KFFB » Topics » Discussion of Financial Condition Changes from June 30, 2006 to March 31, 2007

This excerpt taken from the KFFB 10-Q filed May 15, 2007.

Discussion of Financial Condition Changes from June 30, 2006 to March 31, 2007

Assets:  At March 31, 2007, the Company’s assets totaled $267.2 million, an increase of $5.3 million, or 2.0%, from total assets at June 30, 2006.  The primary reason for the growth in assets was an increase of $9.0 million, or 5.8%, in loans receivable, which increased to $165.1 million at March 31, 2007.  The increase in loans receivable was composed primarily of variable rate real estate mortgage loans and was primarily funded by an increase in short-term Federal Home Loan Bank advances.  It is anticipated that such advances will be repaid as the Company’s short-term, lower-yielding investment securities mature over the next three years.  Management has emphasized the origination and retention of adjustable rate mortgage loans and, as the ability to make such loans changes with market conditions, believes it is prudent to continue to originate such loans with the funding that is available.

Cash and cash equivalents:  Cash and cash equivalents decreased by $526,000 or 22.9%.  It is the Company’s preference to minimize the level of cash and cash equivalents and invest liquidity into higher-yielding assets, when possible.  Cash was drawn down to partially fund the overall increase in loans which is discussed more fully under “Loans.”

Loans:  Loans receivable, net, increased to $164.4 million at March 31, 2007, an increase of $9.0 million or 5.8% compared to the June 30, 2006, level.  Management believes that the successful redeployment of the Company’s funds from lower-yielding cash, cash equivalents and investment securities to higher-yielding mortgage loans is important for the long-term success of the Company.  The Company will continue to emphasize loan originations to the extent that it is profitable and prudent.

Non-Performing Assets: At March 31, 2007, the Company had approximately $895,000, or 0.5% of net loans, in loans 90 days or more past due, compared to $1.4 million, or 0.9%, of net loans at June 30, 2006.  At March 31, 2007, the Company’s allowance for loan losses of $720,000 represented 80.4% of nonperforming loans and 0.4% of total loans.

The Company had $1.7 million in loans classified as substandard for regulatory purposes at March 31, 2007. On a percentage basis, classified loans declined from 1.1% of net loans at June 30, 2006 to 1.0% at March 31, 2007.  Substandard assets included 28 single-family home loans with loan-to-value ratios (percentage of loan balance to the original or an updated appraisal) ranging from 10% to approximately 100%; two mortgage loans (first and second) secured by a duplex (with an overall 70% loan-to-value ratio), and three single-family homes acquired through foreclosure.  The real estate acquired through foreclosure had a recorded investment of $213,000 and an estimated fair value of $248,000.  Subsequent to March 31, 2007, the Company sold one piece of real estate acquired through forclosure and originated a loan to a new borrower, with no material gain or loss realized on the transaction. 

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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, 2006 to March 31, 2007 (continued)

Non-Performing Assets (continued)

At March 31, 2007, the Company had $845,000 in loans classified as special mention.  This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. At March 31, 2007, no loans were classified as doubtful or loss for regulatory purposes.

Investment and Mortgage-Backed Securities:  At March 31, 2007, the Company’s investment and mortgage-backed securities had decreased $3.7 million or 4.8% to $73.7 million.  This decrease was due primarily to the maturity of $2.1 million of investment securities and repayment of principal on mortgage-backed securities which were partially offset by a net increase of $388,000 in the market value of investments and mortgage-backed securities held as available for sale.  Approximately $42.9 million of the Company’s investment and agency securities are scheduled to mature within the next three years with another $5.0 million are scheduled to mature within five years.

Liabilities:  At March 31, 2007, the Company’s liabilities totaled $204.9 million, an increase of $6.8 million, or 3.4%, from total liabilities at June 30, 2006.  The increase in liabilities was attributed primarily to an $8.8 million, or 16.0%, increase in Federal Home Loan Bank advances, which increased to $63.6 million at March 31, 2007.  Of these borrowings, approximately $22.0 million were short-term advances which reprice monthly.  Such advances were utilized to fund the increase in loans during the period as well as offset a reduction of $2.1 million, or 1.5% in deposits, which totaled $139.1 million at March 31, 2007.  Deposits have decreased as market interest rates have increased.  At times, the Company has chosen not to meet market rates if the deposits cannot be invested profitably in interest-earning assets.  As stated previously, management anticipates reducing the level of Federal Home Loan Bank advances as lower-yielding investment securities mature over the next three years.

Shareholders’ Equity:  At March 31, 2007, the Company’s shareholders’ equity totaled $62.3 million, a decrease of $1.6 million or 2.6% from the June 30, 2006 total.  The primary reason for the decrease in shareholders’ equity was the acquisition of $1.9 million of treasury shares at an average cost of $10.31 per share.

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