UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2015
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 |
|
61-1484858 |
| (State or other jurisdiction of |
|
(I.R.S. Employer |
| incorporation or organization) |
|
Identification No.) |
| |
|
|
| 479 Main Street, Hazard, Kentucky |
|
41702 |
| (Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including
area code: (502) 223-1638
Securities registered pursuant to Section
12(b) of the Act:
| Common Stock (par value $0.01 per share) |
|
The Nasdaq Stock Market, LLC |
| (Title of each class) |
|
(Name of each exchange on which registered) |
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark whether
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a 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 smaller reporting company) |
|
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No x
The aggregate market
value of the common stock held by nonaffiliates was $27.9 million as of December 31, 2014.
Number of shares of common stock outstanding
as of September 18, 2015: 8,439,515
DOCUMENTS INCORPORATED BY REFERENCE
The following lists
the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:
| 1. | Portions of the Annual Report to Stockholders for the
fiscal year ended June 30, 2015. (Part II) |
| 2. | Portions of Proxy Statement for the 2015 Annual Meeting
of Stockholders. (Part III) |
INDEX
PART I
Item 1. Business
Forward-Looking Statements
This report contains certain “forward-looking
statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements
based on Kentucky First Federal Bancorp’s current expectations regarding its business strategies, intended results and future
performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,”
“intends” and similar expressions.
Management’s ability to predict
results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include
the following: interest rate trends; the general economic climate in the market areas in which Kentucky First Federal Bancorp operates,
as well as nationwide; Kentucky First Federal Bancorp’s ability to control costs and expenses; competitive products and pricing;
loan delinquency rates; and changes in federal and state legislation and regulation. These factors should be considered in evaluating
the forward-looking statements and undue reliance should not be placed on such statements. Kentucky First Federal Bancorp assumes
no obligation to update any forward-looking statements.
General
References in this
Annual Report on Form 10-K to “we,” “us” and “our” refer to Kentucky First, and where appropriate,
collectively to Kentucky First, First Federal of Hazard and First Federal of Frankfort.
Kentucky First Federal Bancorp. Kentucky
First Federal Bancorp (“Kentucky First” or the “Company”) was incorporated as a mid-tier holding company
under the laws of the United States on March 2, 2005 upon the completion of the reorganization of First Federal Savings and Loan
Association of Hazard (“First Federal of Hazard”) into a federal mutual holding company form of organization (the “Reorganization”).
On that date, Kentucky First completed its minority stock offering and issued a total of 8,596,064 shares of common stock, of which
4,727,938 shares, or 55%, were issued to First Federal MHC, a federally chartered mutual holding company formed in connection with
the Reorganization, in exchange for the transfer of all of First Federal of Hazard’s capital stock, and 2,127,572 shares
were sold at a cash price of $10.00 per share. Also on March 2, 2005, Kentucky First completed its acquisition of Frankfort First
Bancorp, Inc. (“Frankfort First Bancorp”) and its wholly owned subsidiary First Federal Savings Bank of Frankfort,
Frankfort, Kentucky (“First Federal of Frankfort”) (the “Merger”). Following the Reorganization and Merger,
the Company retained Frankfort First Bancorp as a wholly owned subsidiary and holds all of the capital stock of First Federal of
Hazard and First Federal of Frankfort. The Company is operating First Federal of Hazard and First Federal of Frankfort as two independent,
community-oriented savings institutions.
On December 31, 2012, Kentucky First acquired
CFK Bancorp, Inc., the savings and loan holding company for Central Kentucky Federal Savings Bank, a federally chartered savings
bank located in Danville, Kentucky. Under the terms of the merger agreement, CKF Bancorp, Inc. shareholders received approximately
881,275 shares of Kentucky First common stock and an aggregate of $5.1 million in cash. Following the merger of CKF Bancorp, Inc.
with and into Kentucky First, Central Kentucky Federal Savings Bank was merged into First Federal of Frankfort and now operates
as a division of First Federal of Frankfort under the name “Central Kentucky Federal Savings Bank” through its two
offices in Danville, Kentucky and its Lancaster, Kentucky branch. With the acquisition, the Company expanded its customer base
in the central Kentucky area with an institution that shared its community banking orientation and thrift heritage and enjoyed
a favorable reputation within the new Danville-Lancaster market area.
Kentucky First’s and First Federal
of Hazard’s executive offices are located at 479 Main Street, Hazard, Kentucky, 41702 and the telephone number for
investor relations is (888) 818-3372.
At June 30, 2015, Kentucky First had total
assets of $296.3 million, deposits of $199.7 million and stockholders’ equity of $67.3 million. The discussion in this Annual
Report on Form 10-K relates primarily to the businesses of First Federal of Hazard and First Federal of Frankfort (collectively,
the “Banks”), as Kentucky First’s operations consist primarily of operating the Banks and investing funds retained
in the Reorganization.
First Federal of Hazard and First Federal
of Frankfort are subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency and their
savings deposits are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit
Insurance Corporation. Both of the Banks are members of the Federal Home Loan Bank of Cincinnati, which is one of the 12 regional
banks in the FHLB System. See “Regulation and Supervision.”
First Federal Savings and Loan Association
of Hazard. First Federal of Hazard was formed as a federally chartered mutual savings and loan association in 1960.
First Federal of Hazard operates from a single office in Hazard, Kentucky as a community-oriented savings and loan association
offering traditional financial services to consumers in Perry and surrounding counties in eastern Kentucky. It engages primarily
in the business of attracting deposits from the general public and using such funds to originate, when available, loans secured
by first mortgages on owner-occupied, residential real estate and occasionally other loans secured by real estate. To the extent
there is insufficient loan demand in its market area, and where appropriate under its investment policies, First Federal of Hazard
has historically invested in mortgage-backed and investment securities, although since the reorganization, First Federal of Hazard
has been purchasing whole loans and participations in loans originated at First Federal of Frankfort. At June 30, 2015, First Federal
of Hazard had total assets of $77.2 million, net loans of $57.2 million, total mortgage-backed and other securities of $1.5 million,
deposits of $56.6 million and total capital of $16.5 million.
First Federal Savings Bank of Frankfort.
First Federal of Frankfort is a federally chartered savings bank, which is primarily engaged in the business of attracting
deposits from the general public and originating primarily adjustable-rate loans secured by first mortgages on owner-occupied and
nonowner-occupied one- to four-family residences in Franklin, Boyle, Garrard and other counties in Kentucky. First Federal of Frankfort
also originates, to a lesser extent, home equity loans and loans secured by churches, multi-family properties, professional office
buildings and other types of property. At June 30, 2015, First Federal of Frankfort had total assets of $229.2 million, net loans
of $186.6 million, total mortgage-backed and other securities of $5.1 million, deposits of $156.6 million and total capital of
$46.6 million.
First Federal of Frankfort’s main
office is located at 216 W. Main Street, Frankfort, Kentucky 40602 and its main telephone number is (502) 223-1638.
Market Areas
First Federal of Hazard and First Federal
of Frankfort operate in three distinct market areas.
First Federal of Hazard’s market
area consists of Perry County, where the business office is located, as well as the surrounding counties of Letcher, Knott, Breathitt,
Leslie and Clay Counties in eastern Kentucky. The economy in its market area has been distressed in recent years. The local economy
depends on the coal industry and other industries, such as health care and manufacturing. Still, the economy in First Federal
of Hazard’s market area continues to lag behind the economies of Kentucky and the United States. In the most recent available
data, using information from the Commonwealth of Kentucky Economic Development and the United States Bureau of Labor Statistics,
per capita personal income in Perry County averaged $31,766 in 2013, compared to personal income of $36,214 in Kentucky and $44,765
in the United States. Total population in Perry County has remained stable over the last five years at approximately 29,000. However,
as a regional economic center, Hazard tends to draw consumers and workers who commute from surrounding counties. Employment in
the market area, particularly in Perry County, consists primarily of the trade, transportation and utilities industry (18.2%),
the mining industry (17.3%), and the services sector, including health care (15.4%). During the last five years, the unemployment
rate has been higher than most regions, and in June 2015, was 8.4%, compared to 5.3% in Kentucky and 5.3% in the United States.
First Federal of Frankfort’s primary
lending area includes the Kentucky counties of Franklin, Boyle, Garrard and surrounding counties, with the majority of lending
originated on properties located in Franklin and Boyle Counties.
Franklin County has a population of approximately
49,000, of which approximately 27,000 live within the city of Frankfort, which serves as the capital of Kentucky. The primary
employer in the area is government, which employs about 50.3% of the workforce followed by the services sector and construction,
which employ about 13.2% and 10.2% of the workforce, respectively. Despite this large, relatively stable source of employment,
the unemployment rate was 4.6% for June 2015 after having experienced an unemployment rate which had ranged from 4.5 to 9.0% in
prior years. The per capita income in Franklin County for 2013 averaged $39,501.
Boyle County has a population of approximately
29,000. The service sector, which employs about 42.2% of the work force, is the largest employer, while the trade, transportation
and utilities sector is the next largest employer with approximately 21.8% of the workforce. Centre College is one of the larger
employers in the community. The unemployment rate was 5.7% in June 2015, while the per capita income in Boyle County for 2013 averaged
$32,266.
Lending Activities
General. Our loan portfolio
consists primarily of one- to four-family residential mortgage loans. As opportunities arise, we also offer loans secured by churches,
commercial real estate, and multi-family real estate. We also offer loans secured by deposit accounts and, through First Federal
of Frankfort, home equity loans. Substantially all of our loans are made within the Banks’ respective market areas.
Residential Mortgage Loans.
Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes in
the Banks’ respective market areas. At June 30, 2015, residential mortgage loans totaled $212.1 million, or 85.5%, of our
total loan portfolio. We offer a mix of adjustable-rate and fixed-rate mortgage loans with terms up to 30 years. Adjustable-rate
loans have an initial fixed term of one, three, five or seven years. After the initial term, the rate adjustments on most of First
Federal of Frankfort’s adjustable-rate loans are indexed to the National Average Contract Interest Rate for Major Lenders
on the Purchase of Previously Occupied Homes. The interest rates on these mortgages are adjusted once a year, with limitations
on adjustments generally of one percentage point per adjustment period, and a lifetime cap of five percentage points. We determine
loan fees charged, interest rates and other provisions of mortgage loans on the basis of our own pricing criteria and competitive
market conditions. Some loans originated by the Banks have an additional advance clause which allows the borrower to obtain additional
funds at prevailing interest rates, subject to managements’ approval.
At June 30, 2015, the Company’s loan
portfolio included $149.6 million in adjustable-rate residential mortgage loans, or 70.5%, of the Company’s residential mortgage
loan portfolio.
The retention of adjustable-rate loans in
the portfolio helps reduce our exposure to increases in prevailing market interest rates. However, there are unquantifiable credit
risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is
possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases
in interest costs to borrowers. However, despite their popularity in some parts of the country, neither bank has offered adjustable-rate
loans that contractually allow for negative amortization. Such loans, under some circumstances, can cause the balance of a closed-end
loan to exceed the original balance and perhaps surpass the value of the collateral. Further, although adjustable-rate loans allow
us to increase the sensitivity of our interest-earning assets to changes in interest rates, the extent of this interest sensitivity
is limited by the initial fixed-rate period before the first adjustment and the periodic and lifetime interest rate adjustment
limitations. Accordingly, there can be no assurance that yields on our adjustable-rate loans will fully adjust to compensate for
increases in our cost of funds. Finally, adjustable-rate loans may decrease at a pace faster than decreases in our cost of funds,
resulting in reduced net income.
While one- to four-family residential real
estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter
periods because borrowers often prepay their loans in full upon sale of the mortgaged property or upon refinancing the original
loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real
estate market, prevailing interest rates and the interest rates payable on outstanding loans. As interest rates declined and remained
low over the past few years, we have experienced high levels of loan repayments and refinancings.
The Banks offer various programs for the
purchase and refinance of one- to four-family loans. Most of these loans have loan-to-value ratios of 80% or less, based on an
appraisal provided by a state licensed or certified appraiser. For owner-occupied properties, the borrower may be able to borrow
up to 95% of the value if they secure and pay for private mortgage insurance or they may be able to obtain a second mortgage (at
a higher interest rate) in which they borrow up to 90% of the value. On a rare case-by-case basis, the Boards of Directors of the
Banks may approve a loan above the 80% loan-to-value ratio without such enhancements.
Construction Loans. We
originate loans to individuals to finance the construction of residential dwellings for personal use or for use as rental
property. On a case-by-case basis we consider construction loans on other than owner-occupied, residential property. At June 30,
2015, construction loans totaled $3.8 million, or 1.5%, of our total loan portfolio. Our construction loans generally provide
for the payment of interest only during the construction phase, which is usually less than one year. Loans generally can be
made with a maximum loan to value ratio of 80% of the appraised value. Funds are disbursed as progress is made toward
completion of the construction based on site inspections by qualified bank staff.
Construction financing is generally considered
to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction
loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development
and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond
the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may
be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment.
As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent,
in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest.
If we are forced to foreclose on a project before or at completion due to a default, there can be no assurance that we will be
able to recover the unpaid balance and accrued interest on the loan, as well as related foreclosure and holding costs.
Multi-Family Loans. We offer
mortgage loans secured by multi-family property (residential real estate comprised of five or more units.) At June 30, 2015, multi-family
loans totaled $16.6 million, or 6.7%, of our total loan portfolio. We originate multi-family real estate loans for terms of generally
25 years or less. Loan amounts generally do not exceed 80% of the appraised value and tend to range much lower.
Nonresidential Loans. As opportunities
arise, we offer mortgage loans secured by nonresidential real estate, which is generally secured by commercial office buildings,
churches, condominiums and properties used for other purposes. At June 30, 2015, nonresidential totaled $25.7 million, or 10.3%
of our total loan portfolio. We originate nonresidential real estate loans for terms of generally 25 years or less and loan amounts
generally do not exceed 80% of the appraised value and tend to range much lower.
Loans secured by multi-family and nonresidential
real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans.
Of primary concern in multi-family and nonresidential real estate lending is the borrower’s creditworthiness and the feasibility
and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and
management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate
loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers
and/or loan guarantors to provide annual financial statements on larger multi-family and commercial real estate loans. In reaching
a decision on whether to make a multi-family or nonresidential real estate loan, we consider the net cash flow of the project,
the borrower’s expertise, credit history and the value of the underlying property.
Commercial Non-mortgage Loans.
At June 30, 2015, commercial non-mortgage loans totaled $1.8 million, or 0.7%, of our total loan portfolio. We do not emphasize
commercial non-mortgage loans, which may be secured by vehicles used in business or by inventory and equipment of the business
or may be unsecured, although we do originate such loans on a limited basis and generally require a pre-existing relationship with
the Bank. These loans are made only to businesses in our local market and we generally require personal guarantees of well-established
individuals for these loans. Commercial loans involve an even greater degree of risk than real estate loans.
Consumer Lending. Our consumer
loans include home equity lines of credit, loans secured by savings deposits, automobile loans and unsecured or personal loans.
At June 30, 2015, our consumer loan balance totaled $8.4 million, or 3.5%, of our total loan portfolio. Of the consumer loan balance
at June 30, 2015, $5.5 million were home equity loans, $2.3 million were loans secured by savings deposits and $678,000 were automobile
or unsecured loans.
Our home equity loans are made at First
Federal of Frankfort and are made on the security of residential real estate and have terms of up to 15 years. Most of First Federal
of Frankfort’s home equity loans are second mortgages subordinate only to first mortgages also held by the bank and do not
exceed 80% of the estimated value of the property, less the outstanding principal of the first mortgage. First Federal of Frankfort
does offer home equity loans up to 90% of the value less the balance of the first mortgage at a premium rate to qualified borrowers.
These loans are not secured by private mortgage insurance. First Federal of Frankfort’s home equity loans require the monthly
payment of 1.0% to 2% of the unpaid principal until maturity, when the remaining unpaid principal, if any, is due. First Federal
of Frankfort’s home equity loans bear variable rates of interest indexed to the prime rate for loans with 80% or less loan-to-value
ratio, and 2% above the prime rate for loans with a loan-to-value ratio in excess of 80%. Interest rates on these loans can be
adjusted monthly. At June 30, 2015, the total outstanding home equity loans amounted to 2.2% of the Company’s total loan
portfolio.
Loans secured by savings are originated
for up to 90% of the depositor’s savings account balance. The interest rate is varying percentage points above the rate paid
on the savings account, and the account must be pledged as collateral to secure the loan. At June 30, 2015, loans on savings accounts
totaled 0.9% of the Company’s total loan portfolio.
Consumer loans generally entail greater
risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable
assets. Automobile and unsecured loans at June 30, 2015, totaled 0.3% of the Company’s total loan portfolio.
Loan Originations, Purchases and Sales.
Loan originations come from a number of sources. The primary source of loan originations are our in-house loan originators, and
to a lesser extent, advertising and referrals from customers and real estate agents. First Federal of Frankfort sells fixed-rate
loans with longer maturities to the Federal Home Loan Bank of Cincinnati (“FHLB-Cincinnati”). We earn income on the
loans sold through fees we charge on the origination, interest spread premiums earned when we sell the loans, and loan servicing
fees on an on-going basis, because servicing rights are retained on such loans. At June 30, 2015, $11.9 million in loans were being
serviced by First Federal of Frankfort for the FHLB-Cincinnati.
Loan Approval Procedures and Authority.
Our lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by
each Bank’s Board of Directors and management. First Federal of Hazard’s loan committee, consisting of its two senior
officers, has authority to approve loans of up to $275,000. Loans above this amount and loans with non-standard terms such as longer
repayment terms or high loan-to-value ratios, must be approved by our Board of Directors. First Federal of Frankfort’s loan
approval process allows for various combinations of experienced bank officers to approve or deny loans which are one- to four-family
properties totaling $350,000 or less, church loans of under $150,000, home equity lines of credit of $100,000 or less and loans
to individuals whose aggregate borrowings with the Bank is less than $500,000. Loans that do not conform to these criteria must
be submitted to the Board of Directors or Executive Committee composed of at least three directors, for approval.
It is the Company’s practice to record
a lien on the real estate securing a loan. The Banks generally do not require title insurance, although it may be required for
loans made in certain programs. The Banks do require fire and casualty insurance on all security properties and flood insurance
when the collateral property is located in a designated flood hazard area.
Loans to One Borrower. The
maximum amount either Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally
15% of that Bank’s stated capital and the allowance for loan losses. At June 30, 2015, the regulatory limit on loans to one
borrower was $2.6 million for First Federal of Hazard and $5.0 million for First Federal of Frankfort. Neither of the banks had
lending relationships in excess of their respective lending limits. However, loans or participations in loans may be sold among
the Banks, which may allow a borrower’s total loans with the Company to exceed the limit of either individual bank.
Loan Commitments. The Banks
issue commitments for the funding of mortgage loans. Generally, these commitments exist from the time the underwriting of the loan
is completed and the closing of the loan. Generally, these commitments are for a maximum of 30 or 60 days but management routinely
extends the commitment if circumstances delay the closing. Management reserves the right to verify or re-evaluate the borrower’s
qualifications and to change the rates and terms of the loan at that time.
If conditions exist whereby either Bank
experiences a significant increase in loans outstanding or commits to originate loans that are riskier than a typical one- to four-family
mortgage, management and the boards will consider reflecting the anticipated loss exposure in a separate liability. As residential
loans are approved in the normal course of business, and those loans are underwritten to the standards of the Banks, management
does not believe alteration of the allowance for loan losses is warranted. At June 30, 2015, no commitment losses were reflected
in a separate liability.
First Federal of Frankfort offers construction
loans in which the borrower obtains the loan for a short term, less than one year, and simultaneously extends a commitment for
permanent financing. First Federal of Hazard offers a construction loan that is convertible to permanent financing, thus no additional
commitment is made.
Interest Rates and Loan Fees. Interest
rates charged on mortgage loans are primarily determined by competitive loan rates offered in our market areas and our yield objectives.
Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings
industry and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies
of the federal government, including the Board of Governors of the Federal Reserve System, the general supply of money in the economy,
tax policies and governmental budget matters.
We receive fees in connection with late
payments on our loans. Depending on the type of loan and the competitive environment for mortgage loans, we may charge an origination
fee on all or some of the loans we originate. We may also offer a menu of loans whereby the borrower may pay a higher fee to receive
a lower rate or to pay a smaller or no fee for a higher rate.
Delinquencies. When a borrower
fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan
to current status. We make initial contact with the borrower when the loan becomes 15 days past due. Subsequently, bank staff under
the direct supervision of senior management and with consultation by the Banks’ attorneys, attempt to contact the borrower
and determine their status and plans for resolving the delinquency. However, once a delinquency reaches 90 days, management considers
foreclosure and, if the borrower has not provided a reasonable plan (such as selling the collateral, securing a commitment from
another lender to refinance the loan or submitting a plan to repay the delinquent principal, interest, escrow, and late charges)
the foreclosure suit may be initiated. In some cases, management may delay initiating the foreclosure suit if, in management’s
opinion, the Banks’ chance of loss is minimal (such as with loans where the estimated value of the property greatly exceeds
the amount of the loan) or if the original borrower is deceased or incapacitated. If a foreclosure action is initiated and the
loan is not brought current, paid in full, or refinanced with another lender before the foreclosure sale, the real property securing
the loan is sold at foreclosure. The Banks are represented at the foreclosure sale and in most cases will bid an amount equal to
the Banks’ investment (including interest, advances for taxes and insurance, foreclosure costs, and attorney’s fees).
