10-Q 1 v430430_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended December 31, 2015  

 

OR

 

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

 

For the transition period from ____________ to _______________

 

Commission File Number: 0-51176   

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Yes ¨                   No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At February 9, 2016, the latest practicable date, the Corporation had 8,439,515 shares of $.01 par value common stock outstanding.

 

 

 

 

INDEX

 

    Page
     
PART I    -   ITEM 1 FINANCIAL INFORMATION  
     
  Consolidated Balance Sheets 3
     
  Consolidated Statements of Income 4
     
  Consolidated Statements of Comprehensive Income 5
     
  Consolidated Statements of Cash Flows 6
     
  Notes to Consolidated Financial Statements 8
     
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 42
     
ITEM 4 Controls and Procedures 42
     
PART II - OTHER INFORMATION 43
     
SIGNATURES   44

 

 2 
 

 

PART I

ITEM 1: Financial Information

Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   December 31,   June 30, 
   2015   2015 
ASSETS          
           
Cash and due from financial institutions  $5,305   $3,864 
Interest-bearing demand deposits   9,175    9,771 
Cash and cash equivalents   14,480    13,635 
           
Securities available for sale   137    159 
Securities held-to-maturity, at amortized cost- approximate fair value of $15,989 and $6,534 at December 31, 2015 and June 30, 2015, respectively   15,916    6,423 
Loans held for sale       100 
Loans, net of allowance of $1,568 at December 31, 2015 and June 30, 2015   243,968    243,815 
Real estate owned, net   1,138    1,593 
Premises and equipment, net   5,980    5,235 
Federal Home Loan Bank stock, at cost   6,482    6,482 
Accrued interest receivable   685    725 
Bank-owned life insurance   3,018    2,971 
Goodwill   14,507    14,507 
Prepaid federal income taxes   26     
Prepaid expenses and other assets   501    653 
           
Total assets  $306,838   $296,298 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $192,485   $199,701 
Federal Home Loan Bank advances   44,532    26,635 
Advances by borrowers for taxes and insurance   235    699 
Accrued interest payable   32    32 
Accrued federal income taxes       78 
Deferred federal income taxes   706    569 
Deferred revenue   603    610 
Other liabilities   654    661 
Total liabilities   239,247    228,985 
           
Commitments and contingencies   -    - 
           
Shareholders’ equity          
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued and outstanding   -    - 
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued   86    86 
Additional paid-in capital   34,628    34,638 
Retained earnings   34,917    34,711 
Unearned employee stock ownership plan (ESOP), 112,973 shares and 122,311 shares at December 31, 2015 and June 30, 2015, repectively   (1,130)   (1,223)
Treasury shares at cost, 112,563 common shares at December 31, 2015 and June 30, 2015   (937)   (937)
Accumulated other comprehensive income   27    38 
Total shareholders’ equity   67,591    67,313 
           
Total liabilities and shareholders’ equity  $306,838   $296,298 

 

See accompanying notes.

 3 
 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

   Six months ended December 31,   Three months ended December 31, 
   2015   2014   2015   2014 
Interest income                    
Loans, including fees  $5,786   $6,055   $2,894   $3,055 
Mortgage-backed securities   44    57    21    28 
Other securities   10    13    5    7 
Interest-bearing deposits and other   129    130    65    66 
Total interest income   5,969    6,255    2,985    3,156 
                     
Interest expense                    
Interest-bearing demand deposits   14    16    7    8 
Savings   130    118    65    59 
Certificates of Deposit   404    452    196    230 
Deposits   548    586    268    297 
Borrowings   144    119    74    57 
Total interest expense   692    705    342    354 
Net interest income   5,277    5,550    2,643    2,802 
Provision for loan losses   11    266        210 
Net interest income after provision for loan losses   5,266    5,284    2,643    2,592 
                     
Non-interest income                    
Earnings on bank-owned life insurance   47    47    24    24 
Net gain on sales of loans   41    15    22    9 
Net gain on sales of OREO   53    142    37    143 
Valuation adjustments of OREO   (39)   (14)   (21)   (14)
Other   138    138    64    70 
Total non-interest income   240    328    126    232 
Non-interest expense                    
Employee compensation and benefits   2,639    2,509    1,360    1,132 
Occupancy and equipment   316    271    168    140 
Outside service fees   91    87    43    49 
Legal fees   40    26    11    19 
Data processing   191    209    94    107 
Auditing and accounting   130    130    63    65 
FDIC insurance premiums   110    119    56    56 
Franchise and other taxes   127    134    64    67 
Foreclosure and OREO expenses (net)   53    121    25    68 
Other   537    521    285    255 
Total non-interest expense   4,234    4,127    2,169    1,958 
                     
Income before income taxes   1,272    1,485    600    866 
                     
Federal income tax expense   330    490    196    287 
                     
NET INCOME  $942   $995   $404   $579 
                     
EARNINGS PER SHARE                    
Basic and diluted  $0.11   $0.12   $0.05   $0.07 
DIVIDENDS PER SHARE  $0.20   $0.20   $0.10   $0.10 

 

See accompanying notes.

