FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 1-13904
KENTUCKY FIRST BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 61-1281483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 N. Main Street
Cynthiana, Kentucky 41031
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(Address of principal (Zip Code)
executive office)
Issuer's telephone number, including area code: (606) 234-1440
--------
Check whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 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.
Yes X No
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As of May 10, 2000, the latest practicable date, 1,063,813
shares of the registrant's common stock, $.01 par value per
share, were issued and outstanding.
Transitional small business disclosure format (check one):
Yes No X
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Page 1 of 19 pages
INDEX
Page
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PART I
ITEM I - FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
ITEM II MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 10
PART II - OTHER INFORMATION 18
SIGNATURES 19
2
ITEM I FINANCIAL STATEMENTS
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
MARCH 31, JUNE 30,
ASSETS 2000 1999
Cash and due from banks $ 443 $ 635
Interest-bearing deposits in other financial institutions 1,326 809
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Cash and cash equivalents 1,769 1,444
Investment securities available for sale - at market 7,658 7,297
Investment securities held to maturity - at amortized cost,
approximate market value of $1,492 and $1,545 as of
March 31, 2000 and June 30, 1999, respectively 1,497 1,531
Mortgage-backed securities available for sale - at market 6,622 6,579
Mortgage-backed securities held to maturity - at
amortized cost, approximate market value of $7,957
and $9,613 as of March 31, 2000 and June 30, 1999,
respectively 8,284 9,780
Loans receivable - net 45,974 47,801
Office premises and equipment - at depreciated cost 1,218 1,271
Federal Home Loan Bank stock - at cost 1,278 1,212
Accrued interest receivable 459 409
Prepaid expenses and other assets 499 479
Prepaid federal income taxes 144 181
Deferred federal income tax assets 157 160
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Total assets $75,559 $78,144
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $54,585 $56,628
Borrowed funds 7,206 7,003
Accrued interest payable 115 91
Other liabilities 794 590
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Total liabilities 62,700 64,312
Shareholders' equity
Preferred stock - authorized 500,000 shares of $.01
par value; no shares issued - -
Common stock, authorized 3,000,000 shares of $.01
par value; 1,388,625 shares issued 14 14
Additional paid-in capital 9,298 9,300
Retained earnings - restricted 8,674 8,447
Less shares acquired by stock benefit plans (1,024) (1,024)
Less 314,812 and 214,658 shares of treasury stock -
at cost, as of March 31, 2000 and June 30,
1999, respectively (3,852) (2,791)
Accumulated comprehensive loss, unrealized losses
on securities designated as available for sale,
net of related tax effects (251) (114)
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Total shareholders' equity 12,859 13,832
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Total liabilities and shareholders' equity $75,559 $78,144
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3
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
Interest income
Loans $2,814 $2,950 $ 931 $ 962
Mortgage-backed securities 740 825 241 267
Investment securities 384 415 133 142
Interest-bearing deposits and other 92 93 34 39
------ ------ ------ ------
Total interest income 4,030 4,283 1,339 1,410
Interest expense
Deposits 1,685 1,839 559 585
Borrowings 284 306 97 84
------ ------ ------ ------
Total interest expense 1,969 2,145 656 669
------ ------ ------ ------
Net interest income 2,061 2,138 683 741
Provision for losses on loans 27 23 9 8
------ ------ ------ ------
Net interest income after provision
for losses on loans 2,034 2,115 674 733
Other income
Gain on investment securities
transactions - 5 - -
Service charges on deposit accounts 124 98 41 33
Other operating 33 37 12 18
------ ------ ------ ------
Total other income 157 140 53 51
General, administrative and other expense
Employee compensation and benefits 756 778 255 260
Occupancy and equipment 125 132 41 49
Federal deposit insurance premiums 20 25 3 8
Data processing 107 97 35 34
Other operating 298 316 105 112
------ ------ ------ ------
Total general, administrative
and other expense 1,306 1,348 439 463
------ ------ ------ ------
Earnings before income taxes 885 907 288 321
Federal income taxes
Current 178 246 94 107
Deferred 73 15 (13) (14)
------ ------ ------ ------
Total federal income taxes 251 261 81 93
------ ------ ------ ------
NET EARNINGS $ 634 $ 646 $ 207 $ 228
