10-Q 1 f10q0319_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 March 31, 2019

 

OR

 

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

 

For the transition period from ____________ to _______________

 

Commission File Number: 0-51176

 

KENTUCKY FIRST FEDERAL BANCORP

(Exact name of registrant as specified in its charter)

 

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

 

655 Main Street, Hazard, Kentucky 41702

(Address of principal executive offices) (Zip Code)

 

(502) 223-1638

(Registrant’s telephone number, including area code)

 

 

(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 90 days:  Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At May 7, 2019, the latest practicable date, the Corporation had 8,374,315 shares of $.01 par value common stock outstanding.

 

 

 

 

 

 

INDEX

 

      Page
       
PART I - ITEM 1 FINANCIAL INFORMATION  
       
    Condensed Consolidated Balance Sheets 1
       
    Condensed Consolidated Statements of Income 2
       
    Condensed Consolidated Statements of Comprehensive Income 3
       
    Consolidated Statements of Changes in Shareholders’ Equity 4
       
    Condensed Consolidated Statements of Cash Flows 6
       
    Notes to Condensed Consolidated Financial Statements 8
       
  ITEM 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
       
  ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 40
       
  ITEM 4 Controls and Procedures 40
       
PART II -  OTHER INFORMATION 41
       
SIGNATURES 42

 

 

 

 

PART I

 

ITEM 1: Financial Information

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   March 31,   June 30, 
   2019   2018 
ASSETS        
           
Cash and due from financial institutions  $1,623   $2,337 
Interest-bearing demand deposits   8,570    7,606 
Cash and cash equivalents   10,193    9,943 
           
Time deposits in other financial institutions   4,952    5,692 
Securities available-for-sale   547    48 
Securities held-to-maturity, at amortized cost- approximate fair value of $809 and $998 at March 31, 2019 and June 30, 2018, respectively   810    1,002 
Loans, net of allowance of $1,529 and $1,576 at March 31, 2019 and June 30, 2018, respectively   271,670    270,310 
Real estate owned, net   729    710 
Premises and equipment, net   5,009    5,652 
Federal Home Loan Bank stock, at cost   6,482    6,482 
Accrued interest receivable   745    706 
Bank-owned life insurance   2,500    2,444 
Goodwill   14,507    14,507 
Prepaid federal income taxes   154    144 
Prepaid expenses and other assets   1,123    754 
           
Total assets  $319,421   $318,394 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $195,236   $195,653 
Federal Home Loan Bank advances   56,038    53,052 
Advances by borrowers for taxes and insurance   475    762 
Accrued interest payable   29    22 
Deferred federal income taxes   586    443 
Deferred revenue   --    558 
Other liabilities   549    701 
Total liabilities   252,913    251,191 
           
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   35,056    35,085 
Retained earnings   33,916    34,050 
Unearned employee stock ownership plan (ESOP), 52,276 shares and 66,283 shares at, March 31, 2019 and June 30, 2018, respectively   (523)   (663)
Treasury shares at cost, 236,749 and 151,549 common shares at March 31, 2019 and June 30, 2018, respectively   (2,029)   (1,355)
Accumulated other comprehensive income   2    -- 
Total shareholders’ equity   66,508    67,203 
           
Total liabilities and shareholders’ equity  $319,421   $318,394 

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
   2019   2018   2019   2018 
Interest income                
Loans, including fees  $8,907   $8,430   $3,013   $2,822 
Mortgage-backed securities   24    37    8    14 
Other securities   7    --    3    -- 
Interest-bearing deposits and other   478    386    168    132 
Total interest income   9,416    8,853    3,192    2,968 
                     
Interest expense                    
Interest-bearing demand deposits   18    16    6    5 
Savings   163    169    53    55 
Certificates of Deposit   1,255    815    448    305 
Deposits   1,436    1,000    507    365 
Borrowings   906    531    338    196 
Total interest expense   2,342    1,531    845    561 
Net interest income   7,074    7,322    2,347    2,407 
Provision for loan losses   11    107    --    104 
Net interest income after provision for loan losses   7,063    7,215    2,347    2,303 
                     
Non-interest income                    
Earnings on bank-owned life insurance   56    430    19    18 
Net gain on sales of loans   29    24    9    13 
Net gain (loss) on sales of real estate owned   7    47    (5)   (4)
Valuation adjustment for real estate owned   (54)   (18)   --    (18)
Other   155    150    58    48 
Total non-interest income   193    633    81    57 
Non-interest expense                    
Employee compensation and benefits   4,369    4,092    1,452    1,359 
Occupancy and equipment   506    505    171    180 
Voice and data communications   187    194    54    61 
Advertising   172    187    41    56 
Outside service fees   114    126    42    40 
Data processing   330    325    116    110 
Auditing and accounting   76    205    10    68 
Franchise and other taxes   191    182    65    63 
Foreclosure and real estate owned expenses (net)   78    93    18    32 
Other   604    632    204    208 
Total non-interest expense   6,627    6,541    2,173    2,177 
                     
Income before income taxes   629    1,307    255    183 
                     
Federal income tax expense (benefit)   117    (4)   48    21 
                     
NET INCOME  $512   $1,311   $207   $162 
                     
EARNINGS PER SHARE                    
Basic and diluted  $0.06   $0.16   $0.02   $0.02 

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
   2019   2018   2019   2018 
                 
Net income  $512   $1,311   $207   $162 
                     
Other comprehensive gains, net of tax:                    
Unrealized holding gains on securities designated as available-for-sale, net of taxes of $1, $0, $0 and $0 during the respective periods   2    --    1    -- 
Comprehensive income  $514   $1,311   $208   $162 

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the nine months ended

(Dollar amounts in thousands, except per share data)

 

March 31, 2019

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                                    
Balance at June 30, 2018  $86   $35,085   $34,050   $(663)  $(1,355)  $--   $67,203 
                                    
Net income   --    --    512    --    --    --    512 
Allocation of ESOP shares   --    (29)   --    140    --    --    111 
Acquisition of shares for Treasury   --    --    --    --    (674)   --    (674)
Change in accounting method for ASU 2014-09   --    --    441    --    --    --    441 
Other comprehensive income   --    --    --    --    --    2    2 
Cash dividends of $0.30 per common share   --    --    (1,087)   --    --    --    (1,087)
                                    
Balance at March 31, 2019  $86   $35,056   $33,916   $(523)  $(2,029)  $2   $66,508 

 

March 31, 2018

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at June 30, 2017  $86   $35,084   $34,180   $(850)  $(1,355)  $       1   $67,146 
                                    
Net income   --    --    1,311    --    --    --    1,311 
Allocation of ESOP shares   --    1    --    140    --    --    141 
Cash dividends of $0.30 per common share   --    --    (1,088)   --    --    --    (1,088)
                                    