If another bidder outbids the Bank, the Bank’s investment is received in full. If another bidder does not outbid the Banks,
the Banks acquire the property and attempt to sell it to recover their investment.
A borrower’s filing for bankruptcy
can alter the methods available to the Banks to seek collection. In such cases, the Banks work closely with legal counsel to resolve
the delinquency as quickly as possible.
We may consider loan workout arrangements
with certain borrowers under certain conditions. Management of each bank provides a report to its board of directors on a monthly
basis of all loans more than 60 days delinquent, including loans in foreclosure, and all property acquired through foreclosure.
Investment Activities
We have legal authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and state and municipal governments,
mortgage-backed securities and certificates of deposit of federally insured institutions. We also are required to maintain an investment
in FHLB-Cincinnati stock, the level of which is largely dependent on our level of borrowings from the FHLB.
At June 30, 2015, our investment portfolio
consisted of mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities
of 30 years or less. The Company held no equity position with Fannie Mae, but acquired an equity position in Freddie Mac along
with the acquisition of CKF Bancorp. At June 30, 2015, the carrying amount of our Freddie Mac stock was $63,000, which was also
its estimated fair market value, while its cost basis was $8,000.
Our investment objectives are to provide
an alternate source of low-risk investments when loan demand is insufficient, to provide and maintain liquidity, to maintain a
balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish
an acceptable level of interest rate risk, and to generate a favorable return. The Banks’ Board of Directors has the overall
responsibility for each institution’s investment portfolio, including approval of investment policies. The management
of each Bank may authorize investments as prescribed in each of the Bank’s investment policies.
Bank Owned Life Insurance
First Federal of Frankfort owns several
Bank Owned Life Insurance policies totaling $3.0 million at June 30, 2015. The purpose of these policies is to offset future escalation
of the costs of non-salary employee benefit plans such as First Federal of Frankfort’s defined benefit retirement plan and
First Federal of Frankfort’s health insurance plan. The lives of certain key Bank employees are insured, and First Federal
of Frankfort is the sole beneficiary and will receive any benefits upon the employee’s death. The policies were purchased
from four highly-rated life insurance companies. The design of the plan allows for the cash value of the policy to be designated
as an asset of First Federal of Frankfort. The asset’s value will increase by the crediting rate, which is a rate set by
each insurance company and is subject to change on an annual basis. The growth of the value of the asset will be recorded as other
operating income. Management does not foresee any expense associated with the plan. Because this is a life insurance product, current
federal tax laws exempt the income from federal income taxes.
Bank owned life insurance is not secured
by any government agency nor are the policies’ asset values or death benefits secured specifically by tangible property.
Great care was taken in selecting the insurance companies, and the bond ratings and financial condition of these companies are
monitored on a quarterly basis. The failure of one of these companies could result in a significant loss to First Federal of Frankfort.
Other risks include the possibility that the favorable tax treatment of the income could change, that the crediting rate will not
be increased in a manner comparable to market interest rates, or that this type of plan will no longer be permitted by First Federal
of Frankfort’s regulators. This asset is considered illiquid because, although First Federal of Frankfort may terminate the
policies and receive the original premium plus all earnings, such an action would require the payment of federal income taxes on
all earnings since the policies’ inception.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments
and maturities, redemptions, sales and repayments of investment and mortgage-backed securities are the major sources of our funds
for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows
and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. The vast
majority of our depositors are residents of the Banks’ respective market areas. Deposits are attracted from within our market
areas through the offering of passbook savings and certificate accounts, and, at First Federal of Frankfort, checking accounts
and individual retirement accounts (“IRAs”). We do not utilize brokered funds. Deposit account terms vary according
to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.
In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability to us, asset
liability management and customer preferences and concerns. We review our deposit mix and pricing on an ongoing basis as needed.
Borrowings.
First Federal of Hazard and First Federal of Frankfort borrow from the FHLB-Cincinnati to supplement their supplies of investable
funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit
for member financial institutions. As members, each Bank is required to own capital stock in the FHLB-Cincinnati and is authorized
to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been
met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or
on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness.
Subsidiary Activities
The Company has no other wholly owned subsidiaries
other than First Federal of Hazard and Frankfort First Bancorp. Frankfort First Bancorp has one subsidiary, First Federal of Frankfort.
As federally chartered savings institutions,
the Banks are permitted to invest an amount equal to 2% of assets in subsidiaries, with an additional investment of 1% of assets
where such investment serves primarily community, inner-city and community-development purposes. Under such limitations, as of
June 30, 2015, First Federal of Hazard and First Federal of Frankfort were authorized to invest up to $2.3 million and $6.9 million,
respectively, in the stock of or loans to subsidiaries, including the additional 1% investment for community, inner-city and community
development purposes.
Competition
We face significant competition for the
attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the banks
and credit unions operating in our market areas and, to a lesser extent, from other financial services companies, such as investment
brokerage firms. We also face competition for depositors’ funds from money market funds and other corporate and government
securities. Several of our competitors are significantly larger than us and, therefore, have significantly greater resources. We
expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing
trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to enter
new market areas, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for
non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law
permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial
services industry. Competition for deposits and the origination of loans could limit our growth in the future.
According to the Federal Deposit Insurance
Corporation (“FDIC”), at June 30, 2014 (the most recent period for which information is available,) First Federal of
Hazard had a deposit market share of 10.2% in Perry County. Its largest competitors, Hazard Bancorp (Peoples Bank & Trust Company
of Hazard,) Community Trust Bancorp, Inc. (Community Trust Bank, Inc.) and 1st Trust Bank, Inc. had Perry County deposit
market shares of 42.3%, 16.9% and 23.4%, respectively. First Federal of Hazard’s competition for loans comes primarily from
financial institutions in its market area and, to a lesser extent, from other financial services providers, such as mortgage companies
and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial services companies
entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.
First Federal of Frankfort’s principal
competitors for deposits in its market area are other banking institutions, such as commercial banks and credit unions, as well
as mutual funds and other investments. First Federal of Frankfort principally competes for deposits by offering a variety of deposit
accounts, convenient business hours and branch locations, customer service and a well-trained staff. According to the FDIC, at
June 30, 2014, (the most recent period for which information is available,) First Federal of Frankfort had deposit market share
of 8.9%, 38.4% and 18.7% for the Kentucky counties of Franklin, Boyle and Garrard. Its largest competitors for depositors are the
Farmers Capital Bank Corporation (Farmers Bank and Capital Trust Company) at a 26.7% market share in the three-county area, Boyle
Bancorp, Inc. (The Farmers National Bank of Danville) at 16.7% and Whitaker Bank Corporation of Kentucky at 12.3%. Farmers Capital
Bank Corporation, Boyle Bancorp, Inc., and Whitaker Bank Corporation had assets at June 30, 2015, of $1.8 billion, $448.2 million
and $1.4 billion, respectively. The Bank also faces considerable competition from credit unions including the Commonwealth Credit
Union ($979.2 million in assets) and the Kentucky Employees Credit Union ($70.4 million in assets). First Federal of Frankfort
competes for loans with other depository institutions, as well as specialty mortgage lenders and brokers and consumer finance companies.
First Federal of Frankfort principally competes for loans on the basis of interest rates and the loan fees it charges, the types
of loans it originates and the convenience and service it provides to borrowers. In addition, First Federal of Frankfort believes
it has developed strong relationships with the businesses, real estate agents, builders and general public in its market area.
Personnel
At June 30, 2015, we had 69 full-time employees
and two part-time employees, none of whom was represented by a collective bargaining unit. We believe our relationship with our
employees is good.
Regulation and Supervision
General. First Federal of
Hazard and First Federal of Frankfort are subject to extensive regulation, examination and supervision by the Office of the Comptroller
of the Currency, as their primary federal regulator, and the Federal Deposit Insurance Corporation, as insurer of deposits. First
Federal of Hazard and First Federal of Frankfort are each members of the Federal Home Loan Bank System and their deposit accounts
are insured up to applicable limits by the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation. First Federal
of Hazard and First Federal of Frankfort must each file reports with the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation concerning their activities and financial condition in addition to obtaining regulatory approvals
before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic
examinations by the Office of the Comptroller of the Currency and, under certain circumstances, the Federal Deposit Insurance Corporation
to evaluate First Federal of Hazard’s and First Federal of Frankfort’s safety and soundness and compliance with various
regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors.
The Federal Reserve Board, the agency that regulates and supervises bank holding companies, now supervises and regulates Kentucky
First Federal MHC. Kentucky First and First Federal MHC, as savings and loan holding companies, are required to file certain reports
with, and are subject to examination by, and otherwise are required to comply with the rules and regulations of the Federal Reserve
Board.
The Dodd-Frank Act made extensive changes
in the regulation of federal savings banks such as First Federal of Hazard and First Federal of Frankfort. Under the Dodd-Frank
Act, the Office of Thrift Supervision was eliminated and responsibility for the supervision and regulation of federal savings banks
was transferred to the Office of the Comptroller of the Currency, the agency that is primarily responsible for the regulation and
supervision of national banks, on July 21, 2011. The Office of the Comptroller of the Currency assumed responsibility for implementing
and enforcing many of the laws and regulations applicable to federal savings banks. Additionally, the Dodd-Frank Act created a
new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection
Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations
and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as First Federal of
Hazard and First Federal of Frankfort, will continue to be examined for compliance with consumer protection and fair lending laws
and regulations by, and be subject to the enforcement authority of, their prudential regulator. Many of the provisions of the Dodd-Frank
Act require the issuance of regulations before their impact on operations can be fully assessed by management. However, there is
a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden and compliance for
First Federal MHC, Kentucky First and each of the Banks.
Certain of the regulatory requirements that
are applicable to First Federal of Hazard, First Federal of Frankfort, Kentucky First and First Federal MHC are described below.
This discussion does not purport to be a complete description of the laws and regulations involved, and is qualified in its entirety
by the actual laws and regulations. Moreover, laws and regulations are subject to changes by the U.S. Congress or the regulatory
agencies as applicable.
Regulation of Federal Savings Institutions
Business Activities. Federal
law and regulations, primarily the Home Owners’ Loan Act and the regulations of the Office of the Comptroller of the Currency,
govern the activities of federal savings institutions, such as First Federal of Hazard and First Federal of Frankfort. These laws
and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain
lending authority for federal savings institutions, e.g., commercial, nonresidential real property loans and consumer loans,
is limited to a specified percentage of the institution’s capital or assets.
Branching. Federal savings
institutions are authorized to establish branch offices in any state or states of the United States and its territories, subject
to the approval of the Office of the Comptroller of the Currency.
Capital Requirements. In early
July 2013, the Federal Reserve Board and the OCC approved revisions to their capital adequacy guidelines and prompt corrective
action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called “Basel III,”
and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by
the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules
issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital
and leverage ratios, which became effective January 1, 2015, and revise the definition of what constitutes “capital”
for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Company and the Banks are:
(1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital
ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4% for all institutions. In addition, the rules
assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain
commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also eliminate
the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. However, instruments issued prior
to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. In addition, Tier 2 capital
is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax
assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted
from capital, subject to a two-year transition period. Finally Tier 1 capital will include accumulated other comprehensive income
(which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition
period.
The rules also establish a “capital
conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common
equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii)
Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be
phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented
in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible
retained income that could be utilized for such actions.
The OCC also has authority to establish
individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is
or may become inadequate in light of the particular circumstances. At June 30, 2015, the Banks met each of their capital requirements.
Prompt Corrective Regulatory Action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The OCC is required to take certain
supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of
undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion.
The OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors. Significantly and undercapitalized institutions are subject to
additional mandatory and discretionary measures.
Loans to One Borrower. Federal
law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks.
Generally, subject to certain exceptions, a savings institution may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral.
Standards for Safety and Soundness.
As required by statute, the federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. If the Office of the Comptroller of the Currency determines
that a savings institution fails to meet any standard prescribed by the guidelines, the Office of the Comptroller of the Currency
may require the institution to submit an acceptable plan to achieve compliance with the standard.
Limitation on Capital Distributions.
Office of the Comptroller of the Currency regulations impose limitations upon all capital distributions by a savings institution,
including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger.
Under the regulations, an application to and the prior approval of the Office of the Comptroller of the Currency is required before
any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under
Office of the Comptroller of the Currency regulations (i.e., generally, examination and Community Reinvestment Act ratings
in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount
of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement with the Office of the Comptroller of the Currency.
If an application is not required, the institution must still provide prior notice to the Federal Reserve Board of the capital
distribution if, like First Federal of Hazard and First Federal of Frankfort, it is a subsidiary of a holding company as well as
an informational notice to the Office of the Comptroller of the Currency. If First Federal of Hazard’s or First Federal of
Frankfort’s capital were ever to fall below its regulatory requirements or the Office of the Comptroller of the Currency
notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition,
the Office of the Comptroller of the Currency could prohibit a proposed capital distribution that would otherwise be permitted
by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test.
Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings institution is required
to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least
65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments”
(primarily residential mortgages and related investments, including certain mortgage-backed securities, education loans, credit
card loans and small business loans) in at least 9 months out of each 12-month period.
A savings institution that fails the qualified
thrift lender test is subject to certain operating restrictions. The Dodd-Frank Act also specifies that failing the qualified thrift
lender test is a violation of law that could result in an enforcement action and dividend limitations. At June 30, 2015, First
Federal of Hazard and First Federal of Frankfort each met the qualified thrift lender test.
Transactions with Related Parties.
Federal law limits the authority of First Federal of Hazard and First Federal of Frankfort to lend to, and engage in certain other
transactions with (collectively, “covered transactions”), “affiliates” (e.g., any company that controls
or is under common control with an institution, including Kentucky First, First Federal MHC and their non-savings institution subsidiaries).
The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the
savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s
capital and surplus. Loans and other specified transactions with affiliates are required to be secured by collateral in an amount
and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions
with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing
at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary. Transactions between sister depository institutions that are
80% or more owned by the same holding company are exempt from the quantitative limits and collateral requirements.
The Sarbanes-Oxley Act of 2002 generally
prohibits a company from making loans to its executive officers and directors. However, that law contains a specific exception
for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such
laws, First Federal of Hazard’s and First Federal of Frankfort’s authority to extend credit to executive officers,
directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law restricts
both the individual and aggregate amount of loans First Federal of Hazard and First Federal of Frankfort may make to insiders based,
in part, on First Federal of Hazard’s and First Federal of Frankfort’s respective capital positions and requires certain
board approval procedures to be followed. Such loans must be made on terms, including rates and collateral, substantially the same
as those offered to unaffiliated individuals prevailing at the time for comparable loans with persons not related to the lender
and not involve more than the normal risk of repayment. There are additional restrictions applicable to loans to executive officers.
Enforcement. The Office of
The Comptroller of the Currency has primary enforcement responsibility over federal savings institutions and has the authority
to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers
and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or
directors to appointment of a receiver or conservator or termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance
Corporation has authority to recommend to the Director of the Office of the Comptroller of the Currency that enforcement action
to be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance
Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Assessments. Federal savings
banks pay assessments to the Office of the Comptroller of the Currency to fund its operations. The general assessments, paid on
a semi-annual basis, are based upon the savings institution’s total assets, including consolidated subsidiaries, its financial
condition and the complexity of its portfolio.
Insurance of Deposit Accounts.
The deposits of both First Federal of Hazard and First Federal of Frankfort are insured up to applicable limits by the Deposit
Insurance Fund administered by the Federal Deposit Insurance Corporation. Deposit insurance per account owner is currently $250,000.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned a risk
category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment
rate depends upon the category to which it is assigned, and certain adjustments specified by Federal Deposit Insurance Corporation
regulations. Institutions deemed less risky pay lower assessments. The Federal Deposit Insurance Corporation may adjust the scale
uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No
institution may pay a dividend if in default of the federal deposit insurance assessment.
The Dodd-Frank Act required the Federal
Deposit Insurance Corporation to revise its procedures to base its assessments upon each insured institution’s total assets
less tangible equity instead of deposits. The Federal Deposit Insurance Corporation finalized a rule, effective April 1, 2011,
that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.
The Federal Deposit Insurance Corporation
has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect
on the operating expenses and results of operations of the Banks. Management cannot predict what insurance assessment rates will
be in the future.
Federal Home Loan Bank System.
First Federal of Hazard and First Federal of Frankfort are members of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. As members
of the Federal Home Loan Bank of Cincinnati, First Federal of Hazard and First Federal of Frankfort are each required to acquire
and hold shares of capital stock in that Federal Home Loan Bank. First Federal of Hazard and First Federal of Frankfort were in
compliance with this requirement with investments in Federal Home Loan Bank of Cincinnati stock at June 30, 2015, of $2.0 million
and $4.5 million, respectively.
Federal Reserve System. Pursuant
to regulations of the Federal Reserve Board, a financial institution must maintain average daily reserves equal to 3% on transaction
accounts of between $14.5 million and $103.6 million, plus 10% on the remainder. The first $14.5 million of transaction accounts
are exempt. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained
in the form of vault cash or in a noninterest-bearing account at the Federal Reserve Bank, the effect of the reserve requirement
is to reduce the amount of the institution’s interest-earning assets. As of June 30, 2015, the Banks met their reserve requirements.
Community Reinvestment Act.
All federal savings institutions have a continuing and affirmative obligation consistent with its safe and sound operation
to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment
Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s
discretion to develop the types of products and services that it believes are best suited to its particular community, consistent
with the Community Reinvestment Act. The Community Reinvestment Act requires the Office of the Comptroller of the Currency, in
connection with its examination of a savings institution, to assess the institution’s record of meeting the credit needs
of its community and to take such record into account in its evaluation of certain applications by such institution.
The Community Reinvestment Act requires
public disclosure of an institution’s rating and requires the Office of the Comptroller of the Currency to provide a written
evaluation of an institution’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system.
First Federal of Hazard and First Federal of Frankfort each received a “Satisfactory” rating as a result of their most
recent Community Reinvestment Act assessments.
Holding Company Regulation
General. Kentucky First and
First Federal MHC are savings and loan holding companies within the meaning of federal law. As such, they are registered with the
Federal Reserve Board and are subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and
regulations concerning corporate governance and activities. In addition, the Federal Reserve Board has enforcement authority over
Kentucky First and First Federal MHC and their non-savings institution subsidiaries. Among other things, this authority permits
the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to First Federal of Hazard
and/or First Federal of Frankfort.
Restrictions Applicable to Mutual
Holding Companies. According to federal law and Federal Reserve Board regulations, a mutual holding company, such as First
Federal MHC, may generally engage in the following activities: (1) investing in the stock of insured depository institutions and
acquiring them by means of a merger or acquisition; (2) investing in a corporation the capital stock of which may be lawfully purchased
by a savings association under federal law; (3) furnishing or performing management services for a savings association subsidiary
of a savings and loan holding company; (4) conducting an insurance agency or escrow business; (5) holding, managing or liquidating
assets owned or acquired from a savings association subsidiary of the savings and loan holding company; (6) holding or managing
properties used or occupied by a savings association subsidiary of the savings and loan holding company; (7) acting as trustee
under deed of trust; (8) any activity permitted for multiple savings and loan holding companies by Federal Reserve Board regulations;
(9) any activity permitted by the Board of Governors of the Federal Reserve System for bank holding companies and financial holding
companies; and (10) any activity permissible for service corporations. Legislation, which authorized mutual holding companies to
engage in activities permitted for financial holding companies, expanded the authorized activities. Financial holding companies
may engage in a broad array of financial services activities, including insurance and securities.
Federal law prohibits a savings and loan
holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries,
acquiring more than 5% of the voting stock of another savings institution, or its holding company, without prior written approval
of the Federal Reserve Board. Federal law also prohibits a savings and loan holding company from acquiring or retaining control
of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding
companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The Federal Reserve Board is prohibited
from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies,
and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
Capital Requirements.
Savings and loan holding companies historically have not been subject to specific regulatory capital requirements. However, in
July 2013, the Federal Reserve Board approved a new rule that implements the “Basel III” regulatory capital reforms
and changes required by the Dodd-Frank Act. The final rule established consolidated capital requirements for many savings and loan
holding companies, including the Company. See “Regulation and Supervision—Regulation of Federal Savings Institutions
-Capital Requirements” above.
Source of Strength. The
Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory
agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source
of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial
stress.
Dividends. The Federal Reserve
Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expressed the Federal Reserve
Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income
for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company’s
capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate
for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt correction
action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s
bank subsidiary is classified as “undercapitalized.” See “Depository Institution Regulation – Prompt
Corrective Regulatory Action.”
Stock Holding Company Subsidiary Regulation.
