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KFFB > SEC Filings for KFFB > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for KENTUCKY FIRST FEDERAL BANCORP

Form 10-Q for KENTUCKY FIRST FEDERAL BANCORP


15-May-2014

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, 2013.

Acquisition impact on size of the Company

On December 31, 2012, the Company acquired 100% of the outstanding common shares of CKF Bancorp. As a result of the acquisition, the Company was much larger during the nine month period ended March 31, 2014, than during the prior year comparable period. This difference is apparent in the Average Balance Sheets section, below, and is the basis for many of the differences found in the period-to-period comparisons for the nine month periods.

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 nine month periods ended March 31, 2014 and 2013, along with the related calculations of net interest income, net interest margin and net interest spread for the related periods.

                                                         Nine Months Ended March 31,
                                               2014                                       2013
                                             Interest                                   Interest
                               Average          And          Yield/       Average          And          Yield/
                               Balance       Dividends        Cost        Balance       Dividends        Cost
                                                           (Dollars in thousands)
Interest-earning assets:
Loans                         $ 261,697     $     9,519         4.85 %   $ 210,794     $     8,059         5.10 %
Mortgage-backed securities        4,889             102         2.78         6,691             143         2.85
Other securities                  7,850              22         0.37         2,495               9         0.48
Other interest-earning
assets                           18,346             237         1.72        12,870             210         2.18
Total interest-earning
assets                          292,782           9,880         4.50       232,850           8,421         4.82

Less: Allowance for loan
losses                           (1,376 )                                     (935 )
Non-interest-earning assets      29,710                                     26,797
Total assets                  $ 321,116                                  $ 258,712

Interest-bearing
liabilities:
Demand deposits               $   8,501     $        22         0.35 %   $  12,134     $        30         0.33 %
Savings                          67,235             180         0.36        45,625             166         0.48
Certificates of deposit         150,814             839         0.74       107,328             723         0.90
Total deposits                  226,550           1,041         0.61       165,087             919         0.74
Borrowings                       21,175             217         1.37        30,660             336         1.46
Total interest-bearing
liabilities                     247,725           1,258         0.68       195,747           1,255         0.86

Noninterest-Bearing demand
deposits                          3,639                                      1,364
Noninterest-bearing
liabilities                       2,279                                      2,307
Total liabilities               253,643                                    199,418

Shareholders' equity             67,473                                     59,294
Total liabilities and
shareholders' equity          $ 321,116                                  $ 258,712
Net interest income/average
yield                                       $     8,622         3.82 %                 $     7,166         3.96 %
Net interest margin                                             3.93 %                                     4.10 %
Average interest-earning
assets to average
interest-bearing
liabilities                                                   118.19 %                                   118.96 %

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS(continued)

Average Balance Sheets(continued)

The following table represents the average balance sheets for the three month periods ended March 31, 2014 and 2012, along with the related calculations of net interest income, net interest margin and net interest spread for the related periods.

                                                        Three Months Ended March 31,
                                               2014                                       2013
                                             Interest                                   Interest
                               Average          And          Yield/       Average          And          Yield/
                               Balance       Dividends        Cost        Balance       Dividends        Cost
                                                           (Dollars in thousands)
Interest-earning assets:
Loans                         $ 254,815     $     3,137         4.92 %   $ 270,154     $     3,451         5.11 %
Mortgage-backed securities        4,433              32         2.89         8,967              46         2.05
Other securities                  7,556               8         0.42         7,484               9         0.48
Other interest-earning
assets                           14,644              77         2.10        23,465              76         1.30
Total interest-earning
assets                          281,448           3,254         4.62       310,070           3,582         4.62

Less: Allowance for loan
losses                           (1,424 )                                   (1,178 )
Non-interest-earning assets      30,234                                     30,027
Total assets                  $ 310,258                                  $ 338,919

Interest-bearing
liabilities:
Demand deposits               $   4,147     $         7         0.68 %   $  12,187     $        16         0.53 %
Savings                          70,430              58         0.33        62,646              46         0.29
Certificates of deposit         143,133             247         0.69       157,808             277         0.70
Total deposits                  217,710             312         0.57       232,641             339         0.58
Borrowings                       20,166              65         1.29        39,231             105         1.04
Total interest-bearing
liabilities                     237,876             377         0.63       271,872             441         0.65

