10-Q 1 f10q0917_kentuckyfirst.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2017

 

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
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

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 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 ninety days: Yes  ☒   No  ☐ 

 

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

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

 

Large accelerated filer         Accelerated filer     ☐ 
Non-Accelerated filer       (Do not check if a smaller reporting company) Smaller Reporting Company     ☒ 
      Emerging Growth Company ☐ 

 

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

 

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

Yes   ☐  No  ☒ 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At November 9, 2017, the latest practicable date, the Corporation had 8,444,515 shares of $.01 par value common stock outstanding.

 

 

 

 

 

 

INDEX

 

      Page
       
PART I - Item 1 FINANCIAL INFORMATION  
       
    Consolidated Balance Sheets 1
       
    Consolidated Statements of Income 2
       
    Consolidated Statements of Comprehensive Income 3
       
    Consolidated Statements of Cash Flows 4
       
    Notes to Consolidated Financial Statements 6
       
  Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
       
  Item 3 Quantitative and Qualitative Disclosures About Market Risk 36
       
  Item 4 Controls and Procedures 36
       
PART II - OTHER INFORMATION
       
  Item 1 Legal Proceedings 37
       
  Item 1A Risk Factors 37
       
  Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 37
       
  Item 3 Defaults Upon Senior Securities 37
       
  Item 4 Mine Safety Disclosures 37
       
  Item 5 Other Information 37
       
  Item 6 Exhibits 37
       
SIGNATURES 38

 

 

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1: Financial Statements

 

Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   September 30,   June 30, 
  2017   2017 
ASSETS        
Cash and due from financial institutions  $4,837   $4,035 
Interest-bearing demand deposits   3,509    8,769 
Cash and cash equivalents   8,346    12,804 
           
Time deposits in other financial institutions   6,928    4,201 
Securities available for sale   70    71 
Securities held-to-maturity, at amortized cost- approximate fair value of $1,402 and $1,523 at September 30, and June 30, 2017, respectively   1,368    1,487 
Loans, net of allowance of $1,554 and $1,533 at September 30, and June 30, 2017, respectively   255,858    258,244 
Real estate owned, net   777    358 
Premises and equipment, net   5,753    5,810 
Federal Home Loan Bank stock, at cost   6,482    6,482 
Accrued interest receivable   679    679 
Bank-owned life insurance   3,182    3,158 
Goodwill   14,507    14,507 
Prepaid federal income taxes   17    74 
Prepaid expenses and other assets   538    610 
           
Total assets  $304,505   $308,485 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $188,187   $182,845 
Federal Home Loan Bank advances   46,230    55,780 
Advances by borrowers for taxes and insurance   1,054    818 
Accrued interest payable   22    21 
Deferred federal income taxes   696    719 
Deferred revenue   578    578 
Other liabilities   628    578 
Total liabilities   237,395    241,339 
           
Commitments and contingencies   -    - 
           
Shareholders’ equity          
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued and outstanding   -    - 
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued   86    86 
Additional paid-in capital   35,084    35,084 
Retained earnings   34,097    34,180 
Unearned employee stock ownership plan (ESOP), 80,290 shares and 84,959 shares at September 30, and June 30, 2017, respectively   (803)   (850)
Treasury shares at cost, 151,549 and 151,549 common shares at September 30, and June 30, 2017, respectively   (1,355)   (1,355)
Accumulated other comprehensive income   1    1 
Total shareholders’ equity   67,110    67,146 
           
Total liabilities and shareholders’ equity  $304,505   $308,485 

 

See accompanying notes.

 

 1 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

   Three months ended
September 30,
 
   2017   2016 
Interest income        
Loans, including fees  $2,770   $2,693 
Mortgage-backed securities   12    25 
Other securities   --    3 
Interest-bearing deposits and other   119    68 
Total interest income   2,901    2,789 
           
Interest expense          
Interest-bearing demand deposits   6    5 
Savings   57    64 
Certificates of Deposit   231    178 
Deposits   294    247 
Borrowings   174    81 
Total interest expense   468    328 
Net interest income   2,433    2,461 
Provision for loan losses   --    4 
Net interest income after provision for loan losses   2,433    2,457 
           
Non-interest income          
Earnings on bank-owned life insurance   24    24 
Net gain on sales of real estate owned   43    73 
Other   73    71 
Total non-interest income   140    168 
Non-interest expense          
Employee compensation and benefits   1,369    1,344 
Occupancy and equipment   158    182 
Outside service fees   39    41 
Legal fees   8    13 
Data processing   102    97 
Auditing and accounting   66    79 
FDIC insurance premiums   23    60 
Franchise and other taxes   59    60 
Foreclosure and real estate owned expenses (net)   34    21 
Other   300    271 
Total non-interest expense   2,158    2,168 
           
Income before income taxes   415    457 
           
Federal income tax expense   135    160 
           
NET INCOME  $280   $297 
           
EARNINGS PER SHARE          
Basic and diluted  $0.03   $0.04 
DIVIDENDS PER SHARE  $0.10   $0.10 

 

See accompanying notes.

