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. The application of this guidance did not have a material adverse effect on the Company’s financial position or results of operations.
As of December 31, 2007, loan commitments and unused lines of credit totaled $12.7 million, including $2.3 million in undisbursed construction loans, $923,000 in one- to four-family mortgage loans and $9.5 million in lines of credit secured by equity in real property.
Kentucky First Federal Bancorp
ITEM 2: 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, 2007 to December 31, 2007
Assets:At December 31, 2007, the Company’s assets totaled $266.1 million, a decrease of $2.8 million, or 1.0%, from total assets at June 30, 2007. The primary reason for the decrease in assets was the maturity and/or call of $10.8 million, or 18.2%, of held-to-maturity securities, which decreased to $48.8 million at December 31, 2007. Somewhat offsetting the decrease in held-to-maturity securities was an increase of $8.2 million, or 4.9%, in loans receivable. It is management’s intention to deploy maturing or called investments into mortgage loans to the extent possible.
Cash and cash equivalents:Cash and cash equivalents decreased by $560,000 or 20.6%. It is the Company’s preference to minimize the level of cash and cash equivalents and invest liquidity into higher-yielding assets, when possible.
Loans:Loans receivable, net, increased to $174.4 million at December 31, 2007, an increase of $8.2 million or 4.9%. 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 Loans:At December 31, 2007, the Company had approximately $1.0 million, or 0.6% of net loans, in loans 90 days or more past due, compared to $968,000, or 0.6%, of net loans at June 30, 2007. At December 31, 2007, the Company’s allowance for loan losses of $655,000 represented 62.7% of nonperforming loans and 0.4% of total loans.
The Company had $1.7 million in loans classified as substandard for regulatory purposes at December 31, 2007. Classified loans as a percentage of net loans was 1.0% and 0.9% at December 31, 2007 and June 30, 2007, respectively. 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 11% to 98%*; three home equity lines of credit secured by single-family homes; and four single-family homes acquired through foreclosure (with an aggregate fair value of $35,000). At December 31, 2007, the Company had $695,000 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. *Of the substandard assets, one loan exceeded a 90% loan-to-value ratio and that loan is covered by private mortgage insurance.
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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, 2007 to December 31, 2007(continued)
Non-Performing Loans (continued)
At December 31, 2007, no loans were classified as doubtful or loss for regulatory purposes.
Investment and Mortgage-Backed Securities:At December 31, 2007, the Company’s investment and mortgage-backed securities had decreased $10.7 million or 14.6% to $62.2 million. This decrease was due primarily to the maturity and/or call of $10.0 million of investment securities and repayment of principal on mortgage-backed securities which was partially offset by a net increase of $159,000 in the market value of investments and mortgage-backed securities held as available for sale. Since December 31, 2007, $11.0 million in investments have been called. Excluding those investments which have been called, approximately $35.9 million of the Company’s investment and agency securities are scheduled to mature within the next three years.
Liabilities:At December 31, 2007, the Company’s liabilities totaled $205.3 million, a decrease of $2.2 million, or 1.1%, from total liabilities at June 30, 2007. The decrease in liabilities was attributed primarily to a $2.9 million, or 2.1%, decrease in deposits, which decreased to $137.0 million at December 31, 2007. Somewhat offsetting the decrease in deposits was an increase of $1.0 million or 1.6%, in Federal Home Loan Bank advances, which totaled $66.1 million at December 31, 2007. Of the $66.1 million in advances, approximately $26.6 million were in overnight advances. 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 December 31, 2007, the Company’s shareholders’ equity totaled $60.8 million, a decrease of $628,000 or 1.0% from the June 30, 2007 total. The primary reason for the decrease in shareholders’ equity is the acquisition of $1.4 million of treasury shares at an average cost of $10.04 per share.
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2007 and 2006
General
Net earnings totaled $363,000 for the six months ended December 31, 2007, a decrease of $75,000, or 17.1% from the $438,000 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 $192,000 or 7.0% to $2.6 million for the six month period ended December 31, 2007, compared to the 2006 period, due to increased cost of funds. Interest income increased by $329,000, or 5.1%, to $6.7 million, while interest expense increased $521,000 or 14.3% to $4.2 million for the six months ended December 31, 2007. The growth in interest expense was attributable to increased costs for both deposits and advances.
14
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2007 and 2006(continued)
Net Interest Income(continued)
Interest expense on deposits increased $359,000 or 16.1% to $2.6 million, while interest expense on advances increased $162,000, or 11.4%, to $1.6 million for the 2007 period compared to the prior year period. 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 six-month periods year over year. The average rate paid on deposits increased 56 basis points to 3.73% for the six month period ended December 31, 2007, while the average balance outstanding declined 1.0% to $140.0 million for the current period ended. The increase in interest expense on advances was attributable to an increase in the average balance outstanding, as the average rate paid on those advances declined period to period. The average balance of advances outstanding increased $8.0 million, or 13.3%, to $68.2 million for the six month period ended December 31, 2007. The average rate paid on advances decreased by 8 basis points to 4.65% for the 2007 six month period. Net interest margin decreased by 25 basis points to 2.06% for the six months ended December 31, 2007, compared to 2.31% 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 for either of the six months ended December 31, 2007 or 2006. The lack of a provision 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 $88,000 for the six months ended December 31, 2007, an increase of $5,000 from the same period in 2006.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.1 million for the six months ended December 31, 2007, a decrease of $72,000, or 3.3%, compared to the same period in 2006. The decrease was due primarily to a decrease in employee compensation and benefits, which totaled $1.5 million for the six months ended December 31, 2007, a decrease of $92,000, or 5.8%, from the same period in 2006. The decrease in employee compenation and benefits is primarily related to lower salary levels associated with various retirements.
