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EX-31.1 - Kentucky First Federal Bancorpv211445_ex31-1.htm
EX-32.1 - Kentucky First Federal Bancorpv211445_ex32-1.htm
EX-32.2 - Kentucky First Federal Bancorpv211445_ex32-2.htm
EX-31.2 - Kentucky First Federal Bancorpv211445_ex31-2.htm

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, 2010                    
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)
   

479 Main Street, Hazard, Kentucky  41702
(Address of principal executive offices)(Zip Code)
 
(606) 436-3860
(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  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 ¨    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 10, 2011, the latest practicable date, the Corporation had 7,740,703 shares of $.01 par value common stock outstanding.

 
 

 

INDEX

     
Page
       
PART I - 
ITEM 1
FINANCIAL INFORMATION
 
       
   
Consolidated Balance Sheets
3
       
   
Consolidated Statements of Operations
4
       
   
Consolidated Statements of Comprehensive Income (Loss)
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
24
       
 
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
32
       
 
ITEM 4
Controls and Procedures
32
       
PART II - OTHER INFORMATION
33
       
SIGNATURES
34

 
2

 

PART I
ITEM 1: Financial Information
Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)

   
December 31,
   
June 30,
 
   
2010
   
2010
 
         
(Restated)
 
ASSETS
           
             
Cash and due from financial institutions
  $ 1,209     $ 1,118  
Interest-bearing demand deposits
    4,609       7,244  
Cash and cash equivalents
    5,818       8,362  
                 
Interest-bearing deposits in other financial institutions
    100       100  
Securities available for sale
    224       246  
Securities held-to-maturity, at amortized cost- approximate fair value of $19,286 and $10,026 at December 31, and June 30, 2010, respectively
    18,880       9,435  
Loans held for sale
    202       370  
Loans
    190,206       192,153  
Allowance for loan and lease losses
    (1,567 )     (1,535 )
Real estate owned, net
    342       748  
Premises and equipment, net
    2,710       2,731  
Federal Home Loan Bank stock
    5,641       5,641  
Accrued interest receivable
    600       518  
Bank-owned life insurance
    2,563       2,518  
Goodwill
    14,507       14,507  
Other intangible assets
    153       218  
Prepaid FDIC assessments
    447       542  
Prepaid expenses and other assets
    611       385  
                 
Total assets
  $ 241,437     $ 236,939  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Deposits
  $ 143,270     $ 144,969  
Federal Home Loan Bank advances
    38,196       32,009  
Advances by borrowers for taxes and insurance
    154       335  
Accrued interest payable
    130       145  
Other liabilities
    1,530       1,673  
Total liabilities
    183,280       179,131  
                 
Commitments and contingencies
    -       -  
                 
Shareholders’ equity
               
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued
    -       -  
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued and outstanding
    86       86  
Additional paid-in capital
    36,851       36,623  
Retained earnings
    31,418       31,216  
Unearned employee stock ownership plan (ESOP)
    (2,078 )     (2,169 )
Treasury shares at cost, 806,375 and 745,530 common shares at December 31, and June 30, 2010, respectively
    (8,123 )     (7,952 )
Accumulated other comprehensive income
    3       4  
Total shareholders’ equity
    58,157       57,808  
                 
Total liabilities and shareholders’ equity
  $ 241,437     $ 236,939  

See accompanying notes.

 
3

 

Kentucky First Federal Bancorp
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)

   
Six months ended
   
Three months ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
         
(Restated)
         
(Restated)
 
Interest income
                       
Loans
  $ 5,159     $ 5,282     $ 2,577     $ 2,634  
Mortgage-backed securities
    193       252       93       123  
Other securities
    1       91       1       44  
Interest-bearing deposits and other
    119       134       55       64  
Total interest income
    5,472       5,759       2,726       2,865  
                                 
Interest expense
                               
Deposits
    1,420       1,841       681       891  
Borrowings
    404       807       161       391  
Total interest expense
    1,824       2,648       842       1,282  
                                 
