased from 3.67% during the quarter ended December 31, 1999 to 2.94% for the 2000 period. The decrease in net interest spread and margin occurred because the yield on interest earning assets increased 25 basis points while the rate paid on liabilities increased 99 basis points. During the 2000 quarter, average interest-earning assets were $557.7 million, an increase of $76.8 million over the same period in 1999. Total average interest bearing liabilities increased from $438.5 million during the quarter ended December 31, 1999 to $516.5 million for the same period in 2000. While market interest rates have increased over the past year, short-term rates have increased more than long-term rates during that time period. This has caused interest-bearing liabilities, which are generally tied to shorter-term market indices to reprice at higher rates than interest earning assets, which are generally tied to longer-term indexes. Also, the Bank's interest bearing liabilities have a shorter repricing frequency and are subject to repricing at a faster pace than its interest earning assets. Net interest income for the six months ended December 31, 2000 was $8.3 million, down from $8.9 million attained during the same period of 1999. The Bank's net interest spread decreased 70 basis points and net interest margin decreased 71 basis points for the six months ended December 31, 2000 compared to the same period in 1999. The decrease in the net interest spread and margin occurred because the yield on interest earning assets increased 24 basis points while the rate paid on liabilities increased 94 basis points. The same factors contributing to the decline in the quarterly net interest margin and spread also affected the results for the six-month period. 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, 2000 and 1999.
THREE MONTHS ENDED DECEMBER 31, ------------------------------------------------------------------------------- 2000 1999 ---- ---- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ASSETS (DOLLARS IN THOUSANDS) Interest earning assets: Equity securities $ 1,045 $ 8 3.04% $ 1,518 $ 6 1.57% State and political subdivision Securities (1) 969 17 6.96 965 17 6.99 U.S. Treasury and agencies 41,891 684 6.48 41,832 675 6.40 Mortgage-backed securities 1,163 22 7.50 1,464 24 6.50 Loans receivable (2) (3) 503,202 10,435 8.23 428,763 8,640 7.99 FHLB stock 5,281 99 7.44 3,259 57 6.94 Interest bearing deposits 4,138 42 4.03 3,077 23 2.97 ------- ------ ---- ------- ----- ---- TOTAL INTEREST EARNING ASSETS 557,689 11,307 8.04 480,878 9,442 7.79 Less: Allowance for loan losses (2,410) (2,212) Non-interest earning assets 37,368 37,244 -------- ------- TOTAL ASSETS $592,647 $515,910 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings accounts $32,432 $ 324 3.96% $ 37,720 $ 320 3.37% NOW and money market Accounts 78,394 471 2.38 76,282 438 2.28 Certificates of deposit and other time deposits 301,313 4,680 6.16 271,790 3,576 5.22 FHLB Advances 104,365 1,702 6.38 52,713 659 4.89 ------- ----- ---- ------- ----- ---- TOTAL INTEREST BEARING LIABILITIES 516,504 7,177 5.51 438,505 4,993 4.52 Non-interest bearing liabilities: Non-interest bearing deposits 18,010 16,542 Other liabilities 5,369 6,995 ------- ------- TOTAL LIABILITIES 539,883 462,042 Stockholders' equity 52,764 53,868 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $592,647 $515,910 ======== ======== NET INTEREST INCOME $4,130 $4,450 ====== ====== NET INTEREST SPREAD 2.53% 3.27% ===== ===== NET INTEREST MARGIN 2.94% 3.67% ===== =====
- ----------------------------------------------------- (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, 2000 and 1999.
