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| KFFB > SEC Filings for KFFB > Form 10-Q on 14-Feb-2012 | All Recent SEC Filings |
14-Feb-2012
Quarterly Report
Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate to Kentucky First Federal Bancorp or its management are intended to identify such forward looking statements. Kentucky First Federal Bancorp's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company's market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services and the other matters mentioned in Item 1A of the Company's Annual Report on Form 10-K for the year ended June 30, 2011.
Pending Merger
On November 3, 2011, the Company announced that it had signed a definitive merger agreement with CKF Bancorp, Inc. At September 30, 2011, CKF Bancorp had assets of $131.1 million, including loans of $109.0 million (net of $1.7 million in allowance for loan losses) and deposits of $103.5 million. The consideration to be given includes both cash and the Company's common stock. The completion of the merger is subject to approval of the shareholders of CKF Bancorp and receipt of regulatory approvals. The transaction is expected to be closed in the third quarter of 2012.
On December 7, 2011, CKF Bancorp stockholders filed putative class action lawsuits on behalf of CKF Bancorp stockholders in the Boyle Circuit Court against CKF Bancorp, the CKF Bancorp board and Kentucky First Federal Bancorp. The cases are captioned Cassidy, et. al. v. CKF Bancorp, Inc., et al., Civ. Act. No. 11-C1-587 and DeMartini, et al. v. CKF Bancorp, Inc., et al., Civ. Act. No. 11-C1-588. Each complaint alleges that the CKF board breached its fiduciary duties by approving the merger agreement because the merger consideration is inadequate, the CKF Bancorp directors failed to conduct a thorough and proper sales process to maximize stockholder value and the transaction unfairly benefits the CKF Bancorp board to the disadvantage of the CKF Bancorp stockholders. The complaints also allege that Kentucky First Federal Bancorp aided and abetted the CKF Bancorp board's breach of fiduciary duties. CKF Bancorp and Kentucky First Federal Bancorp believe both complaints to be without merit and intend to vigorously defend against these claims.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Average Balance Sheets
The following table represents the average balance sheets for the six month periods ended December 31, 2011 and 2010, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Six Months Ended December 31,
2011 2010
Interest Interest
Average And Yield/ Average And Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans $ 184,741 $ 4,936 5.34 % $ 190,924 $ 5,159 5.40 %
Mortgage-backed securities 6,583 139 4.22 9,102 193 4.24
Other securities 372 1 0.54 1,535 1 0.13
Other interest-earning
assets 11,056 112 2.03 13,168 119 1.81
Total interest-earning
assets 202,752 5,188 5.12 214,729 5,472 5.10
Less: Allowance for loan
losses (764 ) (1,526 )
Non-interest-earning assets 24,810 24,405
Total assets $ 226,798 $ 237,608
Interest-bearing
liabilities:
Demand deposits $ 12,758 $ 16 0.25 % $ 13,712 $ 49 0.71 %
Savings 35,656 150 0.84 29,626 150 1.01
Certificates of deposit 90,992 721 1.58 100,973 1,221 2.42
Total deposits 139,406 887 1.27 144,311 1,420 1.97
Borrowings 25,212 311 2.47 32,506 404 2.49
Total interest-bearing
liabilities 164,618 1,198 1.46 176,817 1,824 2.06
Noninterest-Bearing demand
deposits 1,129 972
Noninterest-bearing
liabilities 2,363 2,303
Total liabilities 168,110 180,092
Shareholders' equity 58,688 57,516
Total liabilities and
shareholders' equity $ 226,798 $ 237,608
Net interest income/average
yield $ 3,990 3.66 % $ 3,648 3.04 %
Net interest margin 3.94 % 3.40 %
Average interest-earning
assets to
average interest-bearing
liabilities 123.17 % 121.44 %
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Average Balance Sheets (continued)
The following table represents the average balance sheets for the three month periods ended December 31, 2011 and 2010, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Three Months Ended December 31,
2011 2010
Interest Interest
Average And Yield/ Average And Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans $ 185,027 $ 2,470 5.34 % $ 190,830 $ 2,577 5.40 %
Mortgage-backed securities 6,349 67 4.22 8,742 93 4.26
Other securities 643 1 0.62 2,969 1 0.14
Other interest-earning
assets 10,259 56 2.18 12,277 55 1.79
Total interest-earning
assets 202,278 2,594 5.13 214,818 2,726 5.08
Less: Allowance for loan
losses (764 ) (1,520 )
Non-interest-earning assets 24,706 24,542
Total assets $ 226,220 $ 237,840
Interest-bearing
liabilities:
Demand deposits $ 13,069 $ 6 0.18 % $ 14,205 $ 24 0.68 %
Savings 36,086 61 0.68 29,688 75 1.01
Certificates of deposit 89,633 336 1.50 100,668 582 2.31
Total deposits 138,788 403 1.16 144,561 681 1.88
Borrowings 25,328 151 2.38 32,475 161 1.98
Total interest-bearing
liabilities 164,116 554 1.35 177,036 842 1.90
Noninterest-Bearing demand
deposits 1,082 985
Noninterest-bearing
liabilities 2,234 2,278
Total liabilities 167,432 180,299
Shareholders' equity 58,788 57,541
Total liabilities and
shareholders' equity $ 226,220 $ 237,840
Net interest income/average
yield $ 2,040 3.78 % $ 1,884 3.18 %
Net interest margin 4.03 % 3.51 %
Average interest-earning
assets to
average interest-bearing
liabilities 123.25 % 121.34 %
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Discussion of Financial Condition Changes from June 30, 2011 to December 31, 2011
Assets: At December 31, 2011, the Company's assets totaled $236.4 million, an increase of $10.3 million, or 4.6%, from total assets at June 30, 2011. This increase was attributed primarily to an increase in securities available-for-sale.