====== ====== ====== ======
EARNINGS PER SHARE
Basic $ .59 $ .57 $ .20 $ .20
====== ====== ====== ======
Diluted $ .58 $ .55 $ .19 $ .20
====== ====== ====== ======
4
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
Net earnings $ 634 $ 646 $ 207 $ 228
Other comprehensive loss, net of tax:
Unrealized holding losses on securities
during the period, net of tax of $70,
$29, $19, $26, for the respective
periods (137) (56) (37) (49)
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Comprehensive income $ 497 $ 590 $ 170 $179
===== ===== ===== ====
Accumulated comprehensive income (loss) $(251) $ 35 $(251) $ 35
===== ===== ===== ====
5
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(In thousands)
2000 1999
Cash flows from operating activities:
Net earnings for the period $ 634 $ 646
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net (2) (10)
Depreciation and amortization 62 68
Amortization of deferred loan origination fees (13) (22)
Provision for losses on loans 27 23
Gain on investment securities transactions - (5)
Federal Home Loan Bank stock dividends (66) (61)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (50) 46
Prepaid expenses and other assets (20) 10
Accrued interest payable 24 (24)
Other liabilities 204 221
Federal income taxes
Current 37 (62)
Deferred 73 15
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Net cash provided by operating activities 910 845
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 72 6,560
Purchase of investment securities designated as available
for sale (486) (4,374)
Purchase of mortgage-backed securities designated as
available for sale (979) (3,975)
Principal repayments on mortgage-backed securities 2,314 4,097
Purchase of loans (2,161) (1,938)
Loan principal repayments 8,437 11,661
Loan disbursements (4,463) (8,355)
Purchase of office premises and equipment (9) (12)
-------- --------
Net cash provided by investing activities 2,725 3,664
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (2,043) 1,022
Proceeds from Federal Home Loan Bank advances 3,536 4,900
Repayment of Federal Home Loan Bank advances (3,708) (8,806)
Proceeds from note payable 375 -
Purchase of treasury stock (1,073) (767)
Proceeds from exercise of stock options 10 90
Dividends on common stock (407) (424)
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Net cash used in financing activities (3,310) (3,985)
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Net increase in cash and cash equivalents 325 524
Cash and cash equivalents at beginning of period 1,444 1,957
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Cash and cash equivalents at end of period $ 1,769 $ 2,481
======== ========
6
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended March 31,
(In thousands)
2000 1999
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 141 $ 308
======= =======
Interest on deposits and borrowings $1,945 $2,169
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Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as
available for sale, net of related tax effects $ (137) $ (56)
======= =======
7
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended March 31, 2000 and 1999
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements
were prepared in accordance with instructions for Form 10-QSB
and, therefore, do not include information or footnotes
necessary for a complete presentation of consolidated
financial position, results of operations and cash flows in
conformity with generally accepted accounting principles.
Accordingly, these financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto of Kentucky First Bancorp, Inc. (the
"Corporation") included in the Annual Report on Form 10-KSB
for the year ended June 30, 1999. However, in the opinion of
management, all adjustments (consisting of only normal
recurring accruals) which are necessary for a fair
presentation of the financial statements have been included.
The results of operations for the nine and three month periods
ended March 31, 2000 are not necessarily indicative of the
results which may be expected for an entire fiscal year.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Corporation and First Federal Savings Bank
(the "Savings Bank"). All significant intercompany items have
been eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-
average shares outstanding during the period, less shares in
the ESOP that are unallocated and not committed to be
released. Weighted-average common shares deemed outstanding,
which gives effect to 65,935 unallocated ESOP shares, totaled
1,073,529 and 1,045,286 for the nine and three month periods
ended March 31, 2000, respectively. Weighted-average common
shares deemed outstanding, which gives effect to 80,153
unallocated ESOP shares, totaled 1,128,014 and 1,117,063, for
the nine and three month periods ended March 31, 1999,
respectively.
