1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2004
-------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 0-51176
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KENTUCKY FIRST FEDERAL BANCORP
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
(To be incorporated under
the laws of the United States) (To be applied for)
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
479 Main Street, Hazard, Kentucky 41702
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
(606) 436-3860
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months or such shorter period that the issuer was required to file such
reports and (2) has been subject to such filing requirements for the past ninety
days: Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Not applicable
--------------------------------
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2
INDEX
Page
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PART I - ITEM 1 FINANCIAL INFORMATION
Statements of Financial Condition 3
Statements of Earnings 4
Statements of Comprehensive Income 5
Statements of Cash Flows 6
Notes to Financial Statements 8
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk 15
ITEM 4 Controls and Procedures 15
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
3
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF FINANCIAL CONDITION
(In thousands)
DECEMBER 31, JUNE 30,
ASSETS 2004 2004
(UNAUDITED)
Cash and due from banks $ 923 $ 899
Federal funds sold - 15,000
Interest-bearing deposits in other financial institutions 3,710 963
--------- ---------
Cash and cash equivalents 4,633 16,862
Investment securities available for sale - at market 12,670 12,391
Investment securities held to maturity, at amortized cost 62,837 50,840
Mortgage-backed securities held to maturity, at amortized cost 23,093 22,983
Loans receivable - net 31,754 33,568
Real estate acquired through foreclosure 28 -
Office premises and equipment - at depreciated cost 165 186
Federal Home Loan Bank stock - at cost 1,865 1,826
Accrued interest receivable 596 603
Prepaid expenses and other assets 945 77
Prepaid federal income taxes 288 308
Deferred federal income taxes 70 179
--------- ---------
Total assets $ 138,944 $ 139,823
========= =========
LIABILITIES AND RETAINED EARNINGS
Deposits $ 97,449 $ 98,751
Advances from the Federal Home Loan Bank 9,000 9,000
Other liabilities 621 1,029
--------- ---------
Total liabilities 107,070 108,780
Retained earnings, restricted 32,091 31,443
Accumulated comprehensive income (loss), unrealized losses on
securities designated as available for sale, net of related tax effects (217) (400)
--------- ---------
Total retained earnings 31,874 31,043
--------- ---------
Total liabilities and retained earnings $ 138,944 $ 139,823
========= =========
3
4
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF EARNINGS
(Unaudited)
(In thousands)
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
2004 2003 2004 2003
Interest income
Loans $ 1,180 $ 1,464 $ 580 $ 702
Mortgage-backed securities 487 126 244 91
Investment securities 1,051 1,121 532 551
Interest-bearing deposits and other 162 117 91 52
------ ------ ------ ------
Total interest income 2,880 2,828 1,447 1,396
Interest expense
Deposits 941 1,167 454 541
Borrowings 134 - 67 -
------ ------ ------ ------
Total interest expense 1,075 1,167 521 541
------ ------ ------ ------
Net interest income 1,805 1,661 926 855
Provision for losses on loans 28 27 13 21
------ ------ ------ ------
Net interest income after provision for
losses on loans 1,777 1,634 913 834
Other operating income 11 11 6 11
General, administrative and other expense
Employee compensation and benefits 537 565 273 272
Occupancy and equipment 71 71 38 37
Data processing 15 17 7 9
Franchise taxes 37 47 19 24
Charitable contributions 7 38 4 11
Other operating 138 145 67 65
------ ------ ------ ------
Total general, administrative and other expense 805 883 408 418
------ ------ ------ ------
Earnings before income taxes 983 762 511 427
Federal income taxes
Current 320 229 162 128
Deferred 15 30 11 17
------ ------ ------ ------
Total federal income taxes 335 259 173 145
------ ------ ------ ------
NET EARNINGS $ 648 $ 503 $ 338 $ 282
====== ====== ====== ======
4
5
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
2004 2003 2004 2003
Net earnings $ 648 $ 503 $ 338 $ 282
Other comprehensive income (loss), net of taxes (benefits):
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $94, $(124), $(44)