Cash and cash equivalents:Cash and cash equivalents decreased by $891,000 to $4.2 million at December 31, 2011. It is management's preference to deploy excess liquidity into mortgage loans and investment securities to the extent possible, while maintaining adequate liquidity at all times.
Loans: Loans receivable, net, increased by $1.2 million to $184.0 million at December 31, 2011, primarily as a result of loans made on sale of real estate acquired through foreclosure and loans made on multi-family property. Included in loans was a $2.2 million loan made on property formerly held in other real estate, which had $650,000 in deferred revenue at December 31, 2011. Also included in loans at December 31, 2011, was approximately $3.1 million in loans made on 98 residential rental units. These transactions are primarily responsible for the increase in the multi-family loan segment of our loan portfolio. Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable and prudent. However, loan demand has weakened as a result of the downturn in the economy and we expect to see a continued decrease in demand for home loans until the housing market regains a stronger footing.
Non-Performing Loans: At December 31, 2011, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $1.8 million, or 1.0% of total loans, compared to $876,000 or 0.5%, of total loans at June 30, 2011. The Company's allowance for loan losses totaled $842,000 at $764,000 at December 31, and June 30, 2011, respectively. The allowance for loan losses at December 31, 2011, represented 45.7% of nonperforming loans and 0.46% of total loans, while at June 30, 2011, the allowance represented 87.2% of nonperforming loans and 0.4% of total loans. What appears to be a deterioration in nonperforming loans was actually a return to the nonperforming loan level the Company experienced at March 31, 2011. At March 31, 2011 the allowance represented 12.2% of nonperforming loans and 0.4% of total loans. Many of the single family, owner-occupied borrowers who had non-performing loans at March 31, 2011, improved performance in the quarter ended June 30, 2011, but returned to poorly performing in the quarter ended September 30, 2011, and have remained poorly performing in the recently ended quarter.
The Company had $7.4 million in assets classified as substandard for regulatory purposes at December 31, 2011, including loans ($4.7 million) and real estate owned ("REO") ($2.6 million). Classified loans as a percentage of total loans was 2.6% and 3.7% at December 31, 2011 and June 30, 2011, respectively. All substandard loans were secured by residential property on which the Banks have priority lien position. The table below summarizes substandard loans and negative escrows on those loans at December 31, 2011, and June 30, 2011:
December 31, 2011 June 30, 2011
Number Number
of Carrying of Carrying
Loans Value Loans Value
One- to four-family 47 $ 2,561 26 $ 1,627
Multi-family 2 2,184 1 641
Total substandard loans 49 $ 4,745 27 $ 2,268
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Discussion of Financial Condition Changes from June 30, 2011 to December 31, 2011 (continued)
At December 31 2011, and June 30, 2011, the Company had $336,000 and $335,000 of loans classified as special mention, respectively. This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. At December 31, 2011, no loans were classified as doubtful or loss for regulatory purposes. For further information on non-performing loans see "Note 6. Loans Receivable" of the Notes to Consolidated Financial Statements set forth in Item 1, above.