Net interest income
    3,648       3,111       1,884       1,583  
                                 
Provision for losses on loans
    68       1,028       43       60  
                                 
Net interest income after provision for losses on loans
    3,580       2,083       1,841       1,523  
                                 
Non-interest income
                               
Earnings on bank-owned life insurance
    45       45       22       22  
Gain on sale of loans
    92       59       64       31  
Loss on sale of real estate acquired through foreclosure
    (36 )     (27 )     (39 )     (15 )
Other
    53       51       27       23  
Total non-interest income
    154       128       74       61  
                                 
Non-interest expense
                               
Employee compensation and benefits
    1,521       1,563       723       798  
Occupancy and equipment
    166       145       81       74  
Franchise taxes
    98       92       49       46  
Data processing
    126       112       64       59  
FDIC insurance premiums
    103       93       49       51  
Auditing and accounting
    87       76       49       42  
Amortization of intangible assets
    65       65       33       65  
Other operating
    442       327       234       142  
Total non-interest expense
    2,608       2,473       1,282       1,277  
                                 
Income (loss) before income taxes
    1,126       (262 )     633       307  
                                 
Federal income tax expense (benefit)
                               
Current
    334       (223 )     59       (36 )
Deferred
    35       132       150       140  
Total federal income tax expense (benefit)
    369       (91 )     209       104  
                                 
NET INCOME (LOSS)
  $ 757     $ (171 )   $ 424     $ 203  
                                 
EARNINGS (LOSS) PER SHARE
                               
Basic and diluted
  $ 0.10     $ (0.02 )   $ 0.06     $ 0.03  
                                 
DIVIDENDS PER SHARE
  $ 0.20     $ 0.20     $ 0.10     $ 0.10  

See accompanying notes.

 
4

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
(Unaudited)
 (In thousands)

   
Six months ended
   
Three months ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
         
(Restated)
         
(Restated)
 
Net income (loss)
  $ 757     $ (171 )   $ 424     $ 203  
                                 
Other comprehensive income (loss), net of taxes (benefits):
                               
Unrealized holding gains (losses) on securities designated as available for sale, net of taxes (benefits) of $—, $(22), $— and $(11) during the respective periods
    (1 )     (43 )     -       (21 )
                                 
Comprehensive income (loss)
  $ 756     $ (214 )   $ 424     $ 182  

See accompanying notes.

 
5

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)
   
Six months ended
 
   
December 31,
 
   
2010
   
2009
 
         
(Restated)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 757     $ (171 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation
    90       85  
Amortization of deferred loan origination (fees) costs
    (19 )     (1 )
Amortization of premiums on FHLB advances
    (76 )     (226 )
Amortization of core deposit intangibles
    65       65  
Net gain on sale of loans
    (92 )     (59 )
Net loss on sale of real estate owned
    36       27  
ESOP compensation expense
    91       130  
Amortization of stock benefit plans and stock options expense
    228       283  
Earnings on bank-owned life insurance
    (45 )     (45 )
Provision for loan losses
    68       1,028  
Origination of loans held for sale
    (2,250 )     (2,141 )
Proceeds from loans held for sale
    2,510       2,325  
Increase (decrease) in cash, due to changes in:
               
Accrued interest receivable
    (82 )     137  
Prepaid expenses and other assets
    (131 )     (726 )
Accrued interest payable
    (15 )     (16 )
Accounts payable and other liabilities
    (142 )     (628 )
Net cash provided by operating activities
    993       67  
                 
Cash flows from investing activities:
               
Purchase of U.S. Treasury Notes
    (11,000 )      
Securities maturities, prepayments and calls:
               
Held to maturity
    1,555       4,027  
Available for sale
    20       59  
Loans originated for investment, net of principal collected
    1,415       (3,249 )
Proceeds from sale of real estate owned
    885       223  
Additions to premises and equipment, net
    (69 )     (35 )
Net cash provided by (used in) investing activities
    (7,194 )     1,025  
                 
Cash flows from financing activities:
               
Net change in deposits
    (1,699 )     2,809  
Payments by borrowers for taxes and insurance, net
    (181 )     (290 )
Proceeds from Federal Home Loan Bank advances
    16,000       4,000  
Repayments on Federal Home Loan Bank advances
    (9,737 )     (7,093 )
Dividends paid on common stock
    (555 )     (567 )
Treasury stock repurchases
    (171 )     (67 )
Net cash provided by (used in) financing activities
    3,657       (1,208 )
                 
Net decrease in cash and cash equivalents
    (2,544 )     (116 )
                 
Beginning cash and cash equivalents
    8,362       4,217  
                 
Ending cash and cash equivalents
  $ 5,818     $ 4,101  

See accompanying notes.