Federal Reserve Board regulations govern the two-tier mutual holding company form of organization and subsidiary stock
holding companies that are controlled by mutual holding companies. Kentucky First is the stock holding company subsidiary of First
Federal MHC. Kentucky First is only permitted to engage in activities that are permitted for First Federal MHC subject to the same
restrictions and conditions.
Waivers of Dividends by First Federal
MHC. Federal Reserve Board regulations require First Federal MHC to notify the Federal Reserve Board if it proposes
to waive receipt of our dividends from Kentucky First. The Dodd-Frank Act addresses the issue of dividend waivers in the context
of the transfer of the supervision of savings and loan holding companies to the Federal Reserve Board. The Dodd-Frank Act specified
that dividends may be waived if certain conditions are met, including that the Federal Reserve Board does not object after being
given written notice of the dividend and proposed waiver. The Dodd-Frank Act indicates that the Federal Reserve Board may not object
to such a waiver (i) if the mutual holding company involved has, prior to December 1, 2009, reorganized into a mutual holding company
structure, engaged in a minority stock offering and waived dividends; (ii) the board of directors of the mutual holding company
expressly determines that a waiver of the dividend is consistent with its fiduciary duties to members and (iii) the waiver would
not be detrimental to the safe and sound operation of the savings association subsidiaries of the holding company. The Federal
Reserve Board will not consider the amount of dividends waived by the mutual holding company in determining an appropriate exchange
ratio in the event of a full conversion to stock form. Kentucky First was granted such a waiver and dividends were paid to the
Company’s shareholders on August 16 and November 22, 2011, as well as February 21, 2012. First Federal MHC was not allowed
to waive its dividend with respect to the dividend paid on May 21, 2012. First Federal MHC subsequently received Federal Reserve
Board approval to waive quarterly dividends totaling $0.40 per share annually beginning with the dividend paid on September 28,
2012 and continuing through the dividend payable in the 3rd quarter of 2014. In an effort to comply with Regulation MM and to be
able to continue to waive the dividend, First Federal MHC put the issue to a vote of the members on August 23, 2012, again on July
9, 2013, again on July 8, 2014 and again on July 7, 2015. Members of First Federal MHC voted in favor of the dividend waiver on
all four occasions. 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 2016. It is expected that First Federal MHC will continue to waive future
dividends, except to the extent dividends are needed to fund First Federal MHC’s continuing operations, subject to the ability
of First Federal MHC to obtain regulatory approval of its requests to waive dividends and to its ability to obtain member approval
of dividend waivers. For more information, see Item 1A, “Risk Factors – Our ability to pay dividends is subject
to the ability of First Federal of Hazard and First Federal of Frankfort to make capital distributions to Kentucky First and the
waiver of dividends by First Federal MHC.”
Conversion of First Federal MHC to
Stock Form. Federal Reserve Board regulations permit First Federal MHC to convert from the mutual form of organization
to the capital stock form of organization. In a conversion transaction, a new holding company would be formed as successor to First
Federal MHC, its corporate existence would end, and certain depositors would receive the right to subscribe for additional shares
of the new holding company. In a conversion transaction, each share of common stock held by stockholders other than First Federal
MHC would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio
determined at the time of conversion that ensures that stockholders other than First Federal MHC own the same percentage of common
stock in the new holding company as they owned in us immediately before conversion. Under Federal Reserve Board regulations, stockholders
other than First Federal MHC would not be diluted because of any dividends waived by First Federal MHC (and waived dividends would
not be considered in determining an appropriate exchange ratio, provided that the mutual holding company involved was formed, engaged
in a minority offering and waived dividends prior to December 1, 2009), in the event First Federal MHC converts to stock form.
First Federal MHC was formed, engaged in a minority stock offering and waived dividends prior to December 1, 2009. The total number
of shares held by stockholders other than First Federal MHC after a conversion transaction also would be increased by any purchases
by stockholders other than First Federal MHC in the stock offering conducted as part of the conversion transaction.
Acquisition of Control. Under
the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company),
or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association.
An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan
holding company or savings institution or as otherwise defined by the Federal rd. Under the Change in Bank Control Act, the Federal
Reserve Board has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires
control would then be subject to regulation as a savings and loan holding company.
Federal and State Taxation
General. We report our income
on a fiscal year basis using the accrual method of accounting.
Federal Taxation. The federal
income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly the reserve
for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be
a comprehensive description of the tax rules applicable to us. Our federal income tax returns are subject to examination for years
2011 and later. For the 2015 fiscal year, First Federal of Hazard’s and Frankfort First’s maximum federal income tax
rate was 34.0%.
For fiscal years beginning before June 30,
1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were
permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad
debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in
real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of
accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions
to recapture or take into income certain portions of their accumulated bad debt reserves. First Federal of Hazard did not qualify
for such favorable tax treatment for any years through 1996. Approximately $5.2 million of First Federal of Frankfort First’s
accumulated bad debt reserves would not be recaptured into taxable income unless Frankfort First makes a “non-dividend distribution”
to Kentucky First as described below.
If First Federal of Hazard or First Federal
of Frankfort makes “non-dividend distributions” to us, the distributions will be considered to have been made from
First Federal of Hazard’s and First Federal of Frankfort’s unrecaptured tax bad debt reserves, including the balance
of their reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from First
Federal of Frankfort’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on
the amount distributed, but not more than the amount of those reserves, will be included in First Federal of Frankfort’s
taxable income. Non-dividend distributions include distributions in excess of First Federal of Frankfort’s current and accumulated
earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in
partial or complete liquidation. Dividends paid out of First Federal of Frankfort’s current or accumulated earnings and profits
will not be so included in First Federal of Frankfort’s taxable income.
The amount of additional taxable income
triggered by a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Therefore, if First Federal of Frankfort makes a non-dividend distribution to us, approximately one
and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for
federal income tax purposes, assuming a 34% federal corporate income tax rate. First Federal of Frankfort does not intend to pay
dividends in the future that would result in a recapture of any portion of its bad debt reserves.
State Taxation. Although
First Federal MHC and Kentucky First are subject to the Kentucky corporation income tax and state corporation license tax (franchise
tax), the corporation license tax is repealed effective for tax periods ending on or after December 31, 2005. Gross income of corporations
subject to Kentucky income tax is similar to income reported for federal income tax purposes except that dividend income, among
other income items, is exempt from taxation. For First Federal MHC and Kentucky First tax years beginning July 1, 2005, the corporations
are subject to an alternative minimum income tax. Corporations must pay the greater of the income tax, the alternative tax or $175.
The corporations can choose between two methods to calculate the alternative minimum; 9.5 cents per $100 of the corporation’s
gross receipts, or 75 cents per $100 of the corporation’s Kentucky gross profits. Kentucky gross profits means Kentucky gross
receipts reduced by returns and allowances attributable to Kentucky gross receipts, less Kentucky cost of goods sold. The corporations,
in their capacity as holding companies for financial institutions, do not have a material amount of cost of goods sold. Although
the corporate license tax rate is 0.21% of total capital employed in Kentucky, a bank holding company, as defined in Kentucky Revised
Statutes 287.900, is allowed to deduct from its taxable capital, the book value of its investment in the stock or securities of
subsidiaries that are subject to the bank franchise tax.
First Federal of Hazard and First Federal
of Frankfort are exempt from both the Kentucky corporation income tax and corporation license tax. However, both institutions are
instead subject to the bank franchise tax, an annual tax imposed on federally or state chartered savings and loan associations,
savings banks and other similar institutions operating in Kentucky. The tax is 0.1% of taxable capital stock held as of January 1
each year. Taxable capital stock includes an institution’s undivided profits, surplus and general reserves plus savings accounts
and paid-up stock less deductible items. Deductible items include certain exempt federal obligations and Kentucky municipal bonds.
Financial institutions which are subject to tax both within and without Kentucky must apportion their net capital.
Item 1A. Risk Factors
Rising interest rates may hurt our profits and asset values.
If interest rates rise, our net interest
income would likely decline in the short term since, due to the generally shorter terms of interest-bearing liabilities, interest
expense paid on interest-bearing liabilities, increases more quickly than interest income earned on interest-earning assets, such
as loans and investments. In addition, a continuation of rising interest rates may hurt our income because of reduced demand
for new loans, the demand for refinancing loans and the interest and fee income earned on new loans and refinancings. While we
believe that modest interest rate increases will not significantly hurt our interest rate spread over the long term due to our
high level of liquidity and the presence of a significant amount of adjustable-rate mortgage loans in our loan portfolio, interest
rate increases may initially reduce our interest rate spread until such time as our loans and investments reprice to higher levels.
Changes in interest rates also affect the
value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of fixed-rate securities
fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported
as separate components of equity. Decreases in the fair value of securities available for sale resulting from increases in interest
rates therefore could have an adverse effect on stockholders’ equity.
A larger percentage of our loans are collateralized by
real estate and further disruptions in the real estate market may result in losses and hurt our earnings.
Approximately 95.9% of our loan portfolio
at June 30, 2015 was comprised of loans collateralized by real estate. The declining economic conditions have caused a decrease
in demand for real estate, which has resulted in an erosion of some real estate values in our markets. Further disruptions in the
real estate market could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.
The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If real estate values decline further, it will become more likely
that we would be required to increase our allowance for loan losses. If during a period of reduced real estate values, we are required
to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially
reduce our profitability and adversely affect our financial condition.
Strong competition within our market areas could hurt
our profits and slow growth.
Although we consider ourselves competitive
in our market areas, we face intense competition both in making loans and attracting deposits. Price competition for loans and
deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest income. Some
of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not
provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability
to compete successfully in our market areas.
The distressed economy in First Federal of Hazard’s
market area could hurt our profits and slow our growth.
First Federal of Hazard’s market area
consists of Perry and surrounding counties in eastern Kentucky. The economy in this market area has been distressed in recent years
due to the decline in the coal industry on which the economy has been dependent. While the region has seen improvement in the economy
from the influx of other industries, such as health care and manufacturing, and the competition provided by new methods of extracting
natural gas has recently hurt the coal industry. As a consequence, the economy in First Federal of Hazard’s market area continues
to lag behind the economies of Kentucky and the United States and First Federal of Hazard has experienced insufficient loan demand
in its market area. While First Federal of Hazard will seek to use excess funds to purchase loans from First Federal of Frankfort,
we expect the redeployment of funds from securities into loans to take several years. Moreover, the slow economy in First Federal
of Hazard’s market area will limit our ability to grow our asset base in that market.
Regulation of the financial services industry is undergoing
major changes, and we may be adversely affected by changes in laws and regulations.
We are subject to extensive government
regulation, supervision and examination. Such regulation, supervision and examination governs the activities in which we may engage,
and is intended primarily for the protection of the deposit insurance fund and our depositors.
In 2010 and 2011, in response to the
financial crisis and recession that began in 2008, significant regulatory and legislative changes resulted in broad reform and
increased regulation affecting financial institutions. The Dodd-Frank Act has created a significant shift in the way financial
institutions operate and has restructured the regulation of depository institutions by merging the Office of Thrift Supervision,
which previously regulated the Banks, into the Office of the Comptroller of the Currency, and assigning the regulation of savings
and loan holding companies, including the Company and the MHC, to the Federal Reserve Board. The Dodd-Frank Act also created the
Consumer Financial Protection Bureau to administer consumer protection and fair lending laws, a function that was formerly performed
by the depository institution regulators. As required by the Dodd-Frank Act, the federal banking regulators have proposed new consolidated
capital requirements that will limit our ability to borrow at the holding company level and invest the proceeds from such borrowings
as capital in the Banks that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions
designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as that which
occurred in 2008 and 2009. The full impact of the Dodd-Frank Act on our business and operations may not be known for years until
final regulations implementing the legislation are adopted. The Dodd-Frank Act may have a material impact on our operations, particularly
through increased regulatory burden and compliance costs. Any future legislative changes could have a material impact on our profitability,
the value of assets held for investment or the value of collateral for loans. Future legislative changes could also require changes
to business practices and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.
In addition to the enactment of the Dodd-Frank
Act, the federal regulatory agencies recently have begun to take stronger supervisory actions against financial institutions that
have experienced increased loan losses and other weaknesses as a result of the recent economic crisis. These actions include the
entering into of written agreements and cease and desist orders that place certain limitations on their operations. Federal banking
regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on
banks, which requirements may be higher than those imposed under the Dodd-Frank Act or which would otherwise qualify the bank as
being “well capitalized” under the Office of the Comptroller of the Currency’s prompt corrective action regulations.
If we were to become subject to a supervisory agreement or higher individual capital requirements, such action may have a negative
impact on our ability to execute our business plans, as well as our ability to grow, pay dividends, repurchase stock or engage
in mergers and acquisitions and may result in restrictions in our operations. See “Regulation and Supervision—Regulation
of Federal Savings Institutions—Capital Requirements” for a discussion of regulatory capital requirements.
We expect that our return on equity will be low compared
to other companies as a result of our high level of capital.
Return on average equity, which equals net
income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other
companies. For the year ended June 30, 2015, our return on average equity was 3.1%. We also intend to continue managing excess
capital through our stock repurchase program, which has been successful, given relatively low market prices of the Company’s
common stock. However, this program could be curtailed or rendered less effective if the market price of our stock increases, or
if the Company’s liquid funds are deployed elsewhere. Our goal of generating a return on average equity that is competitive
with other publicly-held subsidiaries of mutual holding companies, by increasing earnings per share and book value per share, without
assuming undue risk, could take a number of years to achieve, and we cannot assure that our goal will be attained. Consequently,
you should not expect a competitive return on average equity in the near future. Failure to achieve a competitive return on average
equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at
lower prices than comparable companies with higher returns on average equity.
Additional annual employee compensation and benefit expenses
may reduce our profitability and stockholders’ equity.
We will continue to recognize employee compensation
and benefit expenses for employees and executives under our benefit plans. With regard to the employee stock ownership plan, applicable
accounting practices require that the expense be based on the fair market value of the shares of common stock at specific points
in the future, therefore we will recognize expenses for our employee stock ownership plan when shares are committed to be released
to participants’ accounts. We will also recognize expenses for restricted stock awards and options over the vesting periods
of those awards. In addition, employees of both subsidiary Banks participate in a defined-benefit plan through Pentegra. Costs
associated with the defined-benefit plans could increase or legislation could be enacted that would increase the Banks’ obligations
under the plan or change the methods the Banks use in accounting for the plans. Those changes could adversely affect personnel
expense and the Company’s balance sheet.
First Federal MHC owns a majority of our common stock
and is able to exercise voting control over most matters put to a vote of stockholders, including preventing sale or merger transactions
you may like or a second-step conversion by First Federal MHC.
First Federal MHC owns a majority of our
common stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of stockholders.
As a federally chartered mutual holding company, the board of directors of First Federal MHC must ensure that the interests of
depositors of First Federal of Hazard are represented and considered in matters put to a vote of stockholders of Kentucky First.
Therefore, the votes cast by First Federal MHC may not be in your personal best interests as a stockholder. For example, First
Federal MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium
for their shares, prevent a second-step conversion transaction by First Federal MHC or defeat a stockholder nominee for election
to the Board of Directors of Kentucky First. However, implementation of a stock-based incentive plan will require approval of Kentucky
First’s stockholders other than First Federal MHC. Federal Reserve Board regulations would likely prevent an acquisition
of Kentucky First other than by another mutual holding company or a mutual institution.
There may be a limited market for our common stock which
may lower our stock price.
Although our shares of common stock are
listed on the Nasdaq Global Market, there is no guarantee that the shares will be regularly traded. If an active trading market
for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice and the sale
of a large number of shares at one time could temporarily depress the market price.
Our ability to pay dividends is subject to the ability
of First Federal of Hazard and First Federal of Frankfort to make capital distributions to Kentucky First and the waiver of dividends
by First Federal MHC.
Our long-term ability to pay dividends to
our stockholders is based primarily upon the ability of the Banks to make capital distributions to Kentucky First, and also on
the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends according to the
cash dividend payout policy. Under Office of the Comptroller of the Currency safe harbor regulations, the Banks may each distribute
to Kentucky First capital not exceeding net retained income for the current calendar year and the prior two calendar years. First
Federal MHC owns a majority of Kentucky First’s outstanding stock. First Federal MHC has historically waived its right to
dividends on the Kentucky First common shares it owns, in which case the amount of dividends paid to public stockholders is significantly
higher than it would be if First Federal MHC accepted dividends. First Federal MHC is not required to waive dividends, but Kentucky
First expects this practice to continue, subject to member and regulatory approval annually. First Federal MHC is required to obtain
a waiver from the Federal Reserve Board allowing it to waive its right to dividends.
The Federal Reserve Board in 2011 issued
regulations that govern the activities of Kentucky First and First Federal MHC and the regulations were implemented in the fourth
quarter of 2011. Under Section 239.8(d) of the Federal Reserve Board’s Regulation MM governing dividend waivers, a mutual
holding company may waive its right to dividends on shares of its subsidiary if the mutual holding company gives written notice
of the waiver to the Federal Reserve Board and the Federal Reserve Board does not object. For a company such as First Federal MHC
that waived dividends prior to December 1, 2009, the Federal Reserve Board may not object to a dividend waiver if such waiver would
not be detrimental to the safety and soundness of the savings association subsidiary and the board of directors of the mutual holding
company expressly determines that such dividend waiver is consistent with the board’s fiduciary duties to the members of
the mutual holding company.
To address concerns with respect to the
conflict of interest created by dividend waivers, Regulation MM requires the board of directors of the mutual holding company to
adopt a resolution that describes the conflict of interest that exists because of a director’s ownership of stock in the
subsidiary declaring the dividends and any actions the mutual holding company board have taken to eliminate the conflict of interest,
such as the directors’ waiving their right to receive dividends. Also, the resolution must contain an affirmation that a
majority of the mutual members eligible to vote have, within the 12 months prior to the declaration date of the dividend, voted
to approve the waiver of dividends.
Federal MHC has received Federal Reserve
Board approval to waive quarterly dividends totaling $0.40 per share annually beginning with the dividend paid on September 28,
2012 and continuing through the dividend payable in the 3rd quarter of 2016. It is expected that First Federal MHC will continue
to waive future dividends, except to the extent dividends are needed to fund First Federal MHC’s continuing operations, subject
to the ability of First Federal MHC to obtain regulatory approval of its requests to waive dividends and to its ability to obtain
member approval of dividend waivers.
We cannot predict whether members will continue
to approve annual dividend waiver requests or whether the Federal Reserve Board will grant future dividend waiver requests and,
if granted, there can be no assurance as to the conditions, if any, the Federal Reserve Board will place on future dividend waiver
requests by grandfathered mutual holding companies such as First Federal MHC. If First Federal MHC is unable to waive the receipt
of dividends, our ability to pay dividends to our stockholders may be substantially impaired and the amounts of any such dividends
may be significantly reduced.
We are subject to certain risks in connection with our
use of technology.
Our security measures may not be sufficient
to mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business,
as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business.
Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems
and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer
systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious
code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our
customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and
networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties.
We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against
or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Security breaches in our Internet banking
activities could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter
customers from using our Internet banking services that involve the transmission of confidential information. We rely on standard
Internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions
may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability
and significant damage to our reputation and our business.
Our security measures may not protect
us from systems failures or interruptions. While we have established policies and procedures to prevent or limit the impact
of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately
addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain
third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them,
our ability to adequately process and account for transactions could be affected, and our business operations could be adversely
impacted. Threats to information security also exist in the processing of customer information through various other vendors and
their personnel.
The occurrence of any failures or interruptions
may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are
as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend
substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and
result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability.
Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct our business
through seven offices. The following table sets forth certain information relating to our offices at June 30, 2015.
| | |
Year Opened/Acquired | | |
Owned or Leased | |
Net Book Value at June 30, 2015 | | |
Approximate Square Footage | |
| | |
(Dollars in thousands) | |
First Federal of Hazard Main Office: | |
| | | |
| |
| | | |
| | |
479 Main Street
Hazard, Kentucky 41701 | |
| 1960 | | |
Owned | |
$ | 255 | | |
| 15,000 | |
| | |
| | | |
| |
| | | |
| | |
First Federal of Frankfort
Main Office: 216 West Main Street Frankfort, Kentucky 40601 | |
| 2005 | | |
Owned | |
| 1,105 | | |
| 14,000 | |
| | |
| | | |
| |
| | | |
| | |
1980 Versailles Road
Frankfort, Kentucky 40601 | |
| 2005 | | |
Owned | |
| 509 | | |
| 1,800 | |
| | |
| | | |
| |
| | | |
| | |
1220 US 127 South
Frankfort, Kentucky 40601 | |
| 2005 | | |
Owned | |
| 477 | | |
| 2,480 | |
| | |
| | | |
| |
| | | |
| | |
340 West Main Street
Danville, Kentucky 40422 | |
| 2012 | | |
Owned | |
| 517 | | |
| 8,700 | |
| | |
| | | |
| |
| | | |
| | |
| 120 Skywatch Drive | |
| | | |
| |
| | | |
| | |
| Danville, Kentucky 40422 | |
| 2012 | | |
Owned | |
| 774 | | |
| 2,300 | |
| | |
| | | |
| |
| | | |
| | |
| 208 Lexington Street | |
| | | |
| |
| | | |
| | |
| Lancaster, Kentucky 40444 | |
| 2012 | | |
Owned | |
| 526 | | |
| 4,300 | |
The net book value
of our investment in premises and equipment was $5.2 million at June 30, 2015. See Note E of Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings
From time to time,
we may be defendants in claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties
in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident
to our business. We are not a party to any pending legal proceedings that we believe could have a material adverse effect on our
financial condition, results of operations or cash flows.