Diluted earnings per share is computed taking into
consideration common shares outstanding and dilutive potential
common shares to be issued under the Corporation's stock
option plan. Weighted-average common shares deemed outstanding
for purposes of computing diluted earnings per share totaled
1,087,314 and 1,051,314 for the nine and three month periods
ended March 31, 2000 and totaled 1,170,357 and 1,154,631 for
the nine and three month periods ended March 31, 1999,
respectively. Incremental shares related to the assumed
exercise of stock options included in the calculation of
diluted earnings per share totaled 13,785 and 6,028 for the
nine and three month periods ended March 31, 2000 and totaled
42,343 and 37,568 for the nine and three month periods ended
March 31, 1999, respectively.
8
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended March 31, 2000 and 1999
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also
specifies new methods of accounting for hedging transactions,
prescribes the items and transactions that may be hedged, and
specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is
complex, but in general, it is an instrument with one or more
underlyings, such as an interest rate or foreign exchange
rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It
generally requires no significant initial investment and can
be settled net or by delivery of an asset that is readily
convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the
embedded derivative is clearly and closely related to the host
contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. On adoption,
entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category
without calling into question their intent to hold other debt
securities to maturity in the future. SFAS No. 133 is not
expected to have a material impact on the Corporation's
financial statements.
9
KENTUCKY FIRST BANCORP, INC.
ITEM II MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Forward-Looking Statements
- --------------------------
In addition to historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, the
Corporation's operations and the Corporation's actual results
could differ significantly from those discussed in the forward-
looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation
and the Corporation's market area generally.
Some of the forward-looking statements included herein are the
statements regarding management's determination of the amount
and adequacy of the allowance for losses on loans and the effect
of certain recent accounting pronouncements.
Discussion of Financial Condition Changes from June 30, 1999 to
- ---------------------------------------------------------------
March 31, 2000
- --------------
At March 31, 2000, the Corporation's consolidated total assets
amounted to $75.6 million, a decrease of $2.6 million, or 3.3%,
from the total at June 30, 1999. The decrease in assets
resulted from a decrease of $2.0 million in deposits and a
decrease in shareholders' equity of $973,000, which were
partially offset by an increase of $203,000 in borrowed funds
and an increase of $228,000 in other liabilities.
Liquid assets (i.e. cash, interest-bearing deposits and
investment securities) increased by $652,000, or 6.3%, over the
nine month period, to a total of $10.9 million at March 31,
2000. Mortgage-backed securities totaled $14.9 million at March
31, 2000, a decrease of $1.5 million, or 8.9%, from June 30,
1999 levels. The decrease in mortgage-backed securities
resulted primarily from principal repayments.
Loans receivable decreased by $1.8 million, or 3.8%, during the
nine month period, to a total of $46.0 million at March 31,
2000. Loan disbursements and loan purchases amounted to $6.6
million and were offset by principal repayments of $8.4 million.
The general allowance for loan losses totaled $281,000 at March
31, 2000, as compared to $264,000 at June 30, 1999.
Nonperforming loans totaled $268,000 at both March 31, 2000 and
June 30, 1999. The general allowance for loan losses
represented 104.9% of nonperforming loans as of March 31, 2000
and 98.5% at June 30, 1999. Although management believes that
its allowance for loan losses at March 31, 2000 is adequate
based upon the available facts and circumstances, there can be
no assurance that additions to such allowance will not be
necessary in future periods, which could adversely affect the
Corporation's results of operations.
Deposits totaled $54.6 million at March 31, 2000, a decrease of
$2.0 million, or 3.6%, from June 30, 1999 levels. During the
current period, management has not attempted to match premium
certificate of deposit rates offered by certain competitors and
has instead continued its conservative pricing strategy with
respect to certificates during the current interest rate
environment. The decrease in deposits was due to a $2.4 million
decrease in certificates of deposit offset by a $349,000
increase in checking and savings accounts. Borrowed funds
totaled $7.2 million at March 31, 2000, an increase of $203,000,
or 2.9%, from the total at June 30, 1999.
