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 September 30, 1999
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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.
- ----------------------------------------------------------------
(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 November 8, 1999, the latest practicable date, 1,136,697
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 17 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
OPERATION 10
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
ITEM I FINANCIAL STATEMENTS
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
SEPTEMBER 30, JUNE 30,
1999 1999
ASSETS
Cash and due from banks $ 660 $ 635
Interest-bearing deposits in other financial
institutions 807 809
------- -------
Total cash and cash equivalents 1,467 1,444
Investment securities available for sale - at market 7,267 7,297
Investment securities held to maturity - at amortized cost,
approximate market value of $1,506 and $1,545 as of
September 30, 1999 and June 30, 1999 1,496 1,531
Mortgage-backed securities available for sale - at market 6,221 6,579
Mortgage-backed securities held to maturity - at amortized
cost, approximate market value of $9,115 and $9,613 as of
September 30, 1999 and June 30, 1999 9,262 9,780
Loans receivable - net 47,197 47,801
Office premises and equipment - at depreciated cost 1,257 1,271
Federal Home Loan Bank stock - at cost 1,234 1,212
Accrued interest receivable 488 409
Prepaid expenses and other assets 488 479
Prepaid federal income taxes 84 181
Deferred federal income tax assets 173 160
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Total assets $76,634 $78,144
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $55,224 $56,628
Advances from the Federal Home Loan Bank 7,033 7,003
Accrued interest payable 85 91
Other liabilities 696 590
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Total liabilities 63,038 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 9,300 9,300
Retained earnings - restricted 8,540 8,447
Less shares acquired by stock benefit plans (1,024) (1,024)
Less 240,928 and 214,658 shares of treasury
stock - at cost (3,101) (2,791)
Unrealized losses on securities designated as
available for sale, net of related tax effects (133) (114)
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Total shareholders' equity 13,596 13,832
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Total liabilities and shareholders' equity $76,634 $78,144
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3
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
Interest income
Loans $ 956 $ 996
Mortgage-backed securities 258 290
Investment securities 125 144
Interest-bearing deposits and other 29 27
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Total interest income 1,368 1,457
Interest expense
Deposits 569 635
Borrowings 89 124
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Total interest expense 658 759
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Net interest income 710 698
Provision for losses on loans 9 8
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Net interest income after provision
for losses on loans 701 690
Other income
Service charges 40 33
Other operating 12 10
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Total other income 52 43
General, administrative and other expense
Employee compensation and benefits 245 244
Occupancy and equipment 41 42
Federal deposit insurance premiums 8 9
Data processing 37 33
Other operating 97 92
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Total general, administrative and other expense 428 420
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Earnings before income taxes 325 313
Federal income taxes
Current 97 81
Deferred (3) 7
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Total federal income taxes 94 88
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NET EARNINGS $ 231 $ 225
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EARNINGS PER SHARE
Basic $ .21 $ .20
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Diluted $ .21 $ .19
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4
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
Net earnings $ 231 $ 225
Other comprehensive income, net of tax:
Unrealized holding losses on securities during the
period (19) (5)
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Comprehensive income $ 212 $ 220
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Accumulated comprehensive income (loss) $ (133) $ 86
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5
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
(In thousands)
1999 1998
Cash flows from operating activities:
Net earnings for the period $ 231 $ 225
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) (4)
Depreciation and amortization 21 19
Amortization of deferred loan origination fees (6) (6)
Provision for losses on loans 9 8
Federal Home Loan Bank stock dividends (22) (21)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (79) 44
Prepaid expenses and other assets (9) (2)
Accrued interest payable (6) (17)
Other liabilities 106 70
Federal income taxes
Current 97 82
Deferred (3) 7
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Net cash provided by operating activities 337 405
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 47 1,146
Principal repayments on mortgage-backed securities 867 1,021
Purchase of loans (444) -
Loan principal repayments 3,376 2,853
Loan disbursements (2,331) (2,404)
Purchase of office premises and equipment (7) -
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Net cash provided by investing activities 1,508 2,616
Cash flows provided by (used in) financing activities:
Net decrease in deposits (1,404) (602)
Proceeds from Federal Home Loan Bank advances 1,632 5,400
Repayment of Federal Home Loan Bank advances (1,602) (7,802)
Purchase of treasury stock (310) (612)
Proceeds from exercise of stock options - 18
Dividends on common stock (138) (148)
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Net cash used in financing activities (1,822) (3,746)
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Net increase (decrease) in cash and cash equivalents 23 (725)
Cash and cash equivalents at beginning of period 1,444 1,957
------ -------
Cash and cash equivalents at end of period $1,467 $ 1,232
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6
KENTUCKY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended September 30,
(In thousands)
1999 1998
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ - $ -
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Interest on deposits and borrowings $ 664 $ 776
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Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as
available for sale, net of related tax effects $ (19) $ (5)
====== =======
7
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 1999 and 1998
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 three month periods ended
September 30, 1999 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
1,101,885, for the three month period ended September 30,
1999. Weighted-average common shares deemed outstanding,
which gives effect to 80,153 unallocated ESOP shares, totaled
1,149,796 for the three month period ended September 30, 1998.
