UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ____________ to _______________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)(Zip Code)
(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 | ||
| The |
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:
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).
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 | ☐ |
| ☒ | 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 8, 2023, the latest practicable date, the
Corporation had
INDEX
i
PART I – FINANCIAL INFORMATION
ITEM 1: Financial Statements
Kentucky First Federal Bancorp
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| September 30, 2023 | June 30, 2023 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Cash and due from financial institutions | $ | $ | ||||||
| Fed funds sold | ||||||||
| Interest-bearing demand deposits | ||||||||
| Cash and cash equivalents | ||||||||
| Securities available for sale | ||||||||
| Securities held-to-maturity, at amortized cost- approximate fair value of $ | ||||||||
| Loans held for sale | - | |||||||
| Loans, net of allowance of $ | ||||||||
| Other real estate owned, net | ||||||||
| Premises and equipment, net | ||||||||
| Federal Home Loan Bank stock, at cost | ||||||||
| Accrued interest receivable | ||||||||
| Bank-owned life insurance | ||||||||
| Goodwill | ||||||||
| Prepaid income taxes | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits | $ | $ | ||||||
| Federal Home Loan Bank advances | ||||||||
| Advances by borrowers for taxes and insurance | ||||||||
| Accrued interest payable | ||||||||
| Deferred income taxes | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders’ equity | ||||||||
| Preferred stock, | ||||||||
| Common stock, | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury shares at cost, | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| 1 | Beginning July 1, 2023 the ACL was estimated based on current expected credit loss methodology. Prior to July 1, 2023, the estimate was based on the incurred loss methodology. See additional discussion in Note 1, Basis of Presentation. |
See accompanying notes to condensed consolidated financial statements.
1
Kentucky First Federal Bancorp
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
| Three months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Interest income | ||||||||
| Loans, including fees | $ | $ | ||||||
| Mortgage-backed securities | ||||||||
| Interest-bearing deposits and other | ||||||||
| Total interest income | ||||||||
| Interest expense | ||||||||
| Interest-bearing demand deposits | ||||||||
| Savings | ||||||||
| Certificates of deposit | ||||||||
| Deposits | ||||||||
| Borrowings | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for credit losses | ||||||||
| Net interest income after provision for credit losses | ||||||||
| Non-interest income | ||||||||
| Earnings on bank-owned life insurance | ||||||||
| Net gain (loss) on sales of loans | ( | ) | ||||||
| Net gain on sale of other real estate owned | ||||||||
| Net gain on sale of real estate owned | ||||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense | ||||||||
| Employee compensation and benefits | ||||||||
| Data processing | ||||||||
| Occupancy and equipment | ||||||||
| FDIC insurance premiums | ||||||||
| Voice and data communications | ||||||||
| Advertising | ||||||||
| Outside service fees | ||||||||
| Auditing and accounting | ||||||||
| Regulatory assessments | ||||||||
| Foreclosure and real estate owned expenses (net) | ||||||||
| Franchise and other taxes | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ||||
| EARNINGS (LOSS) PER SHARE | ||||||||
| $ | ( | ) | $ | |||||
| DIVIDENDS PER SHARE | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
2
Kentucky First Federal Bancorp
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
| Three months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Other comprehensive losses, net of tax: | ||||||||
| Unrealized losses on securities designated as available-for-sale, net of tax benefits of $ | ( | ) | ( | ) | ||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
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
(Unaudited)
(Dollar amounts in thousands, except per share data)
September 30, 2023
| Common stock | Additional paid-in capital | Retained earnings | Treasury shares | Accumulated other comprehensive income (loss) | Total | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Cumulative impact of adoption of ASC 326 | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at July 1, 2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| – | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
September 30, 2022
| Common stock | Additional paid-in capital | Retained earnings | Unearned employee stock ownership plan (ESOP) | Treasury shares | Accumulated other comprehensive income (loss) | Total | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | – | |||||||||||||||||||||||||||
| Allocation of ESOP shares | – | |||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| – | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
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, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| Depreciation | ||||||||
| Accretion of purchased loan credit discount | ( | ) | ( | ) | ||||
| Amortization of deferred loan origination costs (fees) | ( | ) | ( | ) | ||||
| Amortization of premiums on investment securities | ( | ) | ( | ) | ||||
| Net (gain) loss on sale of loans | ( | ) | ||||||
| Net (gain) loss on sale of other real estate | - | ( | ) | |||||
| Net (gain) loss on sale of real estate owned | ( | ) | - | |||||
| ESOP compensation expense | - | |||||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| Provision for credit losses | ||||||||
| Origination of loans held for sale | ( | ) | ( | ) | ||||
| Proceeds from loans held for sale | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Increase (decrease) in cash, due to changes in: | ||||||||
| Accrued interest receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accrued interest payable | ( | ) | ||||||
| Other liabilities | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of investments available for sale | - | ( | ) | |||||
| Securities maturities, prepayments and calls: | ||||||||
| Held to maturity | ||||||||
| Available for sale | ||||||||
| Proceeds from redemption of FHLB stock | ||||||||
| Proceeds from sale of other real estate | - | |||||||
| Loans originated for investment, net of principal collected | ( | ) | ( | ) | ||||
| Proceeds from sale of real estate owned | - | |||||||
| Additions to premises and equipment, net | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net increase (decrease) in deposits | ( | ) | ||||||
| Payments by borrowers for taxes and insurance, net | ||||||||
| Proceeds from Federal Home Loan Bank advances | ||||||||
| Repayments on Federal Home Loan Bank advances | ( | ) | ( | ) | ||||
| Dividends paid on common stock | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Beginning cash and cash equivalents | ||||||||
| Ending cash and cash equivalents | $ | $ | ||||||
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, | ||||||||
| 2023 | 2022 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest on deposits and borrowings | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
6
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(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.