SIX MONTHS ENDED DECEMBER 31, -------------------------------------------------------------------------------- 2000 1999 ---- ---- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ASSETS (DOLLARS IN THOUSANDS) Interest earning assets: Equity securities $ 1,071 $ 16 2.96% $ 1,677 $ 11 1.30% State and political subdivision Securities (1) 958 34 7.04 974 34 6.92 U.S. Treasury and agencies 41,883 1,363 6.45 41,158 1,349 6.50 Mortgage-backed securities 1,204 44 7.25 1,494 48 6.37 Loans receivable (2) (3) 492,961 20,412 8.21 420,449 16,930 7.99 FHLB stock 4,855 180 7.35 3,239 116 7.10 Interest bearing deposits 4,310 82 3.77 3,945 65 3.27 -------- ------ ---- ------- ------ ---- TOTAL INTEREST EARNING ASSETS 547,242 22,131 8.02 472,936 18,553 7.78 Less: Allowance for loan losses (2,353) (2,173) Non-interest earning assets 37,249 36,348 -------- -------- TOTAL ASSETS $582,138 $507,111 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings accounts $33,897 $ 591 3.46% $ 36,207 $ 525 2.88% NOW and money market Accounts 78,398 969 2.45 78,386 867 2.19 Certificates of deposit and other time deposits 297,827 9,113 6.07 270,177 7,182 5.27 FHLB Advances 96,040 3,107 6.33 43,345 1,051 4.75 ------ ------ ---- ------- ----- ---- TOTAL INTEREST BEARING LIABILITIES 506,162 13,780 5.40 428,115 9,625 4.46 Non-interest bearing liabilities: Non-interest bearing deposits 17,820 16,861 Other liabilities 5,696 6,760 ------ ------- TOTAL LIABILITIES 529,678 451,736 Stockholders' equity 52,460 55,375 ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $582,138 $507,111 ======== ======== NET INTEREST INCOME $8,351 $8,927 ====== ====== NET INTEREST SPREAD 2.62% 3.32% ===== ===== NET INTEREST MARGIN 3.03% 3.74% ===== =====
- ----------------------------------------------------- (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, 2000 VS. 1999 2000 VS. 1999 --------------- ------------- 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 $227 $1,568 $1,795 $411 $$3,072 $3,483 Equity securities 1 1 2 4 1 5 State and political subdivision securities 0 0 0 0 0 0 U.S. Treasury and agencies 4 5 9 (51) 64 13 Mortgage-backed securities (4) 2 (2) (10) 6 (4) FHLB stock 4 38 42 4 60 64 Interest bearing deposits 6 13 19 6 11 17 ---- ----- ----- ---- ----- ----- TOTAL INTEREST EARNING ASSETS 238 1,627 1,865 364 3,214 3,578 ---- ----- ----- ---- ----- ----- INTEREST EXPENSE: Savings accounts 4 0 4 41 25 66 NOW and money market accounts 12 21 33 51 51 102 Certificates of deposit and other time deposits 407 698 1,105 697 1,233 1,930 FHLB advances 168 875 1,043 299 1,757 2,056 --- ----- ----- --- ----- ----- TOTAL INTEREST BEARING LIABILITIES 591 1,594 2,185 1,088 3,066 4,154 --- ----- ----- ----- ----- ----- NET CHANGE IN NET INTEREST INCOME $(353) $ 33 $ (320) $ (724) $ 148 $ (576) ==== ====== ====== ====== ====== ======
NON-INTEREST INCOME-Non-interest income was $1.5 million for the quarter ended December 31, 2000, as compared to $1.0 million for the 1999 period, an increase of $463,000. Gains on investment sales were $351,000 during the 2000 period compared to $152,000 for the 1999 quarter, and increase of $199,000. Fee income from secondary market lending operations increased by $20,000 or 21% during the 2000 period compared to 1999. Customer service fees charged on deposit accounts increased by $129,000 or 26% during the 2000 quarter due to growth in accounts and deposit relationships with existing customers. Other sources of income such as brokerage commissions, loan fees, and other customer transaction fees also increased during the 2000 period as compared to the 1999 period. Non-interest income was $2.8 million for the six months ended December 31, 2000, as compared to $2.0 million for the same period last year. Gains on investment sales were $696,000 during the 2000 period compared to $305,000 for the 1999 period, an increase of $391,000. Customer service fees charged on deposit accounts increased by $257,000 or 27% during the 2000 period. Other sources of income such as brokerage commissions, loan fees, and other customer transaction fees also increased during the 2000 period as compared to the 1999 period. 16 NON-INTEREST EXPENSE- Total non-interest expense was $3.3 million for the 2000 quarter compared to $3.2 million for the 1999 quarter. Non-interest expense increased from $6.2 million for the six months ended December 31, 1999 to $6.6 million for the comparable period in 2000. The increases for both the three and six months ended December 31, 2000 were primarily attributable to costs associated with salaries, employee benefits and occupancy and equipment. Compensation and employee benefit expenses increased $125,000 for the 2000 quarter compared to the 1999 quarter, and $336,000 for the six months ended December 31, 2000 compared to December 31, 1999. The increase includes inflationary salary adjustments and reflects growth