Parent company of

First Federal Savings and Loan Association of Hazard

and

First Federal Savings Bank of Frankfort

 

 

 

2008

Annual Report



KENTUCKY FIRST FEDERAL BANCORP

Kentucky First Federal Bancorp (“Kentucky First” or the “Company”) was formed under federal law in March 2005 and is the holding company for First Federal Savings and Loan Association of Hazard, Hazard, Kentucky (“First Federal of Hazard”) and First Federal Savings Bank of Frankfort, Frankfort, Kentucky (“First Federal of Frankfort”) (collectively, the “Banks”).   Kentucky First’s operations consist primarily of operating the Banks as two independent, community-oriented savings institutions.

On March 2, 2005, First Federal of Hazard completed its reorganizaton into the mutual holding company form of ownership with the incorporation of the Company as the parent of First Federal of Hazard.  Coincident with the Reorganization, First Federal of Hazard converted to the stock form of ownership and issued all of its common stock to the Company.  In addition, on March 2, 2005, the Company issued 4,727,938 common shares, or 55% of its common shares, to First Federal Mutual Holding Company (“First Federal MHC”), a federally chartered mutual holding company, and issued 2,127,572 common shares, or 24.8% of its shares at $10.00 per share to the public and a newly formed Employee Stock Ownership Plan (“ESOP”).  The Company received net cash proceeds of $12.7 million from the public sale of its common shares.  The Company’s remaining 1,740,554 common shares were issued as part of the $31.4 million cash and stock consideration paid for 100% of the common shares of Frankfort First Bancorp (“Frankfort First”) and its wholly owned subsidiary, First Federal of Frankfort.

First Federal of Hazard is a federally chartered savings and loan association offering traditional financial services to consumers in Perry and surrounding counties in eastern Kentucky.  First Federal of Hazard engages primarily in the business of attracting deposits from the general public and using such funds to originate, when available, loans secured by first mortgages on owner-occupied, residential real estate and, occasionally, other loans secured by real estate.  To the extent there is insufficient loan demand in its market area, and where appropriate under its investment policies, First Federal of Hazard has historically invested in mortgage-backed and investment securities, although since the reorganization, First Federal of Hazard has been purchasing whole loans and participations in loans originated at First Federal of Frankfort.

First Federal of Frankfort is a federally chartered savings bank which is primarily engaged in the business of attracting deposits from the general public and the origination primarily of adjustable-rate loans secured by first mortgages on owner-occupied and non-owner-occupied one-to four-family residences in Franklin, Anderson, Scott, Shelby, Woodford and other counties in Kentucky.  First Federal of Frankfort also originates, to a lesser extent, home equity loans and loans secured by churches, multi-family properties, professional office buildings and other types of property.

MARKET INFORMATION

The Company’s common stock began trading under the symbol “KFFB” on the Nasdaq National Market on March 3, 2005.  There are currently 7,711,750 shares of common stock outstanding and approximately 713 holders of record of the common stock.  Following are the high and low closing prices, by fiscal quarter, as reported on the Nasdaq National Market during the periods indicated, as well as dividends declared on the common stock during each quarter.

 

 

High

 

Low

 

Dividends Per Share

Fiscal 2008

 

 

 

 

 

 

First quarter................................................

 

$10.59

 

$ 9.50

 

$0.10

Second quarter...........................................

 

  10.18

 

  9.80

 

  0.10

Third quarter..............................................

 

  10.23

 

     9.75

 

  0.10

Fourth quarter............................................

 

  10.24

 

  9.35

 

  0.10

 

 

 

 

High

 

Low

 

Dividends Per Share

Fiscal 2007

 

 

 

 

 

 

First quarter................................................

 

$10.84

 

$ 9.76

 

$0.10

Second quarter...........................................

 

  10.50

 

  10.05

 

  0.10

Third quarter..............................................

 

  10.47

 

     9.86

 

  0.10

Fourth quarter............................................

 

  10.30

 

     9.60

 

  0.10

 

Comparative Stock Performance Graph 

                The Common Stock commenced trading on the Nasdaq National Market on March 3, 2005.  The graph and table which follow show the cumulative total return on the Common Stock for the period from March 3, 2005 through the fiscal year ended June 30, 2008 with (1) the total cumulative return of all companies whose equity securities are traded on the Nasdaq Stock Market, and (2) the total cumulative return of savings institutions and savings institution holding companies as indicated by America’s Community Bankers Index traded on the Nasdaq Stock Market.  The comparison assumes $100 was invested on March 3, 2005 in the Common Stock and in each of the foregoing indices and assumes reinvestment of dividends.  The stockholder returns shown on the performance graph are not necessarily indicative of the future performance of the Common Stock or of any particular index.

CUMULATIVE TOTAL STOCKHOLDER RETURN

COMPARED WITH PERFORMANCE OF SELECTED INDEXES

March 3, 2005 to June 30, 2008

COMPARISON OF CUMULATIVE TOTAL RETURN*

AMONG KENTUCKY FIRST FEDERAL BANCORP,

THE NASDAQ STOCK MARKET (U.S.) INDEX AND AMERICA'S COMMUNITY BANKERS INDEX

 

 

 

 

3/3/05

6/30/05

6/30/06

6/30/07

 

6/30/08

 

 

KENTUCKY FIRST FEDERAL BANCORP

100.00

102.84

102.04

102.46

 

98.25

 

 

NASDAQ STOCK MARKET (COMPOSITE)

100.00

99.55

107.22

129.54

 

115.16

 

 

AMERICA'S COMMUNITY BANKERS

100.00

101.18

108.54

102.45

 

69.62

 

 

 


(1)     TABLE OF CONTENTS

Kentucky First Federal Bancorp................................................................................................................................................. (ii)

Market Information...................................................................................................................................................................... (ii)

Comparative Stock Performance Graph................................................................................................................................. (iii)

Letter to Shareholders..................................................................................................................................................................... 1

Selected Consolidated Financial and Other Data...................................................................................................................... 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations............................................ 4

Consolidated Financial Statements........................................................................................................................................... 25

Corporate Information................................................................................................................................................................. 66


 

Dear Shareholder:

 

We are pleased to present the 2008 Annual Report for Kentucky First Federal Bancorp.  We encourage you to read both the Annual Report and Proxy Statement.  We strongly encourage you to vote and, if possible, to attend our annual meeting on November 11.

 

The Boards, Officers, and Employees of the Company and its subsidiary banks continue to be very pleased with our arrangement under Kentucky First Federal.  We believe that we have continued to demonstrate to our communities that our primary focus continues to be meeting the financial needs of our hometowns.

 

The financial industry remains in a state of turmoil.  Asset quality concerns have impacted the earnings of many banks both large and small.  Stock prices in the industry generally reflect these tumultuous times.  Most financial stocks have seen severe reductions in their prices.  While we are certainly concerned about the lack of appreciation in the price of Kentucky First Federal Bancorp stock, we are pleased to have avoided the precipitous declines that so many of our fellow banks have suffered in recent months.  We believe this is the result of our high capital levels at both banks and the overall strong asset quality. 

 

We are also pleased to report a moderate increase in our net income at a time when many of our peers are reporting lower and in many cases negative earnings.

 

There are still many dangers in the real estate market as our communities struggle with record levels of foreclosures and the diminished availability of certain types of loans, but management remains optimistic that Kentucky First Federal’s high asset quality will persist.  We remain pleased that the Bauer Financial Rating Service continues to award both First Federal of Hazard and First Federal of Frankfort their highest ranking of five stars.

 

We had surmised that the problems in the mortgage industry would solidify the positions of our banks in their markets as market leaders in lending.  We believe this has occurred, thus allowing the Company

to increase our loans receivable by nearly $16 million or 9.5% during the year.  Community banks that possess ample capital and have demonstrated an ability to make sound loans, such as First Federal of Hazard and First Federal of Frankfort, will be vitally important to the recovery of our nation’s real estate market and our overall economy.

 

As always, we encourage you, our shareholders to visit our banks for your banking needs, and we are always glad to talk to you any time you have a question or concern.

 

Sincerely,

 

 

Tony Whitaker                                                                                     Don D. Jennings

Chairman and C.E.O.                                                                         President and C.O.O.


 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

Selected Financial Condition Data (1)

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Total assets........................................................................

 

$     247,655

 

     $268,916

 

   $261,941

 

$ 273,915

 

$ 139,823

Cash and cash equivalents.................................................

 

15,966

 

2,720

 

2,294

 

8,358

 

16,862

Interest-bearing deposits....................................................

 

100

 

100

 

100

 

100

 

--

Investment securities held to maturity................................

 

16,959

 

59,606

 

64,029

 

72,189

 

73,823

Investment securities available for sale.............................. ..........................................................................................

 

5,480

 

13,298

 

13,290

 

14,547

 

12,391

Loans receivable, net.........................................................

 

182,051

 

166,156

 

155,386

 

151,712

 

33,568

Deposits............................................................................

 

137,634

 

139,893

 

141,238

 

155,044

 

98,751

Federal Home Loan Bank advances..................................

 

47,801

 

65,132

 

54,849

 

50,985

 

9,000

Shareholders’ equity  (2)...................................................

 

59,793

 

61,445

 

63,881

 

65,939

 

31,043

Allowance for loan losses.................................................

 

666

 

720

 

724

 

708

 

665

Nonperforming loans........................................................

 

1,277

 

968

 

1,427

 

1,747

 

1,154

 

 

Selected Operating Data (1)

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Total interest income..........................................................