Noninterest-Bearing demand
deposits                          3,478                                      1,364
Noninterest-bearing
liabilities                       1,904                                      1,644
Total liabilities               243,258                                    274,880

Shareholders' equity             67,000                                     64,039
Total liabilities and
shareholders' equity          $ 310,258                                  $ 338,919
Net interest income/average
yield                                       $     2,877         3.99 %                 $     3,141         3.97 %
Net interest margin                                             4.09 %                                     4.05 %
Average interest-earning
assets to average
interest-bearing
liabilities                                                   118.32 %                                   114.05 %

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

Discussion of Financial Condition Changes from June 30, 2013 to March 31, 2014

Assets: At March 31, 2014, the Company's assets totaled $306.1 million, a decrease of $18.0 million, or 5.5%, from total assets of $324.1 million at June 30, 2013. This decrease was attributed primarily to decreases in loans, cash and cash equivalents and Federal Home Loan Bank stock.

Cash and cash equivalents:Cash and cash equivalents decreased by $3.6 million or 21.5% to $13.0 million at March 31, 2014, as excess liquidity was utilized to repay borrowings.

Loans:Loans receivable, net, decreased by $11.3 million or 4.3% to $251.2 million at March 31, 2014, due primarily to low levels of loan demand and loan payoffs received. 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 March 31, 2014, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $7.8 million, or 3.09% of total loans (including loans purchased in the acquisition), compared to $8.0 million or 3.04%, of total loans at June 30, 2013. The Company's allowance for loan losses totaled $1.5 million and $1.3 million at March 31, 2014, and June 30, 2013, respectively. The allowance for loan losses at March 31, 2014, represented 18.8% of nonperforming loans and 0.58% of total loans (including loans purchased in the acquisition), while at June 30, 2013, the allowance represented 16.4% of nonperforming loans and 0.50% of total loans.

The Company had $14.9 million in assets classified as substandard for regulatory purposes at March 31, 2014, including loans ($13.1 million) and real estate owned ("REO") ($1.8 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 5.2% and 6.2% at March 31, 2014 and June 30, 2013, respectively. Of substandard loans, 99% were secured by real estate on which the Banks have priority lien position.

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, 2013 to March 31, 2014
(continued)



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



(dollars in thousands)    March 31, 2014       June 30, 2013

Substandard assets        $        14,879     $        16,315
Doubtful assets                         -                   -
Loss assets                             -                   -
Total classified assets   $        14,879     $        16,315

At March 31, 2014 all substandard loans were secured by real property on which the banks have priority lien position except for three loans totaling $48,000, which were secured by business inventory, and four unsecured consumer loans, which totaled $19,000. The table below summarizes substandard loans (including substandard loans purchased at December 31, 2012) at the dates indicated:

                                                   March 31,                         June 30,
                                                      2014                             2013
                                             Number            Net            Number            Net
                                               of           Carrying            of           Carrying
                                           Properties         Value         Properties         Value
(dollars in thousands)

Single family, owner occupied                       99     $     6,866               69     $     5,404
Single family, duplex                                -               -                1              37
Single family, non-owner occupied                   32           2,404               37           2,477
Two- to four-family, non-owner occupied              5             868                9           1,915
Multi-family                                         -               -               14           1,550
Nonresidential real estate                           8           1,832                9           2,846
Commercial nonmortgage                               3              48                4             118
Land                                                 5           1,000                6             771
Consumer                                             4              19                7              38
Total substandard loans                            156     $    13,037              176     $    15,155

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, 2013 to March 31, 2014
(continued)



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



                                                March 31, 2014                      June 30, 2013
                                            Number                              Number             Net
                                              of             Carrying             of            Carrying
                                          Properties           Value          Properties          Value

Single family, non-owner occupied                   20      $     1,822                 18     $       946
2-4 family, owner-occupied                           -                -                  2             167
5 or more family, non-owner-occupied                 -                -                  -               -
Building lot                                         3               20                  4              50
Total REO                                           23      $     1,842                 24     $     1,163

Although the Company sold several single-family, non-owner occupied REO properties during the nine month period and three were only two more properties at March 31, 2014 than at June 30, 2013, the carrying value of that class of properties increased $876,000 or 92.6% to $1.8 million. The REO properties acquired during the nine months just ended are more expensive properties than those held at June 30, 2013. Management does not believe this change represents a trend in our lending area.

