UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended               September 30, 2016                    

OR

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

 

For the transition period from ____________ to _______________

 

Commission File Number: 0-51176   

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

Yes ¨           No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

  

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

 

 

 

 

INDEX

 

      Page
       
PART I - ITEM 1 FINANCIAL INFORMATION  
       
    Consolidated Balance Sheets 3
       
    Consolidated Statements of Income 4
       
    Consolidated Statements of Comprehensive Income 5
       
    Consolidated Statements of Cash Flows 6
       
    Notes to Consolidated Financial Statements 8
       
  ITEM 2 Management’s Discussion and Analysis of  Financial Condition and Results of  Operations 30
       
  ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 38
       
  ITEM 4 Controls and Procedures 38
       
PART II - OTHER INFORMATION 39
       
SIGNATURES   40

 

  2 

 

 

PART I

 

ITEM 1: Financial Information

 

Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   September 30,   June 30, 
   2016   2016 
ASSETS          
           
Cash and due from financial institutions  $3,868   $4,297 
Interest-bearing demand deposits   9,778    8,811 
Cash and cash equivalents   13,646    13,108 
           
Time deposits in other financial institutions   4,699    3,711 
Securities available for sale   125    134 
Securities held-to-maturity, at amortized cost- approximate fair value of $3,494 and $4,151 at September 30, 2016 and June 30, 2016, respectively   3,423    4,079 
Loans held for sale   203    — 
Loans, net of allowance of $1,476 and $1,515 at September 30, 2016 and June 30, 2016   241,222    238,468 
Real estate owned, net   345    527 
Premises and equipment, net   5,976    6,022 
Federal Home Loan Bank stock, at cost   6,482    6,482 
Accrued interest receivable   711    710 
Bank-owned life insurance   3,088    3,064 
Goodwill   14,507    14,507 
Prepaid federal income taxes   60    93 
Prepaid expenses and other assets   622    966 
           
Total assets  $295,109   $291,871 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $185,503   $188,572 
Federal Home Loan Bank advances   39,147    33,211 
Advances by borrowers for taxes and insurance   1,014    741 
Accrued interest payable   21    22 
Deferred federal income taxes   666    642 
Deferred revenue   591    595 
Other liabilities   680    573 
Total liabilities   227,622    224,356 
           
Commitments and contingencies   -    - 
           
Shareholders’ equity          
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued and outstanding   -    - 
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued   86    86 
Additional paid-in capital   34,645    34,639 
Retained earnings   34,657    34,732 
Unearned employee stock ownership plan (ESOP), 98,967 shares and 103,636 shares at September 30, 2016 and June 30, 2016, respectively   (990)   (1,036)
Treasury shares at cost, 112,563 common shares at both September 30, 2016 and June 30, 2016   (937)   (937)
Accumulated other comprehensive income   26    31 
Total shareholders’ equity   67,487    67,515 
           
Total liabilities and shareholders’ equity  $295,109   $291,871 

 

See accompanying notes.

 

  3 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

   Three months ended September 30, 
   2016   2015 
Interest income          
Loans, including fees  $2,693   $2,892 
Mortgage-backed securities   25    23 
Other securities   3    5 
Interest-bearing deposits and other   68    64 
Total interest income   2,789    2,984 
           
Interest expense          
Interest-bearing demand deposits   5    7 
Savings   64    65 
Certificates of Deposit   178    208 
Deposits   247    280 
Borrowings   81    70 
Total interest expense   328    350 
Net interest income   2,461    2,634 
Provision for loan losses   4    11 
Net interest income after provision for loan losses   2,457    2,623 
           
Non-interest income          
Earnings on bank-owned life insurance   24    23 
Net gain on sales of loans   —    19 
Net gain on sales of OREO   73    16 
Valuation adjustments of OREO   —    (18)
Other   71    74 
Total non-interest income   168    114 
Non-interest expense          
Employee compensation and benefits   1,344    1,279 
Occupancy and equipment   182    148 
Outside service fees   41    48 
Legal fees   13    29 
Data processing   97    97 
Auditing and accounting   79    67 
FDIC insurance premiums   60    54 
Franchise and other taxes   60    63 
Foreclosure and OREO expenses (net)   21    28 
Other   271    252 
Total non-interest expense   2,168    2,065 
           
Income before income taxes   457    672 
           
Federal income tax expense   160    134 
           
NET INCOME  $297   $538 
           
EARNINGS PER SHARE          
Basic and diluted  $0.04   $0.06 
DIVIDENDS PER SHARE  $0.10   $0.10 

 

See accompanying notes.

 

  4 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   Three months ended September 30, 
   2016   2015 
         
Net income  $297   $538 
           
Other comprehensive loss, net of tax benefits: Unrealized holding gains (losses) on securities designated as available for sale, net of tax benefits of $(3) and $0 during the respective periods   (5)   — 
Comprehensive income  $292   $538 

 

See accompanying notes.