Item 4. Mine
Safety Disclosures
Not applicable.
PART II
Item 5. Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) The information
contained under the sections captioned “Market Information” in the Company’s Annual Report to Stockholders
for the Fiscal Year Ended June 30, 2015 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by
reference.
(b) Not applicable.
(c) The Company
repurchased the following equity securities registered under the Securities Exchange Act of 1934, as amended, during the fourth
quarter of the fiscal year ended June 30, 2015.
| Period | |
(a)
Total
Number of
Shares
Purchased | | |
(b)
Average
Price Paid
per Share | | |
(c)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | |
(d)
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plans or
Programs (1) | |
| | |
| | |
| | |
| | |
| |
| April 2015 | |
| | | |
| | | |
| | | |
| | |
| Beginning date: April 1 | |
| | | |
| | | |
| | | |
| | |
| Ending date: April 30 | |
| — | | |
| — | | |
| — | | |
| 60,323 | |
| | |
| | | |
| | | |
| | | |
| | |
| May 2015 | |
| | | |
| | | |
| | | |
| | |
| Beginning date: May 1 | |
| | | |
| | | |
| | | |
| | |
| Ending date: May 31 | |
| — | | |
| — | | |
| — | | |
| 60,323 | |
| | |
| | | |
| | | |
| | | |
| | |
| June 2015 | |
| | | |
| | | |
| | | |
| | |
| Beginning date: June 1 | |
| | | |
| | | |
| | | |
| | |
| Ending date: June 30 | |
| — | | |
| — | | |
| — | | |
| 60,323 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total | |
| — | | |
| — | | |
| — | | |
| | |
| (1) | On January 16, 2014, the Company announced a program (its seventh) to repurchase up to 150,000
shares of its Common Stock. |
Item 6. Selected
Financial Data
This item is not applicable,
as the Company is a smaller reporting company.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The information contained
in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in the Annual Report, is incorporated herein by reference.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
This item is not applicable,
as the Company is a smaller reporting company.
Item 8. Financial
Statements and Supplementary Data
The Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm and Selected Financial
Data, which are listed under Item 15 herein, are included in the Annual Report and are incorporated herein by reference.
Item 9. Changes
in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
| (a) | Disclosure Controls and Procedures |
The Company’s
management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness
of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s
disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in
the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”)
(1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2)
is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
| (b) | Internal Control Over Financial Reporting |
Parent Company of First Federal Savings and Loan of Hazard
and First Federal Savings Bank of Frankfort
MANAGEMENT’S ANNUAL REPORT ON INTERNAL
CONTROL
OVER FINANCIAL REPORTING
Management of Kentucky First Federal Bancorp
(the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial
statements included in this annual report. The Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America and, as such, include some amounts that are based
on the best estimates and judgments of management.
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting. The internal control system is designed to
provide reasonable assurance to management and the Board of Directors regarding the reliability of the company’s financial
reporting and the preparation and presentation of financial statements for external reporting purposes in conformity with accounting
principles generally accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition.
The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability
through a program of internal audit with actions taken to correct potential deficiencies as they are identified. Because of inherent
limitations in any internal control system, no matter how well designed, misstatements due to error or fraud may occur and not
be detected, including the possibility of the circumvention or overriding controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions,
internal control effectiveness may vary over time.
Management assessed the effectiveness of
the company’s internal control over financial reporting as of June 30, 2015, based upon criteria set forth in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission – 1992 (“COSO”).
Based on this assessment and on the forgoing
criteria, management has concluded that, as of June 30, 2015, the Company’s internal control over financial reporting is
effective.
This annual report
does not include an attestation report of the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting
firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers”
under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
| /s/ Don D. Jennings |
|
/s/ R. Clay Hulette |
| Don D. Jennings |
|
R. Clay Hulette |
| Chief Executive Officer |
|
Vice President and Chief Financial Officer |
| (c) | Changes to Internal Control Over Financial Reporting |
There were no changes
in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors,
Executive Officers, and Corporate Governance
Directors
The information contained
under the section captioned “Proposal I ─ Election of Directors” in the Company’s definitive proxy
statement for the Company’s 2015 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein
by reference.
Executive Officers
The information regarding
the Company’s executive officers is incorporated herein by reference to “Proposal I – Election of Directors”
in the Proxy Statement.
Corporate Governance
Information regarding
the Company’s Audit Committee and Audit Committee financial expert is incorporated herein by reference to the section captioned
“Proposal I ─ Election of Directors ─ Committees of the Board of Directors” in the Proxy Statement.
Compliance with Section 16(a) of the
Exchange Act
Information regarding
compliance with Section 16(a) of the Exchange Act is incorporated by reference to section captioned “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement.
Disclosure of Code
of Ethics
Kentucky First has
adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers and employees. To obtain a copy of
this document at no charge, please write to Kentucky First Federal Bancorp, P.O. Box 535, Frankfort, Kentucky 40602-0535, or call
toll-free (888) 818-3372 and ask for Investor Relations.
Item 11. Executive
Compensation
The information contained
under the section captioned “Executive Compensation” in the Proxy Statement is incorporated herein by reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
| (a) | Security Ownership of Certain Beneficial Owners. Information required by this item is incorporated
herein by reference to the section captioned “Voting Securities and Security Ownership” in the Proxy Statement. |
| (b) | Security Ownership of Management. Information required by this item is incorporated herein
by reference to the sections captioned “Voting Securities and Security Ownership” in the Proxy Statement. |
| (c) | Changes in Control. Management of the Company knows of no arrangements, including any pledge
by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the
Company. |
| (d) | Equity Compensation Plans. The following table sets forth certain information with respect
to the Company’s equity compensation plans as of June 30, 2015. |
| | |
(a) | | |
(b) | | |
(c) | |
| | |
Number
of securities to be
issued upon exercise of
outstanding options, warrants
and rights | | |
Weighted-average
exercise
price of
outstanding options,
warrants and rights | | |
Number
of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected
in column (a)) | |
| | |
| | |
| | |
| |
| Equity compensation plans approved by security holders | |
| 325,800 | | |
$ | 10.10 | | |
| 95,416 | |
| | |
| | | |
| | | |
| | |
| Equity compensation plans not approved by security holders | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | |
| Total | |
| 325,800 | | |
$ | 10.10 | | |
| 95,416 | |
Item 13. Certain
Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
The information required
by this item is incorporated herein by reference to the section captioned “Transactions with Related Persons”
in the Proxy Statement.
Corporate Governance
For information regarding
director independence, the section captioned “Proposal I – Election of Directors” is incorporated herein
by reference.
Item 14. Principal Accountant Fees
and Services
The information required
by this item is incorporated herein by reference to the section captioned “Audit and Other Fees Paid to Independent Accountant”
in the Proxy Statement.
PART IV
Item 15. Exhibits
and Financial Statement Schedules
(a) List of Documents Filed as Part
of This Report
| (1) | Financial Statements. The following consolidated financial statements are
incorporated by reference from Item 8 hereof (see Exhibit 13): |
Report of Independent
Registered Public Accounting Firm
Consolidated Balance
Sheets as of June 30, 2015 and 2014
Consolidated Statements
of Income for the Years Ended June 30, 2015 and 2014
Consolidated
Statements of Comprehensive Income for the Years Ended June 30, 2015 and 2014
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2015 and 2014
Consolidated Statements
of Cash Flows for the Years Ended June 30, 2015 and 2014
Notes to Consolidated
Financial Statements
| (2) | Financial Statement Schedules. All schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions
under which they are required or because the required information is included in the consolidated financial statements and related
notes thereto. |
| (3) | Exhibits. The following is a list of exhibits filed as part of this Annual
Report on Form 10-K and is also the Exhibit Index. |
| No. |
|
Description |
| |
|
|
| 3.11 |
|
Charter of Kentucky First Federal Bancorp |
| 3.26 |
|
Amended and Restated Bylaws of Kentucky First Federal Bancorp |
| 4.11 |
|
Specimen Stock Certificate of Kentucky First Federal Bancorp |
| 10.12 |
|
Employment Agreement between Kentucky First Federal Bancorp and Don D. Jennings, as amended† |
| 10.22 |
|
Employment Agreement between First Federal Savings Bank of Frankfort and Don D. Jennings, as amended† |
| 10.32 |
|
Employment Agreement between Kentucky First Federal Bancorp and R. Clay Hulette, as amended† |
| 10.42 |
|
Employment Agreement between First Federal Savings Bank of Frankfort and R. Clay Hulette, as amended† |
| 10.52 |
|
Employment Agreement between First Federal Savings Bank of Frankfort and Teresa Kuhl, as amended† |
| 10.62 |
|
Amended and Restated First Federal Savings and Loan Association of Hazard Change in Control Severance Compensation Plan† |
| 10.72 |
|
Amended and Restated First Federal Savings Bank of Frankfort Change in Control Severance Compensation Plan† |
| 10.82 |
|
Amended and Restated First Federal Savings and Loan Association Supplemental Executive Retirement Plan† |
| 10.93 |
|
Kentucky First Federal Bancorp 2005 Equity Incentive Plan† |
| 10.104 |
|
Form of Restricted Stock Award Agreement† |
| 10.114 |
|
Form of Incentive Stock Option Award Agreement† |
| 10.124 |
|
Form of Non-Statutory Option Award Agreement† |
| 10.135 |
|
Employment Agreement by and between Kentucky First Federal Bancorp and William H. Johnson† |
| 10.145 |
|
Employment Agreement by and between First Federal Savings Bank of Frankfort and William H. Johnson† |
| 13 |
|
Annual Report to Stockholders for the year ended June 30, 2015 |
| 21 |
|
Subsidiaries |
| 23.1 |
|
Consent of Crowe Horwath LLP |
| 31.1 |
|
Rule 13a-14(a) Certification of Chief Executive Officer |
| 31.2 |
|
Rule 13a-14(a) Certification of Chief Financial Officer |
| 32 |
|
Section 1350 Certifications |
| 101* |
|
The following materials from the Company’s Annual Report on Form 10-K for the year ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and the (vi) Notes to Consolidated Financial Statements. |
| † | Management contract or compensation plan or arrangement. |
| (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 Quarterly Report on Form 10-Q for the quarter
ended December 31, 2008 (File No. 0-51176). |
| (3) | Incorporated herein by reference to the Company’s definitive additional proxy solicitation
materials filed with the Securities and Exchange Commission on October 24, 2005. |
| (4) | Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (File
No. 333-130243). |
| (5) | Incorporated herein by reference to the Company’s
Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 (File No. 0-51176). |
| (6) | 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). |
| (b) | Exhibits. The exhibits required by Item
601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein. |
| (c) | Financial Statements and Schedules Excluded from
Annual Report. There are no other financial statements and financial statement schedules which were excluded from
the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are required to be included herein. |
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) 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 |
| |
|
|
| September 28, 2015 |
By: |
/s/ Don D. Jennings |
| |
|
Don D. Jennings |
| |
|
Chief Executive Officer |
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
| /s/ Don D. Jennings |
|
September 28, 2015 |
| Don D. Jennings |
|
|
| Chief Executive Officer and Director |
|
|
| (Principal Executive Officer) |
|
|
| |
|
|
| /s/ R. Clay Hulette |
|
September 28, 2015 |
| R. Clay Hulette |
|
|
| Vice President, Chief Financial Officer and Treasurer |
|
|
| (Principal Financial and Accounting Officer) |
|
|
| |
|
|
| /s/ Tony D. Whitaker |
|
September 28, 2015 |
| Tony D. Whitaker |
|
|
| Chairman of the Board |
|
|
| |
|
|
| /s/ Stephen G. Barker |
|
September 28, 2015 |
| Stephen G. Barker |
|
|
| Director |
|
|
| |
|
|
| /s/ C. Michael Davenport. |
|
September 28, 2015 |
| C. Michael Davenport |
|
|
| Director |
|
|
| |
|
|
| /s/ Walter G. Ecton, Jr. |
|
September 28, 2015 |
| Walter G. Ecton, Jr. |
|
|
| Director |
|
|
| |
|
|
| /s/ William D. Gorman, Jr. |
|
September 28, 2015 |
| William D. Gorman, Jr. |
|
|
| Director |
|
|
| /s/ David R. Harrod |
|
September 28, 2015 |
| David R. Harrod |
|
|
| Director |
|
|
| |
|
|
| /s/ William H. Johnson |
|
September 28, 2015 |
| William H. Johnson |
|
|
| Director |
|
|
| |
|
|
| /s/ W. Banks Hudson |
|
September 28, 2015 |
| W. Banks Hudson |
|
|
| Director |
|
|
Exhibit 13
Parent company of
First Federal Savings and Loan Association
of Hazard
and
First Federal Savings Bank of Frankfort
2015
Annual Report
| KENTUCKY FIRST FEDERAL BANCORP |
Kentucky First Federal Bancorp (“Kentucky
First” or the “Company”) was formed under federal law in March 2005 and is the holding company for First Federal
Savings and Loan Association of Hazard, Hazard, Kentucky (“First Federal of Hazard”) and First Federal Savings Bank
of Frankfort, Frankfort, Kentucky (“First Federal of Frankfort”) (collectively, the “Banks”). Kentucky
First’s operations consist primarily of operating the Banks as two independent, community-oriented savings institutions.
First Federal of Hazard is a federally chartered
savings and loan association offering traditional financial services to consumers in Perry and surrounding counties in eastern
Kentucky. First Federal of Hazard engages primarily in the business of attracting deposits from the general public and using such
funds to originate, when available, loans secured by first mortgages on owner-occupied, residential real estate and, occasionally,
other loans secured by real estate. To the extent there is insufficient loan demand in its market area, and where appropriate under
its investment policies, First Federal of Hazard has historically invested in mortgage-backed and other securities, although since
formation of the Company in 2005, First Federal of Hazard has been purchasing whole loans and participations in loans originated
at First Federal of Frankfort.
First Federal of Frankfort is a federally
chartered savings bank which is primarily engaged in the business of attracting deposits from the general public and the origination
primarily of adjustable-rate loans secured by first mortgages on owner-occupied and non-owner-occupied one-to four-family residences
in Franklin, Boyle, Garrard and surrounding counties in Kentucky. First Federal of Frankfort also originates, to a lesser extent,
home equity loans, loans secured by churches, multi-family properties, professional office buildings and other types of property,
as well as consumer loans and commercial and industrial loans.
The Company’s common stock began trading
under the symbol “KFFB” on the Nasdaq National Market on March 3, 2005. There are currently 8,439,515 shares of common
stock outstanding and approximately 686 holders of record of the common stock. Following are the high and low closing prices, by
fiscal quarter, as reported on the Nasdaq National Market during the periods indicated, as well as dividends declared on the common
stock during each quarter.
| | |
High | | |
Low | | |
Dividends
Per Share | |
| Fiscal 2015 | |
| | |
| | |
| |
| First quarter | |
$ | 8.89 | | |
$ | 8.00 | | |
$ | 0.10 | |
| Second quarter | |
| 8.50 | | |
| 7.47 | | |
| 0.10 | |
| Third quarter | |
| 8.45 | | |
| 7.94 | | |
| 0.10 | |
| Fourth quarter | |
| 8.79 | | |
| 8.00 | | |
| 0.10 | |
| | |
High | | |
Low | | |
Dividends
Per Share | |
| Fiscal 2014 | |
| | |
| | |
| |
| First quarter | |
$ | 8.97 | | |
$ | 7.55 | | |
$ | 0.10 | |
| Second quarter | |
| 8.45 | | |
| 7.87 | | |
| 0.10 | |
| Third quarter | |
| 8.97 | | |
| 8.03 | | |
| 0.10 | |
| Fourth quarter | |
| 8.88 | | |
| 8.00 | | |
| 0.10 | |
| Kentucky First Federal Bancorp |
(ii) |
| Market Information |
(ii) |
| Letter to Shareholders |
1 |
| Selected Consolidated Financial and Other Data |
2 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
4 |
| Consolidated Financial Statements |
27 |
Dear Shareholder:
We are pleased to present the 2015 Annual Report for Kentucky
First Federal Bancorp. We encourage you to read both the Annual Report and Proxy Statement. We encourage you to vote
and, if possible, to attend our annual meeting on November 12, 2015. Please note that, as always, our meeting will be held on the
campus of the Hazard Community and Technical College, but this year we will be in the Challenger Learning Center, just across the
parking lot.
The enclosed report shows a
pretty good year. We continue to have trouble with loan growth in the communities we serve, but despite a decrease in
loan balances, net income improved compared to the previous year. Our stock price remains pretty flat, but we remain
proud to offer an attractive dividend yield. We certainly appreciate the help from our
staff and our depositors at First Federal of Hazard for approving the First Federal MHC dividend waiver for the fourth
year in a row.
We have a number of exciting things happening at our banks.
First Federal of Hazard has purchased a new building just up the street from their current Main Street location. The new
building affords lots of parking and a drive-through window. In Frankfort, a new building has been purchased to house our
Versailles Road branch. This will allow expanded drive-through capability and more office space. Both will allow us
to continue to improve customer service.
We have debuted new logos for both banks, and First Federal
of Frankfort will soon have a new name: First Federal Savings Bank of Kentucky, to reflect our expanded footprint.
We wish the best to Deloris Justice, who retired this year from
First Federal of Hazard after 43 years.
We also had a retirement on our Board. Herman Regan has
served on the Frankfort bank board since 1988 and on the KFFB board since we formed the company in 2005. C. Michael Davenport,
who has served on the Frankfort bank board since 1996, has been appointed to serve in his place and will stand for election at the
upcoming annual meeting.
We appreciate your continued support and confidence. Please
call us with any questions or concerns and please think of us for your banking needs.
