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KFFB > SEC Filings for KFFB > Form 10-Q on 15-May-2013All 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


15-May-2013

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.

Average Balance Sheets

The following table represents the average balance sheets for the three and nine month periods ended March 31, 2013 and 2012, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

                                                         Nine Months Ended March 31,
                                               2013                                       2012
                                             Interest                                   Interest
                               Average          And          Yield/       Average          And          Yield/
                               Balance       Dividends        Cost        Balance       Dividends        Cost
                                                           (Dollars in thousands)
Interest-earning assets:
Loans                         $ 210,794     $     8,059         5.10 %   $ 184,523     $     7,369         5.32 %
Mortgage-backed securities        6,691             143         2.85         6,312             200         4.22
Other securities                  2,495               9         0.48         2,691               1         0.50
Other interest-earning
assets                           12,870             210         2.18        10,554             176         2.22
Total interest-earning
assets                          232,850           8,421         4.82       204,080           7,746         5.06

Less: Allowance for loan
losses                             (935 )                                     (788 )
Non-interest-earning assets      26,797                                     24,812
Total assets                  $ 258,712                                  $ 228,104

Interest-bearing
liabilities:
Demand deposits               $  12,134     $        30         0.33 %   $  12,485     $        23         0.25 %
Savings                          45,625             166         0.48        35,926             220         0.82
Certificates of deposit         107,328             723         0.90        89,410           1,004         1.50
Total deposits                  165,087             919         0.74       137,821           1,247         1.21
Borrowings                       30,660             336         1.46        28,064             459         2.18
Total interest-bearing
liabilities                     195,747           1,255         0.86       165,885           1,706         1.37

Noninterest-Bearing demand
deposits                          1,364                                      1,161
Noninterest-bearing
liabilities                       2,307                                      2,252
Total liabilities               199,418                                    169,298

Shareholders' equity             59,294                                     58,806
Total liabilities and
shareholders' equity          $ 258,712                                  $ 228,104
Net interest income/average
yield                                       $     7,166         3.96 %                 $     6,040         3.69 %
Net interest margin                                             4.10 %                                     3.94 %
Average interest-earning
assets to average
interest-bearing
liabilities                                                   118.96 %                                   123.03 %

                         Kentucky First Federal Bancorp

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

                     AND RESULTS OF OPERATIONS (continued)



                                                        Three Months Ended March 31,
                                               2013                                       2012
                                             Interest                                   Interest
                               Average          And          Yield/       Average          And          Yield/
                               Balance       Dividends        Cost        Balance       Dividends        Cost
                                                           (Dollars in thousands)
Interest-earning assets:
Loans                         $ 270,154     $     3,451         5.11 %   $ 184,082     $     2,433         5.28 %
Mortgage-backed securities        8,967              46         2.05         5,763              61         4.23
Other securities                  7,484               9         0.48         7,380               -            -
Other interest-earning
assets                           23,465              76         1.30         9,538              64         2.68
Total interest-earning
assets                          310,070           3,582         4.62       206,763           2,558         4.94

Less: Allowance for loan
losses                           (1,178 )                                     (834 )
Non-interest-earning assets      30,027                                     24,818
Total assets                  $ 338,919                                  $ 230,747

Interest-bearing
liabilities:
Demand deposits               $  12,187     $        16         0.53 %   $  12,021     $         7         0.23 %
Savings                          62,646              46         0.29        36,477              70         0.77
Certificates of deposit         157,808             277         0.70        86,211             283         1.31
Total deposits                  232,641             339         0.58       134,709             360         1.07
Borrowings                       39,231             105         1.04        33,832             148         1.75
Total interest-bearing
liabilities                     271,872             441         0.65       168,541             508         1.21

Noninterest-Bearing demand
deposits                          1,364                                      1,138
Noninterest-bearing
liabilities                       1,644                                      2,022
Total liabilities               274,880                                    171,701

Shareholders' equity             64,039                                     59,046
Total liabilities and
shareholders' equity          $ 338,919                                  $ 230,747
Net interest income/average
yield                                       $     3,141         3.97 %                 $     2,050         3.73 %
Net interest margin                                             4.05 %                                     3.96 %
Average interest-earning
assets to average
interest-bearing
liabilities                                                   114.05 %                                   122.68 %

Discussion of Financial Condition Changes from June 30, 2012 to March 31, 2013

Assets: At March 31, 2013, the Company's assets totaled $332.3 million, an increase of $109.3 million, or 49.0%, from total assets at June 30, 2012. This increase was attributed primarily to the acquisition of CKF Bancorp. See Footnote 2 under "Item 1: Financial Information."