  5 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Three months ended 
   September, 
   2016   2015 
Cash flows from operating activities:          
Net income  $297   $538 
Adjustments to reconcile net income to net cash provided by operating          
Activities          
Depreciation   86    72 
Accretion of purchased loan credit discount   (46)   (39)
Amortization of purchased loan premium   3    5 
Amortization (accretion) of deferred loan origination costs (fees)   15    5 
Amortization of premiums on investment securities   18    25 
Amortization of premiums on deposits   (81)   (21)
Net gain on sale of loans   —    (19)
Net loss (gain) on sale of real estate owned   (73)   (16)
Valuation adjustments of real estate owned   —    18 
Deferred gain on sale of real estate owned   (4)   (4)
ESOP compensation expense   52    40 
Earnings on bank-owned life insurance   (24)   (23)
Provision for loan losses   4    11 
Origination of loans held for sale   (203)   (121)
Proceeds from loans held for sale   —    119 
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   (1)   (22)
Prepaid expenses and other assets   343    71 
Accrued interest payable   (1)   1 
Other liabilities   107    (41)
Federal income taxes   61    43 
Net cash provided by operating activities   553    642 
           
Cash flows from investing activities:          
Purchase of term deposits in other financial institutions   (988)   — 
Securities maturities, prepayments and calls:          
Held to maturity   638    773 
Available for sale   1    4 
Loans originated for investment, net of principal collected   (2,798)   (1,278)
Proceeds from sale of real estate owned   336    430 
Additions to real estate owned   (13)   — 
Additions to premises and equipment, net   (40)   (605)
Net cash used in investing activities   (2,864)   (676)
           
Cash flows from financing activities:          
Net decrease in deposits   (2,988)   (3,427)
Payments by borrowers for taxes and insurance, net   273    273 
Proceeds from Federal Home Loan Bank advances   12,000    6,200 
Repayments on Federal Home Loan Bank advances   (6,064)   (3,604)
Dividends paid on common stock   (372)   (378)
Net cash provided by (used in) financing activities   2,849    (936)
           
Net increase (decrease) in cash and cash equivalents   538    (970)
           
Beginning cash and cash equivalents   13,108    13,635 
           
Ending cash and cash equivalents  $13,646   $12,665 

 

See accompanying notes.

 

  6 

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

   Three months ended 
   September 30, 
   2016   2015 
         
Supplemental disclosure of cash flow information:          
Cash paid during the period for:          
Federal income taxes  $100   $110 
           
Interest on deposits and borrowings  $410   $370 
           
Transfers of loans to real estate owned, net  $68   $99 
           
Loans made on sale of real estate owned  $110   $— 

 

See accompanying notes.

 

  7 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

 

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

 

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

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements, which represent the consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three-month period ended September 30, 2016, are not necessarily indicative of the results which may be expected for an entire fiscal year. The consolidated balance sheet as of June 30, 2016 has been derived from the audited consolidated balance sheet as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2016 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. All intercompany transactions and balances have been eliminated in consolidation.

 

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

 

  8 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

2. Earnings Per Share

 

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

 

  

Three months ended

September 30,

 
(in thousands)  2016   2015 
           
Net income allocated to common shareholders, basic and diluted  $297   $538 

 

  

Three months ended

September 30,

 
   2016   2015 
Weighted average common shares outstanding, basic and diluted   8,335,931    8,317,255 

 

There were no stock option shares outstanding for the three-month period ended September 30, 2016, and 309,800 stock option shares outstanding for the three-month period ended September 30, 2015. The stock option shares outstanding were antidilutive for the prior year period.

 

  9 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 2016 and June 30, 2016, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

   September 30, 2016 
(in thousands)  Amortized
cost		  

Gross

unrealized/

unrecognized

gains

  

Gross

unrealized/

unrecognized

losses

  

Estimated

fair value

 
                 
Available-for-sale Securities                    
Agency mortgage-backed: residential  $79   $1   $—   $80 
FHLMC stock   7    38    —    45 
   $86   $39   $—   $125 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $1,906   $70   $—   $1,976 
Agency bonds   1,517    1    —    1,518 
   $3,423   $71   $—   $3,494 

 

       June 30, 2016         
(in thousands) 

Amortized

cost

   Gross
unrealized/
unrecognized
gains		   Gross
unrealized/
unrecognized
losses		   Estimated
fair value		 
                 
Available-for-sale Securities                    
Agency mortgage-backed: residential  $79   $2   $—   $81 
FHLMC stock   8    45    —    53 
   $87   $47   $—   $134 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $2,048   $70   $—   $2,118 
Agency bonds   2,031    2    —    2,033 
   $4,079   $72   $—   $4,151 

 

  10 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

3.Investment Securities (continued)

 

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

 

   September 30, 2016 
(in thousands)  Amortized Cost   Fair Value 
         
Held-to-maturity Securities          
Within one year  $1,517   $1,518 
One to five years   —    — 
Mortgage-backed   1,906    1,976 
   $3,423   $3,494 

 

Our pledged securities totaled $1.2 and $1.7 million at September 30, 2016, and June 30, 2016, respectively. The Company had $1.0 million and $500,000 in time deposits in other financial institutions pledged at September 30, 2016, and June 30, 2016, respectively.

 

There were no sales of investment securities during the three month periods ended September 30, 2016 and 2015.

