FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
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 Number: No. 1-13904
KENTUCKY FIRST BANCORP, INC.
________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 61-1281483
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 N. Main Street
Cynthiana, Kentucky 41031
- ----------------------------------------- -----------
(Address of principal executive office) (Zip Code)
Registrant'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
----- -----
As of February 4, 1999, the latest practicable date, 1,200,514
shares of the registrant's common stock, $0.01 par value, 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 1 - FINANCIAL INFORMATION
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 OPERATIONS 11
PART II - OTHER INFORMATION 18
SIGNATURES 19
2
ITEM 1 FINANCIAL STATEMENTS
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, JUNE 30,
1998 1998
------------ ----------
ASSETS
Cash and due from banks $ 636 $ 522
Interest-bearing deposits in other financial
institutions 954 1,435
------- -------
Total cash and cash equivalents 1,590 1,957
Investment securities available for sale - at market 8,572 4,607
Investment securities - at amortized cost, approximate
market value of $3,087 and $5,211 as of
December 31, 1998 and June 30, 1998 3,021 5,162
Mortgage-backed securities available for sale -
at market 4,141 3,213
Mortgage-backed securities - at cost, approximate
market value of $12,190 and $14,797 as of December 31,
1998 and June 30, 1998 11,937 14,680
Loans receivable - net 47,081 48,801
Office premises and equipment - at depreciated cost 1,318 1,356
Federal Home Loan Bank stock - at cost 1,171 1,130
Accrued interest receivable 406 492
Prepaid expenses and other assets 449 460
Prepaid federal income taxes 197 144
Deferred federal income tax assets 23 44
------- -------
Total assets $79,906 $82,046
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $58,071 $56,566
Advances from the Federal Home Loan Bank 7,108 10,412
Accrued interest payable 96 117
Other liabilities 680 543
------- -------
Total liabilities 65,955 67,638
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 9,277 9,291
Retained earnings - restricted 8,277 8,144
Less shares acquired by stock benefit plans (1,249) (1,249)
Less 188,111 and 147,520 shares of treasury stock -
at cost (2,452) (1,883)
Unrealized gains on securities designated as available
or sale, net of related tax effects 84 91
------- -------
Total shareholders' equity 13,951 14,408
------- -------
Total liabilities and shareholders' equity $79,906 $82,046
======= =======
3
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- --------------------
1998 1997 1998 1997
---------- --------- -------- --------
Interest income
Loans $1,988 $2,059 $ 992 $1,035
Mortgage-backed securities 558 664 268 325
Investment securities 273 423 129 201
Interest-bearing deposits and other 54 48 27 23
------ ------ ------ ------
Total interest income 2,873 3,194 1,416 1,584
Interest expense
Deposits 1,254 1,224 619 612
Borrowings 222 503 98 244
------ ------ ------ ------
Total interest expense 1,476 1,727 717 856
------ ------ ------ ------
Net interest income 1,397 1,467 699 728
Provision for losses on loans 15 18 7 10
------ ------ ------ ------
Net interest income after provision
for losses on loans 1,382 1,449 692 718
Other income
Gain on investment securities
transactions 5 16 5 5
Service charges 65 65 32 31
Other operating 19 19 9 9
------ ------ ------ ------
Total other income 89 100 46 45
General, administrative and other expense
Employee compensation and benefits 518 508 274 279
Occupancy and equipment 83 73 41 37
Federal deposit insurance premiums 17 17 8 8
Data processing 63 63 30 29
Other operating 204 201 112 114
------ ------ ------ ------
Total general, administrative and
other expense 885 862 465 467
------ ------ ------ ------
Earnings before income taxes 586 687 273 296
Federal income taxes
Current 139 207 58 50
Deferred 29 6 22 39
------ ------ ------ ------
Total federal income taxes 168 213 80 89
------ ------ ------ ------
NET EARNINGS $ 418 $ 474 $ 193 $ 207
====== ====== ====== ======
EARNINGS PER SHARE
Basic $ .37 $ .39 $ .17 $ .17
====== ====== ====== ======
Diluted $ .35 $ .38 $ .17 $ .16
====== ====== ====== ======
4
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- --------------------
1998 1997 1998 1997
---------- --------- -------- --------
Net earnings $ 418 $ 474 $ 193 $ 207
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
on securities during the period (7) 70 (2) (3)
Reclassification adjustment for
realized gains included
In earnings - (5) - (5)
------ ------ ------ ------
Comprehensive income $ 411 $ 539 $ 191 $ 199
====== ====== ====== ======
5
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
1998 1997
Cash flows from operating activities:
Net earnings for the period $ 418 $ 474
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 (7) (14)
Depreciation and amortization 43 27
Amortization of deferred loan origination fees (14) (17)
Provision for losses on loans 15 18
Amortization of expense related to stock benefit plans 141 150
Gain on investment securities transactions (5) (16)
Federal Home Loan Bank stock dividends (41) (39)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 87 49
Prepaid expenses and other assets 13 (14)
Accrued interest payable (20) (1)
Other liabilities (18) (58)
Federal income taxes
Current (58) (68)
