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: December 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 0-18832
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)
(502)765-2131
(Registrants'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 January 31, 1996
----------- ------------------------------------
Common Stock 4,171,971 shares
This document is comprised of 12 pages.
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
INDEX
PART I - Financial Information Page Number
Item 1 - Financial Statements
Consolidated Statements of Financial Condition as
of December 31, 1996 (Unaudited) and June 30, 1996. 3
Consolidated Statements of Income for the Three Months
and Six Months Ended December 31, 1996 and 1995
(Unaudited). 4
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1996 and 1995 (Unaudited). 5
Notes to Consolidated Financial Statements. 6
Item 2 - Management's Discussion and Analysis of the
Consolidated Statements of Financial Condition
and Results of Operations. 7
PART II - Other Information 11
SIGNATURES 12
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, June 30,
ASSETS 1996 1996
------ --------------------
(unaudited)
<S> <C> <C>
Cash $ 8,544,498 8,407,735
Interest bearing deposits -- 7,752,537
Securities:
Securities held-to-maturity 17,790,077 11,993,796
Securities available-for-sale 4,840,356 4,748,417
(Total securities fair value $23,103,148
at December 31, 1996; $17,086,603
at June 30, 1996)
Loans receivable, net 318,284,338 302,363,297
Real estate owned:
Acquired through foreclosure 378,340 375,392
Held for development 687,261 505,261
Investment in Federal Home Loan Bank stock 2,681,700 2,589,900
Premises and equipment 9,984,986 9,684,167
Other assets 731,241 986,260
Excess of cost over net assets of
affiliate purchased 3,144,517 3,264,553
----------- ----------
Total Assets $ 367,067,314 $ 352,671,315
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Savings deposits $ 266,991,907 $ 264,945,744
Advances from Federal Home Loan Bank 45,724,944 34,979,079
Accrued interest payable 310,308 218,284
Accounts payable and other liabilities 3,107,886 1,099,293
Deferred income taxes 945,557 1,482,470
-------------- ------------
Total Liabilities 317,080,602 302,724,870
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 4,182,018 shares on
December 31, 1996 and 4,208,490 shares
on June 30, 1996 4,182,018 4,208,490
Additional paid-in capital 4,823,304 5,466,700
Retained earnings - substantially restricted 40,227,345 39,509,189
Net unrealized holding gain on securities
available-for-sale, net of tax 754,045 762,066
-------------- ------------
Total Stockholders' Equity 49,986,712 49,946,445
-------------- ------------
Total Liabilities & Stockholders' Equity $ 367,067,314 $ 352,671,315
============= =============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $6,683,488 $6,277,273 $13,191,837 $12,361,494
Interest and dividends
on investments and
deposits 449,395 438,235 893,716 892,420
---------- ---------- ----------- ----------
Total interest income 7,132,883 6,715,508 14,085,553 13,253,914
---------- ---------- ----------- ----------
Interest expense:
Savings deposits 2,990,636 3,019,260 5,963,664 5,991,457
Federal Home Loan Bank
advances 591,268 460,079 1,101,833 821,670
---------- ---------- ----------- ----------
Total interest expense 3,581,904 3,479,339 7,065,497 6,813,127
---------- ---------- ----------- ----------
Net interest income 3,550,979 3,236,169 7,020,056 6,440,787
Provision for loan losses -- -- 200,000 --
---------- ---------- ----------- ----------
Net interest income
after provision for
loan losses 3,550,979 3,236,169 6,820,056 6,440,787
---------- ---------- ----------- ----------
Other income:
Customer service fees
on deposit accounts 290,171 287,403 611,076 518,055
Other income 207,097 219,785 430,164 428,727
Gain on sale of investment (6,000) 231,956 316,927 543,054
---------- ---------- ----------- ----------
Total other income 491,268 739,144 1,358,167 1,489,836
---------- --------- ----------- ----------
Other expense:
Employee compensation
