U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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 0-26510
NCF FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 61-1285330
- --------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
119 E. Stephen Foster Avenue, Bardstown, Kentucky 40004
- ---------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 348-9278
--------------
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.
X Yes No
----- ------
Class Outstanding
----- -----------
As of May 5, 1997, there were 770,500 shares of the Registrant's common
stock, par value $0.10 per share, outstanding. The Registrant has no other
classes of common equity outstanding.
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Bardstown, Kentucky
Index
PART I.
- -------
FINANCIAL INFORMATION Page(s)
-------
Item I.
Financial Statements
Consolidated Balance Sheets - (Unaudited) as of June 30, 1996
and March 31, 1997 .................................................. 3
Consolidated Statements of Income - (Unaudited) for the three
month periods ended March 31, 1996 and 1997 and nine month
periods ended March 31, 1996 and 1997 ............................... 4
Consolidated Statements of Stockholders' Equity (Unaudited) .......... 5
Consolidated Statements of Cash Flows - (Unaudited) for the
nine months ended March 31, 1996 and 1997 ........................... 6
Notes to Consolidated Financial Statements (Unaudited) ............... 7-11
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 12-15
PART II.
- --------
OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 16
Item 2. Changes in Securities ....................................... 16
Item 3. Defaults Upon Senior Securities ............................. 16
Item 4. Submission of Matters to a Vote of Security Holders ......... 16
Item 5. Other Information ........................................... 16
Item 6. Exhibits and Reports on Form 8-K ............................ 16
Signatures ........................................................... 17
2
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, March 31,
1996 1997
---- ----
Assets
------
Cash and due from banks $ 195 $ 129
Interest-earning deposits 4,968 5,077
Loans receivable, net 28,861 27,956
Mortgage-backed securities
(market value - $165 and $154) 143 133
Premises and equipment, net 51 353
Federal Home Loan Bank stock 412 434
Interest receivable 220 202
Deferred tax asset 4 16
Prepaid income tax - 20
Other 51 37
------- -------
Total assets $34,905 $34,357
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Deposits $22,741 $22,091
Accrued expenses and other liabilities 247 263
Income taxes payable 114 -
------- -------
Total liabilities 23,102 22,354
Preferred stock ($.01 par value, 100,000 shares
authorized; none issued and outstanding) - -
Common stock ($.10 par value, 1,400,000 shares
authorized; 770,500 shares issued and outstanding) 77 77
Additional paid-in capital 7,270 7,284
Retained earnings, substantially restricted 4,918 5,067
Less unearned compensation:
Employee stock ownership plan (462) (425)
------- -------
Total stockholders' equity 11,803 12,003
------- -------
Total liabilities and stockholders' equity $34,905 $34,357
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $567 $509 $1,673 $1,655
Investment securities - 13 - 79
Mortgage-backed securities 5 4 16 12
Interest-earning deposits 69 66 184 152
---- ---- ------ ------
Total interest income 641 592 1,873 1,898
Interest expense:
Deposits 268 254 834 787
Federal Home Loan Bank advances - - 18 -
---- ---- ------ ------
Total interest expense 268 254 852 787
---- ---- ------ ------
Net interest income 373 338 1,021 1,111
Provision for loan losses 4 4 12 12
---- ---- ------ ------
Net interest income after provision
for loan losses 369 334 1,009 1,099
Non-interest income:
Loan fees and service charges 5 4 16 16
Non-interest expenses:
Compensation and employee benefits 186 118 364 354
Net occupancy expense 6 9 17 23
Deposit insurance premiums 20 2 45 183
Data processing 9 10 27 29
State franchise and other taxes 7 1 21 30
Professional fees 7 11 26 47
Other 16 21 48 61
---- ---- ------ ------
Total non-interest expenses 251 172 548 727
---- ---- ------ ------
Income before income taxes 123 166 477 388
Income tax expense 39 49 163 131
---- ---- ------ ------
Net income $ 84 $117 $ 314 $ 257
==== ==== ====== ======
Net income per share $.12 $.14 $ .43 $ .33
==== ==== ====== ======
Cash dividend per share $.00 $.00 $ .00 $ .15
==== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Unearned
Stock Capital Earnings Compensation Total
----- ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1995 $- $ - $4,636 $ - $ 4,636
Net income - - 398 - 398
Net proceeds from sale
of common stock 77 7,259 - (500) 6,836
Fair value of shares committed
to be released from ESOP plan - 11 - 38 49
Cash dividend paid - - (116) - (116)
--- ------ ------ ----- -------
Balance, June 30, 1996 77 7,270 4,918 (462) 11,803
Net income nine months ended
March 31, 1997 - - 257 - 257
Fair value of shares committed
to be released from ESOP plan - 14 - 37 51
Cash dividend paid - - (108) - (108)
--- ------ ------ ----- -------
Balance, March 31, 1997 $77 $7,284 $5,067 $(425) $12,003