Deferred 29 6
------- ------
Net cash provided by operating activities 583 497
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 2,182 2,094
Purchase of investment securities designated as
available for sale (3,974) (1,212)
Purchase of mortgage-backed securities designated as
available for sale (1,013) -
Principal repayments on mortgage-backed securities 2,796 1,736
Purchase of loans (310) -
Loan principal repayments 6,621 5,333
Loan disbursements (4,581) (6,050)
Purchase of office premises and equipment (5) (14)
------- ------
Net cash provided by investing activities 1,716 1,887
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 1,505 (599)
Proceeds from Federal Home Loan Bank advances 4,400 6,700
Repayment of Federal Home Loan Bank advances (7,704) (8,704)
Purchase of treasury stock (631) (271)
Proceeds from exercise of stock options 48 -
Dividends on common stock (284) (305)
------- -------
Net cash used in financing activities (2,666) (3,179)
------- -------
Net decrease in cash and cash equivalents (367) (795)
Cash and cash equivalents at beginning of period 1,957 1,267
------- -------
Cash and cash equivalents at end of period $ 1,590 $ 472
======= =======
6
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
1998 1997
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 198 $ 276
====== ======
Interest on deposits and borrowings $1,497 $1,728
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (7) $ 65
====== ======
7
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three months ended December 31, 1998 and 1997
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, 1998. 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 six and three month periods
ended December 31, 1998 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
------------------
Earnings per share is computed in accordance with the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". Pursuant to SFAS No.
128, 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 80,153 unallocated ESOP shares, totaled
1,133,370 and 1,116,944, for the six and three month periods
ended December 31, 1998. Weighted-average common shares deemed
outstanding, which gives effect to 92,574 unallocated ESOP
shares, totaled 1,213,172 and 1,206,750 for the six and three
month periods ended December 31, 1997.
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 1,179,195 and
1,157,296 for the six and three month periods ended December 31,
1998 and totaled 1,259,762 and 1,260,963 for the six and three
month periods ended December 31, 1997, respectively.
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 1997, the Financial Accounting Standards Board ( the
"FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that
8
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended December 31, 1998 and 1997
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. It does not require a specific format
for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for
the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a
statement of financial condition. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The
Corporation adopted SFAS No. 130 effective July 1, 1998, as
required, without material impact on the Corporation's
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No.
131 significantly changes the way that public business
enterprises report information about operating segments in
annual financial statements and requires that those
enterprises report selected information about reportable
segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial
and descriptive information about the way that management
organizes the segments within the enterprise for making
operating decisions and assessing performance. For many
enterprises, the management approach will likely result in
more segments being reported. In addition, SFAS No. 131
requires significantly more information to be disclosed for
each reportable segment than is presently being reported in
annual financial statements and also requires that selected
information be reported in interim financial statements. SFAS
No. 131 is effective for fiscal years beginning after December
15, 1997. The Corporation adopted SFAS No. 131 effective July
1, 1998, as required, without material impact on the
Corporation's financial statements.
In June 1998, the FASB issued 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.
9
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended December 31, 1998 and 1997
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
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 is effective for fiscal years beginning after
June 15, 1999. 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.
10
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, the effect of
certain recent accounting pronouncements and the Corporation's
projected effects related to the year 2000 compliance issue.
Discussion of Financial Condition Changes from June 30, 1998 to
- ---------------------------------------------------------------
December 31, 1998
- -----------------
At December 31, 1998, the Corporation's consolidated total
assets amounted to $79.9 million, a decrease of $2.1 million, or
2.6%, from the total at June 30, 1998. The decrease in assets
resulted primarily from a decrease of $3.3 million in advances
from the Federal Home Loan Bank and a decline in shareholders'
equity of $457,000, offset by an increase in deposits of $1.5
million.