 

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

 

  11 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable

 

The composition of the loan portfolio was as follows:

 

   September 30,   June 30, 
(in thousands)      2016       2016 
         
Residential real estate          
One- to four-family  $187,299   $186,125 
Multi-family   14,944    15,559 
Construction   2,741    2,809 
Land   1,221    1,186 
Farm   1,814    1,735 
Nonresidential real estate   25,844    27,138 
Commercial nonmortgage   2,023    1,847 
Consumer and other:          
Loans on deposits   1,766    1,813 
Home equity   6,561    6,155 
Automobile   58    69 
Unsecured   556    552 
    244,827    244,988 
           
Undisbursed portion of loans in process   (2,154)   (5,118)
Deferred loan origination costs   25    113 
Allowance for loan losses   (1,476)   (1,515)
   $241,222   $238,468 

 

  12 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

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

 

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

 

  13 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2015:

 

(in thousands)  Beginning
balance		   Provision for
loan losses		   Loans
charged off		   Recoveries   Ending
balance		 
                     
Residential real estate:                    
One- to four-family  $1,059   $12   $(11)  $—   $1,060 
Multi-family   94    3    —    —    97 
Construction   21    (5)   —    —    16 
Land   7    1    —    —    8 
Farm   9    —    —    —    9 
Nonresidential real estate   121    1    —    —    122 
Commercial nonmortgage   10    —    —    —    10 
Consumer and other:                         
Loans on deposits   13    —    —    —    13 
Home equity   31    —    —    —    31 
Automobile   —    —    —    —    — 
Unsecured   3    (1)   —    —    2 
Unallocated   200    —    —    —    200 
Totals  $1,568   $11   $(11)  $—   $1,568 

 

  14 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2016. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality.

 

September 30, 2016:                        
(in thousands)  Loans
individually
evaluated		   Loans
acquired
with
deteriorated
credit
quality		   Ending
loans
balance		   Ending
allowance
attributed to
loans		   Unallocated
allowance		   Total
allowance		 
Loans individually evaluated for impairment:                              
Residential real estate:                              
One- to four-family  $3,980   $1,938   $5,918   $—   $—   $— 
Nonresidential real estate   —    153    153    —    —    — 
    3,980    2,091    6,071    —    —    — 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $181,381   $803   $—   $803 
Multi-family             14,944    208    —    208 
Construction             2,741    5    —    5 
Land             1,221    2    —    2 
Farm             1,814    4    —    4 
Nonresidential real estate             25,691    222    —    222 
Commercial nonmortgage             2,023    15    —    15 
Consumer:                              
Loans on deposits             1,766    4    —    4 
Home equity             6,561    12    —    12 
Automobile             58    —    —    — 
Unsecured             556    1    —    1 
Unallocated             —    —    200    200 
              238,756    1,276    200    1,476 
             $244,827   $1,276   $200   $1,476 

 

  15 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(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, 2016.

 

June 30, 2016:                        
(in thousands)  Loans
individually
evaluated		   Loans
acquired
with
deteriorated
credit
quality		   Ending
loans
balance		   Ending
allowance
attributed to
loans		   Unallocated
allowance		   Total
allowance		 
Loans individually evaluated for impairment:                              
Residential real estate:                              
One- to four-family  $3,400   $2,146   $5,546   $—   $—   $— 
Nonresidential real estate   —    164    164    —    —    — 
    3,400    2,310    5,710    —    —    — 
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $180,579   $862   $—   $862 
Multi-family             15,559    192    —    192 
Construction             2,809    5    —    5 
Land             1,186    2    —    2 
Farm             1,735    3    —    3 
Nonresidential real estate             26,974    217    —    217 
Commercial nonmortgage             1,847    18    —    18 
Consumer:                              
Loans on deposits             1,813    4    —    4 
Home equity             6,155    11    —    11 
Automobile             69    —    —    — 
Unsecured             552    1    —    1 
Unallocated             —    —    200    200 
              239,278    1,315    200    1,515 
             $244,988   $1,315   $200   $1,515 

 

  16 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2016 and 2015:

 

September 30, 2016:                    
(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment		   Allowance
for Loan
Losses
Allocated		   Average
Recorded
Investment		   Interest
Income
Recognized		  

 

 

Cash Basis
Income
Recognized

 
                     
With no related allowance recorded:                         
One- to four-family  $3,980   $—   $3,690   $2   $2 
Purchased credit-impaired loans   2,091    —    2,201    14    14 
    6,071    —    5,891    16    16 
With an allowance recorded:                         
One- to four-family   —    —    —    —    — 
   $6,071   $—   $5,891   $16   $16 

 

September 30, 2015:                    
(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment		   Allowance
for Loan
Losses
Allocated		   Average
Recorded
Investment		   Interest
Income
 Recognized		  

 

 

Cash Basis
Income
Recognized

 
                     
With no related allowance recorded:                         
One- to four-family  $3,566   $—   $3,036   $3   $3 
Purchased credit-impaired loans   2,980    —    3,226    23    23 
    6,546    —    6,262    26    26 
With an allowance recorded:                         
One- to four-family   —    —    —    —    — 
   $6,546   $—   $6,262   $26   $26 

 

  17 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2016, and June 30, 2016:

 

