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, 2012  

 

OR

 

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

 

For the transition period from ____________ to _______________

 

Commission File Number: 0-51176   

 

KENTUCKY FIRST FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
 

 

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

 

216 West Main Street, Frankfort, Kentucky 40601
(Address of principal executive offices)(Zip Code)

 

(502) 223-1638
(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or such shorter period that the issuer was required to file such reports and (2) has been subject to such filing requirements for the past ninety days: Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At February 8, 2013, 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   40
         
    ITEM 4 Controls and Procedures   40
           
PART II - OTHER INFORMATION   41
           
SIGNATURES     42

 

2
 

 

PART I

ITEM 1: Financial Information

Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   December 31,   June30, 
   2012   2012 
ASSETS          
           
Cash and due from financial institutions  $4,882   $1,244 
Interest-bearing demand deposits   10,444    4,491 
Cash and cash equivalents   15,326    5,735 
           
Interest-bearing deposits in other financial institutions   100    100 
Securities available for sale   179    189 
Securities held-to-maturity, at amortized cost- approximate fair value of $29,109 and $5,144 at December 31, 2012 and June 30, 2012, respectively   28,769    4,756 
Loans held for sale   440    481 
Loans, net of allowance of $1,180 and $875 at December 31, 2012 and June 30, 2012, respectively   271,930    182,473 
Real estate owned, net   3,558    2,445 
Premises and equipment, net   4,701    2,644 
Federal Home Loan Bank stock, at cost   7,732    5,641 
Accrued interest receivable   899    497 
Bank-owned life insurance   2,742    2,697 
Goodwill   14,507    14,507 
Prepaid FDIC assessments   401    246 
Prepaid federal income taxes   268    30 
Deferred federal income taxes   108     
Prepaid expenses and other assets   871    508 
           
Total assets  $352,531   $222,949 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $234,342   $134,552 
Federal Home Loan Bank advances   50,948    27,065 
Advances by borrowers for taxes and insurance   168    487 
Accrued interest payable   55    64 
Deferred federal income taxes       774 
Deferred revenue   642    648 
Other liabilities   588    506 
Total liabilities   286,743    164,096 
           
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   34,757    36,870 
Retained earnings   32,859    31,971 
Unearned employee stock ownership plan (ESOP)   (1,720)   (1,772)
Treasury shares at cost, 22,886 and 826,375 common shares at December 31, 2012 and June 30, 2012, respectively   (197)   (8,305)
Accumulated other comprehensive income   3    3 
Total shareholders’ equity   65,788    58,853 
           
Total liabilities and shareholders’ equity  $352,531   $222,949 

 

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, 
   2012   2011   2012   2011 
Interest income                    
Loans, including fees  $4,608   $4,936   $2,295   $2,470 
Mortgage-backed securities   97    139    46    67 
Other securities   -    1    -    1 
Interest-bearing deposits and other   134    112    73    56 
                     
Total interest income   4,839    5,188    2,414    2,594 
                     
Interest expense                    
Interest-bearing demand deposits   14    16    7    6 
Savings   120    150    57    61 
Certificates of Deposit   446    721    212    336 
Deposits   580    887    276    403 
Borrowings   234    311    99    151 
Total interest expense   814    1,198    375    554 
Net interest income   4,025    3,990    2,039    2,040 
Provision for loan losses   418    82    392    82 
Net interest income after provision for losses on loans   3,607    3,908    1,647    1,958 
                     
Non-interest income                    
Earnings on bank-owned life insurance   45    44    23    22 
Net gains on sales of loans   111    23    53    23 
Net gain (loss) on sales of OREO   (15)   (13)   (18)   4 
Other-than-temp impairment loss-REO   (25)   (48)   (25)   (38)
Bargain purchase gain   958        958     
Other   52    51    26    20 
Total non-interest income (loss)   1,126    57    1,017    31 
                     
Non-interest expense                    
Employee compensation and benefits   1,672    1,520    818    773 
Occupancy and equipment   134    168    56    81 
Outside service fees   228    189    191    113 
Legal fees   89    192    42    131 
Data processing   105    111    45    57 
Auditing and accounting   60    78    34    19 
FDIC insurance premiums   63    76    34    36 
Franchise and other taxes   88    93    44    47 
Amortization of intangible assets   -    65    -    32 
Foreclosure and OREO expenses (net)   (39)   32    (11)   15 
 Other   320    236    177    107 
Total non-interest expense   2,720    2,760    1,430    1,411 
                     
Income before income taxes   2,013    1,205    1,234    578 
Federal income taxes                    
Current   661    851    397    194 
Deferred   (97)   (455)   (90)   (4)
Total federal income tax expense   564    396    307    190 
                     
NET INCOME  $1,449   $809   $927   $388 
                     
EARNINGS PER SHARE                    
Basic and diluted  $0.19   $0.11   $0.12   $0.05 
                     
DIVIDENDS PER SHARE  $0.20   $0.20   $0.10   $0.10 

 

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, 
   2012   2011   2012   2011 
                 
Net income  $1,449   $809   $927   $388 
                     
Other comprehensive income (loss), net of taxes (benefits: Unrealized holding gains (losses) on securities designated as available for sale, net of taxes (benefits) of $—, $—, $— and $— during the respective periods                
Comprehensive income  $1,449   $809   $927   $388 

 

See accompanying notes.

 

5
 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

   Six months ended 
   December 31, 
   2012   2011 
         
Cash flows from operating activities:          
Net income  $1,449   $809 
Adjustments to reconcile net income to net cash provided by operating activities Depreciation   65    98 
Amortization of deferred loan origination (fees) costs   1    2 
Amortization of premiums on Federal Home Loan Bank advances       (9)
Amortization of core deposit intangibles       65 
Net gain on sale of loans   (111)   (23)
Other than temporary impairment of real estate owned   25    48 
Net loss on sale of other real estate owned   15     
Deferred gain on sale of other real estate owned   (6)    
ESOP compensation expense   52    87 
Amortization of stock benefit plans and stock options expense   12     
Earnings on bank-owned life insurance   (45)   (44)
Provision for loan losses   418    82 
Origination of loans held for sale   (2,204)   (394)
Proceeds from loans held for sale   2,356    417 
Bargain purchase gain   (958)    
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   33    34 
Prepaid expenses and other assets   (164)   (226)
Accrued interest payable   (27)   (9)
Accounts payable and other liabilities   66    (55)
Federal income taxes:          
Current   (203)   116 
Deferred   (97)   (455)
Net cash provided by operating activities   677    543 
           
Cash flows from investing activities:          
Acquisition of CKF Bancorp, net   3,349     
Purchase of U.S. Treasury notes   (14,000)   (12,500)
Securities maturities, prepayments and calls:          
Held to maturity   765    1,050 
Available for sale   18    9 
Loans originated for investment, net of principal collected   4,265    1,612 
Proceeds from sale of real estate owned   (434)   (654)
Additions to premises and equipment, net   (3)   (127)
Net cash used in investing activities   (5,172)   (10,610)
           
Cash flows from financing activities:          
Net change in deposits   (1,687)   (3,345)
Payments by borrowers for taxes and insurance, net   (349)   (330)
Proceeds from Federal Home Loan Bank advances   21,000    15,000 
Repayments on Federal Home Loan Bank advances   (4,256)   (1,537)
Dividends paid on common stock   (561)   (567)
Treasury stock repurchases   (61)   (45)
Net cash provided by financing activities   14,086    9,176 
           
Net decrease in cash and cash equivalents   9,591    (891)
           
Beginning cash and cash equivalents   5,735    5,049 
           
Ending cash and cash equivalents  $15,326   $4,158 

  

See accompanying notes.

