During December 2004, the Financial Accounting Standards Board (the “FASB”) issued a revision to Statement of Financial Accounting Standards No. 123 (“SFAS 123(R)”), “Share-Based Payment,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based transactions. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with limited exceptions. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award – the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met.
Initially, the cost of employee services received in exchange for an award of liability instruments will be measured based on current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models, adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
Excess tax benefits, as defined by SFAS 123(R) will be recognized as an addition to additional paid-in capital. Cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense, unless there are excess tax benefits from previous awards remaining in additional paid-in capital to which it can be offset.
Compensation cost is required to be recognized in the first interim or annual period that begins after June 15, 2005, or July 1, 2005 as to the Company. Although the Company currently has no stock option plans or other instruments that are subject to the provisions of SFAS No. 123(R), shareholders are scheduled to vote on the adoption of the Kentucky First Federal Bancorp 2005 Equity Incentive Plan at the Annual Meeting of Shareholders on November 15, 2005.
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to Kentucky First Federal Bancorp or its management are intended to identify such forward looking statements. Kentucky First Federal Bancorp’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company’s market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.
Discussion of Financial Condition Changes from June 30, 2005 to September 30, 2005
Assets: At September 30, 2005, the Company’s assets totaled $271.7 million, a decrease of $2.2 million, or 0.8%, from total assets at June 30, 2005. The primary reason for the decrease in assets is the decrease of $1.0 million, or 4.7%, of mortgage-backed securities classified as held to maturity, which decreased to $20.3 million at September 30, 2005. Also contributing to the decrease in total assets was a decrease in cash and cash equivalents which decreased $571,000 or 6.8% to $7.8 million at September 30, 2005.
Non-Performing Assets: At September 30, 2005, the Company had approximately $1.9 million (1.2% of net loans) in loans 90 days or more past due, as compared to $1.7 million at June 30, 2005. At September 30, 2005, the Company’s allowance for loan losses of $593,000 represented 30.8% of nonperforming loans and 0.4% of total loans.
The Company had $2.0 million in loans classified as substandard for regulatory purposes at September 30, 2005. On a percentage basis, classified loans remained consistent at 1.3% of total loans at September 30, 2005 and June 30, 2005. Substandard assets included 41 single-family home loans with loan-to-value ratios (percentage of loan balance to the original or an updated appraisal) ranging from 5% to 95%; one home equity line of credit secured by a single-family home which, combined with the first mortgage (which was not delinquent) had a total loan-to-value ratio of 86%; and two single-family homes, which comprise Real Estate Owned (which had a fair value of $60,000).
At September 30, 2005, no loans were classified as Doubtful or Loss.
Liabilities: At September 30, 2005, the Company’s liabilities totaled $205.8 million, a decrease of $2.2 million, or 1.1%, from total liabilities at June 30, 2005. The decrease in liabilities was attributed primarily to a $2.2 million or 1.4% decrease in deposits, which declined to $152.9 million at September 30, 2005, and a $356,000, or 0.7%, decrease in Advances from the Federal Home Loan Bank, which declined to $50.6 million at September 30, 2005.
Shareholders’ Equity: At June 30, 2005 and September 30, 2005, the Company’s shareholders’ equity totaled $65.9 million.
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Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2005 and 2004
General
Net earnings totaled $491,000 for the three months ended September 30, 2005, an increase of $181,000, or 58.4% from the $310,000 in net earnings for the same period in 2004. The increase was primarily attributable to an $800,000 increase in net interest income offset by an increase of $623,000 in general, administrative and other expense and an increase of $51,000 in the provision for federal income taxes. The period to period increase in operating levels of income and expense are primarily attributable to the acquisition of Frankfort First.
Net Interest Income
Interest income on loans increased by $1.7 million, or 281.2%, for the three months ended September 30, 2005, compared to the 2004 period. This increase was due primarily to a $117.8 million, or 350.2%, increase in the average portfolio balance outstanding period to period offset by an 81 basis point decrease in the weighted-average yield, to 6.04% for the 2005 three-month period. Interest income on investment securities, mortgage-backed securities and interest-bearing deposits increased by $88,000, or 10.6%, due primarily to a 216 basis point increase in the weighted-average yield, to 2.11% for the 2005 period despite a $5.0 million, or 4.8%, decrease in the average balance of the related assets outstanding period to period. As set forth above, interest income was favorably influenced in the 2005 quarter by the addition of $112.8 million of interest-earning assets.