and $(14) during the respective periods 183 (240) (85) (28)
---- ---- ----- -----
Comprehensive income $ 831 $ 263 $ 253 $ 254
==== ==== ==== ====
Accumulated comprehensive loss $(217) $(400) $(217) $(400)
==== ==== ==== ====
5
6
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(Unaudited)
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 648 $ 503
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 (6) 10
Amortization of deferred loan origination fees (11) (30)
Depreciation and amortization 44 43
Provision for losses on loans 28 27
Federal Home Loan Bank stock dividends (39) (35)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 7 (37)
Prepaid expenses and other assets (868) (9)
Other liabilities (408) (73)
Federal income taxes
Current 20 81
Deferred 15 30
------- -------
Net cash provided by (used in) operating activities (570) 510
Cash flows provided by (used in) investing activities:
Purchase of investment securities (11,997) (63,000)
Proceeds from sale of real estate acquired through foreclosure 82 284
Proceeds from maturity of investment securities - 32,996
Proceeds from sales of investment securities - 10,000
Purchase of mortgage-backed securities (1,261) (6,045)
Principal repayments on mortgage-backed securities 1,156 255
Loan principal repayments 4,129 6,826
Loan disbursements (2,441) (3,344)
Purchase of office equipment (23) (31)
------- -------
Net cash used in investing activities (10,357) (22,059)
Cash flows used in financing activities:
Net decrease in deposit accounts (1,302) (3,475)
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Net decrease in cash and cash equivalents (12,229) (25,024)
Cash and cash equivalents at beginning of period 16,862 30,349
------- -------
Cash and cash equivalents at end of period $ 4,633 $ 5,325
======= =======
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7
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(Unaudited)
(In thousands)
2004 2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 300 $ 150
====== ======
Interest on deposits and borrowings $ 1,072 $ 1,209
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 183 $ (240)
====== ======
Transfers from loans to real estate acquired
through foreclosure $ 110 $ 200
====== ======
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8
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO FINANCIAL STATEMENTS
For the six- and three-month periods ended December 31, 2004 and 2003
On July 14, 2004, the Board of Directors of the First Federal Savings and Loan
Association ("First Federal of Hazard" or the "Association") adopted a Plan of
Reorganization (the "Plan" or the "Reorganization") pursuant to which the
Association proposes to reorganize into a mutual holding company structure with
the establishment of a stock holding company, Kentucky First Federal Bancorp, as
parent of the Association, and the Association will convert to the stock form of
ownership, followed by the issuance of all the Association's outstanding stock
to Kentucky First Federal Bancorp. Pursuant to the Reorganization and the
Merger, Kentucky First Federal Bancorp will issue between 2,546,051 and
3,868,313 common shares, representing approximately 45.0% of the outstanding
common stock, up to 45.0% of which will be issued to shareholders of Frankfort
First Bancorp, Inc. ("Frankfort First") in a merger, with the remainder to be
sold in the Reorganization, at $10.00 per share to the Association's depositors
and a newly formed Employee Stock Ownership Plan ("ESOP"). First Federal MHC is
being organized as a federally chartered mutual holding company and will own
approximately 55.0% of the outstanding common stock of Kentucky First Federal
Bancorp upon completion of the reorganization. Immediately following the
Reorganization, Kentucky First Federal Bancorp will acquire Frankfort First and
its wholly-owned subsidiary First Federal Savings Bank in a merger (the
"Merger"), at an aggregate purchase price of $31.2 million to be paid in the
form of both stock and cash. The purchase is expected to result in goodwill of
approximately $16.6 million.
The costs of issuing the common stock have been deferred and will be deducted
from the sale proceeds of the offering. If the conversion is unsuccessful, all
deferred costs will be charged to operations. At December 31, 2004, the
Association had deferred conversion costs totaling approximately $557,000. The
transaction was approved by regulatory authorities and members of the
Association (and by the Frankfort First shareholders).