 

 4 
 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   Six months ended December 31,   Three months ended December 31, 
   2015   2014   2015   2014 
                 
Net income  $942   $995   $404   $579 
                     
Other comprehensive loss, net of tax benefits: Unrealized holding gains (losses) on securities designated as available for sale, net of tax benefits of $(6), $(18), $(6) and $(5) during the respective periods   (11)   (34)   (11)   (10)
Comprehensive income  $931   $961   $393   $569 

 

See accompanying notes.

 

 5 
 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Six months ended 
   December 31, 
   2015   2014 
         
Cash flows from operating activities:          
Net income  $942   $995 
Adjustments to reconcile net income to net cash provided by operating Activities          
Depreciation   148    135 
Accetion of purchased loan credit discount   (78)   (165)
Amortization of purchased loan premium   9    9 
Amortization (accretion) of deferred loan origination costs (fees)   15    8 
Amortization of premiums on investment securities   47    81 
Amortization of premiums on deposits   (42)   (98)
Net gain on sale of loans   (41)   (15)
Net loss (gain) on sale of real estate owned   (53)   (142)
Valuation adjustments of real estate owned   39    14 
Deferred gain on sale of real estate owned   (7)   (13)
ESOP compensation expense   83    77 
Earnings on bank-owned life insurance   (47)   (47)
Provision for loan losses   11    266 
Origination of loans held for sale   (1,019)   (505)
Proceeds from loans held for sale   1,160    340 
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   40    143 
Prepaid expenses and other assets   152    157 
Accrued interest payable       (1)
Other liabilities   (7)   (42)
Federal income taxes   39    235 
Net cash provided by operating activities   1,391    1,432 
           
Cash flows from investing activities:          
Purchase of held-to-maturity U.S. Treasury notes   (11,000)   (8,500)
Securities maturities, prepayments and calls:          
Held to maturity   1,460    1,028 
Available for sale   5    31 
Loans originated for investment, net of principal collected   (304)   1,668 
Proceeds from sale of real estate owned   777    397 
Improvements to real estate owned   (114)    
Additions to premises and equipment, net   (893)   (141)
Net cash used in investing activities   (10,069)   (5,517)
           
Cash flows from financing activities:          
Net decrease in deposits   (7,174)   (8,025)
Payments by borrowers for taxes and insurance, net   (464)   (411)
Proceeds from Federal Home Loan Bank advances   24,700    15,500 
Repayments on Federal Home Loan Bank advances   (6,803)   (3,653)
Dividends paid on common stock   (736)   (704)
Treasury stock repurchases       (345)
Net cash provided by financing activities   9,523    2,362 
           
Net increase (decrease) in cash and cash equivalents   845    (1,723)
           
Beginning cash and cash equivalents   13,635    11,511 
           
Ending cash and cash equivalents  $14,480   $9,788 

 

See accompanying notes.

 6 
 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

   Six months ended 
   December 31, 
   2015   2014 
         
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Federal income taxes  $310   $205 
           
Interest on deposits and borrowings  $734   $804 
           
Transfers of loans to real estate owned, net  $307   $1,035 
           
Loans made on sale of real estate owned  $510   $379 

 

See accompanying notes.

 

 7 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015

(unaudited)

 

On March 2, 2005, First Federal Savings and Loan Association of Hazard (“First Federal of Hazard” or the “Association”) completed a Plan of Reorganization (the “Plan” or the “Reorganization”) pursuant to which the Association reorganized into the mutual holding company form of ownership with the incorporation of a stock holding company, Kentucky First Federal Bancorp (the “Company”) as parent of the Association. Coincident with the Reorganization, the Association converted to the stock form of ownership, followed by the issuance of all the Association’s outstanding stock to Kentucky First Federal Bancorp. Completion of the Plan of Reorganization culminated with Kentucky First Federal Bancorp issuing 4,727,938 common shares, or 55% of its common shares, to First Federal Mutual Holding Company (“First Federal MHC”), a federally chartered mutual holding company, with 2,127,572 common shares, or 24.8% of its shares offered for sale at $10.00 per share to the public and a newly formed Employee Stock Ownership Plan (“ESOP”). The Company received net cash proceeds of $16.1 million from the public sale of its common shares. The Company’s remaining 1,740,554 common shares were issued as part of the $31.4 million cash and stock consideration paid for 100% of the common shares of Frankfort First Bancorp (“Frankfort First”) and its wholly-owned subsidiary, First Federal Savings Bank of Frankfort (“First Federal of Frankfort”). The acquisition was accounted for using the purchase method of accounting and resulted in the recordation of goodwill and other intangible assets totaling $15.4 million.