   September 30, 2016   June 30, 2016 
(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  $5,023   $2,827   $4,785   $2,166 
Multi-family residential real estate   —    —    —    — 
Nonresidential real estate and land   302    —    173    — 
Farm   —    548    —    — 
Consumer   10    8    11    — 
   $5,335   $3,383   $4,969   $2,166 

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Bank would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.” At September 30, 2016 and June 30, 2016, the Company had $1.8 million of loans classified as TDRs. Of the TDRs at September 30, 2016, approximately 26.5% were related to the borrowers’ completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

The following table presents TDR’s by loan type at September 30, 2016 and June 30, 2016, and their performance, by modification type:

 

(dollars in thousands)  Number
of Loans		   Pre-
Modification
 Outstanding
Recorded
Investment		   Post-
Modification
Outstanding
Recorded
Investment		   TDRs
Performing
to Modified
Terms		   TDRs Not
Performing
to
Modified
Terms		 
                     
September 30, 2016                         
Residential Real Estate:                         
1-4 Family   34   $2,123   $1,813   $1,331   $482 
                          
June 30, 2016                         
Residential Real Estate:                         
1-4 Family   35   $2,136   $1,835   $1,318   $517 

 

  18 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

The following table summarizes TDR loan modifications for the three months ended September 30, 2016 and 2015, and their performance, by modification type:

 

(in thousands)  Troubled Debt
Restructurings
Performing to
Modified Terms		   Troubled Debt
Restructurings
Not Performing
to Modified
Terms		   Total Troubled
Debt
Restructurings		 
             
Three months ended September 30, 2016               
Residential real estate:               
Rate reduction  $—   $—   $— 
Bankruptcies   —    —    — 
Total troubled debt restructures  $—   $—   $— 
                
Three months ended September 30, 2015               
Residential real estate:               
Rate reduction  $3   $—   $3 
Bankruptcies   —    —    — 
Total troubled debt restructures  $3   $—   $3 

 

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

 

There were no TDRs that defaulted during the three-month periods ended September 30, 2016 or 2015.

 

  19 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of September 30, 2016, by class of loans:

 

(in thousands)  30-89 Days
Past Due		   90 Days or
Greater
Past Due		   Total
Past
Due		   Loans Not
Past Due		  

 

 

Total

 
                     
Residential real estate:                         
One-to four-family  $4,275   $5,716   $9,991   $177,308   $187,299 
Multi-family   —    —    —    14,944    14,944 
Construction   134    —    134    2,607    2,741 
Land   —    —    —    1,221    1,221 
Farm   —    548    548    1,266    1,814 
Nonresidential real estate   —    153    153    25,691    25,844 
Commercial non-mortgage   —    —    —    2,023    2,023 
Consumer and other:                         
Loans on deposits   —    —    —    1,766    1,766 
Home equity   39    11    50    6,511    6,561 
Automobile   —    —    —    58    58 
Unsecured   —    4    4    552    556 
Total  $4,448   $6,432   $10,880   $233,947   $244,827 

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2016, by class of loans:

 

(in thousands)  30-89 Days
Past Due		   90 Days or
Greater  
Past Due		   Total
Past
Due		   Loans Not
Past Due		   Total 
                     
Residential real estate:                         
One-to four-family  $5,712   $4,377   $10,089   $176,036   $186,125 
Multi-family   —    —    —    15,559    15,559 
Construction   548    —    548    2,261    2,809 
Land   —    —    —    1,186    1,186 
Farm   —    —    —    1,735    1,735 
Nonresidential real estate   —    153    153    26,985    27,138 
Commercial nonmortgage   —    —    —    1,847    1,847 
Consumer:                         
Loans on deposits   —    —    —    1,813    1,813 
Home equity   37    —    37    6,118    6,155 
Automobile   —    —    —    69    69 
Unsecured   9    —    9    543    552 
Total  $6,306   $4,530   $10,836   $234,152   $244,988 

 

  20 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of September 30, 2016, 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  $—   $6,195   $11,970   $—   $169,134 
Multi-family   14,605    —    339    —    — 
Construction   2,741    —    —    —    — 
Land   1,221    —    —    —    — 
Farm   1,814    —    —    —    — 
Nonresidential real estate   24,775    896    173    —    — 
Commercial nonmortgage   2,023    —         —    — 
Consumer:                         
Loans on deposits   1,766    —    —    —    — 
Home equity   6,555    —    6    —    — 
Automobile   58    —    —    —    — 
Unsecured   526    30    —    —    — 
   $56,084   $7,121   $12,448   $—   $169,134 

 

  21 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

At June 30, 2016, the risk category of loans by class of loans was as follows:

 

(in thousands)  Pass   Special
Mention		   Substandard   Doubtful   Not rated 
                     
Residential real estate:                         
One- to four-family  $—   $6,387   $11,970   $—   $167,768 
Multi-family   15,220    —    339    —    — 
Construction   2,809    —    —    —    — 
Land   1,186    —    —    —    — 
Farm   1,735    —    —    —    — 
Nonresidential real estate   26,061    904    173    —    — 
Commercial nonmortgage   1,817    30    —    —    — 
Consumer:                         
Loans on deposits   1,813    —    —    —    — 
Home equity   6,149    —    6    —    — 
Automobile   69    —    —    —    — 
Unsecured   552    —    —    —    — 
   $57,411   $7,321   $12,488   $—   $167,768 

