10-Q 1 v367241_10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended            December 31, 2013            
OR
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from ____________ to _______________
 
Commission File Number: 0-51176   
 
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)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or such shorter period that the issuer was required to file such reports and (2) has been subject to such filing requirements for the past ninety days:                                Yes x                  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ¨                   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  At February 12, 2014, the latest practicable date, the Corporation had 8,529,192 shares of $.01 par value common stock outstanding.
 
 
 
INDEX
 
 
 
 
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
 
 
2

 
PART I
ITEM 1: Financial Information
 
Kentucky First Federal Bancorp
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
 
 
December 31,
 
June 30,
 
 
 
2013
 
2013
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from financial institutions
 
$
4,772
 
$
4,537
 
Interest-bearing demand deposits
 
 
3,136
 
 
12,003
 
Cash and cash equivalents
 
 
7,908
 
 
16,540
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 
224
 
 
205
 
Securities held-to-maturity, at amortized cost- approximate
    fair value of $20,869 and $12,354 at December 31, 2013
    and June 30, 2013, respectively
 
 
20,200
 
 
12,232
 
Loans held for sale
 
 
 
 
196
 
Loans, net of allowance of $1,438 and $1,310 at December
    31, 2013 and June 30, 2013, respectively
 
 
255,047
 
 
262,491
 
Real estate owned, net
 
 
1,660
 
 
1,163
 
Premises and equipment, net
 
 
4,591
 
 
4,608
 
Federal Home Loan Bank stock, at cost
 
 
7,732
 
 
7,732
 
Accrued interest receivable
 
 
928
 
 
919
 
Bank-owned life insurance
 
 
2,833
 
 
2,787
 
Goodwill
 
 
14,507
 
 
14,507
 
Prepaid expenses and other assets
 
 
763
 
 
682
 
 
 
 
 
 
 
 
 
Total assets
 
$
316,393
 
$
324,062
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
220,747
 
$
230,981
 
Federal Home Loan Bank advances
 
 
27,016
 
 
24,310
 
Advances by borrowers for taxes and insurance
 
 
196
 
 
562
 
Accrued interest payable
 
 
36
 
 
36
 
Accrued federal income taxes
 
 
32
 
 
45
 
Deferred federal income taxes
 
 
152
 
 
241
 
Deferred revenue
 
 
639
 
 
641
 
Other liabilities
 
 
570
 
 
624
 
Total liabilities
 
 
249,388
 
 
257,440
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
Preferred stock, 500,000 shares authorized, $.01
    par value; no shares issued and outstanding
 
 
-
 
 
-
 
Common stock, 20,000,000 shares authorized, $.01
    par value; 8,596,064 shares issued
 
 
86
 
 
86
 
Additional paid-in capital
 
 
34,751
 
 
34,732
 
Retained earnings
 
 
33,882
 
 
33,604
 
Unearned employee stock ownership plan (ESOP)
 
 
(1,569)
 
 
(1,626)
 
Treasury shares at cost, 22,886 common shares at both
    December 31, 2013 and June 30, 2013
 
 
(197)
 
 
(197)
 
Accumulated other comprehensive income
 
 
52
 
 
23
 
Total shareholders’ equity
 
 
67,005
 
 
66,622
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
316,393
 
$
324,062
 
 
See accompanying notes.
 
 
3

 
Kentucky First Federal Bancorp
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share data)
 
 
 
Six months ended December 31,
 
Three months ended December 31,
 
 
 
2013
 
2012
 
2013
 
2012
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, including fees
 
$
6,382
 
$
4,608
 
$
3,271
 
$
2,295
 
Mortgage-backed securities
 
 
70
 
 
97
 
 
34
 
 
46
 
Other securities
 
 
14
 
 
-
 
 
7
 
 
-
 
Interest-bearing deposits and other
 
 
160
 
 
134
 
 
78
 
 
73
 
Total interest income
 
 
6,626
 
 
4,839
 
 
3,390
 
 
2,414
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
 
15
 
 
14
 
 
8
 
 
7
 
Savings
 
 
122
 
 
120
 
 
62
 
 
57
 
Certificates of Deposit
 
 
592
 
 
446
 
 
291
 
 
212
 
Deposits
 
 
729
 
 
580
 
 
361
 
 
276
 
Borrowings
 
 
152
 
 
234
 
 
67
 
 
99
 
Total interest expense
 
 
881
 
 
814
 
 
428
 
 
375
 
Net interest income
 
 
5,745
 
 
4,025
 
 
2,962
 
 
2,039
 
Provision for loan losses
 
 
453
 
 
418
 
 
171
 
 
392
 
Net interest income after provision for losses on loans
 
 
5,292
 
 
3,607
 
 
2,791
 
 
1,647
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings on bank-owned life insurance
 