 

$      13,087

 

$     12,948

 

$   12,709

 

$     8,153

 

$     5,601

Total interest expense........................................................

 

7,565

 

7,456

 

6,096

 

3,353

 

2,220

Net interest income............................................................

 

5,522

 

5,492

 

6,613

 

4,800

 

3,381

Provision for losses on loans............................................ ..........................................................................................

 

12

 

--

 

32

 

53

 

10

Net interest income after provision

 

 

 

 

 

 

 

 

 

 

   for losses on loans..........................................................

 

5,510

 

5,492

 

6,581

 

4,747

 

3,371

Total other income (loss)...................................................

 

182

 

174

 

216

 

263

 

(35)

Total general, administrative

 

 

 

 

 

 

 

 

 

 

   and other expenses.........................................................

 

4,321

 

4,364

 

4,486

 

2,509

 

2,183

Income before federal income taxes...................................

 

1,371

 

1,302

 

2,311

 

2,501

 

1,153

Federal income taxes.........................................................

 

439

 

417

 

723

 

872

 

392

Net income........................................................................

 

$            932

 

$     885

 

$    1,588

 

$   1,629

 

$     761

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share – basic...........................................

 

$           0.12

 

$         0.11

 

$       0.19

 

$       N/A

 

$       N/A

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share – diluted …………………………

 

$           0.12

 

$         0.11

 

$       0.19

 

$       N/A

 

$       N/A

Cash dividends declared per common share......................

 

$           0.40

 

$         0.40

 

$       0.40

 

$       0.10

 

$       N/A

_______________________________

(1)   The incorporation of the Company, the issuance of its stock and the acquisition of Frankfort First were completed on March 2, 2005.  Information as of dates and for periods prior to March 2, 2005 are for First Federal of Hazard in mutual form.  In accordance with the purchase method of accounting, the Company’s results of operations for the year ended June 30, 2005 only reflect Frankfort First’s operating results for the four-month period ended June 30, 2005.

(2)   Consists of only retained earnings at June 30, 2004.

 


Selected Financial Ratios and Other Data (1)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

2005

 

2004

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

Return  on average assets

   (net income divided by average total assets)...................................

 

0.35%

 

0.33%

 

0.59%

 

0.88%

 

0.56%

Return  on average equity

   (net income divided by average equity)...........................................

 

1.54

 

1.41

 

2.68

 

4.46

 

2.44

Interest rate spread

   (combined weighted average interest rate earned less   

    combined weighted average interest rate cost)...............................

 

1.65

 

1.61

 

2.15

 

2.30

 

2.04

Net interest margin

   (net interest income divided by  average interest-earning assets)

 

2.29

 

2.26

 

2.63

 

2.69

 

2.54

Ratio of average interest-earning assets to average

   interest-bearing liabilities...........................................................

 

120.28

 

121.16

 

118.77

 

120.74

 

129.55

Ratio of total general administrative and other expenses to

   average total assets....................................................................

 

1.64

 

1.64

 

1.62

 

1.35

 

1.62

Efficiency ratio (2) ........................................................................ ........................................................................................................... ........................................................................................................... ...........................................................................................................

 

75.75

 

77.02

 

65.02

 

49.56

 

65.24

Dividend payout ratio (3) ............................................................

 

    126.82

 

    153.11

 

    97.36

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

Nonperforming loans as a percent of total loans

   at end of period (4).....................................................................

 

0.70

 

0.58

 

0.92

 

1.15

 

3.44

Nonperforming assets as a percent of total assets

   at end of period...........................................................................

 

0.52

 

0.36

 

0.54

 

0.66

 

0.83

Allowance for loan losses as a percent of total loans

   at end of period........................................................................... ..........................................................................

 

0.36

 

0.43

 

0.46

 

0.47

 

1.98

Allowance for loan losses as a percent of nonperforming

   loans at end of period................................................................ .......................................................................... ..........................................................................

 

52.15

 

74.38

 

50.74

 

40.53

 

57.63

Provision for loan losses to total loans.......................................

 

0.01

 

--

 

0.02

 

0.03

 

0.03

Net charge-offs to average loans outstanding..........................

 

0.04

 

--

 

0.01

 

0.20

 

0.17

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

Average equity to average assets................................................

 

22.94

 

23.64

 

21.95

 

19.68

 

23.14

Shareholders’ equity or capital to total assets

   at end of period...........................................................................

 

24.14

 

22.85

 

24.39

 

24.07

 

22.20

 

 

 

 

 

 

 

 

 

 

 

Regulatory Capital Ratios:

 

 

 

 

 

 

 

 

 

 

Tangible capital..............................................................................

 

16.33

 

16.61

 

17.42

 

17.18

 

22.42

Core capital.....................................................................................

 

16.33

 

16.61

 

17.42

 

17.18

 

22.42

Risk-based capital.........................................................................

 

34.03

 

38.61

 

41.92

 

43.83

 

82.40

Number of banking offices..........................................................

 

4

 

4

 

4

 

4

 

1

______________________

(1)   The incorporation of the Company, the issuance of its stock and the acquisition of Frankfort First were completed on March 2, 2005.  Information as of dates and for periods prior to March 2, 2005 are for First Federal of Hazard in mutual form.  In accordance with the purchase method of accounting, the Company’s results of operations for the year ended June 30, 2005 only reflect Frankfort First’s operating results for the four-month period ended June 30, 2005.

(2)   Efficiency ratio represents the ratio of general, administrative and other expenses divided by the sum of net interest income and total other income.

(3)   Represents dividends paid to minority shareholders only as a percent of net earnings.  Does not include dividends waived by       First Federal MHC.

(4)   Nonperforming loans consist of nonaccrual loans and accruing loans greater than 90 days delinquent, while nonperforming   

        assets consist of nonperforming loans and real estate acquired through foreclosure.


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

References in this Annual Report to “we,” “us,” and “our” refer to Kentucky First Federal Bancorp and where appropriate, collectively to Kentucky First Federal Bancorp, First Federal of Hazard and First Federal of Frankfort.

Forward-Looking Statements

Certain statements contained in this Annual 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 the Company or its management are intended to identify such forward-looking statements.  The Company’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, and rapidly changing technology affecting financial services.  We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  We wish to advise readers that the factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

 

The Company was incorporated as a mid-tier holding company under the laws of the United States on March 2, 2005 upon the completion of the reorganization of First Federal of Hazard into a federal mutual holding company form of organization (the “Reorganization”).  On that date, Kentucky First completed its minority stock offering and issued a total of 8,596,064 shares of common stock, of which 4,727,938 shares, or 55%, were issued to First Federal MHC, a federally chartered mutual holding company formed in connection with the Reorganization, in exchange for the transfer of all of First Federal of Hazard’s capital stock, and 2,127,572 shares were sold at a cash price of $10.00 per share. 

Also on March 2, 2005, Kentucky First completed its acquisition of Frankfort First and its wholly owned subsidiary, First Federal of Frankfort (the “Merger”).  Under the terms of the agreement of merger, shareholders of Frankfort First Bancorp received approximately 1,740,554 shares of Kentucky First’s common stock and approximately $13.7 million in cash.  Following the Reorganization and Merger, the Company retained and holds all the capital stock of Frankfort First which holds all of the capital stock of First Federal of Frankfort.  The Company also holds all the capital stock of First Federal of Hazard.  First Federal of Hazard and First Federal of Frankfort are operated as two independent savings institutions with separate charters.  Each bank retains its own management and boards of directors.  The members of management of Kentucky First also serve in a management capacity at one of the two subsidiary Banks, and the directors of Kentucky First also serve on the board of one of the two subsidiary Banks.

Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for losses on loans and service charges and fees collected on our deposit accounts. Our general, administrative and other expense primarily consists of employee compensation and benefits expense, occupancy and equipment expense, data processing expense, other operating expenses and state franchise and federal income taxes. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.

               

                Income.  We have two primary sources of pre-tax income.  The first is net interest income, which is the difference between interest income, the income that we earn on our loans and investments, and interest expense, the interest that we pay on our deposits and borrowings.

 

                To a much lesser extent, we also recognize pre-tax income from fee and service charges, which is the compensation we receive from providing financial products and services, and sales of investment securities.

 

                Expenses.  The expenses we incur in operating our business consist of compensation, taxes and benefits, office occupancy, data processing fees, taxes and other expenses.

 

                Compensation, taxes and benefits consist primarily of the salaries and wages paid to our employees and directors, payroll taxes and expenses for retirement and other employee benefits.

 

                Office occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of taxes, depreciation charges, maintenance and costs of utilities.

 

                Data processing fees primarily includes fees paid to our third-party data processing providers.

 

                Taxes consist of the current and deferred portion of federal income taxes as well as franchise taxes paid to the Commonwealth of Kentucky by the subsidiary Banks.

 

                Other expenses include expenses for attorneys, accountants and consultants, advertising, telephone, employee training and education, charitable contributions, insurance, office supplies, postage and other miscellaneous operating activities.

 

Critical Accounting Policies

 

                We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.   In determining the allowance for loan losses, management makes significant estimates and we consider the allowance for loan losses to be a critical accounting policy.  The allowance for loan losses is the estimated amount considered necessary to cover probable incurred credit losses in the loan portfolio at the balance sheet date.  The allowance is established through the provision for losses on loans which is charged against income.