 

 2 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   Three months ended
September 30,
 
   2017   2016 
         
Net income  $280   $297 
           
Other comprehensive gains (losses), net of tax:          
Unrealized holding gains (losses) on securities designated as available for sale, net of taxes (benefits) of $0 and $(3) during the respective periods   --    (5)
Comprehensive income  $280   $292 

 

See accompanying notes.

 

 3 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Three months ended 
   September 30, 
   2017   2016 
         
Cash flows from operating activities:        
Net income  $280   $297 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   81    86 
Accretion of purchased loan credit discount   (22)   (46)
Amortization of purchased loan premium   4    3 
Amortization (accretion) of deferred loan origination costs (fees)   24    15 
Amortization of premiums on investment securities   3    18 
Amortization of premiums on deposits   --    (81)
Net loss (gain) on sale of real estate owned   (43)   (73)
Deferred gain on sale of real estate owned   --    (4)
ESOP compensation expense   47    52 
Earnings on bank-owned life insurance   (24)   (24)
Provision for loan losses   --    4 
Origination of loans held for sale   --    (203)
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   --    (1)
Prepaid expenses and other assets   72    343 
Accrued interest payable   1    (1)
Other liabilities   50    107 
Federal income taxes   34    61 
Net cash provided by operating activities   507    553 
           
Cash flows from investing activities:          
Purchase of term deposits in other financial institutions   (2,727)   (988)
Securities maturities, prepayments and calls:          
Held to maturity   116    638 
Available for sale   1    1 
Loans originated for investment, net of principal collected   1,889    (2,798)
Proceeds from sale of real estate owned   125    336 
Additions to real estate owned   (10)   (13)
Additions to premises and equipment, net   (24)   (40)
Net cash used in investing activities   (630)   (2,864)
           
Cash flows from financing activities:          
Net increase (decrease) in deposits   5,342    (2,988)
Payments by borrowers for taxes and insurance, net   236    273 
Proceeds from Federal Home Loan Bank advances   1,500    12,000 
Repayments on Federal Home Loan Bank advances   (11,050)   (6,064)
Dividends paid on common stock   (363)   (372)
Net cash provided by (used in) financing activities   (4,335)   2,849 
           
Net increase (decrease) in cash and cash equivalents   (4,458)   538 
           
Beginning cash and cash equivalents   12,804    13,108 
           
Ending cash and cash equivalents  $8,346   $13,646 

 

See accompanying notes.

 

 4 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

   Three months ended 
   September 30, 
   2017   2016 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Federal income taxes  $100   $100 
           
Interest on deposits and borrowings  $467   $410 
           
Transfers of loans to real estate owned, net  $660   $68 
           
Loans made on sale of real estate owned  $169   $110 

 

See accompanying notes.

 

 5 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

 

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

 

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

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements, which represent the consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three-month period ended September 30, 2017, are not necessarily indicative of the results which may be expected for an entire fiscal year. The consolidated balance sheet as of June 30, 2017 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 2017 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.

 

6
 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

 

New Accounting Standards:

 

FASB ASC 606 - In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, and subsequently issued several amendments to the standard. The core principle of ASU 2014-09 is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. As amended, ASU 2014-09 becomes effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, or the fiscal year beginning July 1, 2018, with respect to the Company. Management is finalizing its assessment of impact of the effects of ASU 2014-09, as amended, on the Company’s financial statements and disclosures. We do not expect the new standard or any of the amendments to result in a material change from our current accounting for revenue, because the majority of the Company’s financial instruments are outside of the scope of Topic 606. Management will continue to evaluate the impact, if any, of any additional guidance that is forthcoming.

FASB ASC 825 - In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, or the fiscal year beginning July 1, 2018, with respect to the Company. Management is finalizing its assessment of impact of the effects of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact. However, a fair value estimate on a loan portfolio would consider exit price.

7
 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

 

New Accounting Standards (continued)

FASB ASC 718 - In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting. The amendments are intended to improve the accounting for employee shared-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update became effective July 1, 2017, with respect to the Company and, as expected, it did not have a material impact of the consolidated financial statements.

FASB ASC 326 - In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The Company will now use forward-looking information to enhance its credit loss estimates. The amendment requires enhanced disclosures to aid investors and other users of financial statements to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of our portfolio. The largest impact to the Company will be on its allowance for loan and lease losses, although the ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard is effective public companies for annual periods and interim periods within those annual periods beginning after December 15, 2019, or in the Company’s case the fiscal year beginning July 1, 2020.  ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is required for these debt securities. We have formed a functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. However, the Company does expect ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

8
 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

 

New Accounting Standards (continued)

FASB ASC 230 - In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . The amendments in ASU 2016-15 provide guidance on the following eight specific cash flow issues:

1. Debt Prepayment or Debt Extinguishment Costs;

2. Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing;

3. Contingent Consideration Payments Made after a Business Combination;

4. Proceeds from the Settlement of Insurance Claims;

5. Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies;

6. Distributions Received from Equity Method Investees;

7. Beneficial Interests in Securitization Transactions; and

8. Separately Identifiable Cash Flows and Application of the Predominance Principle.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. Management is finalizing its assessment of impact of the effects of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

FASB ASC 310 – In March 2017, the FASB issued ASU No. 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments requite the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities, which, in turn, are expected to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. For public business entities, the amendments in this update are effective for fiscal years, and the interim periods within those fiscal years, beginning after December 15, 2018. Changes resulting from the amendments in this update should be recognized on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. We have determined that this guidance will have an immaterial impact on the Company’s financial statements and have elected to adopt the guidance.

