The Company holds several life insurance policies, however, the policies do not contain any provisions that would restrict or reduce the cash surrender value of the policies. The consensus in EITF Issue 06-5 is effective for fiscal years beginning after December 15, 2006, or July 1, 2007 as to the Company. The application of this guidance is not expected to have a material adverse effect on the Company’s financial position or results of operation.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including Amendment of FASB Statement No. 115.” This Statement allows companies the choice to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or July 1, 2008, as to the Company, and interim periods within that fiscal year. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements.” The Company is currently evaluating the impact the adoption of SFAS No. 159 will have on the financial statements, but does not presently believe it will have a material adverse effect on financial position or results of operations.
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, 2006 to March 31, 2007
Assets: At March 31, 2007, the Company’s assets totaled $267.2 million, an increase of $5.3 million, or 2.0%, from total assets at June 30, 2006. The primary reason for the growth in assets was an increase of $9.0 million, or 5.8%, in loans receivable, which increased to $165.1 million at March 31, 2007. The increase in loans receivable was composed primarily of variable rate real estate mortgage loans and was primarily funded by an increase in short-term Federal Home Loan Bank advances. It is anticipated that such advances will be repaid as the Company’s short-term, lower-yielding investment securities mature over the next three years. Management has emphasized the origination and retention of adjustable rate mortgage loans and, as the ability to make such loans changes with market conditions, believes it is prudent to continue to originate such loans with the funding that is available.
Cash and cash equivalents: Cash and cash equivalents decreased by $526,000 or 22.9%. It is the Company’s preference to minimize the level of cash and cash equivalents and invest liquidity into higher-yielding assets, when possible. Cash was drawn down to partially fund the overall increase in loans which is discussed more fully under “Loans.”
Loans: Loans receivable, net, increased to $164.4 million at March 31, 2007, an increase of $9.0 million or 5.8% compared to the June 30, 2006, level. Management believes that the successful redeployment of the Company’s funds from lower-yielding cash, cash equivalents and investment securities to higher-yielding mortgage loans is important for the long-term success of the Company. The Company will continue to emphasize loan originations to the extent that it is profitable and prudent.
Non-Performing Assets: At March 31, 2007, the Company had approximately $895,000, or 0.5% of net loans, in loans 90 days or more past due, compared to $1.4 million, or 0.9%, of net loans at June 30, 2006. At March 31, 2007, the Company’s allowance for loan losses of $720,000 represented 80.4% of nonperforming loans and 0.4% of total loans.
The Company had $1.7 million in loans classified as substandard for regulatory purposes at March 31, 2007. On a percentage basis, classified loans declined from 1.1% of net loans at June 30, 2006 to 1.0% at March 31, 2007. Substandard assets included 28 single-family home loans with loan-to-value ratios (percentage of loan balance to the original or an updated appraisal) ranging from 10% to approximately 100%; two mortgage loans (first and second) secured by a duplex (with an overall 70% loan-to-value ratio), and three single-family homes acquired through foreclosure. The real estate acquired through foreclosure had a recorded investment of $213,000 and an estimated fair value of $248,000. Subsequent to March 31, 2007, the Company sold one piece of real estate acquired through forclosure and originated a loan to a new borrower, with no material gain or loss realized on the transaction.
16
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, 2006 to March 31, 2007 (continued)
Non-Performing Assets (continued)
At March 31, 2007, the Company had $845,000 in loans classified as special mention. This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. At March 31, 2007, no loans were classified as doubtful or loss for regulatory purposes.
Investment and Mortgage-Backed Securities: At March 31, 2007, the Company’s investment and mortgage-backed securities had decreased $3.7 million or 4.8% to $73.7 million. This decrease was due primarily to the maturity of $2.1 million of investment securities and repayment of principal on mortgage-backed securities which were partially offset by a net increase of $388,000 in the market value of investments and mortgage-backed securities held as available for sale. Approximately $42.9 million of the Company’s investment and agency securities are scheduled to mature within the next three years with another $5.0 million are scheduled to mature within five years.
Liabilities: At March 31, 2007, the Company’s liabilities totaled $204.9 million, an increase of $6.8 million, or 3.4%, from total liabilities at June 30, 2006. The increase in liabilities was attributed primarily to an $8.8 million, or 16.0%, increase in Federal Home Loan Bank advances, which increased to $63.6 million at March 31, 2007. Of these borrowings, approximately $22.0 million were short-term advances which reprice monthly. Such advances were utilized to fund the increase in loans during the period as well as offset a reduction of $2.1 million, or 1.5% in deposits, which totaled $139.1 million at March 31, 2007. Deposits have decreased as market interest rates have increased. At times, the Company has chosen not to meet market rates if the deposits cannot be invested profitably in interest-earning assets. As stated previously, management anticipates reducing the level of Federal Home Loan Bank advances as lower-yielding investment securities mature over the next three years.