               

                The management and the Boards of the Company and of First Federal of Hazard and First Federal of Frankfort review the allowance for loan losses on a periodic basis.  Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews, volume and mix of the loan portfolio and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to change.  Management considers the economic climate in the Banks’ respective lending areas to be among the factors most likely to have an impact on the level of the required allowance for loan losses.  However, in view of the fact that the local economies are diverse, without significant dependence on a single industry or employer, the economic climate is considered to be stable at June 30, 2008.         

 

                Nevertheless, management continues to monitor and evaluate factors which could have an impact on the required level of the allowance.  Management watches for national issues that may negatively affect a significant percentage of homeowners in the Banks’ lending areas.  These may include significant increases in unemployment or significant depreciation in home prices.  Management reviews employment statistics periodically when determining the allowance for loan losses and generally finds the unemployment rates in both lending areas to be acceptable in relation to historical trends.  Given the aforementioned indicators of economic stability at June 30, 2008, management does not foresee in the near term, any significant increases in the required allowance for loan losses related to economic factors.  Finally, management has no current plans to alter the type of lending or collateral currently offered, but if such plans change or market conditions result in large concentrations of certain types of loans, such as commercial real estate or high loan-to-value ratio residential loans, management would respond with an increase in the overall allowance for loan losses.

               

                The analysis has two components, specific and general allocations.  Specific allocations are made for loans that are determined to be impaired.  Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.  The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history.  We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations.  This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve.  Actual loan losses may be significantly more than the allowances we have established and, if so, this could have a material negative effect on our financial results.

 

Our Operating Strategy

 

Our mission is to operate and grow profitable, community-oriented financial institutions serving primarily retail customers in our market areas.  We plan to pursue a strategy of:

 

              operating two community-oriented savings institutions, First Federal of Hazard, which serves customers in Perry and surrounding counties in eastern Kentucky, and First Federal of Frankfort, which serves customers primarily in Franklin County and surrounding counties in central Kentucky.  Each Bank emphasizes traditional thrift activities of accepting deposits and originating residential mortgage loans for portfolio;

 

                      increasing the yield on First Federal of Hazard’s assets by decreasing its reliance on low yielding government securities and reinvesting these assets into whole loans originated by First Federal of Frankfort, with First Federal of Frankfort retaining servicing on any loans sold.  The Banks have begun such sales and through June 30, 2008, First Federal of Hazard had purchased approximately $44.1 million in loans from First Federal of Frankfort;

 

                      pursuing larger borrowing relationships than would otherwise be available to our separate banks (because of federal restrictions on loans to one borrower) by utilizing the ability to sell loans and participations between the banks;

 

                      continuing our historic heavy reliance on our deposit base to fund our lending and investment activities and to supplement deposits with Federal Home Loan Bank of Cincinnati (“FHLB”) advances when advantageous or necessary.  We expect our projected deposit mix to generally retain its existing composition of passbook, transaction and certificate of deposit accounts;

 

              gradually pursuing opportunities to increase and diversify lending in our market areas;

 

              applying conservative underwriting practices to maintain the high quality of our loan portfolios;

 

              managing our net interest margin and interest rate risk; and

 

              entertaining possibilities of expansion into other markets through branching or acquisition, if such possibilities are beneficial to the Company’s shareholders, provide a good fit within the Company’s mutual holding company framework and can be accomplished without undue encumbrance of the Company’s other operational areas.

 


Market Risk Analysis

 

                Qualitative Aspects of Market Risk.  Our most significant form of market risk is interest rate risk.  We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.  Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits.  As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings.  To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities (or rate adjustment periods), while maintaining an acceptable interest rate spread and by maintaining a high level of liquidity.  Still, when market rates increase rapidly, increases in the cost of deposits and borrowings outpace the increases in the return on assets.  The Company’s assets are primarily comprised of adjustable rate mortgages (all of which have some contractual limits in their ability to react to market changes) and short-term securities.  Those assets will, over time, re-price to counteract the increased costs of deposits and borrowings. 

 

                Asset/Liability Management.  Management and the boards of the subsidiary Banks are responsible for the asset/liability management issues that affect the individual Banks.  Either bank may work with its sister bank to mitigate potential asset/liability risks to the Banks and to the Company as a whole.  Interest rate risk is monitored using the Office of Thrift Supervision Net Portfolio Value (“NPV”).  NPV represents the fair value of portfolio equity and is equal to the fair value of assets minus the fair value of liabilities, with adjustments made for off-balance sheet items.  Management monitors and considers methods of managing the rate sensitivity and repricing characteristics of balance sheet components in an effort to maintain acceptable levels of change in NPV in the event of changes in prevailing market interest rates.  Interest rate sensitivity analysis is used to measure our interest rate risk by computing estimated changes in NPV that are a result of changes in the net present value of its cash flows from assets, liabilities, and off-balance sheet items.  These changes in cash flow are estimated based on hypothetical instantaneous and permanent increases and decreases in market interest rates.

               

                As part of our interest rate risk policy, the Boards of Directors of the subsidiary Banks establish maximum decreases in NPV given these assumed instantaneous changes in interest rates.  Our exposure to interest rate risk is reviewed on a quarterly basis by the Boards of Directors.  If estimated changes to NPV would cause either bank to fall below the “well-capitalized” level, the Board will direct management to adjust its asset and liability mix to bring interest rate risk to a level which reflects the Board’s goals.

 


                The following table sets forth the interest rate sensitivity of our NPV as of June 30, 2008 in the event of instantaneous and permanent increases and decreases in market interest rates, respectively.  Due to the abnormally low prevailing interest rate environment at June 30, 2008 and 2007, NPV estimates are not made for decreases in interest rates greater than 100 basis points and 200 basis points, respectively.  All market risk-sensitive instruments presented in this table at June 30, 2008, are held to maturity or available-for-sale.  We have no trading securities.

 

 

 

June 30, 2008

 

 

 

 

Net Portfolio Value (1)

 

NPV as % of Portfolio Value of Assets (2)

 

Change in Rates

 

Amount

 

$ Change

 

% Change

 

NPV

Ratio (3)

 

Basis Point Changes

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

First Federal of Hazard.........

+300 bp

 

$18,491

 

-3,515

 

-16%

 

17.11%

 

-220bp

 

+200 bp

 

19,901

 

-2,105

 

-10%

 

18.06%

 

-125bp

 

+100 bp

 

21,137

 

-869

 

-4%

 

18.83%

 

-48bp

 

0 bp

 

22,006

 

 

 

 

 

19.31%

 

 

 

-100 bp

 

22,390

 

384

 

2%

 

19.41%

 

10bp

 

 

 

 

 

 

 

 

 

 

 

 

First Federal of Frankfort.....

+300 bp

 

$15,233

 

-2,626

 

-15%

 

12.49%

 

-159bp

 

+200 bp

 

16,388

 

-1,471

 

-8%

 

13.24%

 

-84bp

 

+100 bp

 

17,299

 

-560

 

-3%

 

13.79%

 

-29bp

 

0 bp

 

17,859

 

 

 

 

 

14.08%

 

 

 

-100 bp

 

18,119

 

260

 

1%

 

14.15%

 

7bp

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated..........................

+300 bp

 

$33,724

 

-6,141

 

-15%

 

14.66%

 

-189bp

 

+200 bp

 

36,289

 

-3,576

 

-9%

 

15.51%

 

-104bp

 

+100 bp

 

38,436

 

-1,429

 

-4%

 

16.17%

 

-38bp

 

0 bp

 

39,865

 

 

 

 

 

16.55%

 

 

 

-100 bp

 

40,509

 

644

 

2%

 

16.64%

 

9bp

 


                The following table sets forth the interest rate sensitivity of our NPV as of June 30, 2007 in the event of instantaneous and permanent increases and decreases in market interest rates, respectively.  All market risk-sensitive instruments presented in this table at June 30, 2007, are held to maturity or available-for-sale.  We have no trading securities.

 

 

June 30, 2007

 

 

 

 

Net Portfolio Value (1)

 

NPV as % of Portfolio Value of Assets (2)

 

Change in Rates

 

Amount

 

$ Change

 

% Change

 

NPV

Ratio (3)

 

Basis Point Changes

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

First Federal of Hazard.........

+300 bp

 

$18,824

 

-6,556

 

-26%

 

16.18%

 

-414bp

 

+200 bp

 

21,006

 

-4,374

 

-17%

 

17.63%

 

-269bp

 

+100 bp

 

23,217

 

-2,163

 

-9%

 

19.03%

 

-130bp

 

0 bp

 

25,380

 

 

 

 

 

20.32%

 

 

 

-100 bp

 

27,131

 

1,751

 

7%

 

21.30%

 

98bp

 

-200 bp

 

28,522

 

3,142

 

12%

 

22.03%

 

170bp

 

 

 

 

 

 

 

 

 

 

 

 

First Federal of Frankfort.....

+300 bp

 

$11,033

 

-6,316

 

-36%

 

9.71%

 

-431bp

 

+200 bp

 

13,671

 

-3,678

 

-21%

 

11.08%

 

-240bp

 

+100 bp

 

15,902

 

-1,447

 

-8%

 

12.60%

 

-89bp

 

0 bp

 

17,349

 

 

 

 

 

13.48%

 

 

 

-100 bp

 

18,203

 

854

 

5%

 

13.92%

 

44bp

 

-200 bp

 

18,617

 

1,268

 

7%

 

14.06%

 

58bp

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated..........................

