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.
<PAGE>
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
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 2000 1999
---- ----
(unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
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
<PAGE>
FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------
2000 1999
------ ------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
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
<PAGE>
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
<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 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(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.)
</LEGEND>
<CIK> 0000854395
<NAME> FIRST FEDERAL FINANCIAL CORP. OF KENTUCKY
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> MAR-31-2000 MAR-31-1999
<EXCHANGE-RATE> 1.000 1.000
<CASH> 11,030,600 9,367,233
<INT-BEARING-DEPOSITS> 3,729,542 6,131,324
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 2,009,372 3,099,456
<INVESTMENTS-CARRYING> 43,152,113 44,506,060
<INVESTMENTS-MARKET> 41,137,000 44,220,035
<LOANS> 451,296,640 391,589,777
<ALLOWANCE> 2,303,840 2,052,000
<TOTAL-ASSETS> 536,912,494 481,652,661
<DEPOSITS> 426,697,268 396,239,762
<SHORT-TERM> 53,587,252 22,997,767
<LIABILITIES-OTHER> 4,604,276 5,466,358
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 3,797,855 4,127,112
<OTHER-SE> 48,225,843 53,127,394
<TOTAL-LIABILITIES-AND-EQUITY> 536,912,494 481,652,661
<INTEREST-LOAN> 25,858,333 23,884,427
<INTEREST-INVEST> 2,409,275 2,757,814
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 28,267,608 26,642,241
<INTEREST-DEPOSIT> 13,189,071 12,972,532
<INTEREST-EXPENSE> 14,993,460 13,972,748
<INTEREST-INCOME-NET> 13,274,148 12,669,493
<LOAN-LOSSES> 269,500 180,000
<SECURITIES-GAINS> 456,926 203,200
<EXPENSE-OTHER> 9,310,812 8,807,085
<INCOME-PRETAX> 6,651,996 6,354,428
<INCOME-PRE-EXTRAORDINARY> 6,651,996 6,354,428
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,440,811 4,184,814
<EPS-BASIC> 1.12 1.01
<EPS-DILUTED> 1.12 1.01
<YIELD-ACTUAL> 7.81 8.11
<LOANS-NON> 1,076,000 1,733,000
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 210,852 255,667
<LOANS-PROBLEM> 1,946,000 2,702,000
<ALLOWANCE-OPEN> 2,108,000 1,853,000
<CHARGE-OFFS> 81,000 210,000
<RECOVERIES> 7,000 24,000
<ALLOWANCE-CLOSE> 2,304,000 2,052,000
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,304,000 2,052,000
</TABLE>
