x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

KENTUCKY FIRST FEDERAL BANCORP

(Exact name of registrant as specified in its charter)

United States of America		61-1484858
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

216 West Main Street, Frankfort, Kentucky 40601

(Address of principal executive offices)(Zip Code)

(502) 223-1638

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller Reporting Company x
(Do not check if a smaller reporting company)

 

			Page
PART I    -	ITEM 1	FINANCIAL INFORMATION
		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	8
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	43
	ITEM 4	Controls and Procedures	43
PART II    -	OTHER INFORMATION		44
SIGNATURES			45

   

	4

   

	6

	7

 
  
3.  Investment Securities (continued)  

	14

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2013:

 

(in thousands)		Beginning balance			Provision for loan losses			Loans charged off			Recoveries			Ending balance
Residential real estate:
One- to four-family		$	937		$	164		$	(123)		$	4		$	982
Multi-family			65			(1)			—			—			64
Construction			9			1			—			—			10
Land			11			(1)									10
Farm			8			—			—			—			8
Nonresidential real estate			102			—			—			—			102
Commercial nonmortgage			14			2			—			—			16
Consumer and other:
Loans on deposits			12			2			—			—			14
Home equity			26			2			—			—			28
Automobile			—			—			—			—			—
Unsecured			2			2			—			—			4
Unallocated			200			—			—			—			200
Totals		$	1,386		$	171		$	(123)		$	4		$	1,438

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2012:

  

(in thousands)			Beginning balance			Provision for loan losses			Loans charged off			Recoveries			Ending balance
Residential real estate:
One- to four-family		$	565		$	360		$	113		$	—		$	812
Multi-family			49			38			—			—			87
Construction			3			6			—			—			9
Nonresidential real estate and land			35			24			—			—			59
Loans on deposits			7			—			—			—			7
Consumer and other			16			(10)			—			—			6
Unallocated			200			—			—			—			200
Totals		$	875		$	418		$	113		$	—		$	1,180

 

 

	15

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2012:

  

(in thousands)		Beginning balance			Provision for loan losses			Loans charged off			Recoveries			Ending balance
Residential real estate:
One- to four-family		$	563		$	334		$	85		$	—		$	812
Multi-family			49			38			—			—			87
Construction			3			6			—			—			9
Nonresidential real estate and land			35			24			—			—			59
Loans on deposits			7			—			—			—			7
Consumer and other			16			(10)			—			—			6
Unallocated			200			—			—			—			200
Totals		$	873		$	392		$	85		$	—		$	1,180

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of December 31, 2013. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality.

 

 

	16

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued)

 

December 31, 2013:

 

(in thousands)			Loans individually evaluated			Loans acquired with deteriorated credit quality			Ending loans balance			Ending allowance attributed to loans			Unallocated allowance			Total allowance
Loans individually evaluated for impairment:
Residential real estate:
One- to four-family		$	4,664		$	2,240		$	6,904		$	13		$	—		$	13
Multi-family			1,550			—			1,550
Land			—			368			368
Nonresidential real estate			1,286			837			2,123			—			—			—
Commercial and industrial			—			102			102			—			—			—
Consumer and other
Automobile			—			—			—			—			—			—
Unsecured			—			20			20			—			—			—
		$	7,500		$	3,567			11,067			13			—			13
Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family								$	194,864		$	969		$	—		$	969
Multi-family									12,727			64			—			64
Construction									1,892			10			—			10
Land									2,083			10			—			10
Farm									1,662			8			—			8
Nonresidential real estate									20,330			102			—			102
Commercial and industrial									3,260			16			—			16
Consumer and other
Loans on deposits									2,820			14			—			14
Home equity									5,554			28			—			28
Automobile									55			—			—			—
Unsecured									819			4			—			4
Unallocated									—			—			200			200
									246,066			1,225			200			1,425
								$	257,133		$	1,238		$	200		$	1,438

 

 

	17

 

         

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2013.

 

June 30, 2013:

 

					Loans
					acquired
					with						Ending
		Loans			deteriorated			Ending			allowance
		individually			credit			loans			attributed to			Unallocated			Total
(in thousands)		evaluated			quality			balance			loans			allowance			allowance
Loans individually evaluated for impairment:
Residential real estate:
One- to four-family		$	4,715		$	2,989		$	7,704		$	14		$	—		$	14
Farm			—			485			485			—			—			—
Nonresidential real estate			—			546			546			—			—			—
Commercial and industrial			—			119			119			—			—			—
Consumer and other
Automobile			—			23			23			—			—			—
			4,715			4,162			8,877			14			—			14
Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family								$	201,388		$	860		$	—		$	860
Multi-family									14,506			63			—			63
Construction									1,753			8			—			8
Land									2,821			12			—			12
Farm									1,358			6			—			6
Nonresidential real estate									21,546			94			—			94
Commercial and industrial									3,070			13			—			13
Consumer and other
Loans on deposits									2,710			12			—			12
Home equity									5,757			25			—			25
Automobile									49			—			—			—
Unsecured									708			3			—			3
Unallocated									—			—			200			200
									255,666			1,096			200			1,296
								$	264,543		$	1,110		$	200		$	1,310

 

 

	18

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended December 31, 2013 and 2012:

 

December 31, 2013:

 