Shareholders’ Equity: At March 31, 2007, the Company’s shareholders’ equity totaled $62.3 million, a decrease of $1.6 million or 2.6% from the June 30, 2006 total. The primary reason for the decrease in shareholders’ equity was the acquisition of $1.9 million of treasury shares at an average cost of $10.31 per share.
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2007 and 2006
General
Net earnings totaled $649,000 for the nine months ended March 31, 2007, a decrease of $615,000, or 48.7% from the $1.3 million in net earnings for the same period in 2006. The decrease was primarily attributable to a decline in net interest income.
Net Interest Income
Net interest income declined $885,000 or 17.8% to $4.1 million for the nine month period ended March 31, 2007, compared to the 2006 period. The decrease in net interest income was due primarily to increased cost of funds. Although interest income increased by $88,000, or 0.9%, to $9.7 million for the nine month period ended March 31, 2007, interest expense increased $973,000 or 21.1% to $5.6 million for the same period. The increase in interest expense was attributable to increased costs for both deposits and advances.
17
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, 2007 and 2006 (continued)
Net Interest Income (continued)
Interest expense on deposits increased $438,000 or 14.7% to $3.4 million, and interest expense on advances increased $535,000, or 33.0%, to $2.2 million for the nine-month 2007 period compared to the prior nine month period. The increase in interest expense on deposits was due to an increase in the average rate paid on deposits, as the average balance of deposits outstanding declined for the respective nine-month periods. The average rate paid on deposits increased 107 basis points to 3.28% for the nine month period ended March 31, 2007, while the average balance outstanding declined 8.6% to $139.1 million for the current period ended. The increase in interest expense on advances was attributable both to increases in the average balance outstanding and the average rate paid on those advances. The average balance of advances outstanding increased $10.1 million, or 19.8%, to $61.1 million for the nine month period ended March 31, 2007. The average rate paid on advances increased by 47 basis points to 4.71% for the 2007 nine month period. Net interest margin decreased by 43 basis points to 2.26% for the nine months ended March 31, 2007, compared to 2.69% for the comparable 2006 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 no provision for losses on loans during the nine months ended March 31, 2007, compared to a provision of $32,000, for the comparable nine-month period in 2006. The lack of a provision for the most recent period was influenced by the relatively stable level of nonperforming loans discussed above (See “Critical Accounting Policies”). There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.
Other Income
Other income totaled $134,000 for the nine months ended March 31, 2007, a decrease of $52,000 from the same period in 2006. The decrease in the 2007 period is attributable primarily to a decline of $14,000 in gain on sale of loans, the absence of a $13,000 in gain on sale of equipment recorded in the 2006 period, and a decline of $11,000 in gain on sale of real estate acquired through foreclosure.
18
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, 2007 and 2006 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $3.3 million for the nine months ended March 31, 2007, a decrease of $24,000, or 0.7%, compared to the same period in 2006. This decrease was due to a combination of decreases in both other operating expenses and occupancy and equipment, and was partially offset by an increase in employee compensation and benefits. Other operating expenses totaled $457,000 for the nine months ended March 31, 2007, a decrease of $88,000, or 16.1%, from the same period in 2006. Occupancy and equipment expense totaled $253,000 for the nine months ended March 31, 2007, a decrease of $28,000 or 10.0% compared to the 2006 period. The decrease in occupancy and equipment was primarily related to reduced depreciation expense associated with computer equipment. Other operating expense decreased from $545,000 for the nine months ended March 31, 2006 to $457,000 for the nine months just ended, a decrease of $88,000 or 16.1%, and was primarily related to reduced legal and other outside service fees. Employee compensation and benefits increased from $2.2 million for the nine months ended March 31, 2006 to $2.3 million for the recently ended period, an increase of $99,000 or 4.5%. The net increase in employee compensation and benefits was related to increased expenses associated with the Company’s retirement plans and the 2005 Equity Incentive Plan, but was somewhat offset by lower overall employee compensation levels period to period. Expenses associated with the Company’s multi-employer defined benefit retirement plans totaled $381,000 for the nine months ended March 31, 2007, compared to $274,000 for the 2006 period, an increase of $107,000 or 39.1% period to period. The expenses associated with the Equity Incentive Plan totaled $296,000 for the recent nine-month period, compared to $139,000 for the prior year period. The Equity Incentive Plan was approved by shareholders in November 2005. Employee salaries decreased from $1.3 million for the nine months ended March 31, 2006 to $1.2 million for the nine months ended March 31, 2007, a decrease of $116,000 or 9.2% from period to period.
Federal Income Taxes
The provision for federal income taxes totaled $304,000 for the nine months ended March 31, 2007, an decrease of $266,000, or 46.7%, compared to the same period in 2006. The effective tax rates were 31.9% and 31.1% for the nine-month periods ended March 31, 2007 and 2006, respectively.