 

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 $449,000 and $464,000 at September 30, 2016 and June 30, 2016, respectively, is as follows:

 

(in thousands)  September 30, 2016   June 30, 2016 
         
One- to four-family residential real estate  $1,938   $2,146 
Nonresidential real estate   153    164 
Outstanding balance  $2,091   $2,310 
           

 

  22 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

4.Loans receivable (continued)

 

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

 

(in thousands)  Three months
ended
 September 30,
2016		   Twelve
months ended
 June 30,
 2016		 
         
Balance at beginning of period  $981   $1,021 
Accretion of income   (46)   (164)
Reclassifications from nonaccretable difference   —    124 
Disposals   —    — 
Balance at end of period  $935   $981 

 

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2016, nor for the three-month period ended September 30, 2016. Neither were any allowance for loan losses reversed during those periods.

 

5.Disclosures About Fair Value of Assets and Liabilities

 

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

 

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

 

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

 

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

 

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

 

Securities

 

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

 

  23 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

 

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

 

          Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted
Prices in
 Active
Markets for
 Identical
 Assets
 (Level 1)		   Significant
 Other
Observable
 Inputs
 (Level 2)		   Significant
Unobservable
Inputs    
 (Level 3)		 
                 
September 30, 2016                    
Agency mortgage-backed: residential  $80   $—   $80   $— 
FHLMC stock   45    —    45    — 
   $125   $—   $125   $— 
June 30, 2016                    
Agency mortgage-backed: residential  $81   $—   $81   $— 
FHLMC stock   53    —    53    — 
   $134   $—   $134   $— 

 

  24 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

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

 

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

 

        Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted
 Prices in
 Active
 Markets for
 Identical
 Assets
 (Level 1)		   Significant
Other
Observable
Inputs
 (Level 2)		   Significant
Unobservable
Inputs
(Level 3)		 
                 
September 30, 2016                    
Other real estate owned, net                    
One- to four-family  $274    —    —    274 
Land   28    —    —    28 
                     
June 30, 2016                    
Other real estate owned, net                    
One- to four-family  $274    —    —   $274 
 Land   79    —    —    79 

 

There were no impaired loans, which were measured using the fair value of the collateral for collateral-dependent loans, at September 30, 2016, and June 30, 2016. There was no specific provision made for the three month periods ended September 30, 2016 or 2015.

 

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $302,000 and $353,000 at September 30, 2016 and June 30, 2016, respectively. Other real estate owned was written down $0 and $18,000 during the three months ended September 30, 2016 and 2015, respectively.

 

  25 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

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

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2016 and June 30, 2016:

 

             Range
   Fair Value   Valuation  Unobservable  (Weighted
September 30, 2016  (in thousands)   Technique(s)  Input(s)  Average)
Foreclosed and repossessed assets:              
1-4 family  $274   Sales comparison approach  Adjustments for differences between comparable sales  -24.0% to 15.2% (-5.1%)
Land   28   Sales comparison approach  Adjustments for differences between comparable sales  3.5% to 6.6% (5.9%)

 

            Range
   Fair Value   Valuation  Unobservable  (Weighted
June 30, 2016  (in thousands)   Technique(s)  Input(s)  Average)
Foreclosed and repossessed assets:              
1-4 family  $274   Sales comparison approach  Adjustments for differences between comparable sales  -24.0% to 15.2% (-5.1%)
Land   79   Sales comparison approach  Adjustments for differences between comparable sales  3.5% to 6.6% (5.0%)
               

 

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

 

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

 

  26 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

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

 

The following methods were used to estimate the fair value of all other financial instruments at September 30, 2016 and June 30, 2016:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The fair value of outstanding loan commitments at September 30, 2016 and June 30, 2016, was not material.

 

  27 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at September 30, 2016 and June 30, 2016 are as follows:

 

   Fair Value Measurements at 
  September 30, 2016 Using 
(in thousands)  Carrying
Value		   Level 1   Level 2   Level 3   Total 
Financial assets                   
  Cash and cash equivalents  $13,646   $13,646             $13,646 
  Term deposits in other financial institutions   4,699    4,699              4,699 
  Available-for-sale securities   125        $125         125 
  Held-to-maturity securities   3,423         3,494         3,494 
  Loans held for sale   203         206         206 
  Loans receivable – net   241,222             $244,656    244,656 
  Federal Home Loan Bank stock   6,482                   n/a 
  Accrued interest receivable   711         25    686    711 
                          
Financial liabilities                         
  Deposits  $185,503   $81,720   $112,672         196,453 
  Federal Home Loan Bank advances   39,147         39,408         39,408 
  Advances by borrowers for taxes and insurance   1,014    1,014              1,014 
  Accrued interest payable   21         21         21 

 

   Fair Value Measurements at 
  June 30, 2016 Using 
(in thousands)  Carrying
Value		   Level 1   Level 2   Level 3   Total 
Financial assets                    
  Cash and cash equivalents  $13,108   $13,108             $13,108 
  Term deposits in other financial institutions   3,711    3,711              3,711 
  Available-for-sale securities   134        $134         134 
  Held-to-maturity securities   4,079         4,151         4,151 
  Loans receivable – net   238,468             $242,456    242,456 
  Federal Home Loan Bank stock   6,482                   n/a 
  Accrued interest receivable   710         21    689    710 
                          