9
 


Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

 

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.

  

2. Earnings Per Share

 

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

 

   Three months ended September 30, 
(in thousands)  2017   2016 
Net income allocated to common shareholders, basic and diluted  $280   $297 

 

   Three months ended
September 30,
 
   2017   2016 
Weighted average common shares outstanding, basic and diluted   8,359,607    8,335,931 

 

There were no stock option shares outstanding for the three month periods ended September 30, 2017 and 2016.

 

 10 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 2017 and June 30, 2017, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

   September 30, 2017 
(in thousands)  Amortized cost   Gross unrealized/ unrecognized gains   Gross
unrealized/ unrecognized losses
   Estimated fair value 
                 
Available-for-sale Securities                
Agency mortgage-backed: residential  $69   $1   $--   $70 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $1,368   $42   $8   $1,402 

 

   June 30, 2017 
(in thousands)  Amortized cost   Gross unrealized/ unrecognized gains   Gross
unrealized/ unrecognized losses
   Estimated fair value 
                 
Available-for-sale Securities                
Agency mortgage-backed: residential  $70   $1   $--   $71 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $1,487   $45   $9   $1,523 

 

At September 30, 2017, the Company’s debt securities consist of mortgage-backed securities, which 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.

 

   September 30, 2017 
(in thousands)  Amortized Cost   Fair Value 
         
Held-to-maturity Securities          
Agency mortgage-backed: residential  $1,368   $1,402 

 

Our pledged securities (including overnight and time deposits in other financial institutions) totaled $2.2 million and $2.3 million at September 30 and June 30, 2017, respectively.

 

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

 

 11 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

 

   September 30,   June 30, 
(in thousands)  2017   2017 
         
Residential real estate        
One- to four-family  $196,497   $197,936 
Multi-family   15,067    15,678 
Construction   2,320    2,398 
Land   901    1,304 
Farm   2,368    2,062 
Nonresidential real estate   31,104    29,211 
Commercial nonmortgage   2,200    2,540 
Consumer and other:          
Loans on deposits   1,632    1,607 
Home equity   6,819    6,853 
Automobile   38    42 
Unsecured   471    400 
    259,417    260,031 
           
Undisbursed portion of loans in process   (2,047)   (296)
Deferred loan origination costs   42    42 
Allowance for loan losses   (1,554)   (1,533)
   $255,858   $258,244 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2017:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans charged off   Recoveries   Ending balance 
                     
Residential real estate:                    
One- to four-family  $773   $   (20)  $(18)  $39   $774 
Multi-family   243    --    --    --    243 
Construction   6    1    --    --    7 
Land   4    (2)   --    --    2 
Farm   9    1    --    --    10 
Nonresidential real estate   270    14    --    --    284 
Commercial nonmortgage   6    1    --    --    7 
Consumer and other:                         
Loans on deposits   4    1    --    --    5 
Home equity   17    3    --    --    20 
Automobile   --    --    --    --    -- 
Unsecured   1    1    --    --    2 
Unallocated   200    --    --    --    200 
Totals  $1,533   $--   $(18)  $39   $1,554 

 

 12 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2016:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans charged off   Recoveries   Ending balance 
                     
Residential real estate:                    
One- to four-family  $862   $(16)  $(43)  $     --   $803 
Multi-family   192    16    --    --    208 
Construction   5    --    --    --    5 
Land   2    --    --    --    2 
Farm   3    1    --    --    4 
Nonresidential real estate   217    5    --    --    222 
Commercial nonmortgage   18    (3)   --    --    15 
Consumer and other:                         
Loans on deposits   4    --    --    --    4 
Home equity   11    1    --    --    12 
Automobile   --    --    --    --    -- 
Unsecured   1    --    --    --    1 
Unallocated   200    --    --    --    200 
Totals  $1,515   $4   $(43)  $--   $1,476 

 

 13 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2017. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality. There were no impaired loans at September 30, 2017, that had a related specific allowance.

 

September 30, 2017:                        
                         
   Unpaid Principal Balance and Recorded Investment                 
(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  $3,195   $1,502   $4,697   $--   $--   $-- 
    131    --    131    --    --    -- 
    3,326    1,502    4,828    --    --    -- 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $191,800   $774   $--   $774 
Multi-family             15,067    243    --    243 
Construction             2,320    7    --    7 
Land             901    2    --    2 
Farm             2,368    10    --    10 
Nonresidential real estate             30,973    284    --    284 
Commercial nonmortgage             2,200    7    --    7 
Consumer:                              
Loans on deposits             1,632    5    --    5 
Home equity             6,819    20    --    20 
Automobile             38    --    --    -- 
Unsecured             471    2    --    2 
Unallocated             --    --    200    200 
              254,589    1,354    200    1,554 
             $259,417   $1,354   $200   $1,554 

 

 14 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(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, 2017. There were no impaired loans at June 30, 2017, that had a related specific allowance.