Balance at March 31, 2018  $86   $35,085   $34,403   $(710)  $(1,355)  $1   $67,510 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended

(Dollar amounts in thousands, except per share data)

 

March 31, 2019

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                                    
Balance at December 31, 2018  $86   $35,056   $34,078   $(569)  $(1,842)  $1   $66,810 
                                    
Net income   --    --    207    --    --    --    207 
Allocation of ESOP shares   --    --    --    46    --    --    46 
Acquisition of shares for Treasury   --    --    --    --    (187)   --    (187)
Other comprehensive income   --    --    --    --    --    1    1 
Cash dividends of $0.10 per common share   --    --    (369)   --    --    --    (369)
                                    
Balance at March 31, 2019  $86   $35,056   $33,916   $(523)  $(2,029)  $2   $66,508 

 

March 31, 2018

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                                    
Balance at December 31, 2017  $86   $35,084   $34,605   $(756)  $(1,355)  $1   $67,665 
                                    
Net income   --    --    162    --    --    --    162 
Allocation of ESOP shares   --    1    --    46    --    --    47 
Cash dividends of $0.10 per common share   --    --    (364)   --    --    --    (364)
                                    
Balance at March 31, 2018  $86   $35,085   $34,403   $(710)  $(1,355)  $1   $67,510 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Nine months ended 
   March 31, 
   2019   2018 
         
Cash flows from operating activities:        
Net income  $512   $1,311 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   220    235 
Accretion of purchased loan credit discount   (61)   (65)
Amortization of purchased loan premium   9    11 
Amortization of deferred loan origination costs (fees)   56    58 
Amortization of premiums on investment securities   6    9 
Net gain on sale of loans   (29)   (24)
Net gain on sale of real estate owned   (7)   (47)
Valuation adjustments of real estate owned   54    18 
Deferred gain on sale of real estate owned   --    (16)
ESOP compensation expense   111    141 
Earnings on bank-owned life insurance   (56)   (436)
Provision for loan losses   11    107 
Origination of loans held for sale   (821)   (797)
Proceeds from loans held for sale   850    821 
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   (39)   (29)
Prepaid expenses and other assets   109    148 
Accrued interest payable   7    3 
Other liabilities   (152)   91 
Federal income taxes   15    (306)
Net cash provided by operating activities   795    1,233 
           
Cash flows from investing activities:          
Purchase of available-for-sale securities   (501)   -- 
Purchase of time deposits in other financial institutions   (1,486)   (2,727)
Maturities of time deposits in other financial institutions   2,226    247 
Securities maturities, prepayments and calls:          
Held to maturity   187    397 
Available for sale   4    19 
Proceeds from bank-owned life insurance   --    1,168 
Loans originated for investment, net of principal collected   (1,423)   (6,848)
Proceeds from sale of real estate owned   80    265 
Additions to real estate owned   (98)   (5)
Additions to premises and equipment, net   (55)   (148)
Net cash used in investing activities   (1,066)   (7,632)
           
Cash flows from financing activities:          
Net increase (decrease) in deposits   (417)   10,891 
Payments by borrowers for taxes and insurance, net   (287)   (300)
Proceeds from Federal Home Loan Bank advances   23,200    13,500 
Repayments on Federal Home Loan Bank advances   (20,214)   (19,782)
Treasury stock purchased   (674)   -- 
Dividends paid on common stock   (1,087)   (1,088)
Net cash provided by financing activities   521    3,221 
           
Net increase (decrease) in cash and cash equivalents   250    (3,178)
           
Beginning cash and cash equivalents   9,943    12,804 
           
Ending cash and cash equivalents  $10,193   $9,626 

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

   Nine months ended 
   March 31, 
   2019   2018 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Federal income taxes  $100   $300 
           
Interest on deposits and borrowings  $2,335   $1,528 
           
Transfers of loans to real estate owned, net  $262   $830 
           
Loans made on sale of real estate owned  $214   $169 

 

See accompanying notes to condensed consolidated financial statements.

 

7

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(unaudited)

 

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

 

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

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements, which represent the condensed consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the condensed consolidated financial statements have been included. The results of operations for the nine-month period ended March 31, 2019, are not necessarily indicative of the results which may be expected for an entire fiscal year. The condensed consolidated balance sheet as of June 30, 2018 has been derived from the audited consolidated balance sheet as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2018 filed with the Securities and Exchange Commission.

 

Principles of Consolidation - The consolidated financial statements include the accounts of the Company, Frankfort First, and its wholly-owned banking subsidiaries, First Federal of Hazard and First Federal of Kentucky (collectively hereinafter “the Banks”). All intercompany transactions and balances have been eliminated in consolidation.

 

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

 

8

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

1. Basis of Presentation (continued)

 

New Accounting Standards

 

FASB ASC 606 - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606,) and subsequently issued several amendments to the standard. The primary principle of the guidance is that entities should recognize revenue in a manner consistent with the transfer of promised goods or services to customers in an amount that represents the consideration that the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Most of the revenues earned by the Company are excluded from the scope of the new standard. Revenue streams within the scope of this guidance include service charges and fees on deposits, interchange fees earned on payments processing, and certain components of other service charges, commissions and fees. The Company has analyzed each stream under Topic 606 and determined that there were no material changes to existing recognition practices except with regard to recognition of gain on the sale of other real estate owned (“REO.”) The Company adopted ASU No. 2014-09 effective July 1, 2018 on a modified retrospective basis through a cumulative-effect adjustment of $441,000 directly to retained earnings as an offset to the carrying value of deferred revenue.

 

The Company’s revenue-generating activities accounted for under Topic 606 includes primarily service charges and fees on deposits and other service charges and fees and comprise the majority of other non-interest income on the statement of income.

 

Service charges and fees on deposits are primarily overdraft fees, dormant account fees, and service charges on checking and savings accounts. Overdraft fees are recognized at the time an account is overdrawn. Dormant account fees are recognized when an account is inactive for at least 365 days. Service charges on checking and savings accounts are primarily account maintenance services performed and recognized in the same calendar month. Other deposit-based service charges and fees include transaction-based services completed at the request of the customer and recognized at the time the transaction is completed. These transaction-based services include ATM usage and stop payment services. All service charges and fees on deposits are withdrawn from the customer’s account at the time the service is provided.

 

Other service charges and fees include interchange fees. Interchange fees are earned primarily from debit card holder transactions conducted through the Mastercard payment network and other networks, and such fees from cardholder transactions represent a percentage of the underlying transaction value and are received and recognized daily, concurrent with the transaction processing services provided to the cardholder.

 

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 and, in February 2018, issued an amendment for technical corrections and improvements related to this guidance. The amendments in this ASU require all 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 through net income. Additionally, this ASU eliminates 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. Public business entities must use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public business entities, the amendments in this ASU become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted ASU No. 2016-01 effective July 1, 2018, with no material impact on its consolidated financial position, results of operations, or cash flows upon adoption. However, fair value estimates for all financial instruments now require exit price. Fair value disclosures, which can be found in Note 5, have been modified to consider the exit price notion.