 

6
 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

   Six months ended 
   December 31, 
   2012   2011 
         
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Federal income taxes  $945   $650 
           
Interest on deposits and borrowings  $823   $1,216 
           
Transfers from loans to real estate acquired through foreclosure, net  $(352)  $(2,280)
           
Loans made on sale of real estate acquired through foreclosure  $407   $2,375 
           
Deferred gain on sale of real estate acquired through foreclosure  $   $665 
           
Capitalization of mortgage servicing rights  $18   $3 

 

See Note 2 for noncash transactions related to the acquisition.

 

See accompanying notes.

 

7
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(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 purchase method of accounting and resulted in the recordation of bargain purchase gain of $958,000. See additional discussion in Note 2.

 

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 three- and six-month periods ended December 31, 2012, are not necessarily indicative of the results which may be expected for an entire fiscal year and do not include any results of operations associated with CKF Bancorp or Central Kentucky FSB. The consolidated balance sheet as of June 30, 2012 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 2012 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, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

 

Unsecured consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan.

 

8
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(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, economic conditions, 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.

 

Real estate loans are individually evaluated for impairment. 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, 2012

(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, farms, commercial (non-mortgage) and consumer and other loans. The residential real estate segment is our primary lending activity and it enables a borrower 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 may lend to builders for construction of speculative or custom residential properties 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 have 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.

 

Summary of New Significant Accounting Policies:

 

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, 2012

(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 will be 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. Once management has finalized the fair values of acquired assets and assumed liabilities within this twelve month period, management 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. Bank Acquisition

 

On December 31, 2012 (the “Acquisition Date”), the Company acquired 100% of CKF Bancorp, the savings and loan holding company for Central Kentucky FSB in exchange for cash and common shares of the Company’s stock. Under the terms of the acquisition CKF Bancorp shareholders received approximately 811,275 shares of Company common stock and an aggregate of $5.1 million in cash. The fair value of the common shares issued as part of the consideration paid for CKF Bancorp was determined based on the closing price of the Company’s common shares on the acquisition date. CKF Bancorp maintained its main headquarters in Danville, Kentucky, as well as two branches – one in Danville and the other in Lancaster, Kentucky. CKF Bancorp was merged into the Company and Central Kentucky FSB was merged into First Federal Savings Bank of Frankfort. With the acquisition the Company has expanded its customer base in the central Kentucky area with an institution that shares its community banking orientation and thrift heritage and that enjoys a favorable reputation within its local community. Because the acquisition occurred on December 31, 2012, there are no results of operations of CKF Bancorp included in the Company’s results of operations. Acquisition-related costs of $281,000 and $118,000 are included in the Company’s consolidated statement of income for the six months ended December 31, 2012 and 2011, respectively. The Company has determined that the acquisition constitutes a business acquisition as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values as required by the accounting guidance. Fair values were determined based on the requirements of ASC Topic 820, Fair Value Measurements.

 

11
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(unaudited)

 

2. Bank Acquisition (continued)

 

In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events which are highly subjective in nature and are subject to change. The assets acquired and liabilities assumed in the transaction are presented at estimated fair value on the Acquisition Date. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition, as additional information relative to Acquisition Date fair values becomes available. Given the short period of time from our closing date until our Form 10-Q filing date, we have not yet completed our evaluation of fair values. We continue to work with our third party vendor to finalize these estimates.

 

The Company paid approximately $11.1 million ($5.1 million in cash and $6.0 million in stock) for CKF Bancorp. A summary of the net assets acquired as of December 31, 2012, follows:

 

(in thousands)  December 31, 2012 
     
Consideration     
Kentucky First Federal Bancorp common stock:     
811,275 shares at $7.45/share closing price 12/31/12  $6,044 
Cash   5,070 
Fair Value of Total Consideration Transferred  $11,114 
      
Recognized amounts of identifiable assets acquired and liabilities assumed     
Assets acquired:     
Cash and due from banks  $895 
Interest-bearing demand deposits   7,524 
Securities available for sale   8 
Securities, held-to-maturity   10,778 
Loans   94,086 
Real estate owned, net   1,642 
Premises and equipment, net   2,119 
Federal Home Loan Bank stock, at cost   2,091 
Accrued interest receivable   435 
Prepaid FDIC assessments   212 
Accrued federal income taxes   35 
Deferred federal income taxes   785 
Prepaid expenses and other assets   142 
Total assets acquired  $120,752 
      
Liabilities assumed     
Deposits  $101,477 
FHLB Advances   7,139 
Advances by borrowers for taxes and insurance   30 
Accrued interest payable   18 
Other liabilities   16 
Total liabilities assumed   108,680 
      
Total identifiable net assets  $12,072 
Bargain purchase gain  $958 

 

12
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(unaudited)

 

2. Bank Acquisition (continued)

 

Fair value adjustments:     
Securities, held-to-maturity  $369 
Loans   (1,133)
Other real estate owned   (27)
Real estate premises operated as banking facilities   464 
Deposits   (1,091)
Premium on FHLB Advances   (139)
Total fair value adjustments  $(1,557)

 

The following is a description of the methods used to determine the fair values of significant assets and liabilities at the Acquisition Date presented above.

 

Cash and Due from Banks and Interest-bearing Deposits in Banks – The Company acquired $8.4 million in cash and cash equivalents. The carrying amount of these assets, adjusted for any cash items deemed uncollectible by management, was determined to be a reasonable estimate of fair value based on their short-term nature.

 

Investment Securities – The Company acquired $10.8 million in securities at fair value. Federal Home Loan Bank stock totaling $2.1 million was acquired at cost, as it is not practicable to determine its fair value because of restrictions on its marketability.

 

Loans – The Company acquired approximately $94.1 million in loans with and without evidence of credit quality deterioration. The loans acquired consist of residential real estate, commercial real estate, real estate construction, commercial and consumer loans.