=== ====== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------
1996 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 314 $ 257
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 10 11
Provision for loan losses 12 12
Deferred income taxes (benefit) (33) (12)
FHLB dividends received in stock (20) (22)
Amortization of deferred loan origination fees, net - (1)
Accretion of discounts on mortgage-backed securities - -
Increase in allowance for uncollectible interest 14 86
Increase in interest receivable (122) (146)
Decrease in other assets 15 14
Increase in accrued expenses and other liabilities 35 16
Increase (decrease) in current income taxes payable 87 (134)
ESOP plan expense 36 59
------- -------
Net Cash Provided By Operating Activities 348 140
Investing Activities:
Principal payments on mortgage-backed securities 33 10
Purchase of investment securities held-to-maturity - (2,921)
Maturities of investment securities held-to-maturity - 3,000
Net (increase) decrease in loans originated (1,421) 893
Acquisition of premises and equipment - (313)
------- -------
Net Cash (Used In) Provided By Investing Activities (1,388) 669
Financing Activities:
Net decrease in deposits (757) (650)
Repayments of FHLB advances (700) -
Stock conversion cost (239) -
Common stock issued 7,705 -
ESOP loan (500) -
Dividends paid - (116)
------- -------
Net Cash Provided By (Used In) Financing Activities 5,509 (766)
------- -------
Increase In Cash and Cash Equivalents 4,469 43
Cash and Cash Equivalents, beginning of period 1,201 5,163
------- -------
Cash and Cash Equivalents, end of period $ 5,670 $ 5,206
======= =======
Supplemental Disclosures:
Noncash investing and financing activities:
Cash paid during the period for:
Interest $ 912 $ 830
======= =======
Income taxes $ 109 $ 279
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. NCF Financial Corporation
-------------------------
NCF Financial Corporation (the "Company") was incorporated under the laws
of the State of Delaware for the purpose of becoming the savings and loan
holding company of Nelson County Federal Savings and Loan Association (the
"Association") in connection with the Association's conversion from a
federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association, pursuant to its
Plan of Conversion. The Company commenced on August 24, 1995, a
Subscription Offering of its shares in connection with the conversion of
the Association (the "Conversion"). At October 12, 1995, the Conversion was
complete. The financial statements of the Association are presented on a
consolidated basis with those of the Company. In July, 1996, the
Association changed its name to Nelson County Federal Savings Bank (the
"Bank"). Effective April 2, 1997, the Bank has been approved as a
commercial state Bank and has changed its name to NCF Bank and Trust Co.
The consolidated financial statements included herein are for the Company,
the Bank and the Bank's wholly owned subsidiary, Nelson Service
Corporation. The impact of Nelson Service Corporation (NSC) on the
consolidated financial statements is insignificant. NSC has no operating
activity other than to own stock in the third-party service bureau.
2. Basis of Preparation
--------------------
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated statements of financial condition, consolidated statements of
income, consolidated statements of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted accounting
principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. The statement of income for the three and
nine month periods ended March 31, 1997 is not necessarily indicative of
the results which may be expected for the entire year.
3. Earnings Per Share
------------------
Earnings per share amounts for the three and nine month periods ended March
31, 1996 and 1997 are based on the average number of shares outstanding
throughout the period, except that the initial issue of common stock has
been given an effective date of October 12, 1995. Unallocated ESOP shares
are not considered as outstanding for this calculation.
7
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
4. New Accounting Standards
------------------------
In November, 1992, FASB issued SFAS No. 112 "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 requires recognition of the
obligations to provide postemployment benefits to former or inactive
employees after employment, but before retirement. The effective date for
this statement is for fiscal years beginning after December 15, 1993. At
March 31, 1997, the statement has no material impact on the consolidated
financial statements.
In November, 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans." This statement is effective for fiscal years beginning
after December 15, 1993. This statement changes the way employers report
transactions with a leveraged employee stock ownership plan ("ESOP"). It
requires, among other things, that: (1) for ESOP shares committed to be
released in a period to compensate employees directly, employers should
recognize compensation cost equal to the fair value of the shares committed
to be released, and (2) for earnings-per-share computations, ESOP shares
that have been committed to be released should be considered outstanding.
