
Parent company of
First Federal Savings and Loan
Association of Hazard
and
First Federal Savings Bank of
2008
Annual Report
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
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
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.
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High |
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Low |
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Dividends Per
Share |
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Fiscal 2008 |
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|
|
|
|
|
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First quarter................................................ |
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$10.59 |
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$ 9.50 |
|
$0.10 |
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Second quarter........................................... |
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10.18 |
|
9.80 |
|
0.10 |
|
Third quarter.............................................. |
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10.23 |
|
9.75 |
|
0.10 |
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Fourth quarter............................................ |
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10.24 |
|
9.35 |
|
0.10 |
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|
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High |
|
Low |
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Dividends Per
Share |
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Fiscal 2007 |
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|
|
|
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|
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First quarter................................................ |
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$10.84 |
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$ 9.76 |
|
$0.10 |
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Second quarter........................................... |
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10.50 |
|
10.05 |
|
0.10 |
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Third quarter.............................................. |
|
10.47 |
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9.86 |
|
0.10 |
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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
THE NASDAQ STOCK MARKET (
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3/3/05 |
6/30/05 |
6/30/06 |
6/30/07 |
|
6/30/08 |
|
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|
100.00 |
102.84 |
102.04 |
102.46 |
|
98.25 |
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|
|
|
NASDAQ STOCK MARKET (COMPOSITE) |
100.00 |
99.55 |
107.22 |
129.54 |
|
115.16 |
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|
|
|
|
100.00 |
101.18 |
108.54 |
102.45 |
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69.62 |
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(1) TABLE OF CONTENTS
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 $16 million or 9.5% during the year. Community banks that possess ample capital and have demonstrated an ability to make sound loans, such as First Federal of Hazard and First Federal of Frankfort, will be vitally important to the recovery of our nation’s real estate market and our overall economy.
As always, we encourage you, our shareholders to visit our banks for your banking needs, and we are always glad to talk to you any time you have a question or concern.
Sincerely,
Tony Whitaker Don D. Jennings
Chairman and C.E.O. President and C.O.O.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Selected Financial Condition Data (1)
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At June 30, |
|||||||||
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|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
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2004 |
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(In thousands) |
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Total
assets........................................................................ |
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$ 247,655 |
|
$268,916 |
|
$261,941 |
|
$ 273,915 |
|
$ 139,823 |
|||||||||
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Cash
and cash equivalents................................................. |
|
15,966 |
|
2,720 |
|
2,294 |
|
8,358 |
|
16,862 |
|||||||||
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Interest-bearing
deposits.................................................... |
|
100 |
|
100 |
|
100 |
|
100 |
|
-- |
|||||||||
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Investment
securities held to maturity................................ |
|
16,959 |
|
59,606 |
|
64,029 |
|
72,189 |
|
73,823 |
|||||||||
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Investment
securities available for sale.............................. .......................................................................................... |
|
5,480 |
|
13,298 |
|
13,290 |
|
14,547 |
|
12,391 |
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Loans
receivable, net......................................................... |
|
182,051 |
|
166,156 |
|
155,386 |
|
151,712 |
|
33,568 |
|||||||||
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Deposits............................................................................ |
|
137,634 |
|
139,893 |
|
141,238 |
|
155,044 |
|
98,751 |
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Federal
Home Loan Bank advances.................................. |
|
47,801 |
|
65,132 |
|
54,849 |
|
50,985 |
|
9,000 |
|||||||||
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Shareholders’
equity (2)................................................... |
|
59,793 |
|
61,445 |
|
63,881 |
|
65,939 |
|
31,043 |
|||||||||
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Allowance
for loan losses................................................. |
|
666 |
|
720 |
|
724 |
|
708 |
|
665 |
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Nonperforming
loans........................................................ |
|
1,277 |
|
968 |
|
1,427 |
|
1,747 |
|
1,154 |
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Selected Operating Data (1)
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Year Ended June 30, |
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2008 |
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2007 |
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2006 |
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2005 |
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2004 |
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(Dollars in thousands,
except per share data) |
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|
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|
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|
|
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Total
interest income.......................................................... |
|
$ 13,087 |
|
$ 12,948 |
|
$ 12,709 |
|
$ 8,153 |
|
$ 5,601 |
|||||||||
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Total
interest expense........................................................ |
|
7,565 |
|
7,456 |
|
6,096 |
|
3,353 |
|
2,220 |
|||||||||
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Net
interest income............................................................ |
|
5,522 |
|
5,492 |
|
6,613 |
|
4,800 |
|
3,381 |
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Provision
for losses on loans............................................ .......................................................................................... |
|
12 |
|
-- |
|
32 |
|
53 |
|
10 |
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Net
interest income after provision |
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|
|
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|
|
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|||||||||
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for losses on loans.......................................................... |
|
5,510 |
|
5,492 |
|
6,581 |
|
4,747 |
|
3,371 |
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Total
other income (loss)................................................... |
|
182 |
|
174 |
|
216 |
|
263 |
|
(35) |
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Total general,
administrative |
|
|
|
|
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|
|
|
|
|
|||||||||
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and other expenses......................................................... |
|
4,321 |
|
4,364 |
|
4,486 |
|
2,509 |
|
2,183 |
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Income
before federal income taxes................................... |
|
1,371 |
|
1,302 |
|
2,311 |
|
2,501 |
|
1,153 |
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Federal
income taxes......................................................... |
|
439 |
|
417 |
|
723 |
|
872 |
|
392 |
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Net
income........................................................................ |
|
$ 932 |
|
$
885 |
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$
1,588 |
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$
1,629 |
|
$
761 |
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Net
earnings per share – basic........................................... |
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$ 0.12 |
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$ 0.11 |
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$ 0.19 |
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$ N/A |
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$ N/A |
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Net