Sincerely,
Don Jennings
| SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA |
Selected Financial Condition Data
| | |
At June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| | |
(Dollars in thousands) | |
| Total assets | |
$ | 296,298 | | |
$ | 299,655 | | |
$ | 324,062 | | |
$ | 222,949 | | |
$ | 226,135 | |
| Cash and cash equivalents | |
| 13,635 | | |
| 11,511 | | |
| 16,540 | | |
| 5,735 | | |
| 5,049 | |
| Interest-bearing deposits | |
| — | | |
| — | | |
| — | | |
| 100 | | |
| 100 | |
| Securities held to maturity | |
| 6,423 | | |
| 9,018 | | |
| 12,232 | | |
| 4,756 | | |
| 6,810 | |
| Securities available for sale | |
| 159 | | |
| 247 | | |
| 205 | | |
| 189 | | |
| 203 | |
| Loans, net | |
| 243,815 | | |
| 246,788 | | |
| 262,491 | | |
| 182,473 | | |
| 182,796 | |
| Deposits | |
| 199,701 | | |
| 213,142 | | |
| 230,981 | | |
| 134,552 | | |
| 139,940 | |
| Federal Home Loan Bank advances | |
| 26,635 | | |
| 17,200 | | |
| 24,310 | | |
| 27,065 | | |
| 25,261 | |
| Shareholders’ equity | |
| 67,313 | | |
| 67,205 | | |
| 66,622 | | |
| 58,853 | | |
| 58,697 | |
| Allowance for loan losses | |
| 1,568 | | |
| 1,473 | | |
| 1,310 | | |
| 875 | | |
| 764 | |
| Nonperforming loans (90 days delinquent and nonaccrual) | |
| 6,512 | | |
| 9,740 | | |
| 7,987 | | |
| 1,794 | | |
| 876 | |
Selected Operating Data
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| | |
(Dollars in thousands, except per share data) | |
| Total interest income | |
$ | 12,389 | | |
$ | 13,150 | | |
$ | 11,958 | | |
$ | 10,156 | | |
$ | 10,749 | |
| Total interest expense | |
| 1,428 | | |
| 1,618 | | |
| 1,686 | | |
| 2,179 | | |
| 3,181 | |
| Net interest income | |
| 10,961 | | |
| 11,532 | | |
| 10,272 | | |
| 7,977 | | |
| 7,568 | |
| Provision for losses on loans | |
| 343 | | |
| 580 | | |
| 662 | | |
| 139 | | |
| 668 | |
| Net interest income after provision for losses on loans | |
| 10,618 | | |
| 10,952 | | |
| 9,610 | | |
| 7,838 | | |
| 6,900 | |
| Total non-interest income | |
| 514 | | |
| 344 | | |
| 1,525 | | |
| 140 | | |
| 242 | |
| Total non-interest expenses | |
| 8,042 | | |
| 8,410 | | |
| 6,911 | | |
| 5,423 | | |
| 5,282 | |
| Income before federal income taxes | |
| 3,090 | | |
| 2,886 | | |
| 4,224 | | |
| 2,555 | | |
| 1,860 | |
| Federal income taxes | |
| 1,021 | | |
| 952 | | |
| 1,308 | | |
| 840 | | |
| 104 | |
| Net income | |
$ | 2,069 | | |
$ | 1,934 | | |
$ | 2,916 | | |
$ | 1,715 | | |
$ | 1,756 | |
| Net earnings per share – basic | |
$ | 0.25 | | |
$ | 0.23 | | |
$ | 0.37 | | |
$ | 0.23 | | |
$ | 0.23 | |
| Net earnings per share – diluted | |
$ | 0.25 | | |
$ | 0.23 | | |
$ | 0.37 | | |
$ | 0.23 | | |
$ | 0.23 | |
| Cash dividends declared per common share | |
$ | 0.40 | | |
$ | 0.40 | | |
$ | 0.40 | | |
$ | 0.40 | | |
$ | 0.40 | |
Selected Financial Ratios and Other
Data (1)
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| Performance Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Return on average assets (net income divided by average total assets) | |
| 0.70 | % | |
| 0.63 | % | |
| 1.05 | % | |
| 0.75 | % | |
| 0.75 | % |
| Return on average equity (net income divided by average equity) | |
| 3.07 | | |
| 2.90 | | |
| 4.70 | | |
| 2.91 | | |
| 3.04 | |
| Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost) | |
| 3.96 | | |
| 3.99 | | |
| 3.97 | | |
| 3.68 | | |
| 3.29 | |
| Net interest margin (net interest income divided by average interest-earning assets) | |
| 4.07 | | |
| 4.10 | | |
| 4.09 | | |
| 3.93 | | |
| 3.61 | |
| Ratio of average interest-earning assets to average interest-bearing liabilities | |
| 120.33 | | |
| 119.14 | | |
| 118.57 | | |
| 123.34 | | |
| 121.00 | |
| Ratio of total general administrative and other expenses to average total assets | |
| 2.71 | | |
| 2.74 | | |
| 2.49 | | |
| 2.39 | | |
| 2.26 | |
| Efficiency ratio (1) | |
| 70.08 | | |
| 70.82 | | |
| 58.58 | | |
| 66.81 | | |
| 67.63 | |
| Dividend payout ratio (2) | |
| 66.94 | | |
| 78.13 | | |
| 44.00 | | |
| 93.53 | | |
| 63.58 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Asset Quality Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Nonperforming loans as a percent of total loans at end of period (3) | |
| 2.67 | | |
| 3.95 | | |
| 3.04 | | |
| 0.98 | | |
| 0.48 | |
| Nonperforming assets as a percent of total assets at end of period (3) | |
| 2.74 | | |
| 3.87 | | |
| 2.82 | | |
| 1.90 | | |
| 2.29 | |
| Allowance for loan losses as a percent of total loans at end of period | |
| 0.64 | | |
| 0.60 | | |
| 0.50 | | |
| 0.48 | | |
| 0.42 | |
| Allowance for loan losses as a percent of nonperforming loans at end of period | |
| 24.08 | | |
| 18.44 | | |
| 16.40 | | |
| 48.77 | | |
| 87.21 | |
| Provision for loan losses to total loans | |
| 0.14 | | |
| 0.24 | | |
| 0.25 | | |
| 0.08 | | |
| 0.36 | |
| Net charge-offs to average loans outstanding | |
| 0.10 | | |
| 0.17 | | |
| 0.10 | | |
| 0.02 | | |
| 0.76 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Capital Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Average equity to average assets | |
| 22.64 | | |
| 21.76 | | |
| 22.31 | | |
| 25.91 | | |
| 24.76 | |
| Shareholders’ equity or capital to total assets at end of period | |
| 22.72 | | |
| 22.43 | | |
| 20.56 | | |
| 26.40 | | |
| 25.96 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Regulatory Capital Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common equity Tier 1 | |
| 31.91 | | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | |
| Total capital to risk-weighted assets | |
| 32.88 | | |
| 33.37 | | |
| 28.12 | | |
| 38.57 | | |
| 39.01 | |
| Tier 1 (core) capital to risk-weighted assets | |
| 31.91 | | |
| 32.77 | | |
| 31.17 | | |
| 37.82 | | |
| 38.34 | |
| Tier 1 leverage capital to average assets | |
| 18.66 | | |
| 17.99 | | |
| 19.77 | | |
| 20.83 | | |
| 20.14 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Number of banking offices | |
| 7 | | |
| 7 | | |
| 7 | | |
| 4 | | |
| 4 | |
| (1) | Efficiency ratio represents the ratio of non-interest expenses divided by the sum of net interest income and total non-interest
income. |
| (2) | Represents dividends paid as a percent of net earnings.
Dividends paid does not include dividends waived by First Federal MHC. In May 2012 dividends of $473,000 were paid to First Federal
MHC. |
| (3) | Nonperforming loans consist of nonaccrual loans, accruing loans greater than 90 days delinquent, and restructured loans not
performing according to their revised terms, while nonperforming assets consist of nonperforming loans and real estate acquired
through foreclosure. |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL |
| CONDITION AND RESULTS OF OPERATIONS |
References in this Annual Report to “we,”
“us,” and “our” refer to Kentucky First Federal Bancorp and where appropriate, collectively to Kentucky
First Federal Bancorp, First Federal of Hazard and First Federal of Frankfort.
Forward-Looking Statements
Certain statements contained in this Annual
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 the Company or its management are intended to identify such forward-looking statements.
The Company’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 risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended June
30, 2015. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of
the date made. We wish to advise readers that the factors listed above could affect our financial performance and could cause our
actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods
in any current statements.
We do not undertake, and specifically disclaim
any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
General
The Company was incorporated as a mid-tier
holding company under the laws of the United States on March 2, 2005 upon the completion of the reorganization of First Federal
of Hazard into a federal mutual holding company form of organization (the “Reorganization”). On that date, Kentucky
First completed its minority stock offering and issued a total of 8,596,064 shares of common stock, of which 4,727,938 shares,
or 55%, were issued to First Federal MHC, a federally chartered mutual holding company formed in connection with the Reorganization,
in exchange for the transfer of all of First Federal of Hazard’s capital stock, and 2,127,572 shares were sold at a cash
price of $10.00 per share. On such date, Kentucky First completed its acquisition of Frankfort First and its wholly owned subsidiary,
First Federal of Frankfort (the “Merger”). First Federal of Hazard and First Federal of Frankfort are operated as two
independent savings institutions with separate charters. Each bank retains its own management and boards of directors. The members
of management of Kentucky First also serve in a management capacity at one of the two subsidiary Banks, and the directors of Kentucky
First also serve on the board of one of the two subsidiary Banks.
On December 31, 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 Frankfort
in accordance with accounting standard ASC 805, Business Combinations.
Our results of operations are dependent
primarily on net interest income, which is the difference between the income earned on our loans and securities and our cost of
funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for
losses on loans and service charges and fees collected on our deposit accounts. Our general, administrative and other expense primarily
consists of employee compensation and benefits expense, occupancy and equipment expense, data processing expense, other operating
expenses and state franchise and federal income taxes. Results of operations are also significantly affected by general economic
and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.
Income. We have two primary
sources of pre-tax income. The first is net interest income, which is the difference between interest income, the income that we
earn on our loans and investments, and interest expense, the interest that we pay on our deposits and borrowings.
To a much lesser extent, we also recognize
pre-tax income from fee and service charges, which is the compensation we receive from providing financial products and services.
Expenses.
The expenses we incur in operating our business consist of compensation, taxes and benefits, office occupancy, data
processing fees, taxes and other expenses.
Compensation, taxes and benefits consist
primarily of the salaries and wages paid to our employees and directors, payroll taxes and expenses for retirement and other employee
benefits.
Office occupancy expenses, which are the
fixed and variable costs of buildings and equipment, consist primarily of taxes, depreciation charges, maintenance and costs of
utilities.
Data processing fees primarily include fees
paid to our third-party data processing providers.
Taxes consist of the current and deferred
portion of federal income taxes as well as franchise taxes paid to the Commonwealth of Kentucky by the subsidiary Banks.
Other expenses include expenses for attorneys,
accountants and consultants, advertising, telephone, employee training and education, charitable contributions, insurance, office
supplies, postage and other miscellaneous operating activities.
Critical Accounting Policies
Our accounting and reporting policies comply
with U.S. GAAP and conform to general practices within the banking industry. We believe that of our significant accounting policies,
the following may involve a higher degree of management assumptions and judgments that could result in materially different amounts
to be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses
The allowance for loan losses is the estimated
amount considered necessary to cover probable incurred losses in the loan portfolio at the balance sheet date. The allowance is
established through the provision for losses on loans, which is charged against income.
The management and the Boards of the Company and of First
Federal of Hazard and First Federal of Frankfort review the allowance for loan losses on a quarterly basis. Consideration is given
to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics,
geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results
of internal loan reviews, volume and mix of the loan portfolio and other relevant factors. This evaluation is inherently subjective,
as it requires material estimates that may be susceptible to change. Management considers the economic climate in the Banks’
respective lending areas to be among the factors most likely to have an impact on the level of the required allowance for loan
losses.
Management continues to monitor and evaluate
factors which could have an impact on the required level of the allowance. Management watches for national issues that may negatively
affect a significant percentage of homeowners in the Banks’ lending areas. These may include significant increases in unemployment
or significant depreciation in home prices. Management reviews employment statistics periodically when determining the allowance
for loan losses and generally finds the unemployment rates in both lending areas to be high in relation to historical trends. Management
has no current plans to alter the type of lending or collateral currently offered, but if such plans change or market conditions
result in large concentrations of certain types of loans, such as commercial real estate or high loan-to-value ratio residential
loans, management would respond with an increase in the overall allowance for loan losses.
The analysis has two components, specific
and general allocations. Loans are classified as either homogenous or other. Homogenous loans are analyzed in the aggregate according
to various criteria. Non-homogenous loans receive additional scrutiny and are classified as impaired or unimpaired. Specific allocations
are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future
cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.
A loan is considered to be collateral-dependent when the circumstances of the borrower indicate that we can no longer rely upon
the overall financial strength of that borrower to comply with the terms of the loan and that the loan will likely be repaid in
whole or in part by proceeds from the sale of the collateral. Updated independent appraisals are ordered in most situations where
management has determined to evaluate a loan for impairment. The general allocation is determined by segregating the remaining
loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied
to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances
we have established and, if so, this could have a material negative effect on our financial results.
Goodwill
We test goodwill for impairment at least
annually and more frequently, if circumstances indicate its value may not be recoverable. We test goodwill for impairment by comparing
the fair value of the reporting unit to the book value of the reporting unit. If the fair value exceeds book value, then goodwill
is not considered to be impaired. Based on the annual goodwill impairment test as of March 31, 2015, and consideration of potential
triggering events through year end, management does not believe any of the goodwill is impaired. Different conditions or assumptions,
or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the
outcome of the impairment evaluation and financial condition or future results of operations.
Deferred Taxes
We evaluate deferred tax assets and liabilities
quarterly. We will realize these assets and liabilities to the extent profitable or carry back tax losses to periods in which we
paid income taxes. Our determination of the realization of the deferred tax asset will be based upon management’s judgment
of various future events and uncertainties, including the timing and amount of future income we will earn and the implementation
of various tax plans to maximize realization of the deferred tax assets. Management believes the Company will generate sufficient
operating earnings to realize the deferred tax benefits. Examinations of our income tax returns or changes in tax law may impact
the tax liabilities and resulting provisions for income taxes.
Our Operating Strategy
Our mission is to operate
and grow profitable, community-oriented financial institutions serving primarily retail customers in our market areas. We plan
to pursue a strategy of:
| • | operating two community-oriented savings institutions, First Federal of Hazard, which serves customers
in Perry and surrounding counties in eastern Kentucky, and First Federal of Frankfort, which serves customers primarily in the
central Kentucky counties of Franklin, Boyle and Garrard, as well as their surrounding counties. Each Bank emphasizes traditional
thrift activities of accepting deposits and originating primarily residential mortgage loans for portfolio; |
| • | continuing our historic heavy reliance on our deposit base to fund our lending and investment activities
and to supplement deposits with Federal Home Loan Bank of Cincinnati (“FHLB”) advances when advantageous or necessary.
We expect our projected deposit mix to generally retain its existing composition of passbook, transaction and certificate of deposit
accounts; |
| • | gradually pursuing opportunities to increase and diversify lending in our market areas; |
| • | applying conservative underwriting practices to maintain the high quality of our loan portfolios; |
| • | managing our net interest margin and interest rate risk; and |
| • | entertaining possibilities of expansion into other markets through branching or acquisition, if such possibilities are beneficial
to the Company’s shareholders, provide a good fit within the Company’s mutual holding company framework and can be
accomplished without undue encumbrance of the Company’s other operational areas. |
Market Risk Analysis
Qualitative Aspects
of Market Risk. Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity
of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the
interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans
because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings
while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we
have sought to improve the match between asset and liability maturities (or rate adjustment periods), while maintaining an acceptable
interest rate spread. Still, when market rates increase rapidly, increases in the cost of deposits and borrowings outpace the increases
in the return on assets. The Company’s assets are primarily comprised of adjustable rate mortgages (all of which have some
contractual limits in their ability to react to market changes) and short-term securities. Those assets will, over time, re-price
to counteract the increased costs of deposits and borrowings.
Asset/Liability Management.
Management and the boards of the subsidiary Banks are responsible for the asset/liability management issues that affect the individual
Banks. Either Bank may work with its sister Bank to mitigate potential asset/liability risks to the Banks and to the Company as
a whole. Management utilizes a third-party to perform interest rate risk calculations for each of the Banks. Management monitors
and considers methods of managing the rate sensitivity and repricing characteristics of each of the Bank’s balance sheet
components in an effort to maintain acceptable levels of change in the economic value of equity (“EVE”) as well as
evaluating the impact on earnings in the event of changes in prevailing market interest rates. Interest rate sensitivity analysis
is used to measure our interest rate risk by computing estimated changes in EVE that are a result of changes in the net present
value of its cash flows from assets, liabilities, and off-balance sheet items. These changes in cash flow are estimated based on
hypothetical instantaneous and permanent increases and decreases in market interest rates.
Because the interest rates at June 30, 2015,
were practically zero, we believe our risk associated with falling interest rates was minimal. The model indicated that at June
30, 2015, in the event of a sudden and sustained increase in prevailing market interest rates of 300 basis points, our EVE would
be expected to decrease $10.0 million or 15.0% to $57.6 million, at which level our fair value of tangible equity to fair value
of tangible assets would be expected to be 15.8% and our fair value of equity to fair value of risk-weighted assets would be expected
to be 37.8%. The projected decrease in EVE in the event of a sudden and sustained 300 basis point increase in prevailing interest
rates is within the parameters established by each subsidiary Bank’s Board of Directors. Computations or prospective effects
of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan
prepayments, and deposit run-offs. These computations should not be relied upon as indicative of actual results. Further, the computations
do not contemplate any actions the Banks may undertake in response to changes in interest rates. Certain shortcomings are inherent
in this method of computing EVE. For example, although certain assets and liabilities may have similar maturities or periods to
repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind
changes in market rates.
Statement of Financial Condition
General. At June 30, 2015,
total assets were $296.3 million, a decrease of $3.4 million, or 1.1%, from the $299.7 million total at June 30,
2014. The decrease in total assets was related primarily to decreases in loans, net. At June 30, 2015, total liabilities were
$229.0 million, a decrease of $3.5 million, or 1.5%, from total liabilities at June 30, 2014. The decrease in total liabilities
was related primarily to decreases in deposits.
Loans.
Our primary lending activity is the origination of loans for the purchase, refinance or construction of one- to
four-family residential real estate located in our market areas. As opportunities arise, we also originate church loans,
commercial real estate loans, and multi-family and nonresidential real estate loans. At June 30, 2015, one- to four- family
residential real estate loans totaled $191.7 million, or 77.3% of total loans, compared to $196.4 million, or 78.8%
of total loans, at June 30, 2014, caused primarily by lower demand for home financing in the Banks’ markets.
Construction real estate loans totaled $3.8 million, or 1.5% of total loans, at June 30, 2015, compared to $2.1 million, or
0.9% of total loans at June 30, 2014. At June 30, 2015, multi-family real estate loans totaled $16.6 million, or 6.7% of
total loans, compared to $14.0 million or 5.6% of total loans at June 30, 2014. Nonresidential real estate loans totaled
$22.1 million, or 8.9% of total loans at June 30, 2015, compared to $21.9 million, or 8.8% of total loans, at June 30,
2014. Commercial and industrial loans totaled $1.8 million or 0.7% of total loans at June 30, 2015, compared to $2.1 million
or 0.8% of total loans at June 30, 2014. Farm loans totaled $1.6 million at both June 30, 2015 and 2014, respectively, while
consumer loans including automobile and unsecured loans totaled $8.4 million and $8.6 million at June 30, 2015 and 2014,
respectively. At June 30, 2015, consumer loans were comprised of loans secured by deposits of $2.3 million or 0.9% of total
loans and other consumer loans of $6.2 million or 2.5% of total loans. Please refer to Note C-Loans of the Notes to
Consolidated Financial Statements for a further breakdown of Consumer and other loans.
The following table sets forth the composition of our loan portfolio
at the dates indicated.
| | |
At
June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| | |
Amount | | |
Percent | | |
Amount | | |
Percent | | |
Amount | | |
Percent | | |
Amount | | |
Percent | | |
Amount | | |
Percent | |
| | |
(Dollars in thousands) | |
| Real estate loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 191,721 | | |
| 77.3 | % | |
$ | 196,381 | | |
| 78.8 | % | |
$ | 209,092 | | |
| 79.0 | % | |
$ | 149,086 | | |
| 81.1 | % | |
$ | 158,821 | | |
| 86.4 | % |
| Construction | |
| 3,780 | | |
| 1.5 | % | |
| 2,122 | | |
| 0.9 | % | |
| 1,753 | | |
| 0.7 | % | |
| 964 | | |
| 0.5 | % | |
| 1,062 | | |
| 0.3 | % |
| Multi-family | |
| 16,621 | | |
| 6.7 | % | |
| 14,002 | | |
| 5.6 | % | |
| 14,506 | | |
| 5.5 | % | |
| 15,495 | | |
| 8.4 | % | |
| 4,504 | | |
| 2.5 | % |
| Nonresidential and other | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 12,211 | | |
| 6.6 | % |
| Land | |
| 2,021 | | |
| 0.8 | % | |
| 2,362 | | |
| 1.0 | % | |
| 2,821 | | |
| 1.1 | % | |
| 1,259 | | |
| 0.7 | % | |
| — | | |
| — | |
| Farm | |
| 1,567 | | |
| 0.7 | % | |
| 1,644 | | |
| 0.7 | % | |
| 1,843 | | |
| 0.7 | % | |
| — | | |
| — | | |
| — | | |
| — | |
| Nonresidential real estate | |
| 22,118 | | |
| 8.9 | % | |
| 21,945 | | |
| 8.8 | % | |
| 22,092 | | |
| 8.3 | % | |
| 9,839 | | |
| 5.3 | % | |
| — | | |
| — | |
| Commercial and industrial | |
| 1,782 | | |
| 0.7 | % | |
| 2,080 | | |
| 0.8 | % | |
| 3,189 | | |
| 1.2 | % | |
| — | | |
| — | | |
| — | | |
| — | |
| Consumer: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Consumer and other | |
| 6,155 | | |
| 2.5 | % | |
| 6,061 | | |
| 2.4 | % | |
| 6,537 | | |
| 2.5 | % | |
| 4,865 | | |
| 2.7 | % | |
| 4,824 | | |
| 2.6 | % |
| Loans on deposits | |
| 2,262 | | |
| 0.9 | % | |
| 2,564 | | |
| 1.0 | % | |
| 2,710 | | |
| 1.0 | % | |
| 2,281 | | |
| 1.3 | % | |
| 2,405 | | |
| 1.3 | % |
| Total loans | |
| 248,027 | | |
| 100 | % | |
| 249,161 | | |
| 100 | % | |
| 264,543 | | |
| 100 | % | |
| 183,789 | | |
| 100 | % | |
| 183,827 | | |
| 100 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Allowance for loan losses | |
| (1,568 | ) | |
| | | |
| (1,473 | ) | |
| | | |
| (1,310 | ) | |
| | | |
| (875 | ) | |
| | | |
| (764 | ) | |
| | |
| Undisbursed portion of loans in process | |
| (2,753 | ) | |
| | | |
| (952 | ) | |
| | | |
| (833 | ) | |
| | | |
| (544 | ) | |
| | | |
| (353 | ) | |
| | |
| Deferred loan origination costs | |
| 109 | | |
| | | |
| 52 | | |
| | | |
| 91 | | |
| | | |
| 8103 | | |
| | | |
| 86 | | |
| | |
| Loans receivable, net | |
$ | 243,815 | | |
| | | |
$ | 246,788 | | |
| | | |
$ | 262,491 | | |
| | | |
$ | 182,473 | | |
| | | |
$ | 182,796 | | |
| | |
The following table sets forth certain information at June 30,
2015 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate
of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ
from that shown below. Demand loans having no stated maturity are reported as due in one year or less.
| (In thousands) | |
Real Estate
Loans | | |
Commercial
Loans | | |
Consumer
Loans | | |
Total Loans | |
| | |
| | |
| | |
| | |
| |
| One year or less | |
$ | 77,680 | | |
$ | 1,142 | | |
$ | 8,074 | | |
$ | 86,896 | |
| More than one year to five years | |
| 91,692 | | |
| 640 | | |
| 343 | | |
| 92,675 | |
| More than five years | |
| 68,456 | | |
| — | | |
| — | | |
| 68,456 | |
| Total | |
$ | 237,828 | | |
$ | 1,782 | | |
$ | 8,417 | | |
$ | 248,027 | |
As of June 30, 2015,
there were $66.7 million fixed-rate and $172.0 million adjustable-rate real estate loans maturing in more than a year, while there
were $37,000 fixed-rate and $603,000 adjustable-rate commercial loans maturing in more than a year.