in the overall staffing level from 168 full-time equivalent employees at December 31, 1999 to 198 full-time equivalent employees at December 31, 2000. Additional staffing was required to achieve a new strategic plan adopted by the Bank in 1999 through the development of a bank-wide service and sales culture. The culture's success relies on expanding account relationships and required increasing the number of associates in banking centers, relationship bankers, business development officers, stockbrokers, and loan officers. A Senior Vice President and Retail Banking Officer was also hired to implement management's strategic plan. The transition has been responsible for much of the renewed growth in the lending area of the Bank and has made the certificate special promotions a success in all offices. Increased staffing also resulted from the re-opening of a Bardstown, Kentucky office and a new Customer Service Center. Occupancy and equipment expense increased for both the three and six months ended December 31, 2000. The increase is largely attributable to the costs associated with the Bank's new Customer Service Center, which became operational in July 2000 and the second Bardstown, Kentucky banking center, which opened in early 2000. 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. Management believes, based on information presently available, that it has adequately provided for loan losses at December 31, 2000. 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 $306,000 for the three months ended December 31, 2000 compared to $90,000 for the 1999 quarter. The provision for loan losses also increased for the six months ended December 31, 2000 to $501,000 compared to $180,000 for the 1999 period. The increase in the provision is a result of an increase in charge-offs and non-performing loans for the period and to compensate for the Bank's continued strong loan growth in indirect consumer loans. Net loan charge-offs increased $165,000 to and commercial loans secured by real estate. $212,000 for the six months ended December 31, 2000 compared to $47,000 for the same period in 1999. The increase in charge-offs is primarily related to charge-offs of indirect consumer loans during the 2000 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, 2000 and 1999.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance-beginning of period $2,311 $2,157 $2,252 $2,108 ------ ------ ------ ------ Loans charged-off: Real estate mortgage 0 0 (2) (36) Consumer (96) (7) (237) (16) Commercial 0 0 0 0 ------ ------ ------ ------ Total charge-offs (96) (7) (239) (52) ------ ------ ------ ------ Recoveries: Real estate mortgage 0 0 0 0 Consumer 20 1 27 5 Commercial 0 0 0 0 ------ ------ ------ ------ Total recoveries 20 1 27 5 ------ ------ ------ ------ Net loans charged-off (76) (6) (212) (47) ------ ------ ------ ------ Provision for loan losses 306 90 501 180 ------ ------ ------ ------ Balance-end of period $2,541 $2,241 $2,541 $2,241 ------ ------ ------ ------ Net charge-offs to average loans outstanding .043% .011% Allowance for loan losses to total non-performing loans 185% 171% Allowance for loan losses to to net loans outstanding .48% .50%
NON-PERFORMING ASSETS The Bank's non-performing assets consist of loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The Bank does not have any loans greater than 90 days past due still on accrual. All loans considered impaired under SFAS 114 are included in non-performing loans. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loans effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported in the provision for loan losses. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 90 days and is not cured through normal collection procedures or an acceptable arrangement is not worked out with the borrower, the Bank institutes measures to remedy the default, including commencing a foreclosure action. Consumer loans generally are charged off when a loan is deemed uncollectible by management and any available collateral has been disposed of. Commercial business and real estate loan delinquencies are handled on an individual basis by management with the advice of the Bank's legal counsel. Management does not consider the overall increase in non-performing assets during the period to be material or indicative of any adverse change in overall asset quality. The Bank anticipates that the increase in non-performing real estate loans will continue due to the growth of the Bank's loan portfolio. 