		Unpaid
		Principal			Allowance
		Balance and			for Loan			Average			Interest			Cash Basis
		Recorded			Losses			Recorded			Income			Income
(in thousands)		Investment			Allocated			Investment			Recognized			Recognized
With no related allowance recorded:
One- to four-family		$	4,457		$	—		$	3,056		$	—		$	—
Multi-family			1,550			—			1,063			—			—
Nonresidential real estate			1,286			—			882			—			—
Purchased credit-impaired loans			3,567			—			3,846			—			—
			10,860			—			8,847			—			—
With an allowance recorded:
One- to four-family			207			13			210			—			—
		$	11,067		$	13		$	9,057		$	—		$	—

 

December 31, 2012:

 

		Unpaid
		Principal			Allowance
		Balance and			for Loan			Average			Interest			Cash Basis
		Recorded			Losses			Recorded			Income			Income
(in thousands)		Investment			Allocated			Investment			Recognized			Recognized
With no related allowance recorded:
One- to four-family		$	3,253		$	—		$	2,965		$	33		$	33
Purchased credit-impaired loans			8,988			—			—			—			—
			12,241			—			2,965			33			33
With an allowance recorded:
One- to four-family			665			35			539			2			2
		$	12,906		$	35		$	3,504		$	35		$	35

 

 

	19

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued) 

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2013, and June 30, 2013:

 

		December 31, 2013						June 30, 2013
						Loans Past						Loans Past
						Due Over 90						Due Over 90
						Days Still						Days Still
(in thousands)			Nonaccrual			Accruing			Nonaccrual			Accruing
One- to four-family residential real estate		$	5,699		$	2,032		$	5,989		$	1,972
Multi-family			486						—			—
Nonresidential real estate and land			154			—			—			—
Commercial nonmortgage			34			—			—			—
Consumer and other			31			—			—			—
		$	6,404		$	2,032		$	5,989		$	1,972

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Bank would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.” At December 31, 2013 and June 30, 2013, the Company had $2.6 million and $2.9 million of loans classified as TDRs, respectively. Of the TDRs at December 31, 2013, approximately 59.2% were residential real estate loans involving the Banks’ conceding to refinance a loan to then-current market interest rates despite poor credit history or a high loan-to-value ratio and approximately 40.8% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of his debt to the Banks.

 

The following table presents TDRs by loan type and accrual status:

 

		Troubled Debt
		Restructurings on			Troubled Debt			Total Troubled
December 31, 2013		Non-Accrual			Restructurings on			Debt
(in thousands)		Status				Accrual Status			Restructurings
One- to four-family residential real estate		$	2,392		$	242		$	2,634

 

		Troubled Debt
		Restructurings on			Troubled Debt			Total Troubled
June 30, 2013		Non-Accrual			Restructurings on			Debt
(in thousands)		Status			Accrual Status			Restructurings
One- to four-family residential real estate		$	2,211		$	659		$	2,870

 

 

	20

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2013

(unaudited)

 

4.  Loans receivable (continued)

 

					Troubled Debt
		Troubled Debt			Restructurings
		Restructurings			Not Performing			Total Troubled
		Performing to			to Modified			Debt
(in thousands)		Modified Terms			Terms			Restructurings
December 31, 2013
One- to four- family residential real estate		$	1,921		$	713		$	2,634
June 30, 2013
One- to four- family residential real estate		$	1,542		$	1,328		$	2,870

 

During the period ended December 31, 2013, the term of one single family residential real estate loan was restructured pursuant to a bankruptcy.

 

During the period ended December 31, 2012, the terms of three loans were recognized as TDRs because the borrower completed Chapter 7 bankruptcy proceedings without reaffirming his personal obligation under the mortgage on his principal residence.

 

The following table summarizes TDR loan modifications for the three months ended December 31, 2013 and 2012, and their performance, by modification type:

 

					Troubled Debt
		Troubled Debt			Restructurings
		Restructurings			Not Performing			Total Troubled
		Performing to			to Modified			Debt
(in thousands)		Modified Terms			Terms			Restructurings
Three months ended December 31, 2013
Residential real estate:
Rate reduction		$	—		$	—		$	—
Bankruptcies			42			—			42
Total troubled debt restructures		$	42		$	—		$	42
Three months ended December 31, 2012
Residential real estate:
Rate reduction		$	78		$	247		$	325
Bankruptcies			600			—			600
Total troubled debt restructures		$	678		$	247		$	925

 

 

	21

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

4. Loans receivable (continued)

 

During the six months ended December 31, 2013, the Company restructured six loans with premodification balances of $385,000 and postmodification balances of $390,000.

 

During the six months ended December 31, 2012, the Company restructured eleven loans with premodification balances of $668,000 and postmodification balances of $672,000.

 

The following table summarizes TDR loan modifications that occured during the six months ended December 31, 2013 and 2012, and their performance, by modification type

 

					Troubled Debt
		Troubled Debt			Restructurings
		Restructurings			Not Performing			Total Troubled
		Performing to			to Modified			Debt
(in thousands)		Modified Terms			Terms			Restructurings
Six months ended December 31, 2013
Residential real estate:
Rate reduction		$	—		$	—		$	—
Bankruptcies			376			—			376
Total troubled debt restructures		$	376		$	—		$	376
Six months ended December 31, 2012
Residential real estate:
Rate reduction		$	184		$	247		$	431
Bankruptcies			706			—			706
Total troubled debt restructures		$	890		$	247		$	1,137

 

The Company had no allocated specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2013, or at June 30, 2013. The Company had no commitments to lend on loans classified as TDRs at December 31, 2013 or June 30, 2013.

 

The TDRs described above increased the allowance for loan losses as a result of $194,000 in charge offs during the six months ended December 31, 2013. There was one TDR that defaulted during the six- and three-month periods ended December 31, 2013, as a result of filing bankruptcy. No TDRs defaulted in the six-month period ended December 31, 2012.