The following table presents the aggregate carrying value of REO at December 31, 2011, and June 30, 2011:
December 31, 2011 June 30, 2011
Number Aggregate Number Aggregate
of Carrying of Carrying
Properties Value Properties Value
Single-family homes 8 $ 774 43 $ 2,448
2-4family properties 13 1,607 13 1,607
Multi-family 1 234 1 234
Building lot 1 15 1 15
Total other real estate owned 23 $ 2,630 58 $ 4,304
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Securities:At December 31, 2011, the Company's investment securities had increased $11.4 million or 163.1% to $18.5 million, due primarily to the purchase of a U.S. Treasury note during the quarter just ended. Shortly after the quarter-ended December 31, 2011, the Company's $12.5 million short-term investment in the U.S. Treasury note matured and the short-term FHLB advance used to finance the investment was repaid.
Liabilities: At December 31, 2011, the Company's liabilities totaled $177.5 million, an increase of $10.0 million, or 6.0%, from total liabilities at June 30, 2011. The increase in liabilities was attributed primarily to an $13.5 million, or 53.3%, increase in Federal Home Loan Bank advances. Advances increased to $38.7 million at December 31, 2011. The Company plans to repay a significant portion of short-term advances with proceeds from its U.S. Treasury note, which matures in February, 2012.
Shareholders' Equity: At December 31, 2011, the Company's shareholders' equity totaled $59.0 million, an increase of $284,000 or 0.5% from the June 30, 2011 total.
The Company paid dividends of $567,000 or 70.0% of net income for the six-month period just ended. First Federal MHC has waived its right to dividends on its common shares of the Company. The Company believes that a strong dividend is appropriate in light of the high level of capital that both banks now have. At December 31, 2011, capital on a consolidated basis and at each of the banks exceeded the level necessary to be considered "well capitalized" and was sufficient, in management's opinion, to support foreseeable growth. Management cannot speculate on future dividend levels. Various factors, including capital levels, income levels, liquidity levels, regulatory requirements and overall financial condition of the Company are considered before dividends are declared. However, management continues to believe that a strong dividend is consistent with the Company's long-term capital management strategy. See "Risk Factors" in Part II, Item 1A, herein for additional discussion regarding dividends.
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2011 and 2010
General
Net income totaled $809,000 for the six months ended December 31, 2011, an increase of $52,000 from net income of $757,000 for the same period in 2010. The increase was primarily attributable to higher net interest income.
Net Interest Income
Net interest income after provision for loan losses increased $328,000 or 9.2% to $3.9 million for the six-month period ended December 31, 2011, from $3.6 million for the 2010 period, due to interest expense decreasing at a faster pace than interest income. Interest income decreased by $284,000, or 5.2%, to $5.2 million, while interest expense decreased $626,000 or 34.3% to $1.2 million for the six months ended December 31, 2011. Net interest margin increased from 3.40% for the six months ended December 31, 2010 to 3.94% for the recently ended period. Net interest margin also increased from 3.51% for the prior year quarterly period to 4.03% for the quarter ended December 31, 2011.
Interest income on loans decreased $223,000 or 4.3% to $4.9 million, due primarily to a decrease in the average outstanding balance of the loan portfolio. The average balance of loans outstanding for the six-month period ended December 31, 2011, decreased $6.2 million or 3.2% to an average of $184.7 million for the six months just ended, while the average rate earned decreased 6 basis points to 5.34% for the period just ended. Interest income on mortgage-backed residential securities decreased $54,000 or 28.0% to $139,000 for the six months ended December 31, 2011. The decrease in the income from securities was related to reduced volume, as securities matured and principal from mortgage-backed securities flowed back to the Company. There were no sales of investments during the six-month period just ended.
Interest expense on deposits and borrowings both declined period to period. Interest expense on deposits decreased $533,000 or 37.5% to $887,000 for the six-month period ended December 31, 2011, while interest expense on borrowings declined $93,000 or 23.0% to $311,000 for the same period. The decline in interest expense on deposits was attributed primarily to a reduction in the average rate paid on the deposits. The average rate paid on deposits decreased 70 basis points to 1.27% for the most recent period, while the average balance of deposits decreased $4.9 million or 3.4% to $139.4 million. The decline in interest expense on borrowings was attributed primarily to a lower amount of borrowings outstanding, which declined $7.3 million to $25.2 million for the most recent period, while the average rate paid on borrowings decreased 2 basis points to 2.47% for the recently ended six-month period. If the general level of interest rates remains steady, we expect to see our time deposits continue to reprice to lower levels, although the rate of repricing will decline over time. Our adjustable rate loans have rate floors, which are set at 50 basis points lower than the origination interest rate. At December 31, 2011, adjustable rate loans made up approximately 68% of our real estate loan portfolio. The decline in deposit repricing will likely cause the increase in our net interest margin to plateau.
