Kentucky First Federal Bancorp - Quarter Report: 2005 March (Form 10-Q)

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties.  When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to Kentucky First Federal Bancorp or its management are intended to identify such forward looking statements.  Kentucky First Federal Bancorp’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements.  Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company’s market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

Discussion of Financial Condition Changes from June 30, 2004 to March 31, 2005

Assets:  At March 31, 2005, the Company’s assets totaled $278.2 million, an increase of $138.4 million, or 99%, from total assets at June 30, 2004.  The primary reason for the increase in assets is the addition of $147.8 million of assets from the Frankfort First acquisition, which was partially offset by a $11.8 million reduction in deposits as a result of funds being either converted to stock purchases or returned to potential investors.  The combination brought together two banks with differing asset structures.  First Federal of Hazard had a preponderance of their assets in investment securities, while Frankfort First Federal held most of its assets in loans receivable.  The Company’s assets at March 31, 2005 reflect a significant increase of $116.1 million in loans receivable to a total of $149.7 million at March 31, 2005.  Investment securities increased minimally to $63.3 million at March 31, 2005 (an increase of $97,000), while mortgage-backed securities increased to $ 24.5 million (an increase of $1.5 million).  Total assets also include $14.5 million in goodwill resulting from the Merger.

Non-Performing Assets:  At March 31, 2005, the Company had approximately $1.7 million (1.1% of net loans) in loans 90 days or more past due, as compared to $1.2 million at June 30, 2004.  Primarily, the increase was due to the inclusion of Frankfort First Federal’s nonperforming loans in the Company’s totals.  At March 31, 2005, the Company’s allowance for loan losses of $803,000 represented 47.7% of loans 90 days or more past due and 0.5% of total loans. 

The Company had $2.0 million in loans classified as substandard at March 31, 2005, compared to $1.2 million at June 30, 2004.  Again, the acquisition of the larger loan portfolio was the primary reason for the increase.  On a percentage basis, the percentage of Substandard Assets to Loans Receivable--net decreased from 3.5% at June 30, 2004 to 1.3% at March 31, 2005.   Substandard loans included 36 single-family home loans with loan-to-value ratios (percentage of loan balance to the original or an updated appraisal) ranging from 32% to 96%; one second mortgage to one of the aforementioned loans taking the total loan-to-value ratio to 87%;  one home equity line of credit secured by a single-family home which, combined with the first mortgage (which is not delinquent) has a total loan-to-value ratio of 86%; and two single family homes which comprise Real Estate Owned (which have a fair value of $53,000). 

At March 31, 2005 one loan was classified as Doubtful, totaling $49,000.  Events subsequent to March 31 will likely result in action to charge this loan against the Allowance for Loan and Leases Losses during the three months ending June 30, 2005.   

Liabilities:  As with the asset structure, the Banks had different liability structures with First Federal of Hazard having a larger deposit portfolio on a percentage basis, while Frankfort First Federal utilized FHLB Advances to a greater degree.  As a result of the combination, deposits totaled $158.5 million at March 31, 2005, an increase of $59.7

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Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from June 30, 2004 to March 31, 2005 (continued)

million, or 60.5%, from June 30, 2004 levels.  Similarly, FHLB Advances increased to $52.3 million, an increase of $43.3 million.

Shareholders’ Equity:  As a result of the Reorganization and acquisition, shareholders’ equity more than doubled from $31.0 million at June 30, 2004 to $65.5 million at March 31, 2005.

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2005 and 2004

General

As stated previously, the Company’s results of operations for the nine-month period ended March 31, 2005 is comprised of eight months of First Federal of Hazard as a stand-alone financial institution and one month of combined operations for Kentucky First Federal Bancorp, the holding company for the Banks.  The net earnings contributed by the acquisition of Frankfort First will result in a larger portion of net earnings in future periods.  The operating results presented herein reflect the costs of operating a public stock company.  However those costs are lower than those expected to be incurred in the future because of the date that the Reorganization was completed.  The annual costs of operating a public stock company will offset the additional income to some degree.