 

 

	22

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of December 31, 2013, by class of loans:

 

					90 Days or						Loans
		30-89 Days			Greater Past			Total Past			Not Past
(in thousands)		Past Due			Due			Due			Due				Total
Residential real estate:
One-to four-family		$	6,383		$	5,203		$	11,586		$	190,182		$	201,768
Multi-family			—			—			—			14,277			14,277
Construction			—			—			—			1,892			1,892
Land			395			408			803			1,648			2,451
Farm			—			—			—			1,662			1,662
Nonresidential real estate			—			134			134			22,319			22,453
Commercial non-mortgage			—			37			37			3,325			3,362
Consumer and other:
Loans on deposits			—			—			—			2,820			2,820
Home equity			52			—			52			5,502			5,554
Automobile			—			—			—			55			55
Unsecured			65			31			96			743			839
Total		$	6,895		$	5,813		$	12,708		$	244,425		$	257,133

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2013, by class of loans:

 

(in thousands)		30-89 Days Past Due			90 Days or Greater Past Due			Total Past Due			Loans Not Past Due			Total
Residential real estate:
One-to four-family		$	5,290		$	5,034		$	10,324		$	198,768		$	209,092
Multi-family			—			—			—			14,506			14,506
Construction			42			—			42			1,711			1,753
Land			—			—			—			2,821			2,821
Farm			—			—			—			1,843			1,843
Nonresidential real estate			35			140			175			21,917			22,092
Commercial and industrial			—			—			—			3,189			3,189
Consumer and other:
Loans on deposits			—			—			—			2,710			2,710
Home equity			23			23			46			5,711			5,757
Automobile			29			—			29			43			72
Unsecured			—			48			48			660			708
Total		$	5,419		$	5,245		$	10,664		$	253,879		$	264,543

 

 

	23

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

					Special
(in thousands)		Pass			Mention			Substandard			Doubtful			Not rated
Residential real estate:
One- to four-family		$	—		$	6,481		$	6,852		$	—		$	188,435
Multi-family			12,727			—			1,550			—			—
Construction			1,892			—			—			—			—
Land			2,083			—			368
Farm			1,662			—			—			—			—
Nonresidential real estate			19,362			968			2,123			—			—
Commercial and industrial			3,260			—			102			—			—
Consumer and other:
Loans on deposits			2,820			—			—			—			—
Home equity			5,554			—			—			—			—
Automobile			55			—			—			—			—
Unsecured			810			9			20			—			—
		$	50,225		$	7,458		$	11,015		$	—		$	188,435

 

 

	24

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2013, the risk category of loans by class of loans was as follows:

 

					Special
(in thousands)		Pass			Mention			Substandard			Doubtful			Not rated
Residential real estate:
One- to four-family		$	—		$	4,923		$	9,832		$	—		$	194,337
Multi-family			12,956			—			1,550			—			—
Construction			1,753			—			—			—			—
Land			2,050			—			771			—			—
Farm			1,843			—			—			—			—
Nonresidential real estate			19,246			—			2,846			—			—
Commercial and industrial			3,071			—			118			—			—
Consumer and other:
Loans on deposits			2,710			—			—			—			—
Home equity			5,757			—			—			—			—
Automobile			37			—			38			—			—
Unsecured			681			27			—			—			—
		$	50,104		$	4,950		$	15,155		$	—		$	194,337

 

Purchased Credit Impaired Loans:

 

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $922,000 and $1.2 million at December 31, 2013 and June 30, 2013, respectively, is as follows:

 

(in thousands)		December 31, 2013			June 30, 2013
One- to four-family residential real estate		$	2,380		$	2,771
Land			683			720
Nonresidential real estate			521			529
Commercial nonmortgage			102			119
Consumer			20			23
Outstanding balance		$	3,706		$	4,162

 

 

	25

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

4. Loans receivable (continued)

 

Accretable yield, or income expected to be collected, is as follows

 

		Three months			Six months
		ended			ended			Twelve
		December 31,			December 31,			months ended
(in thousands)		2013				2013		June 30, 2013
Balance at beginning of period		$	1,711		$	1,294		$	—
New loans purchased			—			—			1,423
Accretion of income			(100)			(100)			(129)
Reclassifications from nonaccretable difference			—			417			—
Disposals			—			—			—
Balance at end of period		$	1,611		$	1,611		$	1,294

 

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2013, nor for the six- or three-month periods ended December 31, 2013. Neither were any allowance for loan losses reversed during those periods.

5. Disclosures About Fair Value of Assets and Liabilities

 

ASC topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics. Level 2 securities include agency mortgage-backed securities.

 

	26

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

5. Disclosures About Fair Value of Assets and Liabilities (continued)

 

Impaired Loans

At the time a loan is considered impaired, it is evaluated for loss based on the fair value of collateral securing the loan if the loan is collateral dependent. If a loss is identified, a specific allocation will be established as part of the allowance for loan losses such that the loan’s net carrying value is at its estimated fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. 