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements, which represent the financial
condition and results of operations of First Federal Savings and Loan
Association of Hazard, were prepared in accordance with the instructions for
Form 10-Q and, therefore, do not include information or footnotes necessary for
a complete presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in the United
States of America. 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, 2004, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. Critical Accounting Policies
----------------------------
We consider accounting policies involving significant judgments and assumptions
by management that have, or could have, a material impact on the carrying value
of certain assets or on income to be critical accounting policies. We consider
the allowance for loan losses to be a critical accounting policy.
The allowance for loan losses is the estimated amount considered necessary to
cover probable incurred credit losses in the loan portfolio at the balance sheet
date. The allowance is established through the provision for losses on loans
which is charged against income. In determining the allowance for loan losses,
management makes significant estimates and has identified this policy as one of
the most critical for First Federal of Hazard.
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9
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO FINANCIAL STATEMENTS
For the six- and three-month periods ended December 31, 2004 and 2003
2. Critical Accounting Policies (continued)
----------------------------
Management performs a monthly evaluation of the allowance for loan losses.
Consideration is given to a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews, volume and mix of the loan portfolio and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to change. Management considers the economic
climate in our lending area to be among the factors most likely to have an
impact on the level of the required allowance for loan losses. However, in view
of the fact that local economy is diverse, without significant dependence on a
single industry or employer, the economic climate is considered to be stable,
and improving, at December 31, 2004. Nevertheless, management continues to
monitor and evaluate factors which could have an impact on the required level of
the allowance. Nationally, management will watch for issues that may negatively
affect a significant percentage of homeowners in First Federal of Hazard's
lending area. These may include significant increases in unemployment or
significant depreciation in home prices. Management reviews employment
statistics periodically when determining the allowance for loan losses and
generally finds the unemployment rate in First Federal of Hazard's lending area
to be acceptable in relation to historical trends. Given the aforementioned
indicators of economic stability, management does not foresee in the near term,
any significant increases in the required allowance for loan losses related to
economic factors. Finally, management has no current plans to alter the type of
lending offered or collateral accepted, but if such plans change or market
conditions result in large concentrations of certain types of loans, such as
commercial real estate or high loan-to-value ratio residential loans, management
would respond with an increase in the overall allowance for loan losses.
The allowance for loan losses analysis has two components, specific and general
allocations. Specific allocations are made for loans that are determined to be
impaired. Impairment is measured by determining the present value of expected
future cash flows or, for collateral-dependent loans, the fair value of the
collateral adjusted for market conditions and selling expenses. The general
allocation is determined by segregating the remaining loans by type of loan,
risk weighting (if applicable) and payment history. We also analyze historical
loss experience, delinquency trends, general economic conditions and geographic
and industry concentrations. This analysis establishes factors that are applied
to the loan groups to determine the amount of the general reserve. Actual loan
losses may be significantly more than the allowance we have established which
could have a material negative effect on our financial results.
3. Recent Accounting Pronouncements
--------------------------------
During December 2004, the Financial Accounting Standards Board (the "FASB")
issued a revision to Statement of Financial Accounting Standards No. 123 ("SFAS
123(R)") which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily on accounting for transactions in which an entity obtains employee
services in share-based transactions. This Statement requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, with limited
exceptions. That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award - the
requisite service period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. Employee
share purchase plans will not result in recognition of compensation cost if
certain conditions are met.
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10
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO FINANCIAL STATEMENTS
For the six- and three-month periods ended December 31, 2004 and 2003
3. Recent Accounting Pronouncements (continued)
--------------------------------
Initially, the cost of employee services received in exchange for an award of
liability instruments will be measured based on current fair value; the fair
value of that award will be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. The grant-date
fair value of employee share options and similar instruments will be estimated
using option-pricing models, adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification.