+300 bp

 

$29,857

 

-12,872

 

-30%

 

12.62%

 

-423bp

 

+200 bp

 

34,677

 

-8,052

 

-19%

 

14.30%

 

-255bp

 

+100 bp

 

39,119

 

-3,610

 

-8%

 

15.76%

 

-110bp

 

0 bp

 

42,729

 

 

 

 

 

16.85%

 

 

 

-100 bp

 

45,334

 

2,605

 

6%

 

17.57%

 

71bp

 

-200 bp

 

47,139

 

4,410

 

10%

 

18.00%

 

115bp

_______________

(1)   Net portfolio value represents the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing liabilities.

        (2)           Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(3)   NPV Ratio represents the net portfolio value divided by the present value of assets.

 

            The preceding tables indicate that at June 30, 2008 and 2007, in the event of a sudden and sustained increase in prevailing market interest rates, our NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing interest rates, our NPV would be expected to increase.  The projected decreases in NPV in the event of sudden and sustained increases in prevailing interest rates are within the parameters established by each subsidiary Bank’s Board of Directors.  At all levels represented in the table, the Banks’ NPVs after the rate increase or decrease would be above the “well-capitalized” level based on the current level of assets.

 

                NPV is calculated by the Office of Thrift Supervision using information provided by the Company.  The calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest.  Computations or prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and deposit run-offs.  These computations should not be relied upon as indicative of actual results.  Further, the computations do not contemplate any actions the Banks may undertake in response to changes in interest rates.  Certain shortcomings are inherent in this method of computing NPV.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

 

Statement of Financial Condition

 

                General.  At June 30, 2008, total assets were $247.7 million, a decrease of $21.3 million, or 7.9%, from the $268.9 million total at June 30, 2007.  The decrease in total assets was comprised primarily of a decrease in investment securities  and was offset by an increase in loans receivable.  At June 30, 2008, total liabilities were $187.9 million, a decrease of $19.6 million, or 9.4% from the $207.5 million total at June 30, 2007.  The decrease in total liabilities was comprised primarily of a decrease in FHLB Advances and to a lesser extent by a decrease in deposits.

 

                Loans.  Our primary lending activity is the origination of loans for the purchase, refinance or construction of one- to four-family residential real estate located in our market areas.  As opportunities arise, we also originate church loans, commercial real estate loans, and multi-family and nonresidential real estate loans.  At June 30, 2008, one- to four- family residential real estate loans totaled $158.0 million, or 86.1% of total loans, compared to $146.6 million, or 86.7% of total loans, at June 30, 2007.  Construction real estate loans totaled $3.5 million, or 1.9% of total loans, at June 30, 2008, compared to $6.7 million, or 3.9% of total loans at June 30, 2007.  At June 30, 2008, multi-family real estate loans totaled $2.7 million or 1.5% of total loans, compared to $1.5 million or 0.9% of total loans at June 30, 2007, and nonresidential real estate and other loans totaled $11.3 million, or 6.2% of total loans at June 30, 2008, compared to $6.9 million, or 4.1% of total loans, at June 30, 2007.  We also originate home equity lines of credit and loans secured by deposit accounts, which totaled $7.9 million, or 4.3% of total loans at June 30, 2008, compared to home equity lines of credit and loans secured by deposit accounts of $7.5 million or 4.4% of total loans at June 30, 2007. 

 

The following table sets forth the composition of our loan portfolio at the dates indicated.

 

At June 30,

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

 

 

(Dollars in thousands)

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   One- to four-family

 

$158,007

 

86.1%

 

$146,602

 

86.7%

 

$139,356

 

88.5%

 

$134,117

 

87.3%

 

$ 29,760

 

86.4%

   Construction

 

3,528

 

1.9%

 

6,671

 

3.9%

 

2,703

 

1.7%

 

1,925

 

1.3%

 

130

 

0.4%

   Multi-family

 

2,684

 

1.5%

 

1,497

 

0.9%

 

296

 

0.2%

 

321

 

0.2%

 

280

 

0.8%

   Nonresidential and other

 

11,318

 

6.2%

 

6,898

 

4.1%

 

6,412

 

4.1%

 

7,202

 

4.7%

 

757

 

2.2%

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Consumer and other

 

4,503

 

2.5%

 

4,290

 

2.5%

 

5,211

 

3.3%

 

6,024

 

3.9%

 

0

 

0.0%

   Loans on deposits

 

3,384

 

1.8%

 

3,204

 

1.9%

 

3,432

 

2.2%

 

4,027

 

2.6%

 

3,523

 

10.2%

      Total loans

 

183,424

 

100%

 

169,162

 

100%

 

157,410

 

100%

 

153,616

 

100%

 

34,450

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(666)

 

 

 

(720)

 

 

 

(724)

 

 

 

(708)

 

 

 

(665)

 

 

Undisbursed construction loans

 

(696)

 

 

 

(2,176)

 

 

 

(1,169)

 

 

 

(1,016)

 

 

 

(36)

 

 

Deferred loan origination fees

 

(11)

 

 

 

(110)

 

 

 

(131)

 

 

 

(180)

 

 

 

(181)

 

 

Loans receivable, net

 

$182,051

 

 

 

$166,156

 

 

 

$155,386

 

 

 

$151,712

 

 

 

$ 33,568

 

 

 


            The following table sets forth certain information at June 30, 2008 regarding the dollar amount of loans repricing or maturing during the periods indicated.  The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.  Demand loans having no stated maturity are reported as due in one year or less.

 

 

 

Real Estate Loans

 

Consumer Loans

 

Total Loans

 

 

 

 

 

 

(In thousands)

One year or less.........................................................

 

$ 36,187     

 

$    7,887

 

$  44,074    

More than one year to five years..........................

 

102,691

 

--

 

102,691

More than five years...............................................

 

36,659

 

--

 

36,659

     Total......................................................................

 

$175,537   

 

$    7,887

 

$183,424  

 

                As of June 30, 2008, there were $57.7 million fixed-rate and $117.8 million adjustable-rate loans maturing in more than a year.

 

                The following table shows loan origination activity during the periods indicated.

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

 

 (In thousands)

 

 

 

 

 

 

 

Net loans at beginning of year.........................................

 

$   166,156

 

$   155,386

 

$   151,712

Loans originated:

 

 

 

 

 

 

   Real estate loans:

 

 

 

 

 

 

      Residential.....................................................................

 

44,843

 

30,647

 

28,739

      Construction..................................................................

 

4,380

 

6,355

 

2,197

      Multi-family..................................................................

 

2,383

 

1,203

 

--

   Nonresidential and other................................................

 

2,396

 

1,030

 

973

   Consumer loans...............................................................

 

1,717

 

75

 

4,962

          Total loans originated..............................................

 

55,719   

 

39,310   

 

36,871   

Deduct:

 

 

 

 

 

 

   Real estate loan principal repayments........................

 

(38,118)

 

(27,387)

 

(30,374)

   Loan sales.........................................................................

 

(1,564)

 

(888)

 

(2,712)

   Transfer to real estate acquired through foreclosure

 

         (28)

 

         (312)

 

         (101)

   Other..................................................................................

 

(114)

 

47

 

(10)

Net loan activity.................................................................

 

15,895

 

10,770

 

3,674

Net loans at end of period................................................

 

$    182,051

 

$    166,156

 

$   155,386

                                                  

                Allowance for Loan Losses and Asset Quality.  The allowance for loan losses is a valuation allowance for the probable incurred losses in the loan portfolio.  We evaluate the allowance for loan losses no less than quarterly.  When additional allowances are needed a provision for losses on loans is charged against earnings.  The recommendations for increases or decreases to the allowance are presented by management to the Banks’ boards of directors.  The Company’s board of directors oversees the overall allowance level for the Company and may propose increases or decreases for allowance levels at the banks.

 

                The allowance for loan losses is established to recognize the probable incurred losses associated with lending activities.  Loss and risk factors are based on our historical loss experience and industry averages and are adjusted for significant factors that in management’s judgment affect the collectibility of the portfolio as of the evaluation date.  These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience, duration of the current business cycle and bank regulatory examination results.

 


                At June 30, 2008, the allowance for loans losses totaled $666,000, or 0.36% of total loans, compared to $720,000, or 0.43% of total loans at June 30, 2007.  Nonperforming loans, which consist of all loans 90 days or more past due, totaled $1.3 million at June 30, 2008 and $968,000 at June 30, 2007.  At June 30, 2008, all of these loans consisted of loans secured by single-family residences.  The allowance for loans losses totaled 52.2% and 74.4% of nonperforming loans at June 30, 2008 and 2007, respectively.  In determining the allowance for loan losses at any point in time, management and the boards of directors of the subsidiary Banks apply a systematic process focusing on the risk of loss in the portfolio.  First, the loan portfolio is segregated by loan types to be evaluated collectively and loan types to be evaluated individually.  Delinquent multi-family and nonresidential loans are evaluated individually for potential impairment.  Second, the allowance for loan losses is evaluated using historic loss experience adjusted for significant factors by applying these loss percentages to the loan types to be evaluated collectively in the portfolio.  To the best of management’s knowledge, all known and probable incurred losses that can be reasonably estimated have been recorded at June 30, 2008.  Although management believes that its allowance for loan losses conforms with generally accepted accounting principles based upon the available facts and circumstances, there can be no assurance that additions to the allowance will not be necessary in future periods, which would adversely affect our results of operations.

 

                Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses.  The examinations may require us to make additional provisions for loan losses based on judgments different from ours.  In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.  Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. 

 

            Summary of Loan Loss Experience.  The following table sets forth an analysis of the allowance for loan losses for the periods indicated.  Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to the allowance.

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance at beginning of period................................