Other Real Estate

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

 

	27

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

5. Disclosures About Fair Value of Assets and Liabilities (continued)

Financial assets measured at fair value on a recurring basis are summarized below: 

 

					Fair Value Measurements Using
					Quoted
					Prices in
					Active			Significant
					Markets for			Other			Significant
					Identical			Observable			Unobservable
					Assets			Inputs			Inputs
(in thousands)		Fair Value			(Level 1)			(Level 2)			(Level 3)
December 31, 2013
Agency mortgage-backed: residential		$	141		$	—		$	141		$	—
FHLMC stock			83			—			83			—
		$	224		$	—		$	224		$	—
June 30, 2013
Agency mortgage-backed: residential		$	166		$	—		$	166		$	—
FHLMC stock			39			—			39			—
		$	205		$	—		$	205		$	—

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

					Fair Value Measurements Using
					Quoted
					Prices in
					Active			Significant
					Markets for			Other			Significant
					Identical			Observable			Unobservable
					Assets			Inputs			Inputs
(in thousands)		Fair Value			(Level 1)			(Level 2)			(Level 3)
December 31, 2013
Impaired loans
One- to four-family		$	693		$	—		$	—		$	693
Other real estate owned, net
One- to four-family			667			—			—			667
Land			15			—			—			15
June 30, 2013
Impaired loans
One- to four-family		$	213		$	—		$	—		$	213
Other real estate owned, net
One- to four-family			633			—			—			633
Land			15			—			—			15

 

 

	28

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

5. Disclosures About Fair Value of Assets and Liabilities (continued)

 

Impaired loans, which are measured using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $207,000 and $213,000 at December 31, 2013 and June 30, 2013, with specific valuation allowance of $13,000 and $14,000, respectively. Other real estate owned measured at fair value less costs to sell, had carrying amounts of $682,000 and $648,000 at December 31, 2013 and June 30, 2013, respectively.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013:

 

									Range
		Fair Value			Valuation		Unobservable		(Weighted
		(in thousands)			Technique(s)		Input(s)		Average)
Impaired Loans:
Residential real estate
One- to four- family		$	693		Sales comparison approach		Adjustments for differences between comparable sales		-21.1% to 40.0% (5.36%)
Foreclosed and repossessed assets:
1-4 family		$	667		Sales comparison approach		Adjustments for differences between comparable sales		0.5% to 18.6% (8.6%)
Land		$	15		Sales comparison approach		Adjustments for differences between comparable sales		-66.7 to 73.3% (40.0%)

 

The following is a disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods.

 

The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments.

 

The following methods were used to estimate the fair value of all other financial instruments at December 31, 2013 and June 30, 2013:

 

Cash and cash equivalents and interest-bearing deposits: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value.

 

Held-to-maturity securities: For held-to-maturity securities, fair value is estimated by using pricing models, quoted price of securities with similar characteristics, which is level 2 pricing for the other securities.

 

Loans held for sale: Loans originated and intended for sale in the secondary market are determined by FHLB pricing schedules.

 

 

	29

 

   

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

5.  Disclosures About Fair Value of Assets and Liabilities (continued)

 

Loans: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values.

 

Federal Home Loan Bank stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

Accrued interest receivable: The carrying amount is the estimated fair value.

 

Deposits: The fair value of NOW accounts, passbook accounts, and money market deposits are deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.

 

Federal Home Loan Bank advances: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

 

Advances by borrowers for taxes and insurance and accrued interest payable: The carrying amount presented in the consolidated statement of financial condition is deemed to approximate fair value.

 

Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The fair value of outstanding loan commitments at December 31, 2013 and June 30, 2013, was not material.

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at December 31, 2013 and June 30, 2013 are as follows:

 

					Fair Value Measurements at
					December 31, 2013 Using
		Carrying Value			Level 1			Level 2			Level 3			Total
Financial assets
Cash and cash equivalents		$	7,908		$	7,908								$	7,908
Available-for-sale securities			224					$	224						224
Held-to-maturity securities			20,200						20,869						20,869
Loans receivable - net			255,047								$	263,122			263,122
Federal Home Loan Bank stock			7,732												n/a
Accrued interest receivable			928						928						928
Financial liabilities
Deposits		$	220,747		$	82,007		$	139,085					$	221,092
Federal Home Loan Bank advances			27,016						28,433						28,433
Advances by borrowers for taxes and insurance			196									196			196
Accrued interest payable			36			1			35						36

 

 

	30

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2013

(unaudited)

 

5. Disclosures About Fair Value of Assets and Liabilities (continued)

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at June 30, 2013 were as follows:

 

			Fair Value Measurements at
	Carrying		June 30, 2013 Using
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	16,540	$	16,540					$	16,540
Available-for-sale securities		205			$	205				205
Held-to-maturity securities		12,232				12,354				12,354
Loans held for sale		196				196				196
Loans receivable - net		262,491					$	266,354		266,354
Federal Home Loan Bank stock		7,732								n/a
Accrued interest receivable		919				919				919
Financial liabilities
Deposits	$	230,981	$	75,982	$	155,537			$	231,519
Federal Home Loan Bank advances		24,310				26,019				26,019
Advances by borrowers for taxes and insurance		562					$	562		562
Accrued interest payable		36				36				36

 

Loans receivable represents the Company’s most significant financial asset, which is in Level 3 for fair value measurements. A third party provides financial modeling for the Company and results are based on assumptions and factors determined by management.

6. Other Comprehensive Income (Loss)

 

The following is a summary of the accumulated other comprehensive income balances, net of tax:

 

								Balance at
		Balance at			Current Year			December 31,
		June 30, 2013			Change			2013
Unrealized gains (losses) on available-for-sale securities		$	23		$	29		$	52

 

Other comprehensive income (loss) components and related tax effects for the periods indicated were as follows:

 

		Six months ended December 31,
(in thousands)		2013				2012
Unrealized holding gains (losses) on available-for-sale securities		$	47		$	1
Tax effect			18			—
Net-of-tax amount		$	29		$	1

 

			Three months ended December 31,
(in thousands)			2013			2012
Unrealized holding gains (losses) on available-for-sale securities		$	48		$	—
Tax effect			17			—
Net-of-tax amount		$	31		$	—

 

 

	31

 

 

Kentucky First Federal Bancorp

ITEM 2: 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, rapidly changing technology affecting financial services and the other matters mentioned in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.