The following table shows loan origination
activity during the periods indicated.
| | |
Year Ended June 30, | |
| (In thousands) | |
2015 | | |
2014 | | |
2013 | |
| | |
| | |
| | |
| |
| Net loans at beginning of year | |
$ | 246,788 | | |
$ | 262,491 | | |
$ | 182,473 | |
| Loans acquired in CKF Bancorp transaction | |
| — | | |
| — | | |
| 94,086 | |
| Loans originated: | |
| | | |
| | | |
| | |
| Real estate loans: | |
| | | |
| | | |
| | |
| Residential one- to four-family | |
| 23,827 | | |
| 23,782 | | |
| 18,089 | |
| Construction | |
| 4,082 | | |
| 2,366 | | |
| 1,702 | |
| Multi-family | |
| 4,550 | | |
| 1,838 | | |
| 747 | |
| Land | |
| 132 | | |
| 104 | | |
| 118 | |
| Farm | |
| — | | |
| 21 | | |
| 13 | |
| Nonresidential real estate | |
| 1,542 | | |
| 1,432 | | |
| 3,316 | |
| Commercial and industrial | |
| 220 | | |
| 80 | | |
| 1,060 | |
| Consumer loans | |
| 2,668 | | |
| 1,670 | | |
| 3,914 | |
| Total loans originated | |
| 37,021 | | |
| 31,293 | | |
| 28,959 | |
| Deduct: | |
| | | |
| | | |
| | |
| Real estate loan principal repayments and other | |
| (37,891 | ) | |
| (45,725 | ) | |
| (42,215 | ) |
| Decrease (increase) in allowance | |
| (95 | ) | |
| (163 | ) | |
| (435 | ) |
| Transfer to real estate acquired through foreclosure | |
| (2,122 | ) | |
| (1,069 | ) | |
| (367 | ) |
| Other | |
| 114 | | |
| (39 | ) | |
| (10 | ) |
| Net loan activity | |
| (2,973 | ) | |
| (15,703 | ) | |
| 80,018 | |
| Net loans at end of period | |
$ | 243,815 | | |
$ | 246,788 | | |
$ | 262,491 | |
Allowance for Loan Losses and Asset
Quality. The allowance for loan losses is a valuation allowance for the probable incurred losses in the loan portfolio.
We evaluate the allowance for loan losses no less than quarterly. When additional allowances are needed a provision for losses
on loans is charged against earnings. The recommendations for increases or decreases to the allowance are presented by management
to the Banks’ boards of directors. The Company’s board of directors oversees the overall allowance level for the Company
and may propose increases or decreases for allowance levels at the banks.
The allowance for loan losses is established
to recognize the probable incurred losses associated with lending activities. Loss and risk factors are based on our historical
loss experience and industry averages and are adjusted for significant factors that in management’s judgment affect the collectibility
of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes
in existing general economic and business conditions affecting our primary lending area, credit quality trends, collateral value,
loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience, duration of the current business cycle
and bank regulatory examination results.
At June 30, 2015, the allowance for loan
losses was $1.6 million, or 0.64% of total loans, compared to $1.5 million, or 0.60% of total loans at June 30, 2014. The
allowance included $14,000 designated as specific reserves at June 30, 2014 and no specific reserves at June 30, 2015. Such reserves
are calculated when a non-homogenous loan is considered impaired. An impaired loan is one in which it is likely that we will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Most of the Company’s loans are
collateral-based and, in case of impairment, the loans are carried at the lower of cost or fair value less disposal costs.
Nonperforming loans, which consist of all
loans 90 days or more past due and nonaccrual loans, totaled $6.5 million at June 30, 2015 and $9.7 million at June 30,
2014, a decrease of $3.2 million. The allowance for loan losses totaled 24.1% and 18.4% of nonperforming loans at June 30,
2015 and 2014, respectively. In determining the allowance for loan losses at any point in time, management and the boards of directors
of the subsidiary Banks apply a systematic process focusing on the risk of loss in the portfolio. First, the loan portfolio is
segregated by loan types to be evaluated collectively and loan types to be evaluated individually. Delinquent multi-family and
nonresidential loans are evaluated individually for potential impairment. Second, the allowance for loan losses is evaluated using
historic loss experience adjusted for significant factors by applying these loss percentages to the loan types to be evaluated
collectively in the portfolio. To the best of management’s knowledge, all known and probable incurred losses that can be
reasonably estimated have been recorded at June 30, 2015. Although management believes that its allowance for loan losses conforms
with generally accepted accounting principles based upon the available facts and circumstances, there can be no assurance that
additions to the allowance will not be necessary in future periods, which would adversely affect our results of operations.
Our banking regulators, as an integral part
of their examination process, periodically review our allowance for loan losses. The examinations may require us to make additional
provisions for loan losses based on judgments different from ours. In addition, because further events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate
or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.
Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Summary of Loan Loss Experience.
The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan
loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged
or credited to the allowance.
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| | |
(Dollars in thousands) | |
| Allowance at beginning of period | |
$ | 1,473 | | |
$ | 1,310 | | |
$ | 875 | | |
$ | 764 | | |
$ | 1,535 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Provision for loan losses | |
| 343 | | |
| 580 | | |
| 662 | | |
| 139 | | |
| 668 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Charge-offs: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Real estate loans | |
| (274 | ) | |
| (467 | ) | |
| (229 | ) | |
| (28 | ) | |
| (1,439 | ) |
| Consumer loans | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Total charge-offs | |
| (274 | ) | |
| (467 | ) | |
| (229 | ) | |
| (28 | ) | |
| (1,439 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Recoveries: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Real estate loans | |
| 26 | | |
| 49 | | |
| — | | |
| — | | |
| — | |
| Consumer and other loans | |
| — | | |
| 1 | | |
| 2 | | |
| — | | |
| — | |
| Total recoveries | |
| 26 | | |
| 50 | | |
| 2 | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net charge-offs | |
$ | (248 | ) | |
$ | (417 | ) | |
$ | (227 | ) | |
$ | (28 | ) | |
$ | (1,439 | ) |
| Allowance at end of period | |
$ | 1,568 | | |
$ | 1,473 | | |
$ | 1,310 | | |
$ | 875 | | |
$ | 764 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Allowance to nonperforming loans | |
| 24.1 | % | |
| 18.4 | % | |
| 16.4 | % | |
| 48.8 | % | |
| 87.21 | % |
| Allowance to total loans outstanding at end of period | |
| 0.64 | % | |
| 0.60 | % | |
| 0.50 | % | |
| 0.48 | % | |
| 0.42 | % |
| Net charge-offs to average loans outstanding during the period | |
| 0.10 | % | |
| 0.17 | % | |
| 0.10 | % | |
| 0.02 | % | |
| 0.76 | % |
The following table sets forth the breakdown
of the allowance for loan losses by loan category, which management believes can be allocated on an approximate basis, at the dates
indicated.
| | |
At
June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| | |
Amount
| | |
%
of
Allowance
to Total
Allowance | | |
%
of
Loans in
Category
To
Total
Loans | | |
Amount
| | |
%
of
Allowance
to Total
Allowance
| | |
%
of
Loans in
Category
To Total
Loans | | |
Amount
| | |
%
of
Allowance
to Total
Allowance | | |
%
of
Loans in
Category
To
Total
Loans | | |
Amount | | |
%
of
Allowance
to Total
Allowance | | |
%
of
Loans in
Category
To
Total
Loans | | |
Amount
| | |
%
of
Allowance
to Total
Allowance | | |
%
of
Loans in
Category
To
Total
Loans | |
| | |
(Dollars in thousands) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Loans category: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential one- to four-family | |
$ | 1,059 | | |
| 67.5 | % | |
| 77.4 | % | |
$ | 1,003 | | |
| 68.1 | % | |
| 78.8 | % | |
$ | 874 | | |
| 66.7 | % | |
| 79.0 | % | |
$ | 565 | | |
| 64.6 | % | |
| 81.1 | % | |
$ | 494 | | |
| 64.7 | % | |
| 86.4 | % |
| Construction | |
| 21 | | |
| 1.3 | | |
| 1.5 | | |
| 11 | | |
| 0.7 | | |
| 0.9 | | |
| 8 | | |
| 0.6 | | |
| 0.7 | | |
| 3 | | |
| 0.3 | | |
| 0.5 | | |
| 3 | | |
| 0.4 | | |
| 0.6 | |
| Multi-family | |
| 94 | | |
| 6.0 | | |
| 6.7 | | |
| 73 | | |
| 5.0 | | |
| 5.6 | | |
| 63 | | |
| 4.8 | | |
| 5.5 | | |
| 49 | | |
| 5.6 | | |
| 8.4 | | |
| 13 | | |
| 1.7 | | |
| 2.5 | |
| Land | |
| 7 | | |
| 0.4 | | |
| 0.8 | | |
| 10 | | |
| 0.7 | | |
| 1.0 | | |
| 12 | | |
| 0.9 | | |
| 1.1 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Farm | |
| 9 | | |
| 0.6 | | |
| 0.6 | | |
| 9 | | |
| 0.6 | | |
| 0.7 | | |
| 6 | | |
| 0.5 | | |
| 0.7 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Nonresidential real estate | |
| 121 | | |
| 7.8 | | |
| 8.9 | | |
| 112 | | |
| 7.6 | | |
| 8.8 | | |
| 94 | | |
| 7.2 | | |
| 8.3 | | |
| 35 | | |
| 4.0 | | |
| 6.0 | | |
| 34 | | |
| 4.4 | | |
| 6.6 | |
| Commercial and industrial | |
| 10 | | |
| 0.6 | | |
| 0.7 | | |
| 11 | | |
| 0.7 | | |
| 0.8 | | |
| 13 | | |
| 1.0 | | |
| 1.2 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Consumer and other | |
| 34 | | |
| 2.2 | | |
| 2.5 | | |
| 31 | | |
| 2.1 | | |
| 2.4 | | |
| 28 | | |
| 2.1 | | |
| 2.5 | | |
| 16 | | |
| 1.8 | | |
| 2.7 | | |
| 13 | | |
| 1.7 | | |
| 2.6 | |
| Loans on deposits | |
| 13 | | |
| 0.8 | | |
| 0.9 | | |
| 13 | | |
| 0.9 | | |
| 1.0 | | |
| 12 | | |
| 0.9 | | |
| 1.0 | | |
| 7 | | |
| 0.8 | | |
| 1.3 | | |
| 7 | | |
| 0.9 | | |
| 1.3 | |
| Unallocated | |
| 200 | | |
| 12.8 | | |
| — | | |
| 200 | | |
| 13.6 | | |
| — | | |
| 200 | | |
| 15.3 | | |
| — | | |
| 200 | | |
| 22.9 | | |
| — | | |
| 200 | | |
| 26.2 | | |
| — | |
| Total allowance for loan
losses | |
$ | 1,568 | | |
| 100 | % | |
| 100 | % | |
$ | 1,473 | | |
| 100 | % | |
| 100 | % | |
$ | 1,310 | | |
| 100 | % | |
| 100 | % | |
$ | 875 | | |
| 100.0 | % | |
| 100.0 | % | |
$ | 764 | | |
| 100.0 | % | |
| 100.0 | % |
Nonperforming
and Classified Assets. When a loan becomes 90 days delinquent, the loan may be placed on nonaccrual status at which time
the accrual of interest ceases, the interest previously accrued to income is reversed and interest income is thereafter recognized
on a cash basis. Payments on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time
of collection of the loan or applied entirely to principal, depending on management’s assessment of ultimate collectibility.
In situations where management believes collection of interest due is likely even if the loan is more than 90 days delinquent,
then management may decide not to place the loan on non-accrual status.
We consider repossessed assets and loans
that are 90 days or more past due to be nonperforming assets. Real estate that we acquire as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of carrying
value of the investment or fair value less estimated selling costs at the date of foreclosure. Holding costs and declines in fair
value after acquisition of the property are charged against income.
Under current accounting guidelines, a loan
is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect
all amounts due under the contractual terms of the loan agreement. We consider one- to four-family mortgage loans and deposit loans
to be homogeneous and collectively evaluate them for impairment. Other loans are evaluated for impairment on an individual basis.
At June 30, 2015, 16 loans were individually considered impaired with valuations.
The following table
provides information with respect to our nonperforming assets at the dates indicated.
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
| | |
(Dollars in thousands) | |
| | |
| | |
| | |
| | |
| | |
| |
| Nonaccrual loans: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Real estate loans | |
$ | 2,856 | | |
$ | 4,361 | | |
$ | 3,720 | | |
$ | 1,593 | | |
$ | 876 | |
| Commercial loans | |
| 388 | | |
| 47 | | |
| 40 | | |
| — | | |
| — | |
| Consumer loans | |
| 18 | | |
| 29 | | |
| 18 | | |
| — | | |
| — | |
| Total | |
| 3,262 | | |
| 4,437 | | |
| 3,778 | | |
| 1,593 | | |
| 876 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Accruing loans past due 90 days or more: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Real estate loans | |
| 1,745 | | |
| 3,513 | | |
| 1,945 | | |
| 201 | | |
| — | |
| Commercial loans | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Consumer loans | |
| — | | |
| — | | |
| 27 | | |
| — | | |
| — | |
| Total of accruing loans past due 90 days or more | |
| 1,745 | | |
| 3,513 | | |
| 1,972 | | |
| 201 | | |
| — | |
| Restructured loans not performing as agreed | |
| 1,505 | | |
| 1,790 | | |
| 2,211 | | |
| — | | |
| — | |
| Total nonperforming loans | |
| 6,512 | | |
| 9,740 | | |
| 7,961 | | |
| 1,794 | | |
| 876 | |
| Restructured loans performing as agreed | |
| 346 | | |
| 207 | | |
| 659 | | |
| 187 | | |
| — | |
| Real estate acquired through foreclosure | |
| 1,593 | | |
| 1,846 | | |
| 1,163 | | |
| 2,445 | | |
| 4,304 | |
| Total nonperforming assets and performing restructured loans | |
$ | 8,451 | | |
$ | 11,793 | | |
$ | 9,783 | | |
$ | 4,426 | | |
$ | 5,180 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total nonperforming loans to total loans | |
| 2.67 | % | |
| 3.95 | % | |
| 3.04 | % | |
| 0.98 | % | |
| 0.48 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total nonperforming loans to total assets | |
| 2.20 | % | |
| 3.25 | % | |
| 2.47 | % | |
| 1.10 | % | |
| 0.39 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total nonperforming assets to total assets | |
| 2.74 | % | |
| 3.87 | % | |
| 2.82 | % | |
| 1.90 | % | |
| 2.29 | % |
Interest income that would have been recorded
for the years ended June 30, 2015 and 2014, had nonaccrual loans been current according to their original terms amounted to
$155,000, and $371,000, respectively. Income related to nonaccrual loans included in interest income for the years ended June 30,
2015 and 2014 amounted to $147,000, and $7,000, respectively.
Federal regulations require us to regularly
review and classify our assets. In addition, our regulators have the authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard
assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some
loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions
and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible
and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special
mention” category, described as 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. Special mention assets totaled $8.1 million
and $3.9 million at June 30, 2015 and 2014, respectively.
The following table shows the aggregate
amounts of our assets classified for regulatory purposes at the dates indicated.
| | |
At June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
(In thousands) | |
| Substandard assets | |
$ | 12,639 | | |
$ | 16,284 | | |
$ | 16,315 | |
| Doubtful assets | |
| — | | |
| — | | |
| — | |
| Loss assets | |
| — | | |
| — | | |
| — | |
| Total classified assets | |
$ | 12,639 | | |
$ | 16,284 | | |
$ | 16,315 | |
Substandard assets at June 30, 2015, consisted
of 159 loans totaling $11.0 million and 20 parcels of real estate owned with an aggregate carrying value of $1.6 million. At June
30, 2015, 12.6% of the Company’s substandard assets were represented by real estate acquired through foreclosure compared
to 11.3% at June 30, 2014. During the fiscal years ended June 30, 2015 and 2014, the Company made loans to facilitate the purchase
of its other real estate owned by qualified borrowers. The Company sold property with carrying values of $590,000 and $189,000
for $702,000 and $204,000 during the fiscal years ended June 30, 2015 and 2014, respectively. Such loans are considered loans to
facilitate an exchange and, as such, the Company defers recognition of the gain until the proper time in the future. Loans to facilitate
the sale of other real estate owned which were included in substandard loans and totaled $292,000 and $309,000 at June 30, 2015,
and 2014, respectively.
The table below summarizes other real estate
owned at June 30, 2015:
| (Dollars in thousands) | |
Number of
properties | | |
Net
carrying
value | |
| | |
| | |
| |
| Single family | |
| 15 | | |
$ | 1,440 | |
| Building lots | |
| 5 | | |
| 153 | |
| Total | |
| 20 | | |
$ | 1,593 | |
The table below summarizes substandard
loans at June 30, 2015:
| (Dollars in thousands) | |
Number
of
properties | | |
Net carrying
value | |
| | |
| | |
| |
| Single family, owner occupied | |
| 106 | | |
$ | 5,895 | |
| Single family, non-owner occupied | |
| 32 | | |
| 2,207 | |
| Two- to four-family, non-owner occupied | |
| 6 | | |
| 1,269 | |
| Nonresidential real estate | |
| 7 | | |
| 789 | |
| Commercial and industrial | |
| 1 | | |
| — | |
| Land | |
| 4 | | |
| 857 | |
| Consumer | |
| 3 | | |
| 29 | |
| Total | |
| 159 | | |
$ | 11,046 | |
Other than disclosed above, there are no
other loans at June 30, 2015 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment
terms.
Delinquencies. The following
table provides information about delinquencies in our loan portfolios at the dates indicated.
| | |
At June 30, | |
| | |
2015 | | |
2014 | |
| | |
30-59 Days
Past Due | | |
60-89 Days
Past Due | | |
30-59 Days
Past Due | | |
60-89 Days
Past Due | |
| | |
(In thousands) | |
| Real estate loans | |
$ | 3,140 | | |
$ | 2,474 | | |
$ | 1,987 | | |
$ | 3,212 | |
| Consumer loans | |
| 31 | | |
| 3 | | |
| 68 | | |
| — | |
| Total | |
$ | 3,171 | | |
$ | 2,477 | | |
$ | 2,055 | | |
$ | 3,212 | |
Securities. Our securities portfolio consists
of agency bonds and mortgage-backed securities with maturities of 30 years or less. Investment and mortgage-backed securities totaled
$6.6 million at June 30, 2015, a decrease of $2.7 million, or 29.0%, compared to the $9.3 million total at June 30, 2014.
The decrease in these securities resulted from scheduled maturities and normal repayment/prepayment from the mortgage-backed securities.
All of our mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie Mac.
The following table
sets forth the carrying values and fair values of our securities portfolio at the dates indicated.
| | |
At June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
Amortized
Cost | | |
Fair Value | | |
Amortized
Cost | | |
Fair Value | | |
Amortized
Cost | | |
Fair Value | |
| | |
(In thousands) | |
| Available-for-sale securities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed: residential | |
$ | 94 | | |
$ | 96 | | |
$ | 134 | | |
$ | 136 | | |
$ | 162 | | |
$ | 166 | |
| FHLMC stock | |
| 8 | | |
| 63 | | |
| 8 | | |
| 111 | | |
| 8 | | |
| 39 | |
| | |
$ | 102 | | |
$ | 159 | | |
$ | 142 | | |
$ | 247 | | |
$ | 170 | | |
$ | 205 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Held-to-maturity securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed: residential | |
$ | 2,821 | | |
$ | 2,931 | | |
$ | 3,792 | | |
$ | 3,971 | | |
$ | 5,341 | | |
$ | 5,502 | |
| Agency bonds | |
| 3,602 | | |
| 3,603 | | |
| 5,226 | | |
| 5,224 | | |
| 6,891 | | |
| 6,852 | |
| | |
$ | 6,423 | | |
$ | 6,534 | | |
$ | 9,018 | | |
$ | 9,195 | | |
$ | 12,232 | | |
$ | 12,354 | |
At June 30, 2015 and 2014, we did not own
any securities that had an aggregate book value in excess of 10% of our equity at that date.
