10-Q 1 f10q0919_kentuckyfirst.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2019

 

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
incorporation or organization)   Identification No.)

 

655 Main Street, Hazard, Kentucky 41702

(Address of principal executive offices) (Zip Code)

 

(502) 223-1638

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which
registered
Common Stock, $0.01 par value per share   KFFB   The NASDAQ Stock Market LLC

 

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 for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-Accelerated filer ☐   Smaller Reporting Company ☒
      Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At November 9, 2019, the latest practicable date, the Corporation had 8,294,515 shares of $.01 par value common stock outstanding.

  

 

 

 

 

INDEX

 

      Page
       
PART I - ITEM 1 FINANCIAL INFORMATION  
       
    Condensed Consolidated Balance Sheets 1
       
    Condensed Consolidated Statements of Income 2
       
    Condensed Consolidated Statements of Comprehensive Income 3
       
    Consolidated Statements of Changes in Shareholders’ Equity 4
       
    Condensed Consolidated Statements of Cash Flows 5
       
    Notes to Condensed Consolidated Financial Statements 7
       
  ITEM 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
       
  ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 35
       
  ITEM 4 Controls and Procedures 35
       
PART II -  OTHER INFORMATION 36
       
SIGNATURES 37

  

 

 

 

PART I

 

ITEM 1: Financial Information

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   September 30,   June 30, 
   2019   2019 
ASSETS        
         
Cash and due from financial institutions  $1,555   $1,870 
Interest-bearing demand deposits   10,600    7,991 
Cash and cash equivalents   12,155    9,861 
           
Time deposits in other financial institutions   3,465    6,962 
Securities available-for-sale   1,046    1,045 
Securities held-to-maturity, at amortized cost- approximate fair value of $686 and $775 at September 30, and June 30, 2019, respectively   680    775 
Loans held for sale   441    -- 
Loans, net of allowance of $1,450 and $1,456 at September 30, and June 30, 2019, respectively   279,633    280,969 
Real estate owned, net   965    710 
Premises and equipment, net   5,007    5,028 
Federal Home Loan Bank stock, at cost   6,482    6,482 
Accrued interest receivable   743    758 
Bank-owned life insurance   2,538    2,518 
Goodwill   14,507    14,507 
Prepaid federal income taxes   203    266 
Prepaid expenses and other assets   894    890 
           
Total assets  $328,759   $330,771 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $196,079   $195,836 
Federal Home Loan Bank advances   64,373    66,703 
Advances by borrowers for taxes and insurance   1,050    763 
Accrued interest payable   29    28 
Deferred federal income taxes   701    701 
Other liabilities   487    462 
Total liabilities   262,719    264,493 
           
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   35,022    35,056 
Retained earnings   33,767    33,867 
Unearned employee stock ownership plan (ESOP), 42,938 shares and 47,607 shares at, September 30, and June 30, 2019, respectively   (429)   (476)
Treasury shares at cost, 286,549 and 266,549 common shares at September 30, and June 30, 2019, respectively   (2,410)   (2,259)
Accumulated other comprehensive income   4    4 
Total shareholders’ equity   66,040    66,278 
           
Total liabilities and shareholders’ equity  $328,759   $330,771 

 

See accompanying notes to condensed consolidated financial statements.

  

1 

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

   Three months ended
September 30,		 
   2019   2018 
Interest income        
Loans, including fees  $3,172   $2,888 
Mortgage-backed securities   6    8 
Other securities   6    1 
Interest-bearing deposits and other   144    149 
Total interest income   3,328    3,046 
           
Interest expense          
Interest-bearing demand deposits   5    6 
Savings   52    54 
Certificates of Deposit   531    382 
Deposits   588    442 
Borrowings   359    258 
Total interest expense   947    700 
Net interest income   2,381    2,346 
Provision for loan losses   59    11 
Net interest income after provision for loan losses   2,322    2,335 
           
Non-interest income          
Earnings on bank-owned life insurance   19    19 
Net gain on sales of loans   6    14 
Net gain on sales of real estate owned   --    5 
Valuation adjustment for real estate owned   --    (18)
Other   49    49 
Total non-interest income   74    69 
Non-interest expense          
Employee compensation and benefits   1,360    1,454 
Occupancy and equipment   143    170 
Voice and data communications   61    65 
Advertising   48    67 
Outside service fees   51    38 
Data processing   105    105 
Auditing and accounting   47    34 
Franchise and other taxes   65    63 
Foreclosure and real estate owned expenses (net)   34    23 
Other   188    205 
Total non-interest expense   2,102    2,224 
           
Income before income taxes   294    180 
           
Federal income tax expense   60    42 
           
NET INCOME  $234   $138 
           
EARNINGS PER SHARE          
Basic and diluted  $0.03   $0.02 

 

See accompanying notes to condensed consolidated financial statements.

  

2 

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   Three months ended
September 30,		 
   2019   2018 
         
Net income  $234   $138 
           
Other comprehensive losses, net of tax:          
Unrealized holding losses on securities designated as available-for-sale, net of taxes of $0, and $0 during the respective periods   --    (1)
Comprehensive income  $234   $137 

 

See accompanying notes to condensed consolidated financial statements.