 

Acquisition impact on size of the Company

 

On December 31, 2012, the Company acquired 100% of the outstanding common shares of CKF Bancorp.  As a result of the acquisition, the Company was much larger during the six- and three-month periods ended December 31, 2013, than during the prior year periods.  This difference is apparent in the Average Balance Sheets section, below, and is the basis for many of the differences found in the period-to-period comparisons.

 

 

	32

 

Kentucky First Federal Bancorp

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the six month periods ended December 31, 2013 and 2012, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

		Six Months Ended December 31,
		2013									2012
					Interest									Interest
		Average			And			Yield/			Average			And			Yield/
		Balance			Dividends			Cost			Balance			Dividends			Cost
		(Dollars in thousands)
Interest-earning assets:
Loans		$	259,965		$	6,382		4.91	%		$	181,092		$	4,608		5.09	%
Mortgage-backed securities			4,993			70		2.80				5,559			97		3.49
Other securities			7,613			14		0.37				100			—		—
Other interest-earning assets			19,106			160		1.67				10,149			134		2.64
Total interest-earning assets			291,677			6,626		4.54				196,900			4,839		4.92
Less: Allowance for loan losses			(1,351)									(864)
Non-interest-earning assets			29,094									24,926
Total assets		$	319,420								$	220,962
Interest-bearing liabilities:
Demand deposits		$	8,907		$	15		0.34	%		$	12,339		$	14		0.23	%
Savings			65,555			122		0.37				37,260			120		0.64
Certificates of deposit			150,372			592		0.79				82,074			446		1.09
Total deposits			224,834			729		0.65				131,673			580		0.88
Borrowings			21,274			152		1.43				26,416			234		1.77
Total interest-bearing liabilities			246,108			881		0.72				158,089			814		1.03
Noninterest-Bearing demand deposits			3,664									1,487
Noninterest-bearing liabilities			2,396									2,644
Total liabilities			252,168									162,220
Shareholders’ equity			67,252									58,742
Total liabilities and shareholders’ equity		$	319,420								$	220,962
Net interest income/average yield					$	5,745		3.82	%					$	4,025		3.89	%
Net interest margin								3.94	%								4.09	%
Average interest-earning assets to average       interest-bearing liabilities								118.52	%								124.55	%

 

 

	33

 

Kentucky First Federal Bancorp

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets (continued)

 

The following table represents the average balance sheets for the three month periods ended December 31, 2013 and 2012, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

		Three Months Ended December 31,
		2013									2012
					Interest									Interest
		Average			And			Yield/			Average			And			Yield/
		Balance			Dividends			Cost				Balance		Dividends			Cost
		(Dollars in thousands)
Interest-earning assets:
Loans		$	257,559		$	3,271		5.08	%		$	180,440		$	2,295		5.09	%
Mortgage-backed securities			4,763			34		2.86				6,322			46		2.91
Other securities			8,473			7		0.33				100			—		—
Other interest-earning assets			16,376			78		1.91				9,653			73		3.03
Total interest-earning assets			287,171			3,390		4.72				196,515			2,414		4.91
Less: Allowance for loan losses			(1,384)									(869)
Non-interest-earning assets			29,355									28,910
Total assets		$	315,142								$	224,556
Interest-bearing liabilities:
Demand deposits		$	6,306		$	8		0.51	%		$	16,195		$	7		0.17	%
Savings			68,892			62		0.36				37,358			57		0.61
Certificates of deposit			147,885			291		0.79				81,126			212		1.05
Total deposits			223,083			361		0.65				134,679			276		0.82
Borrowings			19,547			67		1.37				26,795			99		1.48
Total interest-bearing liabilities			242,630			428		0.71				151,474			375		0.93
Noninterest-Bearing demand deposits			3,664									1,487
Noninterest-bearing liabilities			2,296									2,609
Total liabilities			248,590									165,570
Shareholders’ equity			66,552									58,986
Total liabilities and shareholders’ equity		$	315,142								$	224,556
Net interest income/average yield					$	2,962		4.01	%					$	2,039		3.98	%
Net interest margin								4.13	%								4.15	%
Average interest-earning assets to average      interest-bearing liabilities								118.36	%								121.70	%

 

 

	34

 

Kentucky First Federal Bancorp

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2013 to December 31, 2013

 

Assets:  At December 31, 2013, the Company’s assets totaled $316.4 million, a decrease of $7.7 million, or 2.4%, from total assets at June 30, 2013.  This decrease was attributed primarily to a decrease in cash and cash equivalents and loans. 

 

Cash and cash equivalents:  Cash and cash equivalents decreased by $8.6 million or 52.2% to $7.9 million at December 31, 2013, as excess liquidity was utilized to repay borrowings.

 

Loans:  Loans receivable, net, decreased by $7.4 million or 2.8% to $255.0 million at December 31, 2013, due primarily to low levels of loan demand and loan payoffs received.  Also, due to historically low interest rates, many home mortgages have been refinanced to long-term, fixed rate loans either with other lenders or with our banks to be sold into the secondary market.  Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies.  However, loan demand continues in its weakened state as a result of the downturn in the economy and we expect to see a continued decrease in demand for home loans until the housing market regains a stronger footing.