Financial liabilities                         
  Deposits  $188,572   $81,814   $106,820        $188,634 
  Federal Home Loan Bank advances   33,211         33,517         33,517 
  Advances by borrowers for taxes and insurance   741    741               741 
  Accrued interest payable   22         22         22 

  

  28 

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2016

(unaudited)

 

6.Other Comprehensive Income (Loss)

 

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

 

   Balance at
     June 30, 2016		   Current Year
 Change		   Balance at
September 30,
2016		 
                
Unrealized gains on available-for-sale securities  $31   $(5)  $26 

  

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

 

   Three months ended
 September 30,		 
(in thousands)  2016   2015 
         
Unrealized holding gains (losses) on available-for-sale securities  $(8)  $— 
Tax effect   3    — 
Net-of-tax amount  $(5)  $— 
           

 

  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, 2016.

 

  30 

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the three month periods ended September 30, 2016 and 2015, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   Three Months Ended September 30, 
   2016   2015 
   Average
Balance		   Interest
And
Dividends		   Yield/
Cost		   Average
Balance		   Interest
And
Dividends		   Yield/
Cost		 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans 1  $241,520   $2,693    4.46%  $246,319   $2,892    4.70%
Mortgage-backed securities   2,073    25    4.82    2,814    23    3.27 
Other securities   1,957    3    0.61    3,328    5    0.60 
Other interest-earning assets   19,771    68    1.38    15,439    64    1.66 
Total interest-earning assets   265,321    2,789    4.20    267,900    2,984    4.46 
                               
Less: Allowance for loan losses   (1,509)             (1,568)          
Non-interest-earning assets   29,603              30,664           
Total assets  $293,415             $296,996           
                               
Interest-bearing liabilities:                              
Demand deposits  $15,697   $5    0.13%  $17,444   $7    0.16%
Savings   62,886    64    0.41    63,734    65    0.41 
Certificates of deposit   105,156    178    0.68    113,926    208    0.73 
Total deposits   183,739    247    0.54    195,104    280    0.57 
Borrowings   35,158    81    0.92    27,866    70    1.01 
Total interest-bearing liabilities   218,897    328    0.60    222,970    350    0.63 
                               
Noninterest-bearing demand deposits   4,255              3,800           
Noninterest-bearing liabilities   2,654              2,944           
Total liabilities   225,806              229,714           
                               
Shareholders’ equity   67,609              67,282           
Total liabilities and shareholders’ equity  $293,415             $296,996           
Net interest income/average yield       $2,461    3.60%       $2,634    3.83%
Net interest margin             3.71%             3.93%
Average interest-earning assets to average interest-bearing liabilities             121.21%             120.15%

  

 

1 Includes 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

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2016 to September 30, 2016

 

Assets: At September 30, 2016, the Company’s assets totaled $295.1 million, an increase of $3.2 million, or 1.1%, from total assets at June 30, 2016. This increase was attributed primarily to increases in loans, cash and cash equivalents and time deposits in other financial institutions.

 

Cash and cash equivalents: Cash and cash equivalents increased $538,000 or 4.1% to $13.6 million at September 30, 2016, primarily as we seek to maintain the appropriate level of liquidity. Our strategy is to balance our need for liquidity to meet day-to-day operational cash flows against keeping too much idle cash on hand. We keep a minimum of 8.0% of our liquidity base for normal cash flow needs and borrow short-term using FHLB advances when cash is low. Likewise, we pay down FHLB advances with any excess funds we might have.

 

Time Deposits in Other Financial Institutions: Time deposits in other financial institutions increased $988,000 or 26.6% to $4.7 million at September 30, 2016, as we seek to earn a higher interest rate on short-term liquidity.

 

Investment securities: Investment securities decreased $665,000 or 15.8% to $3.5 million at September 30, 2016, due to maturity of a $500,000 agency bond and cash flows associated with mortgage-backed securities.

 

Loans: Loans receivable, net, increased by $2.8 million or 1.2% to $241.2 million at September 30, 2016. Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies.

 

Non-Performing and Classified Loans:  At September 30, 2016, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $8.7 million, or 3.6% of total loans (including loans purchased in the acquisition), compared to $7.1 million or 2.9%, of total loans at June 30, 2016.  The Company’s allowance for loan losses totaled $1.5 million at both September 30, 2016, and June 30, 2016. The allowance for loan losses at September 30, 2016, represented 16.9% of nonperforming loans and 0.6% of total loans (including loans purchased in the acquisition), while at June 30, 2016, the allowance represented 21.2% of nonperforming loans and 0.6% of total loans.

 

The Company had $12.8 million in assets classified as substandard for regulatory purposes at September 30, 2016, including loans ($12.5 million) and real estate owned (“REO”) ($345,000), including loans acquired in the CKF Bancorp transaction. Classified loans as a percentage of total loans (including loans acquired on December 31, 2012) were 5.1% at both September 30, 2016 and June 30, 2016. Of substandard loans at September 30, 2016, 99.8% were secured by real estate on which the Banks have priority lien position.