 

9

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

1. Basis of Presentation (continued)

 

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 Company adopted ASU No. 2016-15 effective July 1, 2018, with no material impact on its consolidated financial position, results of operations, or cash flows upon adoption.

 

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.

 

10

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

1. Basis of Presentation (continued)

 

New Accounting Standards (continued)

 

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

 

2. Earnings Per Share

 

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

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
   2019   2018   2019   2018 
Net income allocated to common shareholders, basic and diluted  $512,000   $1,311,000   $207,000   $162,000 
                     
EARNINGS PER SHARE                    
Basic and diluted  $0.06   $0.16   $0.02   $0.02 
                     
Weighted average common shares outstanding, basic and diluted   8,348,242    8,364,208    8,319,122    8,368,946 

 

There were no stock option shares outstanding for the nine- or three-month periods ended March 31, 2019 and 2018.

 

11

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at March 31, 2019 and June 30, 2018, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

   March 31, 2019 
(in thousands)  Amortized
cost
   Gross unrealized/ unrecognized gains   Gross unrealized/ unrecognized losses   Estimated fair value 
                 
Available-for-sale Securities                
Agency mortgage-backed: residential  $43   $1   $--   $44 
Agency bonds   501    2    --    503 
   $544   $3   $--   $547 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $810   $15   $16   $809 

 

   June 30, 2018 
(in thousands)  Amortized
cost
   Gross unrealized/ unrecognized gains   Gross unrealized/ unrecognized losses   Estimated fair value 
                 
Available-for-sale Securities                
Agency mortgage-backed: residential  $48   $        --   $        --   $48 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $1,002   $19   $23   $998 

 

At March 31, 2019, the Company’s debt securities consist of an agency bond with an amortized cost of $501,000 and fair value of $503,000, which matures in 2020 and mortgage-backed securities, which do not have a single maturity date.

 

Our pledged securities (including overnight and time deposits in other financial institutions) totaled $2.0 million and $2.1 million at March 31, 2019 and June 30, 2018, respectively.

 

12

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

3. Investment Securities (continued)

 

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

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

  

   March 31,   June 30, 
(in thousands)  2019   2018 
         
Residential real estate          
One- to four-family  $208,658   $206,908 
Multi-family   15,573    15,113 
Construction   2,662    2,919 
Land   678    677 
Farm   2,552    2,295 
Nonresidential real estate   31,012    32,413 
Commercial nonmortgage   2,167    1,917 
Consumer and other:          
Loans on deposits   1,537    1,470 
Home equity   7,920    7,603 
Automobile   56    63 
Unsecured   384    508 
    273,199    271,886 
Allowance for loan losses   (1,529)   (1,576)
   $271,670   $270,310 

 

13

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2019:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans
charged off
   Recoveries   Ending balance 
                     
Residential real estate:                         
One- to four-family  $795   $27   $(117)  $39   $744 
Multi-family   225    (9)   --    --    216 
Construction   8    (4)   --    --    4 
Land   1    --    --    --    1 
Farm   6    (1)   --    --    5 
Nonresidential real estate   321    20    --    --    341 
Commercial nonmortgage   3    --    --    --    3 
Consumer and other:                         
Loans on deposits   3    --    --    --    3 
Home equity   13    (1)   --    --    12 
Automobile   --    --    --    --    -- 
Unsecured   1    (21)   --    20    -- 
Unallocated   200    --    --    --    200 
Totals  $1,576   $11   $(117)  $59   $1,529 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans
charged off
   Recoveries   Ending balance 
                     
Residential real estate:                         
One- to four-family  $734   $10   $--   $   --   $744 
Multi-family   220    (4)   --    --    216 
Construction   3    1    --    --    4 
Land   1    --    --    --    1 
Farm   5    --    --    --    5 
Nonresidential real estate   346    (5)   --    --    341 
Commercial nonmortgage   3    --    --    --    3 
Consumer and other:                         
Loans on deposits   3    --    --    --    3 
Home equity   13    (1)   --    --    12 
Automobile   --    --    --    --    -- 
Unsecured   1    (1)   --    --    -- 
Unallocated   200    --    --    --    200 
Totals  $1,529   $--   $--   $--   $1,529 

 

14

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2018:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans
charged off
   Recoveries   Ending balance 
                     
Residential real estate:                    
One- to four-family  $773   $75   $(139)  $48   $757 
Multi-family   243    (15)   --    --    228 
Construction   6    3    --    --    9 
Land   4    (3)   --    --    1 
Farm   9    (1)   --    --    8 
Nonresidential real estate   270    56    --    --    326 
Commercial nonmortgage   6    (2)   --    --    4 
Consumer and other:                         
Loans on deposits   4    (1)   --    --    3 
Home equity   17    (5)   --    --    12 
Automobile   --    --    --    --    -- 
Unsecured   1    --    --    --    1 
Unallocated   200    --    --    --    200 
Totals  $1,533   $107   $(139)  $48   $1,549 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018:

 

(in thousands)  Beginning balance   Provision for loan losses   Loans
charged off
   Recoveries   Ending balance 
                     
Residential real estate:                         
One- to four-family  $739   $104   $(90)  $4   $757 
Multi-family   244    (16)   --        --    228 
Construction   14    (5)   --    --    9 
Land   2    (1)   --    --    1 
Farm   10    (2)   --    --    8 
Nonresidential real estate   293    33    --    --    326 
Commercial nonmortgage   6    (2)   --    --    4 
Consumer and other:                         
Loans on deposits   4    (1)   --    --    3 
Home equity   18    (6)   --    --    12 
Automobile   --    --    --    --    -- 
Unsecured   1    --    --    --    1 
Unallocated   200    --    --    --    200 
Totals  $1,531   $104   $(90)  $4   $1,549 

 

15

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of March 31, 2019. The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

March 31, 2019:

 

(in thousands)  Loans individually evaluated   Loans
acquired with deteriorated credit quality
   Unpaid principal balance and recorded investment   Ending allowance attributed to loans   Unallocated allowance   Total allowance 
Loans individually evaluated for impairment:                              
Residential real estate:                              
One- to four-family  $4,822   $932   $5,754   $--   $--   $-- 
Farm   310    --    310    --    --    -- 
Nonresidential real estate   675    --    675    --    --    -- 
    5,807    932    6,739    --    --    -- 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $202,904   $744   $--   $744 
Multi-family             15,573    216    --    216 
Construction             2,662    4    --    4 
Land             678    1    --    1 
Farm             2,242    5    --    5 
Nonresidential real estate             30,337    341    --    341 
Commercial nonmortgage             2,167    3    --    3 
Consumer:                              
Loans on deposits             1,537    3    --    3 
Home equity             7,920    12    --    12 
Automobile             56    --    --    -- 
Unsecured             384    --    --    -- 
Unallocated             --    --    200    200 
              266,460    1,329    200    1,529 
             $273,199   $1,329   $200   $1,529 

 

16

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2018.