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements, which represent the consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the six- and three-month periods ended December 31, 2015, are not necessarily indicative of the results which may be expected for an entire fiscal year. The consolidated balance sheet as of June 30, 2015 has been derived from the audited consolidated balance sheet as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2015 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 Frankfort (collectively hereinafter “the Banks”). All intercompany transactions and balances have been eliminated in consolidation.

 

Reclassifications - Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. Such reclassifications had no impact on prior years’ net income or shareholders’ equity.

 

 8 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

2. Earnings Per Share

 

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

 

  

Six months ended

December 31,

  

Three months ended

December 31,

 
(in thousands)  2015   2014   2015   2014 
                 
Net income allocated to common shareholders, basic and diluted  $942   $995   $404   $579 

 

  

Six months ended

December 31,

  

Three months ended

December 31,

 
   2015   2014   2015   2014 
Weighted average common shares outstanding, basic and diluted   8,319,589    8,381,992    8,321,924    8,321,183 

 

There were 309,800 stock option shares outstanding for the six- and three-month periods ended December 31, 2015 and 2014, all of which expired on December 13, 2015. The stock option shares outstanding were antidilutive for the respective periods.

 

 9 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at December 31, 2015 and June 30, 2015, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

   December 31, 2015 
(in thousands)  Amortized
cost
   Gross
unrealized/
unrecognized
gains
   Gross
unrealized/
unrecognized
losses
   Estimated
fair value
 
                 
Available-for-sale Securities                    
Agency mortgage-backed: residential  $90   $1   $   $91 
FHLMC stock   8    38        46 
   $98   $39   $   $137 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $2,353   $81   $3   $2,431 
U.S. Treasury notes   10,999    1        11,000 
Agency bonds   2,564    -    6    2,558 
   $15,916   $82   $9   $15,989 

 

   June 30, 2015 
(in thousands)  Amortized
cost
   Gross
unrealized/
unrecognized
gains
   Gross
unrealized/
unrecognized
losses
   Estimated
fair value
 
                 
Available-for-sale Securities                    
Agency mortgage-backed: residential  $94   $2   $   $96 
FHLMC stock   8    55        63 
   $102   $57   $   $159 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $2,821   $112   $2   $2,931 
Agency bonds   3,602    2    1    3,603 
   $6,423   $114   $3   $6,534 

 

 10 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

3. Investment Securities (continued)

 

The Company’s equity securities consist of Federal Home Loan Mortgage Company (FHLMC or Freddie Mac) stock, while our debt securities consist of agency bonds and mortgage-backed securities. Mortgage-backed securities do not have a single maturity date. The amortized cost and fair value of held-to-maturity debt securities are shown by contractual maturity. Securities not due at a single maturity date are shown separately.

 

   December 31, 2015 
(in thousands)  Amortized Cost   Fair Value 
         
Held-to-maturity Securities          
Within one year  $12,533   $12,531 
One to five years   1,030    1,027 
Mortgage-backed   2,353    2,431 
   $15,916   $15,989 

 

Our pledged securities at December 31, 2015, and June 30, 2015 totaled $2.2 million.

 

There were no sales of investment securities during the six month periods ended December 31, 2015 and 2014.

 

We evaluated securities in unrealized loss positions for evidence of other-than-temporary impairment, considering duration, severity, financial condition of the issuer, our intention to sell or requirement to sell. Those securities were agency bonds, which carry a very limited amount of risk. Also, we have no intention to sell nor feel that we will be compelled to sell such securities before maturity. Based on our evaluation, no impairment has been recognized through earnings.

 

 11 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

 

   December 31,   June 30, 
(in thousands)  2015   2015 
         
Residential real estate          
One- to four-family  $192,367   $191,721 
Multi-family   17,207    16,621 
Construction   2,444    3,780 
Land   1,641    2,021 
Farm   1,542    1,567 
Nonresidential real estate   25,801    22,118 
Commercial nonmortgage   1,757    1,782 
Consumer and other:          
Loans on deposits   1,919    2,262 
Home equity   5,367    5,477 
Automobile   75    73 
Unsecured   469    605 
    250,589    248,027 
           
Undisbursed portion of loans in process   (5,157)   (2,753)
Deferred loan origination costs   104    109 
Allowance for loan losses   (1,568)   (1,568)
   $243,968   $243,815 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2015:

 

(in thousands)  Beginning
balance
   Provision
for loan
losses
   Loans
charged
off
   Recoveries   Ending
balance
 
                     
Residential real estate:                         
One- to four-family  $1,059   $(3)  $(13)  $2   $1,045 
Multi-family   94    2            96 
Construction   21    (7)           14 
Land   7    1              8 
Farm   9                9 
Nonresidential real estate   121    22            143 
Commercial nonmortgage   10                10 
Consumer and other:                         
Loans on deposits   13    (2)           11 
Home equity   31    (1)           30 
Automobile                    
Unsecured   3    (1)           2 
Unallocated   200                200 
Totals  $1,568   $11   $(13)  $2   $1,568 