ESOP shares that have not been committed to be released should not be
considered outstanding.
In November, 1995, the FASB's Emerging Issues Task Force (EITF) issued EITF
D-47 concerning the accounting for special assessments of FDIC insurance
premiums for SAIF member institutions. This opinion requires recognition of
an accrual for the FDIC special assessment in the period when legislation
was enacted to provide for such assessment. This opinion does not allow the
charge to earnings to be recorded as an extraordinary item and should be
recorded as a component of operating income. See further discussion in note
6 as to the impact on these financial statements.
In October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement must be adopted on a prospective
basis by July 1, 1996. SFAS 123 encourages, but does not require, the
adoption of a fair value method of accounting for employee stock-based
compensation transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," but would be
required to disclose in a note to the financial statements proforma net
income and earnings per share as if the new method of accounting had been
applied. Management has elected to continue to account for employee
stock-based compensation transactions under APB Opinion No. 25 and will
disclose the proforma data required by SFAS 123. Management has determined
that SFAS 123 will not have a material effect on the consolidated financial
statements.
8
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
5. Plan of Conversion
------------------
On April 27, 1995, the Bank's Board of Directors formally approved a plan
("Plan") to convert from a federally-chartered mutual savings and loan to a
federally-chartered stock savings and loan which was approved by the Bank's
members on July 31, 1995. The Plan, which includes formation of a holding
company, was approved by the Office of Thrift Supervision (OTS) and
included the filing of a registration statement with the Securities and
Exchange Commission.
NCF Financial Corporation was formed on June 19, 1995, as the holding
company for Nelson County Federal Savings and Loan Association in
connection with Association's conversion from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings and
loan association ("Conversion").
On October 12, 1995, the Company issued and sold 770,500 shares of common
stock at $10 per share in its initial public offering, including 50,000
shares to the Bank's ESOP. The net proceeds to the Company after
recognizing approximately $374,000 of expenses and underwriting costs and
$500,000 of employee compensation plans were approximately $6.8 million.
The Company used $3.7 million of the net proceeds to purchase all of the
outstanding capital stock of the Bank and invested virtually all of the
remaining proceeds in short-term investments (after loaning $500,000 to the
Bank's ESOP).
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amounts required for the
liquidation account discussed below or the regulatory capital requirements
imposed by the OTS.
At the time of conversion, the Bank established a liquidation account in an
amount equal to its retained earnings as reflected in the latest
consolidated balance sheet used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their deposit accounts in the Bank after
conversion. In the event of a complete liquidation of the Bank (and only in
such an event), eligible depositors who continue to maintain accounts shall
be entitled to receive a distribution from the liquidation account before
any liquidation may be made with respect to common stock.
9
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
6. Deposit Insurance Premiums
--------------------------
Prior to September 30, 1996, the Bank paid an insurance premium to the
Federal Deposit Insurance Corporation (FDIC) equal to at least .23% of its
total deposits as a member of the Savings Association Insurance Fund
(SAIF). Effective January 1, 1996, the FDIC lowered the annual insurance
premium for members of the Bank Insurance Fund (BIF) to $2,000 minimum. The
disparity in insurance premiums between BIF and SAIF created a competitive
disadvantage for SAIF members by enabling BIF members to attract and retain
deposits at a lower effective cost than that possible for the Bank and put
competitive pressure on the Bank to raise its interest rates paid on
deposits, thus increasing its cost of funds and possibly reducing net
interest income. The resultant competitive disadvantage could have resulted
in the Bank losing deposits to BIF members who had a lower cost of funds
and were therefore able to pay higher rates of interest on deposits.
Although the Bank had other sources of funds, these other sources may have
had higher costs than those of deposits.
In order to allow SAIF members to enjoy the same premium levels as BIF
members, legislation was enacted on September 30, 1996. This legislation
required a special one-time premium assessment of 65.7 cents per $100 of
deposits. Under FASB EITF D-47, the Company has incurred an assessment of
approximately $153,000 and has recorded this charge to normal operating
expense during the quarter ended September 30, 1996. This charge to
earnings was offset by approximately $52,000 in tax benefits.
Beginning January 1, 1997, deposit insurance assessments for SAIF members
were reduced to approximately .064% of deposits on an annual basis that is
expected to continue through the end of 1999. During this same period, BIF
members are expected to be assessed approximately .013% of deposits.