 

June 30, 2018:                        
                         
(in thousands)  Loans individually evaluated   Loans
acquired with deteriorated credit quality
   Unpaid principal balance and recorded investment   Ending allowance attributed to loans   Unallocated allowance   Total allowance 
Loans individually evaluated for impairment:                        
Residential real estate:                        
One- to four-family  $2,977   $1,138   $4,115   $--   $--   $-- 
Farm   310         310                
Nonresidential real estate   122    --    122    --    --    -- 
    3,409    1,138    4,547    --    --    -- 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $202,793   $795   $--   $795 
Multi-family             15,113    225    --    225 
Construction             2,919    8    --    8 
Land             677    1    --    1 
Farm             1,985    6    --    6 
Nonresidential real estate             32,291    321    --    321 
Commercial nonmortgage             1,917    3    --    3 
Consumer:                              
Loans on deposits             1,470    3    --    3 
Home equity             7,603    13    --    13 
Automobile             63    --    --    -- 
Unsecured             508    1    --    1 
Unallocated             --    --    200    200 
              267,339    1,376    200    1,576 
             $271,886   $1,376   $200   $1,576 

 

17

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine months ended March 31:

 

(in thousands)  Average Recorded Investment   Interest Income Recognized   Cash Basis Income Recognized   Average Recorded Investment   Interest
Income
Recognized
   Cash Basis Income Recognized 
   2019   2018 
With no related allowance recorded:                              
One- to four-family  $3,900   $120   $120   $3,340   $3   $3 
Farm   310    --    --    269    --    -- 
Nonresidential real estate   399    28    28    127    --    -- 
Purchased credit-impaired loans   1,035    45    45    1,490    42    42 
    5,644    193    193    5,226    45    45 
With an allowance recorded:                              
One- to four-family   --    --    --    --    --    -- 
   $5,644   $193   $193   $5,226   $45   $45 

 

The following table presents interest income on loans individually evaluated for impairment by class of loans for the three months ended March 31:

 

(in thousands)  Average Recorded Investment   Interest Income Recognized   Cash Basis Income Recognized   Average Recorded Investment   Interest
Income
Recognized
   Cash Basis Income Recognized 
   2019   2018 
With no related allowance recorded:                              
One- to four-family  $4,577   $45   $45   $2,919   $--   $-- 
Farm   310    --    --    538       --       -- 
Nonresidential real estate   686    14    14    124    --    -- 
Purchased credit-impaired loans   963    9    9    1,311    3    3 
    6,536    68    68    4,892    3    3 
With an allowance recorded:                              
One- to four-family   --    --    --    --    --    -- 
   $6,536   $68   $68   $4,892   $3   $3 

 

18

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2019 and June 30, 2018:

 

   March 31, 2019   June 30, 2018 
(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  $4,559   $1,308   $4,210   $2,419 
Multifamily   692    --    --    -- 
Farm   310    --    310    -- 
Nonresidential real estate and land   693    --    708    -- 
Commercial and industrial   2    --    7    -- 
Consumer   315    --    11    -- 
   $6,571   $1,308   $5,246   $2,419 

 

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 March 31, 2019 and June 30, 2018, the Company had $1.6 million and $1.7 million of loans classified as TDRs, respectively. Of the TDRs at March 31, 2019, approximately 34.5% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

During the nine months ended March 31, 2019, the Company had two loans restructured as TDRs. A secondary mortgage loan of $219,000 was renewed and an additional $30,000 was loaned to a borrower to finish construction of an 8-plex, because the construction project had experienced cost overruns. The Company carries the first mortgage on this project and both the primary and secondary loans are secured by the 8-plex and additional real estate collateral. The Company also refinanced an existing single-family mortgage loan and provided additional funds to a borrower attempting to consolidate his debt.

 

The Company had three TDRs during the nine months ended March 31, 2018. The Company had no allocated specific reserves to customers whose loan terms had been modified in troubled debt restructurings as of March 31, 2019 or at June 30, 2018. The Company had no commitments to lend on loans classified as TDRs at March 31, 2019 or June 30, 2018.

 

19

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table summarizes TDR loan modifications that occurred during the nine months ended March 31, 2019 and 2018, and their performance, by modification type:

 

(in thousands)  Troubled Debt Restructurings Performing to Modified Terms   Troubled Debt Restructurings Not Performing to Modified Terms   Total Troubled Debt Restructurings 
             
Nine months ended March 31, 2019            
Residential real estate:            
Terms extended and additional funds advanced  $324   $--   $324 
                
Nine months ended March 31, 2018               
Residential real estate:               
Terms extended and additional funds advanced  $325   $--   $325 
Chapter 7 bankruptcy without reaffirmation   32    --    32 

 

There were no TDR loan modifications during the three months ended March 31, 2019. The following table summarizes TDR loan modifications that occurred during the three months ended March 31, 2018, and their performance, by modification type:

 

(in thousands)  Troubled Debt Restructurings Performing to Modified Terms   Troubled Debt Restructurings Not Performing to Modified Terms   Total
Troubled Debt Restructurings
 
             
Three months ended March 31, 2018               
Residential real estate:               
Terms extended and additional funds advanced  $32   $   --   $32 

 

No TDRs defaulted during the nine-month period ended March 31, 2019. Four TDRs with a carrying value of $136,000 defaulted during the nine-month period ended March 31, 2018. The properties were taken into REO and sold.

 

20

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of March 31, 2019, by class of loans:

 

(in thousands)  30-89 Days Past Due   90 Days or Greater Past Due   Total Past Due   Loans Not Past Due   Total 
                     
Residential real estate:                         
One-to four-family  $2,998   $3,103   $6,101   $202,557   $208,658 
Multi-family   --    443    443    15,130    15,573 
Construction   603    --    603    2,059    2,662 
Land   --    --    --    678    678 
Farm   --    --    --    2,552    2,552 
Nonresidential real estate   1,061    260    1,321    29,691    31,012 
Commercial non-mortgage   20    --    20    2,147    2,167 
Consumer and other:                         
Loans on deposits   --    --    --    1,537    1,537 
Home equity   92    5    97    7,823    7,920 
Automobile   --    --    --    56    56 
Unsecured   --    --    --    384    384 
Total  $4,774   $3,811   $8,585   $264,614   $273,199 