 

June 30, 2017:                        
                         
   Unpaid Principal Balance and Recorded Investment                 
(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  $3,706   $1,676   $5,382   $--   $--   $-- 
Nonresidential real estate   131    --    131    --    --    -- 
    3,837    1,676    5,513    --    --    -- 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $192,554   $773   $--   $773 
Multi-family             15,678    243    --    243 
Construction             2,398    6    --    6 
Land             1,304    4    --    4 
Farm             2,062    9    --    9 
Nonresidential real estate             29,080    270    --    270 
Commercial nonmortgage             2,540    6    --    6 
Consumer:                              
Loans on deposits             1,607    4    --    4 
Home equity             6,853    17    --    17 
Automobile             42    --    --    -- 
Unsecured             400    1    --    1 
Unallocated             --    --    200    200 
              254,518    1,333    200    1,533 
             $260,031   $1,333   $200   $1,533 

 

 15 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(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 September 30, 2017 and 2016:

 

September 30, 2017:

 

(in thousands)  Unpaid Principal Balance and Recorded Investment  Allowance
for Loan
Losses
Allocated
  Average Recorded Investment  Interest
Income
Recognized
  Cash Basis Income Recognized
                
With no related allowance recorded:                         
One- to four-family  $3,195   $-     $3,450   $2   $2 
Nonresidential real estate   131    -      131    -      -   
Purchased credit-impaired loans   1,502    -      1,589    30    30 
    4,828    -      5,170    32    32 
With an allowance recorded:                         
One- to four-family   -      -      -      -      -   
   $4,828   $-     $5,170   $32   $32 

  

September 30, 2016:

 

(in thousands)  Unpaid Principal Balance and Recorded Investment   Allowance
for Loan
Losses
Allocated
   Average Recorded Investment   Interest
Income
Recognized
   Cash Basis Income Recognized 
                     
With no related allowance recorded:                    
One- to four-family  $3,980   $     --   $3,690   $2   $2 
Purchased credit-impaired loans   2,091    --    2,201    14    14 
    6,071    --    5,891    16    16 
With an allowance recorded:                         
One- to four-family   --    --    --    --    -- 
   $6,071   $--   $5,891   $16   $16 

 

 16 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(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 September 30, 2017 and June 30, 2017:

 

   September 30, 2017   June 30, 2017 
(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  $4,790   $1,598   $4,870   $1,770 
Nonresidential real estate and land   150    539    151    -- 
Consumer   9    22    8    11 
   $4,949   $2,159   $5,029   $1,781 

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Banks would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.” At September 30, 2017 and June 30, 2017, the Company had $1.7 million and $1.5 million of loans classified as TDRs, respectively. Of the TDRs at September 30, 2017, approximately 15.9% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

 17 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable (continued)

 

The following table summarizes TDR loan modifications that occurred during the three months ended September 30, 2017 and 2016, and their performance, by modification type:

 

(in thousands)  Troubled Debt Restructurings Performing to Modified Terms   Troubled Debt Restructurings Not Performing to Modified Terms   Total Troubled Debt Restructurings 
             
Three months ended September 30, 2017            
Residential real estate:            
Terms extended  $314   $  --   $314 

 

The Company had no TDRs during the three months ended September 30, 2016. The Company had no allocated specific reserves to customers whose loan terms had been modified in troubled debt restructurings as of September 30, 2017 or at June 30, 2017. The Company had no commitments to lend on loans classified as TDRs at September 30, 2017 or June 30, 2017.

 

Four TDRs with a carrying value of $136,000 defaulted during the three-month period ended September 30, 2017. The properties were taken into REO and sold. There were no TDRs that defaulted during the three- month period ended September 30, 2016.

 

 18 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of September 30, 2017, 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   $ 3,973     $ 3,847     $ 7,820     $ 188,677     $ 196,497  
Multi-family     --       --       --       15,067       15,067  
Construction     --       --       --       2,320       2,320  
Land     --       --       --       901       901  
Farm     --       539       539       1,829       2,368  
Nonresidential real estate     630       133       763       30,341       31,104  
Commercial non-mortgage     --       --       --       2,200       2,200  
Consumer and other:                                        
Loans on deposits     --       --       --       1,632       1,632  
Home equity     3       22       25       6,794       6,819  
Automobile     --       --       --       38       38  
Unsecured     --       --       --       471       471  
Total   $ 4,606     $ 4,541     $ 9,147     $ 250,270     $ 259,417  

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2017, 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  $5,193   $4,496   $9,689   $188,247   $197,936 
Multi-family   --    --    --    15,678    15,678 
Construction   --    --    --    2,398    2,398 
Land   --    --    --    1,304    1,304 
Farm   539    --    539    1,523    2,062 
Nonresidential real estate   635    133    768    28,443    29,211 
Commercial nonmortgage   --    --    --    2,540    2,540 
Consumer:                         
Loans on deposits   --    --    --    1,607    1,607 
Home equity   17    11    28    6,825    6,853 
Automobile   --    --    --    42    42 
Unsecured   13    --    13    387    400 
Total  $6,397   $4,640   $11,037   $248,994   $260,031 