 

At the acquisition date, the Company recorded $85.1 million of loans without evidence of credit quality deterioration and $9.0 million of purchased credit-impaired loans subject to nonaccretable difference of $1.8 million. The acquired loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Fair values for loans were based on discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting current market rates for new originations of comparable loans adjusted for the risk inherent in the cash flow estimates. Certain loans that were determined to be collateral dependent were valued based on the fair value of the underlying collateral. These estimates were based on the most recently available real estate appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the collateral.

 

13
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(unaudited)

 

2. Bank Acquisition (continued)

 

(in thousands)  Non-impaired
Purchased
Loans
   Credit-impaired
Purchased
Loans
 
         
Real estate mortgage loans:          
Residential:          
1-4 Family  $65,159   $4,473 
Multi-family   2,081     
Construction   1,272    1,025 
Farm   1,911     
Nonresidential and land   10,775    2,505 
Commercial non-mortgage loans   2,241    946 
Consumer loans   1,659    39 
           
Total loans  $85,098   $8,988 

 

The composition of acquired loans at December 31, 2012 follows:

 

(in thousands)  Contractual
Amount
   Fair Value
Adjustments
   Fair Value 
             
Real estate mortgage loans:               
Residential:               
1-4 Family  $71,574   $(1,940)  $69,634 
Multi-family   2,109    (28)   2,081 
Construction   2,450    (153)   2,297 
Farm   1,937    (26)   1,911 
Nonresidential and land   13,799    (520)   13,279 
Commercial non-mortgage loans   3,417    (231)   3,186 
Consumer loans   1,812    (114)   1,698 
                
Total loans  $97,098   $(3,012)  $94,086 

 

Loans purchased in the acquisition are accounted for using one of two following accounting standards:

 

·ASC Topic 310-20 is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expect to collect all contractually required payments from the borrower. For these loans, the difference between fair value of the loan at acquisition and the amortized cost of the loan would be amortized or accreted into income using the interest method.
·ASC Topic 310-30 is used to value loans with post origination credit quality deterioration. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC 310-30, the expected cash flows that exceed the initial investment in the loan (fair value) represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. The excess of the loan’s contractual principal and interest over the expected cash flows is the nonaccretable difference.

 

14
 

 

  

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(unaudited)

 

2. Bank Acquisition (continued)

 

The following table presents the purchased loans that are included within the scope of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality as of December 31, 2012.

 

(in thousands)    
     
Contractually-required principal and interest payments  $10,858 
Non-accretable difference   (1,752)
Accretable yield   (118)
Fair value of loans  $8,988 

 

Core Deposit Intangible – This intangible asset represents the value of the relationships that Central Ky FSB had with its deposit customers. The fair value of this intangible asset will be estimated based on a discounted cash flow methodology that gave appropriate consideration to the type of deposit, deposit retention, cost of the deposit base, and net maintenance cost attributable to customer deposits. This analysis has not yet been completed, but preliminary calculations indicate that the amounts are not significant.

 

OREO – The Company acquired $1.6 million in other real estate owned in the acquisition after a $27,000 fair value adjustment as of the Acquisition Date. OREO is presented at fair value, which is estimated value that management expects to receive when the property is sold, net of related costs to sell. These estimates were based on the most recently available real estate appraisals, with certain adjustments made based on the type of property, age of appraisal, current status of the property and othe related factors to estimate the current value of the property.

 

Deposits - The Company assumed $101.5 million in deposits at estimated fair value. Savings accounts and demand deposit accounts totaled $22.5 million, while certificates of deposit had face value of $77.9 million. The Company recorded a premium associated with the certificates of deposit of $1.1 million due to the interest rates associated with the time deposits, which caused those deposits to be valued at $79.0 million.

 

The following table presents pro forma information as if the acquisition had occurred at the beginning of the periods presented (July 1, in this case.) The pro forma information includes adjustments for interest expense on time deposits and the related income tax effects but excluded any bargain purchase gain or its related income tax effect. Other adjustments are not anticipated to have a material impact on the pro forma information. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

 

   Six months ended   Three months ended 
   December 31,   December 31, 
(in thousands, except per share data)  2012   2011   2012   2011 
                 
Net interest income  $6,051   $6,199   $3,025   $3,156 
                     
Net income (loss)  $791   $(30)  $143   $(610)
                     
Basic and diluted earnings (loss) per share  $0.09   $(0.00)  $0.02   $(0.07)

 

15
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

3. 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, 
   2012   2011 
         
Net income  $1,449   $809 
Less earnings allocated to unvested shares        
           
Net income allocated to common shareholders, basic and diluted  $1,449   $809 

 

   Three months ended December 31, 
   2012   2011 
         
Net income  $927   $388 
Less earnings allocated to unvested shares        
           
Net income allocated to common shareholders, basic and diluted  $927   $388 

 

 

   Six months ended December 31, 
   2012   2011 
Basic          
Weighted-average common shares including unvested Common shares outstanding   7,544,654    7,544,432 
Less: Weighted-average unvested common shares        
Weighted-average common shares outstanding   7,544,654    7,544,432 
Diluted          
Add: Dilutive effect of assumed exercise of stock options   -    - 
           
Weighted-average common shares outstanding (diluted)   7,544,654    7,544,432 

 

   Three months ended December 31, 
   2012   2011 
Basic          
Weighted-average common shares including unvested Common shares outstanding   7,544,233    7,547,047 
Less: Weighted-average unvested common shares        
Weighted-average common shares outstanding   7,544,233    7,547,047 
Diluted          
Add: Dilutive effect of assumed exercise of stock options   -    - 
           
Weighted-average common shares outstanding (diluted)   7,544,233    7,547,047 

 

16
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

3. Earnings Per Share (continued)

 

There were 309,800 stock option shares outstanding for the three- and six-month periods ended December 31, 2012. There were 325,800 stock option shares outstanding for the three- and six-month period ended December 31, 2011. The stock option shares outstanding were antidilutive for the respective periods.

 

4. 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, 2012 and June 30, 2012, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains:

 

   December 31, 2012 
       Gross   Gross   Estimated 
   Carrying   unrealized   unrealized   fair 
   Value   gains   losses   value 
   (In thousands) 
Available-for-sale Securities                    
Agency mortgage-backed: residential  $166   $5   $   $171 
Equity securities   8            8 
   $174   $5   $   $179 
                     
Held-to-maturity Securities                    
U.S. Treasury securities and U.S. Government agencies  $21,996   $   $   $21,996 
Agency mortgage-backed: residential   6,773    340        7,113 
   $28,769   $340   $   $29,109 

 

   June 30, 2012 
       Gross   Gross   Estimated 
   Amortized   unrealized   unrealized   fair 
   cost   gains   losses   value 
Available-for-sale Securities                    
Agency mortgage-backed: residential  $185   $4   $-   $189 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $4,756   $388   $-   $5,144 

 

Our securities holdings consist of U.S. Treasury securities, U.S. Government agency bonds and agency mortgage-backed securities, which do not have a single maturity date. Our pledged securities at December 31, 2012, totaled $3.7 million. None of our securities were pledged at June 30, 2012.