Thereafter, assessments for BIF and SAIF members should be the same and
SAIF and BIF may be merged. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes,
beginning January 1, 1997, the rate of deposit insurance assessed the Bank
declined by approximately 70%. In addition, there is certain legislation
that allows for the conversion of the thrift charter into a bank charter.
The tax impact of elimination of the thrift charter could have resulted in
recapture of existing bad debt reserves for income tax purposes in excess
of those allowed for banks. However, this potential tax implication has
generally been eliminated. As a result of this legislation, the Bank has
filed applications to obtain a commercial state bank charter. Effective
April 2, 1997, the Bank has received final approval and will operate under
a Bank charter for the quarter ended June 30, 1997.
10
<PAGE>
NCF FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
7. Employee Stock Ownership Plan (ESOP)
------------------------------------
The Bank has established for eligible employees an Employee Stock Ownership
Plan ("ESOP"). The ESOP borrowed $500,000 from the Holding Company and
purchased 50,000 common shares issued in the offering. The Bank is expected
to make scheduled cash contributions to the ESOP sufficient to service the
amount borrowed. The $500,000 in stock issued by the Holding Company is
reflected in the accompanying consolidated financial statements as a charge
to unearned compensation and a credit to common stock and paid-in capital.
In accordance with GAAP, the unpaid balance of the ESOP loan has been
eliminated in consolidation and the unamortized balance of unearned
compensation is shown as a deduction of stockholders' equity.
For the three and nine months ending March 31, 1997, compensation from the
ESOP of approximately $17,717 and $51,579, respectively, was expensed.
Compensation is recognized at the average fair value of the ratably
released shares during the accounting period as the employees performed
services. At March 31, 1997, the ESOP had approximately 7,500 allocated
shares and 42,500 unallocated shares. The fair value of the unallocated
shares at March 31, 1997, was approximately $610,938.
The Plan administrators will determine whether dividends on allocated and
unallocated shares will be used for debt service. Any allocated dividends
used will be replaced with common stock of equal value. For the purpose of
computing earnings per share, all ESOP shares committed to be released have
been considered outstanding.
11
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist in understanding the
financial condition and the results of operations of the Company. References to
the "Company" include NCF Financial Corporation and/or Nelson County Federal
Savings Bank, as appropriate.
Comparison of Financial Condition at June 30, 1996 and March 31, 1997
Total consolidated assets of the Company at March 31, 1997 have decreased by
approximately $548,000 since June 30, 1996. Total consolidated assets were
approximately $34.4 million and $34.9 million at March 31, 1997 and June 30,
1996, respectively.
The primary change to the balance sheet are the Company's capital expansion
plans consisting of the construction of a new main office location. Construction
in progress to date equals $311,000 which is reflected in the increase to
Premises and Equipment. The Company also experienced some prepayment of mortgage
loans which resulted in a decline in Loans Receivable of approximately $905,000
from June 30, 1996 to March 31, 1997.
There was a decrease in deposits of approximately $650,000 or 2.8% from
$22,741,000 at June 30, 1996 to $22,091,000 at March 31, 1997. Although this is
only a small decline due to normal customer balance maintenance, management is
looking at expanding customer account services to provide future deposit growth.
Comparison of Results of Operations for the Three Months Ended March 31, 1996
and 1997 and the Nine Months Ended March 31, 1996 and 1997
Net Income. Net income increased $33,000 from $84,000 for the three months ended
March 31, 1996 to $117,000 for the three months ended March 31, 1997 primarily
because of decreases in non-interest expense. Net income decreased $57,000 for
the nine months ended March 31, 1997 when compared to the same period for March
31, 1996. However, this decrease for the nine month period is primarily
attributed to the payment of the FDIC special assessment of approximately
$101,000 (net of tax). Without this special assessment accrual, net income would
have increased by approximately $44,000 or 14.01% for the nine month period as
compared to last year. Net income of $257,000 for the nine months ended March
31, 1997 resulted in earnings per share of .33 cents.
Net Interest Income. Net interest income decreased $35,000 or 9.4% from $373,000
for the three months ended March 31, 1996 to $338,000 for the three months ended
March 31, 1997. This was primarily attributable to certain loans being placed on
non-accrual status during the three months ended March 31, 1997. Net interest
income increased $90,000 or 8.81% from $1,021,000 for the nine months ended
March 31, 1996 to $1,111,000 for the nine months ended March 31, 1997. The
improvement in net interest income primarily reflects an increase in average
interest-earning assets over average interest-bearing liabilities for the Bank
of $1.8 million or 18.4% for the nine months ended March 31, 1997 as compared to
1996, offset by a decrease in the interest rate spread from 2.99 for the nine
months ended March 31, 1996 to 2.75% for the nine months ended March 31, 1997.