Note 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, 2023, 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, 2023, 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 2023 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.
Critical Accounting Policies and Estimates
Investments – Management determines the classification of debt securities at purchase as held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are those we have both the intent and ability to hold to maturity and are reported at amortized cost. Securities that are not considered held-to-maturity are considered either trading or available-for-sale securities in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 320, Investments – Debt Securities, and are reported at fair value in the statement of financial position. We have no trading securities. The adjustment to fair value for available-for-sale securities for unrealized gains and losses is included as a separate component of shareholders’ equity, net of tax.
Loans – Loans for which we have the ability and intent to hold until maturity and/or payoff are reported at the carrying value of the unpaid principal reduced by unearned interest, an allowance for credit losses and unamortized deferred fees and costs and premiums. Interest income is accrued on a level yield basis. In circumstances where management believes that collection of interest income is uncollectible on specific loans, after considering economic and business conditions, collateral value and collection efforts, interest accrual is discontinued. Interest income may be recognized on the cash basis when received unless a determination has been made by management to apply all of the payment against principal.
7
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 1. Basis of Presentation (continued)
Critical Accounting Policies and Estimates (continued)
Allowance for Credit Losses – We account for the allowance for credit losses under ASC 326, Measurement of Credit Losses on Financial Instruments, which is commonly known as CECL. We measure expected credit losses of financial assets on a weighted average remaining maturity (WARM) basis.
We maintain an allowance for credit losses (“ACL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit losses inherent in the estimated life of the loan portfolio. Credit losses are charged to and recoveries are credited to the ACL.
Loans with similar risk characteristics are evaluated on a collective basis within homogeneous loan pools under ASC 326. Our homogeneous loan pools are primarily determined by loan purpose and collateral type. Pools include residential real estate (composed of one-to four-family, multi-family, and construction), land, farm, nonresidential real estate, commercial and industrial, and consumer loans (composed of Loans on deposit, home equity, automobile, and unsecured). Credits that are nonaccrual status are subject to individual evaluation.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Qualitative factors used to derive our ACL include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, trends in loan losses and underwriting exceptions. Reasonable and supportable economic forecasts that may offset collectibility are also included as factors in our ACL model. Management continually reevaluates the other subjective factors included in its ACL analysis.
Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates.
New Accounting Standards
FASB ASC 326 - In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard requires credit losses on most financial assets and certain other instruments to be measured using an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under this model entities estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of that instrument. The ASU replaces the current accounting model for purchased credit impaired and debt securities. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (referred to as “PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described herein.
8
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 1. Basis of Presentation (continued)
New Accounting Standards (continued)
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 was on its allowance for loan and lease losses, although the ASU also amends the accounting for credit losses on available-for-sale debt securities, held-to-maturity securities, and purchased financial assets with credit deterioration. The standard was 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 was applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach).
In addition, ASC 326 made changes to the accounting for available-for-sale (“AFS”) debt securities. One such change requires credit losses to be presented as an allowance rather than as a write-down on AFS securities. Management does not intend to sell or believes that it is more likely than not that they will be required to sell.
We adopted ASC 326 effective July 1, 2023, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet (“OBS”) credit exposures. Results for reporting periods beginning after July 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.
Upon adoption of the ASU we recorded an increase
in the allowance for credit loss (“ACL”) for loans which represented a $
A liability of $
| As Reported | Pre-ASC | Impact of | ||||||||||
| Under | 326 | ASC 326 | ||||||||||
| (Dollars in thousands) | ASC 326 | Adoption | Adoption | |||||||||
| Assets: | ||||||||||||
| Loans | ||||||||||||
| Residential real estate: | ||||||||||||
| One- to four-family | $ | $ | $ | |||||||||
| Multi-family | ( | ) | ||||||||||
| Construction | ||||||||||||
| Land | ||||||||||||
| Farm | ||||||||||||
| Nonresidential real estate | ( | ) | ||||||||||
| Commercial and industrial | ( | ) | ||||||||||
| Consumer and other: | - | |||||||||||
| Loans on deposits | ( | ) | ||||||||||
| Home equity | ||||||||||||
| Automobile | ||||||||||||
| Unsecured | ||||||||||||
| Allowance for credit losses on loans | $ | |||||||||||
| Liabilities: | ||||||||||||
| Allowance for credit losses on unfunded credit exposures | $ | |||||||||||
9
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 1. Basis of Presentation (continued)
New Accounting Standards (continued)
ASU 2019-05, Financial Instruments-Credit Losses, Targeted Transition Relief, allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20, if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016-13. We adopted ASU 2019-05 on July 1, 2023, and did not elect the fair value option on any financial instruments.
ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, eliminates the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, for entities that have adopted the current expected credit loss model introduced by ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2022-02 also requires disclosure by public business entities of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The Company adopted the standard on July 1, 2023.
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.
Note 2. Earnings Per Share
| Three months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| $ | ( | ) | $ | |||||
| $ | ( | ) | $ | |||||
There were stock option shares outstanding for the three-month periods ended September 30, 2023 and 2022.
10
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 3. Investment Securities
| September 30, 2023 | ||||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Estimated fair value | ||||||||||||
| Available-for-sale Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | | $ | $ | |||||||||||
| Held-to-maturity Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
| June 30, 2023 | ||||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized (losses) | Estimated fair value | ||||||||||||
| Available-for-sale Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
| Held-to-maturity Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
At September 30, 2023 and June 30, 2023 the Company’s debt securities consisted of mortgage-backed securities, which do not have a single maturity date. 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.