 

There were no sales of investment securities during the fiscal year ended June 30, 2012 nor the three- or six-month periods ended December 31, 2012.

 

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.

 

17
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

5. Loans receivable

 

The composition of the loan portfolio was as follows:

 

   December 31,   June 30, 
(in thousands)  2012   2012 
         
Residential real estate          
One- to four-family  $211,770   $149,086 
Multi-family   17,957    15,495 
Construction   3,992    964 
Farm   1,911     
Nonresidential real estate and land   24,025    11,098 
Commercial nonmortgage and other   3,186     
Consumer and loans on deposits   10,702    7,146 
    273,543    183,789 
Less:          
Undisbursed portion of loans in process   535    544 
Deferred loan origination fees (cost)   (102)   (103)
Allowance for loan losses   1,180    875 
   $271,930   $182,473 

 

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 
Farm                    
Nonresidential real estate and land   35    24            59 
Commercial nonmortgage and other                    
Consumer and other   23    (10)           13 
Unallocated   200                200 
Totals  $875   $418   $113   $   $1,180 

 

18
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2011:

(in thousands)  Beginning
balance
   Provision
for loan
losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                         
One- to four-family  $490   $69   $4   $   $555 
Multi-family   11    18            29 
Construction   5    (4)           1 
Nonresidential real estate and land   36    (1)           35 
Consumer and other   22                22 
Unallocated   200                200 
Totals  $764   $82   $4   $   $842 

 

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 
Farm                    
Nonresidential real estate and land   35    24            59 
Commercial nonmortgage and other                    
Consumer and other   23    (10)           13 
Unallocated   200                200 
Totals  $873   $392   $85   $   $1,180 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2011:

 

(in thousands)  Beginning
balance
   Provision
for loan
losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                         
One- to four-family  $490   $69   $4   $   $555 
Multi-family   19    10            29 
Construction   1                1 
Nonresidential real estate and land   33    2            35 
Consumer and other   21    1            22 
Unallocated   200                200 
Totals  $764   $82   $4   $   $842 

 

19
 

 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2012

(unaudited)

 

5. Loans receivable (continued)

 

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, 2012. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality.

 

(in thousands)  Recorded
investment
in loans
   Ending
allowance
attributed to
loans
   Unallocated
allowance
   Total
allowance
 
Loans individually evaluated for impairment:                    
Residential real estate:                    
One- to four-family  $3,918   $35   $   $35 
Multi-family                
Construction                
Nonresidential real estate and land                
Loans on deposits                
Consumer and other                
Purchased credit-impaired loans   8,988             
   $12,906   $35   $   $35 
                     
Loans collectively evaluated for impairment:                    
Residential real estate:                    
One- to four-family  $198,614   $777   $   $777 
Multi-family   17,957    87        87 
Construction   3,992    9        9 
Farm   1,911             
Nonresidential real estate and land   24,025    59        59 
Commercial nonmortgage and other   3,186             
Consumer and other   10,702    13        13 
Unallocated           200    200 
    260,387    945    200    1,145 
   $273,293   $980   $200   $1,180 

 

20
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2012

(unaudited)

 

5. Loans receivable (continued)

 

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 June 30, 2012. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality. There were no loans acquired with deteriorated credit quality at June 30, 2012.

 

(in thousands)  Recorded
investment in
loans
   Ending
allowance
attributed to
loans
   Unallocated
allowance
   Total
allowance
 
Loans individually evaluated for impairment:                    
Residential real estate:                    
One- to four-family  $2,757   $97   $   $97 
                     
Loans collectively evaluated for impairment:                    
Residential real estate:                    
One- to four-family  $146,329   $468   $   $468 
Multi-family   15,495    49        49 
Construction   964    3        3 
Nonresidential real estate and land   11,098    35        35 
Loans on deposits   2,281    7        7 
Consumer and other   4,865    16        16 
Unallocated           200    200 
    181,032    578    200    778 
   $183,789   $675   $200   $875 

 

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

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
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 

 

21
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2012

(unaudited)

 

5. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the twelve months ended June 30, 2012:

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income 
Recognized
 
                     
With no related allowance recorded:                         
One- to four-family  $1,222   $   $889   $45   $45 
                          
With an allowance recorded:                         
One- to four-family   1,535    97    1,434    27    27 
   $2,757   $97   $2,323   $72   $72 

 

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, 2012, and June 30, 2012:

 

   December 31, 2012   June 30, 2012 
(in thousands)  Nonaccrual   Loans Past
Due Over 90
Days Still
Accruing
   Nonaccrual   Loans Past
Due Over 90
Days Still
Accruing
 
                 
One- to four-family residential real estate  $966   $2,862   $1,593   $201 
Purchased credit-impaired loans   3,286    566         
   $4,252   $3,428   $1,593   $201 

 

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, 2012, the Company had $826,000 of loans classified as TDRS of which approximately 40.0% 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 36.7% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of his debt to the Banks.

 

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

 

22
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2012

(unaudited)

 

5. Loans receivable (continued)

 

The following table presents loans by class modified as TDRs during the three and six months ended December 31, 2012 and the year ended June 30, 2012, and their performance, by modification type:

 

Dollars in thousands  Number
of Loans
   Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
   TDRs
Performing
to Modified
Terms
   TDRs Not
Performing
to
Modified
Terms
 
                     
Three months ended December 31, 2012                         
Residential Real Estate:                         
1-4 Family   3   $600   $600   $600   $- 
                          
Six months ended December 31, 2012                         
Residential Real Estate:                         
1-4 Family   11   $668   $672   $670   $- 
                          
Twelve months ended June 30, 2012                         
Residential Real Estate:                         
1-4 Family   4   $179   $188   $187   $- 

 

The Company had no allocated specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2012, and had $2,000 of specific reserves at June 30, 2012. The Company had no commitments to lend on loans classified as TDRs at December 31, 2012 or June 30, 2012.

 

The TDRs described above did not increase the allowance for loan losses and did not result in charge offs during the three or six months ended December 31, 2012. There were no TDRs that defaulted during the three- or six-month periods ended December 31, 2012 or over the previous twelve months.

 

At June 30, 2012, the Company had $820,000 of loans classified as TDRs.