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2018, 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  $3,182   $4,051   $7,233   $199,675   $206,908 
Multi-family   792    --    792    14,321    15,113 
Construction   --    --    --    2,919    2,919 
Land   --    --    --    677    677 
Farm   --    --    --    2,295    2,295 
Nonresidential real estate   --    269    269    32,144    32,413 
Commercial nonmortgage   --    --    --    1,917    1,917 
Consumer:                         
Loans on deposits   --    --    --    1,470    1,470 
Home equity   9    5    14    7,589    7,603 
Automobile   --    --    --    63    63 
Unsecured   3    --    3    505    508 
Total  $3,986   $4,325   $8,311   $263,575   $271,886 

 

21

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. 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 March 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(in thousands)  Pass   Special Mention   Substandard   Doubtful   Not rated 
                     
Residential real estate:                         
One- to four-family  $--   $939   $8,861   $     --   $198,858 
Multi-family   14,881    --    692    --    -- 
Construction   2,662    --    --    --    -- 
Land   678    --    --    --    -- 
Farm   2,242    --    310    --    -- 
Nonresidential real estate   30,320    --    692    --    -- 
Commercial nonmortgage   2,165    --    2    --    -- 
Consumer:                         
Loans on deposits   1,537    --    --    --    -- 
Home equity   7,812    79    29    --    -- 
Automobile   56    --    --    --    -- 
Unsecured   379    --    5    --    -- 
   $62,732   $1,018   $10,591   $--   $198,858 

 

22

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2018, 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  $--   $1,093   $10,215   $--   $195,600 
Multi-family   14,445    --    668    --    -- 
Construction   2,919    --    --    --    -- 
Land   677    --    --    --    -- 
Farm   1,985    --    310    --    -- 
Nonresidential real estate   31,700    --    713    --    -- 
Commercial nonmortgage   1,910    --    7    --    -- 
Consumer:                         
Loans on deposits   1,470    --    --    --    -- 
Home equity   7,603    --    --    --    -- 
Automobile   63    --    --    --    -- 
Unsecured   506    --    2    --    -- 
   $63,278   $1,093   $11,915   $--   $195,600 

 

Purchased Credit Impaired Loans:

 

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $351,000 and $383,000 at March 31, 2019 and June 30, 2018, respectively, is as follows:

 

(in thousands)  March 31,
2019
   June 30,
2018
 
           
One- to four-family residential real estate  $932   $1,138 

 

23

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)  Nine
months ended
March 31,
2019
   Twelve months ended June 30,
2018
 
         
Balance at beginning of period  $634   $720 
Accretion of income   (61)   (86)
Disposals, net of recoveries   --    -- 
Balance at end of period  $573   $634 

  

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2018, nor for the nine-month period ended March 31, 2019. Neither were any allowance for loan losses reversed during those periods.

 

5. Disclosures About Fair Value of Assets and Liabilities

 

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

 

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

 

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

 

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

 

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

 

Securities

 

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

 

24

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

 

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)
 
                 
March 31, 2019                
Agency mortgage-backed: residential  $44   $   --   $44   $    -- 
Agency bonds   503    --    503    -- 
   $547   $--   $547   $-- 
                     
June 30, 2018                    
Agency mortgage-backed: residential  $48   $--   $48   $-- 

 

25

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

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

 

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

 

   Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant Other Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
                 
March 31, 2019                
Loans                    
One- to four-family  $480   $--   $--   $480 
                     
Other real estate owned, net                    
One- to four-family  $288    --    --   $288 
                     
June 30, 2018                    
Loans                    
One- to four-family  $513   $--   $--   $513 
                     
Other real estate owned, net                    
One- to four-family  $5   $--   $--   $5 

 

There were seven impaired loans, which were measured using the fair value of the collateral for collateral-dependent loans, at March 31, 2019, and five impaired loans at June 30, 2018. There was a charge off of $23,000 made for the nine-month period ended March 31, 2019 and a $21,000 charge off for the nine-month period ended March 31, 2018.

 

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $288,000 and $5,000 at March 31, 2019 and June 30, 2018, respectively. Other real estate owned was written down $54,000 and $18,000 during the nine months ended March 31, 2019 and 2018, respectively.

 

26

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

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

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2019 and June 30, 2018:

 

                  Range
    Fair Value     Valuation   Unobservable   (Weighted
March 31, 2019   (in thousands)     Technique(s)   Input(s)   Average)
                   
Loans:                    
One- to four-family   $ 480     Sales comparison approach   Adjustments for differences between comparable sales   -50.6% to 25.3%
(-1.7%)
                     
Foreclosed and repossessed assets:                    
One- to four-family   $ 288     Sales comparison approach   Adjustments for differences between comparable sales   6.07% to 31.0%
(14.5%)

  

                  Range
    Fair Value     Valuation   Unobservable   (Weighted
June 30, 2018   (in thousands)     Technique(s)   Input(s)   Average)
                   
Loans:                    
One- to four-family   $        513     Sales comparison approach   Adjustment for differences between comparable sales   -38.5% to 20.7%
(-27.8%)
                     
Foreclosed and repossessed assets:                    
One- to four-family   $ 5     Sales comparison approach   Adjustments for differences between comparable sales   0.0% to 0.0%
(0.0%)

  

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.

 

27

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at March 31, 2019 and June 30, 2018 are as follows:

  

       Fair Value Measurements at 
       March 31, 2019 Using 
(in thousands)  Carrying Value   Level 1   Level 2   Level 3   Total 
Financial assets                    
Cash and cash equivalents  $10,193   $10,193             $10,193 
Time deposits in other financial institutions   4,952    4,906              4,906 
Available-for-sale securities   547        $547         547 
Held-to-maturity securities   810         809         809 
Loans receivable - net   271,670              274,259    274,259 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   745         745         745 
                          
Financial liabilities                         
Deposits  $195,236   $71,297   $123,797         195,094 
Federal Home Loan Bank advances   56,038         55,984         55,984 
Advances by borrowers for taxes and insurance   475         475         475 
Accrued interest payable   29         29         29 

 

       Fair Value Measurements at 
       June 30, 2018 Using 
(in thousands)  Carrying Value   Level 1   Level 2   Level 3   Total 
Financial assets                    
Cash and cash equivalents  $9,943   $9,943             $9,943 
Term deposits in other financial institutions   5,692    5,692              5,692 
Available-for-sale securities   48        $48         48 
Held-to-maturity securities   1,002         998         998 
Loans receivable – net   270,310             $271,295    271,295 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   706         706         706 
                          
Financial liabilities                         
Deposits  $195,653   $75,163   $120,215        $195,378 
Federal Home Loan Bank advances   53,052         53,043         53,043 
Advances by borrowers for taxes and insurance   762         762         762 
Accrued interest payable   22         22         22 

 

28

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2019

(unaudited)

 

6. Other Comprehensive Income (Loss)

 

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

 

   Nine months
ended
March 31,
2019
 
     
Beginning balance  $          -- 
Current year change   2 
Ending balance  $2 

 

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

 

   Nine months ended
March 31,
 
(in thousands)  2019   2018 
         
Unrealized holding gains (losses) on available-for-sale securities  $         3   $           1 
Tax effect   1    -- 
Net-of-tax amount  $2   $1 

 

   Three months ended
March 31,
 
(in thousands)  2019   2018 
         
Unrealized holding gains (losses) on available-for-sale securities  $           2   $       1 
Tax effect   1    -- 
Net-of-tax amount  $1   $1 

 

29

 

 

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, 2018. 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.