At March 31, 2014, and June 30, 2013, the Company had $4.4 million and $5.0 million of loans classified as special mention, respectively (including loans purchased at December 31, 2012.) 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, 2014, the Company's investment securities had decreased $2.3 million or 18.6% to $10.1 million compared to June 30, 2013, due primarily to the maturity of $1.0 million in agency bonds and principal repayment on mortgage-backed securities.

Liabilities: At March 31, 2014, the Company's liabilities totaled $239.0 million, a decrease of $18.5 million, or 7.2%, from total liabilities at June 30, 2013. The decrease in liabilities was attributed primarily to decreases in deposits and FHLB advances. Deposits decreased $12.5 million or 5.4% to $218.5 million at March 31, 2014, as certificate of deposit customers have sought higher yields elsewhere. FHLB advances decreased $6.1 million or 25.0% from $24.3 million at June 30, 2013 to $18.2 million at March 31, 2014. We utilize excess liquidity to reduce liabilities when possible.

Shareholders' Equity:At March 31, 2014, the Company's shareholders' equity totaled $67.1 million, an increase of $506,000 or 0.8% from the June 30, 2013 total. The change in shareholders' equity is primarily associated with net profits for the period less dividends paid on common 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, 2013 to March 31, 2014
(continued)

The Company paid dividends of $1.1 million or 74.5% of net income for the nine month period just ended. The Company received notice from the Federal Reserve Board on August 6, 2013, 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 July 9, 2013, the members of First Federal MHC for the second time approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock. The Board of Directors of First Federal MHC applied for approval of another waiver. As a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 2014. The Board of Directors of First Federal MHC has called a special meeting of members to be held July 8, 2014, to consider waiving of dividends through the third quarter of 2015. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Management cannot speculate on future dividend levels, because 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, 2013 for additional discussion regarding dividends.

Comparison of Operating Results for the Nine Month Periods Ended March 31, 2014 and 2013

General

Net income totaled $1.5 million for the nine months ended March 31, 2014, a decrease of $567,000 or 27.3% from net income of $2.1 million for the same period in 2013. The decrease in net income was primarily attributable to a $958,000 bargain purchase gain recognized in the 2013 period, which was a result of the acquisition of CKF Bancorp, Inc. ("CKF Bancorp"), on December 31, 2012. Only three months of CKF Bancorp operations are included in the Company's reported earnings for the 2013 period, while the Company's results of operations for the nine months ended March 31, 2014 include operations acquired from CKF Bancorp.

Net Interest Income

Net interest income after provision for loan losses increased $1.5 million or 22.8% to $8.1 million for the nine months recently ended compared to $6.6 million for the nine months ended March 31, 2013, due primarily to the larger operation base resulting from the acquisition of CKF Bancorp. Provision for loan losses decreased $48,000 or 8.3% to $531,000 for the nine month period just ended compared to $579,000 for the prior year period. Net interest income before provision for loan losses increased $1.5 million or 20.3% to $8.6 million for the recent period compared to the prior year period. Interest income increased $1.5 million or 17.3%, to $9.9 million, while interest expense increased only $3,000 or 0.2% to $1.3 million for the nine months ended March 31, 2014, after amortization of fair value adjustments on interest bearing accounts.

Interest income on loans increased $1.5 million or 18.1% to $9.5 million, due primarily to the CKF Bancorp acquisition. The average balance of loans outstanding increased $50.9 million to $261.7 million for the nine month period just ended, while the average rate earned on loans outstanding decreased 25 basis points to 4.85% for the period. Interest income on mortgage-backed residential securities ("MBS") decreased $41,000 or 28.7% to $102,000 for the nine months ended March 31, 2014, due both to a reduced rate earned and a reduction in the average balance. The rate earned on MBS decreased 7 basis points to 2.78% for the recently ended period. Other securities, primarily composed of agency bonds, were also acquired in the acquisition, and accounted for $22,000 in interest income during the recent nine month period, compared to $9,000 for the prior year period. The average balance of the other investment securities was $7.9 million for the nine month period just ended and the average rate earned on those securities was 37 basis points. 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, 2014 and 2013 (continued)