Our pledged securities totaled $
We evaluated securities in unrealized loss positions
for evidence of credit loss, considering duration, severity, financial condition of the issuer, our intention to sell or requirement to
sell. Those securities were agency mortgage-backed securities, 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 reserve for credit loss was
considered necessary. Debt securities in an unrealized loss position as a percent of total debt securities were
September 30, 2023
Available-for-Sale
| (in thousands) | Amortized Cost | Gross Unrealized (losses) | Fair Value | |||||||||
| Less Than 12 Months | ||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | |||||||||
| 12 Months or More | ||||||||||||
| Agency mortgage-backed securities | ||||||||||||
| Total temporarily impaired AFS securities | $ | $ | $ | |||||||||
11
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 3. Investment Securities (continued)
Held to Maturity
| (in thousands) | Amortized Cost | Gross Unrealized (losses) | Fair Value | |||||||||
| Less Than 12 Months | ||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | |||||||||
| 12 Months or More | ||||||||||||
| Agency mortgage-backed securities | ||||||||||||
| Total temporarily impaired HTM securities | $ | $ | $ | |||||||||
June 30, 2023
Available-for-Sale
| (in thousands) | Amortized Cost | Gross Unrealized (losses) | Fair Value | |||||||||
| Less Than 12 Months | ||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | |||||||||
| 12 Months or More | ||||||||||||
| Agency mortgage-backed securities | ||||||||||||
| Total temporarily impaired AFS securities | $ | $ | $ | |||||||||
Held to Maturity
| (in thousands) | Amortized Cost | Gross Unrealized Losses | Fair Value | |||||||||
| Less Than 12 Months | ||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | |||||||||
| 12 Months or More | ||||||||||||
| Agency mortgage-backed securities | ||||||||||||
| Total temporarily impaired HTM securities | $ | $ | $ | |||||||||
Note 4. Loans receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, adjusted for deferred loan origination costs, net, discounts on purchased loans, and the allowance for credit losses. Interest income is accrued on the unpaid principal balance unless the collectability of the loan is in doubt. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on one- to four-family residential loans is generally discontinued at the time a loan is 180 days delinquent and on other loans at the time a loan is 90 days delinquent. All other loans are moved to non-accrual status in accordance with the Company’s policy, typically 90 days after the loan becomes delinquent. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
12
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
| September 30, | June 30, | |||||||
| (in thousands) | 2023 | 2023 | ||||||
| Residential real estate | ||||||||
| One- to four-family | $ | $ | ||||||
| Multi-family | ||||||||
| Construction | ||||||||
| Land | ||||||||
| Farm | ||||||||
| Nonresidential real estate | ||||||||
| Commercial and industrial | ||||||||
| Consumer and other: | ||||||||
| Loans on deposits | ||||||||
| Home equity | ||||||||
| Automobile | ||||||||
| Unsecured | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The amounts above include net deferred loan costs
of $
13
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
The allowance for credit losses is a valuation allowance that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected for the loans. Loan losses are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience, derived from the Company’s data, provides the basis for estimation of expected credit losses, although management also compares the Company’s data with peer group data. Adjustments to historical loss information may be made for differences in: lending policy, procedures and practice; economic conditions; the nature and volume of the loan portfolio; volume delinquent and problem loans; the current and anticipated economic conditions in the primary lending area; and other external 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.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pool evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the sale of the collateral, the expected credit losses are based on the fair value of the collateral at the reporting date, less any discounts and selling costs.
Management monitors loan performance on a monthly
basis and performs a quarterly evaluation of the adequacy of the ACL. The Banks begin enhanced monitoring of all loans rated 5-Watch or
worse and obtain a new appraisal or asset valuation for most loans placed on nonaccrual status. New appraisals are usually not obtained
on loans with outstanding principal amounts of $
14
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments, when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a modification will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Banks.
The Banks categorize 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, and current economic trends, among other factors. Management utilizes a risk rating scale ranging from 1-Highest Pass to 9-Loss to evaluate loan quality. Consumer purpose loans are identified as either performing or nonperforming based on the payment status of the loans. Nonperforming consumer loans are loans that are nonaccrual or 90 days or more past due and still accruing.
Our portfolio segments include residential real estate, nonresidential real estate, farm, land, commercial and industrial, and consumer and other loans. Risk factors associated with our portfolio segments are as follows:
Residential Real Estate
Our primary lending activity is the origination of mortgage loans, which enable a borrower to purchase or refinance existing homes in the Banks’ respective market areas. We further classify our residential real estate loans as one- to four-family (owner-occupied vs nonowner-occupied), multi-family or construction. We believe that our first mortgage position on loans secured by residential real estate presents lower risk than our other loans, with the exception of loans secured by deposits.
We offer a mix of adjustable-rate and fixed-rate
mortgage loans with terms up to 30 years for owner-occupied properties. For these properties a borrower may be able to borrow up to
We offer loans on one- to four-family rental properties
at a maximum of
We also originate loans to individuals to finance
the construction of residential dwellings for personal use or for use as rental property. We occasionally lend to builders for construction
of speculative or custom residential properties for resale, but on a limited basis. Construction loans are generally less than one year
in length, do not exceed
15
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
Multi-family Loans
We offer mortgage loans secured by residential
multi-family (five or more units). Generally, these loans are originated for 25 years or less and do not exceed
Nonresidential Loans
We offer mortgage loans secured by nonresidential
real estate comprised generally of commercial office buildings, churches and properties used for other purposes. Generally, these loans
are originated for
Consumer lending
Our consumer loans include home equity lines of
credit, loans secured by savings deposits, automobile loans, and unsecured loans. Home equity loans are generally second mortgage loans
subordinate only to first mortgages also held by the bank and do not exceed
Impaired loans
The Banks choose the most appropriate method for accounting for impaired loans. For secured loans, which make up the vast majority of the loans in the Banks’ portfolio, this method involves determining the fair value of the collateral, reduced by estimated selling costs. Where appropriate, the Banks would account for impaired loans by determining the present value of expected future cash flows discounted at the loan’s effective interest rate.