 

30

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the nine month periods ended March 31, 2019 and 2018, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   Nine Months Ended March 31, 
   2019   2018 
  

Average

Balance

  

Interest

And

Dividends

  

Yield/

Cost

   Average Balance  

Interest

And Dividends

  

Yield/

Cost

 
   (Dollars in thousands) 
Interest-earning assets:                        
Loans 1  $272,014   $8,907    4.37%  $261,401   $8,430    4.30%
Mortgage-backed securities   935    24    3.42    1,379    37    3.58 
Other securities   364    7    2.56    --    --    -- 
Other interest-earning assets   20,554    478    3.10    18,910    386    2.72 
Total interest-earning assets   293,867    9,416    4.27    281,690    8,853    4.19 
                               
Less: Allowance for loan losses   (1,544)             (1,535)          
Non-interest-earning assets   26,351              29,187           
Total assets  $318,674             $309,342           
                               
Interest-bearing liabilities:                              
Demand deposits  $15,236   $18    0.16%  $15,228   $16    0.14%
Savings   54,767    163    0.40    57,714    169    0.39 
Certificates of deposit   122,612    1,255    1.37    112,707    815    0.96 
Total deposits   192,615    1,436    0.99    185,649    1,000    0.72 
Borrowings   51,912    906    2.33    48,829    531    1.45 
Total interest-bearing liabilities   244,527    2,342    1.28    234,478    1,531    0.87 
                               
Noninterest-bearing demand deposits   5,210              5,183           
Noninterest-bearing liabilities   1,866              2,310           
Total liabilities   251,603              241,971           
                               
Shareholders’ equity   67,071              67,371           
Total liabilities and shareholders’ equity  $318,674             $309,342           
Net interest spread       $7,074    3.00%       $7,322    3.32%
Net interest margin             3.21%             3.47%
Average interest-earning assets to average interest-bearing liabilities             120.18%             120.14%

 

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

 

31

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets (continued)

 

The following table represents the average balance sheets for the three-month periods ended March 31, 2019 and 2018, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   Three Months Ended March 31, 
   2019   2018 
  

Average

Balance

  

Interest

And

Dividends

  

Yield/

Cost

   Average Balance  

Interest

And Dividends

  

Yield/

Cost

 
   (Dollars in thousands) 
Interest-earning assets:                        
Loans 1   $273,047   $3,013    4.41%  $265,644   $2,822    4.25%
Mortgage-backed securities    879    8    3.64    1,247    14    4.49 
Other securities    502    3    2.39    --    --    -- 
Other interest-earning assets    20,759    168    3.24    18,146    132    2.91 
Total interest-earning assets    295,187    3,192    4.33    285,037    2,968    4.17 
                               
Less: Allowance for loan losses   (1,524)             (1,523)          
Non-interest-earning assets    26,213              28,953           
Total assets   $319,876             $312,467           
                               
Interest-bearing liabilities:                              
Demand deposits  $14,989   $6    0.16%  $14,946   $5    0.13%
Savings   53,141    53    0.40    56,946    55    0.39 
Certificates of deposit   123,993    448    1.45    116,859    305    1.04 
Total deposits   192,123    507    1.06    188,751    365    0.77 
Borrowings   54,620    338    2.48    49,118    196    1.60 
Total interest-bearing liabilities    246,743    845    1.37    237,869    561    0.94 
                               
Noninterest-bearing demand deposits   4,958              5,038           
Noninterest-bearing liabilities    1,497              1,934           
Total liabilities    253,198              244,841           
                               
Shareholders’ equity    66,678              67,626           
Total liabilities and shareholders’ equity  $319,876             $312,467           
Net interest spread        $2,347    2.96%       $2,407    3.22%
Net interest margin              3.18%             3.38%
Average interest-earning assets to average interest-bearing liabilities              119.63%             119.83%

 

1Includes 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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2018 to March 31, 2019

 

Assets: At March 31, 2019, the Company’s assets totaled $319.4 million, an increase of $1.0 million, or 0.3%, from total assets at June 30, 2018. This increase was attributed primarily to increases in loans, investment securities, and cash and cash equivalents, but was somewhat offset by a decrease in time deposits in other financial institutions.

 

Cash and cash equivalents: Cash and cash equivalents increased $250,000 or 2.5% to $10.2 million at March 31, 2019.

 

Time deposits in other financial institutions: Time deposits in other financial institutions decreased by $740,000 or 13.0% to $5.0 million at March 31, 2019. As short-term time deposits matured we employed the funds at the highest earning level possible.

 

Investment securities: At March 31, 2019 our securities portfolio consisted of an agency bond and mortgage-backed securities. Investment securities increased $307,000 or 29.2% to $1.4 million at March 31, 2019.

 

Loans: Loans receivable, net, increased by $1.4 million or 0.5% to $271.7 million at March 31, 2019. Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies.

 

Non-Performing and Classified Loans: At March 31, 2019, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $7.9 million, or 2.9% of total loans (including loans purchased in the acquisition), compared to $7.7 million or 3.1%, of total loans at June 30, 2018. The Company’s allowance for loan losses totaled $1.5 million and $1.6 million at March 31, 2019 and June 30, 2018, respectively. The allowance for loan losses at March 31, 2019, represented 19.4% of nonperforming loans and 0.6% of total loans (including loans purchased in the acquisition), while at June 30, 2018, the allowance represented 20.6% of nonperforming loans and 0.6% of total loans.

 

The Company had $11.3 million in assets classified as substandard for regulatory purposes at March 31, 2019, including loans ($10.6 million) and real estate owned (“REO”) ($729,000.) Classified loans as a percentage of total loans (including loans acquired) was 3.9% and 4.4% at March 31, 2019 and June 30, 2018, respectively. Of substandard loans, 90.2% were secured by real estate on which the Banks have priority lien position.

 

33

 

 

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, 2018 to March 31, 2019 (continued)

  

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

 

(dollars in thousands)  March 31,
2019
   June 30,
2018
 
         
Substandard assets   $11,320   $12,625 
Doubtful assets    --    -- 
Loss assets    --    -- 
Total classified assets   $11,320   $12,625 

 

At March 31, 2019, the Company’s real estate acquired through foreclosure represented 6.4% of substandard assets compared to 5.6% at June 30, 2018. During the nine months ended March 31, 2019, the Company sold property with a carrying value of $287,000 for $298,000, while during the year ended June 30, 2018, property with a carrying value of $133,000 was sold for $144,000. During the nine months ended March 31, 2019, the Company made five loans totaling $214,000 to facilitate the purchase of its other real estate owned by qualified borrowers, while for the fiscal year ended June 30, 2018, $169,000 in loans to facilitate an exchange were made. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $112,000 and $241,000 at March 31, 2019 and June 30, 2018, respectively.