10
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1999 to
- ---------------------------------------------------------------
March 31, 2000 (continued)
- --------------
The Corporation's shareholders' equity amounted to $12.9 million
at March 31, 2000, a decrease of $973,000, or 7.0%, from June
30, 1999 levels. The decrease resulted from purchases of
treasury stock totaling $1.1 million, dividends paid on common
stock totaling $407,000, and additional unrealized losses on
securities designated as available for sale of $137,000, which
were partially offset by net earnings of $634,000 during the
nine months ended March 31, 2000.
The Savings Bank is required to meet each of three minimum
capital standards promulgated by the Office of Thrift
Supervision ("OTS"), hereinafter described as the tangible
capital requirement, the core capital requirement and the risk-
based capital requirement. The tangible capital requirement
mandates maintenance of shareholders' equity less all intangible
assets equal to 1.5% of adjusted total assets. The core capital
requirement provides for the maintenance of tangible capital
plus certain forms of supervisory goodwill generally equal to 4%
of adjusted total assets, except for those associations with the
highest examination rating and acceptable levels of risk. The
risk-based capital requirement mandates maintenance of core
capital plus general loan loss allowances equal to 8% of risk-
weighted assets as defined by OTS regulations.
At March 31, 2000, the Savings Bank's tangible and core capital
totaled $12.6 million, or 16.7%, of adjusted total assets, which
exceeded the minimum tangible and core capital requirements of
$1.1 million and $3.0 million by $11.5 million and $9.6 million,
respectively. The Savings Bank's risk-based capital of $12.9
million, or 29.5% of risk-weighted assets, exceeded the current
8% of risk-weighted assets requirement by $9.4 million.
Comparison of Operating Results for the Nine Month Periods Ended
- ----------------------------------------------------------------
March 31, 2000 and 1999
- -----------------------
General
- -------
Net earnings amounted to $634,000 for the nine months ended
March 31, 2000, a decrease of $12,000, or 1.9%, from the
$646,000 of net earnings reported for the nine months ended
March 31, 1999. The decrease in net earnings in the current
period was due to a $77,000 decrease in net interest income and
a $4,000 increase in the provision for losses on loans, which
were partially offset by a $17,000 increase in other income, a
$42,000 decrease in general administrative and other expense,
and a $10,000 decrease in the provision for federal income
taxes.
Net Interest Income
- -------------------
Net interest income was $2.1 million for the nine months ended
March 31, 2000, which represents a decrease of $77,000, or 3.6%,
compared to the nine months ended March 31, 1999. Total
interest income decreased by $253,000, or 5.9%, due to a $2.8
million, or 3.6%, decrease in the weighted-average balance of
interest-earning assets outstanding year to year and due to a
decrease in the average yield on interest-earning assets, from
7.42% to 7.25%. Interest income on loans decreased by $136,000,
or 4.6%, due to a $758,000, or 1.6%, decrease in the weighted-
average balance of loans outstanding year to year and due to a
decrease in the average yield on loans, from 8.16% to 7.90%.
Interest income on mortgage-backed securities decreased by
$85,000, or 10.3%, due to a $1.5 million, or 9.0%, decrease in
the weighted-average balance outstanding year to year and due to
a decrease in the average yield on mortgage-backed securities,
from 6.48% to 6.40%.
11
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended
- ----------------------------------------------------------------
March 31, 2000 and 1999 (continued)
- -----------------------
Net Interest Income (continued)
- -------------------
Interest income on investment securities and interest-bearing
deposits decreased by $32,000, or 6.3%, due to a $512,000, or
4.4%, decrease in the weighted-average balance outstanding year
to year and due to a decrease in the average yield from 5.77% to
5.65%.
Total interest expense decreased by $176,000, or 8.2%, due to a
$2.6 million, or 4.0%, decrease in the weighted average balance
of interest-bearing liabilities outstanding year to year and due
to a decrease in the average cost of funds, from 4.41% to 4.22%.
Interest expense on deposits decreased by $154,000, or 8.4%, due
to a $1.6 million, or 2.8%, decrease in the weighted-average
balance of deposits outstanding year to year and due to a
decrease in the average cost of deposits, from 4.31% to 4.06%.