 
46
 
 
45
 
 
23
 
 
23
 
Net gains on sales of loans
 
 
55
 
 
111
 
 
20
 
 
53
 
Net loss on sales of OREO
 
 
(17)
 
 
(15)
 
 
(7)
 
 
(18)
 
Other-than-temp impairment loss-REO
 
 
(34)
 
 
(25)
 
 
(17)
 
 
(25)
 
Bargain purchase gain
 
 
 
 
958
 
 
 
 
958
 
Other
 
 
162
 
 
52
 
 
78
 
 
26
 
Total non-interest income
 
 
212
 
 
1,126
 
 
97
 
 
1,017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee compensation and benefits
 
 
2,512
 
 
1,672
 
 
1,263
 
 
818
 
Occupancy and equipment
 
 
285
 
 
134
 
 
145
 
 
56
 
Outside service fees
 
 
79
 
 
228
 
 
43
 
 
191
 
Legal fees
 
 
17
 
 
89
 
 
6
 
 
42
 
Data processing
 
 
220
 
 
105
 
 
98
 
 
45
 
Auditing and accounting
 
 
99
 
 
60
 
 
66
 
 
34
 
FDIC insurance premiums
 
 
115
 
 
63
 
 
55
 
 
34
 
Franchise and other taxes
 
 
136
 
 
88
 
 
68
 
 
44
 
Foreclosure and OREO expenses (net)
 
 
70
 
 
(39)
 
 
50
 
 
(11)
 
Other
 
 
498
 
 
320
 
 
250
 
 
177
 
Total non-interest expense
 
 
4,031
 
 
2,720
 
 
2,044
 
 
1,430
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 
1,473
 
 
2,013
 
 
844
 
 
1,234
 
Federal income taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
 
437
 
 
661
 
 
230
 
 
397
 
Deferred
 
 
15
 
 
(97)
 
 
16
 
 
(90)
 
Total federal income tax expense
 
 
452
 
 
564
 
 
246
 
 
307
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
1,021
 
$
1,449
 
$
598
 
$
927
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EARNINGS PER SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
 
$
0.12
 
$
0.19
 
$
0.07
 
$
0.12
 
 
See accompanying notes.
 
4

 
Kentucky First Federal Bancorp
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
 
Six months ended December 31,
 
Three months ended December 31,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,021
 
$
1,449
 
$
598
 
$
927
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes (benefits: Unrealized holding gains (losses) on securities designated as available for sale, net of taxes (benefits) of $15, $—, $16 and $— during the respective periods
 
 
29
 
 
 
 
31
 
 
 
Comprehensive income
 
$
1,050
 
$
1,449
 
$
629
 
$
927
 
   
See accompanying notes.
 
 
5

 
Kentucky First Federal Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Six months ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
 
$
1,021
 
$
1,449
 
Adjustments to reconcile net income to net cash provided by
   operating activities
 
 
 
 
 
 
 
Depreciation
 
 
157
 
 
65
 
Amortization of purchased loan credit discount
 
 
(100)
 
 
 
Amortization of purchased loan premium
 
 
4
 
 
 
Amortization of deferred loan origination costs
 
 
(19)
 
 
1
 
Amortization of premiums on investment securities
 
 
119
 
 
 
Amortization of premiums on Federal Home Loan Bank advances
 
 
(56)
 
 
 
Amortization of premiums on deposits
 
 
(218)
 
 
 
Net gain on sale of loans
 
 
(55)
 
 
(111)
 
Net loss on sale of real estate owned
 
 
 