 

 12 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2015:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                         
One- to four-family  $1,060   $(15)  $(2)  $2   $1,045 
Multi-family   97    (1)           96 
Construction   16    (2)           14 
Land   8                8 
Farm   9                9 
Nonresidential real estate   122    21            143 
Commercial nonmortgage   10                10 
Consumer and other:                         
Loans on deposits   13    (2)           11 
Home equity   31    (1)           30 
Automobile                    
Unsecured   2                2 
Unallocated   200                200 
Totals  $1,568   $   $(2)  $2   $1.568 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2014:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                         
One- to four-family  $1,003   $241   $(165)  $7   $1,086 
Multi-family   73    7            80 
Construction   11    (4)           7 
Land   10    3              13 
Farm   9                9 
Nonresidential real estate   112    11            123 
Commercial nonmortgage   11    1            12 
Consumer and other:                         
Loans on deposits   13    2            15 
Home equity   28    4            32 
Automobile                    
Unsecured   3    1            4 
Unallocated   200                200 
Totals  $1,473   $266   $(165)  $7   $1,581 

 

 13 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2014:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                         
One- to four-family  $1,020   $189   $(128)  $5   $1,086 
Multi-family   73    7            80 
Construction   11    (4)           7 
Land   11    2            13 
Farm   9                9 
Nonresidential real estate   114    9            123 
Commercial nonmortgage   10    2            12 
Consumer and other:                         
Loans on deposits   14    1            15 
Home equity   30    2            32 
Autombile                    
Unsecured   2    2            4 
Unallocated   200                200 
Totals  $1,494   $210   $(128)  $5   $1.581 

 

 14 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of December 31, 2015. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality.

 

December 31, 2015:                        
(in thousands)  Loans
individually
evaluated
   Loans
acquired
with
deteriorated
credit
quality
   Ending
loans
balance
   Ending
allowance
attributed to
loans
   Unallocated
allowance
   Total
allowance
 
Loans individually evaluated for impairment:                              
Residential real estate:                              
One- to four-family  $2,993   $2,059   $5,052   $   $   $ 
Land       282    282             
Nonresidential real estate       147    147             
    2,993    2,488    5,481             
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $187,315   $1,045   $   $1,045 
Multi-family             17,207    96        96 
Construction             2,444    14        14 
Land             1,359    8        8 
Farm             1,542    9        9 
Nonresidential real estate             25,654    143        143 
Commercial nonmortgage             1,757    10        10 
Consumer:                              
Loans on deposits             1,919    11        11 
Home equity             5,367    30        30 
Automobile             75             
Unsecured             469    2        2 
Unallocated                     200    200 
              245,108    1,368    200    1,568 
             $250,589   $1,368   $200   $1,568 

 

 15 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2015.

 

June 30, 2015:                        
(in thousands)  Loans
individually
evaluated
   Loans
acquired
with
deteriorated
credit
quality
   Ending
loans
balance
   Ending
allowance
attributed to
loans
   Unallocated
allowance
   Total
allowance
 
Loans individually evaluated for impairment:                              
Residential real estate:                              
One- to four-family  $1,743   $2,565   $4,308   $   $   $ 
Land   476    381    857              
Nonresidential real estate   241    526    767             
Consumer and other:                              
Home equity   28        28             
Unsecured   18        18             
    2,506    3,472    5,978             
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $187,413   $1,059   $   $1,059 
Multi-family             16,621    94        94 
Construction             3,780    21        21 
Land             1,164    7        7 
Farm             1,567    9        9 
Nonresidential real estate             21,351    121        121 
Commercial nonmortgagel             1,782    10        10 
Consumer:                              
Loans on deposits             2,262    13        13 
Home equity             5,449    31        31 
Automobile             73             
Unsecured             587    3        3 
Unallocated                     200    200 
              242,049    1,368    200    1,568 
             $248,027   $1,368   $200   $1,568 

 

 16 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended December 31, 2015 and 2014:

 

December 31, 2015:

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
                     
With no related allowance recorded:                         
One- to four-family  $2,993   $   $3,022   $5   $5 
Purchased credit-impaired loans   2,488        2,980    34    34 
    5,481        6,002    39    39 
With an allowance recorded:                         
One- to four-family                    
   $5,481   $   $6,002   $39   $39 

 

December 31, 2014:

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
                     
With no related allowance recorded:                         
One- to four-family  $1,006   $   $1,470   $   $ 
Purchased credit-impaired loans   3,510        3,593    75    75 
    4,516        5,063    75    75 
With an allowance recorded:                         
One- to four-family   80    8    116         
   $4,596   $8   $5,179   $75   $75 

 

 17 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended December 31, 2015 and 2014:

 

December 31, 2015:

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
                     
With no related allowance recorded:                         
One- to four-family  $2,993   $   $3,280   $2   $2 
Purchased credit-impaired loans   2,488        2,734    11    11 
    5,481        6,014    13    13 
With an allowance recorded:                         
One- to four-family                    
   $5,481   $   $6,014   $13   $13 

 

December 31, 2014:

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
                     
With no related allowance recorded:                         
One- to four-family  $1,006   $   $1,264   $   $ 
Purchased credit-impaired loans   3,510        3,539    44    44 
    4,516        4,803    44    44 
With an allowance recorded:                         
One- to four-family   80    8    35         
   $4,596   $8   $4,838   $44   $44 

 

 18 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2015, and June 30, 2015:

 

   December 31, 2015   June 30, 2015 
(in thousands)  Nonaccrual   Loans Past
Due Over 90
Days Still
Accruing
   Nonaccrual   Loans Past
Due Over 90
Days Still
Accruing
 
                 
One- to four-family residential real estate  $4,066   $1,198   $4,331   $1,745 
Nonresidential real estate and land   691        410     
Consumer   7        26     
   $4,764   $1,198   $4,767   $1,745 

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Bank would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.” At December 31, 2015 and June 30, 2015, the Company had $1.6 million and $1.9 million of loans classified as TDRs, respectively. Of the TDRs at December 31, 2015, approximately 32.5% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

The following table presents TDR’s by loan type at December 31, 2015 and June 30, 2015, and their performance, by modification type:

 

(dollars in thousands)  Number
of Loans
   Pre-
Modification
Outstanding
Recorded
Investment
   Post-
Modification
Outstanding
Recorded
Investment
   TDRs
Performing
to Modified
Terms
   TDRs Not
Performing
to
Modified
Terms
 
                     
December 31, 2015                         
Residential Real Estate:                         
1-4 Family   30   $1,858   $1,595   $1,062   $533 
                          
June 30, 2015                         
Residential Real Estate:                         
1-4 Family   38   $2,110   $1,851   $1,710   $141 

 

 19 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

There were no TDR loan modifications for the three months ended December 31, 2015 and 2014.

 

There were no TDR loan modifications for the six months ended December 31, 2014. The following table summarizes TDR loan modifications that occured during the six months ended December 31, 2015, and their performance, by modification type:

 

(in thousands)  Troubled Debt
Restructurings
Performing to
Modified Terms
   Troubled Debt
Restructurings
Not Performing
to Modified
Terms
   Total Troubled
Debt
Restructurings
 
             
Six months ended December 31, 2015               
Residential real estate:               
Rate reduction  $3   $   $3 

 

The Company had no allocated specific reserves to customers whose loan terms had been modified in troubled debt restructurings as of December 31, 2015, or at June 30, 2015. The Company had no commitments to lend on loans classified as TDRs at December 31, 2015 or June 30, 2015.

 

There were no TDRs that defaulted during the six- or three- month periods ended December 31, 2015, or December 31, 2014.

 

 20 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of December 31, 2015, by class of loans:

 

(in thousands)  30-89 Days
Past Due
   90 Days or
Greater
Past Due
   Total
Past
Due
   Loans Not
Past Due
   Total 
                     
Residential real estate:                         
One-to four-family  $4,227   $2,674   $6,901   $185,466   $192,367 
Multi-family               17,207    17,207 
Construction               2,444    2,444 
Land               1,641    1,641 
Farm               1,542    1,542 
Nonresidential real estate   139    147    286    25,515    25,801 
Commercial non-mortgage               1,757    1,757 
Consumer and other:                         
Loans on deposits               1,919    1,919 
Home equity   19    27    46    5,321    5,367 
Automobile   1        1    74    75 
Unsecured               469    469 
Total  $4,386   $2,848   $7,234   $243,355   $250,589 

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2015, by class of loans:

 

(in thousands)  30-89 Days
Past Due
   90 Days or
Greater Past
Due
   Total
Past Due
   Loans Not
Past Due
   Total 
                     
Residential real estate:                         
One-to four-family  $5,129   $3,233   $8,362   $183,359   $191,721 
Multi-family               16,621    16,621 
Construction               3,780    3,780 
Land   344    262    606    1,415    2,021 
Farm               1,567    1,567 
Nonresidential real estate   142    388    530    21,588    22,118 
Commercial nonmortgage               1,782    1,782 
Consumer:                         
Loans on deposits               2,262    2,262 
Home equity   20        20    5,457    5,477 
Automobile               73    73 
Unsecured   13    18    31    574    605 
Total  $5,648   $3,901   $9,549   $238,478   $248,027 

 

 21 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Not rated 
                     
Residential real estate:                         
One- to four-family  $   $8,072   $10,626   $   $173,669 
Multi-family   16,862        345         
Construction   2,444                 
Land   1,359        282         
Farm   1,542                 
Nonresidential real estate   24,728    904    169         
Commercial nonmortgage   1,757                 
Consumer:                         
Loans on deposits   1,919                 
Home equity   5,360        7         
Automobile   75                 
Unsecured   469                 
   $56,515   $8,976   $11,429   $   $173,669 