 

23
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2012

(unaudited)

 

5. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of December 31, 2012, by class of loans:

 

(in thousands)  30-89 Days
Past Due
   Greater than
90 Days Past
Due
   Total
Past Due
   Loans Not
Past Due
   Total 
                     
Residential real estate:                         
One-to four-family  $6,205   $7,362   $13,567   $197,953   $211,770 
Multi-family               17,957    17,957 
Construction   19    54    73    3,919    3,992 
Farm               1,911    1,911 
Nonresidential real estate and land               24,025    24,025 
Commercial non-mortgage       229    229    2,957    3,186 
Consumer and other   102    35    137    10,565    10,702 
Total  $6,326   $7,680   $14,006   $259,287   $273,293 

 

The following table presents the aging of the principal balance outstanding in past due loans as of June 30, 2012, by class of loans:

 

(in thousands)  30-89 Days
Past Due
   Greater than
90 Days Past
Due
   Total
Past Due
   Loans Not
Past Due
   Total 
                     
Residential real estate:                         
One-to four-family  $4,332   $1,794   $6,126   $142,960   $149,086 
Multi-family               15,495    15,495 
Construction               964    964 
Nonresidential real estate and land               11,098    11,098 
Loans on deposits               2,281    2,281 
Consumer and other               4,865    4,865 
Total  $4,332   $1,794   $6,126   $177,663   $183,789 

 

24
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2012

(unaudited)

 

5. 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, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Not rated 
                     
Residential real estate:                         
One- to four-family  $   $7,032   $11,194   $   $193,294 
Multi-family   16,200    207    1,550         
Construction   2,967        1,025         
Farm   1,693    218             
Nonresidential real estate and land   18,069    2,143    3,813         
Commercial non-mortgage   2,189    51    946         
Consumer and other       159    39        10,504 
   $41,118   $9,810   $18,567   $   $203,798 

 

25
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

5. Loans receivable (continued)

 

At June 30, 2012, the risk category of loans by class of loans was as follows:

 

(in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Not rated 
                     
Residential real estate:                         
One- to four-family  $   $64   $3,057   $   $145,965 
Multi-family   12,692        2,803         
Construction   964                 
Nonresidential real estate and land   10,831    267             
Loans on deposits                   2,281 
Consumer and other                   4,865 
   $24,487   $331   $5,860   $   $153,111 

 

6. 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, 2012

(unaudited)

 

6. 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.

 

Purchased Credit Impaired Loans

 

The Company purchased a group of loans more fully described in Note 2, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income ove the remaining life of the loan or pool (accretable yield.) The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference.) Over the life of the loan or pool expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

 

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, 2012

(unaudited)

 

6. 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, 2012                    
Agency mortgage-backed: residential  $171   $   $171   $- 
Equity securities   8        8    - 
   $179   $   $179   $ 
                     
June 30, 2012                    
Agency mortgage-backed: residential  $189   $-   $189   $- 

 

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

 

       Fair Value Measurements Using 
       Quotes 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, 2012                    
Impaired loans                    
One- to four-family  $630   $-   $-   $630 
Other real estate owned, net                    
One- to four-family   648    -    -    648 
                     
June 30, 2012                    
Impaired loans                    
One- to four-family  $807   $-   $-   $807 
Multi-family   631    -    -    631 
Other real estate owned, net                    
One- to four-family   648    -    -    648 
Multi-family   233    -    -    233 

 

Impaired loans with allocated allowance for loan losses had a carrying amount of $665,000 and $1.5 million at December 31, 2012 and June 30, 2012, with specific valuation allowance of $35,000 and $97,000 at December 31, 2012 and June 30, 2012, respectively. No specific allowance provision was made for the three month or six month periods ended December 31, 2012. A specific provision of $41,000 was made for the three and six month periods ended December 31, 2011. Other real estate owned measured at fair value less costs to sell, had a carrying amount of $648,000 and $881,000 at December 31, 2012 and June 30, 2012. Additional write-down of $25,000 charged for the three and six months ended December 31, 2012, while a write-down of $58,000 occurred in the year ended June 30, 2012. An other real estate owned write-down of $38,000 and $48,000 was made for the three and six month periods ended December 31, 2011, respectively.

 

28
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

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

 

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, 2012:

 

             Range
   Fair Value   Valuation  Unobservable  (Weighted
   (in thousands)   Technique(s)  Input(s)  Average)
Impaired Loans:              
Residential real estate              
1-4 family  $630   Sales comparison approach  Adjustments for differences between comparable sales  3.1% to 19.8% (4.3%)
               
Foreclosed and repossessed assets:              
1-4 family  $648   Sales comparison approach  Adjustments for differences between comparable sales  0.5% to 18.6% (8.6%)

 

The following is a disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated statement of financial condition, 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, 2012 and June 30, 2012:

 

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.

 

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.

 

29
 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

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

 

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, 2012 and June 30, 2011, 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, 2012 and June 30, 2012 are as follows:

 

   Fair Value Measurements at 
   Carrying   December 31, 2012 Using 
   Value   Level 1   Level 2   Level 3   Total 
Financial assets               
Cash and cash equivalents  $15,326   $15,326             $15,326 
Interest-earning deposits   100    100              100 
Available-for-sale securities   179        $179         179 
Held-to-maturity securities   28,769         29,109         29,109 
Loans held for sale   440         452         452 
Loans receivable - net   271,930             $282,108    282,108 
Federal Home Loan Bank stock   7,732                   n/a 
Accrued interest receivable   899         27    872    899 
                          
Financial liabilities                         
Deposits  $234,342   $74,642   $160,522        $235,164 
Federal Home Loan Bank advances   50,948         54,457         54,457 
Advances by borrowers for taxes and insurance   168              168    168 
Accrued interest payable   55    1    54         55 

 

30
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2012

(unaudited)

 

6. 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, 2012 were as follows:

 

   Fair Value Measurements at 
(in thousands)  Carrying   June 30, 2012 Using 
   Value   Level 1   Level 2   Level 3   Total 
Financial assets                         
Cash and cash equivalents  $5,735   $5,735             $5,735 
Interest-earning deposits   100    100              100 
Available-for-sale securities   189        $189         189 
Held-to-maturity securities   4,756         5,144         5,144 
Loans held for sale   481         500         500 
Loans receivable - net   182,473             $190,354    190,354 
Federal Home Loan Bank stock   5,641                   n/a 
Accrued interest receivable   497              497    497 
                          
Financial liabilities                         
Deposits  $134,552   $51,069   $83,906        $134,975 
Federal Home Loan Bank advances   27,065         29,429         29,429 
Advances by borrowers for taxes and insurance   487             $487    487 
Accrued interest payable   64         64         64 

 

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.

 

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, 2012.