Excess tax benefits, as defined by SFAS 123(R) will be recognized as an addition
to additional paid-in capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense, unless there are excess tax benefits from previous awards
remaining in additional paid-in capital to which it can be offset.
Compensation cost is required to be recognized in the first interim or annual
period that begins after June 15, 2005, or July 1, 2005 as to the Association.
The Association currently has no stock option plans or other instruments that
are subject to the provisions of SFAS No. 123(R).
10
11
KENTUCKY FIRST FEDERAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
Certain statements contained in this report that are not historical facts are
forward-looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to First Federal of Hazard or its management
are intended to identify such forward looking statements. First Federal of
Hazard's actual results, performance or achievements may materially differ from
those expressed or implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, prices for real
estate in the Association's market area, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
Discussion of Financial Condition Changes from June 30, 2004 to December 31,
- ----------------------------------------------------------------------------
2004
- ----
At December 31, 2004, the Association's assets totaled $138.9 million, a
decrease of $879,000, or 0.6%, from total assets at June 30, 2004.
Cash and cash equivalents decreased by $12.2 million, or 72.5%, from June 30,
2004 levels, to a total of $4.6 million at December 31, 2004. Investment
securities totaled $75.5 million at December 31, 2004, an increase of $12.3
million, or 19.4%, from June 30, 2004 levels, due primarily to purchases of
$12.0 million. Purchases of investment securities consisted of a short-term U.S.
Government obligations. Mortgage-backed securities totaled $23.1 million at
December 31, 2004, an increase of $110,000, or 0.5%, from the total at June 30,
2004, due primarily to purchases totaling $1.3 million, which were offset by
principal repayments of $1.2 million.
Loans receivable decreased by $1.8 million, or 5.4%, during the six-month period
ended December 31, 2004, to a total of $31.8 million. Loan disbursements
totaling $2.4 million for the six months ended December 31, 2004, were more than
offset by principal repayments of $4.1 million. During the six months ended
December 31, 2004, loans originated consisted entirely of loans secured by one-
to four-family residential real estate.
The allowance for loan losses totaled $670,000 and $665,000 at December 31, 2004
and June 30, 2004, respectively. Nonperforming and nonaccrual loans totaled $1.1
million at December 31, 2004, a decrease of $7,000, or 0.6% from the balance at
June 30, 2004. The allowance for loan losses represented 58.4% and 57.6% of
nonperforming loans at December 31, 2004 and June 30, 2004, respectively. At
December 31, 2004, nonperforming loans consisted entirely of one- to four-family
residential real estate loans. Management believes such loans are adequately
collateralized and does not expect to incur any significant losses on such
loans. Although management believes that its allowance for loan losses at
December 31, 2004, was 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
Association's results of operations.
Deposits totaled $97.4 million at December 31, 2004, a decrease of $1.3 million,
or 1.3%, from June 30, 2004 levels. The decrease in deposits was due primarily
to increased competition in deposit rates.
11
12
KENTUCKY FIRST FEDERAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2004 to December 31,
- ----------------------------------------------------------------------------
2004 (continued)
- ----
Retained earnings totaled $31.9 million at December 31, 2004, an increase of
$831,000, or 2.7%, over the June 30, 2004 level. The increase was due to net
earnings of $648,000 and an $183,000 net decrease in unrealized losses on
securities available for sale.
The Association is required to meet minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision ("OTS"). At December 31, 2004,
the Association's regulatory capital exceeded the minimum capital requirements.
Comparison of Operating Results for the Six-Month Periods Ended December 31,
- ----------------------------------------------------------------------------
2004 and 2003
- -------------
General
- -------
Net earnings totaled $648,000 for the six months ended December 31, 2004, an
increase of $145,000, or 28.8%, over the same period in 2003. An increase of
$144,000 in net interest income and a decrease of $78,000 in general,
administrative and other expense were offset in part by an increase of $76,000
in the provision for federal income taxes.