Net earnings totaled $1.0 million for the nine months ended March 31, 2005, an increase of $235,000, or 29.4%, over the same period in 2004.  An increase of $563,000 in net interest income was offset in part by an increase of $239,000 in general, administrative and other expense and an increase of $109,000 in the provision for federal income taxes.

Net Interest Income

Interest income on loans increased by $189,000, or 8.9%, for the nine months ended March 31, 2005, compared to the 2004 period.  This increase was due primarily to a $7.8 million, or 20.5%, increase in the average portfolio balance outstanding period to period, offset by a 72 basis point decrease in the weighted-average yield, to 6.73% for the 2005 nine-month period.  Interest income on investment securities, mortgage-backed securities and interest-bearing deposits increased by $609,000, or 29.9%, due primarily to $14.1 million, or 15.1%, increase in the average portfolio period to period and a 37 basis point increase in the weighted-average yield, to 3.28% for the 2005 period.  Interest income for the 2005 nine-month period was favorably influenced by the addition of $123.7 million in interest-earning assets from the Frankfort First combination.

Interest expense on deposits decreased by $144,000, or 8.6%, for the nine months ended March 31, 2005, compared to the same period in 2004.  This decrease was due primarily to a 33 basis point decrease in the weighted-average cost of deposits, to 1.87% for the nine months ended March 31, 2005 and offset by a $7.6 million, or 7.5%, increase in the average balance of deposits outstanding period to period.  Interest expense on borrowings increased by $379,000, or 100%, as the Company had no borrowings outstanding during the 2004 period.  The Frankfort First combination resulted in the assumption of $116.1 million of interest-bearing liabilities which influenced interest expense in the 2005 nine-month period.

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $563,000, or 22.6%, to a total of $3.1 million for the nine months ended March 31, 2005. 

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Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2005 and 2004 (continued)

Provision for Losses on Loans

The Company charges a provision for losses on loans to earnings to bring the total allowance for loan losses to a level considered appropriate 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,  general economic conditions, particularly as such conditions relate to the Banks’ market areas, and other factors related to the collectibility of the Banks’ loan portfolios. The Company recorded a provision for losses on loans totaling $40,000 during the nine months ended March 31, 2005, a decrease of $6,000, or 13%, from the comparable three-month period in 2004.  There can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming loans or that the allowance will be adequate to cover losses on nonperforming assets in the future, which could adversely affect the Company’s results of operations.

Other Income

Other income totaled $34,000 for the nine months ended March 31, 2005, an increase of $14,000 or 70% over the 2004 period.  Other income is not a significant part of the Company’s operations.

General, Administrative and Other Expense

General, administrative and other expense totaled $1.5 million for the nine months ended March 31, 2005, an increase of $239,000, or 18.9%, over the same period in 2004.  This increase was comprised primarily of increases of $208,000, or 25.3%, in employee compensation and benefits.  The increase in employee compensation and benefits was due primarily to inclusion of approximately $97,000 in expenses from the addition of Frankfort First Federal employees and expenses associated with the ESOP that was ratified coincident with the Company’s Reorganization.

Federal Income Taxes

The provision for federal income taxes totaled $514,000 for the nine months ended March 31, 2005, an increase of $109,000, or 26.9%, compared to the same period in 2004.  This increase was due to an increase in earnings before taxes of $344,000, or 28.6%.  The effective tax rates were 33.2% and 33.7% for the nine-month periods ended March 31, 2005 and 2004, respectively. 

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Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2005 and 2004

General

Net earnings totaled $385,000 for the three months ended March 31, 2005, an increase of $90,000, or 30.5% from the $295,000 in earnings reported for the same period in 2004.  The increase was primarily attributable to a $419,000 increase in net interest income offset by an increase of $317,000 in general, administrative and other expense and an increase of $33,000 in the provision for federal income taxes.