Liquid assets (i.e. cash, interest-bearing deposits and
investment securities) increased by $1.5 million, or 12.4%, over
the six month period, to a total of $13.2 million at December
31, 1998. Investment securities totaling $2.2 million matured
or were called during the period. Purchases of investment
securities during the period were $4.0 million. The increase in
liquid assets was funded by net increases in deposits and by
repayments of loans and mortgage-backed securities. Mortgage-
backed securities totaled $16.1 million at December 31, 1998, a
decrease of $1.8 million, or 10.1%, from June 30, 1998 levels.
The decrease in mortgage-backed securities resulted from
principal repayments of $2.8 million during the period offset by
purchases of $1.0 million.
Loans receivable decreased by $1.7 million, or 3.5%, during the
six month period, to a total of $47.1 million at December 31,
1998. Loan disbursements amounted to $4.6 million and were
offset by principal repayments of $6.6 million. The allowance
for loan losses totaled $399,000 at December 31, 1998, as
compared to $384,000 at June 30, 1998. Nonperforming loans
totaled $112,000 at December 31, 1998, as compared to $141,000
at June 30, 1998. The allowance for loan losses represented
356.3% of nonperforming loans as of December 31, 1998 and 272.3%
at June 30, 1998. Although management believes that its
allowance for loan losses at December 31, 1998 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 $58.1 million at December 31, 1998, a increase
of $1.5 million, or 2.7%, from June 30, 1998 levels. During the
current period, management has not attempted to match premium
deposit rates offered by certain competitors and has instead
continued its conservative pricing strategy with respect to
deposit accounts during the current interest rate environment.
11
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1998 to
- ---------------------------------------------------------------
December 31, 1998 (continued)
- -----------------
Advances from the Federal Home Loan Bank totaled $7.1 million at
December 31, 1998, a decrease of $3.3 million, or 31.7%, from
the total at June 30, 1998, as proceeds from maturities of
investment securities and principal repayments of loans and
mortgage-backed securities were partially utilized to repay such
advances.
The Corporation's shareholders' equity amounted to $14.0 million
at December 31, 1998, a decrease of $457,000, or 3.2%, from June
30, 1998 levels. The decrease resulted primarily from purchases
of treasury stock totaling $631,000 and dividends paid on common
stock totaling $284,000, which were partially offset by 1998
period net earnings of $418,000.
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 equal to 3% of
adjusted total assets, while 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 December 31, 1998, the Savings Bank's tangible and core
capital totaled $11.3 million, or 14.1%, of adjusted total
assets, which exceeded the minimum tangible and core capital
requirements of $1.2 million and $2.4 million by $10.1 million
and $8.9 million, respectively. The Savings Bank's risk-based
capital of $11.7 million, or 26.0% of risk-weighted assets,
exceeded the current 8% of risk-weighted assets requirement by
$8.1 million.
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1998 and 1997
- --------------------------
General
- -------
Net earnings amounted to $418,000 for the six months ended
December 31, 1998, a decrease of $56,000, or 11.8%, from the
$474,000 of net earnings reported for the same period in 1997.
The decrease in net earnings in the current period was due to a
$70,000 decrease in net interest income, an $11,000 decrease in
other income and a $23,000 increase in general administrative
and other expense, which were partially offset by a $3,000
decrease in the provision for losses on loans and a $45,000
decrease in the provision for federal income taxes.
12
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1998 and 1997 (continued)
- --------------------------
Net Interest Income
- -------------------
Net interest income decreased by $70,000, or 4.8%, for the six
months ended December 31, 1998, compared to the 1997 period.
Interest income on loans decreased by $71,000, or 3.4%, due
primarily to a $1.2 million, or 2.4%, decrease in the weighted-
average balance of loans outstanding year to year and due to a 9
basis point decrease in the average yield on loans, from 8.27%
to 8.18%. Interest income on mortgage-backed securities
decreased by $106,000, or 16.0%, due to a $3.3 million, or
16.3%, decrease in the weighted-average balance outstanding year
to year. Interest income on investment securities and interest-
bearing deposits decreased by $144,000, or 30.6%, due primarily
to a $4.0 million, or 26.1%, decrease in the weighted-average
balance outstanding and due to a decline in the average yields
available on investment securities and interest-bearing
deposits.