One of the factors contributing to the decrease in the interest rate spread is
the placement of certain loans on non-accrual status. These loans are discussed
under "Interest Income".
12
<PAGE>
Interest Income. Total interest income decreased $49,000 from $641,000 for the
three months ended March 31, 1996 to $592,000 for the three months ended March
31, 1997. Interest on loans decreased $58,000 primarily due to certain loans
being placed on non-accrual status during the quarter. As previously disclosed
in the most recent Form 10-KSB, the Company originates speculative loans to
residential builders who have established business relationships with the
Company. During the quarter ended March 31, 1997, the Company learned that two
such builders had experienced financial difficulties as a result of disputed
divorce settlements that eventually evolved into bankruptcy actions. Loans to
these builders totaled $711,000 at March 31, 1997 and include 6 loans for the
construction of, or for partially and fully completed, single family homes, all
within one subdivision. After its review of these construction loans and the
circumstances affecting future completion and sale of the collateral securing
these loans, the Company has ceased to accrue interest income on these loans,
but does not believe that it will ultimately experience any loss on these loans.
However, while these loans remain on non-accrual status, interest income will be
negatively impacted. Subsequent to March 31, 1997, the Company is now carrying
four of these properties in real estate owned and two of the properties are
going to be sold at an auction in the near future.
This statement of beliefs concerning the repayment of these loans and possible
loan losses is a forward looking statement. The Private Securities Litigation
Reform Act of 1995 (the "Act") provides protection to the Company in making
certain forward looking statements that are accompanied by meaningful cautionary
statements that identify important factors that could cause actual results to
differ materially from the forward looking statement. Construction lending is
generally considered to involve a higher degree of credit risk than long-term
financing of residential properties. The Company's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, the Company may be compelled to advance additional funds to complete
the development. Furthermore, if the estimate of value proves to be inaccurate,
the Company may be confronted, at or prior to the maturity of the loan, with a
property with a value that is insufficient to assure full repayment. Further,
for speculative loans originated to builders, the ability to sell completed
dwelling units will depend, among other things, on demand, pricing the
availability of comparable properties, and economic conditions.
Total interest income increased $25,000 from $1,873,000 for the nine months
ended March 31, 1996 to $1,898,000 for the nine months ended March 31, 1997.
Interest on loans decreased $18,000 or 1.1%. An increase of $15,000 was
attributable to a .69% rise in the average balance of loans outstanding which
was offset by a $33,000 decrease attributable to the average yield on the loan
portfolio decreasing from 8.02% during the nine months ended March 31, 1996 to
7.81% during the nine months ended March 31, 1997.
Interest income on mortgage-backed securities decreased by $1,000 for the three
months ended March 31, 1997 when compared to the same period for March 31, 1996.
Interest income on mortgage-backed securities decreased $4,000 from $16,000 for
the nine months ended March 31, 1996 to $12,000 for the nine months ended March
31, 1997. This decrease was solely due to the principal repayments on the
existing portfolio.
13
<PAGE>
Interest income from other interest-earning assets increased $10,000 for the
three months ended March 31, 1997 compared to the three months ended March 31,
1996. Interest income from other interest-earning assets increased $47,000 from
$184,000 for the nine months ended March 31, 1996 to $231,000 for the nine
months ended March 31, 1997.The average balance of other interest-earning assets
for the Bank increased $663,000 or 13.6% for the nine months ended March 31,
1997. In addition, the average yield continued to increase for the nine months
ended March 31, 1997 from 5.42% to 5.54% which in combination with the volume
increase resulted in the overall increase.
Interest Expense. Interest expense decreased $14,000 from $268,000 for the three
months ended March 31, 1996 to $254,000 for the three months ended March 31,
1997. Interest expense decreased $65,000 from $852,000 for the nine months ended
March 31, 1996 to $787,000 for the nine months ended March 31, 1997. The
decrease for the nine months ended March 31, 1997 was the result of a $18,000
decrease in interest on advances that were outstanding in 1995 but not in 1996.
Between the nine months ended March 31, 1996 and nine months ended March 31,
1997, the average balance of deposits decreased by $762,000, and average rates
decreased from 4.79% to 4.70%. Both of these factors attributed to the decrease
in interest expense.