  

3 

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended

(Dollar amounts in thousands, except per share data)

 

September 30, 2019

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at June 30, 2019  $86   $35,056   $33,867   $(476)  $(2,259)  $4   $66,278 
                                    
Net income   --    --    234    --    --    --    234 
Allocation of ESOP shares   --    (34)   --    47    --    --    13 
Acquisition of shares for Treasury   --    --    --    --    (151)   --    (151)
Other comprehensive income   --    --    --    --    --    --    -- 
Cash dividends of $0.10 per common share   --    --    (334)   --    --    --    (334)
                                    
Balance at September 30, 2019  $86   $35,022   $33,767   $(429)  $(2,410)  $4   $66,040 

  

September 30, 2018

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at June 30, 2018  $86   $35,085   $34,050   $(663)  $(1,355)  $--   $67,203 
                                    
Net income   --    --    138    --    --    --    138 
Allocation of ESOP shares   --    --    --    47    --    --    47 
Acquisition of shares for treasury   --    --    --    --    (89)   --    (89)
Change in accounting method   --    --    441    --    --    --    441 
Other comprehensive income   --    --    --    --    --    (1)   (1)
Cash dividends of $0.10 per common share   --    --    (365)   --    --    --    (365)
                                    
Balance at September 30, 2018  $86   $35,085   $34,264   $(616)  $(1,444)  $(1)  $67,374 

 

See accompanying notes to condensed consolidated financial statements.

  

4 

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Three months ended 
   September 30, 
   2019   2018 
         
Cash flows from operating activities:        
Net income  $234   $138 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   74    77 
Accretion of purchased loan credit discount   (28)   (21)
Amortization of purchased loan premium   3    3 
Amortization of deferred loan origination costs (fees)   23    15 
Amortization of premiums on investment securities   --    2 
Net gain on sale of loans   (6)   (14)
Net gain on sale of real estate owned   --    (5)
Valuation adjustments of real estate owned   --    18 
ESOP compensation expense   13    47 
Earnings on bank-owned life insurance   (19)   (19)
Provision for loan losses   59    11 
Origination of loans held for sale   (586)   (476)
Proceeds from loans held for sale   151    380 
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   15    (15)
Prepaid expenses and other assets   (4)   61 
Accrued interest payable   1    2 
Other liabilities   25    182 
Federal income taxes   63    32 
Net cash provided by operating activities   18    418 
           
Cash flows from investing activities:          
Purchase of available-for-sale securities   --    (501)
Purchase of time deposits in other financial institutions   --    (494)
Maturities of time deposits in other financial institutions   3,497    1,234 
Securities maturities, prepayments and calls:          
Held to maturity   92    98 
Available for sale   1    2 
Loans originated for investment, net of principal collected   984    1,385
Proceeds from sale of real estate owned   44    -- 
Additions to real estate owned   (4)   (62)
Additions to premises and equipment, net   (53)   (34)
Net cash provided by (used in) investing activities   4,561    1,628
           
Cash flows from financing activities:          
Net increase in deposits   243    1,157 
Payments by borrowers for taxes and insurance, net   287    277 
Proceeds from Federal Home Loan Bank advances   4,000    8,500 
Repayments on Federal Home Loan Bank advances   (6,330)   (11,538)
Treasury stock purchased   (151)   (89)
Dividends paid on common stock   (334)   (365)
Net cash used in financing activities   (2,285)   (2,058)
           
Net increase (decrease) in cash and cash equivalents   2,294    (12)
           
Beginning cash and cash equivalents   9,861    9,943 
           
Ending cash and cash equivalents  $12,155   $9,931 

 

See accompanying notes to condensed consolidated financial statements.

  

5 

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

   Three months ended 
   September 30, 
   2019   2018 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Federal income taxes  $--   $-- 
           
Interest on deposits and borrowings  $946   $698 
           
Transfers of loans to real estate owned, net  $295   $116 
           
Loans made on sale of real estate owned  $--   $80 

 

See accompanying notes to condensed consolidated financial statements.

  

6 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

 

The Kentucky First Federal Bancorp (“Kentucky First” or the “Company”) was incorporated under federal law in March 2005, and is the mid-tier holding company for First Federal Savings and Loan Association of Hazard, Hazard, Kentucky (“First Federal of Hazard”) and Frankfort First Bancorp, Inc. (“Frankfort First”). Frankfort First is the holding company for First Federal Savings Bank of Kentucky, Frankfort, Kentucky (“First Federal of Kentucky”). First Federal of Hazard and First Federal of Kentucky (hereinafter collectively the “Banks”) are Kentucky First’s primary operations, which consist of operating the Banks as two independent, community-oriented savings institutions.

 

In December 2012, the Company acquired CKF Bancorp, Inc., a savings and loan holding company which operated three banking locations in Boyle and Garrard Counties in Kentucky. In accounting for the transaction the assets and liabilities of CKF Bancorp were recorded on the books of First Federal of Kentucky in accordance with accounting standard ASC 805, Business Combinations.

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements, which represent the condensed 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 condensed consolidated financial statements have been included. The results of operations for the three-month period ended September 30, 2019, are not necessarily indicative of the results which may be expected for an entire fiscal year. The condensed consolidated balance sheet as of June 30, 2019 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 condensed 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 2019 filed with the Securities and Exchange Commission.

 

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 Kentucky (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 or shareholders’ equity.

  

7 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

1. Basis of Presentation (continued)

 

New Accounting Standards

 

FASB ASC 326 - In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The Company will now use forward-looking information to enhance its credit loss estimates. The amendment requires enhanced disclosures to aid investors and other users of financial statements to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of our portfolio. The largest impact to the Company will be on its allowance for loan and lease losses, although the ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard is effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2019. However, the FASB has delayed the implementation of the ASU for smaller reporting companies until years beginning after December 15, 2022, or in the Company’s case the fiscal year beginning July 1, 2023.  ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is required for these debt securities. We have formed a functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. However, the Company does expect ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

 

FASB ASC 842 – In March 2017, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance changes lease accounting by introducing the core principle that a lessee should recognize the assets and liabilities that arise from operating leases under the premise that all leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements. The Company adopted this ASU effective July 1, 2019, with no recordation of right-to-use lease assets or operating lease liabilities, because the level of operating leases was determined to be immaterial.

 

FASB ASC 350 – In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. This guidance modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. For public business entities, the amendments in this update are effective for fiscal years, and the interim periods within those fiscal years, beginning after December 15, 2019, or July 1, 2020, with respect to the Company.