A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Although most of our loans are secured by collateral, we rely heavily on the capacity of our borrowers to generate sufficient cash flow to service their debt. As a result, our loans do not become collateral-dependent until there is deterioration in the borrower’s cash flow and financial condition, which makes it necessary for us to look to the collateral for our sole source of repayment. Collateral-dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under the policy at that time.
We utilize updated independent appraisals to determine fair value for collateral-dependent loans, adjusted for estimated selling costs, in determining our specific reserve. In some situations, management does not secure an updated independent appraisal. These situations may involve small loan amounts or loans that, in management’s opinion, have an abnormally low loan-to-value ratio.
With respect to the Banks’ investment in troubled debt restructurings, multi-family and nonresidential loans, and the evaluation of impairment thereof, such loans are nonhomogenous and, as such, may be deemed to be collateral-dependent when they become more than 90 days delinquent. We obtain updated independent appraisals in these situations or when we suspect that the previous appraisal may no longer be reflective of the property’s current fair value. This process varies from loan to loan, borrower to borrower, and also varies based on the nature of the collateral.
16
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
| September 30, 2023: | ||||||||||||||||||||||||||||
| (in thousands) | Pre-ASC 326 Adoption | Impact of ASC 326 Adoption | As Reported Under ASC 326 | Provision (credit) for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||
| Multi-family | ( | ) | ( | ) | ||||||||||||||||||||||||
| Construction | ( | ) | ||||||||||||||||||||||||||
| Land | ( | ) | ||||||||||||||||||||||||||
| Farm | ( | ) | ||||||||||||||||||||||||||
| Nonresidential real estate | ( | ) | ( | ) | ||||||||||||||||||||||||
| Commercial and industrial | ( | ) | ||||||||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||||||||||
| Loans on deposits | ( | ) | ||||||||||||||||||||||||||
| Home equity | ||||||||||||||||||||||||||||
| Automobile | ( | ) | ||||||||||||||||||||||||||
| Unsecured | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
For the three months ended September 30, 2023,
the provision for credit losses totaled $
The following table presents the activity in the ALLL by portfolio segment for the three months ended September 30, 2022:
| (in thousands) | Beginning balance | Provision for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate: | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Land | ( | ) | ||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ( | ) | ||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | ||||||||||||||||||||
| Home equity | ( | ) | ||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | |||||||||||||||
17
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
September 30, 2023:
| (in thousands) | Amortized Cost Basis | Ending allowance on collateral- dependent loans | ||||||
| Loans individually evaluated for impairment: | ||||||||
| Residential real estate: | ||||||||
| One- to four-family | $ | $ | ||||||
| Nonresidential real estate | ||||||||
| Commercial and industrial | ||||||||
Real estate stands as collateral for loans individually evaluated for impairment.
The following tables present the balance in the ALLL and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2023.
June 30, 2023:
| (in thousands) | Loans individually evaluated | Loans acquired with deteriorated credit quality* | Ending loans balance | Ending allowance attributed to loans | ||||||||||||
| Loans individually evaluated for impairment: | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | $ | $ | ||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Home Equity | ||||||||||||||||
| Loans collectively evaluated for impairment: | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | ||||||||||||||
| Multi-family | ||||||||||||||||
| Construction | ||||||||||||||||
| Land | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Loans on deposits | ||||||||||||||||
| Home equity | ||||||||||||||||
| Automobile | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | |||||||||||||||
| * | These loans were evaluated at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition. |
18
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
| Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | ||||||||||
| (in thousands) | Three months ended September 30, 2022 | |||||||||||
| With no related allowance recorded: | ||||||||||||
| Residential real estate: | ||||||||||||
| One- to four-family | $ | $ | $ | |||||||||
| Multi-family | ||||||||||||
| Farm | ||||||||||||
| Nonresidential real estate | ||||||||||||
| Consumer and other | ||||||||||||
| Purchased credit-impaired loans | ||||||||||||
| $ | $ | $ | ||||||||||
There were no impaired loans with an allowance recorded at June 30, 2023.
| September 30, 2023 | June 30, 2023 | |||||||||||||||
| (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 | $ | $ | $ | $ | ||||||||||||
| Nonresidential real estate and land | ||||||||||||||||
| Consumer | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Nonaccrual loans had no related allowance for credit losses based on individual evaluation at September 30, 2023.
One- to four-family loans in process of foreclosure
totaled $
There were no loans modified during the three months ended September 30, 2023 to borrowers experiencing financial difficulties.
Troubled Debt Restructurings:
Prior to the adoption of ASC 326 a Troubled Debt Restructuring (“TDR”) was the situation where the Bank granted 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 June 30, 2023, the Company had $
During the three months ended September 30, 2022 the Company added no loans restructured as TDRs. No TDRs defaulted during the three-month periods ended September 30, 2022.
19
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
| (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 | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Land | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | ||||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2023, by class of loans:
| June 30, 2023: | ||||||||||||||||||||
| (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 | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Land | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Loans on deposits | ||||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
20
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 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.