earnings per share – diluted ………………………… |
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$ 0.12 |
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$ 0.11 |
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$ 0.19 |
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$ N/A |
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$ N/A |
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Cash
dividends declared per common share...................... |
|
$ 0.40 |
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$ 0.40 |
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$ 0.40 |
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$ 0.10 |
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$ N/A |
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_______________________________
(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)
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Year
Ended June 30, |
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2008 |
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2007 |
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2006 |
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2005 |
|
2004 |
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Performance Ratios: |
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Return on average assets (net income divided by average total
assets)................................... |
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0.35% |
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0.33% |
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0.59% |
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0.88% |
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0.56% |
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Return on average equity (net income divided by average equity)........................................... |
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1.54 |
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1.41 |
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2.68 |
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4.46 |
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2.44 |
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Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)............................... |
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1.65 |
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1.61 |
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2.15 |
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2.30 |
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2.04 |
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Net interest margin (net interest income divided by
average interest-earning assets) |
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2.29 |
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2.26 |
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2.63 |
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2.69 |
|
2.54 |
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Ratio of average interest-earning assets to average interest-bearing liabilities........................................................... |
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120.28 |
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121.16 |
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118.77 |
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120.74 |
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129.55 |
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Ratio of total general administrative and other expenses to average total assets.................................................................... |
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1.64 |
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1.64 |
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1.62 |
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1.35 |
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1.62 |
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Efficiency ratio (2) ........................................................................ ........................................................................................................... ........................................................................................................... ........................................................................................................... |
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75.75 |
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77.02 |
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65.02 |
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49.56 |
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65.24 |
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Dividend payout ratio (3) ............................................................ |
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126.82 |
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153.11 |
|
97.36 |
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N/A |
|
N/A |
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Asset Quality Ratios: |
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Nonperforming loans as a percent of total loans at end of period (4)..................................................................... |
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0.70 |
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0.58 |
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0.92 |
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1.15 |
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3.44 |
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Nonperforming assets as a percent of total assets at end of period........................................................................... |
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0.52 |
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0.36 |
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0.54 |
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0.66 |
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0.83 |
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Allowance for loan losses as a percent of total loans at end of period........................................................................... .......................................................................... |
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0.36 |
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0.43 |
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0.46 |
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0.47 |
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1.98 |
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Allowance for loan losses as a percent of nonperforming loans at end of period................................................................ .......................................................................... .......................................................................... |
|
52.15 |
|
74.38 |
|
50.74 |
|
40.53 |
|
57.63 |
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Provision for loan losses to total loans....................................... |
|
0.01 |
|
-- |
|
0.02 |
|
0.03 |
|
0.03 |
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Net charge-offs to average loans outstanding.......................... |
|
0.04 |
|
-- |
|
0.01 |
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0.20 |
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0.17 |
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Capital Ratios: |
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Average equity to average assets................................................ |
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22.94 |
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23.64 |
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21.95 |
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19.68 |
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23.14 |
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Shareholders’ equity or capital to total assets at end of period........................................................................... |
|
24.14 |
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22.85 |
|
24.39 |
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24.07 |
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22.20 |
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Regulatory Capital Ratios: |
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Tangible capital.............................................................................. |
|
16.33 |
|
16.61 |
|
17.42 |
|
17.18 |
|
22.42 |
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Core capital..................................................................................... |
|
16.33 |
|
16.61 |
|
17.42 |
|
17.18 |
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22.42 |
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Risk-based capital......................................................................... |
|
34.03 |
|
38.61 |
|
41.92 |
|
43.83 |
|
82.40 |
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Number of banking offices.......................................................... |
|
4 |
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4 |
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4 |
|
4 |
|
1 |
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______________________
(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
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
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
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
• 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 |
+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 |
+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) |
|
|
|
|||||||||||