  

FASB ASC 820 – In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This guidance reduces the level of detail surrounding the processes used by the Company in determining the fair value of some of its assets. For public business entities, the amendments in this update are effective for fiscal years, and the interim periods within those fiscal years, beginning after December 15, 2019, or July 1, 2020, with respect to the Company.

  

8 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

1. Basis of Presentation (continued)

 

New Accounting Standards (continued)

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

2. Earnings Per Share

 

Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued or released under the Company’s share-based compensation plans. The factors used in the basic and diluted earnings per share computations follow:

  

   Three months ended
September 30,		 
   2019   2018 
Net income allocated to common shareholders, basic and diluted  $234,000   $138,000 
           
EARNINGS PER SHARE          
Basic and diluted  $0.03   $0.02 
           
Weighted average common shares outstanding, basic and diluted   8,277,502    8,376,928 

 

There were no stock option shares outstanding for the three-month periods ended September 30, 2019 and 2018.

  

9 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 2019 and June 30, 2019, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

   September 30, 2019 
(in thousands)  Amortized
cost		   Gross
unrealized/
unrecognized
gains		   Gross
unrealized/
unrecognized
losses		   Estimated
fair value		 
                 
Available-for-sale Securities                
U.S. Treasury securities  $499   $--   $--   $499 
Agency bonds   501    4    --    505 
Agency mortgage-backed: residential   42    --    --    42 
   $1,042   $4   $--   $1,046 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $680   $13   $7   $686 

 

   June 30, 2019 
(in thousands)  Amortized
cost		   Gross
unrealized/
unrecognized
gains		   Gross
unrealized/
unrecognized
losses		   Estimated
fair value		 
                 
Available-for-sale Securities                
U.S. Treasury securities  $496   $1   $--   $497 
Agency bonds   501    4         505 
Agency mortgage-backed: residential   43    --    --    43 
   $1,040   $5   $--   $1,045 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $775   $14   $14   $775 

 

At September 30, 2019, the Company’s debt securities consisted of a single U.S. Treasury note, a single agency bond, and mortgage-backed securities, which do not have a single maturity date.

  

10 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

3. Investment Securities (continued)

 

The amortized cost and estimated fair value of securities as of September 30, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities without a single maturity, primarily mortgage-backed securities, are not shown.

  

(in thousands)  Amortized Cost   Fair Value 
Available for sale:          
Within one year  $997   $1,002 

  

Our pledged assets (including overnight and time deposits in other financial institutions) totaled $2.0 million and $2.1 million at September 30, and June 30, 2019, respectively.

 

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. Those securities were agency bonds, which carry a very limited amount of risk. Also, we have no intention to sell nor feel that we will be compelled to sell such securities before maturity. Based on our evaluation, no impairment has been recognized through earnings.

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

  

   September 30,   June 30, 
(in thousands)  2019   2019 
         
Residential real estate        
One- to four-family  $215,384   $216,066 
Multi-family   15,545    15,928 
Construction   3,927    3,757 
Land   1,099    852 
Farm   3,135    3,157 
Nonresidential real estate   30,513    30,419 
Commercial nonmortgage   1,942    2,075 
Consumer and other:          
Loans on deposits   1,259    1,415 
Home equity   7,644    8,214 
Automobile   95    91 
Unsecured   539    451 
    281,083    282,425 
Allowance for loan losses   (1,450)   (1,456)
   $279,633   $280,969 

  

11 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2019:

 

(in thousands)  Beginning
balance		   Provision
for loan
losses		   Loans
charged off		   Recoveries   Ending
balance		 
                     
Residential real estate:                    
One- to four-family  $685   $66   $65   $--   $686 
Multi-family   200    (7)   --    --    193 
Construction   6    --    --    --    6 
Land   1    --    --    --    1 
Farm   6    --    --    --    6 
Nonresidential real estate   336    3    --    --    339 
Commercial nonmortgage   5    --    --    --    5 
Consumer and other:                         
Loans on deposits   3    (1)   --    --    2 
Home equity   14    (2)   --    --    12 
Automobile   --    --    --    --    -- 
Unsecured   --    --    --    --    -- 
Unallocated   200    --    --    --    200 
Totals  $1,456   $59   $65   $--   $1,450 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans
charged off		   Recoveries   Ending balance 
                     
Residential real estate:                    
One- to four-family  $795   $22   $(59)  $23   $781 
Multi-family   225    7    --    --    232 
Construction   8    (4)   --    --    4 
Land   1    --    --    --    1 
Farm   6    --    --    --    6 
Nonresidential real estate   321    2    --    --    323 
Commercial nonmortgage   3    1    --    --    4 
Consumer and other:                         
Loans on deposits   3    --    --    --    3 
Home equity   13    3    --    --    16 
Automobile   --    --    --    --    -- 
Unsecured   1    (20)   --    20    1 
Unallocated   200    --    --    --    200 
Totals  $1,576   $11   $(59)  $43   $1,571 

  

12 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. 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 September 30, 2019. The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

September 30, 2019:

 

(in thousands)  Loans
individually
evaluated		   Loans
acquired
with
deteriorated
credit
quality		   Unpaid
principal
balance
and
recorded
investment		   Ending
allowance
attributed
to loans		   Unallocated
allowance		   Total
allowance		 
Loans individually evaluated for impairment:                        
Residential real estate:                        
One- to four-family  $3,553   $902   $4,455   $--   $--   $-- 
Multi-family   681    --    681    --    --    -- 
Farm   310    --    310    --    --    -- 
Nonresidential real estate   727    --    727    --    --    -- 
    5,271    902    6,173    --    --    -- 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $210,929   $686   $--   $686 
Multi-family             14,864    193    --    193 
Construction             3,927    6    --    6 
Land             1,099    1    --    1 
Farm             2,825    6    --    6 
Nonresidential real estate             29,786    339    --    339 
Commercial nonmortgage             1,942    5    --    5 
Consumer:                              
Loans on deposits             1,259    2    --    2 
Home equity             7,644    12    --    12 
Automobile             95    --    --    -- 
Unsecured             539    --    --    -- 
Unallocated             --    --    200    200 
              274,910    1,250    200    1,450 
             $281,083   $1,250   $200   $1,450 

  

13 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2019.