21
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. 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.
| Revolving | ||||||||||||||||||||||||||||||||
| (in thousands) | Term Loans Amortized Cost by Origination Fiscal Year | Loans Amortized | ||||||||||||||||||||||||||||||
| As of September 30, 2023 | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Cost Basis | Total | ||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||||||||
| One- to four-family | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Special mention | - | - | ||||||||||||||||||||||||||||||
| Substandard | - | |||||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | $ | - | $ | ||||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | |||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | |||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | |||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | |||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Farm | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | - | $ | $ | - | $ | ||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | - | $ | $ | - | $ | ||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Special mention | - | - | ||||||||||||||||||||||||||||||
| Substandard | - | - | ||||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | - | $ | - | $ | ||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | - | $ | - | $ | ||||||||||||||||||||||
| Current period gross charge offs | $ | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||
| Share Loans | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Home Equity | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | - | $ | - | $ | $ | ||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | ||||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | - | $ | - | $ | $ | ||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Auto | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||||||||||||||
| Risk Rating: | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Special mention | - | - | - | - | ||||||||||||||||||||||||||||
| Substandard | - | - | - | - | ||||||||||||||||||||||||||||
| Doubtful | - | - | - | - | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Current period gross charge offs | $ | $ | $ | $ | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
22
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 4. Loans receivable (continued)
At June 30, 2023, 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 | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Construction | ||||||||||||||||
| Land | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Loans on deposits | ||||||||||||||||
| Home equity | ||||||||||||||||
| Automobile | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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.
| (in thousands) | June 30, 2023 | |||
| One- to four-family residential real estate | $ | |||
| (in thousands) | Twelve months ended June 30, 2023 | |||
| Balance at beginning of period | $ | |||
| Accretion of income | ( | ) | ||
| Balance at end of period | $ | |||
For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2023, and noallowance for loan losses were reversed during those periods.
23
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 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 six 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.
| 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, 2023 | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
| June 30, 2023 | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
There were no assets or liabilities which were measured at fair value on a nonrecurring basis at September 30, 2023, and June 30, 2023.
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.
24
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 5. Disclosures About Fair Value of Assets and Liabilities (continued)
| Fair Value Measurements at | ||||||||||||||||||||
| Carrying | September 30, 2023 Using | |||||||||||||||||||
| (in thousands) | Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Available-for-sale securities | $ | |||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans receivable – net | $ | |||||||||||||||||||
| Federal Home Loan Bank stock | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | $ | |||||||||||||||||
| Federal Home Loan Bank advances | ||||||||||||||||||||
| Advances by borrowers for taxes and insurance | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Fair Value Measurements at | ||||||||||||||||||||
| Carrying | June 30, 2023 Using | |||||||||||||||||||
| (in thousands) | Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Available-for-sale securities | $ | |||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||
| Loans receivable - net | $ | |||||||||||||||||||
| Federal Home Loan Bank stock | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | ||||||||||||||||
| Federal Home Loan Bank advances | ||||||||||||||||||||
| Advances by borrowers for taxes and insurance | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
25
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 2023
(unaudited)
Note 6. Other Comprehensive Income (Loss)
| (in thousands) | Three months ended September 30, 2023 | |||
| Beginning balance | $ | ( | ) | |
| Current year change | ( | ) | ||
| Ending balance | $ | ( | ) | |
| Three months ended September 30, | ||||||||
| (in thousands) | 2023 | 2022 | ||||||
| Unrealized holding gains (losses) on available-for-sale securities | $ | ( | ) | $ | ( | ) | ||
| Tax effect | ||||||||
| Net-of-tax amount | $ | ( | ) | $ | ( | ) | ||
26
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, as well as other periodic reports filed with the Securities and Exchange Commission, that are not historical facts are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, that are subject to certain risks and uncertainties. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits. 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; the interest rate environment and the impact of the interest rate environment on our business, financial condition and results of operations; our ability to successfully execute our strategy to increase earnings, increase core deposits, reduce reliance on higher cost funding sources and shift more of our loan portfolio towards higher-earning loans; our ability to pay future dividends and if so at what level; our ability to receive any required regulatory approval or non-objection for the payment of dividends from First Federal Savings and Loan Association of Hazard and First Federal Savings Bank of Kentucky to the Company or from the Company to shareholders; competitive conditions in the financial services industry; changes in the level of inflation; changes in the demand for loans, deposits and other financial services that we provide; the possibility that future credit losses may be higher than currently expected; competitive pressures among financial services companies; the ability to attract, develop and retain qualified employees; our ability to maintain the security of our data processing and information technology systems; the outcome of pending or threatened litigation, or of matters before regulatory agencies; 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, 2023. 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.
Asset/Liability Management
Management and the boards of the subsidiary Banks are responsible for the asset/liability management issues that affect the individual Banks. Either Bank may work with its sister Bank to mitigate potential asset/liability risks to the Banks and to the Company as a whole. Management utilizes a third-party to perform interest rate risk (“IRR”) calculations for each of the Banks. Management monitors and considers methods of managing the rate sensitivity and repricing characteristics of each of the Bank’s balance sheet components to maintain acceptable levels of change in the economic value of equity (“EVE”) as well as evaluating the impact on earnings in the event of changes in prevailing market interest rates. Interest rate sensitivity analysis is used to measure our interest rate risk by computing estimated changes in EVE that are a result of changes in the net present value of its cash flows from assets, liabilities, and off-balance sheet items. These changes in cash flow are estimated based on hypothetical instantaneous and permanent increases and decreases in market interest rates.
In March 2022 the Federal Open Market Committee (“FOMC”) of the Federal Reserve Bank began raising the target range for the fed funds rate of interest and since that time has raised the short-term interest rate by 500 basis points. At September 30, 2023, we believe our risk associated with rising interest rates was moderate. Our IRR model indicated that at June 30, 2023, our EVE was approximately 16.5%, despite the historic interest rate increases during the previous twelve months. Although general market participants believe that the FOMC will now pause interest rate increases for a period of time, our June 30, 2023 EVE is anticipated to be approximately 14.6% and 11.9% under sudden and sustained increase in prevailing market interest rates of 100 basis points and 200 basis points, respectively. Computations or prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and deposit run-offs. These computations should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Banks may undertake in response to changes in interest rates. Certain shortcomings are inherent in this method of computing EVE. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.