 
6

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)
(In thousands)

   
Six months ended
 
   
December 31,
 
   
2010
   
2009
 
             
Supplemental disclosure of cash flow information:
           
Cash paid during the period for:
           
Federal income taxes
  $ 350     $ 330  
                 
Interest on deposits and borrowings
  $ 1,915     $ 2,890  
                 
Transfers from loans to real estate acquired through foreclosure, net
  $ 523     $ 261  
                 
Loans made on sale of real estate acquired through foreclosure
  $ 593     $ 184  
                 
Capitalization of mortgage servicing rights
  $ 20     $ 17  

See accompanying notes.

 
7

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 December 31, 2010
(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.

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, except for the ESOP adjustments referenced below) which are necessary for a fair presentation of the consolidated financial statements have been included.  The results of operations for the six- and three-month periods ended December 31, 2010, are not necessarily indicative of the results which may be expected for an entire fiscal year.  The consolidated balance sheet as of June 30, 2010 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 2010 filed with the Securities and Exchange Commission.

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.

 
8

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 December 31, 2010
(unaudited)

1. Basis of presentation (continued)

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.

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 three 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, loans on deposits and consumer and other loans.

 
9

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 December 31, 2010
(unaudited)

1. Basis of presentation (continued)

The Securities and Exchange Commission (the “SEC” or “Commission”) Staff Accounting Bulletin 108 (“SAB108”) provides guidance on quantifying and evaluating the materiality of unrecorded misstatements.  SAB 108 requires that a company uses both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts.  Under the rollover approach, the error is quantified as the amount by which the current year income statement is misstated.  The iron curtain approach, however, quantifies the error as the cumulative errors using both a balance sheet and an income statement approach – and evaluate whether either of these approaches results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.

The Company has performed an analysis of its unrecorded misstatements using both the rollover and iron curtain approaches.  Using the rollover method, management concluded that none of its unrecorded misstatements were material to its current period or prior periods’ financial statements.  Under the iron curtain method, however, management concluded that the Company’s adjustment related to additional compensation associated with its Employee Stock Ownership Plan (“ESOP”) was material to the current period’s financial statements, but using the rollover method was immaterial to its prior periods’ financial statements.  This misstatement was related to an error associated with the release of shares to ESOP participants.  The Company recorded a one-time entry to retained earnings to correct the unrecorded misstatements on the balance sheet.  The SAB 108 entries posted in the six-month period ended December 31, 2010 and the effect on retained earnings and net income were as follows:

(in thousands)
 
Effect on
Retained
Earnings
   
Effect on
Current
Year’s
Earnings
 
Recording of prior years’ additional ESOP compensation expense
  $ (223 )   $  
                 
Income tax effect of the item above
    76        
                 
Net SAB 108 effect
    (147 )      

The understatement of ESOP expense was discovered in the three month period ended December 31, 2010, when the company was notified pursuant to a review by the United States Department of Labor (“DOL”) that the Company had incorrectly calculated the number of shares required to be released to participants of its ESOP.  The incorrect method of calculating shares was in place from March 2, 2005 through June 30, 2010.  The Company is working with the DOL to take the necessary corrective action with regard to the ESOP.  There is no current year effect for the adjustment related to the additional ESOP compensation expense, which is applicable to prior periods.