Cash and cash equivalents: Cash and cash equivalents increased by $10.7 million or 186.4% to $16.4 million at March 31, 2013.

Loans: Loans receivable, net, increased by $86.4 million to $268.9 million at March 31, 2013, due primarily to the acquisition of CKF Bancorp. See Footnote 2 under "Item 1, Financial Information." 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.

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 March 31, 2013
(continued)

Non-Performing Loans: At March 31, 2013, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $8.7 million, or 3.22% of total loans (including loans purchased in the acquisition referenced in Note 2), compared to $1.8 million or 0.98%, of total loans at June 30, 2012. The Company's allowance for loan losses totaled $1.3 million and $875,000 at March 31, 2013, and June 30, 2012, respectively. The allowance for loan losses at March 31, 2013, represented 14.6% of nonperforming loans and 0.47% of total loans (including loans purchased in the acquisition referenced in Note 2), while at June 30, 2012, the allowance represented 48.8% of nonperforming loans and 0.48% of total loans.

The Company had $16.2 million in assets classified as substandard for regulatory purposes at March 31, 2013, including loans ($14.9 million) and real estate owned ("REO") ($1.3 million), including both loans and REO acquired in the CKF Bancorp transaction. Classified loans as a percentage of total loans (including loans acquired on December 31, 2012) was 3.2% at both March 31, 2013 and June 30, 2012. Of substandard loans, 98% were secured by real estate 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:

                          March 31, 2013       June 30, 2012

Substandard assets        $        16,208     $         8,305
Doubtful assets                         -                   -
Loss assets                             -                   -
Total classified assets   $        16,208     $         8,305

All substandard loans were secured by real property on which the banks have priority lien position. The table below summarizes substandard loans (including substandard loans purchased at December 31, 2012) at the dates indicated:

                                                 March 31,                         June 30,
                                                    2013                             2012
                                           Number            Net            Number             Net
                                             of           Carrying            of            Carrying
                                         Properties         Value         Properties          Value
(dollars in thousands)
One- to four-family                              113     $     8,795                67     $     5,860
Multi-family                                       2           3,114                 -               -
Nonresidential real estate and land               11           2,659                 -               -
Commercial nonmortgage                             -             290                 -               -
Consumer and other                                 -              32                 -               -
Total substandard loans                          126     $    14,890                67     $     5,860

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 March 31, 2013
(continued)



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



                                                March 31, 2013                      June 30, 2012
                                            Number                              Number             Net
                                              of             Carrying             of            Carrying
                                          Properties           Value          Properties          Value

Single family, non-owner occupied                   16      $     1,100                  7     $       765
2-4 family, owner-occupied                           2              167                 11           1,432
5 or more family, non-owner-occupied                 -                -                  1             233
Building lot                                         4               51                  1              15
Total REO                                           22      $     1,318                 20     $     2,445

At March 31, 2013, and June 30, 2012, the Company had $5.5 million and $331,000 of loans classified as special mention, respectively including CKF. 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 March 31, 2013, the Company's investment securities had increased $8.6 million to $13.6 million, due in part to the acquisition more fully described in Note 2 under "Item 1, Financial Information." The investments acquired in the CKF Bancorp transaction include primarily U.S. Government agency bonds and mortgage-backed securities.