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2007 and 2006
General
Net earnings totaled $211,000 for the three months ended March 31, 2007, a decrease of $113,000, or 34.9% from the $324,000 in net earnings for the same period in 2006. The decrease was primarily attributable to a decline in net interest income.
Net Interest Income
Net interest income declined $278,000 or 17.3% to $1.3 million for the three month period ended March 31, 2007, compared to the 2006 period, due to increased cost of funds. While interest income increased by $74,000, or 2.3%, interest expense increased $352,000 or 22.4% to $1.9 million for the three months ended March 31, 2007. The growth in interest expense was attributable to increased costs for both deposits and advances.
19
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, 2007 and 2006 (continued)
Net Interest Income (continued)
Interest expense on deposits increased $157,000 or 15.2% to $1.2 million, and interest expense on advances increased $195,000, or 36.2%, to $733,000 for the 2007 quarter compared to the prior year quarter. The increase in interest expense on deposits was due an increase in the average rate paid on deposits, as the average balance of deposits outstanding declined for the quarterly periods year over year. The average rate paid on deposits increased 105 basis points to 3.43% for the three month period ended March 31, 2007, while the average balance outstanding declined 6.0% to $139.1 million for the current quarter. The increase in interest expense on advances was attributable both to increases in the average balance outstanding and the average rate paid on those advances. The average balance of advances outstanding increased $10.9 million, or 21.0%, to $62.9 million for the three month period ended March 31, 2007. The average rate paid on advances increased 52 basis points to 4.66% for the 2007 quarter. Net interest margin decreased by 46 basis points to 2.18% for the three months ended March 31, 2007, compared to 2.64% for the comparable 2006 quarter.
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 no provision for losses on loans during the three months ended March 31, 2007, compared to a provision of $8,000, for the comparable three-month period in 2006. The lack of a provision for the most recent period was influenced by the stable level of nonperforming loans discussed above (See “Critical Accounting Policies”). There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.
Other Income
Other income totaled $51,000 for the three months ended March 31, 2007, a decrease of $13,000 from the same period in 2006. The decrease in the 2007 period is attributable primarily to a decline of $20,000 other operating income, which consists primarily of the absence of a $13,000 in gain on sale of equipment and a $7,500 reversal of a charitable contribution, both of which were recorded in the 2006 period.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.1 million for the three months ended March 31, 2007, a decrease of $133,000, or 11.1%, compared to the same period in 2006. The decrease was due primarily to a decrease in employee compensation and benefits, which totaled $732,000 for the three months ended March 31, 2007, a decrease of $89,000, or 10.8%, from the same period in 2006. The decrease in employee compensation and benefits is primarily related to reductions in employee compensation and the Company’s Equity Incentive Plan expense. Employee salaries decreased $71,000 or 16.7% to $358,000 for the three month period ended March 31, 2007. The expenses associated with the Equity Incentive Plan totaled $91,000 for the recent quarterly period, compared to $104,000 for the prior year period, a decrease of $13,000 or 12.5%.
20
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, 2007 and 2006 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $98,000 for the three months ended March 31, 2007, an decrease of $37,000, or 27.4%, compared to the same period in 2006. The effective tax rates were 31.7% and 29.4% for the three-month periods ended March 31, 2007 and 2006, respectively. The difference between the Company’s effective tax rate for all periods presented herein and the 34% statutory rate I due primarily to tax-exempt earnings on bank-owned life insurance.
21
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, 2006.
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, 2007, 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.
22
Kentucky First Federal Bancorp
PART II
ITEM 1. | Legal Proceedings |
| |
| Not applicable. |
| |
ITEM 1A. | Risk Factors |
| |
| The Registrant’s risk factors have not changed from those set forth in the Annual Report on Form 10-K. |
| |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c) The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended March 31, 2007.
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, 2007 | | | 25,835 | | $ | 10.30 | | | 25,835 | | | 35,276 | |
February 1-28, 2007 | | | 31,000 | | $ | 10.31 | | | 31,000 | | | 4,276 | |
March 1-31, 2007 | | | 31,000 | | $ | 10.21 | | | 31,000 | | | 123,276 | |
|
(1) On June 1, 2006, the Company announced a program to repurchase up to 193,000 shares of its Common Stock. This program was completed on March 13, 2007 when the Company completed the repurchase of substantially all shares authorized under this program, and announced another program to repurchase up to 150,000 shares of its Common Stock. |
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 |
23
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, 2007 | By: | /s/ Tony D. Whitaker |
| |
|
| | Tony D. Whitaker |
| | Chairman of the Board and
Chief Executive Officer |
| | |
| | |
Date: May 15, 2007 | By: | /s/ R. Clay Hulette |
| |
|
| | R. Clay Hulette |
| | Vice President and Chief Financial Officer |
24