 

June 30, 2019:                        
                         
(in thousands)  Loans
individually
evaluated		   Loans
acquired
with
deteriorated
credit
quality		   Unpaid
principal
balance
and
recorded
investment		   Ending
allowance
attributed
to loans		   Unallocated
allowance		   Total
allowance		 
Loans individually evaluated for impairment:                        
Residential real estate:                        
One- to four-family  $3,837   $949   $4,786   $--   $--   $-- 
Multi-family   685    --    685                
Farm   309    --    309                
Nonresidential real estate   683    --    683    --    --    -- 
    5,514    949    6,463    --    --    -- 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $210,595   $685   $--   $685 
Multi-family             15,928    200    --    200 
Construction             3,757    6    --    6 
Land             852    1    --    1 
Farm             2,848    6    --    6 
Nonresidential real estate             29,736    336    --    336 
Commercial nonmortgage             2,075    5    --    5 
Consumer:                              
Loans on deposits             1,415    3    --    3 
Home equity             8,214    14    --    14 
Automobile             91    --    --    -- 
Unsecured             451    --    --    -- 
Unallocated             --    --    200    200 
              275,962    1,256    200    1,456 
             $282,425   $1,256   $200   $1,456 

  

14 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

  

The following table presents interest income on loans individually evaluated for impairment by class of loans for the three months ended September 30:

 

(in thousands)  Average
Recorded
Investment		   Interest
Income
Recognized		   Cash Basis
Income
Recognized		   Average
Recorded
Investment		   Interest
Income
Recognized		   Cash Basis
Income
Recognized		 
   2019   2018 
With no related allowance recorded:                        
One- to four-family  $3,694   $34   $34   $3,605   $16   $16 
Multi-family   683    11    11    --    --    -- 
Farm   310    --    --    310    --    -- 
Nonresidential real estate   705    7    7    411    --    -- 
Purchased credit-impaired loans   926    18    18    1,055    8    8 
    6,318    70    70    5,380    24    24 
With an allowance recorded:                              
One- to four-family   --    --    --    --    --    -- 
   $6,318   $70   $70   $5,380   $24   $24 

  

15 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

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 September 30, 2019 and June 30, 2019:

 

   September 30, 2019   June 30, 2019 
(in thousands)  Nonaccrual   Loans
Past Due
Over 90
Days Still
Accruing		   Nonaccrual   Loans
Past Due
Over 90
Days Still
Accruing		 
                 
Residential real estate:                    
One- to four-family residential real estate  $4,145   $1,607   $4,545   $1,747 
Multifamily   681    --    685    -- 
Farm   310    --    309    -- 
Nonresidential real estate and land   727    --    683    49 
Commercial and industrial   1    --    1    -- 
Consumer   5    8    9    -- 
   $5,869   $1,615   $6,232   $1,796 

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Banks would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.”

 

At September 30, 2019 and June 30, 2019, the Company had $1.5 million and $1.6 million of loans classified as TDRs, respectively. Of the TDRs at September 30, 2019, approximately 27.0% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

During the three months ended September 30, 2019, the Company had one loan restructured as a TDR. A borrower refinanced a piece of one- to four-family, non-owner occupied, residential property to bring to current amounts owed on other loans with the Bank. Because the borrower’s financial condition had deteriorated, it was unlikely that the borrower could have secured financing elsewhere. The restructured loan is collateralized and cross-collateralized by real estate.

 

During the three months ended September 30, 2018, a secondary mortgage loan of $219,000 was renewed and an additional $30,000 was loaned to a borrower to finish construction of an 8-plex. The construction project had experienced cost overruns. The Company carries the first mortgage on this project and both the primary and secondary loans are secured by the 8-plex and additional real estate collateral.

 

The Company had no allocated specific reserves to customers whose loan terms had been modified in troubled debt restructurings as of September 30, 2019 or at June 30, 2019. The Company had no commitments to lend on loans classified as TDRs at September 30, 2019 or June 30, 2019.

  

16 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table summarizes TDR loan modifications that occurred during the three months ended September 30, 2019 and 2018, and their performance, by modification type:

 

(in thousands)  Troubled Debt
Restructurings
Performing to
Modified
Terms		   Troubled Debt
Restructurings
Not
Performing to
Modified
Terms		   Total
Troubled Debt
Restructurings		 
             
Three months ended September 30, 2019            
Residential real estate:            
Terms extended and additional funds advanced  $120   $--   $120 
                
Three months ended September 30, 2018               
Residential real estate:               
Terms extended  $249   $--   $249 

  

No TDRs defaulted during the three-month periods ended September 30, 2019 or 2018.