15
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2007 and 2006(continued)
Federal Income Taxes
The provision for federal income taxes totaled $166,000 for the six months ended December 31, 2007, a decrease of $40,000, or 19.4%, compared to the same period in 2006. The effective tax rates were 31.4% and 32.0% for the six-month periods ended December 31, 2007 and 2006, respectively.
Comparison of Operating Results for the Three-Month Periods Ended December 31, 2007 and 2006
General
Net earnings totaled $211,000 for the three months ended December 31, 2007, an increase of $7,000, or 3.4% from the $204,000 in net earnings for the same period in 2006. The increase was primarily attributable to a decline in general, administrative and other expense.
Net Interest Income
Net interest income declined $15,000 or 1.1% to $1.3 million for the three month period ended December 31, 2007, compared to the 2006 period, due to increased cost of funds. Interest income increased by $202,000, or 6.3%, while interest expense increased $217,000 or 11.6% to $2.1 million for the three months ended December 31, 2007. The growth in interest expense was attributable to increased costs for both deposits and advances.
Interest expense on deposits increased $161,000 or 14.3% to $1.3 million, while interest expense on advances increased $56,000, or 7.6%, to $797,000 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 51 basis points to 3.73% for the three month period ended December 31, 2007, while the average balance outstanding declined 1.0% to $138.4 million for the current quarter. The increase in interest expense on advances was attributable to an increase in the average balance outstanding, as the average rate paid on those advances declined. The average balance of advances outstanding increased $8.6 million, or 13.7%, to $70.9 million for the three month period ended December 31, 2007. The average rate paid on advances decreased of 26 basis points to 4.5% for the 2007 quarter. Net interest margin decreased by 12 basis points to 2.10% for the three months ended December 31, 2007, compared to 2.22% 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 December 31, 2007 or 2006. The lack of a provision for the periods 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.
16
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 December 31, 2007 and 2006(continued)
Other Income
Other income totaled $43,000 for the three months ended December 31, 2007, a decrease of $4,000 from the same period in 2006. The decrease in the 2007 period is attributable to a nonreoccuring gain on sale of real estate acquired through foreclosure, which was recognized in the 2006 period.
General, Administrative and Other Expense
General, administrative and other expense totaled $1.0 million for the three months ended December 31, 2007, a decrease of $31,000, or 2.9%, compared to the same period in 2006. This decrease was due primarily to a decrease in employee compensation and benefits, which totaled $724,000 for the three months ended December 31, 2007, a decrease of $55,000, or 7.1%, from the same period in 2006. The decrease in employee compensation and benefits is related to both a decrease in salary cost and lower retirement expense. The lower salary levels are associated with various retirements and other attrition of the Company’s personnel, while the Company has experienced somewhat favorable results with regard to its defined benefit retirement plan.
Federal Income Taxes
The provision for federal income taxes totaled $99,000 for the three months ended December 31, 2007, an increase of $5,000, or 5.3%, compared to the same period in 2006. The effective tax rates were 31.9% and 31.5% for the three-month periods ended December 31, 2007 and 2006, respectively.
17
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, 2007.
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 December 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.
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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 December 31, 2007.
| | | | | | Total # of | | |
| | | | Average | | shares purchased | | Maximum # of shares |
| | Total | | price paid | | as part of publicly | | that may yet be |
| | # of shares | | per share | | announced plans | | purchased under |
| Period | | purchased | | (incl commissions) | | or programs | | the plans or programs |
| October 1-31, 2007 | 20,000 | | $ | 10.11 | | | 20,000 | | 89,400 |
| November 1-30, 2007 | 20,000 | | $ | 10.06 | | | 20,000 | | 69,400 |
| December 1-31, 2007 | 20,300 | | $ | 10.06 | | | 20,300 | | 49,100 |
(1) On March 13, 2007, the Company announced a program to repurchase up to 150,000 shares of its Common Stock. This program was terminated on August 17, 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 |
| |
| | | (a) | | The registrant held its Annual Meeting of Shareholders on November 13, 2007. |
| | | (b) | | Not applicable |
| | | (c) | | Two matters were voted upon at the Annual Meeting: |
| | | 1) Election of three individuals as directors: |
| | | Votes For | | Votes Withheld |
| | William D. Gorman | | 7,547,281 | | 31,108 |
| Herman D. Regan, Jr. | | 7,557,040 | | 21,349 |
| | | | | |
| | 2) Ratification of BKD, LLP, as the Company’s independent registered public accountants for the fiscal year ending June 30, 2008: |
| | Votes For | | Votes Against | | Abstain |
| | | 7,543,612 | | 24,650 | | 10,127 |
| |
| There were no broker nonvotes. |
19
Kentucky First Federal Bancorp
PART II (continued)
| 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 |
20
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: | | February 14, 2008 | | By: | | /s/Tony D. Whitaker | |
| | | | | | Tony D. Whitaker |
| | | | | | Chairman of the Board and Chief Executive Officer |
| | | | | | | |
| Date: | | February 14, 2008 | | By: | | /s/R. Clay Hulette | |
| | | | | | R. Clay Hulette |
| | | | | | Vice President and Chief Financial Officer |
21