The following table sets forth the maturities and weighted
average yields of debt securities at June 30, 2015. At June 30, 2015, we had no U.S. Government agency securities with adjustable
rates.
| | |
One Year or Less | | |
More Than
One Year to
Five Years | | |
More Than
Five Years to
Ten Years | | |
More Than Ten Years | | |
Total Investment Portfolio | |
| | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Weighted
Average
Yield | | |
Amortized
Cost | | |
Fair
Value | | |
Weighted
Average
Yield | |
| | |
(Dollars in thousands) | |
| Available for sale securities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Mortgage-backed securities | |
$ | 4 | | |
| 1.92 | % | |
$ | 19 | | |
| 1.92 | % | |
$ | 26 | | |
| 1.92 | % | |
$ | 45 | | |
| 1.92 | % | |
$ | 94 | | |
$ | 96 | | |
| 1.92 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Held to maturity securities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Mortgage-backed securities | |
$ | 345 | | |
| 1.41 | % | |
$ | 1,535 | | |
| 1.41 | % | |
$ | 731 | | |
| 1.41 | % | |
$ | 210 | | |
| 1.41 | % | |
$ | 2,821 | | |
$ | 2,931 | | |
| 1.41 | % |
| Agency bonds | |
| 1,512 | | |
| 0.48 | | |
| 2,090 | | |
| 0.71 | | |
| — | | |
| | | |
| — | | |
| | | |
| 3
602 | | |
| 3,603 | | |
| 0.61 | % |
| | |
| 1,857 | | |
| | | |
| 3,625 | | |
| | | |
| 731 | | |
| | | |
| 210 | | |
| | | |
| 6,423 | | |
| 6,534 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
$ | 1,861 | | |
| | | |
$ | 3,644 | | |
| | | |
$ | 757 | | |
| | | |
$ | 255 | | |
| | | |
$ | 6,517 | | |
$ | 6,630 | | |
| | |
Other Assets. Other assets at June
30, 2015, include goodwill of $14.5 million, which was a result of the Company’s acquisition of Frankfort First, and bank
owned life insurance policies with a carrying value of $3.0 million and $2.9 million at June 30, 2015 and 2014, respectively,
of which First Federal of Frankfort is the owner and beneficiary. Both subsidiary Banks are members and stockholders of the Federal
Home Loan Bank of Cincinnati (“FHLB”). FHLB stock, at cost, totaled $6.5 million and $6.5 million at June 30, 2015
and 2014, respectively. During the fiscal year ended June 30, 2014, the FHLB redeemed $1.2 million of its stock owned by the Company
pursuant to the FHLB’s capital program.
Deposits. Our primary source
of funds is retail deposit accounts held primarily by individuals within our market areas. Deposits totaled $199.7 million
at June 30, 2015, a decrease of $13.4 million or 6.3%, compared to the $213.1 million total at June 30, 2014. The decrease
in deposits was a result of deposit customers’ shift to more liquidity in their deposit balances and redeploying some cash
reserves.
The following table sets forth the balances
of our deposit products at the dates indicated.
| | |
At June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
(In thousands) | |
| Certificate of deposit accounts | |
$ | 116,098 | | |
$ | 136,705 | | |
$ | 154,934 | |
| Demand, transaction and savings accounts | |
| 83,603 | | |
| 76,427 | | |
| 76,047 | |
| Total | |
$ | 199,701 | | |
$ | 213,142 | | |
$ | 230,981 | |
The following table indicates the amount
of certificate of deposit accounts with balances equal to or greater than $100,000, by time remaining until maturity at June 30,
2015. The Federal Deposit Insurance Corporation (“FDIC”) currently insures deposits up to $250,000 in most cases,
making certificate of deposit accounts with balances equal to or greater than $100,000 less volatile as before the limit was raised.
| Maturity Period | |
Certificates
of Deposit | |
| | |
(In thousands) | |
| | |
| |
| Three months or less | |
$ | 7,032 | |
| Over three months through six months | |
| 10,330 | |
| Over six months through twelve months | |
| 15,358 | |
| Over twelve months | |
| 13,489 | |
| Total | |
$ | 46,209 | |
The following table sets forth our certificate
of deposit accounts classified by rates at the dates indicated.
| | |
At June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
(In thousands) | |
| Rate | |
| | |
| | |
| |
| 0.01 - 0.99% | |
$ | 87,765 | | |
$ | 91,979 | | |
$ | 87,108 | |
| 1.00 - 1.99 | |
| 18,522 | | |
| 27,104 | | |
| 43,399 | |
| 2.00 - 2.99 | |
| 8,868 | | |
| 11,478 | | |
| 14,407 | |
| 3.00 - 3.99 | |
| 934 | | |
| 6,128 | | |
| 8,148 | |
| 4.00 - 4.99 | |
| 9 | | |
| 16 | | |
| 1,811 | |
| 5.00 - 5.99 | |
| — | | |
| — | | |
| 61 | |
| Total | |
$ | 116,098 | | |
$ | 136,705 | | |
$ | 154,934 | |
The following table sets forth the amount and maturities
of certificate accounts at June 30, 2015.
| | |
Amount Due | | |
| | |
| |
| | |
Less Than
One Year | | |
More Than
One Year to
Two Years | | |
More Than
Two Years to
Three Years | | |
More Than
Three Years | | |
Total | | |
Percentage of
Total Certificate
Accounts | |
| | |
(Dollars in thousands) | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| 0.01 –0.99% | |
$ | 67,618 | | |
$ | 12,330 | | |
$ | 4,143 | | |
$ | 3,674 | | |
$ | 87,765 | | |
| 75.6 | % |
| 1.00 – 1.99 | |
| 6,579 | | |
| 7,196 | | |
| 3,595 | | |
| 1,152 | | |
| 18,522 | | |
| 16.0 | |
| 2.00 – 2.99 | |
| 5,947 | | |
| 2,921 | | |
| — | | |
| — | | |
| 8,868 | | |
| 7.6 | |
| 3.00 – 3.99 | |
| 934 | | |
| — | | |
| — | | |
| — | | |
| 934 | | |
| 1.8 | |
| 4.00 – 4.99 | |
| 9 | | |
| — | | |
| — | | |
| — | | |
| 9 | | |
| — | |
| Total | |
$ | 81,087 | | |
$ | 22,447 | | |
$ | 7,738 | | |
$ | 4,826 | | |
$ | 116,098 | | |
| 100.0 | % |
The following table sets forth the average
balances and rates paid on deposits.
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
Average | | |
Average | | |
Average | | |
Average | | |
Average | | |
Average | |
| | |
Balance | | |
Rate | | |
Balance | | |
Rate | | |
Balance | | |
Rate | |
| | |
(Dollars in thousands) | |
| Noninterest-bearing demand | |
$ | 4,138 | | |
| 0.00 | % | |
$ | 3,721 | | |
| 0.00 | % | |
$ | 2,579 | | |
| 0.00 | % |
| Interest-bearing demand | |
| 16,648 | | |
| 0.18 | % | |
| 14,969 | | |
| 0.19 | % | |
| 24,402 | | |
| 0.20 | % |
| Savings accounts | |
| 59,276 | | |
| 0.40 | % | |
| 58,436 | | |
| 0.42 | % | |
| 37,579 | | |
| 0.57 | % |
| Certificates of deposit | |
| 127,361 | | |
| 0.73 | % | |
| 141,296 | | |
| 0.76 | % | |
| 119,595 | | |
| 0.83 | % |
The following table sets forth the deposit
activities for the periods indicated.
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
(In thousands) | |
| Beginning balance | |
$ | 213,142 | | |
$ | 230,981 | | |
$ | 134,552 | |
| Deposits acquired from CKF Bancorp | |
| — | | |
| — | | |
| 101,477 | |
| Increase (decrease) before interest credited | |
| (14,631 | ) | |
| (19,180 | ) | |
| (6,303 | ) |
| Interest credited | |
| 1,190 | | |
| 1,341 | | |
| 1,255 | |
| Net increase (decrease) in deposits | |
| (13,441 | ) | |
| (17,839 | ) | |
| 96,429 | |
| Ending balance | |
$ | 199,701 | | |
$ | 213,142 | | |
$ | 230,981 | |
Borrowings. Advances from
the Federal Home Loan Bank of Cincinnati amounted to $26.6 million and $17.2 million at June 30, 2015 and 2014, respectively.
The following table presents certain information
regarding our Federal Home Loan Bank of Cincinnati advances during the periods and at the dates indicated.
| | |
Year Ended June 30, | |
| | |
2015 | | |
2014 | | |
2013 | |
| | |
(Dollars in thousands) | |
| | |
| | |
| | |
| |
| Balance outstanding at end of period | |
$ | 26,635 | | |
$ | 17,200 | | |
$ | 24,310 | |
| Maximum amount of advances outstanding at any month end during the period | |
$ | 29,047 | | |
$ | 27,016 | | |
$ | 43,808 | |
| Average advances outstanding during the period | |
$ | 20,375 | | |
$ | 19,413 | | |
$ | 30,050 | |
| Weighted average interest rate during the period | |
| 1.17 | % | |
| 1.43 | % | |
| 1.43 | % |
| Weighted average interest rate at end of period | |
| 1.04 | % | |
| 1.39 | % | |
| 2.17 | % |
Shareholders’ Equity.
Shareholders’ equity totaled $67.3 million at June 30, 2015, a $108,000 or 0.2%, increase compared to June 30, 2014.
The increase resulted primarily from earnings exceeding dividends paid in the year.
The Banks are required to maintain minimum
regulatory capital pursuant to federal regulations. At June 30, 2015, both First Federal of Hazard’s and First Federal of
Frankfort’s regulatory capital substantially exceeded all minimum regulatory capital requirements. Management is not aware
of any recent event that would cause this classification to change.
Results of Operations for the Years Ended June 30, 2015
and 2014
General. Net earnings
totaled $2.1 million for the fiscal year ended June 30, 2015, an increase of $135,000, or 7.0%, from the net earnings recorded
for the fiscal year ended June 30, 2014. The increase in earnings year over year was due primarily to decreases in non-interest
expense and provision for losses on loans, as well as an increase in non-interest income. Non-interest expense decreased $368,000
or 4.4% from $8.4 million for the prior year end to $8.0 million for the recent year end primarily due to lower costs associated
with the Company’s employee compensation and benefits. Provision for losses on loans decreased $237,000 or 40.9% to $343,000
for the year just ended due primarily to improving quality in the loan portfolio, while non-interest income increased $170,000
or 49.4% to $514,000. The increase non-interest income was due primarily to gains recognized on sales of real estate owned by
the Company. Net interest income decreased $571,000 or 5.0% to $11.0 million for the recently ended fiscal year as interest income
decreased more than interest expense decreased. Interest income decreased $761,000 or 5.8% due chiefly to lower yield earned on
the Company’s loan portfolio. Interest expense decreased $190,000 or 11.7% to $1.4 million.
Interest Income. Total
interest income for the fiscal year ended June 30, 2015 was $12.4 million, a decrease of $761,000, or 5.8%, compared to the
fiscal year ended June 30, 2014. The decrease in interest income was due primarily to a decrease in interest income on loans,
which decreased by $685,000, or 5.4% to $12.0 million for the fiscal year ended June 30, 2015, compared to fiscal 2014.
Interest
income from loans decreased due to a decrease in the average rate earned on the portfolio as well as a decrease in the
average balance outstanding. The average rate earned on the portfolio decreased 18 basis points from 5.05% for fiscal year
2014 to 4.87% for fiscal 2015, while the average balance of loans outstanding decreased $4.9 million or 2.0% from $251.2
million for the 2014 fiscal year to $246.3 million for the 2015 fiscal year. The decrease in the average rate earned on loans
for fiscal 2015 occurred primarily as a result of borrowers refinancing to lower rates and to a lesser degree by loans
repricing as scheduled, as many adjustable-rate loans are at their rate floors, because of the extended period of
historically low interest rate environment. Income from other interest-earning assets also decreased year over year. Income
on interest-bearing deposits and other decreased $50,000 or 16.2% to $258,000 for the fiscal year ended June 30, 2015, while
income on the Company’s investment portfolio decreased $26,000 or 16.1% to $135,000 for the year just ended.
Interest
Expense. Interest expense totaled $1.4 million for the fiscal year ended June 30, 2015, a decrease of
$190,000, or 11.7%, from fiscal 2014. The decrease in interest expense resulted primarily from lower costs of deposits and
borrowings. Interest expense on deposits decreased $151,000 or 11.3% to $1.2 million for the 2015 fiscal year, while the cost
of borrowings decreased $39,000 or 14.1% to $238,000 for the 2015 fiscal year. Decreased costs on deposits were attributable
primarily to a decrease in the average balance of those deposits, while a decrease in the interest rates paid on deposits
also contributed to the overall decrease in cost. The average balance of deposits decreased $11.4 million or 5.3% to $203.3
million for the year just ended, while the rate paid on deposits decreased 4 basis points to 0.59% for the 2015 year. The
average balance of certificates of deposit was $127.4 million for the recently-ended year. This category registered
the largest decrease in volume by decreasing $13.9 million or 9.9% from fiscal 2014 to fiscal 2015, as depositors sought
higher returns on their funds. The Company utilized FHLB advances to fund the decrease in deposits. Average borrowings
increased by $962,000 or 5.0% to $20.4 million for the year ended June 30, 2015, while the average rate paid on borrowings
decreased 26 basis points to 1.17% for fiscal 2015.
Net Interest Income. As a
result of the aforementioned changes in interest income and interest expense, net interest income before provision for loan losses
decreased $571,000 or 5.0% to $11.0 million for the 2015 year. As indicated on the following table, our net interest margin decreased
from 4.13% for the 2014 fiscal year to 4.07% for the year just ended, primarily as a result of interest-bearing assets repricing
to lower interest rates at a faster pace than our interest-earning liabilities repriced to lower interest rates. The pace at which
the rates for interest-bearing liabilities has continued to decline as the low interest rate environment persists. As those liabilities
reprice ever closer to nil, they will likely level off at the lowest levels. Also in the current historically-low interest rate
environment, we might be forced to meet competing lenders’ low rates in order to retain our loan portfolio.
Average Balances and Yields.
The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of
interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs. The yields
and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of
daily balances and nonaccrual loans are included in average balances only. We did not hold any non-taxable securities during any
of the periods presented in the table.
| | |
2015 | | |
2014 | | |
2013 | |
| | |
| | |
Interest | | |
| | |
| | |
Interest | | |
| | |
| | |
Interest | | |
| |
| | |
Average | | |
And | | |
Yield/ | | |
Average | | |
And | | |
Yield/ | | |
Average | | |
And | | |
Yield/ | |
| (Dollars in thousands) | |
Balance | | |
Dividends | | |
Cost | | |
Balance | | |
Dividends | | |
Cost | | |
Balance | | |
Dividends | | |
Cost | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans | |
$ | 246,252 | | |
$ | 11,996 | | |
| 4.87 | % | |
$ | 251,181 | | |
$ | 12,681 | | |
| 5.05 | % | |
$ | 225,153 | | |
$ | 11,466 | | |
| 5.09 | % |
| Mortgage-backed securities | |
| 3,412 | | |
| 110 | | |
| 3.22 | | |
| 4,515 | | |
| 132 | | |
| 2.92 | | |
| 6,510 | | |
| 185 | | |
| 2.84 | |
| Other securities | |
| 5,409 | | |
| 25 | | |
| 0.46 | | |
| 6,749 | | |
| 29 | | |
| 0.43 | | |
| 3,795 | | |
| 17 | | |
| 0.45 | |
| Other interest-earning assets | |
| 14,063 | | |
| 258 | | |
| 1.84 | | |
| 16,483 | | |
| 308 | | |
| 1.87 | | |
| 15,458 | | |
| 290 | | |
| 1.88 | |
| Total interest-earning assets | |
| 269,136 | | |
| 12,389 | | |
| 4.60 | | |
| 278,928 | | |
| 13,150 | | |
| 4.71 | | |
| 250,916 | | |
| 11,958 | | |
| 4.77 | |
| Less: ALLL | |
| (1,533 | ) | |
| | | |
| | | |
| (1,391 | ) | |
| | | |
| | | |
| | | |
| | | |
| | |
| Noninterest-earning assets | |
| 29,693 | | |
| | | |
| | | |
| 29,445 | | |
| | | |
| | | |
| 27,007 | | |
| | | |
| | |
| Total assets | |
$ | 297,296 | | |
| | | |
| | | |
$ | 306,982 | | |
| | | |
| | | |
$ | 277,923 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Demand deposits | |
$ | 16,648 | | |
$ | 30 | | |
| 0.18 | % | |
$ | 14,969 | | |
$ | 29 | | |
| 0.19 | % | |
$ | 24,402 | | |
$ | 49 | | |
| 0.20 | % |
| Savings | |
| 59,276 | | |
| 237 | | |
| 0.40 | | |
| 58,436 | | |
| 243 | | |
| 0.42 | | |
| 37,579 | | |
| 213 | | |
| 0.57 | |
| Certificates of deposit | |
| 127,361 | | |
| 923 | | |
| 0.73 | | |
| 141,296 | | |
| 1,069 | | |
| 0.76 | | |
| 119,595 | | |
| 993 | | |
| 0.83 | |
| Total deposits | |
| 203,285 | | |
| 1,190 | | |
| 0.59 | | |
| 214,701 | | |
| 1,341 | | |
| 0.63 | | |
| 181,576 | | |
| 1,255 | | |
| 0.69 | |
| Borrowings | |
| 20,375 | | |
| 238 | | |
| 1.17 | | |
| 19,413 | | |
| 277 | | |
| 1.43 | | |
| 30,050 | | |
| 431 | | |
| 1.43 | |
| Total interest-bearing
liabilities | |
| 223,660 | | |
| 1,428 | | |
| 0.64 | | |
| 234,114 | | |
| 1,618 | | |
| 0.69 | | |
| 211,626 | | |
| 1,686 | | |
| 0.80 | |
| Noninterest-bearing demand deposits | |
| 4,138 | | |
| | | |
| | | |
| 3,721 | | |
| | | |
| | | |
| 2,579 | | |
| | | |
| | |
| Noninterest-bearing liabilities | |
| 2,190 | | |
| | | |
| | | |
| 2,344 | | |
| | | |
| | | |
| 1,708 | | |
| | | |
| | |
| Total liabilities | |
| 229,988 | | |
| | | |
| | | |
| 240,179 | | |
| | | |
| | | |
| 215,913 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Shareholders’ equity | |
| 67,308 | | |
| | | |
| | | |
| 66,803 | | |
| | | |
| | | |
| 62,010 | | |
| | | |
| | |
| Total liabilities and
shareholders’ | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Equity | |
$ | 297,296 | | |
| | | |
| | | |
$ | 306,982 | | |
| | | |
| | | |
$ | 277,923 | | |
| | | |
| | |
| Net interest income/average yield | |
| | | |
$ | 10,961 | | |
| 3.96 | % | |
| | | |
$ | 11,532 | | |
| 4.02 | % | |
| | | |
$ | 10,272 | | |
| 3.97 | % |
| Net interest margin | |
| | | |
| | | |
| 4.07 | % | |
| | | |
| | | |
| 4.13 | % | |
| | | |
| | | |
| 4.09 | % |
| Average interest-earning
assets to Average interest-bearing liabilities | |
| | | |
| | | |
| 120.33 | % | |
| | | |
| | | |
| 119.14 | % | |
| | | |
| | | |
| 118.57 | % |
Rate/Volume Analysis.
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by prior year volume). The volume column shows the
effects attributable to changes in volume (changes in volume multiplied by prior year rate). For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes
due to rate and the changes due to volume. The total column represents the sum of the prior columns.
| | |
Twelve months ended June 30,
2015 to June 30, 2014
Increase (Decrease) Due to
Changes In | | |
Twelve months ended June 30,
2014 to June 30, 2013
Increase (Decrease) Due to
Changes In | |
| (in thousands) | |
Volume | | |
Rate | | |
Total | | |
Volume | | |
Rate | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans receivable | |
$ | (244 | ) | |
$ | (441 | ) | |
$ | (685 | ) | |
$ | 1,311 | | |
$ | (96 | ) | |
$ | 1,215 | |
| Mortgage-backed securities | |
| (38 | ) | |
| 16 | | |
| (22 | ) | |
| (59 | ) | |
| 6 | | |
| (53 | ) |
| Investment securities | |
| (6 | ) | |
| 2 | | |
| (4 | ) | |
| 13 | | |
| (1 | ) | |
| 12 | |
| Other interest-earning assets | |
| (44 | ) | |
| (6 | ) | |
| (50 | ) | |
| 19 | | |
| (1 | ) | |
| 18 | |
| Total interest-earning assets | |
| (332 | ) | |
| (429 | ) | |
| (761 | ) | |
| 1,284 | | |
| (92 | ) | |
| 1,192 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Demand deposits | |
| 2 | | |
| (1 | ) | |
| 1 | | |
| (18 | ) | |
| (2 | ) | |
| (20 | ) |
| Savings | |
| 3 | | |
| (9 | ) | |
| (6 | ) | |
| 56 | | |
| (26 | ) | |
| 30 | |
| Certificates of deposit | |
| (100 | ) | |
| (46 | ) | |
| (146 | ) | |
| 147 | | |
| (71 | ) | |
| 76 | |
| Borrowings | |
| 14 | | |
| (53 | ) | |
| (39 | ) | |
| (152 | ) | |
| (2 | ) | |
| (154 | ) |
| Total interest-bearing liabilities | |
| (81 | ) | |
| (109 | ) | |
| (190 | ) | |
| 33 | | |
| (101 | ) | |
| (68 | ) |
| Increase (decrease) in net interest income | |
$ | (251 | ) | |
$ | (320 | ) | |
$ | (571 | ) | |
$ | 1,251 | | |
$ | 9 | | |
$ | 1,260 | |
Provision for Losses on Loans.