 

 22 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2015, the risk category of loans by class of loans was as follows:

 

(in thousands)  Pass   Special
Mention
   Substandard   Doubtful   Not rated 
                     
Residential real estate:                         
One- to four-family  $   $6,914   $9,371   $   $175,436 
Multi-family   16,621                 
Construction   3,780                 
Land   1,164        857         
Farm   1,567                 
Nonresidential real estate   20,198    1,131    789         
Commercial nonmortgage   1,750    32             
Consumer:                         
Loans on deposits   2,262                 
Home equity   5,448        29         
Automobile   73                 
Unsecured   605                 
   $53,468   $8,077   $11,046   $   $175,436 

 

Purchased Credit Impaired Loans:

 

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $472,000 and $616,000 at December 31, 2015 and June 30, 2015, respectively, is as follows:

 

(in thousands)  December 31, 2015   June 30, 2015 
         
One- to four-family residential real estate  $2,059   $2,565 
Land   282    381 
Nonresidential real estate   147    526 
Commercial nonmortgage        
Outstanding balance  $2,488   $3,472 

 

 23 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)  Three months
ended
December 31,
2015
   Six months
ended
December 31,
2015
   Twelve
months ended
June 30, 2015
 
             
Balance at beginning of period  $1,088   $1,021   $1,478 
Accretion of income   (39)   (78)   (457)
Reclassifications from nonaccretable difference   43    149     
Disposals   (20)   (20)    
Balance at end of period  $1,072   $1,072   $1,021 

 

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2015, nor for the six- or three-month periods ended December 31, 2015. Neither were any allowance for loan losses reversed during those periods.

 

5. Disclosures About Fair Value of Assets and Liabilities

 

ASC topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics. Level 2 securities include agency mortgage-backed securities.

 

 24 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

 

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

 

   Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
                 
December 31, 2015                    
Agency mortgage-backed: residential  $91   $   $91   $ 
FHLMC stock   46        46     
   $137   $   $137   $ 
June 30, 2015                    
Agency mortgage-backed: residential  $96   $   $96   $ 
FHLMC stock   63        63     
   $159   $   $159   $ 

 

 25 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

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

 

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

 

   Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs    
(Level 3)
 
                 
December 31, 2015                    
Other real estate owned, net                    
One- to four-family  $651           $651 
Land   121            121 
                     
June 30, 2015                    
Other real estate owned, net                    
One- to four-family  $525           $525 
Land   15            15 

 

There were no impared loans, which were measured using the fair value of the collateral for collateral-dependent loans, at December 31, 2015, and June 30, 2015. There was no specific provision made for the six month periods ended December 31, 2015 or 2014.

 

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $772,000 and $540,000 at December 31, 2015 and June 30, 2015, respectively. Other real estate owned was written down $39,000 and $14,000 during the six months ended December 31, 2015 and 2014, respectively.

 

 26 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

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

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2015 and June 30, 2015:

 

             Range
   Fair Value   Valuation  Unobservable  (Weighted
December 31, 2015  (in thousands)   Technique(s)  Input(s)  Average)
Foreclosed and repossessed assets:              
1-4 family  $651   Sales comparison approach  Adjustments for differences between comparable sales  -10.79% to 11.7% (0.1%)
Land  $121   Sales comparison approach  Adjustments for differences between comparable sales  3.5% to 6.6% (5.4%)

 

             Range
   Fair Value   Valuation  Unobservable  (Weighted
June 30, 2015  (in thousands)   Technique(s)  Input(s)  Average)
Foreclosed and repossessed assets:              
1-4 family  $525   Sales comparison approach  Adjustments for differences between comparable sales  1.5% to 11.7% (2.9%)
Land  $15   Sales comparison approach  Adjustments for differences between comparable sales  20.2% to 38.9% (20.8%)

 

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.

 

 27 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

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

 

The following methods were used to estimate the fair value of all other financial instruments at December 31, 2015 and June 30, 2015:

 

Cash and cash equivalents and interest-bearing deposits: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value.

 

Held-to-maturity securities: For held-to-maturity securities, fair value is estimated by using pricing models, quoted price of securities with similar characteristics, which is level 2 pricing for the other securities.

 

Loans held for sale: Loans originated and intended for sale in the secondary market are determined by FHLB pricing schedules.

 

Loans: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The fair values of the loans does not necessarily represent an exit price.

 

Loans receivable represents the Company’s most significant financial asset, which is in Level 3 for fair value measurements. A third party provides financial modeling for the Company and results are based on assumptions and factors determined by management.

 

Federal Home Loan Bank stock: It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

Accrued interest receivable: The carrying amount is the estimated fair value.

 

Deposits: The fair value of NOW accounts, passbook accounts, and money market deposits are deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities.