 
15
 
Write down of real estate owned
 
 
34
 
 
25
 
Deferred gain on sale of real estate owned
 
 
(2)
 
 
(6)
 
ESOP compensation expense
 
 
76
 
 
52
 
Amortization of stock benefit plans and stock options expense
 
 
 
 
12
 
Earnings on bank-owned life insurance
 
 
(46)
 
 
(45)
 
Provision for loan losses
 
 
453
 
 
418
 
Origination of loans held for sale
 
 
(1,502)
 
 
(2,204)
 
Proceeds from loans held for sale
 
 
1,753
 
 
2,356
 
Bargain purchase gain
 
 
 
 
(958)
 
Increase (decrease) in cash, due to changes in:
 
 
 
 
 
 
 
Accrued interest receivable
 
 
(9)
 
 
33
 
Prepaid expenses and other assets
 
 
(81)
 
 
(164)
 
Accrued interest payable
 
 
 
 
(27)
 
Accounts payable and other liabilities
 
 
(54)
 
 
66
 
Federal income taxes
 
 
(116)
 
 
(300)
 
Net cash provided by operating activities
 
 
1,359
 
 
677
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Acquisition of CKF Bancorp, Inc.
 
 
 
 
3,349
 
Purchase held to maturity U.S. Treasury notes
 
 
(10,000)
 
 
(14,000)
 
Securities maturities, prepayments and calls:
 
 
 
 
 
 
 
Held to maturity
 
 
1,913
 
 
765
 
Available for sale
 
 
24
 
 
18
 
Loans originated for investment, net of principal collected
 
 
6,575
 
 
4,699
 
Additions to premises and equipment, net
 
 
(140)
 
 
(3)
 
Net cash used by investing activities
 
 
(1,628)
 
 
(5,172)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Net change in deposits
 
 
(10,016)
 
 
(1,687)
 
Payments by borrowers for taxes and insurance, net
 
 
(366)
 
 
(349)
 
Proceeds from Federal Home Loan Bank advances
 
 
10,000
 
 
21,000
 
Repayments on Federal Home Loan Bank advances
 
 
(7,238)
 
 
(4,256)
 
Dividends paid on common stock
 
 
(743)
 
 
(561)
 
Treasury stock repurchases
 
 
 
 
(61)
 
Net cash provided by (used in) financing activities
 
 
(8,363)
 
 
14,086
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
(8,632)
 
 
9,591
 
 
 
 
 
 
 
 
 
Beginning cash and cash equivalents
 
 
16,540
 
 
5,735
 
 
 
 
 
 
 
 
 
Ending cash and cash equivalents
 
$
7,908
 
$
15,326
 
 
See accompanying notes.
 
 
6

 
Kentucky First Federal Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(In thousands)
 
 
 
Six months ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
Federal income taxes
 
$
575
 
$
945
 
 
 
 
 
 
 
 
 
Interest on deposits and borrowings
 
$
1,155
 
$
823
 
 
 
 
 
 
 
 
 
Transfers of loans to real estate owned, net
 
$
(867)
 
$
(352)
 
 
 
 
 
 
 
 
 
Loans made on sale of real estate owned
 
$
35
 
$
407
 
 
 
 
 
 
 
 
 
Deferred gain on sale of real estate owned
 
$
2
 
$
 
 
 
 
 
 
 
 
 
Capitalization of mortgage servicing rights
 
$
13
 
$
18
 
 
See accompanying notes.
 
 
7

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2013
(unaudited)
 
On March 2, 2005, First Federal Savings and Loan Association of Hazard (“First Federal of Hazard” or the “Association”) completed a Plan of Reorganization (the “Plan” or the “Reorganization”) pursuant to which the Association reorganized into the mutual holding company form of ownership with the incorporation of a stock holding company, Kentucky First Federal Bancorp (the “Company”) as parent of the Association. Coincident with the Reorganization, the Association converted to the stock form of ownership, followed by the issuance of all the Association’s outstanding stock to Kentucky First Federal Bancorp. Completion of the Plan of Reorganization culminated with Kentucky First Federal Bancorp issuing 4,727,938 common shares, or 55% of its common shares, to First Federal Mutual Holding Company (“First Federal MHC”), a federally chartered mutual holding company, with 2,127,572 common shares, or 24.8% of its shares offered for sale at $10.00 per share to the public and a newly formed Employee Stock Ownership Plan (“ESOP”). The Company received net cash proceeds of $16.1 million from the public sale of its common shares. The Company’s remaining 1,740,554 common shares were issued as part of the $31.4 million cash and stock consideration paid for 100% of the common shares of Frankfort First Bancorp (“Frankfort First”) and its wholly-owned subsidiary, First Federal Savings Bank of Frankfort (“First Federal of Frankfort”). The acquisition was accounted for using the purchase method of accounting and resulted in the recordation of goodwill and other intangible assets totaling $15.4 million.
 