 

 19 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(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 September 30, 2017, 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  $--   $4,569   $9,998   $--   $181,930 
Multi-family   14,686    --    381    --    -- 
Construction   2,320    --    --    --    -- 
Land   901    --    --    --    -- 
Farm   1,829    --    539    --    -- 
Nonresidential real estate   30,954    --    150    --    -- 
Commercial nonmortgage   2,174    26    --    --    -- 
Consumer:                         
Loans on deposits   1,632    --    --    --    -- 
Home equity   6,819    --    --    --    -- 
Automobile   38    --    --    --    -- 
Unsecured   467    --    4    --    -- 
   $61,820   $4,595   $11,072   $--   $181,930 

 

 20 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2017, 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  $--   $6,110   $9,883   $       --   $181,943 
Multi-family   14,541    --    1,137    --    -- 
Construction   2,398    --    --    --    -- 
Land   1,304    --    --    --    -- 
Farm   1,523    --    539    --    -- 
Nonresidential real estate   29,061    --    150    --    -- 
Commercial nonmortgage   2,513    27    --    --    -- 
Consumer:                         
Loans on deposits   1,607    --    --    --    -- 
Home equity   6,744    93    16    --    -- 
Automobile   42    --    --    --    -- 
Unsecured   396    --    4    --    -- 
   $60,129   $6,230   $11,729   $--   $181,943 

 

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 $388,000 at September 30, 2017 and June 30, 2017, respectively, is as follows:

 

(in thousands)  September 30, 2017   June 30,
2017
 
         
One- to four-family residential real estate  $1,502   $1,676 
Nonresidential real estate   --    -- 
Outstanding balance  $1,502   $1,676 

 

 21 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

4. Loans receivable (continued)

 

Accretable yield, or income expected to be collected on loans purchased during fiscal year 2013, is as follows

 

(in thousands)  Three months
ended
September 30,
2017
   Three months
ended
September 30,
2016
 
         
Balance at beginning of period  $720   $981 
Accretion of income   (22)   (46)
Reclassifications from nonaccretable difference   -      -   
Disposals, net of recoveries   1    -   
Balance at end of period  $699   $935 

 

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2017, nor for the three-month period ended September 30, 2017. 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 that the entity has the ability to access at the measurement date.

 

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 reflect a reporting entity’s own assumptions and 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 FHLMC stock.

 

 22 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(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)
 
                 
September 30, 2017                
Agency mortgage-backed: residential  $70   $--   $70   $-- 
                     
June 30, 2017                    
Agency mortgage-backed: residential  $71   $--   $71   $-- 

 

 23 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

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

 

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

 

   Fair Value Measurements Using
(in thousands)  Fair Value  Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs
(Level 2)
  Significant Unobservable Inputs
(Level 3)
             
September 30, 2017                    
Loans                    
One- to four-family  $70    -      -     $70 
                     
June 30, 2017                    
Other real estate owned, net                    
One- to four-family  $103    -      -     $103 
Land   79    -      -      79 

  

There were no impaired loans, which were measured using the fair value of the collateral for collateral-dependent loans, at September 30, 2017, and June 30, 2017. There was no specific provision made for the three month periods ended September 30, 2017 or 2016.

 

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $182,000 at June 30, 2017. Other real estate owned was not written down during the three months ended September 30, 2017 and 2016.

 

 24 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

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

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2017 and June 30, 2017:

 

September 30, 2017  Fair Value
(in thousands)
   Valuation
Technique(s)
  Unobservable
Input(s)
  Range
(Weighted
Average)
              
Loans:              
               

One- to four-family

  $70   Sales comparison approach 

Adjustments for differences between comparable sales

 

-23.5% to 13.8% (-1.5%)

 

June 30, 2017  Fair Value (in thousands)   Valuation
Technique(s)
  Unobservable
Input(s)
  Range
(Weighted
Average)
              
Foreclosed and repossessed assets:             
One- to four-family  $103   Sales comparison approach  Adjustments for differences between comparable sales  -3.6% to 45.8%  (9.5%)
Land  $79   Sales comparison approach  Adjustments for differences between comparable sales  3.5% to 6.6% (5.0%)

  

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

 

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

 

 25 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(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 September 30, 2017 and June 30, 2017:

 

Cash and cash equivalents, interest-bearing deposits and time deposits in other financial institutions: 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: 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 September 30, 2017 and June 30, 2017, was not material.