 
10

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 December 31, 2010
(unaudited)

1. Basis of presentation (continued)

The applicable effect on the prior year balance sheet and statements of operations related to additional ESOP compensation expense is as follows:

(in thousands)
       
June 30,
2010
 
             
Balance Sheet:
           
Other liabilities as previously reported
        $ 1,749  
Income tax adjustment
          (76 )
Other liabilities as adjusted
        $ 1,673  
               
Additional paid-in capital as previously reported
        $ 36,597  
ESOP compensation expense adjustment
          26  
Additional paid-in capital as adjusted
        $ 36,623  
               
Retained earnings as previously reported
        $ 31,363  
ESOP compensation expense adjustment (net of tax)
          (147 )
Retained earnings as adjusted
        $ 31,216  
               
Unearned employee stock ownership plan (ESOP) as previously reported
        $ (2,366 )
ESOP compensation expense adjustment
          197  
Unearned employee stock ownership plan (ESOP) as adjusted
        $ (2,169 )
               
Six- and three-months ended December 31, 2009
 
Six
months
ended
   
Three
months
ended
 
Statements of Operations:
             
Employee compensation and benefits as previously reported
  $ 1,526     $ 780  
ESOP expense adjustment
    37       18  
Employee compensation and benefits as adjusted
  $ 1,563     $ 798  
                 
Tax impact of total federal income tax expense (benefit) as previously reported
  $ (78 )   $ 110  
ESOP expense adjustment
    (13 )     (6 )
Total federal income tax expense (benefit) as adjusted
  $ (91 )   $ 104  
                 
Net income (loss) as previously reported
  $ (147 )   $ 215  
ESOP expense adjustment (net of tax)
    (24 )     (12 )
Net income (loss) as adjusted
  $ (171 )   $ 203  
                 
Earnings (loss) per share-basic and diluted as previously reported
  $ (0.02 )   $ 0.03  
ESOP expense adjustment
           
Earnings (loss) per share-basic and diluted as adjusted
  $ (0.02 )   $ 0.03  

 
11

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

2.  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.

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,
 
   
2010
   
2009
 
         
(Restated)
 
             
Net income (loss)
  $ 757     $ (171 )
Less earnings (loss) allocated to unvested shares
    7       (9 )
                 
Net income (loss) allocated to common shareholders, basic and diluted
  $ 750     $ (180 )

   
Three months ended December 31,
 
   
2010
   
2009
 
         
(Restated)
 
             
Net income
  $ 424     $ 203  
Less earnings allocated to unvested shares
    3       7  
                 
Net income allocated to common shareholders, basic and diluted
  $ 421     $ 196  

   
Six months ended December 31,
 
   
2010
   
2009
 
             
Basic
           
Weighted-average common shares including unvested common shares outstanding
    7,499,750       7,562,968  
Less: Weighted-average unvested common shares
    24,629       38,850  
Weighted-average common shares outstanding
    7,475,121       7,524,118  
                 
Diluted
               
Add: Dilutive effect of assumed exercise of stock options
    -       -  
                 
Weighted-average common shares outstanding (diluted)
    7,475,121       7,524,118  

 
12

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

3.  Earnings Per Share (continued)

   
Three months ended December 31,
 
   
2010
   
2009
 
             
Basic
           
Weighted-average common shares including unvested Common shares outstanding
    7,498,653       7,561,360  
Less: Weighted-average unvested common shares
    24,900       51,800  
Weighted-average common shares outstanding
    7,473,753       7,509,560  
                 
Diluted
               
Add: Dilutive effect of assumed exercise of stock options
    -       36,566  
                 
Weighted-average common shares outstanding (diluted)
    7,473,753       7,546,126  

There were 325,800 stock option shares outstanding for each of the six- and three-month periods ended December 31, 2010, which were antidilutive for the respective periods.  There were 339,200 stock option shares outstanding for each of the six- and three-month periods ended December 31, 2009, which were antidilutive for the respective periods.

4. New Accounting Standards

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements.” The update requires new disclosures including significant transfers in and out of Level 1 and Level 2 fair value measurements. Also, the ASU provides an update on the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The new guidance is effective for interim and annual periods beginning after December 15, 2009, except for the update on the reconciliation of Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The standard did not have an impact on the Company’s consolidated financial statements.
 