and benefits 857,613 813,608 1,744,126 1,584,393
Office occupancy and
equipment expense 211,725 171,727 442,285 359,007
Federal insurance
premiums (Note 2) 118,589 147,861 1,927,428 292,981
Marketing and advertising 103,393 100,181 201,704 171,403
Outside services and
data processing 148,049 160,187 302,949 289,235
State franchise tax 73,994 69,786 144,788 138,326
Other expense 434,561 409,711 877,939 841,635
---------- ---------- ----------- ----------
Total other expense 1,947,924 1,873,061 5,641,219 3,676,980
---------- ---------- ----------- ----------
Income before taxes 2,094,323 2,102,252 2,537,004 4,253,643
Income taxes 707,668 724,249 865,118 1,442,339
---------- ---------- ----------- ----------
Net Income $1,386,655 $1,378,003 $ 1,671,886 $2,811,304
========== ========== =========== ==========
Net income per share
of common stock $0.33 $0.33 $0.40 $0.66
===== ===== ===== =====
Dividends per share
of common stock $0.12 $0.11 $0.24 $0.22
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended
December 31,
1996 1995
<S> <C> <C>
Operating Activities:
Net income $ 1,671,886 $ 2,811,304
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision for loan losses 200,000 --
Provision for depreciation 257,431 228,910
Net change in deferred loan fees and costs 83,830 79,526
Federal Home Loan Bank stock dividends (91,800) (85,900)
Amortization of discounts on
securities held-to-maturity (71,091) (62,526)
Amortization of acquired intangible assets 120,036 120,036
Gain on sale of investments
available-for-sale (316,927) (543,054)
Increase (Decrease) in interest payable 92,024 (52,734)
Decrease in other assets 255,019 517,985
Increase in accounts payable
and other liabilities 1,471,680 432,754
------------ ------------
Net cash provided by operating activities 3,672,088 3,446,301
------------ ------------
Investing Activities:
Sale of securities available-for-sale 335,111 571,965
Purchases of securities available-for-sale (100,215) (99,118)
Purchases of securities held-to-maturity (6,000,000) --
Maturity of securities held-to-maturity -- 1,000,000
Principal collections on securities
held-to-maturity 274,811 244,368
Net increase in loans to customers (16,573,888) (11,427,422)
Purchases of premises and equipment (558,250) (115,480)
Sales of real estate acquired in settlement
of loans 399,839 23,000
Increase in real estate held for development (182,000) (2,907)
------------ ------------
Net cash used in investing activities (22,404,592) (9,805,594)
------------ ------------
Financing Activities:
Advances from Federal Home Loan Bank 10,745,865 10,821,731
Net Increase (Decrease) in customer savings
deposits 2,046,163 (2,343,006)
Dividends paid (1,005,430) (933,139)
Proceeds from stock options exercised 60,543 60,551
Common stock repurchased (730,411) (415,280)
Repayment of advance to ESOP -- 126,537
------------ ------------
Net cash provided by financing activities 11,116,730 7,317,394
------------ ------------
Increase (Decrease) in cash and cash equivalents (7,615,774) 958,101
Cash and cash equivalents, beginning of year 16,160,272 13,864,501
------------ ------------
Cash and cash equivalents, end of period $ 8,544,498 $14,822,602
============ ===========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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.
In the opinion of management, these unaudited consolidated financial
statements include all adjustments necessary for a fair presentation of
its financial position as of December 31, 1996 and the results of its
operations and its cash flows for the three month and six month periods
then ended. All such adjustments were of a normal recurring nature.
The results of operations for the three month and six month periods ended
December 31, 1996 and 1995 are not necessarily indicative of the results
for the full years.
It is suggested that these financial statements be read in conjunction
with the financial statements, accounting policies and financial notes
thereto included in the Appendix to the Company's 1996 Proxy Statement
which has been previously filed with the Commission.