Interest expense on borrowings decreased by $22,000, or 7.2%,
due to a $1.0 million, or 12.8%, decrease in the weighted-
average balance of borrowed funds outstanding year to year,
which was partially offset by an increase in the average cost of
borrowed funds, from 5.17% to 5.50%.
As a result of the foregoing changes in interest income and
interest expense, net interest income decreased by $77,000, or
3.6%, to a total of $2.1 million for the nine months ended March
31, 2000, as compared to the nine months ended March 31, 1999.
The interest rate spread amounted to approximately 3.03% and
3.01% during the nine month periods ended March 31, 2000 and
1999, respectively, while the net interest margin amounted to
approximately 3.71% and 3.70% during the nine month periods
ended March 31, 2000 and 1999, respectively.
Provision for Losses on Loans
- -----------------------------
A provision for losses on loans is charged 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 Savings Bank, the
status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to
the Savings Bank's market area, and other factors related to the
collectibility of the Savings Bank's loan portfolio. As a
result of such analysis, management recorded a $27,000 and a
$23,000 provision for losses on loans during the nine month
periods ended March 31, 2000 and 1999, respectively. There can
be no assurance that the loan loss allowance of the Savings Bank
will be adequate to cover losses on nonperforming assets in the
future.
Other Income
- ------------
Other income increased by $17,000, or 12.1%, for the nine months
ended March 31, 2000, compared to the nine months ended March
31, 1999, due to a $26,000, or 26.5%, increase in service
charges on deposit accounts offset by a $4,000, or 10.8%,
decrease in other operating income and by the lack of any gain
or loss on investment securities transactions in the current
period compared to a gain of $5,000 in the previous year period.
The increase in service charges on deposit accounts was due to
an increase, during the early part of the nine month period
ended March 31, 2000, in the monthly service charge fee schedule
on checking accounts.
12
KENTUCKY FIRST BANCORP, INC.
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, 2000 and 1999 (continued)
- -----------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense decreased by $42,000,
or 3.1%, during the nine months ended March 31, 2000, compared
to the nine months ended March 31, 1999. The decrease in
general, administrative and other expense resulted primarily
from a $22,000, or 2.8%, decrease in employee compensation and
benefits, a $7,000, or 5.3%, decrease in occupancy and
equipment, a $5,000, or 20.0%, decrease in federal deposit
insurance premiums, and an $18,000, or 5.7%, decrease in other
operating expense, which were offset by a $10,000, or 10.3%,
increase in data processing expense.
The decrease in employee compensation and benefits was primarily
due to a decrease in expenses of the employee stock benefit plan
related to the reduced market value of the Company's stock and
due to the director retirement plan becoming fully funded prior
to the nine month period ended March 31, 2000. The decrease in
other operating expense is primarily due to the reduction of
outsourced internal audit services and the elimination of
asset/liability consulting services. Internal audit and
asset/liability management functions are now being performed by
the bank's staff. The increase in data processing was primarily
due to increased charges for on-line services and ATM processing
related to preparing computer systems for the change to year
2000.
Federal Income Taxes
- --------------------
The provision for federal income taxes decreased by $10,000, or
3.8%, for the nine months ended March 31, 2000, as compared to
the nine months ended March 31, 1999. The decrease resulted
primarily from a decrease of $22,000, or 2.4%, in net earnings
before taxes. The effective tax rates were 28.4% and 28.8% for
the nine month periods ended March 31, 2000 and 1999,
respectively.
Comparison of Operating Results for the Three Month Periods
- -----------------------------------------------------------
Ended March 31, 2000 and 1999
- -----------------------------
General
- -------
Net earnings amounted to $207,000 for the three months ended
March 31, 2000, a decrease of $21,000, or 9.2%, from the
$228,000 of net earnings reported for the three months ended
March 31, 1999. The decrease in net earnings in the current
period was due to a $58,000 decrease in net interest income and
a $1,000 increase in the provision for losses on loans, which
were partially offset by a $2,000 increase in other income, a
$24,000 decrease in general, administrative and other expense,
and a $12,000 decrease in the provision for federal income
taxes.