 

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, 2018 to March 31, 2019 (continued)

 

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

 

   March 31, 2019   June 30, 2018 
   Number   Net   Number   Net 
   of   Carrying   of   Carrying 
   Properties   Value   Properties   Value 
                 
One- to four-family    6   $729    7   $710 
Building lot    1    --    1    -- 
Total REO    7   $729    8   $710 

  

At March 31, 2019 and June 30, 2018, the Company had $1.0 million and $1.1 million of loans classified as special mention, respectively (including loans acquired in the CKF Bancorp transaction on December 31, 2012.) This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention.

 

Liabilities: Total liabilities increased $1.7 million, or 0.7% to $252.9 million at March 31, 2019, primarily as a result of an increase in FHLB advances. FHLB advances increased $3.0 million or 5.6% to $56.0 million at March 31, 2019, while deposits decreased $417,000 or 0.2% to $195.2 million.

 

Shareholders’ Equity: At March 31, 2019, the Company’s shareholders’ equity totaled $66.5 million, a decrease of $695,000 or 1.0% from the June 30, 2018 total. The change in shareholders’ equity was primarily associated with common shares purchased by the Company to hold as treasury shares, a change in accounting principle, and net profits for the period less dividends paid on common stock.

 

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, 2018 to March 31, 2019 (continued)

 

The Company paid dividends of $1.1 million or 212.3% of net income for the nine-month period just ended. On July 5, 2018, the members of First Federal MHC for the seventh 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 2019. 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, 2018 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2019 and 2018

 

General

 

Net income totaled $512,000 or $0.06 diluted earnings per share for the nine months ended March 31, 2019, a decrease of $799,000 or 60.9% from net income of $1.3 million for the same period in 2018.

 

Net Interest Income

 

Net interest income before provision for loan losses decreased $248,000 or 3.4% to $7.1 million for the nine-month period just ended. Interest income increased $563,000, or 6.4%, to $9.4 million, while interest expense increased $811,000 or 53.0% to $2.3 million for the nine months ended March 31, 2019. Interest expense increased at a faster pace during the recent increase in interest rate environment, because of the short-term nature of those funding sources compared to the long-term nature of the Company’s primary interest-earning assets, loans. Although the loan portfolio is comprised primarily of adjustable rate loans, those assets often have limits on the amount of interest rate increases that can occur in the near term. Many of the newer loans have fixed rates for a period of time (three years to five years) before the interest rate can change, while the interest rates on seasoned loans can change no more than 100 basis points annually. We believe that the most recent indications by the Federal Open Market Committee (“FOMC”) suggest that interest rates may be near neutral, which would have a positive effect on our operations.

 

Interest income on loans increased $477,000 or 5.7% to $8.9 million, due primarily to an increase in the average volume of the loan portfolio. The average balance of the loan portfolio increased $10.6 million or 4.1% to $272.0 million for the nine-month period ended March 31, 2019, while the rate earned on the loan portfolio increased seven basis points to 4.37%. Interest income on mortgage-backed securities decreased $13,000 or 35.1% to $24,000 for the nine-month period just ended due to lower asset levels. Interest income from other securities increased $7,000 as the Company purchased an agency bond during the fiscal year. Interest income from interest-bearing deposits and other increased $92,000 or 23.8% to $478,000 for the nine months just ended due to an increase in the average rate earned, which increased 38 basis points to 310 basis points for the recently-ended period as well as an increase in the average balance of those assets, which increased $1.6 million or 8.7% to $20.6 million for the current fiscal year period.

 

36

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2019 and 2018 (continued)

 

Interest expense on deposits increased $436,000 or 43.6% to $1.4 million for the nine months ended March 31, 2019, while interest expense on borrowings increased $375,000 or 70.6% to $906,000 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 27 basis points to 99 basis points for the recently ended period. The average balance of deposits increased $7.0 million or 3.8% to $192.6 million for the most recent period. The increase in interest expense on borrowings was attributed to primarily to higher interest rate levels, although the average balance also increased period to period. The average rate paid on borrowings increased 88 basis points to 233 basis points for the most recent period, while the average balance of borrowings outstanding increased $3.1 million or 6.3% to $51.9 million for the recently ended nine-month period.

 

Net interest spread decreased from 332 basis points for the prior year quarterly period to 300 basis points for the nine-month period ended March 31, 2019.

 

Provision for Losses on Loans

 

The Company recorded an $11,000 provision for losses on loans during the nine months ended March 31, 2019, compared to a provision of $107,000 for the nine months ended March 31, 2018.

 

Non-interest Income

 

Non-interest income decreased $440,000 or 69.5% to $193,000 for the nine months ended March 31, 2019, compared to the prior year period, primarily because of a decrease in earnings on bank-owned life insurance (“BOLI”), which decreased $374,000 for the recently-ended nine-month period over the prior year amount and totaled $56,000. During the quarter ended December 31, 2017, First Federal of Kentucky received insurance death benefit proceeds under its bank-owned life insurance program. The nonrecurring receipt of insurance proceeds, along with the accompanying decrease in BOLI asset was primarily responsible for a decrease in BOLI earnings. Also contributing to the decrease in non-interest income were decreases in net gain on sale of REO and higher valuation adjustment on REO. Net gain on sales of REO decreased $40,000 or 85.1% and totaled $7,000 for the recently ended nine-month period compared to the prior year, while the Company recorded negative valuation adjustments on REO of $54,000 for the current year compared to $18,000 in negative valuation adjustments in the prior year period.

 

Non-interest Expense

 

Non-interest expense increased $86,000 or 1.3% and totaled $6.6 million for the nine months ended March 31, 2019, primarily due to an increase in employee compensation and benefits.

 

Employee compensation and benefits for the nine months ended March 31, 2019 increased $277,000 or 6.8% to $4.4 million. Employee compensation and benefits increased primarily because of higher required contributions to the Company’s defined benefit (“DB”) plan. Over the last several quarters, excluding the quarter ended December 31, 2017, the Company has faced declining earnings in part due to increasing contributions required by the DB plan. In the past four years, the required contribution has more than doubled from $560,000 in fiscal 2016 to an estimated $1.2 million for fiscal 2019. DB pension contributions increased $292,000 or 61.0% to $771,000 for the nine-month period recently ended compared to the prior year period. Effective April 1, 2019, the Company froze its DB plan. After that date active employees no longer accrue additional benefits in the DB plan and no new employees will be enrolled in the plan. While the Company will continue to incur costs for maintaining the plan and Pension Benefit Guaranty Corporation premiums, freezing the DB plan is estimated to result in annual savings of approximately $500,000 beginning the fiscal year ending June 30, 2020.