Provision for Loan Losses. The provision for loan losses for the three months
and nine months ended March 31, 1996 was $4,000 and $12,000, respectively, and
was the same for the three months and nine months ended March 31, 1997.
Historically, management has emphasized the Company's loss experience over other
factors in establishing provisions for loan losses. However, management has
reviewed the allowance for loan losses in relation to the Company's composition
of its loan portfolio and observations of the general economic climate and loan
loss expectations. See "Interest Income" for a discussion of certain loans
placed on non-accrual status during the quarter ended March 31, 1997.
Non-Interest Income. Fee income and other service charges of $4,000 and $16,000,
respectively, for the three months and nine months ended March 31, 1997 remained
relatively stable when compared to the three months and nine months ended March
31, 1996.
Non-Interest Expense. Non-interest expense decreased by $79,000 from $251,000
for the three months ended March 31, 1996 to $172,000 for the three months ended
March 31, 1997. This decrease was due to the implementation of the Supplemental
Executive Retirement Plan (SERP) during the three months ended March 31, 1996 in
which the Bank incurred a charge to earnings of $95,000. Non-interest expense
increased by $179,000 from $548,000 for the nine months ending March 31, 1996 to
$727,000 for the nine months ended March 31, 1997. These increases are the
direct result of the special one-time FDIC assessment accrual, additional
operating expense as a public company and the effect of increased compensation
from the recognition of allocated ESOP shares at fair market value. During the
nine month period ended March 31, 1997, the Company recognized a $153,000
expense accrual for the FDIC special assessment. During the nine month period
ending March 31, 1997, the Company recognized $52,000 of compensation expense
related to the Employee Stock Ownership Plan compared to $32,000 of compensation
expense for the nine months ended March 31, 1996. Other non-interest expense
items remained relatively stable with minor percentage changes.
14
<PAGE>
Income Taxes. The effective tax rate for the three months ending March 31, 1996
and 1997 and the nine months ending March 31, 1996 and 1997 was approximately
34%. Since there are no state income taxes imposed on the Bank, the effective
tax rate remained at approximately the federal statutory percentage.
Liquidity and Capital Resources. The Company's primary sources of funds are
deposits and proceeds from principal and interest payments on loans and
investment securities. While maturities and scheduled amortization of loans and
investment securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Company's primary investing activity is loan
originations. The Company maintains liquidity levels adequate to fund loan
commitments, investment opportunities, deposit withdrawals and other financial
commitments. At March 31, 1997, the Bank has a commitment for the construction
of a new bank location with an anticipated cost of approximately $500,000 of
which approximately $311,000 has been funded. The Bank received approval to
convert its charter to that of a commercial bank chartered by the Commonwealth
of Kentucky effective April 2, 1997. The Company was approved by the Board of
Governors of the Federal Reserve System ("FRB") for authority to act as a bank
holding company. Following this conversion, the Bank and the Company became
subject to capital and other requirements imposed by these regulators as well as
by the FDIC. During the quarter under report, the Company was primarily
regulated by the Office of Thrift Supervision ("OTS") and was not required to
maintain any capital levels. Prior to the conversion, the Bank was subject to
regulation primarily by the Office of Thrift Supervision and the FDIC. Following
these events, the Company became subject to regulation primarily by the FRB and,
to a lesser extent, the FDIC and the Bank became subject to regulation primarily
by the Commonwealth of Kentucky and the FDIC. However, it is not expected that
the change in regulators or the imposition of new capital requirements will have
a material adverse impact on the liquidity or capital resources of the Company
or the Bank. Management also does not believe, based on its discussion with
these regulators, that the change in regulators will have a material adverse
impact on the operations of the Company or the Bank. Management has no knowledge
of any other trends, events or uncertainties that will have or are reasonably
likely to have material effects on the liquidity, capital resources or
operations of the Company. Further, management is not aware of any current
recommendations by the regulatory authorities which, if implemented, would have
such an effect.
15
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time, the Company and any subsidiaries may be a party to
various legal proceedings incident to its or their business. At March
31, 1997, there were no legal proceedings to which the Company or any
subsidiary was a party, or to which of any of their property was
subject, which were expected by management to result in a material
loss.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
-------------------------------
(a) Exhbibits: Exhibit 27 (financial data schedule)
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
NCF FINANCIAL CORPORATION
Date: May 12, 1997 By /s/ Dan R. Biggs
------------ -------------------------------
Dan R. Biggs
(Vice President and Principal
Financial Officer and duly
authorized representative)
17
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