27
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Average Balance Sheets
The following table represents the average balance sheets for the three-month periods ended September 30, 2023 and 2022, 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, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Average Balance | Interest And Dividends | Yield/ Cost | Average Balance | Interest And Dividends | Yield/ Cost | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans 1 | $ | 318,541 | $ | 3,459 | 4.34 | % | $ | 283,554 | $ | 2,644 | 3.73 | % | ||||||||||||
| Mortgage-backed securities | 11,924 | 99 | 3.32 | 14,002 | 114 | 3.26 | ||||||||||||||||||
| Other interest-earning assets | 11,878 | 176 | 5.93 | 17,542 | 127 | 2.90 | ||||||||||||||||||
| Total interest-earning assets | 342,343 | 3,734 | 4.36 | 315,098 | 2,885 | 3.66 | ||||||||||||||||||
| Less: Allowance for loan losses | (1,627 | ) | (1,545 | ) | ||||||||||||||||||||
| Non-interest-earning assets | 12,194 | 12,028 | ||||||||||||||||||||||
| Total assets | $ | 352,910 | $ | 325,581 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | $ | 17,887 | $ | 8 | 0.18 | % | $ | 21,638 | $ | 11 | 0.20 | % | ||||||||||||
| Savings | 56,332 | 57 | 0.41 | 75,593 | 102 | 0.54 | ||||||||||||||||||
| Certificates of deposit | 149,812 | 1,151 | 3.07 | 121,286 | 237 | 0.78 | ||||||||||||||||||
| Total deposits | 224,031 | 1,216 | 2.17 | 218,517 | 350 | 0.64 | ||||||||||||||||||
| Borrowings | 63,120 | 848 | 5.37 | 38,011 | 103 | 1.08 | ||||||||||||||||||
| Total interest-bearing liabilities | 287,151 | 2,064 | 2.87 | 256,528 | 453 | 0.71 | ||||||||||||||||||
| Noninterest-bearing demand deposits | 13,225 | 15,054 | ||||||||||||||||||||||
| Noninterest-bearing liabilities | 2,197 | 2,120 | ||||||||||||||||||||||
| Total liabilities | 302,573 | 273,702 | ||||||||||||||||||||||
| Shareholders’ equity | 50,337 | 51,879 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 352,910 | $ | 325,581 | ||||||||||||||||||||
| Net interest spread | $ | 1,670 | 1.49 | % | $ | 2,432 | 2.96 | % | ||||||||||||||||
| Net interest margin | 1.95 | % | 3.09 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 119.22 | % | 122.83 | % | ||||||||||||||||||||
| 1 | Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans. Also includes loans on nonaccrual status. |
28
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, 2023 to September 30, 2023
Financial Position and Results of Operations
At September 30, 2023 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession could adversely impact the Company’s and the Banks’ capital position and regulatory capital ratios due to a potential increase in credit losses.
Assets: At September 30, 2023, the Company’s assets totaled $356.8 million, an increase of $7.8 million, or 2.2%, from total assets at June 30, 2023, due primarily to the increase in loans, net, as well as an increase in cash and cash equivalents.
Cash and cash equivalents: Cash and cash equivalents increased $4.4 million or 54.1% to $12.6 million at September 30, 2023. Most of the Company’s cash and cash equivalents are held in interest-bearing demand deposits.
Investment securities: At September 30, 2023, our securities portfolio, which consisted of mortgage-backed securities, decreased $868,000 or 7.0% and totaled $11.5 million, compared to June 30, 2023.
Loans: Loans, net and loans available-for sale in the aggregate increased $4.7 million or 1.5% and totaled $318.2 million and $280,000, respectively at September 30, 2023. Loans receivable, net, increased by $4.4 million or 1.4% to $318.2 million at September 30, 2023. Loans available-for-sale increased to $280,000 at September 30, 2023. 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, 2023, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $5.3 million, or 1.6% of total loans compared to $4.7 million or 1.5%, of total loans at June 30, 2023. The Company’s ACL totaled $2.1 million at September 30, 2023 and the ALLL totaled $1.6 million at June 30, 2023, respectively. The ACL at September 30, 2023, represented 40.3% of nonperforming loans and 0.7% of total loans, while at June 30, 2023, ALLL represented 34.8% of nonperforming loans and 0.5% of total loans.
The Company had $7.7 million in assets classified as substandard for regulatory purposes at September 30, 2023, including real estate owned (“REO”) of $10,000. Classified loans as a percentage of total loans (including loans acquired) was 2.4% and 2.3% at September 30, 2023 and June 30, 2023, respectively. Of substandard loans, 100.0% were secured by real estate on which the Banks have priority lien position.
The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated:
| (dollars in thousands) | September 30, 2023 | June 30, 2023 | ||||||
| Substandard assets | $ | 7,719 | $ | 7,266 | ||||
| Doubtful assets | – | – | ||||||
| Loss assets | – | – | ||||||
| Total classified assets | $ | 7,719 | $ | 7,266 | ||||
At September 30, 2023, the Company’s real estate acquired through foreclosure represented 0.1% of substandard assets compared to 0.1% at June 30, 2023. During the period presented the Company made no loans to facilitate the purchase of its other real estate owned by qualified buyers. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $0 and $0 at September 30, 2023 and June 30, 2023, respectively.
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, 2023 to September 30, 2023 (continued)
The following table presents the aggregate carrying value of REO at the dates indicated:
| September 30, 2023 | June 30, 2022 | |||||||||||||||
| Number of Properties | Net Carrying Value | Number of Properties | Net Carrying Value | |||||||||||||
| One- to four-family | 1 | $ | 10 | 2 | $ | 70 | ||||||||||
| Building lot | – | – | – | – | ||||||||||||
| Total REO | 1 | $ | 10 | 2 | $ | 70 | ||||||||||
At September 30, 2023 and June 30, 2023, the Company had $853,000 and $854,000 of loans classified as special mention, respectively. This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but does possess credit deficiencies or potential weaknesses deserving our close attention.