 

Non-Performing Loans:  At December 31, 2013, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $8.4 million, or 3.3% of total loans (including loans purchased in the acquisition), compared to $8.0 million or 3.04%, of total loans at June 30, 2013.  The Company’s allowance for loan losses totaled $1.4 million and $1.3 million at December 31, 2013, and June 30, 2013, respectively.  The allowance for loan losses at December 31, 2013, represented 17.1% of nonperforming loans and 0.56% of total loans (including loans purchased in the acquisition), while at June 30, 2013, the allowance represented 16.4% of nonperforming loans and 0.50% of total loans. 

 

The Company had $12.7 million in assets classified as substandard for regulatory purposes at December 31, 2013, including loans ($11.0 million) and real estate owned (“REO”) ($1.7 million), including both loans and REO acquired in the CKF Bancorp transaction.  Classified loans as a percentage of total loans (including loans acquired on December 31, 2012) was 4.3% and 6.2% at December 31, 2013 and June 30, 2013, respectively.  Of substandard loans, 99% were secured by real estate on which the Banks have priority lien position.

 

 

	35

 

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, 2013 to December 31, 2013 (continued)

 

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

 

		December 31,
(dollars in thousands)		2013			June 30, 2013
Substandard assets		$	12,675		$	16,315
Doubtful assets			—			—
Loss assets			—			—
Total classified assets		$	12,675		$	16,315

 

All substandard loans were secured by real property on which the banks have priority lien position.  The table below summarizes substandard loans (including substandard loans purchased at December 31, 2012) at the dates indicated:

 

		December 31,						June 30,
		2013						2013
		Number			Net			Number			Net
		of			Carrying			of			Carrying
		Properties			Value			Properties			Value
(dollars in thousands)
Single family, owner occupied			94		$	5,679			69		$	5,404
Single family, duplex			—			—			1			37
Single family, non-owner occupied			6			687			37			2,477
Two- to four-family, non-owner occupied			11			486			9			1,915
Multi-family			34			1,550			34			1,550
Nonresidential real estate			7			2,123			9			2,846
Commercial nonmortgage			—			102			4			118
Land			7			368			6			771
Consumer			—			20			7			35
Total substandard loans			159		$	11,015			176		$	15,152

 

 

	36

 

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, 2013 to December 31, 2013 (continued)

 

The following table presents the aggregate carrying value of REO at the dates indicated:

 

		December 31, 2013						June 30, 2013
		Number						Number			Net
		of			Carrying			of			Carrying
		Properties			Value			Properties			Value
Single family, non-owner occupied			14		$	1,622			18		$	946
2-4 family, owner-occupied			—			—			2			167
5 or more family, non-owner-occupied			—			—			—			—
Building lot			3			38			4			50
Total REO			17		$	1,660			24		$	1,163

 

At December 31, 2013, and June 30, 2013, the Company had $7.4 million and $5.0 million of loans classified as special mention, respectively (including loans purchased at December 31, 2012.)  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. 

 

Securities:  At December 31, 2013, the Company’s investment securities had increased $8.0 million or 64.2% to $20.4 million compared to June 30, 2013, due primarily to the purchase of a $10.0 million short-term U.S. Treasury note.  The Treasury note had matured prior to the filing of this document. 

 

Liabilities:  At December 31, 2013, the Company’s liabilities totaled $249.4 million, a decrease of $8.1 million, or 3.1%, from total liabilities at June 30, 2013.  The decrease in liabilities was attributed primarily to a decrease in deposits.  Deposits decreased $10.2 million or 4.4% to $220.7 million at December 31, 2013, as certificate of deposit customers have sought higher yields elsewhere.  FHLB advances increased $2.7 million or 11.1% from $24.3 million at June 30, 2013 to $27.0 million at December 31, 2013, primarily to fund the purchase of a short-term U.S. Treasury note.

 

Shareholders’ Equity:  At December 31, 2013, the Company’s shareholders’ equity totaled $67.0 million, an increase of $383,000 or 0.6% from the June 30, 2013 total.  The change in shareholders’ equity is primarily associated with net profits for the period less dividends paid on common stock.

 

 

	37

 

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, 2013 to December 31, 2013 (continued)

 

The Company paid dividends of $743,000 or 72.8% of net income for the six month period just ended.  The Company received notice from the Federal Reserve Board on August 6, 2013, that there would be no objection to a waiver of dividends paid by Kentucky First Federal to First Federal MHC in the next twelve months.  On July 9, 2013, the members of First Federal MHC for the second time approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock.  The Board of Directors of First Federal MHC applied for approval of another waiver.  As a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 2014.  Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank.  Management cannot speculate on future dividend levels, because various factors, including capital levels, income levels, liquidity levels, regulatory requirements and overall financial condition of the Company are considered before dividends are declared.  However, management continues to believe that a strong dividend is consistent with the Company’s long-term capital management strategy.   See “Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2013 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Six Month Periods Ended December 31, 2013 and 2012

 

General

 

Net income totaled $1.0 million for the six months ended December 31, 2013, a decrease of $428,000 or 29.5% from net income of $1.4 million for the same period in 2012.  The decrease in net income was primarily attributable to a $958,000 bargain purchase gain recognized in the 2012 period, which was a result of the acquisition of CKF Bancorp, Inc. (“CKF Bancorp”), on December 31, 2012.  No CKF Bancorp operations are included in the Company’s reported earnings for the 2012 period, while the Company’s results of operations for the 2013 period include operations acquired from CKF Bancorp. 