Net Interest Income

Interest income on loans increased by $472,000, or 70.4%, for the nine months ended March 31, 2005, compared to the 2004 period.  This increase was due primarily to a $36.5 million, or 99.9%, increase in the average portfolio balance outstanding period to period offset by a 108 basis point decrease in the weighted-average yield, to 6.26% for the 2005 three-month period.  Interest income on investment securities, mortgage-backed securities and interest-bearing deposits increased by $274,000, or 40.7%, due primarily to a $19.4 million, or 20.6%, increase in the average balance of the related assets outstanding period to period and a 48 basis point increase in the weighted-average yield, to 3.35% for the 2005 period.  As set forth above, interest income was favorably influenced in the 2005 quarter by the addition of $123.7 million of interest-earning assets.

Interest expense on deposits increased by $82,000, or 16.1%, for the three months ended March 31, 2005, compared to the same period in 2004.  This increase was due primarily to a $30.7 million, or 30.7%, increase in the average balance of deposits outstanding period to period, generally reflecting the assumption of $71.5 million of deposits in the Frankfort First combination.  The weighted average cost of deposits was 1.81% for the 2005 period and 2.03% for the 2004 period.  Interest expense on borrowings increased by $245,000, or 100% as the Company had no borrowings outstanding during the 2004 period.

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $419,000, or 50.2%, to a total of $1.3 million for the three months ended March 31, 2005. 

Provision for Losses on Loans

The Company charges a provision for losses on loans to earnings to bring the total allowance for loan losses to a level considered appropriate 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, general economic conditions, particularly as such conditions relate to the Banks’ market areas, and other factors related to the collectibility of the Banks’ loan portfolios. The Company recorded a provision for losses on loans totaling $12,000 during the three months ended March 31, 2005, a decrease of $7,000, or 36.8%, from the comparable three-month period in 2004.  There can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming loans or that the allowance will be adequate to cover losses on nonperforming assets in the future, which could adversely affect the Company’s results of operations.

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Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2005 and 2004 (continued)

Other Income

Other income totaled $23,000 for the three months ended March 31, 2005, an increase of $14,000, or 155.6%, from the same period in 2004.  Other income is not a significant part of the Company’s operations.

General, Administrative and Other Expense

General, administrative and other expense totaled $701,000 for the three months ended March 31, 2005, an increase of $317,000, or 82.6%, compared to the same period in 2004.  This increase was due primarily to effects of the Frankfort First combination.  Employee compensation and benefits totaled $493,000 for the three months ended March 31, 2005, an increase of $236,000, or 91.8%, from the same period in 2004.  Such increase was due primarily to normal merit increases, $97,000 in expense attributed to the Frankfort First Federal combination and $46,000 attributed to expense of the Company’s ESOP plan.  Generally, other categories of operating expenses also experienced increases associated with the growth in operations period to period.

Federal Income Taxes

The provision for federal income taxes totaled $179,000 for the three months ended March 31, 2005, an increase of $33,000, or 22.6%, compared to the same period in 2004.  This increase was due to an increase in earnings before taxes of $123,000, or 27.9%.  The effective tax rates were 31.7% and 33.1% for the three-month periods ended March 31, 2005 and 2004, respectively. 

ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the Company’s market risk since the disclosure included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management” in the Association’s Form S-1 filing dated January 10, 2005.

ITEM 4:  Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.  There were no changes in the Company’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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Kentucky First Federal Bancorp

PART II

ITEM 1.	Legal Proceedings
	Not applicable.
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Not applicable.
ITEM 3.	Defaults Upon Senior Securities
	Not applicable.
ITEM 4.	Submission of Matters to a Vote of Security Holders
	None.
ITEM 5.	Other Information
	None.
ITEM 6.	Exhibits

	31.1	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Kentucky First Federal Bancorp

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KENTUCKY FIRST FEDERAL BANCORP
Date:  May 16, 2005	By:	/s/ TONY D. WHITAKER
		Tony D. Whitaker Chairman of the Board and Chief Executive Officer
Date:  May 16, 2005	By:	/s/ R. CLAY HULETTE
		R. Clay Hulette Vice President, Chief Financial Officer and Treasurer

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