In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables, which for the Company includes loans and standby letters of credit. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this standard, allowance for loan losses is to be disclosed by portfolio segment, while credit quality information, impaired loans and nonaccrual status are to be presented by class. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. The adoption of ASU 2010-20 resulted in additional quarterly disclosures regarding the allowance for credit losses and credit financing receivables.

 
13

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
December 31, 2010
(unaudited)

5.  Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities are summarized as follows:

   
December 31, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
   
fair
 
   
cost
   
gains
   
losses
   
value
 
   
(In thousands)
 
Available-for-sale Securities
                       
Agency mortgage-backed: residential
  $ 219     $ 6     $ (1 )   $ 224  
                                 
Held-to-maturity Securities
                               
Agency mortgage-backed: residential
  $ 7,881     $ 405     $ -     $ 8,286  
U.S. Treasury Notes
    10,999       1       -       11,000  
    $ 18,880     $ 406     $ -     $ 19,286  

   
June 30, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
unrealized
   
unrealized
   
fair
 
   
cost
   
gains
   
losses
   
value
 
   
(In thousands)
 
Available-for-sale Securities
                       
Agency mortgage-backed: residential
  $ 240     $ 7     $ (1 )   $ 246  
                                 
Held-to-maturity Securities
                               
Agency mortgage-backed: residential
  $ 9,435     $ 591     $ -     $ 10,026  

Our securities holdings consist of agency mortgage-backed securities, which do not have a single maturity date and a U.S. Treasury note that matures in January 2011.

There were no sales of investment securities during the fiscal year ended June 30, 2010 or the six-month period ended December 31, 2010.

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.

 
14

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

6. Loans Receivable

The composition of the loan portfolio was as follows:
   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(In thousands)
 
Residential real estate
           
One- to four-family
  $ 161,841     $ 165,818  
Multi-family
    7,580       6,689  
Construction
    1,543       1,916  
Nonresidential real estate and land
    12,342       10,943  
Loans on deposits
    2,341       2,754  
Consumer and other
    4,873       4,802  
      190,520       192,922  
                 
Less:
               
Undisbursed portion of loans in process
    381       631  
Deferred loan origination fees (cost)
    (67 )     138  
Allowance for loan losses
    1,567       1,535  
    $ 188,639     $ 190,618  

 
15

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

6.  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, 2010.  There were no loans acquired with deteriorated credit quality at December 31, 2010.

(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
  $ 7,633     $ 896     $     $ 896  
Multi-family
    425                    
Construction
                       
Nonresidential real estate and land
                       
Loans on deposits
                       
Consumer and other
                       
    $ 8,058     $ 896     $     $ 896  
                                 
Loans collectively evaluated for impairment:
                               
Residential real estate:
                               
One- to four-family
  $ 154,784     $ 400     $     $ 400  
Multi-family
    7,180       18             18  
Construction
    1,167       3             3  
Nonresidential real estate and land
    12,381       31             31  
Loans on deposits
    2,348       6             6  
Consumer and other
    4,888       13             13  
Unallocated
                200       200  
    $ 182,748     $ 471     $ 200     $ 671  

Impaired loans were as follows:
   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(In thousands)
 
             
Loans with no allocated allowance for loan losses
  $ 2,382     $ 1,348  
Loans with allocated allowance for loan losses
    5,676       5,370  
Total
  $ 8,058     $ 6,718  
                 
Amount of allowance for loan losses allocated
  $ 896     $ 904  


 
16

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

6.  Loans Receivable (continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

(in thousands)
 
Outstanding
Principal
Balance
   
Allowance
for Loan
Losses
Allocated
 
             
With no related allowance recorded:
           
One- to four-family
  $ 1,957     $  
Multi-family
    425        
    $ 2,382     $  
                 
With an allowance recorded:
               
One- to four-family
  $ 5,676     $ 896  

Nonperforming loans were as follows:
   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(In thousands)
 
             
Nonaccrual loans
  $ 6,536     $ 7,671  
Restructured loans
    734        
Loans past due 90 days or more and still accruing
          112  
Total
  $ 7,270     $ 7,783  

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:

(in thousands)
 
Nonaccrual
   
Loans Past
Due Over 90
Days Still
Accruing
 
             
Consumer and other
  $ 20     $ -  
1-4 Family residential real estate
    6,516       -  
                 
Total
  $ 6,536     $ -  


 
17

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

6. Loans Receivable (continued)

Troubled Debt Restructurings:

The Company has allocated $10,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010.  The Company has no commitments to lend additional amounts as of December 31, 2010, to customers with outstanding loans that are classified as troubled debt restructurings.