Net Interest Income
- -------------------
Net interest income was $683,000 for the three months ended
March 31, 2000, which represents a decrease of $58,000, or 7.8%,
compared to the three month period ended March 31, 1999. Total
interest income decreased by $71,000, or 5.0%, due to a $3.1
million, or 4.0%, decrease in the weighted-average balance of
interest-earning assets outstanding year to year and due to a
decrease in the average yield on interest-earning assets, from
7.40% to 7.32%.
13
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION (CONTINUED)
Comparison of Operating Results for the Three Month Periods
- -----------------------------------------------------------
Ended March 31, 2000 and 1999 (continued)
- -----------------------------
Net Interest Income (continued)
- -------------------
Interest income on loans decreased by $31,000, or 3.2%, due to a
$383,000, or .8%, decrease in the weighted-average balance of
loans outstanding year to year and due to a decrease in the
average yield on loans, from 8.18% to 7.98%. Interest income on
mortgage-backed securities decreased by $26,000, or 9.7%, due to
a $1.8 million, or 11.2%, decrease in the weighted-average
balance outstanding year to year offset by an increase in the
average yield on mortgage-backed securities, from 6.46% to
6.57%. Interest income on investment securities and interest-
bearing deposits decreased by $14,000, or 7.7%, due to an
$847,000, or 6.7%, decrease in the weighted-average balance
outstanding year to year and due to a decrease in the yield,
from 5.76% to 5.66%.
Total interest expense decreased by $13,000, or 1.9%, due to a
$2.9 million, or 4.5%, decrease in the weighted average balance
of interest-bearing liabilities outstanding year to year offset
by an increase in the average cost of funds, from 4.18% to
4.29%. Interest expense on deposits decreased by $26,000, or
4.4%, due to a $3.1 million, or 5.3%, decrease in the weighted-
average balance of deposits outstanding year to year offset by
an increase in the average cost of deposits, from 4.07% to
4.11%. Interest expense on borrowings increased by $13,000, or
15.5%, due to a $150,000, or 2.2%, increase in the weighted-
average balance of borrowed funds outstanding and due to an
increase in the average cost of borrowed funds, from 5.06% to
5.68%.
As a result of the foregoing changes in interest income and
interest expense, net interest income decreased by $58,000, or
7.8%, to a total of $683,000 for the three months ended March
31, 2000, as compared to the three months ended March 31, 1999.
The interest rate spread amounted to approximately 3.04% and
3.23% during the three month periods ended March 31, 2000 and
1999, respectively, while the net interest margin amounted to
approximately 3.73% and 3.89% during the three month periods
ended March 31, 2000 and 1999, respectively.
Provision for Losses on Loans
- -----------------------------
A provision for losses on loans is charged 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 Savings Bank, the
status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to
the Savings Bank's market area, and other factors related to the
collectibility of the Savings Bank's loan portfolio. As a
result of such analysis, management recorded a $9,000 and an
$8,000 provision for losses on loans during the three month
periods ended March 31, 2000 and 1999, respectively. There can
be no assurance that the loan loss allowance of the Savings Bank
will be adequate to cover losses on nonperforming assets in the
future.
14
KENTUCKY FIRST BANCORP, INC.
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, 2000 and 1999 (continued)
- -----------------------------
Other Income
- ------------
Other income increased by $2,000, or 3.9%, for the three months
ended March 31, 2000, compared to the three months ended March
31, 1999, due to an $8,000, or 24.2%, increase in service
charges on deposit accounts offset by a $6,000, or 33.3%,
decrease in other operating income. The increase in service
charges on deposit accounts was due to an increase, prior to the
beginning of the three month period ended March 31, 2000, in the
monthly service charge fee schedule on checking accounts. The
decrease in other operating income was primarily due to a
decrease in loan related fees.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense decreased by $24,000,
or 5.2%, during the three months ended March 31, 2000, compared
to the three months ended March 31, 1999. The decrease in
general, administrative and other expense resulted primarily
from a $5,000, or 1.9%, decrease in employee compensation and
benefits, an $8,000, or 16.3%, decrease in occupancy and
equipment expense, a $5,000, or 62.5%, decrease in federal
deposit insurance premiums, and a $7,000, or 6.3%, decrease in
other operating expense.