Liabilities: Total liabilities increased $8.8 million, or 3.0% to $307.1 million at September 30, 2023, as deposits increased $26.1 million or 11.5% to $252.4 million and advances decreased $17.5 million or 25.0% to $52.6 million.
Certificates of deposit increased $29.2 million or 21.3% and totaled $166.5 million at September 30, 2023, of which $48.1 million were brokered deposits. Demand deposit accounts increased $375,000 or 1.2% and totaled $31.8 million at quarter end. Savings accounts decreased $3.5 million or 6.1% and totaled $54.1 million at the end of the current period. The cost of liabilities has been increasing rapidly due to higher costs of both wholesale and retail funding. Continued increases in liability costs, especially for wholesale funds, will primarily be driven by future increases in market rates by the Federal Reserve. It is believed that we are near the peak of this rate cycle which, if so, will likely slow the increasing costs of our liabilities.
Shareholders’ Equity: At September 30, 2023, the Company’s shareholders’ equity totaled $49.7 million, a decrease of $1.1 million or 2.1% from the June 30, 2023 total. The decrease in shareholders’ equity was primarily associated with adoption of the CECL accounting standard ($414,000) and unrealized losses on available-for-sale securities ($138,000 net of taxes), net loss for the period and dividends paid on common stock.
The Company paid dividends of $335,000 compared to net loss of $175,000 for the three-month period just ended. On July 6, 2023, the members of First Federal MHC again 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 2024.On October 13, 2023, the Company announced that future dividends will be reduced primarily due to the recent decline in earnings of the Banks. We expect the board to carefully evaluate whether a dividend may be paid to shareholders in future periods and, if so, at what level. The Board currently expects that if quarterly dividends will continue in 2024, they will be limited to no more than $0.05 per share. Our ability to pay future dividends and if so at what level will also be dependent on our ability to successfully execute our strategy to increase earnings and core deposits, reduce reliance on higher cost funding sources and shift more of our loan portfolio towards higher-earning loans, and the receipt of required regulatory approval or non-objection for the payment of dividends from the Banks to the Company or from the Company to shareholders. 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, 2023 for additional discussion regarding dividends.
30
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, 2023 and 2022
General
Net loss totaled $175,000 or ($0.02) diluted earnings per share for the three months ended September 30, 2023, a decrease of $548,000 or 146.9% from net income of $373,000 or $0.05 diluted earnings per share for the same period in 2022. The decrease in net earnings for the quarter ended September 30, 2023, was primarily attributable to lower net interest income, and higher non-interest expense, which were partially offset by lower income taxes and lower provision for credit losses.
Net Interest Income
Net interest income decreased $762,000 or 31.3% to $1.7 million due primarily to interest expense increasing more than interest income increased period to period. Interest expense increased $1.6 million or 355.6%, while interest income increased $849,000 or 29.4% to $3.7 million for the recently-ended quarter. During the unprecedented interest rate increases seen in the market since March 2022, our funding sources have repriced more quickly than our assets have repriced, which has had a negative impact on net interest income.
The average rate earned on interest-earning assets increased 70 basis points to 4.36% and was the primary reason for the increase in interest income, although average interest-earning assets also increased $27.2 million or 8.7% to $342.3 million for the recently-ended quarterly period. The increase in interest income was due primarily to an increase of $815,000 or 30.8% in interest income from loans, which totaled $3.5 million for the period.
The increase in interest income from loans period-to-period was due to increases in both the average balance of loans and the average rate earned on those loans. The average balance of loans increased $35.0 million or 12.3% to $318.5 million for the three months ended September 30, 2023, while the average rate increased 61 basis points to 4.34%.
Although the average balance of interest-bearing liabilities increased $30.6 million or 11.9% to $287.2 million for the quarter just ended, the average rate paid increased 216 basis points to 2.87%. The cost of liabilities increased rapidly due to higher costs of both wholesale and retail funding. Continued increases in liability costs, especially for wholesale funds, will primarily be driven by future increases in market rates by the Federal Reserve. It is widely believed that we are near the peak of this rate cycle which, if so, will likely slow the increasing costs of our liabilities.
Net interest spread decreased from 2.96% for the prior year quarterly period to 1.49% for the three-month period ended September 30, 2023.
Provision for Cred Losses
Management determined that a $6,000 provision for credit loss was prudent in light of the increase in the loan portfolio during the recently-ended quarter.
31
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, 2023 and 2022 (continued)
Non-interest Income
Non-interest income decreased $24,000 or 24.5% to $74,000 for the three months ended September 30, 2023, compared to the prior year period, primarily because of a decrease in other non-interest income, which is comprised of various items including bank-related fees and services.
Non-interest Expense
Non-interest expense increased $54,000 or 2.8% and totaled $2.0 million for the three months ended September 30, 2023, primarily due to increased employee compensation and benefits and data processing charges.
Employee compensation and benefits expense increased $48,000 or 4.0% and totaled $1.2 million for the quarterly period just ended, additional salary expense and lower deferred loan costs year over year.
Data processing costs increased $27,000 or 25.5% and totaled $133,000 due to higher fees associated with expanded technology services offered to customers.
Income Tax Expense
Income taxes decreased $185,000 or 159.5% from an expense of $116,000 for the three months ended September 30, 2022, to a benefit of $69,000 for the recently-ended period. The effective tax rates for the three-month periods ended September 30, 2023 and 2022, were 28.3% and 23.7%, respectively.
32
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, 2023 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.
33
Kentucky First Federal Bancorp
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
Please see “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended June 30, 2023 for information regarding risk factors that could materially affect the Company’s business, financial condition, or future results of operations. Other than as set forth below, there have been changes with regard to the risk factors disclosed in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December June 30, 2023.