Liabilities: At March 31, 2013, the Company's liabilities totaled $266.2 million, an increase of $102.1 million, or 62.2%, from total liabilities at June 30, 2012. The increase in liabilities was attributed primarily to the acquisition more fully described in Note 2 under "Item 1, Financial Information." In addition to the liabilities assumed in the acquisition of CKF Bancorp, the Company borrowed $5.1 million in FHLB Advances to provide funds for the cash portion of the transaction. FHLB Advances increased $3.9 million from $27.1 million at June 30, 2012 to $31.0 million at March 31, 2013. Deposits increased $98.7 million or 73.4% to $233.3 million at March 31, 2013, primarily as a result of the acquisition more fully described in Note 2. The deposits acquired in the CKF Bancorp transaction are expected to remain with the Company except for normal run-off, as no hot money deposits have been identified.

Shareholders' Equity:At March 31, 2013, the Company's shareholders' equity totaled $66.1 million, an increase of $7.2 million or 12.3% from the June 30, 2012 total. The change in shareholders' equity is primarily associated with the acquisition more fully described in Note 2 under "Item 1, Financial Information", as a portion of the consideration was paid in stock.

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 March 31, 2013
(continued)

The Company paid dividends of $924,000 or 44.5% of net income for the nine-month period just ended and $364,000 or 57.8% 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. The Board of Directors of First Federal MHC has voted to seek approval for another waiver and will begin soliciting members for their vote on or about May 27, 2013. At March 31, 2013, 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 Nine-Month Periods Ended March 31, 2013 and 2012

General

Net income totaled $2.1 million for the nine months ended March 31, 2013, an increase of $742,000 or 55.5% from net income of $1.3 million for the same period in 2012. The increase was primarily attributable to the bargain purchase gain recorded coincident with the acquisition which occurred on December 31, 2012.

Net Interest Income

Net interest income before provision for loan losses increased $1.1 million or 18.6% to $7.2 million for the nine month period just ended, while net income after provision for loan losses increased $629,000 or 10.6% to $6.6 million. The provision for loan losses was $579,000 for the recently ended nine month period, an increase of $497,000 compared to the prior year. Interest income increased by $760,000, or 9.8%, to $8.5 million, while interest expense decreased $366,000 or 21.5% to $1.3 million for the nine months ended March 31, 2013.

Interest income on loans increased $690,000 or 9.4% to $8.1 million, due primarily to an increase in the average balance outstanding on the loan portfolio. The average balance of loans outstanding increased $26.3 million to $210.8 million for the period just ended, primarily because of the acquisition which occurred on December 31, 2012. The average rate earned on loans outstanding for the nine-month period ended March 31, 2013, decreased 22 basis points to 5.10% for the nine months just ended. Interest income on mortgage-backed residential securities decreased $57,000 or 28.5% to $143,000 for the nine months ended March 31, 2013, 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 nine-month period just ended.

Kentucky First Federal Bancorp

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2013 and 2012 (continued)

Net Interest Income (continued)

Interest expense on deposits and borrowings both declined period to period. Interest expense on deposits decreased $328,000 or 26.3% to $919,000 for the nine-month period ended March 31, 2013, while interest expense on borrowings decreased $123,000 or 26.8% to $336,000 for the same period. The decline in interest expense on deposits was attributed primarily to a reduction in the average rate paid on deposits, which was in part due to amortization of deposit premiums. The average rate paid on deposits decreased 47 basis points to 0.74% for the most recent period, while the average balance of deposits increased $27.3 million or 19.8% to $165.1 million, primarily because of the acquisition which occurred on December 31, 2012. The decrease in interest expense on borrowings was attributed to a lower rate paid on borrowings outstanding, which decreased 72 basis points to 1.46% for the most recent period, while the average balance of borrowings outstanding increased $2.6 million or 9.3% to $30.7 million for the recently ended nine-month period.

Net interest margin increased from 3.94% for the prior year nine-month period to 4.10% for the period ended March 31, 2013.