Interest expense on deposits increased by $466,000, or 95.7%, for the three months ended September 30, 2005, compared to the same period in 2004. This increase was due primarily to a $58.7 million, or 59.1%, increase in the average balance of deposits outstanding period to period, generally reflecting the assumption of $72.5 million of average deposits in the Frankfort First combination. The weighted average cost of deposits was 2.41% for 2005 period and 1.95% for the 2004 period. Interest expense on borrowings increased by $509,000, or 759.7%, due primarily to the assumption of $42.9 million of average FHLB advances in the Frankfort First combination. The weighted average cost of borrowings increased 129 basis points to 4.25% for the 2005 period.
As a result of the foregoing changes in interest income and interest expense, net interest income increased by $800,000, or 91.0%, to a total of $1.7 million for the three months ended September 30, 2005. Net interest margin increased by 11 basis points to 2.67% for the three months ended September 30, 2005, compared to the prior year period.
Provision for Losses on Loans
The Company charges a provision for losses on loans to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Banks’ market areas, and other factors related to the collectibility of the Banks’ loan portfolio. The Company recorded a provision for losses on loans totaling $14,000 during the three months ended September 30, 2005, a decrease of $1,000, or 6.7%, from the comparable three-month period in 2004. There can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming loans or that the allowance will be adequate to cover losses on nonperforming assets in the future, which could adversely affect the Company’s results of operations.
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Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended September 30, 2005 and 2004 (continued)
Other Income
Other income totaled $59,000 for the three months ended September 30, 2005, an increase of $54,000, or 1080.0%, from the same period in 2004. The increase in the 2005 quarter is generally attributable to $20,000 of earnings on bank-owned life insurance and $17,000 in gain on sale of loans.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.0 million for the three months ended September 30, 2005, an increase of $623,000, or 156.9%, compared to the same period in 2004. This increase was due primarily to effects of the Frankfort First combination and the costs of operating a public company. Employee compensation and benefits totaled $656,000 for the three months ended September 30, 2005, an increase of $392,000, or 148.5%, from the same period in 2004. Such increase was due primarily to normal merit increases, $289,000 in expense attributed to Frankfort First Federal combination and $46,000 attributed to expense of the Company’s ESOP plan. Generally, other categories of operating expenses also experienced increases associated with the growth in operations period to period.
Federal Income Taxes
The provision for federal income taxes totaled $213,000 for the three months ended September 30, 2005, an increase of $51,000, or 31.5%, compared to the same period in 2004. This increase was due to an increase in earnings before taxes of $232,000, or 49.2%. The effective tax rates were 30.3% and 34.3% for the three-month periods ended September 30, 2005 and 2004, respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company’s market risk since the disclosure included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management” in the Association’s Form S-1 filing dated January 10, 2005.
ITEM 4: Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. During the quarterly period ended September 30, 2005, there were no changes in the Company’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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Kentucky First Federal Bancorp
PART II
ITEM 1. | | Legal Proceedings |
| | |
| | Not applicable. |
| | |
ITEM 2. | | Unregistered Sales of Equity Securities and Use of Proceeds |
| | |
| | Not applicable. |
| | |
ITEM 3. | | Defaults Upon Senior Securities |
| | |
| | Not applicable. |
| | |
ITEM 4. | | Submission of Matters to a Vote of Security Holders |
| | |
| | None. |
| | |
ITEM 5. | | Other Information |
| | |
| | None. |
| | |
ITEM 6. | | Exhibits |
| | |
| | 31.1 | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 31.2 | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32.1 | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | 32.2 | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Kentucky First Federal Bancorp
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.
| KENTUCKY FIRST FEDERAL BANCORP |
| |
| |
Date: November 14, 2005 | By: | /s/ Tony D. Whitaker |
| |
|
| | Tony D. Whitaker |
| | Chairman of the Board and Chief Executive Officer |
| | |
| | |
Date: November 14, 2005 | By: | /s/ R. Clay Hulette |
| |
|
| | R. Clay Hulette |
| | Vice President and Chief Financial Officer |
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