Net Interest Income
- -------------------
Interest income on loans decreased by $284,000, or 19.4%, for the six months
ended December 31, 2004, compared to the 2003 period. This decrease was due
primarily to a $6.0 million, or 15.2%, decrease in the average portfolio balance
outstanding period to period, and a 37 basis point decrease in the
weighted-average yield, to 7.07% for the 2004 six-month period. Interest income
on investment securities, mortgage-backed securities and interest-bearing
deposits increased by $336,000, or 24.6%, due primarily to a 69 basis point
increase in the weighted-average yield, to 3.24% for the 2004 period and an
$11.5 million, or 12.4%, increase in the average balance of the related assets
outstanding period to period.
Interest expense on deposits decreased by $226,000, or 19.4%, for the six months
ended December 31, 2004, compared to the same period in 2003. This decrease was
due primarily to a $3.7 million, or 3.5%, decrease in the average balance of
deposits outstanding period to period and a 37 basis point decrease in the
weighted-average cost of deposits, to 1.91% for the six months ended December
31, 2004. Interest expense on borrowings increased by $134,000 during the 2004
period. First Federal of Hazard had no borrowings outstanding during the
comparable 2003 period.
12
13
KENTUCKY FIRST FEDERAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended December 31,
- ----------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Net Interest Income (continued)
- -------------------
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $144,000, or 8.7%, to a total of $1.8 million
for the six months ended December 31, 2004. The interest rate spread increased
to 2.17% for the six months ended December 31, 2004, from 1.99% for the 2003
period, while the net interest margin increased to 2.61% in the 2004 period,
compared to 2.50% in the 2003 period.
Provision for Losses on Loans
- -----------------------------
The Association charges a provision for losses on loans to earnings to bring the
total allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by the
Association, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Association's
market area, and other factors related to the collectibility of the
Association's loan portfolio. The Association recorded a provision for losses on
loans totaling $28,000 during the six months ended December 31, 2004, an
increase of $1,000, or 3.7%, over the comparable six-month period in 2003. There
can be no assurance that the loan loss allowance will be adequate to absorb
losses on known nonperforming loans or that the allowance will be adequate to
cover losses on nonperforming assets in the future, which could adversely affect
the Association's results of operations.
Other Income
- ------------
Other income totaled $11,000 for each of the six months ended December 31, 2004
and 2003. Other income is not a significant part of the Association's
operations.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $805,000 for the six months
ended December 31, 2004, a decrease of $78,000, or 5.0%, over the same period in
2003. This decrease was comprised primarily of decreases of $28,000, or 5.0%, in
employee compensation and benefits and $31,000, or 81.6%, in charitable
contributions. The decrease in employee compensation and benefits was due
primarily to a decrease in pension expense, partially offset by normal merit
increases year to year.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $335,000 for the six months ended
December 31, 2004, an increase of $76,000, or 29.3%, compared to the same period
in 2003. This increase was due to an increase in earnings before taxes of
$221,000, or 29.0%. The effective tax rates were 34.1% and 34.0% for the
six-month periods ended December 31, 2004 and 2003, respectively.
13
14
KENTUCKY FIRST FEDERAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended December 31,
- ------------------------------------------------------------------------------
2004 and 2003
- -------------
General
- -------
Net earnings totaled $338,000 for the three months ended December 31, 2004, an
increase of $56,000, or 19.9% from the $282,000 in earnings reported for the
same period in 2003. The increase was primarily attributable to a $71,000
increase in net interest income and a decrease of $10,000 in general,
administrative and other expense, partially offset by an increase of $28,000 in
the provision for federal income taxes.