 

$720

 

$724

 

$708

 

$665

 

$720

 

Allowance acquired – Frankfort First ……………...

 

--

 

--

 

--

 

133

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses................................................

 

12

 

--

 

32

 

53

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

   Real estate loans.........................................................

 

(66)

 

(4)

 

(16)

 

(145)

 

(65)

 

   Consumer loans...........................................................

 

--

 

--

 

--

 

--

 

--

 

      Total charge-offs................................................

 

(66)

 

(4)

 

(16)

 

(145)

 

(65)

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

Real estate loans............................................................

 

--

 

--

 

--

 

2

 

--

 

Consumer loans..............................................................

 

--

 

--

 

--

 

--

 

--

 

   Total recoveries...........................................................

 

--

 

--

 

--

 

2

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs...............................................................

 

($66)

 

($4)

 

($16)

 

($143)

 

($65)

 

Allowance at end of period..........................................

 

$666

 

$720

 

$724

 

$708

 

$665

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to nonperforming loans.............................

 

52.15%

 

74.38%

 

50.74%

 

40.53%

 

57.63%

 

Allowance to total loans outstanding at

  end of period.................................................................

 

0.36%

 

0.43%

 

0.46%

 

0.47%

 

1.98%

 

Net charge-offs to average loans outstanding

 

 

 

 

 

 

 

 

 

 

 

  during the period...........................................................

 

0.04%

 

--%

 

0.01%

 

0.20%

 

0.17%

 

 


The following table sets forth the breakdown of the allowance for loan losses by loan category, which management believes can be allocated on an approximate basis, at the dates indicated.

 

 

At June 30,

 

2008

 

2007

 

2006

 

2005

______________2004_  ___________

 

Amount

 

% of Allowance to Total Allowance

 

% of

Loans in

Category

To Total

Loans

 

Amount

 

% of Allowance to Total Allowance

 

% of

Loans in

Category

To Total

Loans

 

Amount

 

% of Allowance to Total Allowance

 

% of

Loans in

Category

To Total

Loans

 

Amount

 

% of Allowance to Total Allowance

 

% of

Loans in

Category

To Total

Loans

 

Amount

 

% of Allowance to Total Allowance

 

% of

Loans in

Category

To Total

Loans

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

$    584

 

     87.7%

 

     86.1%

 

$    636

 

     88.3%

 

     86.7%

 

$    633

 

     87.4%

 

     88.5%

 

$    626

 

     88.3%

 

    87.3%

 

$   574

 

 86.3%

 

    86.4%

Construction

   13

 

   2.0

 

   1.9

 

  29

 

   4.0

 

   3.9

 

  12

 

   1.7

 

   1.7

 

    7

 

   1.1

 

  1.3

 

   3

 

0.5

 

  0.4

Multi-family

   10 

 

   1.4

 

   1.5

 

   7 

 

   1.0

 

   0.9

 

   9 

 

   1.3

 

   0.2

 

    1

 

   0.2

 

  0.2

 

   5

 

0.8

 

 0.8

Nonresidential & other

   42 

 

  6.3

 

  6.2

 

 30 

 

  4.2

 

  4.1

 

 30 

 

  4.1

 

  4.1

 

   31

 

  4.4

 

  4.7

 

 15

 

2.2

 

 2.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other

   17

 

   2.6

 

   2.5

 

  18

 

   2.5

 

   2.5

 

  24

 

   3.3

 

   3.3

 

   26

 

   3.6

 

  3.9

 

  0

 

 0.0

 

 0.0

Loans secured by deposits

  --

 

   --

 

   1.8

 

  --

 

   --

 

   1.9

 

  16

 

   2.2

 

   2.2

 

   17

 

   2.4

 

  2.6

 

  68

 

10.2

 

10.2

   Total allowance for loan losses........................................

$666

 

100.0%

 

100.0%

 

$720

 

100.0%

 

100.0%

 

$724

 

100.0%

 

100.0%

 

$708

 

100.0%

 

100.0%

 

$665

 

100.0%

 

100.0%

 

 

 

 


                Nonperforming and Classified Assets.  When a loan becomes 90 days delinquent, the loan may be placed on nonaccrual status at which time the accrual of interest ceases, the interest previously accrued to income is reversed and interest income is thereafter recognized on a cash basis.  Payments on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.  In situations where management believes collection of interest due is likely even if the loan is more than 90 days delinquent, then management may decide not to place the loan on non-accrual status.

 

                We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets.  Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold.  When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, or fair market value at the date of foreclosure.  Holding costs and declines in fair value after acquisition of the property are charged against income.

 

                Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.  We consider one- to four-family mortgage loans and deposit loans to be homogeneous and collectively evaluate them for impairment.  Other loans are evaluated for impairment on an individual basis.  At June 30, 2008, no loans were considered impaired.

 

The following table provides information with respect to our nonperforming assets at the dates indicated.  We did not have any troubled debt restructurings at any of the dates presented.

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

   Real estate loans.................................................

 

$        666

 

$        713

 

$        819

 

$        874

 

$       989

   Consumer loans...................................................

 

--

 

--

 

--

 

--

 

--

      Total ..................................................................

 

666

 

713

 

819

 

874

 

989

 

 

 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

 

 

 

   Real estate loans.................................................

 

611

 

255

 

608

 

873

 

165

   Consumer loans...................................................

 

--

 

--

 

--

 

--

 

--

      Total of accruing loans past due 90

 

 

 

 

 

 

 

 

 

 

        days or more...................................................

 

611

 

255

 

608

 

873

 

165

      Total nonperforming loans.............................

 

1,277

 

968

 

1,427

 

1,747

 

1,154

   Real estate acquired through foreclosure.......

 

21

 

8

 

51

 

60

 

--

      Total nonperforming assets............................

 

$        1,298

 

$          976

 

$       1,478

 

$       1,807

 

$      1,154

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans to total loans..........

 

0.70%

 

0.58%

 

0.92%

 

1.15%

 

3.44%

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans to total assets.........

 

0.52%

 

0.36%

 

0.54%

 

0.64%

 

0.83%

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming assets to total assets........

 

0.52%

 

0.36%

 

0.56%

 

0.66%

 

0.83%

 

                Other than disclosed above, there are no other loans at June 30, 2008 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

 

                Interest income that would have been recorded for the years ended June 30, 2008, 2007 and 2006, had nonaccrual loans been current according to their original terms amounted to $33,000, $85,000 and $82,000, respectively.  Income related to nonaccrual loans included in interest income for the years ended June 30, 2008, 2007 and 2006 amounted to $124,000, $74,000 and $74,000, respectively.

 


 

                Federal regulations require us to regularly review and classify our assets.  In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: substandard, doubtful and loss.  “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  The regulations also provide for a “special mention” category, described as 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.  Special mention assets totaled $628,000 and $890,000 at June 30, 2008 and 2007, respectively.

 

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

 

 

 

 

 

 

 

At June 30,

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

(In thousands)

Substandard assets.............................................

 

$         2,051

 

$        1,490

 

$        1,698

Doubtful assets....................................................

 

--

 

--

 

--

Loss assets............................................................

 

--

 

--

 

--

      Total classified assets...................................

 

$         2,051

 

$        1,490

 

$        1,698

 

Substandard assets at June 30, 2008, consisted of 36 loans totaling $2.0 million and three parcels of real estate owned with an aggregate carrying value of $21,000.  All substandard loans were secured by single-family residences on which the banks have priority lien position, with the exception of one loan that is secured by a property on which there are two single-family residences.  The average balance of substandard loans is $56,000 with a total of five loans in excess of $100,000.  The largest substandard loan is $206,000.  Substandard assets at June 30, 2007, consisted of $713,000 of nonaccrual loans, $769,000 of other loans and $8,000 of real estate owned.  Substandard assets at June 30, 2006 consisted of $819,000 of nonaccrual loans, $828,000 of other loans and $51,000 of real estate owned. 

 

                Delinquencies.  The following table provides information about delinquencies in our loan portfolios at the dates indicated.

 

 

At June 30,

 

 

2008

 

2007

 

 

30-59 Days Past Due

 

60-89 Days Past Due

 

30-59 Days Past Due

 

60-89 Days Past Due

 

 

(In thousands)

Real estate loans.............................

$  1,437

 

$  1,378

 

$  1,629

 

$  1,051

Consumer loans..............................

         --

 

        --

 

         --

 

        --

     Total.............................................

$  1,437

 

$  1,378

 

$  1,629

 

$  1,051

 


 

Securities.  Our securities portfolio consists primarily of U.S. Government agency obligations as well as mortgage-backed securities with maturities of 30 years or less.  Investment and mortgage-backed securities totaled $22.4 million at June 30, 2008, a decrease of $50.5 million, or 69.2%, compared to the $72.9 million total at June 30, 2007.  The reduction in these securities resulted from maturities, calls and prepayments of investments and mortgage-backed securities.  All of our mortgage-backed securities were issued by  Ginnie Mae, Fannie Mae or Freddie Mac.

 

The following table sets forth the carrying values and fair values of our securities portfolio at the dates indicated.

 

At June 30,

 

2008

 

2007

 

2006

 

Amortized Cost

 

 Fair Value

 

Amortized Cost

 

 Fair Value

 

Amortized Cost

 

 Fair Value

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

   U.S. Government agency

 

 

 

 

 

 

 

 

 

 

 

     obligations...................................

 $      4,999

 

$    5,030     

 

 $    12,999

 

    $12,571     

 

 $    12,999

 

    $12,211     

   Mortgage-backed securities.......