 

 26 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at September 30, 2017 and June 30, 2017 are as follows:

 

      Fair Value Measurements at
      September 30, 2017 Using
(in thousands)  Carrying Value   Level 1    Level 2   Level 3    Total
                
Financial assets                         
Cash and cash equivalents  $8,346   $8,346             $8,346 
Term deposits in other financial institutions   6,928    6,928              6,928 
Available-for-sale securities   70        $70         70 
Held-to-maturity securities   1,368         1,402         1,402 
Loans receivable - net   255,858              267,115    267,115 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   679         679         679 
                          
Financial liabilities                         
Deposits  $188,187   $77,449   $110,209         187,658 
Federal Home Loan Bank advances   46,230         46,314         46,314 
Advances by borrowers for taxes and insurance   1,054    1,054              1,054 
Accrued interest payable   22         22         22 

  

          Fair Value Measurements at
        June 30, 2017 Using
(in thousands)   Carrying Value      Level 1     Level 2     Level 3   Total
                           
Financial assets                            
Cash and cash equivalents   $ 12,804     $ 12,804                   $ 12,804
Term deposits in other financial institutions     4,201       4,201                     4,201
Available-for-sale securities     71             $ 71             71
Held-to-maturity securities     1,487               1,523             1,523
Loans receivable – net     258,244                     $ 269,606     269,606
Federal Home Loan Bank stock     6,482                              n/a
Accrued interest receivable     679               679           679
                                     
Financial liabilities                                    
Deposits   $ 182,845     $ 78,561     $ 103,786             $182,347
Federal Home Loan Bank advances     55,780               55,881             55,881
Advances by borrowers for taxes and insurance     818               818             818
Accrued interest payable     21               21             21

 27 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2017

(unaudited)

 

6.  Accumulated Other Comprehensive Income (Loss)

 

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

 

   Three months
ended
September 30,
2017
 
     
Beginning balance  $1 
Current year change         -- 
Ending balance  $1 

 

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

 

   Three months ended September 30, 
(in thousands)  2017   2016 
         
Unrealized holding gains (losses) on available-for-sale securities  $1   $(8)
Tax effect   --    (3)
Net-of-tax amount  $1   $(5)

 

7. Subsequent Events

 

Subsequent to September 30, 2017, the former President/CEO and a current director of First Federal Savings Bank of Kentucky passed away. Mr. Garland was covered under the bank-owned life insurance program operated as part of the overall employee benefits program, which has been in place for many years. As a result of the passing of this director, the Bank will be receiving the insurance proceeds on the policies maintained for the director in the amount of approximately $1.2 million. Because the cash value of the policies pertaining to Mr. Garland totaled $792,000 at September 30, 2017, the Company expects to recognize income of approximately $370,000.

 

 28 

 

 

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, 2017. 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.

  

Average Balance Sheets

 

The following table represents the average balance sheets for the three month periods ended September 30, 2017 and 2016, 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, 
   2017   2016 
  

Average

Balance

  

Interest

And

Dividends

  

Yield/

Cost

   Average Balance  

Interest

And Dividends

  

Yield/

Cost

 
   (Dollars in thousands) 
Interest-earning assets:                        
Loans 1   $257,815   $2,770    4.30%  $241,520   $2,693    4.46%
Mortgage-backed securities    1,510    12    3.18    2,073    25    4.82 
Other securities    --    --    --    1,957    3    0.61 
Other interest-earning assets    19,464    119    2.45    19,771    68    1.38 
Total interest-earning assets    278,789    2,901    4.16    265,321    2,789    4.20 
                               
Less: Allowance for loan losses   (1,534)             (1,509)          
Non-interest-earning assets    29,494              29,603           
Total assets   $306,749             $293,415           
                               
Interest-bearing liabilities:                              
Demand deposits  $15,035   $6    0.16%  $15,697   $5    0.13%
Savings   58,680    57    0.39    62,886    64    0.41 
Certificates of deposit   107,276    231    0.86    105,156    178    0.68 
Total deposits   180,991    294    0.65    183,739    247    0.54 
Borrowings   50,397    174    1.38    35,158    81    0.92 
Total interest-bearing liabilities    231,388    468    0.81    218,897    328    0.60 
                               
Noninterest-bearing demand deposits   5,328              4,255           
Noninterest-bearing liabilities    2,834              2,654           
Total liabilities    239,550              225,806           
                               
Shareholders’ equity    67,199              67,609           
Total liabilities and shareholders’ equity  $306,749             $293,415           
Net interest spread        $2,433    3.35%       $2,461    3.60%
Net interest margin              3.49%             3.71%
Average interest-earning assets to average interest-bearing liabilities              120.49%             121.21%

 

 

 

 

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

 

 29 

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2017 to September 30, 2017

 

Assets: At September 30, 2017, the Company’s assets totaled $304.5 million, a decrease of $4.0 million, or 1.3%, from total assets at June 30, 2017. This decrease was attributed primarily to decreases in loans and cash and cash equivalents.

 

Cash and cash equivalents: Cash and cash equivalents decreased $4.5 million or 34.8% to $8.3 million at September 30, 2017.

 

Time deposits in other financial institutions: Time deposits in other financial institutions increased by $2.7 million or 64.9% to $6.9 million at September 30, 2017, as we seek to employ liquidity at the highest earning level possible.

 

Investment securities: At September 30, 2017 our securities portfolio consisted of mortgage-backed securities. Investment securities decreased $120,000 or 7.7% to $1.4 million at September 30, 2017.