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2011 and 2010 (continued)
Provision for Losses on Loans
The Company charges a provision for losses on loans to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Banks' market areas and other factors related to the collectibility of the Banks' loan portfolio. The Company recorded a provision of $82,000 for losses on loans during the six months ended December 31, 2011, compared to a provision of $68,000 for the six months ended December 31, 2010. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company's results of operations.
Non-interest Income
Non-interest income totaled $57,000 for the six months ended December 31, 2011, a decrease of $97,000 from the same period in 2010, primarily as a result of a decrease of $69,000 in net gains on sales of loans. Also contributing to the decline in non-interest income were losses recognized on the sale of OREO and a charge on the decline in value of OREO property held at December 31, 2011. A loss of $13,000 was recognized on the sale of OREO during the current period, while impairment charges totaled $48,000 for OREO.
Non-interest Expense
Non-interest expense totaled $2.8 million for the six months ended December 31, 2011, an increase of $152,000, or 5.8%, compared to the same period in 2010. The increase was due primarily to an increase in legal and other outside service expense, which increased chiefly because of the Company's agreement of merger with CKF Bancorp, Inc., which was announced on November 3, 2011. Outside service fees totaled $189,000 for the recently-ended period compared to $67,000 for the prior year period, a $122,000 or 182.1% increase. Legal fees totaled $192,000 for the six months ended December 31, 2011, an increase of $123,000 or 178.3% over the prior year.
Federal Income Tax Expense (Benefit)
Federal income taxes expense totaled $396,000 for the six months ended December 31, 2011, an increase of $27,000, compared to federal income tax expense recognized in the prior year period. The effective tax rates were 32.9% and 32.8% for the six-month periods ended December 31, 2011 and 2010, respectively.
Comparison of Operating Results for the Three-Month Periods Ended December 31, 2011 and 2010
General
Net income totaled $388,000 for the three months ended December 31, 2011, a decrease of $36,000 from net income of $424,000 for the same period in 2010. The decrease was primarily attributable to higher non-interest expense and higher provision for loan losses.
Net Interest Income
Net interest income after provision for loan losses increased $117,000 or 6.4% to $1.9 million for the three-month period ended December 31, 2011, from $1.8 million for the 2010 period, due to interest expense decreasing at a faster pace than interest income. Interest income decreased by $132,000, or 4.8%, to $2.6 million, while interest expense decreased $288,000 or 34.2% to $554,000 for the three months ended December 31, 2011
Interest income on loans decreased $107,000 or 4.2% to $2.5 million, due primarily to a decrease in the average outstanding balance of the loan portfolio. The average balance of loans outstanding for the three-month period ended December 31, 2011, decreased $5.8 million or 3.0% to an average of $185.0 million for the three months just ended, due primarily to loan payoffs due to refinancing, while the average rate earned decreased 6 basis points to 5.34% for the period just ended. Interest income on mortgage-backed residential securities decreased $26,000 or 28.0% to $67,000 for the three months ended December 31, 2011. The decrease in the income from securities was related to reduced volume, as securities matured and principal from mortgage-backed securities flowed back to the Company. There were no sales of investments during the three-month period just ended.
Interest expense on deposits and borrowings both declined period to period. Interest expense on deposits decreased $278,000 or 40.8% to $403,000 for the three-month period ended December 31, 2011, while interest expense on borrowings declined $10,000 or 6.2% to $161,000 for the same period. The decline in interest expense on deposits was attributed primarily to a reduction in the average rate paid on the deposits. The average rate paid on deposits decreased 72 basis points to 1.16% for the most recent period, while the average balance of deposits decreased $5.8 million or 4.0% to $138.8 million. The decline in interest expense on borrowings was attributed primarily to a lower amount of borrowings outstanding, which declined $7.1 million to $25.3 million for the most recent period, while the average rate paid on borrowings increased 40 basis points to 2.38% for the recently ended three-month period, due primarily to lower amortization of premium associated with FHLB advances acquired in its 2005 merger.
Comparison of Operating Results for the Three-Month Periods Ended December 31, 2011 and 2010 (continued)
Provision for Losses on Loans
The Company recorded a provision of $82,000 for losses on loans during the three months ended December 31, 2011, compared to a provision of $43,000 for the three months ended December 31, 2010. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company's results of operations.
Non-interest Income
Non-interest income totaled $31,000 for the three months ended December 31, 2011, a decrease of $43,000 from the same period in 2010, primarily as a result of a decrease of $41,000 in net gains on sales of loans. Also contributing to the decline in non-interest income were charges on the decline in value of OREO property. An impairment charge of $38,000 was recorded during the quarter ended December 31, 2011.
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