Interest expense on deposits increased by $30,000, or 2.5%, due
primarily to a $1.8 million, or 3.3%, increase in the weighted-
average balance of deposits outstanding, offset by a decrease in
the average cost of deposits year to year, from 4.47% to 4.43%.
Interest expense on borrowings decreased by $281,000, or 55.9%,
during the current period due to a $10.4 million, or 56.2%,
decrease in the weighted-average balance of advances outstanding
from the Federal Home Loan Bank.
As a result of the foregoing changes in interest income and
interest expense, net interest income decreased by $70,000, or
4.8%, to a total of $1.4 million for the six months ended
December 31, 1998, as compared to the same period in 1997. The
interest rate spread amounted to approximately 2.92% and 2.77%
during the respective 1998 and 1997 six month periods, while the
net interest margin amounted to approximately 3.64% in 1998 and
3.44% in 1997.
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 $15,000 and an
$18,000 provision for losses on loans during the six month
periods ended December 31, 1998 and 1997, 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 decreased by $11,000, or 11.0%, for the six months
ended December 31, 1998, compared to the same period in 1997,
due primarily to an $11,000, or 68.8%, decrease in gain on
investment securities transactions for the six months ended
December 31, 1998, compared to the 1997 period.
13
KENTUCKY FIRST BANCORP, INC.
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, 1998 and 1997 (continued)
- --------------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense increased by $23,000,
or 2.7%, during the six month period ended December 31, 1998,
compared to the same period in 1997. The increase in general,
administrative and other expense resulted from a $10,000, or
2.0%, increase in employee compensation and benefits, a $10,000,
or 13.7%, increase in occupancy and equipment and a $3,000, or
1.5%, increase in other operating expense. The increase in
occupancy and equipment expense was primarily due to an increase
in depreciation expense on furniture, fixture and equipment
during the six month period ended December 31, 1998.
Federal Income Taxes
- --------------------
The provision for federal income taxes decreased by $45,000, or
21.1%, for the six month period ended December 31, 1998, as
compared to the same period in 1997. This decrease resulted
primarily from the decrease in net earnings before taxes of
$101,000, or 14.7%. The effective tax rates were 28.7% and
31.0% for the six month periods ended December 31, 1998 and
1997, respectively.
Comparison of Operating Results for the Three Month Periods
- -----------------------------------------------------------
Ended December 31, 1998 and 1997
- --------------------------------
General
- -------
Net earnings amounted to $193,000 for the three months ended
December 31, 1998, a decrease of $14,000, or 6.8%, from the
$207,000 of net earnings reported for the same period in 1997.
The decrease in net earnings in the current period was due to a
$29,000 decrease in net interest income, offset by a $3,000
decrease in provision for losses on loans, a $1,000 increase in
other income, a $2,000 decrease in general administrative and
other expense, and a $9,000 decrease in the provision for
federal income taxes.
Net Interest Income
- -------------------
Net interest income decreased by $29,000, or 4.0%, for the three
months ended December 31, 1998, compared to the 1997 period.
Interest income on loans decreased by $43,000, or 4.2%, due
primarily to a $1.6 million, or 3.2%, decrease in the weighted-
average balance of loans outstanding year to year and due to a
10 basis point decrease in the average yield on loans, from
8.31% to 8.21%. Interest income on mortgage-backed securities
decreased by $57,000, or 17.5%, due primarily to a $3.2 million,
or 16.2%, decrease in the weighted-average balance outstanding.
Interest income on investment securities and interest-bearing
deposits decreased by $68,000, or 30.4%, due primarily to a
decrease in the weighted-average balance outstanding of $3.7
million, or 25.0%, and due to a decline in the average yields
available on investment securities and interest-bearing
deposits.
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 December 31, 1998 and 1997 (continued)
- --------------------------------
Net Interest Income (continued)
- -------------------
Interest expense on deposits increased by $7,000, or 1.1%, due
to a $2.1 million, or 3.9%, increase in the weighted-average
balance of deposits outstanding, offset by a 12 basis point
decrease in the average cost of deposits year to year, from
4.50% to 4.38%. Interest expense on borrowings decreased by
$146,000, or 59.8%, during the current period, due to a $10.6
million, or 59.2%, decrease in the weighted-average balance of
advances outstanding from the Federal Home Loan Bank.