 

Net Interest Income

 

Net interest income after provision for loan losses increased $1.7 million or 46.7% to $5.3 million for the six months recently ended compared to $3.6 million for the six months ended December 31, 2012, due primarily to the larger operation base resulting from the acquisition of CKF Bancorp.  Provision for loan losses increased $35,000 or 8.4% to $453,000 for the six month period just ended compared to $418,000 for the prior year period.  Core earnings increased significantly.  Interest income increased $1.8 million or 36.9%, to $6.6 million, while interest expense increased only $67,000 or 8.2% to $881,000 for the six months ended December 31, 2013, after amortization of fair value adjustments on interest bearing accounts.

 

Interest income on loans increased $1.8 million or 38.5% to $6.4 million, due primarily to the CKF Bancorp acquisition.  The average balance of loans outstanding increased $78.9 million to $260.0 million for the six month period just ended, while the average rate earned on loans outstanding decreased 18 basis points to 4.91% for the period.  Interest income on mortgage-backed residential securities (“MBS”) decreased $27,000 or 27.8% to $70,000 for the six months ended December 31, 2013, due both to a reduced rate earned and a reduction in the average balance.  The rate earned on MBS decreased 69 basis points to 2.80% for the recently ended period, primarily due to the CKF Bancorp acquisition and the adjustment to fair market value for MBS acquired pursuant to acquisition accounting procedures.  Other securities, primarily composed of agency bonds, were also acquired in the acquisition, and accounted for $14,000 in interest income during the recent six month period, compared to nil for the prior year period.  The average balance of the other investment securities was $7.6 million for the six month period just ended and the average rate earned on those securities was 37 basis points.  There were no sales of investments during the six month period just ended. 

 

 

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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 Six Month Periods Ended December 31, 2013 and 2012 (continued)

 

Net Interest Income (continued)

 

Interest expense on deposits increased $149,000 or 25.7% to $729,000 for the  six month period ended December 31, 2013, due to the increase in average deposits outstanding.  The increase in deposits was primarily attributed to the CKF Bancorp acquisition.  Average deposits outstanding increased $93.2 million or 70.8% to $224.8 million for the recently ended six month period, while the average rate paid on deposits declined from 23 basis points to 65 basis points for the current year period.  Interest expense on borrowings decreased $82,000 or 35.0% to $152,000 for the six month period ended December 31, 2013, compared to the prior year period.  The decrease in interest expense on borrowings was attributed both to a lower rate paid on borrowings and a smaller average balance outstanding.  The average rate paid on borrowings decreased 34 basis points to 1.43% for the recently ended six month period, while the average balance of borrowings outstanding decreased $5.1 million or 19.5% to $21.3 million.

 

Net interest margin decreased from 4.09% for the prior year period to 3.94% for the six months ended December 31, 2013.

 

Provision for Losses on Loans

 

The Company recorded $453,000 in provision for losses on loans during the six months ended December 31, 2013, compared to a provision of $418,000 for the six months ended December 31, 2012.  The increased provision was primarily due to decline in fair value of underlying collateral on two impaired, collateral-dependent loans. The loans were both secured by one- to four- family residential properties. While one property was taken as real estate owned, the other loan, which is secured by nine properties, is currently in foreclosure.  There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations. 

 

Non-interest Income

 

Non-interest income totaled $212,000 for the six months ended December 31, 2013, a decrease of $914,000 or 81.2% from the same period in 2012.  The decrease in non-interest income was primarily attributable to a $958,000 bargain purchase gain recognized in the 2012 period, which was a result of the CKF Bancorp acquisition.  Also contributing to the decrease was lower net gains on sales of loans, which decreased $56,000 or 50.5% to $55,000 for the six months just ended.  The Company had both fewer loans and lower dollar volume of long-term, fixed rate loans that it sold to the FHLB during the period due to lower customer demand.  The amount of gain realized on each loan was smaller in the period just ended than the prior period due to margin compression, which was associated with a recent rise in long-term mortgage rates.  Other income increased $110,000 or 211.5% to $162,000 for the six month period just ended, primarily attributable to fees earned on deposit accounts acquired from CKF Bancorp.  Other real estate owned represented net charges of $51,000 for the six month period ended December 31, 2013, compared to net charges of $40,000 in the prior year period.  Included in the net charges for other real estate owned for the six months ended December 31, 2013, were impairment charges on REO of $34,000 in addition to the net loss on sale of REO of $17,000.

 

 

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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 Six Month Periods Ended December 31, 2013 and 2012 (continued)

 

Non-interest Expense

 

Non-interest expense totaled $4.0 million and $2.7 million for the six months ended December 31, 2013 and 2012, respectively, an increase of $1.3 million or 48.2% period to period.  The increase was primarily related to higher costs associated with normal operations of the CKF Bancorp acquisition.  Employee compensation and benefits increased $840,000 or 50.2% due to additional personnel hired with the acquisition, as well as higher retirement expense.  Foreclosure and OREO expenses (net) was $70,000 for the recently ended six month period compared to net gain of $39,000 for the prior year period.  Somewhat offsetting the increases in non-interest expenses due to increased size of operation, outside service fees and legal fees decreased $149,000 and $72,000, respectively, period to period.  Outside service and legal fees incurred in the prior year period were primarily associated with the CKF Bancorp acquisition.

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $452,000 for the six months ended December 31, 2013, compared to $564,000 in the prior year period.  The effective tax rates were 30.7% and 28.0% for the  six month periods ended December 31, 2013 and 2012, respectively.

 

Comparison of Operating Results for the Three Month Periods Ended December 31, 2013 and 2012

 

General

 

Net income totaled $598,000 for the three months ended December 31, 2013, a decrease of $329,000 or 35.5% from net income of $927,000 for the same period in 2012.  The decrease was primarily attributable to the bargain purchase gain recognized in the 2012 period.

