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KFFB > SEC Filings for KFFB > Form 10-Q on 16-Nov-2012All Recent SEC Filings

Show all filings for KENTUCKY FIRST FEDERAL BANCORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for KENTUCKY FIRST FEDERAL BANCORP


16-Nov-2012

Quarterly Report


ITEM 2: 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 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, 2012.

Pending Merger

On November 3, 2011, the Company entered into an agreement of merger with CFK Bancorp, Inc. ("CKP") and Central Kentucky Federal Savings Bank, whereby CKF will merger with and into the Company with the Company being the surviving corporation. In connection with the merger, Central Kentucky Federal Savings Bank will merge into First Federal of Frankfort and will operate under the name "Central Kentucky Federal Savings Bank" as a division of First Federal of Frankfort. The CFK Bancorp, Inc. stockholders, who can elect to receive cash, the Company's stock, or a combination of cash and the Company's stock, approved the merger on July 3, 2012. The merger is also subject to regulatory approval and Kentucky First has filed the appropriate applications with its primary regulator, the Board of Governors of the Federal Reserve System. As of September 30, 2012, CFK Bancorp, Inc., maintained $124.3 million in assets, $98.7 million in net loans, $101.8 million in deposits and $13.0 million in tangible equity capital. The merger consideration is expected to be valued at $11.6 million and the combination is expected to be completed during the fourth quarter of 2012, pending regulatory approval. Please refer to Form 424B3 - Prospectus [Rule
242(b)(3)] filed with the Securities and Exchange Commission on May 23, 2012, for additional information about the proposed merger.

Kentucky First Federal Bancorp

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Average Balance Sheets

The following table represents the average balance sheets for the three month periods ended September 30, 2012 and 2011, 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 September 30,
                                                         2012                                       2011
                                                       Interest                                   Interest
                                         Average          And          Yield/       Average          And          Yield/
                                         Balance       Dividends        Cost        Balance       Dividends        Cost
                                                                     (Dollars in thousands)
Interest-earning assets:
Loans                                   $ 181,814     $     2,313         5.10 %   $ 184,454     $     2,466         5.35 %
Mortgage-backed securities                  4,796              51         4.25         6,816              72         4.23
Other securities                              100               -            -           100               -            -
Other interest-earning assets              11,314              61         2.16        11,853              56         1.89
Total interest-earning assets             198,024           2,425         4.90       203,223           2,594         5.11

Less: Allowance for loan losses              (859 )                                     (764 )
Non-interest-earning assets                25,106                                     24,919
Total assets                            $ 222,271                                  $ 227,378

Interest-bearing liabilities:
Demand deposits                         $  11,006     $         7         0.25 %   $  12,485     $        10         0.32 %
Savings                                    36,973              63         0.68        35,225              89         1.01
Certificates of deposit                    83,022             234         1.13        92,352             385         1.67
Total deposits                            131,001             304         0.93       140,062             484         1.38
Borrowings                                 26,038             135         2.07        25,096             160         2.55
Total interest-bearing liabilities        157,039             439         1.12       165,158             644         1.56

Noninterest-Bearing demand deposits         1,525                                      1,138
Noninterest-bearing liabilities             2,650                                      2,494
Total liabilities                         161,214                                    168,790

Shareholders' equity                       61,057                                     58,588
Total liabilities and shareholders'
equity                                  $ 222,271                                  $ 227,378
Net interest income/average yield                     $     1,986         3.78 %                 $     1,950         3.55 %
Net interest margin                                                       4.01 %                                     3.84 %
Average interest-earning assets to
average interest-bearing liabilities                                    126.10 %                                   123.05 %

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, 2012 to September 30, 2012

Assets: At September 30, 2012, the Company's assets totaled $219.8 million, a decrease of $3.2 million, or 1.4%, from total assets at June 30, 2012. This decrease was attributed primarily to a decrease in loans.

Cash and cash equivalents: Cash and cash equivalents increased by $1.6 million or 27.7% to $7.3 million at September 30, 2012. While 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, additional cash was held at the end of the quarterly period in anticipation of the Company's merger transaction.