As a result of the foregoing changes in interest income and
interest expense, net interest income decreased by $29,000, or
4.0%, to a total of $699,000 for the three months ended December
31, 1998, as compared to the same period in 1997. The interest
rate spread amounted to approximately 2.98% and 2.78% during the
respective 1998 and 1997 three month periods, while the net
interest margin amounted to approximately 3.69% in 1998 and
3.45% in 1997.
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 $7,000 and a
$10,000 provision for losses on loans during the three month
periods ended December 31, 1998 and 1997, 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 $1,000, or 2.2%, for the three months
ended December 31, 1998, compared to the same period in 1997,
due to a $1,000, or 3.2%, increase in service charges for the
three months ended December 31, 1998 compared to the 1997
period.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense decreased by $2,000,
or 0.4%, during the three month period ended December 31, 1998,
compared to the same period in 1997. The decrease in general,
administrative and other expense resulted from a $5,000, or
1.8%, decrease in employee compensation and benefits, and a
$2,000, or 1.8%, decrease in other operating expense offset by a
$4,000, or 10.8%, increase in occupancy and equipment and a
$1,000, or 3.4%, increase in data processing.
15
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 December 31, 1998 and 1997 (continued)
- --------------------------------
Federal Income Taxes
- --------------------
The provision for federal income taxes decreased by $9,000, or
10.1%, for the three month period ended December 31, 1998, as
compared to the same period in 1997. This decrease resulted
primarily from the decrease in net earnings before taxes of
$23,000, or 7.8%. The effective tax rates were 29.3% and 30.1%
for the three month periods ended December 31, 1998 and 1997,
respectively.
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 is addressing 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 recognize the two-
digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data.
As part of the awareness and assessment phases of its action
plan related to the Year 2000 problem, the Savings Bank
identified the operating systems that it considers critical to
the on-going operations of the Savings Bank. The Savings Bank
is working with companies that supply or service its information
technology systems to remedy any year 2000 problems.
Of the systems that the Savings Bank 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 service provider is converting its
hardware to a new Year 2000 compliant system. The Savings
Bank's conversion to this new system was completed on October
17, 1998. The service provider successfully performed Year 2000
proxy testing with several of its larger users during early
October 1998. On November 15, 1998, the Savings Bank performed
final customer testing, which was designed to test the Savings
Bank's unique equipment configuration and communications link to
the service provider.
In September 1998, the Savings Bank developed a contingency plan
in case the mission-critical systems are not successfully
renovated in a timely manner or if they actually fail at Year
2000 critical dates. The contingency plan states that the bank
deems the likelihood of failure of the service provider's
efforts to renovate Year 2000 changes to the on-line core
account processing system to be remote; however, a more likely
scenario is that the service provider's system will be down for
several days or weeks upon arrival of Year 2000. The plan,
therefore, primarily addresses action to deal with the latter
possibility rather than with a catastrophic event. The Savings
Bank does not consider contingency planning to be a static
process; therefore, the plan will be amended to address a
catastrophic event if testing results indicate greater concern.
16
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
- ----------------------------
Management of the Savings Bank has developed an estimate of
expenses that are reasonably likely to be incurred by the
Savings Bank in connection with this issue; however, the Savings
Bank does not expect to incur significant expense to implement
the necessary corrective measurers. No assurance can be given,
however, that significant expense will not be incurred in future
periods. In the event that the Savings Bank is ultimately
required to purchase replacement computer systems, programs and
equipment, or incur substantial expense to make the Savings
Bank's current systems, programs and equipment Year 2000
compliant, the Savings Bank's net earnings and financial
condition could be adversely affected.
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.
17
KENTUCKY FIRST BANCORP, INC.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
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 Holders
---------------------------------------------------
On November 11, 1998, the Annual Meeting of the
Corporation's Shareholders was held. Three directors
nominated were elected to terms expiring in 2001 by
the following votes:
Betty J. Long
For: 1,097,433 Withheld: 8,280
Milton G. Rees
For: 1,098,513 Withheld: 7,200
Wilbur H. Wilson
For: 1,098,513 Withheld: 7,200
ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Reports on Form 8-K: None
Exhibits: 27 Financial Data Schedule for the
six months ended December 31,
1998
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: February 9, 1999 By: /s/Betty J. Long
-------------------------
Betty J. Long
President and Chief
Executive Officer
Date: February 9, 1999 By: /s/Russell M. Brooks
-------------------------
Russell M. Brooks
Executive Vice President and
Financial Officer
19