2. Federal Deposit Insurance Corporation (FDIC) legislation was signed into
law on September 30, 1996, to recapitalize the Savings Association
Insurance Fund (SAIF). All SAIF-insured savings institutions were required
to pay a one-time special assessment of $.657 for every $100 of customer
deposits. This has resulted in a charge to earnings of $1,658,000
($1,094,000, net of tax) during the Bank's first quarter ended September
30, 1996.
3. Net income per share of common stock is computed by dividing net income by
the weighted average number of shares on common stock issued and
outstanding: 4,186,608 shares and 4,233,176 shares issued and outstanding
for the three month periods ended December 31, 1996 and 1995 respectively,
and 4,196,340 shares 4,235,209 shares issued and outstanding for the six
month periods ended December 31, 1996 and 1995 respectively. Common stock
equivalents have not been used in computing net income per share because
their effect share is not material. Net income and dividends paid per
share reflect a 2-for-1 common stock split in the form of a 100% stock
dividend distributed on June 10, 1996.
6
<PAGE>
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 central Kentucky communities of
Elizabethtown, Radcliff, Bardstown, Munfordville, Shepherdsville, and
Mt. Washington.
The following discussion and analysis covers any material changes in the
financial condition since June 30, 1996 and any material changes in the results
of operations for the three month and six month periods ending, December 31,
1996. This discussion and analysis should be read in conjunction with
"Managements Discussion and Analysis of Financial Condition and Results of
Operations" included in the 1996 Annual Report to Shareholders.
Results of Operations
Three Month Period Ended December 31, 1996 vs. 1995 - Net income was $1,386,655
or $0.33 per share for the three month period ended December 31, 1996, as
compared to $1,378,003 or $0.33 per share for the same period in 1995. The
following discussion outlines the material differences in income and expenses
for the three month period ended December 31, 1996, as compared to 1995.
Net interest income increased by $314,810 in 1996 as compared to 1995. This
increase was due to the strong growth of the Bank's loan portfolio and a 11
basis point improvement in the net interest margin. The Bank's net interest
margin for the 1996 period increased to 4.08% as compared to 3.97% for the 1995
quarter. The Corporation's cost of funds decreased by 19 basis points in 1996
compared to 1995, due to customer's transferring deposits from long-term
maturities to short-term.
Average interest-earning assets increased by $18 million from $324 million for
the 1995 period to $342 million for the 1996 period. Average loans were $23
million higher and averaged $316 million during 1996, while the average yield on
loans decreased by 10 basis points to 8.39%.
Average interest-bearing liabilities increased by $21 million to an average
balance of $310 million for the 1996 period. Customer deposits averaged $267
million during 1996, an increase of $11 million compared to the 1995 quarter.
The remaining $10 million increase in interest-bearing liabilities was due to
borrowings from Federal Home Loan Bank to help finance the Bank's loan growth.
Total other income was $491,268 for the three months ended December 31, 1996, as
compared to $739,144 for the 1995 period, a decrease of $247,876. The decrease
in income is primarily attributable to the fact that no sales of
available-for-sale securities took place during the 1996 period compared to the
1995 period. Other sources of miscellaneous income, such as government loan
income decreased due to the lower loan volume generated by the Bank's government
lending team.
Total other expense was $1,947,924 for the three month period ended
December 31, 1996, as compared to $1,873,061 for the 1995 period. This 4%
increase of $74,863 was primarily due to the Bank's opening of a new branch
office in the Elizabethtown Wal-Mart Supercenter which became operational in
July 1996, resulting in an increase of $58,000 in operating expenses for the
1996 quarter. The rest of the increase was attributable to expanded services and
products offered to customers. FDIC premiums were $29,272 lower this quarter
versus the 1995 quarter due to the SAIF special assessment reducing the normal
prepaid quarterly premium.
7
<PAGE>
Six Month Period Ended December 31, 1996 vs. 1995 - Net income was $1,671,886 or
$0.40 per share for the six month period ended December 31, 1996, as compared to
$2,811,304 or $0.66 per share for the same period in 1995. The decrease in
earnings is primarily attributable to the one-time special assessment of $1.7
million ($1.1 million, net of tax) to recapitalize the Savings Association
Insurance Fund ("SAIF"). Beginning January 1, 1997, the Bank will benefit from
reduced premiums to the FDIC of approximately $430,000 annually ($285,000, net
of tax). See further discussion under "Regulatory Matters".
