KFFB

Business Context and Reporting Period

Kentucky First Federal Bancorp filed a Form 10-Q for the quarterly period ended December 31, 2005. The Company operates as a mutual holding company parent to First Federal Savings and Loan Association of Hazard and Frankfort First Federal Savings Bank. The reporting period reflects the first full six months of operations following the March 2005 acquisition of Frankfort First Bancorp and the Company's reorganization into a stock form of ownership.

Key Financial Metrics

Liquidity and Debt: Cash and cash equivalents decreased 62.0% to $3.2 million as the Company redeployed liquidity into higher-yielding mortgage loans. Total liabilities decreased 4.6% to $198.4 million, driven primarily by an $8.1 million decline in deposits. Advances from the Federal Home Loan Bank totaled $50.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Net earnings increased 45.1% ($292,000) for the six-month period compared to the prior year. This was driven by a $1.6 million increase in net interest income, largely due to the acquisition of Frankfort First, which added approximately $119.2 million to the average loan portfolio.
• Expense Increases: General, administrative, and other expenses rose 159.1% to $2.1 million for the six-month period. This increase is attributed to the integration of Frankfort First and the costs associated with operating as a public company.
• Asset Composition: Total assets decreased 3.7% to $263.7 million. While loans increased 1.3%, investment securities and cash equivalents declined significantly as the Company shifted strategy toward loan originations.
• Non-Performing Assets: Loans 90 days or more past due decreased to $1.3 million (0.9% of net loans) from $1.7 million at June 30, 2005. Classified loans dropped to 1.0% of total loans.

Outlook, Risks, and Management Commentary

Management Commentary: Management emphasizes the successful redeployment of funds from lower-yielding cash and securities into higher-yielding mortgage loans as a key strategy for long-term success. The Company continues to emphasize loan originations where profitable and prudent. The effective tax rate for the six-month period was 31.6%, lower than the statutory rate due to tax-exempt earnings on bank-owned life insurance.

Risks and Contingencies:

• Interest Rate Risk: The Company noted that recent increases in market interest rates have led to deposit outflows, as the Company has not always met market rates when deposits could not be invested profitably.
• Credit Risk: Management identifies the allowance for loan losses as a critical accounting policy. While local economies are considered stable, management monitors unemployment rates and home price depreciation which could impact the allowance.
• Forward-Looking Statements: Actual results may differ due to general economic conditions, real estate prices, competitive conditions, and regulatory changes.

Unusual Items: The financial results for the six months ended December 31, 2004, do not include the operating results of Frankfort First, making year-over-year comparisons heavily influenced by the March 2005 acquisition.

Investor Verification Checklist

• Acquisition Integration: Verify the ongoing impact of the Frankfort First acquisition on operating expenses and loan portfolio yield.
• Deposit Trends: Monitor the $8.1 million decline in deposits and the Company's ability to retain liquidity in a rising interest rate environment.
• Loan Quality: Review the allowance for loan losses ($733,000) relative to the 0.9% of loans 90+ days past due and the 1.0% classified loan ratio.
• Stock Repurchases: Note the repurchase of 78,800 shares in December 2005 at an average price of $10.55 to fund the Equity Incentive Plan.
• Equity Incentive Plan Costs: Confirm the estimated future impact of the new Equity Incentive Plan, estimated at $20,000 after-tax per quarter.