 

Average Balance Sheets

 

The following table represents the average balance sheets for the three and six month periods ended December 31, 2012 and 2011, 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, 
   2012   2011 
   Average
Balance
   Interest
And
Dividends
   Yield/
Cost
   Average
Balance
   Interest
And
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $181,092   $4,608    5.09%  $184,741   $4,936    5.34%
Mortgage-backed securities   5,559    97    3.49    6,583    139    4.22 
Other securities   100            372    1    0.54 
Other interest-earning assets   10,149    134    2.64    11,056    112    2.03 
Total interest-earning assets   196,900    4,839    4.92    202,752    5,188    5.12 
                               
Less: Allowance for loan losses   (864)             (764)          
Non-interest-earning assets   24,926              24,810           
Total assets  $220,962             $226,798           
                               
Interest-bearing liabilities:                              
Demand deposits  $12,339   $14    0.23%  $12,758   $16    0.25%
Savings   37,260    120    0.64    35,656    150    0.84 
Certificates of deposit   82,074    446    1.09    90,992    721    1.58 
Total deposits   131,673    580    0.88    139,406    887    1.27 
Borrowings   26,416    234    1.77    25,212    311    2.47 
Total interest-bearing liabilities   158,089    814    1.03    164,618    1,198    1.46 
                               
Noninterest-Bearing demand deposits   1,487              1,129           
Noninterest-bearing liabilities   2,644              2,363           
Total liabilities   162,220              168,110           
                               
Shareholders’ equity   58,742              58,688           
Total liabilities and shareholders’ equity  $220,962             $226,798           
Net interest income/average yield       $4,025    3.89%       $3,990    3.66%
Net interest margin             4.09%             3.94%
Average interest-earning assets to average interest-bearing liabilities             124.55%             123.17%

 

32
 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

   Three Months Ended December 31, 
   2012   2011 
   Average
Balance
   Interest 
And
Dividends
   Yield/
Cost
   Average
Balance
   Interest
And
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $180,440   $2,295    5.09%  $185,027   $2,470    5.34%
Mortgage-backed securities   6,322    46    2.91    6,349    67    4.22 
Other securities   100            643    1    0.62 
Other interest-earning assets   9,653    73    3.03    10,259    56    2.18 
Total interest-earning assets   196,515    2,414    4.91    202,278    2,594    5.13 
                               
Less: Allowance for loan losses   (869)             (764)          
Non-interest-earning assets   28,910              24,706           
Total assets  $224,556             $226,220           
                               
Interest-bearing liabilities:                              
Demand deposits  $16,195   $7    0.17%  $13,069   $6    0.18%
Savings   37,358    57    0.61    36,086    61    0.68 
Certificates of deposit   81,126    212    1.05    89,633    336    1.50 
Total deposits   134,679    276    0.82    138,788    403    1.16 
Borrowings   26,795    99    1.48    25,328    151    2.38 
Total interest-bearing liabilities   161,474    375    0.93    164,116    554    1.35 
                               
Noninterest-Bearing demand deposits   1,487              1,082           
Noninterest-bearing liabilities   2,609              2,234           
Total liabilities   165,570              167,432           
                               
Shareholders’ equity   58,986              58,788           
Total liabilities and shareholders’ equity  $224,556             $226,220           
Net interest income/average yield       $2,039    3.98%       $2,040    3.78%
Net interest margin             4.15%             4.03%
Average interest-earning assets to average interest-bearing liabilities             121.70%             123.25%

 

Discussion of Financial Condition Changes from June 30, 2012 to December 31, 2012

 

Assets: At December 31, 2012, the Company’s assets totaled $352.4 million, an increase of $129.5 million, or 58.1%, from total assets at June 30, 2012. This increase was attributed primarily to the acquisition of CKF Bancorp. See Footnote 2 under “Item 1: Financial Information.”

 

Cash and cash equivalents: Cash and cash equivalents increased by $9.6 million or 167.2% to $15.3 million at December 31, 2012.

 

Loans: Loans receivable, net, increased by $89.4 million to $271.9 million at December 31, 2012, due primarily to the acquisition of CKF Bancorp. See Footnote 2 under “Item 1, Financial Information.” 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.

 

33
 

 

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, 2012 to December 31, 2012 (continued)

 

Non-Performing Loans:  At December 31, 2012, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $3.8 million, or 2.1% of total loans (excluding loans purchased in the acquisition referenced in Note 2), compared to $1.8 million or 0.98%, of total loans at June 30, 2012.  The Company’s allowance for loan losses totaled $1.2 million and $875,000 at December 31, 2012, and June 30, 2012, respectively. The allowance for loan losses at December 31, 2012, represented 30.8% of nonperforming loans and 0.66% of total loans (excluding loans purchased in the acquisition referenced in Note 2), while at June 30, 2012, the allowance represented 48.8% of nonperforming loans and 0.48% of total loans.

 

The Company had $11.7 million in assets classified as substandard for regulatory purposes at December 31, 2012, including loans ($9.8 million) and real estate owned (“REO”) ($1.9 million), excluding both loans and REO acquired in the CKF Bancorp transaction. Classified loans as a percentage of total loans (net of loans acquired on December 31, 2012) was 2.1% and 3.2% at December 31, 2012 and June 30, 2012, respectively. All substandard loans were secured by residential property on which the Banks have priority lien position.

 

The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated and excludes assets purchased in the acquisition more fully described in Note 2 under “Part I, Financial Information”:

 

   December 31,
2012
   June 30, 2012 
         
Substandard assets  $11,675   $8,305 
Doubtful assets        
Loss assets        
Total classified assets  $11,675   $8,305 

 

Based on our current evaluation of the loan portfolio purchased, the Company acquired $8.9 million in net substandard loans and $1.6 million in REO, for an additional $10.5 million in substandard assets.

 

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

 

   December 31,   June 30, 
   2012   2012 
   Number of
Properties
   Net Carrying
Value
   Number of
Properties
   Net Carrying
Value
 
(dollars in thousands)                
Single family, owner occupied    76   $5,604    57   $5,190 
Single family, non-owner occupied   2    627    9    633 
2-4 family, owner occupied   1    37    1    37 
Multi-family   2    2,182         
Non-residential    1    1,309         
Total substandard loans    82   $9,759    67   $5,860 

 

34
 

 

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, 2012 to December 31, 2012 (continued)

 

The following table presents the aggregate carrying value of REO (including REO acquired on December 31, 2012) at the dates indicated:

 

   December 31, 2012   June 30, 2012 
   Number       Number   Net 
   of   Carrying   of   Carrying 
   Properties   Value   Properties   Value 
                 
Single family, non-owner occupied   6   $665    7   $765 
2-4 family, owner-occupied   9    1,218    11    1,432 
5 or more family, non-owner-occupied           1    233 
Building lot   3    33    1    15 
Acquired REO   40    1,642         
Total REO   58   $3,558    20   $2,445 

 

At December 31 2012, and June 30, 2012, the Company had $1.1 million and $331,000 of loans classified as special mention, respectively excluding CKF. Special mention loans acquired from CKF total $8.7 million. 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, 2012, the Company’s investment securities had increased $24.0 million to $28.9 million, due in part to the acquisition more fully described in Note 2 under “Item 1, Financial Information” and the purchase of a $14.0 million short-term U.S. Treasury note. The investment acquired in the CKF Bancorp transaction include primarily U.S. Government agency bonds and mortgage-backed securities. The Treasury note had matured prior to the filing of this document.