         455

 

       450

 

         734

 

       727

 

         1,104

 

       1,079

      Total............................................

 $      5,454

 

 $    5,480

 

 $    13,733

 

 $  13,298

 

 $    14,103

 

 $  13,290

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

   U.S. Government agency

$      3,000

 

$    3,001

 

$    43,848

 

$  42,957

 

$    45,844

 

$  43,919

     obligations...................................

 

 

 

 

 

 

 

 

 

 

 

   Mortgage-backed securities.......

       13,959

 

     13,408

 

       15,758

 

     14,878

 

       18,185

 

     17,028

      Total............................................

 $    16,959

 

 $  16,409

 

 $    59,606

 

 $  57,835

 

 $    64,029

 

 $  60,947

 

                At June 30, 2008 and 2007, we did not own any securities, other than U.S. Government agency securities, that had an aggregate book value in excess of 10% of our equity at that date.


The following table sets forth the maturities and weighted average yields of securities at June 30, 2008.  At June 30, 2008, we had no U.S. Government agency securities with adjustable rates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Year or Less

 

More Than

One Year to

Five Years

 

More Than

Five Years to

Ten Years

 

More Than Ten Years

 

Total Investment Portfolio

 

 

Amortized Cost

 

Weighted Average Yield

 

Amortized Cost

 

Weighted Average Yield

 

Amortized Cost

 

Weighted Average Yield

 

Amortized Cost

 

Weighted Average Yield

 

Amortized Cost

 

Fair Value

 

Weighted Average Yield

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  U.S. Government agency obligations...

 

$           --

 

         --%

 

$       4,999

 

         3.50%

 

$           --

 

            --%

 

$            --

 

             --%

 

$   4,999

 

$   5,030

 

3.50%

  Mortgage-backed securities............

 

9

 

         5.18

 

42

 

         5.18

 

66

 

         5.18

 

338

 

        5.18

 

455

 

450

 

      5.18

   Total  available for sale securities

 

$            9

 

 

 

$       5,041

 

 

 

$          66

 

 

 

$         338

 

 

 

$   5,454

 

$   5,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  U.S. Government agency obligations...

 

$         --

 

          --

 

$     3,000

 

         3.02

 

 $           --

 

            --

 

$            --

 

            --

 

$    3,000

 

$   3,001

 

      3.02

  Mortgage-backed securities............

 

950

 

       4.19

 

4,204

 

         4.18

 

6,346

 

         4.19

 

2,459

 

         4.94

 

13,959

 

13,408

 

      4.32

    Total held-to-maturity securities.

 

$      950

 

 

 

$   7,204

 

 

 

$     6,346

 

 

 

$      2,459

 

 

 

$   16,959

 

$ 16,409

 

 

 


                Other Assets.  Other assets at June 30, 2008 include goodwill and other intangible assets of $15.0 million, which was a sole result of the Company’s acquisition of Frankfort First and bank owned life insurance policies with a carrying value of  $2.3 million at both June 30, 2008 and 2007, of which First Federal of Frankfort is the owner and beneficiary.  Previously, the Company had no such policies.  Both subsidiary Banks are members and stockholders of the Federal Home Loan Bank of Cincinnati (“FHLB”).  FHLB stock, at cost, totaled $5.6 million and $5.4 million at June 30, 2008 and 2007, respectively. 

 

                Deposits.  Our primary source of funds is retail deposit accounts held primarily by individuals within our market areas.  Deposits totaled $137.6 million at June 30, 2008, a decrease of $2.3 million or 1.6%, compared to the $139.9 million total at June 30, 2007.  Although management generally strives to maintain a moderate rate of growth in deposits, primarily through marketing and pricing strategies, market conditions and competition may curtail growth opportunities.  Rather than striving to offer the highest interest rate on deposit products in our market area, management of the Banks offer deposit products that fit the Banks’ funding strategies.

 

                The following table sets forth the balances of our deposit products at the dates indicated.

 

 

 

 

 

 

 

At June 30,

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

(In thousands)

Certificate of deposit accounts.....................................

 

$     97,020

 

$    96,354

 

$    90,782

Demand, transaction and

  passbook savings accounts.........................................

 

40,614

 

43,539

 

50,456

      Total............................................................................

 

$   137,634

 

$  139,893

 

$  141,238

 

 

                The following table indicates the amount of certificate of deposit accounts with balances equal to or greater than $100,000, by time remaining until maturity at June 30, 2008.

 

Maturity Period

 

Certificates

of Deposit

 

 

(In thousands)

 

 

 

Three months or less..........................................................

 

$        4,789

Over three months through six months..........................

 

4,606

Over six months through twelve months.......................

 

12,137

Over twelve months...........................................................

 

7,811

      Total...............................................................................

 

$      29,343

 

               

The following table sets forth our certificate of deposit accounts classified by rates at the dates indicated.

 

 

 

 

 

 

 

At June 30,

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

(In thousands)

Rate

 

 

 

 

 

 

1.00 -  1.99%................................................

 

$          1,241

 

$          199

 

$      3,192

2.00 -  2.99....................................................

 

12,039

 

4,890

 

9,350

3.00 -  3.99....................................................

 

21,375

 

14,568

 

39,763

4.00 -  4.99....................................................

 

32,011

 

16,637

 

30,690

5.00 -  5.99....................................................

 

30,354

 

60,060

 

7,783

6.00 -  6.99....................................................

 

--

 

--

 

4

7.00 -  7.99....................................................

 

--

 

--

 

--

      Total........................................................

 

$    97,020

 

$    96,354

 

$    90,782

 


The following table sets forth the amount and maturities of certificate accounts at June 30, 2008.

 

 

 

Amount Due

 

 

 

 

 

 

Less Than One Year

 

More Than One Year to Two Years

 

More Than

Two Years to Three Years

 

More Than

Three Years

 

Total

 

Percentage of

Total Certificate Accounts

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

1.00 –1.99%..........

 

$       1,239

 

$              2

 

$             --

 

$            --

 

$     1,241

 

             1.28%

2.00 – 2.99.............

 

11,588

 

451

 

--

 

--

 

12,039

 

             12.41

3.00 – 3.99.............

 

16,064

 

3,784

 

1,294

 

233

 

21,375

 

            22.03

4.00 – 4.99.............

 

23,335

 

5,572

 

1,496

 

1,608

 

32,011

 

            32.99

5.00 – 5.99.............

 

15,213

 

7,314

 

6,894

 

933

 

30,354

 

            31.29

      Total..................

 

$    67,439

 

$      17,123

 

$      9,684

 

$    2,774

 

$   97,020

 

         100.00%

 

 

The following table sets forth the average balances and rates paid on deposits.

 

 

Year Ended June 30,

 

2008

 

2007

 

2006

 

Average

 

Average

 

Average

 

Average

 

Average

 

Average

 

Balance

 

Rate

 

Balance

 

Rate

 

Balance

 

Rate

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Noninterest-bearing demand............

 $         719

 

0.00%

 

 $        762

 

0.00%

 

 $     742

 

0.00%

Interest-bearing demand...................

         9,370

 

1.65%

 

         8,754

 

2.57%

 

           13,377

 

2.13%

Passbook..............................................

32,410

 

1.11%

 

36,931

 

1.19%

 

44,549

 

1.18%

Time......................................................

96,466

 

4.52%

 

92,690

 

4.33%

 

94,440

 

3.41%

 

 

The following table sets forth the deposit activities for the periods indicated.

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

 

(In thousands)

 

 

 

 

 

 

 

Beginning balance............................................................

 

$   139,893

 

$   141,238

 

$   155,044

Decrease before interest credited...................................

 

(7,131)

 

(5,894)

 

(17,703)

Interest credited................................................................

 

4,872

 

4,549

 

3,897

Net decrease in deposits..................................................

 

(2,259)

 

(1,345)

 

(13,806)

Ending balance.................................................................

 

$   137,634

 

$   139,893

 

$   141,238

 

                Borrowings.  Advances from the Federal Home Loan Bank of Cincinnati amounted to $47.8 million and $65.1 million at June 30, 2008 and 2007, respectively.

 


                The following table presents certain information regarding our Federal Home Loan Bank of Cincinnati advances during the periods and at the dates indicated.

 

 

 

Year Ended June 30,

 

 

2008

 

2007

 

2006

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Balance outstanding at end of period..........................

 

$47,801

 

$65,132

 

$54,849

Maximum amount of advances outstanding

 

 

 

 

 

 

  at any month end during the period............................

 

$71,220

 

$65,132

 

$54,849

Average advances outstanding

 

 

 

 

 

 

  during the period.............................................................

 

$61,687

 

$61,696

 

$54,696

Weighted average interest rate

 

 

 

 

 

 

  during the period.............................................................

 

   4.37%

 

   4.71%

 

   4.02%

Weighted average interest rate

 

 

 

 

 

 

  at end of period...............................................................

 

      5.21%

 

      5.75%

 

      6.04%

               

               

                Shareholders’ Equity.  Shareholders’ equity totaled $59.8 million at June 30, 2008, a $1.7 million or 2.7%, decrease compared to June 30, 2007.  The reduction resulted primarily from repurchases of the Company’s common stock.

 

                The Banks are required to maintain minimum regulatory capital pursuant to federal regulations.  At June 30, 2008, both First Federal of Hazard’s and First Federal of Frankfort’s regulatory capital substantially exceeded all minimum regulatory capital requirements.  Management is not aware of any recent event that would cause this classification to change.