Net Interest Income (continued)

Interest expense on deposits increased $122,000 or 13.3% to $1.0 million for the nine month period ended March 31, 2014, due to the increase in average deposits outstanding. The increase in deposits was primarily attributed to the CKF Bancorp acquisition. Average deposits outstanding increased $61.5 million or 37.2% to $226.6 million for the recently ended nine month period, while the average rate paid on deposits declined from 13 basis points to 61 basis points for the current year period. Interest expense on borrowings decreased $119,000 or 35.4% to $217,000 for the nine month period ended March 31, 2014, compared to the prior year period. The decrease in interest expense on borrowings was attributed both to a lower rate paid on borrowings and a smaller average balance outstanding. The average rate paid on borrowings decreased 9 basis points to 1.37% for the recently ended nine month period, while the average balance of borrowings outstanding decreased $9.5 million or 30.9% to $21.2 million.

Net interest margin decreased from 4.10% for the prior year period to 3.93% for the nine months ended March 31, 2014.

Provision for Losses on Loans

The Company recorded $531,000 in provision for losses on loans during the nine months ended March 31, 2014, compared to a provision of $579,000 for the nine months ended March 31, 2013. Although management believes the provision for loan losses is adequate, there can be no assurance that the loan loss allowance will be sufficient 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 $319,000 for the nine months ended March 31, 2014, a decrease of $916,000 or 72.4% from the same period in 2013. The decrease in non-interest income was primarily attributable to a $958,000 bargain purchase gain recognized in the 2013 period, which was a result of the CKF Bancorp acquisition. Also contributing to the decrease was lower net gains on sales of loans, which decreased $87,000 or 61.3% to $55,000 for the nine months just ended. The Company had both fewer loans and lower dollar volume of long-term, fixed rate loans that it sold to the FHLB during the period due to lower customer demand. The amount of gain realized on each loan was smaller in the period just ended than the prior period due to margin compression, which was associated with a recent rise in long-term mortgage rates. Other income increased $107,000 or 80.5% to $240,000 for the nine month period just ended, primarily attributable to fees earned on deposit accounts acquired from CKF Bancorp. Other real estate owned represented net charges of $44,000 for the nine month period ended March 31, 2014, compared to net charges of $65,000 in the prior year period. Included in the net charges for other real estate owned for the nine months ended March 31, 2014, were valuation adjustments on REO of $34,000 in addition to the net loss on sale of REO of $10,000.

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, 2014 and 2013 (continued)

Non-interest Expense

Non-interest expense totaled $6.1 million and $4.9 million for the nine months ended March 31, 2014 and 2013, respectively, an increase of $1.3 million or 26.4% period to period. The increase was primarily related to higher costs associated with normal operations of the CKF Bancorp acquisition. Employee compensation and benefits increased $922,000 or 30.9% due to additional personnel hired with the acquisition, as well as higher retirement expense. Foreclosure and OREO expenses (net) was $107,000 for the recently ended nine month period compared to net charges of $17,000 for the prior year period. Somewhat offsetting the increases in non-interest expenses due to increased size of operation, outside service fees and legal fees decreased $148,000 and $143,000, respectively, period to period. Outside service and legal fees incurred in the prior year period were primarily associated with the CKF Bancorp acquisition.

Federal Income Tax Expense

Federal income taxes expense totaled $755,000 for the nine months ended March 31, 2014, compared to $884,000 in the prior year period. The effective tax rates were 33.3% and 29.8% for the nine month periods ended March 31, 2014 and 2013, respectively.

Comparison of Operating Results for the Three Month Periods Ended March 31, 2014 and 2013

General

Net income totaled $491,000 for the three months ended March 31, 2014, a decrease of $139,000 or 22.1% from net income of $630,000 for the same period in 2013. The decrease was primarily attributable to lower net interest income.

Net Interest Income

Net interest income after provision for loan losses decreased $181,000 or 6.1% to $2.8 million for the three month period just ended compared to $3.0 million for the prior year quarter. Net interest income before provision for loan losses decreased $624,000 or 8.4% to $2.9 million for the quarter ended March 31, 2014. Provision for losses on loans decreased $83,000 to $78,000 for the recently-ended quarter compared to a provision of $161,000 in the prior year . . .

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