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.
The Company had $1.5 million in loans classified as substandard for regulatory purposes at March 31, 2006. On a percentage basis, classified loans dropped from 1.3% at June 30, 2005 to 1.0% of total loans at March 31, 2006. Substandard assets included 31 single-family home loans with loan-to-value ratios (percentage of loan balance to the original or an updated appraisal) ranging from 5% to 87%; 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 72%; and two single-family homes acquired through foreclosure (with a combined fair value of $51,000).
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2005 to March 31, 2006 (continued)
Non-Performing Assets (continued)
At March 31, 2006, no loans were classified as doubtful or loss for regulatory purposes.
Liabilities: At March 31, 2006, the Company’s liabilities totaled $197.7 million, a decrease of $10.3 million, or 5.0%, from total liabilities at June 30, 2005. The decrease in liabilities was attributed primarily to an $11.1 million or 7.2% decrease in deposits, which declined to $143.9 million at March 31, 2006. Deposits have decreased as market interest rates have increased. The Company at times has not met market rates if the resulting deposits cannot be invested profitably in interest-earning assets.
Shareholders’ Equity: At March 31, 2006, the Company’s shareholders’ equity totaled $64.6 million, a decrease of $1.4 million or 2.1% from the June 30, 2005 level. The primary reason for the decrease in shareholders’ equity is the acquisition of $1.5 million of shares to fulfill the obligations of the Company’s Equity Incentive Plan, which was approved at the Company’s Annual Meeting held November 15, 2005.
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2006 and 2005
General
Net earnings totaled $1.3 million for the nine months ended March 31, 2006, an increase of $231,000, or 22.4% from net earnings for the same period in 2005. The increase was primarily attributable to a $1.9 million increase in net interest income, coupled with an increase of $152,000 in other income, partially offset by an increase of $1.8 million in general, administrative and other expense and an increase of $56,000 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 $4.6 million, or 196.4%, for the nine months ended March 31, 2006, compared to the 2005 period. This increase was due primarily to a $109.9 million, or 258.2%, increase in the average loan portfolio balance outstanding period to period. It should be noted, however, that the loans acquired in the Frankfort First transaction were mostly adjustable rate mortgages, which typically bear a lower interest rate than fixed rate mortgages, such as the ones that entirely comprised the First Federal of Hazard portfolio prior to March 1, 2005. Consequently, there was a 125 basis point decrease in the weighted-average yield, from 7.27% to 6.02% for the 2006 nine-month period. Due to the vast differences in the volume and type of loans being compared between the two periods, management does not believe it is appropriate to consider this decrease a trend. Further, changes in the average yield on loans in future periods will be primarily driven by market forces that cannot be predicted.
Income on other interest-earning assets increased by $41,000, or 1.5%, due primarily to a 214 basis point increase in the weighted-average yield, to 3.82% for the 2006 period, which more than offset a $11.3 million, or 10.8%, decrease in the average balance of the related assets outstanding period to period. As set forth above, interest income was favorably influenced in the 2006 period by the addition of an average of $98.6 million of interest-earning assets. Approximately $122.0 million in interest-earning assets were acquired in the Frankfort First transaction.
Interest expense on deposits increased by $1.5 million, or 94.8%, for the nine months ended March 31, 2006, compared to the same period in 2005. This increase was due primarily to a $42.2 million, or 38.4%, 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.
12
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2006 and 2005 (continued)
Net Interest Income (continued)
The weighted average cost of deposits was 2.62% for the 2006 period and 1.86% for the 2005 period. Interest expense on borrowings increased by $1.2 million, or 327.4%, 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 50 basis points to 4.24% for the 2006 period.
As a result of the foregoing changes in interest income and interest expense, net interest income increased by $1.9 million, or 62.3%, to a total of $5.0 million for the nine months ended March 31, 2006. Net interest margin decreased by 7 basis points to 2.69% for the nine months ended March 31, 2006, 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 $32,000 during the nine months ended March 31, 2006, a decrease of $8,000, or 20.0%, from the comparable nine-month period in 2005. The 2006 provision was influenced by the reduction in nonperforming loans, offset by growth in the loan portfolio over the period. 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.
Other Income
Other income totaled $186,000 for the nine months ended March 31, 2006, an increase of $152,000 from the same period in 2005. The increase in the 2006 period is attributable, among other things, to $60,000 of earnings on bank-owned life insurance and $23,000 in gain on sale of loans. These activities were not present before the acquisition of Frankfort First.
General, Administrative and Other Expense
General, administrative and other expense totaled $3.3 million for the nine months ended March 31, 2006, an increase of $1.8 million, or 118.2%, compared to the same period in 2005. 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 $2.2 million for the nine months ended March 31, 2006, an increase of $1.2 million, or 115.0%, from the same period in 2005. Such increase was due primarily to $769,000 in expense attributed to Frankfort First Federal combination, $93,000 attributed to expense of the Company’s ESOP plan, $166,000 attributable to awards made under the Equity Incentive Plan and normal salary increases. Generally, other categories of operating expenses also experienced increases associated with the growth in operations due to the acquisition of Frankfort First.