Net interest income increased by $579,269 in 1996 as compared to 1995 due to the
Bank's strong loan growth and a 7 basis point improvement in the net interest
margin. Average interest-earning assets increased by $19 million during the six
months ended December 31, 1996 compared to the 1995 period as average loans grew
by $22 million. Average interest-bearing liabilities increased by $20 million to
an average balance of $306 million for the 1996 period, while the average cost
of funds decreased by 15 basis points during the comparative periods due to
lower rates paid on short-term customer deposits.
Total other income was $1,358,167 for the six months ended December 31, 1996, as
compared to $1,489,836 for the 1995 period, a decrease of $131,669. The decrease
was due to the fact that no gains were recorded on sales of investments during
the second quarter of 1996. Customer service fees on deposit accounts increased
by $93,000 during the 1996 period due to a growth in customer checking accounts
and an increase in customer service fees.
Total other expense was $5,641,219 for the six months ended December 31, 1996,
as compared to $3,676,980 for the 1995 period, an increase of $1,964,239. The
increase is a result of the SAIF special assessment recorded in the first
quarter of 1996. Costs attributable to the new branch in the Elizabethtown
Wal-Mart Supercenter were approximately $120,000 during the six month period
ended December 31, 1996. All other expenses increased by approximately 10% for
the 1996 period as compared to the same period in 1995, primarily from expanded
services and products offered to customers and to accommodate loan growth.
8
<PAGE>
Non-Performing Assets
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 effect the borrower's ability to repay
and other factors. During the six month period ended December 31, 1996,
management chose to add $200,000 to the reserve for loan loss. Although current
loan charge-offs and delinquencies are consistent with previous years, the
reserve was increased to compensate for the Bank's continued strong loan growth.
The Bank experienced an insignificant amount of uncollectible loans during the
periods indicated in the table below. Approximately 57% of the Bank's delinquent
loans are secured by one-to-four-family residences at December 31, 1996.
Three Months Ended Six Months Ended
December 31, December31,
1996 1995 1996 1995
---- ---- ---- -----
(Dollars in thousands)
Allowance for loan losses:
Balance, beginning of period $ 1,785 $ 1,656 $ 1,613 $ 1,662
Provision for loan losses -- -- 200 --
Charge-offs (33) (14) (60) (20)
Recoveries 20 -- 19 --
------- ------- ------- -------
Balance, end of period $ 1,772 $ 1,642 $ 1,772 $ 1,642
======= ======= ======= =======
Net loans outstanding at quarter end $318,284 $294,215
Non-performing loans at quarter end:
Collaterized by one-to-four family
homes $971 $658
Other non-performing loans $343 $467
Ratios:
Non-performing loans to total loans .41% .38%
Allowance for loan losses to non-
performing loans 135% 146%
Allowance for loan losses to net loans .57% .56%
Non-performing assets to total assets .46% .43%
9
<PAGE>
Liquidity & Capital Resources
Loan demand continued to be strong during the six months ended December 31,
1996, as net loans grew by $15.9 million to $318.3 million, a 10% annualized
growth. Deposits increased by $2.0 million during the six month period,
primarily in customer accounts with maturity terms under one year. The loan
growth was funded by additional borrowings of $10.7 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 5%) of
cash and eligible investments to the savings deposits and short-term borrowings.
At December 31, 1996, the Bank's liquid assets were 6.84% of its liquidity base.
The Bank intends to continue to fund loan growth (outstanding loan commitments
were $4.4 million at December 31, 1996) and any declines in customer deposits
through additional advances from the FHLB. At December 31, 1996, the Bank has an
unused approved line of credit in the amount of $6.5 million, and the potential
to significantly increase its indebtedness with the FHLB, if necessary, due to
the Bank's strong financial condition.