  

17 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of September 30, 2019, by class of loans:

 

(in thousands)  30-89 Days
Past Due		   90 Days or
Greater
Past Due		   Total Past
Due		   Loans Not
Past Due		   Total 
                     
Residential real estate:                    
One-to four-family  $2,648   $2,720   $5,368   $210,016   $215,384 
Multi-family   --    248    248    15,297    15,545 
Construction   --    --    --    3,927    3,927 
Land   740    --    740    359    1,099 
Farm   189    310    499    2,637    3,135 
Nonresidential real estate   434    306    740    29,772    30,513 
Commercial non-mortgage   --    --    --    1,942    1,942 
Consumer and other:                         
Loans on deposits   --    --    --    1,259    1,259 
Home equity   44    --    44    7,600    7,644 
Automobile   --    8    8    87    95 
Unsecured   2    --    2    537    539 
Total  $4,057   $3,592   $7,649   $273,434   $281,083 

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2019, by class of loans:

 

(in thousands)  30-89 Days
Past Due		   90 Days or
Greater
Past Due		   Total Past
Due		   Loans Not
Past Due		   Total 
                     
Residential real estate:                    
One-to four-family  $4,201   $3,479   $7,500   $208,566   $216,066 
Multi-family   --    248    248    15,680    15,928 
Construction   753    --    753    3,004    3,757 
Land   --    --    --    852    852 
Farm   2    --    2    3,155    3,157 
Nonresidential real estate   362    49    411    30,008    30,419 
Commercial nonmortgage   --    --    --    2,075    2,075 
Consumer:                         
Loans on deposits   --    --    --    1,415    1,415 
Home equity   38    --    38    8,176    8,214 
Automobile   8    --    8    83    91 
Unsecured   --    --    --    451    451 
Total  $5,184   $3,776   $8,960   $273,465   $282,425 

  

18 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. See the aging of past due loan table above. As of September 30, 2019, 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 
                 
Residential real estate:                    
One- to four-family  $206,428   $833   $8,123   $-- 
Multi-family   14,864    --    681    -- 
Construction   3,927    --    --    -- 
Land   1,099    --    --    -- 
Farm   2,826    --    310    -- 
Nonresidential real estate   29,043    742    727    -- 
Commercial nonmortgage   1,574    --    369    -- 
Consumer:                    
Loans on deposits   1,259    --    --    -- 
Home equity   7,417    207    20    -- 
Automobile   87    --    8    -- 
Unsecured   534    --    5    -- 
   $269,058   $1,782   $10,243   $-- 

  

19 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2019, the risk category of loans by class of loans was as follows:

 

(in thousands)  Pass   Special
Mention		   Substandard   Doubtful 
                 
Residential real estate:                    
One- to four-family  $206,489   $894   $8,683   $-- 
Multi-family   15,243    --    685    -- 
Construction   3,757    --    --    -- 
Land   852    --    --    -- 
Farm   2,848    --    309    -- 
Nonresidential real estate   28,990    746    683    -- 
Commercial nonmortgage   1,584    --    491    -- 
Consumer:                    
Loans on deposits   1,415    --    --    -- 
Home equity   8,053    137    24    -- 
Automobile   91    --    --    -- 
Unsecured   446    --    5    -- 
   $269,768   $1,777   $10,880   $-- 

  

Purchased Credit Impaired Loans:

 

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $351,000 and $351,000 at September 30, 2019 and June 30, 2019, respectively, is as follows:

 

(in thousands)  September 30,
2019		   June 30,
2019		 
One- to four-family residential real estate  $902   $949 

  

20 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)  Three
months ended
September 30,
2019		   Twelve
months
ended
June 30,
2019		 
         
Balance at beginning of period  $544   $634 
Accretion of income   (28)   (90)
Disposals, net of recoveries   --    -- 
Balance at end of period  $516   $544 

  

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2019, nor for the three-month period ended September 30, 2019. Neither were any allowance for loan losses reversed during those periods.

 

5. Disclosures About Fair Value of Assets and Liabilities

 

ASC topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (exit price) 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 and agency bonds.

  

21 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

  

22 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

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

 

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

  

   Fair Value Measurements Using 
(in thousands)  Fair
Value		   Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 
                 
September 30, 2019                
U.S. Treasury notes  $499   $--   $499   $-- 
Agency bonds   505    --    505    -- 
Agency mortgage-backed: residential   42    --    42    -- 
   $1,046   $--   $1,046   $-- 
                     
June 30, 2019                    
U.S. Treasury notes  $497   $--   $497   $-- 
Agency bonds   505    --    505    -- 
Agency mortgage-backed: residential   43    --    43    -- 
   $1,045   $--   $1,045   $-- 

  

23 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

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

 

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

 

   Fair Value Measurements Using 
(in thousands)  Fair
Value		   Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)		   Significant
Other
Observable
Inputs
(Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 
                 
September 30, 2019                
Loans                
One- to four-family  $9   $--   $--   $9 
                     
June 30, 2019                    
Loans                    
One- to four-family  $593   $--   $--   $593 
                     
Other real estate owned, net                    
One- to four-family  $117   $--   $--   $117 

 

There was one impaired loan, which was measured using the fair value of the collateral for collateral-dependent loans, at September 30, 2019, and seven impaired loans at June 30, 2019. There was a charge off of $8,000 made for the three-month period ended September 30, 2019 and a $10,000 charge off for the three-month period ended September 30, 2018.

 

There was no other real estate owned written down during the three months ended September 30, 2019. Other real estate owned measured at fair value less costs to sell, had a carrying amount of $117,000 at June 30, 2019. Other real estate owned was written down $18,000 during the three months ended September 30, 2018.

  

24 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

5. 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 September 30, 2019 and June 30, 2019:

 

             Range
   Fair Value   Valuation  Unobservable  (Weighted
September 30, 2019  (in thousands)   Technique(s)  Input(s)  Average)
Loans:             
One- to four-family  $9   Sales comparison approach  Adjustments for differences between comparable sales  -82.2% to 151.3%
(20.5%)

  

             Range
   Fair Value   Valuation  Unobservable  (Weighted
June 30, 2019  (in thousands)   Technique(s)  Input(s)  Average)
Loans:             
One- to four-family  $593   Sales comparison approach  Adjustment for differences between comparable sales  25.3% to -50.6%
(-0.6%)
               
Foreclosed and repossessed assets:              
One- to four-family  $117   Sales comparison approach  Adjustments for differences between comparable sales  8.6% to 31.0%
(29.0%)

  

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

 

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

  

25 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at September 30, 2019 and June 30, 2019 are as follows:

  