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
1,126,790 for the three month period ended September 30, 1999
and totaled 1,201,706 for the three month period ended
September 30, 1998, respectively. Incremental shares related
to the assumed exercise of stock options included in the
calculation of diluted earnings per share totaled 24,905 and
51,910 for the three month periods ended September 30, 1999
and 1998, respectively.
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") 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.
8
KENTUCKY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 1999 and 1998
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, 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, 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, 1999 to
- ---------------------------------------------------------------
September 30, 1999
- ------------------
At September 30, 1999, the Corporation's consolidated total
assets amounted to $76.6 million, a decrease of $1.5 million, or
1.9%, from the total at June 30, 1999. The decrease in assets
resulted primarily from a decrease of $1.4 million in deposits
and a decline in shareholders' equity of $236,000, which were
partially offset by an increase in other liabilities of
$106,000.
Liquid assets (i.e. cash, interest-bearing deposits and
investment securities) decreased by $42,000, or 0.4%, over the
three month period, to a total of $10.2 million at September 30,
1999. Mortgage-backed securities totaled $15.5 million at
September 30, 1999, a decrease of $876,000, or 5.4%, from June
30, 1999 levels. The decrease in mortgage-backed securities
resulted from principal repayments.
Loans receivable decreased by $604,000, or 1.3%, during the
three month period, to a total of $47.2 million at September 30,
1999. Loan disbursements and loan purchases amounted to $2.8
million and were offset by principal repayments of $3.4 million.
The allowance for loan losses totaled $413,000 at September 30,
1999, as compared to $414,000 at June 30, 1999. Nonperforming
loans totaled $719,000 at September 30, 1999, as compared to
$268,000 at June 30, 1999. The allowance for loan losses
represented 57.4% of nonperforming loans as of September 30,
1999 and 154.5% at June 30, 1999. Loans, totaling $412,000,
that were nonperforming as of September 30, 1999 were paid off
in November, 1999. Although management believes that its
allowance for loan losses at September 30, 1999 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 $55.2 million at September 30, 1999, a decrease
of $1.4 million, or 2.5%, from June 30, 1999 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.
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
- ---------------------------------------------------------------
September 30, 1999 (continued)
- ------------------
Advances from the Federal Home Loan Bank totaled $7.0 million at
September 30, 1999, an increase of $30,000, or 0.4%, from the
total at June 30, 1999.
The Corporation's shareholders' equity amounted to $13.6 million
at September 30, 1999, a decrease of $236,000, or 1.7%, from
June 30, 1999 levels. The decrease resulted primarily from
purchases of treasury stock totaling $310,000 and dividends paid
on common stock totaling $138,000, which were partially offset
by net earnings during the three months ended September 30, 1999
of $231,000.
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 September 30, 1999, the Savings Bank's tangible and core
capital totaled $12.2 million, or 15.9%, of adjusted total
assets, which exceeded the minimum tangible and core capital
requirements of $1.1 million and $3.1 million by $11.1 million
and $9.1 million, respectively. The Savings Bank's risk-based
capital of $12.5 million, or 28.0% of risk-weighted assets,
exceeded the current 8% of risk-weighted assets requirement by
$8.9 million.
Comparison of Operating Results for the Three Month Periods
- -----------------------------------------------------------
Ended September 30, 1999 and 1998
- ---------------------------------
General
- -------
Net earnings amounted to $231,000 for the three months ended
September 30, 1999, an increase of $6,000, or 2.7%, from the
$225,000 of net earnings reported for the three months ended
September 30, 1998. The increase in net earnings in the current
period was due to a $12,000 increase in net interest income and
a $9,000 increase in other income, which were partially offset
by an $8,000 increase in general administrative and other
expense, a $1,000 increase in the provision for losses on loans
and a $6,000 increase in the provision for federal income taxes.