 

Federal Home Loan Bank advances: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

 

Advances by borrowers for taxes and insurance and accrued interest payable: The carrying amount presented in the consolidated statement of financial condition is deemed to approximate fair value.

 

Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The fair value of outstanding loan commitments at December 31, 2015 and June 30, 2015, was not material.

 

 28 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at December 31, 2015 and June 30, 2015 are as follows:

 

       Fair Value Measurements at 
(in thousands)      December 31, 2015 Using 
   Carrying
Value
   Level 1   Level 2   Level 3   Total 
Financial assets                         
Cash and cash equivalents  $14,480   $14,480             $14,480 
Available-for-sale securities   137        $137         137 
Held-to-maturity securities   15,916         15,989         15,989 
Loans held for sale                      
Loans receivable - net   243,968              248,029    248,029 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   685         22    663    685 
                          
Financial liabilities                         
Deposits  $192,485   $83,122   $109,367         192,489 
Federal Home Loan Bank advances   44,532         44,820         44,820 
Advances by borrowers for taxes and insurance   235         235         235 
Accrued interest payable   32         32         32 

 

       Fair Value Measurements at 
(in thousands)      June 30, 2015 Using 
   Carrying
Value
   Level 1   Level 2   Level 3   Total 
Financial assets                         
Cash and cash equivalents  $13,635   $13,635             $13,635 
Available-for-sale securities   159        $159         159 
Held-to-maturity securities   6,423         6,534         6,534 
Loans held for sale   100         101         101 
Loans receivable – net   243,815             $248,265    248,265 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   725         27    698    725 
                          
Financial liabilities                         
Deposits  $199,701   $83,603   $116,304        $199,907 
Federal Home Loan Bank advances   26,635         27,265         27,265 
Advances by borrowers for taxes and insurance   699         699         699 
Accrued interest payable   32         32         32 

 

 29 
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

December 31, 2015

(unaudited)

 

6. Other Comprehensive Income (Loss)

 

The following is a summary of the accumulated other comprehensive income balances, net of tax:

 

   Balance at
June 30, 2015
   Current Year
Change
   Balance at
December 31,
2015
 
             
Unrealized gains (losses) on available-for-sale securities  $38   $(11)  $27 

 

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

 

   Six months ended December 31, 
(in thousands)  2015   2014 
         
Unrealized holding gains (losses) on available-for-sale securities  $(17)  $(52)
Tax effect   (6)   (18)
Net-of-tax amount  $(11)  $(34)

 

   Three months ended December 31, 
(in thousands)  2015   2014 
         
Unrealized holding gains (losses) on available-for-sale securities  $(17)  $(15)
Tax effect   (6)   (5)
Net-of-tax amount  $(11)  $(10)

 

 30 
 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to Kentucky First Federal Bancorp or its management are intended to identify such forward looking statements. Kentucky First Federal Bancorp’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company’s market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services and the other matters mentioned in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.

 

 31 
 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the six month periods ended December 31, 2015 and 2014, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   Six Months Ended December 31, 
   2015   2014 
   Average
Balance
   Interest 
And
Dividends
   Yield/
Cost
   Average
Balance
   Interest
And
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans 1  $246,172   $5,786    4.70%  $246,474   $6,055    4.91%
Mortgage-backed securities   2,683    44    3.28    3,652    57    3.12 
Other securities   3,423    10    0.58    5,704    13    0.46 
Other interest-earning assets   16,062    129    1.61    14,417    130    1.80 
Total interest-earning assets   268,340    5,969    4.45    270,247    6,255    4.63 
Less: Allowance for loan losses   (1,568)             (1,479)          
Non-interest-earning assets   29,503              29,196           
Total assets  $296,275             $297,964           
Interest-bearing liabilities:                              
Demand deposits  $4,765   $14    0.59%  $6,348   $16    0.50%
Savings   76,197    130    0.34    68,834    118    0.34 
Certificates of deposit   112,198    404    0.72    132,693    452    0.68 
Total deposits   193,160    548    0.57    207,875    586    0.56 
Borrowings   29,737    144    0.97    16,673    119    1.43 
Total interest-bearing liabilities   222,897    692    0.62    224,548    705    0.63 
Noninterest-Bearing demand deposits   3,792              4,036           
Noninterest-bearing liabilities   2,749              2,036           
Total liabilities   229,438              230,620           
Shareholders’ equity   66,837              67,344           
Total liabilities and shareholders’ equity  $296,275             $297,964           
Net interest income/average yield       $5,277    3.83%       $5,550    4.00%
Net interest margin             3.93%             4.11%
Average interest-earning assets to average interest-bearing liabilities             120.39%             120.35%

 

 

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

 

 32 
 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets (continued)

 