18 The following table sets forth information with respect to the Bank's non-performing assets for the periods indicated. DECEMBER 31, JUNE 30, 2000 2000 ------------ -------- (DOLLARS IN THOUSANDS) Loans on non-accrual status (1)(2) $2,685 $1,562 Real estate acquired through foreclosure 17 - Repossessed assets 74 - Total non-performing assets $2,776 $1,562 ====== ====== Ratios: Non-performing loans to total loans .52% .33% Non-performing assets to total assets .46% .28% - ----------------------------------------------------- (1) Loans on non-accrual status include impaired loans. (2) The interest income that would have been earned and received on non-accrual loans was approximately $220,000 for the six month period ending December 31, and $126,000 for the year ending June 30. LIQUIDITY The Bank is required to maintain minimum specific levels of liquid assets as defined by the Office of Thrift Supervision's regulations. This requirement is based on a percentage of cash and eligible investments to deposits and short-term borrowings and is currently 4%. At December 31, 2000, the Bank's liquid assets were 5.63% of its liquidity base. The Bank's primary source of funds for meeting its liquidity needs are customer deposits, borrowings from the Federal Home Loan Bank, principal and interest payments from loans and mortgage-backed securities, and earnings from operations retained by the Bank. The Bank intends to continue to fund loan growth (outstanding loan commitments were $2.3 million at December 31, 2000) with customer deposits and additional advances from the FHLB. At December 31, 2000, the Bank had an unused approved line of credit in the amount of $32.1 million and sufficient collateral to borrow an additional $196 million in advances from the FHLB. CAPITAL Savings institutions insured by the FDIC must meet various regulatory capital requirements. The Bank continues to exceed the regulatory requirements for Tier I, Tier I leverage and total risk-based capital. The Bank expects to maintain a capital position that meets or exceeds the "well capitalized" requirements as defined by the FDIC. The Bank's actual and required capital amounts and ratios at December 31, 2000 are presented below:
TO BE CONSIDERED WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTION ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------------------------------------------------- AS OF DECEMBER 31, 2000: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- Total risk-based capital (to risk- weighted assets) $44,428 10.13% $33,449 8.0% $41,812 10.0% Tier I capital (to risk-weighted assets) 41,889 9.55 16,725 4.0 25,087 6.0 Tier I leverage capital (to average assets) 41,889 7.07 22,871 4.0 28,588 5.0
19 STOCK REPURCHASE PLAN-In October 1999 the Corporation's Board of Directors authorized the establishment of an additional stock repurchase program pursuant to which 10% of the Corporation's outstanding stock may be repurchased from time to time in the open market. The programs, which began in 1995, have repurchased a total of 613,681 shares. The Board will continue to evaluate earnings per share and monitor the success of the repurchase plan to maintain an attractive return to stockholders. The current plan expires in April 2001, at which time the Board will reanalyze the Bank's capital position and future earnings potential and if appropriate, initiate a new repurchase plan. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Bank currently does not engage in any derivative or hedging activity. Refer to the Bank's 2000 10-K for analysis of the interest rate sensitivity. 20 FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY PART II - OTHER INFORMATION Item 1. Legal Proceedings Although the Bank is, from time to time, involved in various legal proceedings in the normal course of business, there are no material pending legal proceedings to which the Corporation, the Bank, or its subsidiaries is a party, or to which any of their property is subject. Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders The Corporation's 2000 Annual Meeting of Shareholders was held on November 8, 2000. 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 ---- ------------ B. Keith Johnson 2003 Diane E. Logsdon 2003 John L. Newcomb, Jr. 2003 In addition, the following directors will continue in office until the annual meeting of the year set forth beside each of their names. NAME TERM EXPIRES ---- ------------ Robert M. Brown 2001 Wreno M. Hall 2002 Walter D. Huddleston 2002 J. Stephen Mouser 2002 Burlyn Pike 2001 J. Alton Rider 2001 Michael L. Thomas 2002 21 The voting results for the matters brought before the 2000 Annual Meeting are as follows: 1. Election of Directors. Cumulative voting applied in the election of directors. NAME VOTES FOR ABSTENTIONS BROKER NONVOTES B. Keith Johnson 2,577,086.827 0 0 Diane E. Logsdon 2,559,441.827 0 0 John L. Newcomb, Jr. 2,563,586.827 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, 2001 BY: (S) B. KEITH JOHNSON ---------------------- B. Keith Johnson President and Chief Executive Officer DATE: February 12, 2001 BY: (S) CHARLES E. CHANEY ---------------------- Charles E. Chaney Senior Vice President Chief Operating Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----