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 xNo ¨

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		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.

38

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 thesix 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.

39

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 thesix 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.

40

 

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.

41

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