Provision for Losses on Loans

The Company recorded $579,000 in provision for losses on loans during the nine months ended March 31, 2013, compared to a provision of $82,000 for the nine months ended March 31, 2012. The Company recorded the provision to more closely align the Company's loan loss reserves with changes in the composition of the loan portfolio, which includes additional non-owner-occupied one- to four-family residential loans. 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 $1.2 million for the nine months ended March 31, 2013, an increase of $1.1 million from the same period in 2012. The primary contributor to this increase is the bargain purchase gain, which was recorded in connection with the acquisition of CKF Bancorp effective December 31, 2012. Please see Note 2 under "Item 1, Financial Information." Also contributing to the increase in non-interest income was an increase in net gains on sales of loans, which totaled $143,000 for the recent period ended compared to $23,000 for the prior year period. 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 represented charges totaling $65,000 for the nine month period just ended, compared to charges of $47,000 in the 2012 period. Net gain on sale of REO was $34,000 for the current period compared to a gain of $1,000 in the prior year period, while other-than-temporary impairment losses for the current period were $99,000 compared to $48,000 for the 2012 period.

Kentucky First Federal Bancorp

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2013 and 2012 (continued)

Non-interest Expense

Non-interest expense totaled $4.9 million and $4.1 million for the nine months ended March 31, 2013 and 2012, respectively, an increase of $775,000, or 19.0%, compared to the same period in 2012. The increase was due primarily to higher costs associated with normal operations of the business acquired on December 31, 2012. Legal fees (some of which were associated with the Company's merger/acquisition plans announced November 3, 2011) decreased $104,000 from period to period, while outside service fees increased $42,000 period to period. Foreclosure and REO expenses (net) posted a net gain of $17,000 for the recent period compared to net loss of $1,000 for the prior year period, as rental expense exceeded rental income. 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 $87,000 for the prior year period. Employee compensation and benefits totaled $3.0 million for the recently-ended period compared to $2.4 million for the prior year period, a $611,000 or 25.7% increase, and was attributed both to personnel hired with the merger as well as to higher retirement expense, in general.

Federal Income Tax Expense

Federal income taxes expense totaled $884,000 for the nine months ended March 31, 2013, compared to $656,000 in the prior year period. The effective tax rates were 29.8% and 32.9% for the nine-month periods ended March 31, 2013 and 2012, respectively.

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2013 and 2012

General

Net income totaled $630,000 for the three months ended March 31, 2013, an increase of $102,000 or 19.3% from net income of $528,000 for the same period in 2012. The increase was primarily attributable to higher core earnings.

Net Interest Income

Net interest income before provision for loan losses increased $1.1 million or 53.2% to $3.1 million for the three month period just ended primarily as a result of higher interest income. Provision for loan losses was $161,000 and caused net interest income after provision for loan losses to increase by $930,000 or 45.4% to $3.0 million compared to net interest income of $2.1 million for the prior year period. Core earnings increased significantly. Interest income increased $1.1 million, or 43.4%, to $3.7 million, while interest expense increased only $18,000 or 3.5% to $526,000 for the three months ended March 31, 2013.

Interest income on loans increased $1.0 million or 41.8% to $3.5 million, due primarily to the acquisition which occurred on December 31, 2012. The average balance of loans outstanding increased $86.1 million to $270.2 million for the period just ended, while the average rate earned on loans outstanding for the three-month period ended March 31, 2013, decreased 17 basis points to 5.11% for the three months just ended. Interest income on mortgage-backed residential securities decreased $15,000 or 24.6% to $46,000 for the three months ended March 31, 2013, 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.

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 March 31, 2013 and 2012 (continued)

Net Interest Income (continued)

Interest expense on deposits and borrowings both declined period to period. Interest expense on deposits decreased $21,000 or 5.8% to $339,000 for the three-month period ended March 31, 2013, while interest expense on borrowings decreased $46,000 or 31.1% to $102,000 for the same period. The decline in interest expense on deposits was attributed to a reduction in the average rate paid on the deposits. The average rate paid on deposits decreased 49 basis points to 0.58% for the most recent period, while the average balance of deposits increased $97.9 million or 72.7% to $232.6 million. The increase in deposits is primarily attributed to the acquisition which occurred on December 31, 2012. The decrease in interest expense on borrowings was attributed to a lower rate paid on borrowings despite a larger average balance outstanding. The average rate paid on borrowings decreased 71 basis points to 1.04% for the most recent period, while the average balance of borrowings outstanding increased $5.4 or 16.0% to $39.2 million for the recently ended three-month period.

. . .

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