 

Net Interest Income

 

Net interest income after provision for loan losses increased $1.1 million or 69.5% to $2.8 million for the three month period just ended compared to $1.7 million for the prior year quarter.  Net interest income before provision for loan loss increased $923,000 or 45.3% to $3.0 million for the quarter ended December 31, 2013, primarily because of the larger operating base of the Company.  Provision for losses on loans decreased $221,000 to $171,000 for the recently-ended quarter compared to a provision of $392,000 in the prior year period.  Core earnings improved significantly.  Interest income increased by $976,000, or 40.4%, to $3.4 million, while interest expense increased only $53,000 or 14.1% to $428,000 for the three months ended December 31, 2013, after amortization of fair value adjustments on interest bearing accounts.

 

Interest income on loans increased $976,000 or 42.5% to $3.3 million, due primarily to an increase in the average size of the loan portfolio.  The average balance of loans outstanding for the three month period ended December 31, 2013, increased $77.1 million to $257.6 million, while the average rate earned decreased only 1 basis points to 5.08% for the period.  Interest income on mortgage-backed residential securities decreased $12,000 or 26.1% to $34,000 for the three months ended December 31, 2013, primarily as a result of reduced volume, as securities matured and principal from mortgage-backed securities flowed back to the Company.  There were no sales of investments during the three month period just ended. 

 

 

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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 December 31, 2013 and 2012

(continued)

 

Interest expense on deposits increased $85,000 or 30.8% to $361,000 for the three month period ended December 31, 2013, while interest expense on borrowings decreased $32,000 or 32.3% to $67,000 for the same period.  The increase in interest expense on deposits was attributed to an increase in the average balance of deposits, as the average rate paid on deposits declined.  The average balance of deposits increased $88.4 million to $223.1 million for the most recent period, while the average balance paid on deposits decreased 17 basis points to 0.65%.  The increase in average deposits was attributed to the CKF Bancorp acquisition.  The decrease in interest expense on borrowings was attributed both to lower outstanding balances and a lower rate paid on amounts outstanding.   The average balance of borrowings outstanding decreased $7.2 million or 27.0% to $19.5 million for the recently ended three month period, while the average rate paid on borrowings decreased 11 basis points to 1.37% for the most recent period.

 

Net interest margin decreased from 4.15% for the prior year quarterly period to 4.13% for the quarter ended December 31, 2013.

 

Provision for Losses on Loans

 

The Company recorded $171,000 in provision for losses on loans during the three months ended December 31, 2013, compared to a $392,000 provision for the three months ended December 31, 2012, primarily due to decline in fair value of collateral on an impaired single family residential property, which the Company acquired in foreclosure proceedings.  There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, 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 December 31, 2013 and 2012 (continued)

 

Non-interest Income

 

Non-interest income totaled $97,000 for the three months ended December 31, 2013, a decrease of $920,000 from the same period in 2012, primarily due to the bargain purchase gain noted previously.  Also contributing to the decrease in non-interest income was a decrease in net gains on sales of loans, which totaled $20,000 for the recent quarterly period ended compared to $53,000 for the prior year quarter. 

 

Non-interest Expense

 

Non-interest expense totaled $2.0 million for the three months ended December 31, 2013, compared to $1.4 million for 2012 period.  The increase was generally attributed to higher operating costs associated with the CKF Bancorp acquisition.  The increase primarily related to higher costs associated with employee compensation and benefits, which increased $445,000 or 54.4% from period to period and were linked to a higher employee base due to the CKF Bancorp acquisition. 

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $278,000 for the three months ended December 31, 2013, compared to $307,000 in the prior year period.  The effective tax rates were 32.9% and 24.9% for the three-month periods ended December 31, 2013 and 2012, respectively.

 

 

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Kentucky First Federal Bancorp

 

ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk

 

This item is not applicable as the Company is a smaller reporting company.

 

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, and have concluded that the Company’s disclosure controls and procedures were effective.

 

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended December 31, 2013, in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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Kentucky First Federal Bancorp

 

PART II

 

ITEM 1.

Legal Proceedings

 

None.

 

ITEM 1A.

Risk Factors

 

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)           The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended December 31, 2013.

 

								Total # of
					Average			shares purchased			Maximum # of shares
		Total			price paid			as part of publicly			that may yet be
		# of shares			per share			announced plans			purchased under
Period		purchased			(incl commissions)			or programs			the plans or programs
October 1-31, 2013			—		$	—			—			69,700
November 1-30, 2013			—		$	—			—			69,700
December 1-31, 2013			—		$	—			—			69,700

 

(1)  On January 16, 2014, the Company announced the completion of the stock repurchase program begun on May 14, 2010 and initiated another program for the repurchase of up to 150,000 shares of its Common Stock.  Repurchase activity for the previous program was suspended pending expiration of the Federal Reserve’s one year limitation on repurchases following a stock issuance.   

 

ITEM 3.

Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.

Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5.

Other Information

 

None.

 

ITEM 6.

Exhibits

 

	3.11	Charter of Kentucky First Federal Bancorp
	3.21	Bylaws of Kentucky First Federal Bancorp, as amended and restated
	4.11	Specimen Stock Certificate of Kentucky First Federal Bancorp
	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
	32.1	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

______________

(1)

Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No. 333-119041).

 

 

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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:	February 14, 2014		By:	/s/Don D. Jennings
				Don D. Jennings
				Chief Executive Officer
Date:	February 14, 2014		By:	/s/ R. Clay Hulette
				R. Clay Hulette
				Vice President and Chief Financial Officer

 

 

	45