       Fair Value Measurements at 
       September 30, 2019 Using 
(in thousands)  Carrying Value   Level 1   Level 2   Level 3   Total 
Financial assets                         
Cash and cash equivalents  $12,155   $12,155             $12,155 
Time deposits in other financial institutions   3,465    3,475              3,475 
Available-for-sale securities   1,046        $1,046         1,046 
Held-to-maturity securities   680         686         686 
Loans receivable - net   279,633              283,880    283,880 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   743         743         743 
                          
Financial liabilities                         
Deposits  $196,079   $68,437   $127,649         196,086 
Federal Home Loan Bank advances   64,373         64,505         64,505 
Advances by borrowers for taxes and insurance   1,050         1,050         1,050 
Accrued interest payable   29         29         29 

  

       Fair Value Measurements at 
       June 30, 2019 Using 
(in thousands)  Carrying Value   Level 1   Level 2   Level 3   Total 
Financial assets                    
Cash and cash equivalents  $9,861   $9,861             $9,861 
Term deposits in other financial institutions   6,962    6,963              6,963 
Available-for-sale securities   1,045        $1,045         1,045 
Held-to-maturity securities   775         775         775 
Loans receivable – net   280,969             $285,700    285,700 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   758         758         758 
                          
Financial liabilities                         
Deposits  $195,836   $69,944   $123,920        $193,864 
Federal Home Loan Bank advances   66,703         66,719         66,719 
Advances by borrowers for taxes and insurance   763         763         763 
Accrued interest payable   28         28         28 

 

26 

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(unaudited)

 

6. Other Comprehensive Income (Loss)

 

The Company’s other comprehensive income is comprised solely of unrealized gains and losses on available-for-sale securities. The following is a summary of the accumulated other comprehensive income balances, net of tax:

 

   Three months
ended
September 30,
2019		 
     
Beginning balance  $4 
Current year change   -- 
Ending balance  $4 

 

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

 

   Three months ended
September 30,		 
(in thousands)  2019   2018 
         
Unrealized holding losses on available-for-sale securities  $--   $(1)
Tax effect   --    -- 
Net-of-tax amount  $--   $(1)

  

27 

 

  

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, 2019. Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

28 

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets (continued)

 

The following table represents the average balance sheets for the three-month periods ended September 30, 2019 and 2018, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   Three Months Ended September 30, 
   2019   2018 
  

Average

Balance

  

Interest

And

Dividends

  

Yield/

Cost

   Average Balance  

Interest

And Dividends

  

Yield/

Cost

 
   (Dollars in thousands) 
Interest-earning assets:                        
Loans 1   $281,646   $3,172    4.50%  $270,305   $2,888    4.27%
Mortgage-backed securities    789    6    3.04    998    8    3.21 
Other securities    1,002    6    2.40    93    1    4.30 
Other interest-earning assets    21,366    144    2.70    20,387    149    2.92 
Total interest-earning assets    304,803    3,328    4.37    291,783    3,046    4.18 
                               
Less: Allowance for loan losses   (1,436)             (1,546)          
Non-interest-earning assets    26,129              26,498           
Total assets   $329,496             $316,735           
                               
Interest-bearing liabilities:                              
Demand deposits  $14,384   $5    0.14%  $15,211   $6    0.16%
Savings   51,157    52    0.41    56,296    54    0.38 
Certificates of deposit   126,937    531    1.67    120,905    382    1.26 
Total deposits   192,478    588    1.22    192,412    442    0.92 
Borrowings   62,796    359    2.29    49,070    258    2.10 
Total interest-bearing liabilities    255,274    947    1.48    241,482    700    1.16 
                               
Noninterest-bearing demand deposits   5,793              5,463           
Noninterest-bearing liabilities    2,128              2,322           
Total liabilities    263,195              249,267           
                               
Shareholders’ equity    66,301              67,468           
Total liabilities and shareholders’ equity  $329,496             $316,735           
Net interest spread        $2,381    2.89%       $2,346    3.02%
Net interest margin              3.13%             3.22%
Average interest-earning assets to average interest-bearing liabilities              119.40%             120.83%

 

1 Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans. Also includes loans on nonaccrual status.

 

29 

 

  

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, 2019 to September 30, 2019

 

Assets: At September 30, 2019, the Company’s assets totaled $328.8 million, a decrease of $2.0 million, or 0.6%, from total assets at June 30, 2019. This decrease was attributed primarily to decreases in loans, net, and time deposits in other financial institutions, but was partially offset by an increase in cash and cash equivalents and loans for sale.

 

Cash and cash equivalents: Cash and cash equivalents increased $2.3 million or 23.3% to $12.2 million at September 30, 2019.

 

Time deposits in other financial institutions: Time deposits in other financial institutions decreased by $3.5 million or 50.2% to $3.5 million at September 30, 2019. As time deposits matured we reduced FHLB advances and increased cash and cash equivalents.

 

Investment securities: At September 30, 2019 our securities portfolio consisted of a single U.S. Treasury note, a single agency bond and mortgage-backed securities. Investment securities decreased $94,000 or 5.2% to $1.7 million at September 30, 2019.

 

Loans: Loans receivable, net, decreased by $1.3 million or 0.5% to $279.6 million at September 30, 2019. 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.

 

Non-Performing and Classified Loans: At September 30, 2019, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $7.5 million, or 2.7% of total loans (including loans purchased in the acquisition), compared to $8.0 million or 2.8%, of total loans at June 30, 2019. The Company’s allowance for loan losses totaled $1.5 million and $1.5 million at September 30, 2019 and June 30, 2019, respectively. The allowance for loan losses at September 30, 2019, represented 19.4% of nonperforming loans and 0.5% of total loans (including loans purchased in the acquisition), while at June 30, 2019, the allowance represented 18.1% of nonperforming loans and 0.5% of total loans.