 

Loans: Loans receivable, net, decreased by $2.4 million or 0.9% to $255.9 million at September 30, 2017. 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, 2017, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $7.1 million, or 2.8% of total loans (including loans purchased in the acquisition), compared to $6.8 million or 2.6%, of total loans at June 30, 2017.  The Company’s allowance for loan losses totaled $1.6 million and $1.5 million at both September 30, 2017 and June 30, 2017, respectively. The allowance for loan losses at September 30, 2017, represented 22.9% of nonperforming loans and 0.6% of total loans (including loans purchased in the acquisition), while at June 30, 2017, the allowance represented 22.5% of nonperforming loans and 0.6% of total loans.

 

The Company had $11.8 million in assets classified as substandard for regulatory purposes at September 30, 2017, including loans ($11.0 million) and real estate owned (“REO”) ($777,000), including loans acquired in the CKF Bancorp transaction. Classified loans as a percentage of total loans (including loans acquired) was 4.3% and 4.5% at September 30, 2017 and June 30, 2017, respectively. Of substandard loans, 95.1% were secured by real estate on which the Banks have priority lien position.

 

 30 

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2017 to September 30, 2017 (continued)

 

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

 

(dollars in thousands)  September 30, 2017   June 30,
2017
 
         
Substandard assets   $11,849   $12,087 
Doubtful assets    --    -- 
Loss assets    --    -- 
Total classified assets   $11,849   $12,087 

 

At September 30, 2017, the Company’s real estate acquired through foreclosure represented 6.6% of substandard assets compared to 3.0% at June 30, 2017. During the three months ended September 30, 2017, the Company sold property with a carrying value of $245,000 for $294,000, while during the year ended June 30, 2017, property with a carrying value of $780,000 was sold for $816,000. During the three months ended September 30, 2017, the Company made no loans to facilitate the purchase of its other real estate owned by qualified borrowers, while for the fiscal year ended June 30, 2017, $254,000 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 according to ASC topic 360, Property, Plant and Equipment. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $247,000 and $346,000 at September 30, 2017 and June 30, 2017, respectively.

 

 31 

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2017 to September 30, 2017 (continued)

 

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

 

   September 30, 2017   June 30, 2017 
   Number of Properties   Net Carrying Value   Number of Properties   Net Carrying Value 
                 
                 
Single family, non-owner occupied    6   $777    6   $330 
Building lot    1    --    2    28 
Total REO    7   $777    8   $358 

 

At September 30, 2017 and June 30, 2017, the Company had $4.6 million and $6.2 million of loans classified as special mention, respectively (including loans acquired in the CKF Bancorp transaction on December 31, 2012.) This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. The decrease in loans classified as special mention from June 30, 2017 to the recently-ended quarter was due to improved financial condition of borrowers previously included in the special mention category.

 

Liabilities: Total liabilities decreased $3.9 million, or 1.6% to $237.4 million at September 30, 2017, primarily as a result of a decrease in FHLB advances, which decreased $9.6 million or 17.1% to $46.2 million at September 30, 2017. Short-term advances were repaid as the Company received loan repayments and additional retail deposits. Deposits increased $5.3 million or 2.9% and totaled $188.2 million at quarter end.

 

Shareholders’ Equity: At September 30, 2017, the Company’s shareholders’ equity totaled $67.1 million, a decrease of $36,000 or 0.1% from the June 30, 2017 total. The change in shareholders’ equity was primarily associated with net profits for the period less dividends paid on common stock.

 

 32 

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2017 to September 30, 2017 (continued)

 

The Company paid dividends of $363,000 or 129.6% of net income for the three month period just ended. On July 6, 2017, the members of First Federal MHC for the sixth time approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock. The Board of Directors of First Federal MHC applied for approval of another waiver. The Federal Reserve Bank of Cleveland has notified the Company that it did not object to the waiver of dividends paid by the Company to First Federal MHC, and, as a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third calendar quarter of 2018. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Management cannot speculate on future dividend levels, because various factors, including capital levels, income levels, liquidity levels, regulatory requirements and overall financial condition of the Company are considered before dividends are declared. However, management continues to believe that a strong dividend is consistent with the Company’s long-term capital management strategy. See “Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2017 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Three Month Periods Ended September 30, 2017 and 2016

 

General

 

Net income totaled $280,000 for the three months ended September 30, 2017, a decrease of $17,000 or 5.7% from net income of $297,000 for the same period in 2016.

 

Net Interest Income

 

Net interest income before provision for loan losses decreased $28,000 or 1.1% to $2.4 million for the three month period just ended. Interest income increased by $112,000, or 4.1%, to $2.9 million, while interest expense increased $140,000 or 42.7% to $468,000 for the three months ended September 30, 2017.