Loans: Loans receivable, net, decreased by $4.5 million to $177.9 million at September 30, 2012, due primarily to unscheduled repayments of loans. Also, due to historically low interest rates, many home mortgages have been refinanced to long-term, fixed rate loans either with other lenders or with our banks to be sold into the secondary market. 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, prudent and consistent with our interest rate risk strategies. However, loan demand continues in its weakened state 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 September 30, 2012, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $2.7 million, or 1.5% of total loans, compared to $1.8 million or 0.98%, of total loans at June 30, 2012. The Company's allowance for loan losses totaled $873,000 and $875,000 at September 30, 2012, and June 30, 2012, respectively. The allowance for loan losses at September 30, 2012, represented 32.5% of nonperforming loans and 0.49% of total loans, while at June 30, 2012, the allowance represented 48.8% of nonperforming loans and 0.48% of total loans.

The Company had $10.0 million in assets classified as substandard for regulatory purposes at September 30, 2012, including loans ($7.5 million) and real estate owned ("REO") ($2.5 million). Classified loans as a percentage of total loans was 4.2% and 3.2% at September 30, 2012 and June 30, 2012, respectively. All substandard loans were secured by residential property on which the Banks have priority lien position.

The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated:

                           September 30,       June 30,
                               2012              2012

Substandard assets        $        10,007     $    8,305
Doubtful assets                         -              -
Loss assets                             -              -
Total classified assets   $        10.007     $    8,305

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, 2012 to September 30, 2012 (continued)

All substandard loans were secured by residential property on which the banks have priority lien position. The table below summarizes substandard loans at the dates indicated:

                                              September 30,                       June 30,
                                                  2012                              2012
                                         Number             Net            Number             Net
                                           of            Carrying            of            Carrying
                                       Properties          Value         Properties          Value
(dollars in thousands)

Single family, owner occupied                    66     $     6,266                57     $     5,190
Single family, non-owner occupied                14           1,219                 9             633
2-4 family, owner occupied                        1              37                 1              37
Total substandard loans                          81     $     7,522                67     $     5,860

The following table presents the aggregate carrying value of REO at the dates indicated:

                                           September 30, 2012             June 30, 2012
                                       Number                         Number         Net
                                         of            Carrying         of         Carrying
                                        Loans           Value          Loans        Value

Single family, non-owner occupied            7       $        805           7     $      765
2-4 family, owner-occupied                  11              1,432          11          1,432
5 or more family, non-owner-occupied         1                233           1            233
Building lot                                 1                 15           1             15
Total substandard loans                     20       $      2,485          20     $    2,445

At September 30 2012, and June 30, 2012, the Company had $1.6 million and $331,000 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.

Securities: At September 30, 2012, the Company's investment securities had decreased $388,000 or 7.8% to $4.5 million, due to scheduled and unscheduled principal repayments. The proceeds were utilized to partially offset a decrease in deposits.

Liabilities: At September 30, 2012, the Company's liabilities totaled $160.7 million, a decrease of $3.4 million, or 2.1%, from total liabilities at June 30, 2012. The decrease in liabilities was attributed primarily to a $2.6 million, or 9.5%, decrease in FHLB Advances, which decreased to $24.5 million at September 30, 2012, and a decrease in deposits, which decreased $1.2 million or 0.9% to $133.3 million at September 30, 2012.

Shareholders' Equity:At September 30, 2012, the Company's shareholders' equity totaled $59.1 million, an increase of $231,000 or 0.4% from the June 30, 2012 total.

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, 2012 to September 30, 2012 (continued)

The Company paid dividends of $277,000 or 53.1% of net income for the three-month period just ended. The Company received notice from the Federal Reserve Board on September 27, 2012, that there would be no objection to a waiver of dividends paid by Kentucky First Federal to First Federal MHC in the next twelve months. On August 23, 2012, the members of First Federal MHC approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock by casting 64.3% of the eligible votes in favor of the waiver. At September 30, 2012, 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, of the Company's Annual Report on Form 10-K for the year ended June 30, 2012 for additional discussion regarding dividends.

