UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x QUARTERLY 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.

 

    32  

 

 

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

 

3.1 1 Charter of Kentucky First Federal Bancorp
3.2 2 Bylaws of Kentucky First Federal Bancorp, as amended and restated
4.1 1 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  

 

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