 

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Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2016 to September 30, 2016 (continued)

 

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

 

(dollars in thousands)  September 30, 2016   June 30, 2016 
         
Substandard assets  $12,833   $13,015 
Doubtful assets   —    — 
Loss assets   —    — 
Total classified assets  $12,833   $13,015 

 

At September 30, 2016, the Company’s real estate acquired through foreclosure represented 2.7% of substandard assets compared to 4.0% at June 30, 2016. During the three months ended September 30, 2016, the Company sold property with carrying value of $239,000 for $357,000, while during the year ended June 30, 2016, property with a carrying value of $727,000 was sold for $822,000. During the three months ended September 30, 2016, the Company made a $110,000 loan to facilitate the purchase of its other real estate owned by qualified borrowers, while for the fiscal year ended June 30, 2016, $741,000 in loans to facilitate an exchange were made. The Company defers recognition of any gain on loans to facilitate an exchange until the proper time in the future. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $372,000 and $375,000 at September 30, 2016 and June 30, 2016, respectively.

 

  33 

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2016 to September 30, 2016 (continued)

 

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

 

   September 30, 2016   June 30, 2016 
   Number   Net   Number   Net 
   of   Carrying   of   Carrying 
   Properties   Value   Properties   Value 
                 
Single family, non-owner occupied   5   $345    5   $445 
Building lot   2    —    3    82 
Total REO   7   $345    8   $527 

 

At September 30, 2016, and June 30, 2016, the Company had $7.1 million and $7.3 million of loans classified as special mention, respectively (including loans purchased at December 31, 2012.) This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. The primary reason for this decrease was related to two larger borrowers who each experienced some weakness in cash flow, but had no delinquency and their loans were well secured by real estate.

 

Liabilities: At September 30, 2016, the Company’s liabilities increased $3.3 million, or 1.5%, to $227.6 million compared to total liabilities at June 30, 2016, primarily as a result of an increase in advances, which increased $5.9 million or 17.9% to $39.1 million at September 30, 2016. The increase in advances was used to fund the growth in assets and to partially offset a decrease of $3.1 million or 1.6% in deposits, which totaled $185.5 million at quarter end. Deposit customers continue seeking higher yields on their funds after growing impatient in the current low-rate environment and some are turning to non-insured investments. As deposits have continued to decrease, we have utilized short-term FHLB advances as replacement funding.

 

Shareholders’ Equity: At September 30, 2016, the Company’s shareholders’ equity totaled $67.5 million, a decrease of $28,000 from the June 30, 2016 total. The change in shareholders’ equity was chiefly associated with net profits for the period less dividends paid on common stock.

 

  34 

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2016 to September 30, 2016 (continued)

 

The Company paid dividends of $372,000 or 125.3% of net income for the three month period just ended. On July 7, 2016, the members of First Federal MHC for the fifth 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 there would be no objection to a 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 quarter of 2017. 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, 2016 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Three Month Periods Ended September 30, 2016 and 2015

 

General

 

Net income totaled $297,000 for the three months ended September 30, 2016, a decrease of $241,000 or 44.8% from net income of $538,000 for the same period in 2015. The net decrease in net earnings for the recently-ended quarter was primarily attributable to lower net interest income, higher non-interest expense and higher income tax expense.

 

Net Interest Income

 

Net interest income after provision for loan losses decreased $166,000 or 6.3% to $2.5 million for the three month period just ended compared to $2.6 million for the prior year quarter primarily due to reduced interest income. Interest income decreased $195,000 or 6.5% to $2.8 million for the quarter ended September 30, 2016, while interest expense decreased $22,000 or 6.3% to $328,000 for the quarter just ended after amortization of fair value adjustments on interest bearing accounts. Provision for losses on loans decreased $7,000 to $4,000 for the recently-ended quarter compared to a provision of $11,000 in the prior year period.

 

Interest income on loans decreased $199,000 or 6.9% to $2.7 million, due primarily to a decrease in the average rate earned on the loan portfolio, which decreased 24 basis points to 4.46% for the recently ended quarter compared to the prior year period. The average balance of loans outstanding for the three month period ended September 30, 2016, decreased $4.8 million or 2.0% to $241.5 million. Interest income on mortgage-backed securities and other securities was largely unchanged, while interest-bearing deposits and other increased $4,000 or 6.3% to $68,000 for the three months ended September 30, 2016, due to higher balances of time deposits in other financial institutions during the recently-ended quarter.

 

  35 

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Three Month Periods Ended September 30, 2016 and 2015

(continued)

 

Interest expense on deposits decreased $33,000 or 11.8% and totaled $247,000 for the three month period ended September 30, 2016, while interest expense on borrowings increased $11,000 or 15.7% to $81,000 for the most recently ended period. The decrease in interest expense on deposits was attributed to a decrease in both the average balance of deposits and the average rate paid on deposits. The average balance of deposits decreased $11.4 million or 5.8% to $183.7 million for the most recent quarter, while the average rate paid on deposits decreased 3 basis points to 0.54%. The decrease in average deposits was primarily attributed to rate-sensitive deposit customers withdrawing funds to seek additional yield as the historically low interest rate environment continues. The increase in interest expense on borrowings also was attributed to higher outstanding balances of FHLB advances, which were used increase total assets and to offset deposit funding. The average balance of outstanding borrowings increased $7.3 million or 26.2% to $35.2 million for the quarter ended September 30, 2016, compared to $27.9 million for the prior year quarterly period. The average rate paid on borrowings decreased 8 basis points to 92 basis points for the recently ended quarter.