Net Interest Income
- -------------------
Interest income on loans decreased by $122,000, or 17.4%, for the three months
ended December 31, 2004, compared to the 2003 period. This decrease was due
primarily to a $5.6 million, or 14.5%, decrease in the average portfolio balance
outstanding period to period and a 24 basis point decrease in the
weighted-average yield, to 7.04% for the 2004 three-month period. Interest
income on investment securities, mortgage-backed securities and interest-bearing
deposits increased by $173,000, or 24.9%, due primarily to an $11.7 million, or
12.6%, increase in the average balance of the related assets outstanding period
to period and a 33 basis point increase in the weighted-average yield, to 3.32%
for the 2004 period.
Interest expense on deposits decreased by $87,000, or 16.1%, for the three
months ended December 31, 2004, compared to the same period in 2003. This
decrease was due primarily to a $2.9 million, or 2.8%, decrease in the average
balance of deposits outstanding period to period. The weighted average cost of
deposits was 1.85% for 2004 and 2.14% for the 2003 period. Interest expense on
borrowings increased by $67,000, or 100.0%, as First Federal of Hazard had no
borrowings outstanding during the 2003 period.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $71,000, or 8.3%, to a total of $926,000 for
the three months ended December 31, 2004. The interest rate spread increased to
2.27% for the three months ended December 31, 2004, from 2.11% for the 2003
period, while the net interest margin increased to 1.35% in the 2004 period,
compared to 1.30% in the 2003 period.
Provision for Losses on Loans
- -----------------------------
The Association charges a provision for losses on loans to earnings to bring the
total allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by the
Association, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Association's
market area, and other factors related to the collectibility of the
Association's loan portfolio. The Association recorded a provision for losses on
loans totaling $13,000 during the three months ended December 31, 2004, a
decrease of $8,000, or 38.1%, from the comparable three-month period in 2003.
The reduction in the provision during the 2004 period was primarily influenced
by a decline in the balance of the loan portfolio and a decrease in
nonperforming loans over the period. There can be no assurance that the loan
loss allowance will be adequate to absorb losses on known nonperforming loans or
that the allowance will be adequate to cover losses on nonperforming assets in
the future, which could adversely affect the Association's results of
operations.
14
15
KENTUCKY FIRST FEDERAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended December 31,
- ------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Other Income
- ------------
Other income totaled $6,000 for the three months ended December 31, 2004, a
decrease of $5,000, or 45.5%, from the same period in 2003. Other income is not
a significant part of the Association's operations.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $408,000 for the three months
ended December 31, 2004, a decrease of $10,000, or 2.4%, compared to the same
period in 2003. This decrease was due primarily to a decrease of $7,000, or
63.6%, in charitable contributions. There were no significant changes in other
categories of operating expenses during the periods.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $173,000 for the three months
ended December 31, 2004, an increase of $28,000, or 19.3%, compared to the same
period in 2003. This increase was due to an increase in earnings before taxes of
$84,000, or 19.7%. The effective tax rates were 33.9% and 34.0% for the
three-month periods ended December 31, 2004 and 2003, respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There has been no material change in the Association's market risk since the
disclosure included under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management"
in the Association's Form S-1 filing dated January 10, 2005.
ITEM 4: Controls and Procedures
-----------------------
The Association's Chief Executive Officer and Chief Financial Officer have
evaluated the Association's disclosure controls and procedures (as defined under
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Association's disclosure controls and procedures are
effective. There were no changes in the Association's internal control over
financial reporting which materially affected, or are reasonably likely to
materially affect, the Association's internal controls over financial reporting.
15
16
KENTUCKY FIRST FEDERAL BANCORP
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable.
ITEM 2. Unregistered Sales of Equity 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
--------
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
16
17
KENTUCKY FIRST FEDERAL BANCORP
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENTUCKY FIRST FEDERAL BANCORP
Date: February 24, 2005 By: /s/ Tony D. Whitaker
-------------------------------
Tony D. Whitaker
Chairman of the Board and
Chief Executive Officer
Date: February 24, 2005 By: /s/ Kaye C. Lewis
-------------------------------
Kaye C. Lewis
Acting Treasurer