The following table represents the average balance sheets for the three month periods ended December 31, 2015 and 2014, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   Three Months Ended December 31, 
   2015   2014 
   Average
Balance
   Interest
And
Dividends
   Yield/
Cost
   Average
Balance
   Interest
And
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans 2  $246,024   $2,894    4.71%  $246,344   $3,055    4.96%
Mortgage-backed securities   2,552    21    3.29    3,510    28    3.19 
Other securities   3,528    5    0.57    6,081    7    0.46 
Other interest-earning assets   16,684    65    1.56    14,620    66    1.81 
Total interest-earning assets   268,788    2,985    4.44    270,555    3,156    4.67 
Less: Allowance for loan losses   (1,568)             (1,493)          
Non-interest-earning assets   29,284              28,933           
Total assets  $296,504             $297,995           
Interest-bearing liabilities:                              
Demand deposits  $5,478   $7    0.51%  $7,531   $8    0.43%
Savings   75,532    65    0.34    67,886    59    0.35 
Certificates of deposit   110,470    196    0.71    130,398    230    0.71 
Total deposits   191,480    268    0.56    205,815    297    0.58 
Borrowings   31,608    74    0.94    18,685    57    1.22 
Total interest-bearing liabilities   223,088    342    0.61    224,500    354    0.63 
Noninterest-bearing demand deposits   3,519              4,252           
Noninterest-bearing liabilities   2,435              1,865           
Total liabilities   229,042              230,617           
Shareholders’ equity   67,462              67,378           
Total liabilities and shareholders’ equity  $296,504             $297,995           
Net interest income/average yield       $2,643    3.83%       $2,802    4.04%
Net interest margin             3.93%             4.14%
Average interest-earning assets to average interest-bearing liabilities             120.48%             120.51%

 

 

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

 

 33 
 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to December 31, 2015

 

Assets: At December 31, 2015, the Company’s assets totaled $306.8 million, an increase of $10.5 million, or 3.6%, from total assets at June 30, 2015. This increase was attributed primarily to an increase in investment securities.

 

Cash and cash equivalents: Cash and cash equivalents increased by $845,000 or 6.2% to $14.5 million at December 31, 2015.

 

Securities: At December 31, 2015 and 2014 our securities portfolio consisted of agency bonds, mortgage-backed securities and U.S. Treasury notes. Investment securities totaled $16.1 million at December 31, 2015, compared to $6.6 million at June 30, 2015, an increase of $9.5 million or 143.9% due primarily to an $11.0 million short-term U.S. Treasury note purchased by the Company, which matured subsequent to December 31, 2015.

 

Loans: Loans receivable, net, increased by $153,000 or 0.1% to $244.0 million at December 31, 2015. Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies. However, loan demand continues in its weakened state as a result of the downturn in the economy and we expect to see a continued decrease in demand for home loans until the housing market regains a stronger footing.

 

Non-Performing Loans:  At December 31, 2015, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $6.0 million, or 2.4% of total loans (including loans purchased in the acquisition), compared to $6.5 million or 2.7%, of total loans at June 30, 2015.  The Company’s allowance for loan losses totaled $1.6 million at December 31, 2015, and June 30, 2015, respectively. The allowance for loan losses at December 31, 2015, represented 26.3% of nonperforming loans and 0.64% of total loans (including loans purchased in the acquisition), while at June 30, 2015, the allowance represented 24.1% of nonperforming loans and 0.6% of total loans.

 

The Company had $12.5 million in assets classified as substandard for regulatory purposes at December 31, 2015, including loans ($11.4 million) and real estate owned (“REO”) ($1.1 million), including loans acquired in the CKF Bancorp transaction. Classified loans as a percentage of total loans (including loans acquired) was 4.7% and 4.5% at December 31, 2015 and June 30, 2015, respectively. Of substandard loans, 99.9% were secured by real estate on which the Banks have priority lien position.

 

 34 
 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to December 31, 2015 (continued)

 

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

 

(dollars in thousands)  December 31, 2015   June 30, 2015 
         
Substandard assets  $12,567   $12,639 
Doubtful assets        
Loss assets        
Total classified assets  $12,567   $12,639 

 

At December 31, 2015, the Company’s real estate acquired through foreclosure represented 9.1% of substandard assets compared to 12.6% at June 30, 2015. During the six months ended December 31, 2015, the Company sold property with a carrying value of $723,000 for $777,000, while during the year ended June 30, 2015, property with a carrying value of $590,000 was sold for $702,000. During the six months ended December 31, 2015, the Company made $510,000 in loans to facilitate the purchase of its other real estate owned by qualified borrowers, while for the fiscal year ended June 30, 2015, $424,000 in loans to facilitate an exchange were made. The Company defers recognition of any gain on loans to facilitate an exchange until the proper time in the future. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $235,000 and $292,000 at December 31, 2015 and June 30, 2015, respectively.

 

 35 
 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to December 31, 2015 (continued)

 

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

 

   December 31, 2015   June 30, 2015 
   Number   Net   Number   Net 
   of   Carrying   of   Carrying 
   Properties   Value   Properties