The following table presents the aging of the principal balance outstanding in past due loans as of December 31, 2010, 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
  $ 3,572     $ 6,516     $ 10,088     $ 151,753     $ 161,841  
Multi-family
                      7,580       7,580  
Construction
                      1,543       1,543  
Nonresidential real estate and land
                      12,342       12,342  
Loans on deposits
                      2,341       2,341  
Consumer and other
          20       20       4,853       4,873  
Total
  $ 3,572     $ 6,536     $ 10,108     $ 180,412     $ 190,520  

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.

 
18

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

6. Loans Receivable (continued)

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, 2010, 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
  $     $ 69     $ 3,498     $     $ 158,274  
Multi-family
    3,920             3,660              
Construction
    1,543                          
Nonresidential real estate and land
    12,342                          
Loans on deposits
                            2,341  
Consumer and other
                            4,873  

7.  Allowance for Loan Losses

The activity in the allowance for loan losses is summarized as follows:

   
For the Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
             
Beginning balance
  $ 1,535     $ 678  
Provision for losses on loans
    68       1,028  
Charge-offs
    (36 )     (88 )
                 
Ending balance
  $ 1,567     $ 1,618  
 
 
19

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)
 
8.  Commitments
 
As of December 31, 2010, loan commitments and unused lines of credit totaled $10.6 million, a decrease of $171,000 or 1.6% from the June 30, 2010 level.  At December 31, 2010, loan commitments included $381,000 in undisbursed construction loans, a $250,000 or 39.6% decrease from the June 30, 2010 level, while one- to four-family mortgage loans totaled $987,000, a $109,000 or 12.4% increase, other real estate totaled $188,000 and lines of credit secured by equity in real property totaled $9.0 million, a $218,000 or 2.4% decrease between reference points.

9.  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.
 
Impaired Loans
 
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent independent 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 appraisers to adjust for difference 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.  Independent appraisals for collateral-dependendent loans are updated periodically (usually every 9-12 months).

 
20

 
Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2010
(unaudited)

9.
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 at December 31, 2010
       
(in thousands)
           
Quotes Prices
           
           
in Active
  
Significant
     
           
Markets for
  
Other
 
Significant
       
Identical
 
Observable
 
Unobservable
       
Assets
 
Inputs
 
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
                         
Agency mortgage-backed: residential
 
$
224
 
$
-
 
$
224
 
$
-

       
Fair Value Measurements at June 30, 2010 .
       
(in thousands)
       
Quotes Prices
       
       
in Active
 
Significant
   
       
Markets for
 
Other
 
Significant
       
Identical
 
Observable
 
Unobservable
       
Assets
 
Inputs
 
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
                         
Agency mortgage-backed: residential
 
$
246
 
$
 -
 
$
246
 
$
-

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

       
Fair Value Measurements at December 31, 2010 .
       
(in thousands)
       
Quotes Prices
       
       
in Active
 
Significant
   
       
Markets for
 
Other
 
Significant
       
Identical
 
Observable
 
Unobservable
       
Assets
 
Inputs
 
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
                         
Impaired loans
 
$
4,780
 
$
-
 
$
-
 
$
4,780

Impaired loans with allocated allowance for loan losses had a carrying amount of $5.7 million and a specific valuation allowance of $896,000 at December 31, 2010.  A specific allowance provision of $27,000 was made for the six- and three month period ended December 31, 2010.

       
Fair Value Measurements at June 30, 2010
       
(in thousands)
       
Quotes Prices
       
       
in Active
 
Significant
   
       
Markets for
 
Other
 
Significant
       
Identical
 
Observable
 
Unobservable
      </