 

 33 

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Three Month Periods Ended September 30, 2017 and 2016 (continued)

 

Interest income on loans increased $77,000 or 2.9% to $2.8 million, due primarily to an increase in the average volume of the loan portfolio. The average balance of the loan portfolio increased $16.3 million or 6.8% to $257.8 million for the three month period ended September 30, 2017, while the rate earned on the loan portfolio decreased 16 basis points to 4.30%. Interest income on mortgage-backed securities decreased $13,000 or 52.0% to $12,000 for the quarterly period just ended due to lower interest rate and volume of asset level. Interest income from interest-bearing deposits and other increased $51,000 or 75.0% to $119,000 for the quarter just ended primarily as a result of an increase in the average rate earned on those assets which increased 107 basis points to 2.4% compared to the period a year ago.

 

Interest expense on deposits increased $47,000 or 19.0% to $294,000 for the three months ended September 30, 2017, while interest expense on borrowings increased $93,000 or 114.8% to $174,000 for the same period. The increase in interest expense on deposits was attributed primarily to an increase in the average rate paid on deposits, which increased 11 basis points to 65 basis points for the recently ended quarter. The average balance of deposits decreased $2.7 million or 1.5% to $181.0 million for the most recent period. The increase in interest expense on borrowings was attributed to both higher average outstanding balances quarter to quarter as well as higher interest rate levels. The average balance of borrowings outstanding increased $15.2 million or 43.3% to $50.4 million for the recently ended three month period, while the average rate paid on borrowings increased 46 basis points to 138 basis points for the most recent period.

 

Net interest spread decreased from 3.60% for the prior year quarterly period to 3.35% for the quarter ended September 30, 2017.

 

Provision for Losses on Loans

 

The Company recorded no provision for losses on loans during the three months ended September 30, 2017, compared to a provision of $4,000 for the three months ended September 30, 2016. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.

 

Non-interest Income

 

Non-interest income decreased $28,000 or 16.7% to $140,000 for the quarter ended September 30, 2017, compared to the prior year quarter, primarily because of decreased gain on the sale of REO. Net gain on sale of REO decreased $30,000 to $43,000 for the recently ended quarter compared to the prior year.

 

 34 

 

 

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, 2017 and 2016 (continued)

 

Non-interest Expense

 

Non-interest expense decreased $10,000 or 0.5% and totaled $2.2 million for the three months ended September 30, 2017, primarily due to a decrease in FDIC insurance expense, which resulted from changes in the FDIC assessment methodology. FDIC insurance premiums for the three months ended September 30, 2017 decreased $37,000 or 61.7% to $23,000. In addition to the decrease in FDIC insurance premiums, expenses associated with occupancy and equipment and auditing and accounting also decreased. Occupancy and equipment expense decreased $24,000 or 13.2% to $158,000 for the period, while auditing and accounting decreased $13,000 or 16.5% to $66,000 for the period. Somewhat offsetting the decreases in these expenses were increased costs associated with other non-interest expense, employee compensation and benefits, and foreclosure and OREO expenses. Other non-interest expense increased $29,000 or 10.7% primarily due to higher costs for data transmission and communication as well as higher loan costs. Employee compensation and benefits increased $25,000 or 1.9% to $1.4 million for the quarter just ended due to higher employee compensation due to a higher number of full-time equivalent personnel quarter-to-quarter and higher ESOP compensation, which was due to higher average trading price of our Company’s stock. Foreclosure and OREO expenses, net increased $13,000 or 61.9% and totaled $34,000 for the recently ended period.

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $135,000 for the three months ended September 30, 2017, compared to $160,000 in the prior year period. The effective tax rates were 32.5% and 35.0% for the three-month periods ended September 30, 2017 and 2016, respectively.

 

 35 

 

 

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, 2017 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.

 

 36 

 

 

Kentucky First Federal Bancorp

 

PART II

OTHER INFORMATION

 

 

ITEM 1.Legal Proceedings

 

None.

 

ITEM 1A.Risk Factors

 

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.

 

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, 2017.

 

Period  Total # of shares purchased   Average
price paid per
share (incl commissions)
   Total # of shares purchased as part of publicly announced plans or programs   Maximum # of shares that may yet be  purchased under the plans or programs 
                 
July 1-31, 2017   --   $     --       --    60,323 
August 1-31, 2017   --   $--    --    60,323 
September 1-30, 2017   --   $--    --    60,323 

 

(1)  On January 16, 2014, the Company announced a program (its seventh) to repurchase of up to 150,000 shares of its common stock.

 

ITEM 3.Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5.Other Information

 

None.

 

ITEM 6.Exhibits

 

  3.11   Charter of Kentucky First Federal Bancorp
  3.22   Bylaws of Kentucky First Federal Bancorp, as amended and restated
  4.11   Specimen Stock Certificate of Kentucky First Federal Bancorp
  31.1   CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2   CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101.0   The following materials from Kentucky First Federal Bancorp’s Quarterly Report
      On Form 10-Q for the quarter ended September 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 

 

(1)Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No. 333-119041).
(2)Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the Year Ended June 30, 2012 (File No. 0-51176).

 

 37 

 

 

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, 2017 By: /s/ Don D. Jennings
    Don D. Jennings
    Chief Executive Officer

 

Date: November 14, 2017 By: /s/ R. Clay Hulette
    R. Clay Hulette
    Vice President and Chief Financial Officer

 

 

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