11
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION (CONTINUED)
Comparison of Operating Results for the Three Month Periods
- -----------------------------------------------------------
Ended September 30, 1999 and 1998 (continued)
- ---------------------------------
Net Interest Income
- -------------------
Net interest income was $710,000 for the three months ended
September 30, 1999, which represents an increase of $12,000, or
1.7%, compared to the three month period ended September 30,
1998. Total interest income decreased by $89,000, or 6.1%, due
to a $2.3 million, or 3.0%, 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 7.52% to 7.27%. Interest income on loans decreased
by $40,000, or 4.0%, due to a $799,000, 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 8.15% to
7.93%. Interest income on mortgage-backed securities decreased
by $32,000, or 11.0%, due to a $1.3 million, or 7.5%, decrease
in the weighted-average balance outstanding year to year and due
to a decrease in the average yield on mortgage-backed
securities, from 6.66% to 6.42%. Interest income on investment
securities and interest-bearing deposits decreased by $17,000,
or 9.9%, due to a $228,000, or 2.0%, decrease in the
weighted-average balance outstanding year to year and due to a
decrease in the yield from 6.09% to 5.65%.
Total interest expense decreased by $101,000, or 13.3%, due to a
$2.5 million, or 3.8%, decrease in the weighted average balance
of interest-bearing liabilities year to year and due to a
decrease in the average cost of funds, from 4.63% to 4.17%.
Interest expense on deposits decreased by $66,000, or 10.4%, due
to a $437,000, or 0.8%, decrease in the weighted-average balance
of deposits outstanding year to year and by a decrease in the
average cost of deposits, from 4.48% to 4.05%. Interest expense
on borrowings decreased by $35,000, or 28.2%, due to a $2.1
million, or 23.1%, decrease in the weighted-average balance of
advances outstanding from the Federal Home Loan Bank and due to
a decrease in the average cost of advances, from 5.61% to 5.19%.
As a result of the foregoing changes in interest income and
interest expense, net interest income increased by $12,000, or
1.7%, to a total of $710,000 for the three months ended
September 30, 1999, as compared to the three months ended
September 30, 1998. The interest rate spread amounted to
approximately 3.10% and 2.88% during the three month periods
ended September 30, 1999 and 1998, respectively, while the net
interest margin amounted to approximately 3.78% and 3.60%
during the three month periods ended September 30, 1999 and
1998, 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 September 30, 1999 and 1998, 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.
12
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 September 30, 1999 and 1998 (continued)
- ---------------------------------
Other Income
- ------------
Other income increased by $9,000, or 20.9%, for the three months
ended September 30, 1999, compared to the three months ended
September 30, 1998, due to a $7,000, or 21.2%, increase in
service charges and a $2,000, or 20.0%, increase in other
operating income.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense increased by $8,000,
or 1.9%, during the three months ended September 30, 1999,
compared to the three months ended September 30, 1998. The
increase in general, administrative and other expense resulted
from a $4,000, or 12.1%, increase in data processing expense,
and a $5,000, or 5.4%, increase in other operating expense.
Federal Income Taxes
- --------------------
The provision for federal income taxes increased by $6,000, or
6.8%, for the three months ended September 30, 1999, as compared
to the three months ended September 30, 1998. The increase
resulted primarily from the increase in net earnings before
taxes of $12,000, or 3.8%. The effective tax rates were 28.9%
and 28.1% for the three month periods ended September 30, 1999
and 1998, 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 has 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 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
has worked 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 has converted its
hardware to a new Year 2000 compliant system and has
successfully performed Year 2000 proxy testing with several of
its larger users. In November 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.
13
KENTUCKY FIRST BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
- ----------------------------
The Savings Bank has 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 Savings 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. The plan primarily addresses
action to deal with the possibility that the service provider's
system would be down for several days or weeks upon arrival of
Year 2000. The Bank has the ability to process transactions
utilizing spreadsheet software on in-house personal computers
for a period of time, if necessary. The board has amended its
contingency plan several times since the original adoption. The
most recent amendment, in July 1999, details the methods to be
taken should it become necessary to implement the contingency
plan. Final testing of the methology involved in the
spreadsheet processing was completed in September, 1999
Management of the Savings Bank developed an estimate of expenses
of $20,000 that are reasonably likely to be incurred by the
Savings Bank in connection with its efforts to achieve
compliance. The amount expended, as of September 30, 1999, was
approximately $7,000. 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.
Financial Modernization
- -----------------------
On November 12, 1999, President Clinton signed into law
legislation which 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 which are engaged in commercial
activities and prohibits the formation of new unitary holding
companies.
14
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.
15
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 Bankersfiled 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. On November
5, 1999, the principal balance of the Bank's loan to the Thompsons
was paid by the Bank's fidelity bond insurer. Although there can
be no assurance, the Bank does not anticipate that this litigation
will have a material impact on its operations.
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
---------------------------------------------------
None
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 three months ended
September 30, 1999.
16
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: November 12, 1999 By: /s/ Betty J. Long
----------------- ----------------------
Betty J. Long
President and Chief
Executive Officer
Date: November 12, 1999 By: /s/ Russell M. Brooks
----------------- ----------------------
Russell M. Brooks
Executive Vice President
and Financial Officer
17