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2012 and 2011

General

Net income totaled $522,000 for the three months ended September 30, 2012, an increase of $101,000 or 24.0% from net income of $421,000 for the same period in 2011. The increase was primarily attributable to gains on sales of loans and lower expenses associated with other real estate owned.

Net Interest Income

Net interest income after provision for loan losses increased $10,000 or 0.5% to $2.0 million for the three-month period ended September 30, 2012, as interest expense continued decreasing at a faster pace than interest income. Interest income decreased by $169,000, or 6.5%, to $2.4 million, while interest expense decreased $205,000 or 31.8% to $439,000 for the three months ended September 30, 2012

Interest income on loans decreased $153,000 or 6.2% to $2.3 million, due primarily to a decrease in the average rate earned on the loan portfolio. The average rate earned on loans outstanding for the three-month period ended September 30, 2012, decreased 25 basis points to 5.10% for the three months just ended, while the average balance of loans outstanding decreased $2.6 million to $181.8 million for the period just ended. Interest income on mortgage-backed residential securities decreased $21,000 or 29.2% to $51,000 for the three months ended September 30, 2012, primarily as a result of 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 $180,000 or 37.2% to $304,000 for the three-month period ended September 30, 2012, while interest expense on borrowings decreased $25,000 or 15.6% to $135,000 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 45 basis points to 0.93% for the most recent period, while the average balance of deposits decreased $9.1 million or 6.5% to $131.0 million. The decrease in interest expense on borrowings was attributed primarily to a lower rate paid on borrowings outstanding, which decreased 48 basis points to 2.07% for the most recent period, while the average balance of borrowings outstanding increased $942,000 to $26.0 million for the recently ended three-month period.

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 September 30, 2012 and 2011 (continued)

Net Interest Income (continued)

Net interest margin increased from 3.84% for the prior year quarterly period to 4.01% for the quarter ended September 30, 2012.

Provision for Losses on Loans

The Company recorded $26,000 in provision for losses on loans during the three months ended September 30, 2012, compared to no provision for the three months ended September 30, 2011. The Company recorded the provision to restore the Company's loan loss reserves to a level that management determined appropriate after charging off $28,000 in loans during the quarter. 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 $109,000 for the three months ended September 30, 2012, an increase of $83,000 from the same period in 2011. Net gains on sales of loans totaled $58,000 for the recent quarterly period ended compared to nil for the prior year quarter. In the current low interest rate environment the Company prefers to sell its long-term, fixed rate mortgage production rather than retain the loans in its portfolio, and the demand for that loan product was strong for the quarter just ended. Other real estate owned posted a $3,000 gain in the quarterly period ended September 30, 2012, compared to total charges of $27,000 in the prior year's quarter. In the quarter ended September 30, 2011, the Company realized a net loss on the sale of REO of $17,000 as well as other-than-temporary impairment charges of $10,000.

Non-interest Expense

Non-interest expense totaled $1.3 million for the three months ended September 30, 2012, a decrease of $59,000, or 4.4%, compared to the same period in 2011. The decrease was due primarily to lower professional fees paid. Outside service fees, legal fees, and auditing and accounting fees (some of which were associated with the Company's merger/acquisition plans announced November 3, 2011) decreased $39,000, $14,000 and $33,000, respectively from period to period. Foreclosure and OREO expenses (net) was actually a net gain of $28,000 for the recently ended quarter compared to net expense of $50,000 for the prior year period, as rental income exceeded rental expense and occupancy rates were higher. The core deposit intangible created when the Company purchased First Federal of Frankfort became completely amortized in the fiscal year ended June 30, 2012. Consequently, amortization of intangible assets for the recently ended quarter was nil, compared to $33,000 for the prior year period. Employee compensation and benefits totaled $854,000 for the recently-ended quarter compared to $747,000 for the prior year period, a $107,000 or 14.3% increase, and was attributed primarily to higher retirement expense.

Federal Income Tax Expense

Federal income taxes expense totaled $257,000 for the three months ended September 30, 2012, compared to $206,000 in the prior year period. The effective tax rates were 33.0% and 32.9% for the three-month periods ended September 30, 2012 and 2011, respectively.

Kentucky First Federal Bancorp

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