 

Results of Operations for the Years Ended June 30, 2008 and 2007

 

                General.  Net earnings totaled $932,000 for the fiscal year ended June 30, 2008, an increase of $47,000, or 5.3%, from the net earnings recorded for the fiscal year ended June 30, 2007.  The increase was due primarily to a $30,000 increase in net interest income.

               

                Interest Income.  Total interest income for the fiscal year ended June 30, 2008 totaled $13.1 million, an increase of $139,000, or 1.1%, compared to the fiscal year ended June 30, 2007.  The increase in interest income is due primarily to an increase in interest income on loans, which increased by $753,000, or 7.7%, for the fiscal year ended June 30, 2008, compared to fiscal 2007.  Interest income from investments, including mortgage-backed securities, interest-bearing deposits and other, decreased $614,000 or 19.5% from $3.1 million for the 2007 fiscal year to $2.5 million for fiscal 2008.

 

The increase in interest income from loans was attributable primarily to a $12.2 million, or 7.6%, increase in the average balance of loans outstanding and was partially supported by an increase of 1 basis point in the average yield on loans to 6.06% for fiscal 2008.  The interest income on investments, including mortgage-backed securities, decreased primarily due to a $14.2 million decrease in the average balance outstanding.  Average balances of mortgage-backed securities and investment securities assets decreased by $2.4 million or 13.3% and $16.1 million or 28.4%, respectively, year to year, while the average balance of other interest-earning assets increased by $4.3 million or 65.3%, as a result of maturities and/or calls of a large portion of the Company’s investment portfolio during the year.  The average rates earned on mortgage-backed securities and investment securities decreased only 1 and 2 basis points, respectively, while the average rate earned on other interest-earning assets decreased 172 basis points year to year.

 

                Interest Expense.  Interest expense totaled $7.6 million for the fiscal year ended June 30, 2008, an increase of $109,000, or 1.5%, from interest expense of $7.5 million for fiscal 2007.  The increase in interest expense resulted primarily from increased costs associated with deposits, which increased $323,000 or 7.1% from year to year.  Increased cost on deposits is attributable to both an increase in rate paid and a shift in the deposit composition.  The average rate paid on deposits increased 24 basis points to 3.52% for the year just ended, while the average deposits outstanding declined $172,000 or 0.1% from year to year.  However, deposit composition changed significantly as the average balance of certificates of deposits increased $3.8 million or 4.1% from year to year while other deposit categories saw average balances decline $3.9 million or 8.5% year to year.  The interest rates paid on certificates of deposits are usually higher than rates paid on other deposit products.  Interest expense on borrowings totaled $2.7 million for the fiscal year ended June 30, 2008, a decrease of $214,000 or 7.4% compared to fiscal 2007.  Average borrowings decreased by only $9,000 remaining at $61.7 million for the year ended June 30, 2008, while the average rate paid on borrowings decreased 34 basis points to 4.37% for fiscal 2008. 

               

                Net Interest Income.  As a result of the aforementioned changes in interest income and interest expense, net interest income increased by $30,000, or 0.5%, during the fiscal year ended June 30, 2008, compared to fiscal 2007.  The average interest rate spread increased from 1.54% for the fiscal year ended June 30, 2007 to 1.65% for fiscal 2008.  The net interest margin increased to 2.29% for the fiscal year ended June 30, 2008 from 2.20% for fiscal 2007.

 

Average Balances and Yields.  The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs.  The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.  For purposes of this table, average balances have been calculated using the average of daily balances and nonaccrual loans are included in average balances only.  We did not hold any non-taxable investment securities during any of the periods presented in the table.

 

 

Year Ended June 30,

 

2008

 

2007

 

Average

Balance

 

Interest

And

Dividends

 

Yield/

Cost

 

Average Balance

 

Interest

And Dividends

 

Yield/

Cost

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

   Loans receivable.......................................

$   174,259

 

$    10,555

 

6.06%

 

$  162,010

 

$      9,802

 

6.05%

   Mortgage-backed securities....................

15,514

 

665

 

4.29

 

17,883

 

768

 

4.30

   Investment securities................................

40,751

 

1,426

 

3.50

 

56,893

 

1,999

 

3.51

   Other interest-earning assets...................

10,811

 

441

 

4.08

 

6,540

 

379

 

5.80

      Total interest-earning assets.................

241,335

 

13,087

 

5.42

 

243,326

 

12,948

 

5.32

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets..........................

22,517

 

 

 

 

 

22,703

 

 

 

 

      Total assets.............................................

$   263,852

 

 

 

 

 

$  266,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

   Demand deposits...... …………...............

$   9,370

 

155

 

1.65

 

$   8,754

 

225

 

2.57

   Noninterest-Bearing demand deposits ……

719

 

--

 

0.00

 

762

 

--

 

0.00

   Savings ……………………………………

32,410

 

360

 

1.11

 

36,931

 

439

 

1.19

   Certificates of deposit …………………….

96,466

 

4,357

 

4.52

 

92,690

 

3,885

 

4.19

  Total deposits ……………………………...

138,965

 

4,872

 

3.51

 

139,137

 

4,549

 

3.27

  Borrowings ………………………………...

61,687

 

2,693

 

4.37

 

61,696

 

2,907

 

4.71

      Total interest-bearing liabilities............

200,652

 

7,565

 

3.77

 

200,833

 

7,456

 

3.71

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities.....................

2,665

 

 

 

 

 

2,301

 

 

 

 

      Total liabilities........................................

203,317

 

 

 

 

 

203,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity ...................................

60,535

 

 

 

 

 

62,895

 

 

 

 

      Total liabilities and shareholders’ equity

$   263,852

 

 

 

 

 

$  266,029

 

 

 

 

Net interest income/average yield.............

 

 

$      5,522

 

1.65%

 

 

 

$      5,492

 

1.61%

Net interest margin.......................................

 

 

 

 

2.29%

 

 

 

 

 

2.26%

Average interest-earning assets to

  average interest-bearing liabilities...........

 

 

 

 

 

120.28%

 

 

 

 

 

 

121.16%

 

            Rate/Volume Analysis.  The following table sets forth the effects of changing rates and volumes on our net interest income.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.  The net column represents the sum of the prior columns.

 

                                                Twelve months ended June 30,                                                         Twelve months ended June 30,

                                                       2008 to June 30, 2007                                                      2007 to June 30, 2006

                                                         Increase (Decrease)                                                        Increase (Decrease)

                                                          Due to Changes In                                                           Due to Changes In

 

 

 

Rate

 

Volume

 

Total

 

Rate

 

Volume

 

Total

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

   Loans receivable

 

 $         737

 

 $       16

 

 $         753

 

 $       557

 

 $       46

 

 $     603

  Mortgage-backed securities

 

          (101)

 

              (2)

 

           (103)

 

         (142)

 

             20

 

          (122)

  Investment securities

 

          (563)

 

            (10)

 

           (573)

 

         (135)

 

             56

 

            (79)

   Other interest-earning assets

 

            113

 

            (51)

 

              62

   

         (455)

 

           292

 

          (163)

Total interest-earning assets

 

            186

 

            (47)

 

            139

   

         (175)

 

           414

 

            239

 

 

 

 

 

 

 

   

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

   

 

 

 

 

   Checking accounts

 

              17

 

            (87)

 

             (70)

   

         (164)

 

           104

 

            (60)

   Savings accounts

 

            (51)

 

            (28)

 

             (79)

   

           (93)

 

               5

 

            (88)

   Certificates of deposit

 

            162

 

           310

 

            472

   

           (59)

 

           859

 

            800

   FHLB Advances

 

                 -

 

          (214)

 

           (214)

   

          304

 

           404

 

            708

  Total interest-bearing liabilities

 

            128

 

            (19)

 

            109

   

           (12)

 

        1,372

 

         1,360

Increase in net interest income

 

 $           58

 

 $    (28)

 

 $           30

 

 $     (163)

 

 $  (958)

 

 $(1,121)

 

                Provision for Losses on Loans.  A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated 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 and other factors related to the collectibility of the loan portfolio.  Based upon an analysis of these factors, management recorded a provision of $12,000 for losses on loans for the fiscal year ended June 30, 2008, an increase of $12,000 compared to no provision for fiscal 2007.  The provision recorded during the fiscal year ended June 30, 2008 generally reflects management’s perception of the risk prevalent in the economy integrated with the overall change in the level of nonperforming loans year over year.  Management believes all nonperforming loans are adequately collateralized; however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. 

 

Other  Income.  Other operating income increased $8,000, to $182,000 for the fiscal year ended June 30, 2008, due primarily to a $13,000 or 130% increase in gain on sale of loans.    Other operating income is generally comprised of service charges and fees charged on loan and deposit accounts. 

 

General, Administrative and Other Expense.  General, administrative and other expense decreased $43,000 or 1.0% to $4.3 million for the fiscal year ended June 30, 2008 compared to fiscal 2007.  The decrease in general, administrative and other expense is primarily attributed to a decrease in employee compensation and benefits, which decreased $43,000 or 1.5% to $2.9 million for the year just ended. 

 

The decrease in employee compensation and benefits is attributed primarily to a decrease in health insurance benefits and share-based compensation year to year.  Health insurance benefits declined $29,000 or 17.1% to $141,000 for the fiscal year ended June 30, 2008, primarily as a result of realignment of employee share of costs.  In addition, share-based compensation decreased $14,000 or 3.6% to $376,000 for the 2008 fiscal year compared to $390,000 for the prior fiscal year.  Fiscal 2007 was the first full year in which the share-based compensation plans were in force.