Federal Income Taxes
The provision for federal income taxes totaled $570,000 for the nine months ended March 31, 2006, an increase of $56,000, or 10.9%, compared to the same period in 2005. This increase was due to an increase in earnings before taxes of $287,000, or 18.6%. The effective tax rates were 31.1% and 33.2% for the nine-month periods ended March 31, 2006 and 2005, respectively.
13
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2006 and 2005 (continued)
Federal Income Taxes (continued)
The difference between the 31.1% effective tax rate in 2006 and the 34% statutory tax rate is due primarily to tax-exempt earnings on bank-owned life insurance.
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2006 and 2005
General
Net earnings totaled $324,000 for the three months ended March 31, 2006, a decrease of $61,000, or 15.8% from the $385,000 in net earnings for the same period in 2005. The decrease was primarily attributable to a $499,000 increase in general, administrative and other expense, partially offset by an increase of $349,000 in net interest income, an increase of $41,000 in other income, and a decrease of $44,000 in the provision for federal income taxes. As previously stated, the period to period increase in levels of operating income and expense are primarily attributable to the acquisition of Frankfort First in March 2005.
Net Interest Income
Interest income on loans increased by $1.2 million, or 101.7%, for the three months ended March 31, 2006, compared to the 2005 period. This increase was due primarily to an $81.6 million, or 114.1%, increase in the average loan portfolio balance outstanding period to period offset by a 37 basis point decrease in the weighted-average yield, to 6.01% for the 2006 three-month period. Income on other interest-earning assets decreased by $74,000, or 7.8%, due primarily to a $19.8 million or 18.1% decrease in the average balance of the related assets outstanding period to period despite a 214 basis point increase in the weighted-average yield, to 3.91% for the 2006 period. As set forth above, interest income was favorably influenced in the 2006 quarter by the addition of an average of $61.9 million of interest-earning assets, primarily a result of the acquisition of Frankfort First.
Interest expense on deposits increased by $445,000, or 75.3%, for the three months ended March 31, 2006, compared to the same period in 2005. This increase was due primarily to a $17.5 million, or 13.4%, 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 2.80% for 2006 period and 1.81% for the 2005 period. Interest expense on borrowings increased by $293,000, or 119.6%, 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 122 basis points to 4.14% for the 2006 period.
As a result of the foregoing changes in interest income and interest expense, net interest income increased by $349,000, or 27.8%, to a total of $1.6 million for the three months ended March 31, 2006. Net interest margin decreased by 13 basis points to 2.64% for the three months ended March 31, 2006, 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.
14
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 March 31, 2006 and 2005 (continued)
Provision for Losses on Loans (continued)
The Company recorded a provision for losses on loans totaling $8,000 during the three months ended March 31, 2006, a decrease of $4,000, or 33.3%, from the comparable three-month period in 2005. The 2006 provision was predicated on the factors set forth above. 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.
Other Income
Other income totaled $64,000 for the three months ended March 31, 2006, an increase of $41,000 from the same period in 2005. The increase in the 2006 period is attributable, among other things, to $20,000 of earnings on bank-owned life insurance. This activity was not present before the acquisition of Frankfort First.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.2 million for the three months ended March 31, 2006, an increase of $499,000, or 71.2%, compared to the same period in 2005. 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 $821,000 for the three months ended March 31, 2006, an increase of $328,000, or 66.5%, from the same period in 2005. Such increase was due primarily to $100,000 in expense attributed to Frankfort First Federal combination, approximately $51,000 attributed to expense of the Company’s ESOP plan, $107,000 attributable to awards made under the Equity Incentive Plan and normal salary increases. 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 $135,000 for the three months ended March 31, 2006, an decrease of $44,000, or 24.6%, compared to the same period in 2005. The effective tax rates were 29.4% and 31.7% for the three-month periods ended March 31, 2006 and 2005, 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 Company’s Form 10-K filed September 28, 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 March 31, 2006, 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 1A. | Risk Factors |
| |
| Not applicable. |
| |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| |
| (b) | The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended March 31, 2006. |
| Period | | Total
# of shares
purchased | | | Average
price paid
per share
(incl commissions) | | Total # of
shares purchased
as part of publicly
announced plans
or programs | | Maximum # of
shares
that may yet be
purchased under
the plans or
programs | |
|
| |
| |
| |
| |
| |
| January 1-31, 2006 | | | 18,161 | | $ | 10.85 | | | 96,961 | | | 71,525 | |
| February 1-28, 2006 | | | 32,100 | | $ | 11.05 | | | 129,061 | | | 39,425 | |
| March 1-31, 2006 | | | 11,885 | | $ | 11.11 | | | 140,946 | | | 27,540 | |
| | | | | | | | | | | | | | |
|
|
| On December 14, 2005, the Company announced a program to repurchase up to 168,486 shares in order to fund awards of restricted stock under the Company’s 2005 Incentive Equity Plan. |
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 |
16
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: | May 15, 2006 | | By: | /s/ Tony D. Whitaker |
| | | |
|
| | | | Tony D. Whitaker |
| | | | Chairman of the Board and Chief Executive Officer |
| | | | |
| | | | |
Date: | May 15, 2006 | | By: | /s/ R. Clay Hulette |
| | | |
|
| | | | R. Clay Hulette |
| | | | Vice President and Chief Financial Officer |
17