Our ability to pay dividends is subject to the ability of First Federal of Hazard and First Federal of Kentucky to make capital distributions to Kentucky First Federal and the waiver of dividends by First Federal MHC. On October 13, 2023, we announced that future dividends will be reduced primarily due to the recent decline in earnings of the Banks, and that the Board currently expects that if quarterly dividends will continue in 2024, they will be limited to no more than $0.05 five cents per share.
Our long-term ability to pay dividends to our stockholders is based primarily upon the ability of the Banks to make capital distributions to Kentucky First Federal, and also on the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends according to the cash dividend payout policy. Under Office of the Comptroller of the Currency safe harbor regulations, the Banks may each distribute to Kentucky First capital not exceeding net retained income for the current calendar year and the prior two calendar years. On October 13, 2023, the Company announced that future dividends will be reduced primarily due to the recent decline in earnings of the Banks. We expect the Board to carefully evaluate whether a dividend may be paid to shareholders in future periods and, if so, at what level. The Board currently expects that if quarterly dividends will continue in 2024, they will be limited to no more than $0.05 five cents per share. Our ability to pay future dividends will be dependent on our ability to successfully execute our strategy to increase earnings and core deposits, to reduce reliance on higher cost funding sources and shift more of our loan portfolio towards higher-earning loans, and on the receipt of required regulatory approval or non-objection for the payment of dividends from the Banks to the Company or from the Company to shareholders.
First Federal MHC owns a majority of Kentucky First Federal’s outstanding stock. First Federal MHC has historically waived its right to dividends on the Kentucky First common shares it owns and, without the waiver of such dividends, the amount of dividends paid to public stockholders is significantly higher than it would be if First Federal MHC accepted dividends. First Federal MHC is not required to waive dividends, but Kentucky First expects this practice to continue, subject to member and regulatory approval annually, to the extent Kentucky First continues to pay dividends in future periods. First Federal MHC is required to obtain a waiver from the Federal Reserve Board allowing it to waive its right to dividends.
The Federal Reserve Board in 2011 issued regulations that govern the activities of Kentucky First Federal and First Federal MHC and the regulations were implemented in the fourth quarter of 2011. Under Section 239.8(d) of the Federal Reserve Board’s Regulation MM governing dividend waivers, a mutual holding company may waive its right to dividends on shares of its subsidiary if the mutual holding company gives written notice of the waiver to the Federal Reserve Board and the Federal Reserve Board does not object. For a company such as First Federal MHC that waived dividends prior to December 1, 2009, the Federal Reserve Board may not object to a dividend waiver if such waiver would not be detrimental to the safety and soundness of the savings association subsidiary and the board of directors of the mutual holding company expressly determines that such dividend waiver is consistent with the board’s fiduciary duties to the members of the mutual holding company.
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Kentucky First Federal Bancorp
To address concerns with respect to the conflict of interest created by dividend waivers, Regulation MM requires the board of directors of the mutual holding company to adopt a resolution that describes the conflict of interest that exists because of a director’s ownership of stock in the subsidiary declaring the dividends and any actions the mutual holding company board have taken to eliminate the conflict of interest, such as the directors’ waiving their right to receive dividends. Also, the resolution must contain an affirmation that a majority of the mutual members eligible to vote have, within the 12 months prior to the declaration date of the dividend, voted to approve the waiver of dividends.
First Federal MHC has received Federal Reserve Board approval to waive quarterly dividends totaling $0.40 per share annually beginning with the dividend paid on September 28, 2012 and continuing through the dividend payable in the third quarter of 2024. It is expected that First Federal MHC will continue to waive future dividends, to the extent Kentucky First continues to pay dividends in future periods, except to the extent dividends are needed to fund First Federal MHC’s continuing operations, subject to the ability of First Federal MHC to obtain regulatory approval of its requests to waive dividends and to its ability to obtain member approval of dividend waivers.
We cannot predict whether members will continue to approve annual dividend waiver requests or whether the Federal Reserve Board will grant future dividend waiver requests and, if granted, there can be no assurance as to the conditions, if any, the Federal Reserve Board will place on future dividend waiver requests by grandfathered mutual holding companies such as First Federal MHC. If First Federal MHC is unable to waive the receipt of dividends, our ability to pay dividends to our stockholders may be substantially impaired and the amounts of any such dividends may be significantly reduced.
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, 2023.
| Period | Total # of shares purchased | Average price paid per share (including 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, 2023 | – | $ | – | – | – | |||||||||||
| August 1-31, 2023 | – | $ | – | – | – | |||||||||||
| September 1-30, 2023 | – | $ | – | – | – | |||||||||||
| (1) | On May 18, 2023, the Company announced that it had substantially completed its program to repurchase up to 150,000 shares of its Common Stock, which was initiated on February 3, 2021. |
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures.
Not applicable.
ITEM 5. Other Information
None.
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Kentucky First Federal Bancorp
ITEM 6. Exhibits
| (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 Annual Report on Form 10-K for the Year Ended June 30, 2012 (File No. 0-51176). |
| (3) | Incorporated herein by reference to the Company’s Current Report on Form 8-K filed August 25, 2017 (File No. 0-51176). |
| (4) | Incorporated herein by reference to the Company’s Current Report on Form 8-K filed September 28, 2020 (File No. 0-51176). |
| (5) | Incorporated herein by reference to the Company’s Current Report on Form 8-K filed February 2, 2022 (File No. 0-51176). |
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Kentucky First Federal Bancorp
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KENTUCKY FIRST FEDERAL BANCORP | ||||
| Date: | November 14, 2023 | By: | /s/ Don D. Jennings | |
| Don D. Jennings | ||||
| Chief Executive Officer | ||||
| Date: | November 14, 2023 | By: | /s/ R. Clay Hulette | |
| R. Clay Hulette | ||||
| Vice President and Chief Financial Officer | ||||
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