 

The Company had $11.2 million in assets classified as substandard for regulatory purposes at September 30, 2019, including loans ($10.2 million) and real estate owned (“REO”) ($965,000.) Classified loans as a percentage of total loans (including loans acquired) was 3.6% and 3.9% at September 30, 2019 and June 30, 2019, respectively. Of substandard loans, approximately 96.3% were secured by real estate on which the Banks have priority lien position.

 

30 

 

  

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, 2019 to September 30, 2019 (continued)

  

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

 

(dollars in thousands)  September 30,
2019		   June 30,
2019		 
         
Substandard assets   $11,208   $11,590 
Doubtful assets    --    -- 
Loss assets    --    -- 
Total classified assets   $11,208   $11,590 

 

At September 30, 2019, the Company’s real estate acquired through foreclosure represented 8.6% of substandard assets compared to 6.1% at June 30, 2019. During the periods presented the Company made loans to facilitate the purchase of its other real estate owned by qualified buyers. During three months ended September 30, 2019, the Company sold no property and, therefore, made no loans to facilitate the purchases. During the year ended June 30, 2019, property with a carrying value of $193,000 was sold for $206,000 and made five loans totaling $214,000 to facilitate the purchases. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $135,000 and $136,000 at September 30, 2019 and June 30, 2019, respectively.

 

31 

 

  

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, 2019 to September 30, 2019 (continued)

 

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

 

   September 30, 2019   June 30, 2019 
   Number   Net   Number   Net 
   of   Carrying   of   Carrying 
   Properties   Value   Properties   Value 
                 
One- to four-family    17   $965    7   $710 
Building lot    1    --    1    -- 
Total REO    18   $965    8   $710 

  

At September 30, 2019 and June 30, 2019, the Company had $1.8 million and $1.8 million of loans classified as special mention, respectively (including loans acquired in the CKF Bancorp transaction on December 31, 2012). This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention.

 

Liabilities: Total liabilities decreased $1.8 million, or 0.7% to $262.7 million at September 30, 2019, primarily as a result of a decrease in FHLB advances. FHLB advances decreased $2.3 million or 3.5% to $64.4 million at September 30, 2019, while deposits increased $243,000 or 0.1% to $196.1 million.

 

Shareholders’ Equity: At September 30, 2019, the Company’s shareholders’ equity totaled $66.0 million, a decrease of $238,000 or 0.4% from the June 30, 2019 total. The change in shareholders’ equity was primarily associated with common shares purchased by the Company to hold as treasury shares, and net profits for the period less dividends paid on common stock.

 

32 

 

  

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, 2019 to September 30, 2019 (continued)

 

The Company paid dividends of $334,000 or 142.7% of net income for the three-month period just ended. On July 2, 2019, the members of First Federal MHC for the eighth time approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock. The Board of Directors of First Federal MHC applied for approval of another waiver. The Federal Reserve Bank of Cleveland has notified the Company that it did not object to the waiver of dividends paid by the Company to First Federal MHC, and, as a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third calendar quarter of 2020. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Management cannot speculate on future dividend levels, because various factors, including capital levels, income levels, liquidity levels, regulatory requirements and overall financial condition of the Company are considered before dividends are declared. However, management continues to believe that a strong dividend is consistent with the Company’s long-term capital management strategy. See “Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for additional discussion regarding dividends.

  

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2019 and 2018

 

General

 

Net income totaled $234,000 or $0.03 diluted earnings per share for the three months ended September 30, 2019, an increase of $96,000 or 69.6% from net income of $138,000 for the same period in 2018.

 

Net Interest Income

 

Net interest income before provision for loan losses increased $35,000 or 1.5% to $2.4 million for the three-month period just ended. Interest income increased by $282,000, or 9.3%, to $3.3 million, while interest expense increased $247,000 or 35.3% to $947,000 for the three months ended September 30, 2019.

 

Interest income increased period-to-period due to increases in both the average volume of interest-earning assets and the average rate earned on those assets. Average interest-earning assets increased $13.0 million or 4.5% to $304.8 million for the quarter ended September 30, 2019, compared to the prior-year period, while the average rate earned on assets increased 19 basis points to 437 basis points. Interest income on loans increased $284,000 or 9.8% to $3.2 million, due primarily to an increase in the average rate earned on the loan portfolio, which increased 23 basis points to 451 basis points for the three-month period ended September 30, 2019, while the average balance of the loan portfolio also increased $11.3 million or 4.2% to $281.6 million. Interest income on mortgage-backed securities decreased $2,000 to $6,000 for the quarterly period just ended due primarily to lower average volume of the assets. Interest income from other securities increased $5,000 to $6,000 for the recently ended quarter due primarily to a higher average volume of other securities period to period. Interest income from interest-bearing deposits and other decreased $5,000 or 3.4% to $144,000 for the quarter just ended primarily due to a decrease in the average rate earned of those assets, which decreased 22 basis points to 270 basis points for the quarterly period just ended. The average balance of interest-bearing deposits and other increased $979,000 or 4.8% to $21.4 million for the recently ended quarterly period.

 

Interest expense was higher for both deposits and borrowings for the recently ended quarterly period compared to the year-ago period, because of both rate and volume changes. Interest expense on deposits increased $146,000 or 33.0% to $588,000 for the three months ended September 30, 2019. In addition to attracting new time deposits, some of the banks’ deposit customers opted for the higher rate associated with the time deposits rather than remain in traditional savings accounts. The average rate paid on deposits increased 30 basis points to 122 basis points for the quarter ended September 30, 2019. Interest expense on borrowings increased $101,000 or 39.1% to $359,000 for the just-ended period, primarily due to a higher volume of borrowings. The average outstanding balance of borrowings increased $13.7 million or 28.0% to $62.8 million for the quarter ended September 30, 2019. Net interest spread decreased from 3.02% for the prior year quarterly period to 2.89% for the quarter ended September 30, 2019.