On December 31, 2012, the Company completed its acquisition of CKF Bancorp, Inc. (“CKF Bancorp”), the parent company of Central Kentucky Federal Savings Bank (“Central Kentucky FSB”), pursuant to the provisions of the Agreement of Merger dated as of November 3, 2011 and amended as of September 28, 2012. The acquisition was accounted for using the acquisition method of accounting and resulted in the recordation of bargain purchase gain of $958,000. The results of operations associated with Central Kentucky FSB for the six months ended December 31, 2013, have been included herein.
 
1. Basis of Presentation
 
The accompanying unaudited consolidated financial statements, which represent the consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the six- and three-month periods ended December 31, 2013, are not necessarily indicative of the results which may be expected for an entire fiscal year. The consolidated balance sheet as of June 30, 2013 has been derived from the audited consolidated balance sheet as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2013 filed with the Securities and Exchange Commission.
 
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, adjusted for deferred loan fees, discounts on purchased loans, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance, unless the collectability of the loan is in doubt. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
 
Interest income on one- to four-family residential loans is generally discontinued at the time a loan is 180 days delinquent and on other loans at the time the loan is 90 days delinquent. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
 
 
8

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
(unaudited)
 
1.  Basis of presentation (continued)
 
Interest income on non-consumer loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Retail credit, which includes loans to individuals secured by their personal residence, including first mortgage, home equity and home improvement loans, are placed on nonaccrual status in accordance with the Uniform Retail Credit Classification and Account Management. Nonaccrual loans and loans past due 90 days still on accrual include both homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment for commercial credits and 180 days for one- to four-family residential credits.
 
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, anticipated economic conditions in the primary lending area, trends in the level of delinquent and problem loans and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
 
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
 
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
 
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
 
 
9

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
(unaudited)
 
1.  Basis of presentation (continued)
 
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the loss history experience of the Company over the most recent two years and a rolling average of the current year’s loss history. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
 
The following portfolio segments have been identified: residential real estate, nonresidential real estate, land, farms, commercial (non-mortgage) and consumer and other loans. The residential real estate segment is our primary lending activity and it enables borrowers to purchase or refinance homes in the Banks’ respective market areas. We further classify our residential real estate loans as one- to four-family, multi-family or construction. We originate loans to individuals to finance the construction of residential dwellings for personal use or for use as rental property. We occasionally lend to builders for construction of speculative or custom residential properties for resale, but on a limited basis. We also offer loans secured by nonresidential real estate, primarily commercial office buildings, churches and properties used for other purposes. Generally, these loans are originated for 25 years or less and do not exceed 75% of the appraised value. Our consumer loans include home equity lines of credit, auto loans, personal loans, and loans secured by savings deposits. In the acquisition of CKF, we acquired a portfolio of non-mortgage commercial loans totaling $3.2 million. Future originations of this type of loan are expected to be limited in the foreseeable future.
 
Purchased Credit Impaired Loans – Purchased credit impaired loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. In determining the estimated fair value of these loans, management considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated future credit losses, estimated value of the underlying collateral, estimated holding periods and the net present value of the cash flows expected to be received. To the extent that any smaller dollar purchased credit impaired loan is not specifically reviewed, when evaluating the net present value of the future estimated cash flows, management applies a loss estimate to that loan based on the average expected loss rates for the loans that were individually reviewed in that loan portfolio, adjusted for other factors, as applicable.
 
The difference between the estimated value of the loans acquired is divided into accretable and non-accretable portions. The non-accretable difference represents the difference between the contractually required payments and the cash flows expected to be collected.
 
Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will result in a reversal of the provision for loan losses to the extent of prior charges with a corresponding adjustment to the accretable yield, which would have a positive impact on interest income.
 
The accretable difference on purchased credit impaired loans represents the difference between the expected cash flows and the amount paid. Such difference is accreted into earnings using the level-yield method over the expected cash flow periods of the loans.
 
 
10

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
(unaudited)
 
1.  Basis of presentation (continued)
 
Management will separately monitor the purchased credit impaired loan portfolio and on a quarterly basis will review loans contained within this portfolio against the factors and assumptions used in determining the initial fair value adjustment. In addition to its quarterly evaluation, a loan is typically reviewed (i) when it is modified or extended, (ii) when material information becomes available to the Bank which provides additional insight pertaining to the loan’s performance, the status of the borrower, or the quality or value of the underlying collateral, or (iii) in connection with the quarterly review of projected cash flows, which includes a substantial portion of each acquired loan portfolio.
 
United States generally accepted accounting principles (“U.S. GAAP”) provides up to twelve months following the date of acquisition in which management can finalize the fair values of acquired assets and assumed liabilities. Material events that occur during the measurement period are analyzed to determine if the new information reflected facts and circumstances that existed on the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is unobtainable. The measurement period is limited to one year from the acquisition date. Management has finalized the fair values of acquired assets and assumed liabilities and, as such considers such values to be the “Day One Fair Values.”
 
Principles of Consolidation - The consolidated financial statements include the accounts of the Company, Frankfort First, and its wholly-owned banking subsidiaries, First Federal of Hazard and First Federal of Frankfort (collectively hereinafter “the Banks”). All intercompany transactions and balances have been eliminated in consolidation.
 
Reclassifications - Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. Such reclassifications had no impact on prior years’ net income.

2. Earnings Per Share
 
Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued or released under the Company’s share-based compensation plans. The factors used in the basic and diluted earnings per share computations follow:
 
 
 
Six months ended
December 31
 
Three months ended
December 31
 
(in thousands)
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income allocated to common shareholders, basic and diluted
 
$
1,021
 
$
1,449
 
$
598
 
$
927
 
 
 
 
Six months ended
December 31
 
 
Three months ended
December 31
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
 
8,374,184
 
7,544,654
 
8,374,184
 
7,544,233
 
 
 
11

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2013
(unaudited)
 
2.  Earnings per share (continued)
  
There were 309,800 stock option shares outstanding for the six- and three-month periods ended December 31, 2013 and 2012. The stock option shares outstanding were antidilutive for the respective periods.

3. Investment Securities
 
The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at December 31, 2013 and June 30, 2013, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:
 
 
 
December 31, 2013
 
(in thousands)
 
Amortized
cost
 
Gross
unrealized/
unrecognized
gains
 
Gross
unrealized/
unrecognized
losses
 
Estimated
fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed:residential
 
$
138
 
$
3
 
$
-
 
$
141
 
FHLMC stock
 
 
39
 
 
44
 
 
-
 
 
83
 
 
 
$
177
 
$
47
 
$
-
 
$
224
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed: residential
 
$
4,399
 
$
142
 
$
-
 
$
4,541
 
U.S. Treasury notes
 
 
10,000
 
 
-
 
 
-
 
 
10,000
 
Agency bonds
 
 
5,801
 
 
527
 
 
-
 
 
6,328
 
 
 
$
20,200
 
$
669
 
$
-
 
$
20,869
 
 
 
 
June 30, 2013
 
(in thousands)
 
Amortized
cost
 
Gross
unrealized/
unrecognized
gains
 
Gross
unrealized/
unrecognized
losses
 
Estimated
fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed:residential
 
$
162
 
$
4
 
$
-
 
$
166
 
FHLMC stock
 
 
8
 
 
31
 
 
-
 
 
39
 
 
 
$
170
 
$
35
 
$
-
 
$
205
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed: residential
 
$
5,340
 
$
210
 
$
49
 
$
5,502
 
Agency bonds
 
 
6,892
 
 
-
 
 
39
 
 
6,852
 
 
 
$
12,232
 
$
210
 
$
88
 
$
12,354
 
 
 
12

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2013
(unaudited)
 
3.  Investment Securities (continued)
 
The Company’s equity securities consist of Federal Home Loan Mortgage Company (FHLMC or Freddie Mac) stock, while our debt securities consist of agency bonds, a U.S. Treasury note, and mortgage-backed securities.  Mortgage-backed securities do not have a single maturity date.  The amortized cost and fair value of held-to-maturity debt securities are shown by contractual maturity.  Securities not due at a single maturity date are shown separately.
 