The decrease in employee compensation and benefits was primarily
due to a decrease in expenses of the employee stock benefit plan
related to the reduced market value of the Company's stock and
due to the director retirement plan becoming fully funded prior
to the three month period ended March 31, 2000. The decrease in
occupancy and equipment was primarily due to a decrease in
depreciation expense on furniture, fixtures, and equipment. The
decrease in federal deposit insurance premiums was primarily due
to a reduction in the insurance assessment rate effective
January 1, 2000. The decrease in other operating expense is
primarily due to the reduction of outsourced internal audit
services and the elimination of asset/liability consulting
services. Internal audit and asset/liability management
functions are now being performed by the bank's staff.
Federal Income Taxes
- --------------------
The provision for federal income taxes decreased by $12,000, or
12.9%, for the three months ended March 31, 2000, as compared to
the three months ended March 31, 1999. The decrease resulted
primarily from a decrease of $33,000, or 10.3%, in the net
earnings before taxes. The effective tax rates were 28.1% and
29.0% for the three month periods ended March 31, 2000 and 1999,
respectively.
15
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters
- ----------------------------
As with all providers of financial services, the Savings Bank's
operations are heavily dependent on information technology
systems. The Savings Bank addressed the potential problems
associated with the possibility that the computers that control
or operate the Bank's information technology system and
infrastructure may not be programmed to read four-digit date
codes and, upon arrival of the year 2000, may have recognized
the two-digit code "00" as the year 1900, causing systems to
fail to function or to generate erroneous data.
Of the systems that the Savings Bank had identified as mission-
critical, the most significant is the on-line core account
processing system that is performed by a third party service
provider, Intrieve, Inc. The Savings Bank experienced no
problems with the on-line system, or with other systems, related
to the year 2000 change. Management had developed an estimate
of expenses and lost income of $20,000 that was reasonably
likely to be incurred in connection with the efforts to achieve
compliance. The amount of expenses and lost income, as of March
31, 2000, was approximately $18,000, with no additional
significant amount expected.
In addition to possible expense related to its own systems, the
Savings Bank could incur losses if loan payments are delayed due
to Year 2000 problems affecting any major borrowers in the
Savings Bank's primary market area. Because the Savings Bank's
loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and the Savings Bank's primary
market area is not significantly dependent upon one employer or
industry, the Savings Bank does not expect any significant or
prolonged difficulties that will affect net earnings or cash
flow.
Financial Modernization
- -----------------------
On November 12, 1999, President Clinton signed into law
legislation that could have a far-reaching impact on the
financial services industry. The Gramm-Leach-Bliley ("G-L-B")
Act authorizes affiliations between banking, securities and
insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to
bank holding companies and national bank subsidiaries are
securities and insurance brokerage, securities underwriting and
certain forms of insurance underwriting. Bank holding companies
will have broader insurance underwriting powers than national
banks and may engage in merchant banking activities after the
adoption of implementing regulations. Merchant banking
activities may also become available to national bank
subsidiaries after five years. The Federal Reserve Board, in
consultation with the Department of Treasury, may approve
additional financial activities. The G-L-B Act, however,
prohibits future affiliations between existing unitary savings
and loan holding companies, like the Corporation, and firms that
are engaged in commercial activities and prohibits the formation
of new unitary holding companies.