 

Provision for Losses on Loans

 

The Company recorded a $59,000 provision for losses on loans during the three months ended September 30, 2019, compared to a provision of $11,000 for the three months ended September 30, 2018.

 

33 

 

  

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 September 30, 2019 and 2018 (continued)

 

Non-interest Income

 

Non-interest income increased $5,000 or 7.2% to $74,000 for the three months ended September 30, 2019, compared to the prior year quarter, primarily because of a decrease in valuation adjustments on REO. The Company recorded no valuation adjustment during the recently-ended quarterly period to write down other real estate owned compared to an $18,000 adjustment recorded in the prior year period.

 

Non-interest Expense

 

Non-interest expense decreased $122,000 or 5.5% and totaled $2.1 million for the three months ended September 30, 2019. The decrease was primarily due to decreases in employee compensation and benefits, occupancy and equipment, advertising and other non-interest expense. Those decreases in expense were partially offset by increases in outside service fees, auditing and accounting, and foreclosure and OREO expenses, net.

 

Employee compensation and benefits for the quarter ended September 30, 2019 decreased $94,000 or 6.5% to $1.4 million, primarily due to lower contributions to the Company’s Defined Benefit (“DB”) pension plan. DB pension contributions decreased $82,000 or 31.6% to $179,000 for the three-month period recently ended compared to the prior year period. Lower DB pension contributions are a result of the freeze placed on the plan effective April 1, 2019, which is currently estimated to lower DB costs by $279,000 for the fiscal year ending June 30, 2020 compared to the prior fiscal year. Also contributing to lower employee compensation and benefits expense was the Company’s reduction of full-time equivalent (“FTE”) personnel from period to period. The Company had 64 FTEs at September 30, 2019, compared to 68 FTEs at September 30, 2018. Occupancy and equipment expenses decreased $27,000 or 15.9% to $143,000 for the recently ended quarter, as reduced maintenance and repair costs were experienced for both buildings and equipment and depreciation expense declined period to period. Advertising decreased $19,000 or 28.4% to $48,000 for the three months ended September 30, 2019, as the Company concentrated its advertising focus. Other non-interest expenses decreased $17,000 or 8.3% to $188,000 for the recently ended quarter primarily due to decreased FDIC insurance premiums. FDIC insurance premiums decreased from $22,000 for the quarter ended September 30, 2018, to zero for the recently ended quarter, because the banks were able to utilize their Small Bank Assessment Credits (“SBAC”) during the period. Because the Banks did not pay surcharges at least once during the credit calculation period (3rd quarter 2016 through 3rd quarter 2018), the FDIC determined the Banks to be eligible for credits against their insurance premiums when the Deposit Insurance Fund (“DIF”) reserve ratio equals or exceeds 1.38%. The DIF reserve ratio as of June 30, 2019 was 1.40%. The FDIC automatically applies SBACs to offset regular deposit insurance assessments for assessment periods where the DIF reserve ratio is at or above 1.38%. Assessments for the recently ended quarter totaled $21,000. The Banks’ remaining credits as of September 30, 2019 totaled $52,000. The determination on whether credits can be applied in any assessment period can only be made after the FDIC determines the reserve ratio. This information becomes publicly available about one month before that quarter’s assessments are paid. Although management expects to be able to utilize the remaining credits going forward, use of the credits is dependent on the DIF exceeding the 1.38% level.

 

Auditing and accounting expense increased $13,000 or 38.2% to $47,000 for the quarterly period just ended. Outside service fees increased $13,000 or 34.2% to $51,000 for the three months ended September 30, 2019, as Company switches data communication carriers in order to secure cost savings in the future. Foreclosure and OREO expenses, net, increased $11,000 or 47.8% to $34,000 for the recently ended quarter as a number of properties were received in foreclosure during the period.

 

Federal Income Tax Expense

 

The Company recorded a federal income tax expense of $60,000 for the three months ended September 30, 2019, compared to federal income tax expense of $42,000 in the prior year period, an increase of $18,000 or 42.9%.  

 

34 

 

   

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 effectiveness of 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 for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended September 30, 2019 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.

 

35 

 

 

Kentucky First Federal Bancorp

 

PART II

 

ITEM 1. Legal Proceedings

 

None.

 

ITEM 1A. Risk Factors

 

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

 

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 September 30, 2019.

 

Period  Total # of shares purchased   Average price paid per share (incl commissions)   Total # of shares purchased as part of publicly announced plans or programs   Maximum # of shares that may yet be purchased under the plans or programs 
                 
July 1-31, 2019   --   $--    --    96,200 
August 1-31, 2019   --   $--    --    96,200 
September 1-30, 2019   20,000   $7.50    20,000    76,200 

 

(1) On December 19, 2018, the Company announced that it had substantially completed its program initiated on January 16, 2014 to repurchase of up to 150,000 shares of its common stock and that it was initiating a new stock repurchase plan in which the Board of Directors authorized the purchase of up to 150,000 shares of its common stock.

 

ITEM 3. Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. Other Information

 

None.

 

ITEM 6. Exhibits

 

3.11   Charter of Kentucky First Federal Bancorp
3.22   Bylaws of Kentucky First Federal Bancorp, as amended and restated
4.11   Specimen Stock Certificate of Kentucky First Federal Bancorp
31.1   CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0   The following materials from Kentucky First Federal Bancorp’s Quarterly Report On Form 10-Q for the quarter ended September 30, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 

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

 

(2) Incorporated herein by reference to the Company’s Current Report on Form 8-K filed August 25, 2017 (File No. 0-51176).

 

36 

 

  

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: November 14, 2019 By: /s/ Don D. Jennings
    Don D. Jennings
    Chief Executive Officer
     
Date: November 14, 2019 By: /s/ R. Clay Hulette
   

R. Clay Hulette

Vice President and Chief Financial Officer

 

 

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