 
 
December 31, 2013
 
(in thousands)
 
Amortized Cost
 
Fair Value
 
 
 
 
 
 
 
 
 
Held-to-maturity Securities
 
 
 
 
 
 
 
Within one year
 
$
11,013
 
$
11,014
 
One to five years
 
 
4,788
 
 
5,314
 
Mortgage-backed
 
 
4,399
 
 
4,541
 
 
 
$
20,200
 
$
20,869
 
 
Our pledged securities at December 31, 2013, and June 30, 2013 totaled $2.8 million and $3.1 million, respectively.
 
There were no sales of investment securities during the six month period ended December 31, 2013 or 2012 nor the fiscal year ended June 30, 2013.
 
We evaluated securities in unrealized loss positions for evidence of other-than-temporary impairment, considering duration, severity, financial condition of the issuer, our intention to sell or requirement to sell. Management does not believe other-than-temporary impairment is evident, because none of the investments have been in a loss position for more than twelve months.
 
 
13

 
Kentucky First Federal Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2013
(unaudited)
 
4. Loans receivable
 
The composition of the loan portfolio was as follows:
 
 
 
December 31,
 
June 30,
 
(in thousands)
 
2013
 
2013
 
 
 
 
 
 
 
 
 
Residential real estate
 
 
 
 
 
 
 
One- to four-family
 
$
201,768
 
$
209,092
 
Multi-family
 
 
14,277
 
 
14,506
 
Construction
 
 
1,892
 
 
1,753
 
Land
 
 
2,451
 
 
2,821
 
Farm
 
 
1,662
 
 
1,843
 
Nonresidential real estate
 
 
22,453
 
 
22,092
 
Commercial nonmortgage
 
 
3,362
 
 
3,189
 
Consumer and other:
 
 
 
 
 
 
 
Loans on deposits
 
 
2,820
 
 
2,710
 
Home equity
 
 
5,554
 
 
5,757
 
Automobile
 
 
55
 
 
72
 
Unsecured
 
 
839
 
 
708
 
 
 
 
257,133
 
 
264,543
 
 
 
 
 
 
 
 
 
Undisbursed portion of loans in process
 
 
731
 
 
833
 
Deferred loan origination fees (cost)
 
 
(83)
 
 
(91)
 
Allowance for loan losses
 
 
1,438
 
 
1,310
 
 
 
$
255,047
 
$
262,491
 
 
The following table presents the activity in the allowance for loan losses by portfolio segment for the six 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
 
$
871
 
 
437
 
$
(330)
 
$
4
 
$
982
 
Multi-family
 
 
63
 
 
1
 
 
 
 
 
 
64
 
Construction
 
 
8
 
 
2
 
 
 
 
 
 
10
 
Land
 
 
12
 
 
(2)
 
 
 
 
 
 
 
 
10
 
Farm
 
 
6
 
 
2
 
 
 
 
 
 
8
 
Nonresidential real estate
 
 
94
 
 
8
 
 
 
 
 
 
102
 
Commercial nonmortgage
 
 
13
 
 
3
 
 
 
 
 
 
16
 
Consumer and other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans on deposits
 
 
12
 
 
2
 
 
 
 
 
 
14
 
Home equity
 
 
25
 
 
3
 
 
 
 
 
 
28
 
Automobile
 
 
 
 
 
 
 
 
 
 
 
Unsecured
 
 
6
 
 
(3)
 
 
 
 
1
 
 
4
 
Unallocated
 
 
200
 
 
 
 
 
 
 
 
200
 
Totals
 
$
1,310
 
$
453
 
$
(330)
 
$
5
 
$
1,438
 
 
 
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