 

Federal Income Taxes. The provision for federal income tax increased $22,000 or 5.3% from $417,000 for the fiscal year ended June 30, 2008 to $439,000 for the fiscal year ended June 30, 2008, as a result of higher earnings before income taxes by $69,000, or 5.3%.  The effective tax rate for each of the years ended June 30, 2008 and 2007 was 32.0%.

 

Liquidity and Capital Resources

 

            Liquidity is the ability to meet current and future short-term financial obligations.  Our primary sources of funds consist of cash and deposits at other banks, deposit inflows, loan repayments and maturities, calls and sales of investment and mortgage-backed securities and advances from the FHLB.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

                We periodically assess our available liquidity and projected upcoming liquidity demands.  We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program.  Excess liquid assets are invested generally in interest-earning deposits, federal funds and short- and intermediate-term U.S. Government agency obligations.

 

                Our most liquid assets are cash, federal funds sold and interest-bearing deposits.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At June 30, 2008 and June 30, 2007, cash and cash equivalents totaled $16.0 million and $2.7 million respectively.  Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $5.5 million and $13.3 million at June 30, 2008 and 2007, respectively.  At June 30, 2008, we had the ability to borrow a total $104.3 million from the FHLB, of which $46.8 million (before premium) was outstanding.

 

                We are not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material protracted decrease in liquidity.  We expect that all of our liquidity needs, including the contractual commitments set forth in the table below can be met by our currently available liquid assets and cash flows.  In the event any unforeseen demand or commitments were to occur, we would access our borrowing capacity with the FHLB.  We expect that our currently available liquid assets and our ability to borrow from the FHLB would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.

 

                Our primary investing activities are the origination of loans and the purchase of investment securities.  In fiscal 2008, we originated $54.1 million of loans.  In fiscal 2007, we originated $38.4 million of loans.  In fiscal 2006, we originated $34.2 million of loans.  During fiscal 2008, these activities were funded primarily by proceeds from the principal repayments on loans of $38.1 million and maturities of investment securities and mortgage-backed securities of $50.9 million.  During fiscal 2007, these activities were funded primarily by proceeds from the principal repayments on loans of $27.4 million and maturities of investment securities and mortgage-backed securities of $4.8 million.

 

Financing activities consist primarily of activity in deposit accounts and in FHLB advances.  We experienced a net decrease in total deposits of $2.3 million, $1.3 million and $13.8 million for the years ended June 30, 2008, 2007 and 2006, respectively.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.  While we generally manage the pricing of our deposits to be competitive and to increase core deposit relationships, during fiscal 2008, management chose to allow the deposit base to reprice to lower overall levels over attracting new deposits.  The net decrease in FHLB advances totaled $17.3 million, as we repaid short-term funds with additional liquidity available to us. 

 


Commitments and Contractual Obligations

 

                At June 30, 2008, we had $946,000 in mortgage commitments.  Certificates of deposit due within one year of June 30, 2008 totaled $67.4 million, or 49.0% of total deposits.  If these deposits do not remain with us, we might be required to seek other sources of funds, including FHLB advances or other certificates of deposit.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2009.  We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

                The following table sets forth our contractual obligations and loan commitments as of June 30, 2008.

 

 

 

Total Amounts

Committed

 

Less Than

One Year

 

One to

Three Years

 

Four to

Five Years

More than Five Years

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances (1).

 

$46,839

 

    $10,155

 

$29,268

 

$ 5,194

$  2,222

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One to four family residential real estate

         

       946

 

       946

 

        --

 

          --

--

 

Unused lines of credit..................................

 

    9,499

 

    9,499

 

        --

 

          --

--

 

Undisbursed loans.......................................

 

      696

 

      696

 

        --

 

          --

          --

 

      Total commitments...............................

 

$57,980

 

$21,296

 

$29,268

 

$5,194

$2,222

 

_________________

 

 

 

 

 

 

 

 

 

 

(1)  Net of premium on FHLB borrowings

 

                For the year ended June 30, 2008, other than loan commitments, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Impact of Inflation and Changing Prices

Our consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.  The primary impact of inflation on our operations is reflected in increased operating costs.  Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature.  As a result, interest rates generally have a more significant impact on our performance than do general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.


[Insert Financial Statements]


The Board of Kentucky First Federal Bancorp would like to recognize our employees who are working hard every day to maximize the value of your investment:

 

First Federal Savings & Loan of Hazard

First Federal Savings Bank of Frankfort

 

 

Deborah Bersaglia, Assistant

Wick Asbury, Lending

     Vice President/Lending/Collection

Brenda Baldwin, Accounting

Phyllis Campbell, Customer Service

Stan Betsworth, Vice President/Lending

Sandy Craft, Customer Service

Phyllis Bowman, Loan Servicing

Lou Ella R. Farler, Assistant Vice

Lisa Brinley, Branch Manager

     President/Data Processing

Andrea Cline, Customer Service

Deloris S. Justice, Accounting Assistant

Carolyn Eades, Customer Service

Velma Kelly, Customer Service

Diana Eads, Customer Service

Kaye Craft, Treasurer

Stacey Greenawalt, Lending

Brenda Lovelace, Customer Service

Barry Holder, Customer Service

Fred Skaggs, Vice President/Lending

Clay Hulette,  President/Treasurer

Peggy Hopper Steele, Receptionist/Loan

Don D. Jennings, Chief Executive Officer

     Processing

Teresa A. Kuhl, Executive Vice President/

Molly Ann E. Toler, Asst. Vice President

     Operations/Human Resources

     Teller Operations

Janet Lewis, Branch Manager

Tony Whitaker, President

Patty Luttrell, Loan Processing/Compliance

 

Carla McMillen, Customer Service

 

Kim Moore, Head Teller

 

Carolyn Mulcahy, Accounting

 

Jeannie Murphy, Customer Service

 

David Semones, Loan Processing

Martha Sowders, Customer Service

 

Sandy Stover, Receptionist

 

Melissa Thompson, Administrative Assistant

 

Yvonne Thornberry, Loan Processing/ 

   Servicing

 

Nancy Watts, Customer Service/Insurance

     Processing

 

 

 

 

 

 

 


 

Kentucky First Federal Bancorp

First Federal Savings and

Loan Association of Hazard

First Federal Savings Bank of

Frankfort

 

 

 

Board of Directors

Board of Directors

Board of Directors

 

 

 

Stephen G. Barker, Attorney and     

     Assistant General Counsel to the

    Kentucky River Properties, LLC

Walt Ecton, Attorney

William D. Gorman, Mayor of

     the City of Hazard

Stephen G. Barker

Walter G. Ecton, Jr.

William D. Gorman

Tony Whitaker

Charles A. Cotton, III

C. Michael Davenport

Danny A. Garland

David R. Harrod

Don D. Jennings

William C. Jennings, Chairman

David R. Harrod C.P.A. and

   principal of Harrod and

  Associates, P.S.C.

 

 

William M. Johnson

Frank McGrath

Herman D. Regan, Jr.

Don D. Jennings, President,

    Kentucky First Federal Bancorp

 

 

Herman D. Regan, Jr., Retired

    President of Kenvirons, Inc.

 

 

Tony Whitaker, Chairman of

 

 

    Kentucky First Federal Bancorp

 

 

 

Office Locations

 

 

 

 

 

 

First Federal of Frankfort

 

 

East Branch

First Federal of Hazard

First Federal of Frankfort

1980 Versailles Road

Main Office

Main Office

Frankfort, KY 40601

479 Main Street

216 West Main Street

 

P.O. Box 1069

P.O. Box 535

First Federal of Frankfort

Hazard, KY 41702-1069

Frankfort, KY 40602-0535

West Branch

 

 

1220 US 127 South

 

 

Frankfort, KY 40601

 

 

 

Chairman and CEO

 

Shareholder Inquiries and

Tony Whitaker

Special Counsel

Availability of 10-K Report: A

(606) 436-3860

firstfederal@windstream.net

Kilpatrick Stockton                         LLP

COPY OF THE COMPANY’S

ANNUAL REPORT ON FORM

 

607 14th Street, NW

10-K FOR THE YEAR ENDED

 

Washington, DC 20005

JUNE 30, 2008, AS FILED

Investor Relations

 

WITH THE SECURITIES AND

Don Jennings

Transfer Agent and Registrar

EXCHANGE COMMISSION

Djenni7474@aol.com

Illinois Stock Transfer Company

WILL BE FURNISHED

 

209 W Jackson Blvd, Ste 903

WITHOUT CHARGE TO

Clay Hulette

Chicago, IL 60606-6905

SHAREHOLDERS AS OF THE

rchulette@hotmail.com

(312) 427-2953

RECORD DATE FOR THE

 

 

NOVEMBER 11, 2008

(502) 223-1638

Annual Meeting

ANNUAL MEETING UPON

P.O. Box 535

The Annual Meeting of Share-

WRITTEN REQUEST TO:

Frankfort, KY 40602

holders will be held on

 

 

November 11, 2008 at

INVESTOR RELATIONS

Independent Auditors

3:30 p.m., Eastern Time, at

KENTUCKY FIRST

BKD, LLP

the First Federal Center on the

FEDERAL BANCORP

312 Walnut Street, Suite 3000

campus of Hazard Community

P.O. BOX 535

Cincinnati, OH 45202

and Technical College, One

FRANKFORT, KY 40602

 

Community College Blvd,

 

 

Hazard, KY