The Office of Thrift Supervision's capital regulations require the Bank to meet
three capital standards. As indicated below, the Bank substantially exceeded the
regulatory requirements for each category at December 31, 1996.
(Dollars in thousands)
Tangible Core Risk-Weighted
Actual capital
$ 44,753 $ 44,753 $ 46,500
Regulatory requirement
5,403 10,806 18,874
------- ------- -------
Excess $ 39,350 $ 33,947 $ 27,626
========= ========= =========
Regulatory Matters
The Bank insures its customers' deposits through the Savings Association
Insurance Fund ("SAIF"). On September 30, 1996, Federal Deposit Insurance
Corporation ("FDIC") legislation was signed into law to recapitalize the SAIF.
As was anticipated, all SAIF-insured savings institutions were required to pay a
one-time special assessment of $.657 for every $100 of customer deposits. This
has resulted in a charge to earnings of $1,095,000, net of tax during the
quarter ended September 30, 1996. Future earnings accruing from a reduced rate
in the deposit insurance premium should more than offset the special assessment
over a period of time. On January 1, 1997, the Bank will begin paying insurance
premiums of $.064 per $100 of deposits as compared to a previous premium of $.23
per $100 of deposits. The reduced premium will contribute approximately
$285,000, net of tax to future annual earnings.
Recent legislation will require the Bank to change its method of computing bad
debt deductions for income tax purposes, effective July 1, 1996. Formerly, the
Bank was permitted a bad debt deduction in the amount of 8% pre-tax income. The
annual deductions created a bad debt reserve for income tax purposes. Conversion
from a thrift charter to a commercial bank charter would have triggered the
recapture of the reserve, resulting in approximately $4 million of income taxes.
The new law has eliminated this income tax cost upon conversion to a commercial
bank charter. Although recapture of the post-1987 reserve will occur, the Bank
has previously deferred the related tax consequences and therefore will have no
material effect on future earnings of the Bank.
10
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY
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
The Corporation's Board of Directors authorized a six
month extension of its stock repurchase program which
expired on January 18, 1997.
Item 6. Exhibits: Not Applicable
Reports on Form 8-K:
Not Applicable
11
<PAGE>
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 11, 1997 BY: (S) B. Keith Johnson
----------------------
B. Keith Johnson
Executive Vice President
DATE: February 11, 1997 BY: (S) M. Dennis Young
---------------------
M. Dennis Young
Senior Vice President,
Chief Financial Officer & Comptroller
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,544,498
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,840,356
<INVESTMENTS-CARRYING> 17,790,077
<INVESTMENTS-MARKET> 23,103,148
<LOANS> 318,284,338
<ALLOWANCE> 1,772,000
<TOTAL-ASSETS> 367,067,314
<DEPOSITS> 266,991,907
<SHORT-TERM> 45,724,944
<LIABILITIES-OTHER> 3,107,886
<LONG-TERM> 0
0
0
<COMMON> 4,182,018
<OTHER-SE> 45,804,694
<TOTAL-LIABILITIES-AND-EQUITY> 367,067,314
<INTEREST-LOAN> 13,191,837
<INTEREST-INVEST> 893,716
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,085,553
<INTEREST-DEPOSIT> 5,963,664
<INTEREST-EXPENSE> 7,065,497
<INTEREST-INCOME-NET> 7,020,056
<LOAN-LOSSES> 200,000
<SECURITIES-GAINS> 316,927
<EXPENSE-OTHER> 5,641,219
<INCOME-PRETAX> 2,537,004
<INCOME-PRE-EXTRAORDINARY> 2,537,004
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,671,886
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 8.23
<LOANS-NON> 0
<LOANS-PAST> 1,314,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,197,000
<ALLOWANCE-OPEN> 1,613,000
<CHARGE-OFFS> 60,000
<RECOVERIES> 19,000
<ALLOWANCE-CLOSE> 1,772,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,772,000
</TABLE>