 

Liabilities: At December 31, 2012, the Company’s liabilities totaled $286.7 million, an increase of $122.6 million, or 74.7%, from total liabilities at June 30, 2012. The increase in liabilities was attributed primarily to the acquisition more fully described in Note 2 under “Item 1, Financial Information” as well as short-term borrowing to fund the acquisition of a $14.0 million U.S. Treasury note. In addition to the liabilities assumed in the acquisition of CKF Bancorp, the Company borrowed $5.1 million in FHLB Advances to provide funds for the cash portion of the transaction. FHLB Advances increased $23.9 million from $27.1 million at June 30, 2012 to $50.9 million at December 31, 2012. The $14.0 million advance utilized to fund the purchase of the U.S. Treasury note was repaid with proceeds received from the maturity of the investment. Deposits increased $99.8 million or 74.2% to $234.3 million at December 31, 2012, primarily as a result of the acquisition more fully described in Note 2. The deposits acquired in the CKF Bancorp transaction are expected to remain with the Company except for normal run-off, as no hot money deposits have been identified.

 

Shareholders’ Equity: At December 31, 2012, the Company’s shareholders’ equity totaled $65.8 million, an increase of $6.9 million or 11.8% from the June 30, 2012 total. The change in shareholders’ equity is primarily associated with the acquisition more fully described in Note 2 under “Item 1, Financial Information”, as a portion of the consideration was paid in stock.

 

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, 2012 to December 31, 2012 (continued)

 

The Company paid dividends of $560,000 or 38.6% of net income for the six-month period just ended and $283,000 or 30.5% of net income for the three-month period just ended. The Company received notice from the Federal Reserve Board on September 27, 2012, 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 August 23, 2012, the members of First Federal MHC approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock by casting  64.3% of the eligible votes in favor of the waiver. At December 31, 2012, capital on a consolidated basis and at each of the banks exceeded the level necessary to be considered “well capitalized” and was sufficient, in management’s opinion, to support foreseeable growth. Management cannot speculate on future dividend levels. 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, 2012 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Six-Month Periods Ended December 31, 2012 and 2011

 

General

 

Net income totaled $1.4 million for the six months ended December 31, 2012, an increase of $640,000 or 79.1% from net income of $809,000 for the same period in 2011. The increase was primarily attributable to the bargain purchase gain recorded coincident with the acquisition which occurred on December 31, 2012.

 

Net Interest Income

 

Net interest income before provision for loan losses increased $35,000 or 0.9% and, therefore, remained at $4.0 million for the six month period just ended, while provision for loan losses of $418,000 caused net income after provision for loan losses to decrease $301,000 or 7.7% to $3.6 million compared to $3.9 million for the prior year period. Core earnings remained relatively constant, while interest expense continued to decline at a faster pace than interest income declined. Interest income decreased by $349,000, or 6.7%, to $4.8 million, while interest expense decreased $384,000 or 32.1% to $814,000 for the six months ended December 31, 2012.

 

Interest income on loans decreased $328,000 or 6.6% to $4.6 million, due primarily to a decrease in the average rate earned on the loan portfolio. The average rate earned on loans outstanding for the six-month period ended December 31, 2012, decreased 25 basis points to 5.09% for the six months just ended, while the average balance of loans outstanding decreased $3.6 million to $181.1 million for the period just ended. Interest income on mortgage-backed residential securities decreased $42,000 or 30.2% to $97,000 for the six months ended December 31, 2012, 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 six-month period just ended.

 

Interest expense on deposits and borrowings both declined period to period. Interest expense on deposits decreased $307,000 or 34.6% to $580,000 for the six-month period ended December 31, 2012, while interest expense on borrowings decreased $77,000 or 24.8% to $234,000 for the same period. The decline in interest expense on deposits was attributed primarily to a reduction in the average rate paid on deposits. The average rate paid on deposits decreased 39 basis points to 0.88% for the most recent period, while the average balance of deposits decreased $7.7 million or 5.5% to $131.7 million. The decrease in interest expense on borrowings was attributed primarily to a lower rate paid on borrowings outstanding, which decreased 70 basis points to 1.77% for the most recent period, while the average balance of borrowings outstanding increased $1.2 million to $26.4 million for the recently ended six-month period.

 

36
 

 

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, 2012 and 2011 (continued)

 

Net Interest Income (continued)

 

Net interest margin increased from 3.94% for the prior year six-month period to 4.09% for the period ended December 31, 2012.

 

Provision for Losses on Loans

 

The Company recorded $418,000 in provision for losses on loans during the six months ended December 31, 2012, compared to a provision of $82,000 for the six months ended December 31, 2011. The Company recorded the provision to more closely align the Company’s loan loss reserves with changes in the composition of the loan portfolio, which includes additional non-owner-occupied one- to four-family residential loans. 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 $1.1 million for the six months ended December 31, 2012, an increase of $1.1 million from the same period in 2011. The primary contributor to this increase is the bargain purchase gain, which was recorded in connection with the acquisition of CKF Bancorp effective December 31, 2012. Please see Note 2 under “Item 1, Financial Information.” Also contributing to the increase in non-interest income was an increase in net gains on sales of loans, which totaled $111,000 for the recent period ended compared to $23,000 for the prior year period. In the current low interest rate environment the Company prefers to sell its long-term, fixed rate mortgage production rather than retain the loans in its portfolio, and the demand for that loan product was strong for the quarter just ended. Other real estate owned represented charges totaling $40,000 for the six month period just ended, compared to charges of $61,000 in the 2011 period. Net loss on sale of REO was $15,000 for the current period compared to a loss of $13,000 in the prior year period, while other-than-temporary impairment losses for the current period were $25,000 compared to $48,000 for the 2011 period.

 

Non-interest Expense

 

Non-interest expense totaled $2.7 million for the six months ended December 31, 2012 and 2011, with the current period reflecting a decrease of $40,000, or 1.4%, compared to the same period in 2011. The decrease was due primarily to lower professional fees paid. Legal fees and auditing and accounting fees (some of which were associated with the Company’s merger/acquisition plans announced November 3, 2011) decreased $103,000, and $18,000, respectively from period to period, while outside service fees increased $39,000 period to period. Foreclosure and OREO expenses (net) posted a net gain of $39,000 for the recent period compared to net expense of $32,000 for the prior year period, as rental income exceeded rental expense and occupancy rates were higher. The core deposit intangible created when the Company purchased First Federal of Frankfort became completely amortized in the fiscal year ended June 30, 2012. Consequently, amortization of intangible assets for the recently ended quarter was nil, compared to $65,000 for the prior year period. Employee compensation and benefits totaled $1.7 million for the recently-ended period compared to $1.5 million for the prior year period, a $152,000 or 10.0% increase, and was attributed primarily to higher retirement expense.