 

Net interest margin decreased 22 basis points from 3.93% for the prior year quarterly period to 3.71% for the quarter ended September 30, 2016.

 

Provision for Losses on Loans

 

The Company recorded $4,000 in provision for losses on loans during the three months ended September 30, 2016, compared to a $11,000 provision for the three months ended September 30, 2015. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.

 

Non-interest Income

 

Non-interest income totaled $168,000 for the three months ended September 30, 2016, an increase of $54,000 or 47.4% from the same period in 2015 due primarily to positive experience with other real estate owned (“REO”). Net gains on sales of REO totaled $73,000 for the quarter just ended compared to $16,000 for the prior year quarter, an increase of $57,000 period over period. The Company recorded a write-down on REO during the year ago quarter of $18,000, compared to no write-down on REO in the current year period. There were no sales of loans during the recently ended quarter compared to gain on sale of loans of $19,000 for the three months ended September 30, 2015. There were no sales of investments during the three month periods ended September 30, 2016 and 2015.

 

Non-interest Expense

 

Non-interest expense increased $103,000 or 5.0% and totaled $2.2 million for the three months ended September 30, 2016 compared to $2.1 million for the same period in 2015.

 

Employee compensation and benefits increased $65,000 or 5.1% and totaled $1.3 million for the quarterly period, primarily due to higher levels of compensation expense, retirement contributions and fringe benefits. Employee compensation increased $31,000 quarter over quarter as the Company employed two more full-time equivalent staff during the recently-ended period compared to the prior year, while pension contributions accounted for $23,000 of the increase and the balance was primarily related to increased employee benefits. The Company participates in a multiple-employer pension plan and, like most sponsors of defined benefit plans, is faced with increasing costs associated with the plans. Contributions to the defined benefit pension plan totaled $174,000 and $151,000 for the three months ended September 30, 2016 and 2015, respectively.

 

  36 

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

  

Occupancy and equipment expense increased $34,000 or 23.0% to $182,000 for the quarter just ended primarily due to increased costs associated with newly-acquired bank offices in Hazard and Frankfort.

 

Other non-interest expense increased $19,000 or 7.5% to $271,000 for the three months ended September 30, 2016, primarily due to increased advertising and communication costs incurred by the Company. Advertising expense totaled $53,000 for the quarter recently ended as the Company seeks to develop top-of-mind awareness in its local markets, while communications charges increased $24,000 or 85.7% to $52,000 for the quarter ended recently to provide faster data transfer speeds. Somewhat offsetting the increased employee compensation, occupancy and equipment and other non-interest expenses were decreases in legal and outside service fees. Legal fees decreased $16,000 or 55.2% to $13,000 for the quarter ended September 30, 2016, while outside service fees decreased $7,000 or 14.6% to $41,000 for the quarter recently ended.

 

Federal Income Tax Expense

 

Federal income taxes expense increased $26,000 or 19.4% and totaled $160,000 for the three months ended September 30, 2016, compared to $134,000 in the prior year quarter primarily due to the reversal of an ASC 740 reserve related to a previously received federal tax refund in the prior year period. The effective tax rates were 35.0% and 19.9% for the three-month periods ended September 30, 2016 and 2015, respectively.

 

  37 

 

 

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 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.

 

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended September 30, 2016, 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.

 

  38 

 

 

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, 2016.

 

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)         The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended September 30, 2016.

 

                Total # of        
          Average     shares purchased     Maximum # of shares   
    Total     price paid     as part of publicly     that may yet be  
    # of shares     per share     announced plans     purchased under  
Period   purchased     (incl commissions)     or programs     the plans or programs  
                         
July 1-31, 2016     —     $ —       —       60,323  
August 1-31, 2016     —     $ —       —       60,323  
September 1-30, 2016     —     $ —       —       60,323  

 

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

 

ITEM 3.Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5.Other Information

 

None.

 

ITEM 6.Exhibits

 

3.11 Charter of Kentucky First Federal Bancorp
3.22 Bylaws of Kentucky First Federal Bancorp, as amended and restated
4.11 Specimen Stock Certificate of Kentucky First Federal Bancorp
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0 The following materials from Kentucky First Federal Bancorp’s Quarterly Report
  On Form 10-Q for the quarter ended September 30, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 

 

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

(2) Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the Year Ended June 30, 2012 (FIle No. 0-51176).

 

  39 

 

 

Kentucky First Federal Bancorp

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    KENTUCKY FIRST FEDERAL BANCORP
     
Date: November 14, 2016   By: /s/ Don D. Jennings
      Don D. Jennings
      Chief Executive Officer
       
Date: November 14, 2016   By:   /s/ R. Clay Hulette
      R. Clay Hulette
      Vice President and Chief Financial Officer

 

  40