16
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Financial Modernization (continued)
- -----------------------
The G-L-B Act imposes new requirements on financial institutions
with respect to customer privacy. The G-L-B Act generally
prohibits disclosure of customer information to non-affiliated
third parties unless the customer has been given the opportunity
to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy
policies to customers annually. Financial institutions, however,
will be required to comply with state law if it is more
protective of customer privacy than the G-L-B Act. The G-L-B Act
directs the federal banking agencies, the National Credit Union
Administration, the Secretary of the Treasury, the Securities
and Exchange Commission and the Federal Trade Commission, after
consultation with the National Association of Insurance
Commissioners, to promulgate implementing regulations within six
months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home
Loan Bank System. The G-L-B Act imposes new capital
requirements on the Federal Home Loan Banks and authorizes them
to issue two classes of stock with differing dividend rates and
redemption requirements. The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute
$300 million to pay interest on certain government obligations
in favor of a 20% of net earnings formula. The G-L-B Act
expands the permissible uses of Federal Home Loan Bank advances
by community financial institutions (under $500 million in
assets) to include funding loans to small businesses, small
farms and small agri-businesses. The G-L-B Act makes membership
in the Federal Home Loan Bank voluntary for federal savings
associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first
been provided notice of the imposition and amount of the fee.
The G-L-B Act reduces the frequency of Community Reinvestment
Act examinations for smaller institutions and imposes certain
reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the
Community Reinvestment Act. The G-L-B Act eliminates the SAIF
special reserve and authorizes a federal savings association
that converts to a national or state bank charter to continue to
use the term "federal" in its name and to retain any interstate
branches.
The Corporation is unable to predict the impact of the G-L-B Act
on its operations at this time. Although the G-L-B Act reduces
the range of companies with which the Corporation may affiliate,
it may facilitate affiliations with companies in the financial
services industry.
17
Kentucky First Bancorp, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
The Bank is party to a lawsuit captioned Charles Michael
---------------
Thompson and Beverly A. Thompson v. First Federal Savings Bank;
- --------------------------------------------------------------
Trustcorp Mortgage Company; Blair Corporation Mortgage
- ------------------------------------------------------
Bankers filed in the Fayette Circuit Court, 4th Division,
- -------
Commonwealth of Kentucky. The suit alleges that in August 1997
the Thompsons arranged for a first mortgage loan through Blair
Corporation Mortgage Bankers ("Blair"), such mortgage being
subsequently assigned to the Bank although all servicing of the
loan was still being handled by Blair. The suit further alleges
that in February 1999 the Thompsons refinanced the mortgage loan
through Blair and that such loan was assigned to Trustcorp
although the Thompsons' loan with the Bank was never paid off
nor was the related mortgage released. The suit is seeking a
declaratory judgment as to which mortgage represents the valid
first mortgage. The suit further seeks an order compelling the
institution not found to have the valid first lien to release
its mortgage. The Thompsons also seek money damages of an
unspecified amount. The Bank has referred this matter to its
counsel and to its insurance carrier. Although there can be no
assurance, the Bank does not anticipate that this litigation
will have a material impact on its operations.
The Bank is party to a lawsuit captioned Family Bank, FSB
----------------
and First Federal Savings Bank v. Oscar S. Blankenship a/k/a O.
- ---------------------------------------------------------------
Sam Blankenship and Jenny Blankenship filed in the Johnson
- -------------------------------------
Circuit Court, Division No. II, Commonwealth of Kentucky. The
lawsuit is a collection action seeking recovery of three loans
of which the Bank has an interest in two. The suit also asks
for the court to sell the property securing the loans with the
proceeds to be used to repay all amounts owed. The defendants
filed an answer on February 3, 2000 making various counterclaims
alleging breach of contract, breach of fiduciary duty and
unspecified violations of the federal banking laws. The
defendants are seeking money damages (including punitive
damages) of an unspecified amount. Certain of the counterclaims
relate only to the one loan in which the Bank does not have any
interest. While the Bank does not believe there is any merit
in the counterclaims, it is having the answer evaluated by
counsel.
ITEM 2. Changes in 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 Holder
--------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Reports on Form 8-K: None.
Exhibit 27: Financial Data Schedule for the
nine months ended March 31,
2000
18
KENTUCKY FIRST BANCORP, INC.
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: May 11, 2000 By:/s/ Betty J. Long
-----------------------------
Betty J. Long
President and Chief
Executive Officer
Date: May 11, 2000 By:/s/ Russell M. Brooks
-----------------------------
Russell M. Brooks
Executive Vice President and
Financial Officer
19