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $564,000 for the six months ended December 31, 2012, compared to $396,000 in the prior year period. The effective tax rates were 28.0% and 32.9% for the six-month periods ended December 31, 2012 and 2011, respectively.

 

37
 

 

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, 2012 and 2011

 

General

 

Net income totaled $927,000 for the three months ended December 31, 2012, an increase of $539,000 or 138.9% from net income of $388,000 for the same period in 2011. The increase was primarily attributable to the bargain purchase gain recorded coincident with the acquisition which occurred on December 31, 2012.

 

Net Interest Income

 

Net interest income before provision for loan losses decreased $1,000 and, therefore, remained at $2.0 million for the three month period just ended, while provision for loan losses of $392,000 caused net income after provision for loan losses to decrease $311,000 or 15.9% to $1.6 million compared to $2.0 million for the prior year period. Core earnings remained relatively constant. Interest income decreased by $180,000, or 6.9%, to $2.4 million, while interest expense decreased $179,000 or 32.3% to $375,000 for the three months ended December 31, 2012

 

Interest income on loans decreased $175,000 or 7.1% to $2.3 million, due primarily to a decrease in the average rate earned on the loan portfolio. The average rate earned on loans outstanding for the three-month period ended December 31, 2012, decreased 25 basis points to 5.09% for the three months just ended, while the average balance of loans outstanding decreased $4.6 million to $180.4 million for the period just ended. Interest income on mortgage-backed residential securities decreased $21,000 or 31.3% to $46,000 for the three months ended December 31, 2012, 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.

 

Interest expense on deposits and borrowings both declined period to period. Interest expense on deposits decreased $127,000 or 31.5% to $276,000 for the three-month period ended December 31, 2012, while interest expense on borrowings decreased $52,000 or 34.4% to $99,000 for the same period. The decline in interest expense on deposits was attributed primarily to a reduction in the average rate paid on the deposits. The average rate paid on deposits decreased 34 basis points to 0.82% for the most recent period, while the average balance of deposits decreased $4.1 million or 3.0% to $134.7 million. The decrease in interest expense on borrowings was attributed primarily to a lower rate paid on borrowings outstanding, which decreased 90 basis points to 1.48% for the most recent period, while the average balance of borrowings outstanding increased $1.4 to $26.8 million for the recently ended three-month period.

 

Net interest margin increased from 4.03% for the prior year quarterly period to 4.15% for the quarter ended December 31, 2012.

 

Provision for Losses on Loans

 

The Company recorded $392,000 in provision for losses on loans during the three months ended December 31, 2012, compared to an $82,000 provision for the three months ended December 31, 2011. The Company recorded the provision to increase the allowance to a level that management determined appropriate after charging off $85,000 in loans during the quarter and after considering changes in the composition of the loan portfolio, which include additional non-owner-occupied one- to four-family residential loans. 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.

 

38
 

 

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, 2012 and 2011 (continued)

 

Non-interest Income

 

Non-interest income totaled $1.0 million for the three months ended December 31, 2012, an increase of $986,000 from the same period in 2011. The primary contributor to this increase was the bargain purchase gain, which was recorded in connection with the acquisition of CKF Bancorp effective December 31, 2012. Please see Note 2 under “Item 1, Financial Information.” Also contributing to the increae in non-interest income was an increase in net gains on sales of loans totaled $53,000 for the recent quarterly period ended compared to $23,000 for the prior year quarter. Other real estate owned represented charges of $43,000 for the quarterly period ended December 31, 2012, compared to net charges of $34,000 in the prior year’s quarter. In the quarter ended December 31, 2012, the Company realized a net loss on the sale of REO of $18,000 as well as other-than-temporary impairment charges of $25,000.

 

Non-interest Expense

 

Non-interest expense totaled $1.4 million for the three months ended December 31, 2012 and 2011, with the current period reflecting an increase of $19,000, or 1.3%, compared to the same period in 2011. The decrease was primarily related to an increase in employee compensation and benefits, which increased $45,000 or 5.8% and was linked to higher retirement expense. Foreclosure and OREO expenses (net) was actually a net gain of $11,000 for the recently ended quarter compared to net expense of $15,000 for the prior year period, as rental income exceeded rental expense and occupancy rates were higher. The core deposit intangible created when the Company purchased First Federal of Frankfort became completely amortized in the fiscal year ended June 30, 2012. Consequently, amortization of intangible assets for the recently ended quarter was nil, compared to $32,000 for the prior year period.

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $307,000 for the three months ended December 31, 2012, compared to $190,000 in the prior year period. The effective tax rates were 24.9% and 32.9% for the three-month periods ended December 31, 2012 and 2011, respectively.

 

39
 

 

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, 2012, 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.

 

40
 

 

Kentucky First Federal Bancorp

 

PART II

 

ITEM 1.            Legal Proceedings

 

Not applicable.

 

ITEM 1A.         Risk Factors

 

Not applicable.

 

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, 2012.

 

          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, 2012      $        69,700 
November 1-30, 2012      $        69,700 
December 1-31, 2012      $        69,700 

 

(1)  On May 14, 2010, the Company announced the completion of the stock repurchase program begun on October 17, 2008 and initiated another program for the repurchase of up to 150,000 shares of its Common Stock. The Company has suspended its repurchase program, as certain regulations requiring Federal Reserve Bank of Cleveland (“FRB”) approval of stock repurchases became applicable to the Company upon the completion of its acquisition of CKF Bancorp, Inc. As of the date of this Form 10-Q, the Company has not determined whether or when to request FRB approval to resume stock repurchases.

 

ITEM 3.            Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.            Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5.            Other Information

 

None.

 

ITEM 6.            Exhibits

 

3.11Charter of Kentucky First Federal Bancorp
3.21Bylaws of Kentucky First Federal Bancorp, as amended and restated
4.11Specimen Stock Certificate of Kentucky First Federal Bancorp

10.1Employment Agreement between Kentucky First Federal Bancorp and William H. Johnson

10.2Employment Agreement between First Federal Savings Bank of Frankfort and William H. Johnson

31.1CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2CFO 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).

 

41
 

 

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 21, 2013   By: /s/Don D. Jennings
        Don D. Jennings
        Chief Executive Officer
         
Date: February 21, 2013   By: /s/R. Clay Hulette
        R. Clay Hulette
        Vice President and Chief Financial Officer

 

42