 

Somewhat offsetting higher expenses associated with employee compensation and benefits were decreases in auditing and accounting, and other non-interest expense. Auditing and accounting fees decreased $129,000 or 62.9% to $76,000 for the nine-month period just ended, while other non-interest expense decreased $28,000 or 4.4% to $604,000 for the recently-ended period. The decreased costs are primarily related to the Company’s efforts to reduce expenses. 

 

37

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2019 and 2018 (continued)

 

Federal Income Tax Expense

 

The Company recorded a federal income tax expense of $117,000 for the nine months ended March 31, 2019, compared to an income tax benefit of $4,000 in the prior year period. The increase in income tax expense was primarily related to a $268,000 tax benefit recognized in the prior year period. The tax benefit resulted from a change in income tax law, which reduced the top income tax rate for corporations beginning January 1, 2018. The Tax Cuts and Jobs Act was enacted in 2017 and, according to U.S. Generally Accepted Accounting Principles, the lower tax rate was applied to the Company’s deferred tax assets and liabilities at December 31, 2017. The effective tax rates for the nine-month periods ended March 31, 2019 and 2018, were 18.6% and (0.3%), respectively.

 

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2019 and 2018

 

General

 

Net income totaled $207,000 or $0.02 diluted earnings per share for the three months ended March 31, 2019, an increase of $45,000 or 27.8% from net income of $162,000 for the same period in 2018.

 

Net Interest Income

 

Net interest income before provision for loan losses decreased $60,000 or 2.5% to $2.3 million for the three-month period just ended. Interest income increased by $224,000, or 7.5%, to $3.2 million, while interest expense increased $284,000 or 50.6% to $845,000 for the three months ended March 31, 2019.

 

Interest income on loans increased $191,000 or 6.8% to $3.0 million, due primarily to an increase in the average rate earned on the loan portfolio, which increased 16 basis points to 441 basis points for the three-month period ended March 31, 2019, while the rate average balance of the loan portfolio increased $7.4 million or 2.8% to $273.0 million. Interest income on mortgage-backed securities decreased $6,000 to $8,000 for the quarterly period just ended due to a lower volume of the assets. Interest income from interest-bearing deposits and other increased $36,000 or 27.3% to $168,000 for the quarter just ended primarily due to an increase in the average balance of those assets which increased $2.6 million or 14.4% to $20.8 million for the recently-ended quarterly period.

 

Interest expense on deposits increased $142,000 or 38.9% to $507,000 for the three months ended March 31, 2019, while interest expense on borrowings increased $142,000 or 72.4% to $338,000 for the same period. The increase in interest expense on deposits was attributed to an increase in the average rate paid on deposits, which increased 33 basis points to 106 basis points for the recently ended quarter. The Company’s deposits have increased overall, and its new and existing customers appear to have moved somewhat from savings and demand deposit accounts to certificates of deposit in response to the rising interest rate environment. Certificates of deposit usually bear a higher interest rate than demand deposits. The increase in interest expense on borrowings was attributed primarily to higher interest rates paid on those funds. The average rate paid on borrowings increased 110 basis points to 248 basis points for the most recent period. The average balance of borrowings outstanding increased $7.6 million or 16.3% to $54.6 million for the recently ended three-month period. Net interest spread decreased from 3.38% for the prior year quarterly period to 3.18% for the quarter ended March 31, 2019.

 

Provision for Losses on Loans

 

The Company recorded no provision for losses on loans during the three months ended March 31, 2019, compared to a provision of $104,000 for the three months ended March 31, 2018.

 

38

 

 

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 March 31, 2019 and 2018 (continued)

 

Non-interest Income

 

Non-interest income increased $24,000 or 42.1% to $81,000 for the three months ended March 31, 2019, compared to the prior year quarter, primarily because of a decrease in valuation adjustments on REO. The Company recorded no valuation adjustment during the recently-ended quarterly period to write down other real estate owned compared to an $18,000 adjustment recorded in the prior year period.

 

Non-interest Expense

 

Non-interest expense decreased $4,000 or 0.2% and totaled $2.2 million for the three months ended March 31, 2019. The decrease was primarily due to decreases in auditing and accounting, advertising, and foreclosure and REO expenses, net. Those decreases in expense were partially offset by an increase in employee compensation and benefits.

 

Auditing and accounting expense decreased $58,000 or 85.3% to $10,000 for the quarterly period just ended as the Company incurred less expense than it had anticipated previously. Advertising decreased $15,000 or 26.8% to $41,000 for the three months ended March 31, 2019, as the Company focused its advertising. Foreclosure and REO expenses, net, decreased $14,000 or 43.8% to $18,000 for the recently ended quarter as fewer foreclosures were necessary during the period.

 

Employee compensation and benefits for the quarter ended March 31, 2019 increased $93,000 or 6.8% to $1.5 million, primarily due to higher required contributions to the Company’s DB plan. DB pension contributions increased $144,000 or 82.9% to $318,000 for the three-month period recently ended compared to the prior year period.

 

Federal Income Tax Expense

 

The Company recorded a federal income tax expense of $48,000 for the three months ended March 31, 2019, compared to federal income tax expense of $21,000 in the prior year period, an increase of $27,000 or 128.6%.  

 

39

 

  

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 March 31, 2019 in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

40

 

 

Kentucky First Federal Bancorp

 

PART II

 

ITEM 1. Legal Proceedings

 

None.

 

ITEM 1A. Risk Factors

 

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

 

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 March 31, 2019.

 

Period   Total # of shares purchased     Average price paid per share (incl commissions)     Total # of shares purchased as part of publicly announced plans or programs     Maximum # of shares that may yet be purchased under the plans or programs  
                         
January 1-31, 2019     --     $      --            --       150,000  
February 1-28, 2019     9,000     $ 7.45       9,000       141,000  
March 1-31, 2019     15,000     $ 7.96       15,000       126,000  

 

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

 

ITEM 3. Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. Other Information

 

None.

 

ITEM 6. Exhibits

 

3.11   Charter of Kentucky First Federal Bancorp
3.22   Bylaws of Kentucky First Federal Bancorp, as amended and restated
4.11   Specimen Stock Certificate of Kentucky First Federal Bancorp
31.1   CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0   The following materials from Kentucky First Federal Bancorp’s Quarterly Report On Form 10-Q for the quarter ended March 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 

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

 

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

 

41

 

 

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: May 10, 2019   By: /s/ Don D. Jennings
      Don D. Jennings
      Chief Executive Officer
       
Date: May 10, 2019   By: /s/ R. Clay Hulette
     

R. Clay Hulette

Vice President and Chief Financial Officer

 

 

42