A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated by
management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal
and interest payments and other factors related to the collectability of the loan portfolio. Based upon an analysis of these factors,
management recorded a provision of $343,000 for losses on loans for the fiscal year ended June 30, 2015, a decrease of $237,000
compared to a provision of $580,000 for fiscal 2014. Management believes all nonperforming loans are adequately collateralized
or have been written down to their realizable value; however, there can be no assurance that the loan loss allowance will be adequate
to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets
in the future. See discussion about Allowance Loan Losses and Asset Quality.
Non-interest
Income. Other non-interest income increased $170,000 or 49.4% to $514,000 for the fiscal year ended June 30, 2015,
due primarily to gains recognized on sales of real estate owned by the Company. During fiscal 2015 we recognized gain of
$207,000 in gains on sales of real estate owned compared to a loss of $14,000 for fiscal 2014. We experienced a decline
of $27,000 or 49.1% on gain on sale of loans as
fewer loan customers chose our 30-year fixed rate mortgages, which we sell to the FHLB. During fiscal 2015 we were able to
sell fewer long-term, fixed rate loans into the secondary market than during the previous year because of waning market
demand. The number of loans sold as well as their aggregate value declined year over year. The number of loans sold decreased
by 8 or 66.7% from 12 for the year ended June 30, 2014 to just four for the year ended June 30, 2015, while the principal
amount of loans sold decreased $1.1 million or 64.2% from $1.7 million for the 2014 fiscal year to $599,000 for the
recently ended fiscal year. Contributing to the increase in non-interest income was a decrease in the valuation
adjustment for real estate owned. Impairment charges on other real estate decreased from $101,000 for the 2014 fiscal year to
$87,000 for the year just ended.
Non-interest Expense. Non-interest
expense decreased $368,000 or 4.4% to $8.0 million for the fiscal year ended June 30, 2015 compared to fiscal 2014 primarily due
to lower costs associated with the Company’s employee compensation and benefits, which decreased $ 494,000 or 9.2% from
the 2014 fiscal year and totaled $4.9 million for the year just ended. Favorable funding levels for the Company’s defined
benefit pension plan allowed us to recognize expense of $227,000 for the fiscal year ended June 30, 2015, compared to $876,000
for the immediately preceding year. See NOTEA-Summary of Significant Accounting Policies, Item 11. Retirement and Employee
Benefit Plans.) Somewhat offsetting the decrease in employee compensation and benefits were increases in legal fees, outside
service fees and occupancy and equipment. Legal fees increased $59,000 or 168.6% to $94,000 for the year ended June 30, 2015,
while outside service fees increased $58,000 or 41.4%, to $198,000 for the year ended June 30, 2015, compared to fiscal 2014.
The increase in outside service fees was attributable both to technology and communications capability as well as efforts to strengthen
the Company’s internal audit processes.
Federal Income Taxes. The
provision for federal income tax increased $69,000 or 7.2% from $952,000 for the fiscal year ended June 30, 2014 to $1.0 million
for the fiscal year ended June 30, 2015. The effective income tax rate for each of the years ended June 30, 2015 and 2014, was
33.0%.
Liquidity and Capital Resources
Liquidity is the ability to meet current
and future short-term financial obligations. Our primary sources of funds consist of cash and deposits at other banks, deposit
inflows, loan repayments and maturities, calls and sales of investment and mortgage-backed securities and advances from the FHLB.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic conditions and competition.
We periodically assess our available liquidity
and projected upcoming liquidity demands. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected
loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the
objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits,
federal funds and short- and intermediate-term U.S. Government agency obligations.
Our most liquid assets are cash, federal
funds sold and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing
activities during any given period. At June 30, 2015 and June 30, 2014, cash and cash equivalents totaled $13.6 million
and $11.5 million, respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled
$159,000 and $247,000 at June 30, 2015 and 2014, respectively.
We are not aware of any trends and/or demands,
commitments, events or uncertainties that could result in a material protracted decrease in liquidity. We expect that all of our
liquidity needs, including the contractual commitments set forth in the table below can be met by our currently available liquid
assets and cash flows. In the event any unforeseen demand or commitments were to occur, we would access our borrowing capacity
with the FHLB. We expect that our currently available liquid assets and our ability to borrow from the FHLB would be sufficient
to satisfy our liquidity needs without any material adverse effect on our liquidity.
Our primary investing activities are the
origination of loans and the purchase of investment securities. In fiscal 2015 and 2014, we originated $37.0 million and $31.3 million
of loans, respectively. During fiscal 2015, these activities were funded primarily by proceeds from principal repayments on loans
of $37.9 million. During fiscal 2014, these activities were funded primarily by proceeds from the principal repayments on loans
of $45.7 million.
Financing activities
consist primarily of activity in deposit accounts and in FHLB advances. Total deposits decreased $13.4 million (net of amortization
of purchased premium) for the year ended June 30, 2015, compared to a net decrease of $17.4 million for the year ended June 30,
2014. FHLB advances increased $9.4 million from June 30, 2014 to June 30, 2015. Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage
the pricing of our deposits to be competitive and to increase core deposit relationships.
Commitments and Contractual Obligations
At June 30, 2015, we had $3.8 million in
mortgage commitments. Certificates of deposit due within one year of June 30, 2015 totaled $75.9 million, or 38.0% of total deposits.
If these deposits do not remain with us, we might be required to seek other sources of funds, including FHLB advances or other
certificates of deposit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings
than we currently pay on the certificates of deposit due on or before June 30, 2016. We believe, however, based on past experience,
that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits
by adjusting the interest rates offered.
For the year ended
June 30, 2015, other than loan commitments, we engaged in no off-balance-sheet transactions reasonably likely to have a material
effect on our financial condition, results of operations or cash flows.
Dividend Policy
In fiscal
2015, the Company’s net income exceeded its aggregate dividend of $1.4 million by $684,000. In fiscal 2014,
the Company’s net income exceeded its aggregate dividend of $1.5 million by $423,000. Approximately 56.0% of the shares
of Kentucky First Federal are held by First Federal MHC, a mutual holding company created in 2005. Under regulations of
the board of governors of the federal reserve system mutual holding companies, who have waived their dividends prior to
December 1, 2009, may continue to waive these dividends provided there is no objection by the Federal Reserve. This
waiver action is conditioned on providing appropriate notice and absent the Federal Reserve’s determination that the
waiver would be detrimental to the safe and sound operations of the banks. An interim final rule issued by the Federal
Reserve raises some question whether we will continue to be allowed to waive these dividends without detriment to the Company
as a whole. The Federal Reserve did not object to dividend waivers in August 2011, November 2011 or February 2012. However,
they refused to allow the waiver for the May 2012 dividend. As a result, the dividend was paid to the MHC as well as to
public shareholders. In an effort to comply with Regulation MM and to be able to continue to waive the dividend, First
Federal MHC put the issue to a vote of the members and on August 23, 2012, again on July 9, 2013, again on July 8, 2014, and
again on July 7, 2015. Members of First Federal MHC voted in favor of the dividend waiver on all four occasions and the
Federal Reserve Bank of Cleveland subsequently approved the waiver of dividends. 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 2016. Management believes that the Company has sufficient capital to continue the current dividend policy
without affecting the well-capitalized status of either subsidiary bank. Indeed, the Banks still far exceed all regulatory
required capital levels. Therefore, we expect to continue to seek approval from the Federal Reserve to allow First Federal
MHC to waive its right to dividends. If management should anticipate a long-term trend in which dividends consistently exceed
net income (either due to regulatory mandate or a drop in income levels), the dividend policy would be reconsidered.
Management cautions that comparison between the Company’s published earnings per share and the Company’s
published dividends per share does not lead to an accurate portrayal of the relationship between net income and dividends
paid.
Impact of Inflation and Changing Prices
Our consolidated financial statements and
accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement
of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating
costs. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest
rates generally have a more significant impact on our performance than do general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and services.
Report of Independent Registered Public
Accounting Firm
Kentucky First Federal Bancorp
Frankfort, Kentucky
We have audited the accompanying consolidated balance sheets
of Kentucky First Federal Bancorp as of June 30, 2015 and 2014, and the related consolidated statements of income, comprehensive
income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of the Company as of June 30, 2015 and 2014, and the
results of its operations and its cash flows for the two years then ended, in conformity with U.S. generally accepted accounting
principles.
Louisville, Kentucky
September 28, 2015
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
June 30, 2015 and 2014
(Dollar amounts in thousands, except per
share data)
| | |
2015 | | |
2014 | |
| ASSETS | |
| | | |
| | |
| | |
| | | |
| | |
| Cash and due from financial institutions | |
$ | 3,864 | | |
$ | 4,191 | |
| Interest-bearing demand deposits | |
| 9,771 | | |
| 7,320 | |
| Cash and cash equivalents | |
| 13,635 | | |
| 11,511 | |
| | |
| | | |
| | |
| Securities available for sale | |
| 159 | | |
| 247 | |
| Securities held-to-maturity, at amortized cost- approximate fair value of $6,534 and $9,195 at June 30, 2015 and 2014, respectively | |
| 6,423 | | |
| 9,018 | |
| Loans held for sale | |
| 100 | | |
| — | |
| Loans, net of allowance of $1,568 and $1,473 at June 30, 2015 and 2014, respectively | |
| 243,815 | | |
| 246,788 | |
| Real estate owned, net | |
| 1,593 | | |
| 1,846 | |
| Premises and equipment, net | |
| 5,235 | | |
| 4,629 | |
| Federal Home Loan Bank stock, at cost | |
| 6,482 | | |
| 6,482 | |
| Accrued interest receivable | |
| 725 | | |
| 891 | |
| Bank-owned life insurance | |
| 2,971 | | |
| 2,878 | |
| Goodwill | |
| 14,507 | | |
| 14,507 | |
| Prepaid federal income taxes | |
| — | | |
| 227 | |
| Prepaid expenses and other assets | |
| 653 | | |
| 631 | |
| | |
| | | |
| | |
| Total assets | |
$ | 296,298 | | |
$ | 299,655 | |
| | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Deposits | |
$ | 199,701 | | |
$ | 213,142 | |
| Federal Home Loan Bank advances | |
| 26,635 | | |
| 17,200 | |
| Advances by borrowers for taxes and insurance | |
| 699 | | |
| 616 | |
| Accrued interest payable | |
| 32 | | |
| 32 | |
| Accrued federal income taxes | |
| 78 | | |
| — | |
| Deferred federal income taxes | |
| 569 | | |
| 210 | |
| Deferred revenue | |
| 610 | | |
| 631 | |
| Other liabilities | |
| 661 | | |
| 619 | |
| Total liabilities | |
| 228,985 | | |
| 232,450 | |
| | |
| | | |
| | |
| 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 | |
| 34,638 | | |
| 34,671 | |
| Retained earnings | |
| 34,711 | | |
| 34,027 | |
| Unearned employee stock ownership plan (ESOP) | |
| (1,223 | ) | |
| (1,410 | ) |
| Treasury shares at cost, 112,563 and 27,886 common shares at June 30, 2015 and 2014, respectively | |
| (937 | ) | |
| (239 | ) |
| Accumulated other comprehensive income | |
| 38 | | |
| 70 | |
| Total shareholders’ equity | |
| 67,313 | | |
| 67,205 | |
| | |
| | | |
| | |
| Total liabilities and shareholders’ equity | |
$ | 296,298 | | |
$ | 299,655 | |
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the years ended June 30, 2015 and 2014
(Dollar amounts in thousands, except per
share data)
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Interest income | |
| | | |
| | |
| Loans, including fees | |
$ | 11,996 | | |
$ | 12,681 | |
| Mortgage-backed securities | |
| 110 | | |
| 132 | |
| Other securities | |
| 25 | | |
| 29 | |
| Interest-bearing deposits and other | |
| 258 | | |
| 308 | |
| Total interest income | |
| 12,389 | | |
| 13,150 | |
| | |
| | | |
| | |
| Interest expense | |
| | | |
| | |
| Deposits | |
| 1,190 | | |
| 1,341 | |
| Borrowings | |
| 238 | | |
| 277 | |
| Total interest expense | |
| 1,428 | | |
| 1,618 | |
| | |
| | | |
| | |
| Net interest income | |
| 10,961 | | |
| 11,532 | |
| | |
| | | |
| | |
| Provision for loan losses | |
| 343 | | |
| 580 | |
| | |
| | | |
| | |
| Net interest income after provision for loan losses | |
| 10,618 | | |
| 10,952 | |
| | |
| | | |
| | |
| Non-interest income | |
| | | |
| | |
| Net gains on sales of loans | |
| 28 | | |
| 55 | |
| Earnings on bank-owned life insurance | |
| 93 | | |
| 91 | |
| Net gain (loss) on sales of REO | |
| 207 | | |
| (14 | ) |
| Valuation adjustment for REO | |
| (87 | ) | |
| (101 | ) |
| Other | |
| 273 | | |
| 313 | |
| Total non-interest income | |
| 514 | | |
| 344 | |
| | |
| | | |
| | |
| Non-interest expense | |
| | | |
| | |
| Employee compensation and benefits | |
| 4,859 | | |
| 5,353 | |
| Occupancy and equipment | |
| 610 | | |
| 552 | |
| Legal fees | |
| 94 | | |
| 35 | |
| Outside service fees | |
| 198 | | |
| 140 | |
| Data processing | |
| 429 | | |
| 457 | |
| Audit and accounting | |
| 252 | | |
| 263 | |
| FDIC insurance premiums | |
| 230 | | |
| 230 | |
| Franchise and other taxes | |
| 261 | | |
| 269 | |
| Foreclosure and REO expense, net | |
| 180 | | |
| 160 | |
| Other | |
| 929 | | |
| 951 | |
| Total non-interest expense | |
| 8,042 | | |
| 8,410 | |
| | |
| | | |
| | |
| Income before income taxes | |
| 3,090 | | |
| 2,886 | |
| | |
| | | |
| | |
| Federal income tax expense (benefit) | |
| | | |
| | |
| Current | |
| 646 | | |
| 1,056 | |
| Deferred | |
| 375 | | |
| (104 | ) |
| Total federal income taxes | |
| 1,021 | | |
| 952 | |
| | |
| | | |
| | |
| NET INCOME | |
$ | 2,069 | | |
$ | 1,934 | |
| | |
| | | |
| | |
| EARNINGS PER SHARE | |
| | | |
| | |
| Basic and diluted | |
$ | 0.25 | | |
$ | 0.23 | |
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
For the years ended June 30, 2015 and 2014
(Dollar amounts in thousands)
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Net income | |
$ | 2,069 | | |
$ | 1,934 | |
| | |
| | | |
| | |
| Other comprehensive income (loss), net of tax-related effects: | |
| | | |
| | |
| Unrealized holding gains (losses) on securities available for sale during the year, net of tax expense (benefit) of $(16) and $24 in 2015 and 2014, respectively | |
| (32 | ) | |
| 47 | |
| | |
| | | |
| | |
| Comprehensive income | |
$ | 2,037 | | |
$ | 1,981 | |
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
For the years ended June 30, 2015 and 2014
(Dollar amounts in thousands, except per
share data)
| | |
| | |
| | |
| | |
Unearned | | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
employee | | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
stock | | |
| | |
Accumulated | | |
| |
| | |
| | |
Additional | | |
| | |
ownership | | |
| | |
other | | |
| |
| | |
Common | | |
paid-in | | |
Retained | | |
plan | | |
Treasury | | |
comprehensive | | |
| |
| | |
stock | | |
capital | | |
earnings | | |
(ESOP) | | |
shares | | |
income | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at July 1, 2013 | |
$ | 86 | | |
$ | 34,732 | | |
$ | 33,604 | | |
$ | (1,626 | ) | |
$ | (197 | ) | |
$ | 23 | | |
$ | 66,622 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| - | | |
| - | | |
| 1,934 | | |
| - | | |
| - | | |
| - | | |
| 1,934 | |
| Allocation of ESOP shares | |
| - | | |
| (61 | ) | |
| - | | |
| 216 | | |
| - | | |
| - | | |
| 155 | |
| Acquisition of 5,000 shares for Treasury | |
| - | | |
| - | | |
| - | | |
| - | | |
| (42 | ) | |
| - | | |
| (42 | ) |
| Unrealized gains on securities
designated as available for sale, net of related tax effects | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 47 | | |
| 47 | |
| Cash dividends of $0.40
per common share | |
| - | | |
| - | | |
| (1,511 | ) | |
| - | | |
| - | | |
| - | | |
| (1,511 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at June 30, 2014 | |
| 86 | | |
| 34,671 | | |
| 34,027 | | |
| (1,410 | ) | |
| (239 | ) | |
| 70 | | |
| 67,205 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| - | | |
| - | | |
| 2,069 | | |
| - | | |
| - | | |
| - | | |
| 2,069 | |
| Allocation of ESOP shares | |
| - | | |
| (33 | ) | |
| - | | |
| 187 | | |
| - | | |
| - | | |
| 154 | |
| Acquisition of 84,677 shares for Treasury | |
| - | | |
| - | | |
| - | | |
| - | | |
| (698 | ) | |
| - | | |
| (698 | ) |
| Unrealized gains on securities
designated as available for sale, net of related tax effects | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (32 | ) | |
| (32 | ) |
| Cash dividends of $0.40
per common share | |
| - | | |
| - | | |
| (1,385 | ) | |
| - | | |
| - | | |
| - | | |
| (1,385 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at June 30,
2015 | |
$ | 86 | | |
$ | 34,638 | | |
$ | 34,711 | | |
$ | (1,223 | ) | |
$ | (937 | ) | |
$ | 38 | | |
$ | 67,313 | |
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2015 and 2014
(Dollar amounts in thousands)
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Cash flows from operating activities: | |
| | | |
| | |
| Net income | |
$ | 2,069 | | |
$ | 1,934 | |
| Adjustments to reconcile net income to net cash | |
| | | |
| | |
| provided by operating activities: | |
| | | |
| | |
| Depreciation | |
| 278 | | |
| 288 | |
| Accretion of purchased loan discount | |
| (310 | ) | |
| (155 | ) |
| Amortization of purchased loan premium | |
| 18 | | |
| 11 | |
| Amortization of discounts and premiums on investment securities, net | |
| 148 | | |
| 216 | |
| Amortization (accretion) of deferred loan origination costs (fees) | |
| 55 | | |
| (18 | ) |
| Accretion of premiums on Federal Home Loan Bank advances | |
| — | | |
| (56 | ) |
| Accretion of premiums on deposits | |
| (212 | ) | |
| (414 | ) |
| Net gain on sale of loans | |
| (28 | ) | |
| (55 | ) |
| Valuation adjustment of REO | |
| 87 | | |
| 101 | |
| Net loss (gain) on real estate owned | |
| (186 | ) | |
| 7 | |
| Deferred gain on sale of real estate owned | |
| (21 | ) | |
| (10 | ) |
| ESOP compensation expense | |
| 154 | | |
| 155 | |
| Earnings on bank-owned life insurance | |
| (93 | ) | |
| (91 | ) |
| Provision for loan losses | |
| 343 | | |
| 580 | |
| Origination of loans held for sale | |
| (699 | ) | |
| (1,420 | ) |
| Proceeds from loans held for sale | |
| 627 | | |
| 1,671 | |
| Increase (decrease) in cash, due to changes in: | |
| | | |
| | |
| Accrued interest receivable | |
| 166 | | |
| 28 | |
| Prepaid expenses and other assets | |
| (22 | ) | |
| 51 | |
| Accrued interest payable | |
| — | | |
| (4 | ) |
| Accounts payable and other liabilities | |
| 42 | | |
| (5 | ) |
| Federal income tax (benefit) | |
| | | |
| | |
| Current | |
| 305 | | |
| (223 | ) |
| Deferred | |
| 375 | | |
| (104 | ) |
| Net cash provided by operating activities | |
| 3,096 | | |
| 2,487 | |
| | |
| | | |
| | |
| Cash flows from investing activities: | |
| | | |
| | |
| Purchase of investment securities held to maturity | |
| (8,500 | ) | |
| (10,000 | ) |
| Investment securities maturities, prepayments and calls: | |
| | | |
| | |
| Held to maturity | |
| 10,947 | | |
| 13,000 | |
| Available for sale | |
| 40 | | |
| 27 | |
| Loans originated for investment, net of principal collected | |
| 1,388 | | |
| 13,794 | |
| Proceeds from Federal Home Loan Bank stock repurchase | |
| — | | |
| 1,250 | |
| Proceeds from sale of real estate owned | |
| 1,831 | | |
| 700 | |
| Additions to premises and equipment, net | |
| (884 | ) | |
| (309 | ) |
| Net cash provided by investing activities | |
| 4,822 | | |
| 18,462 | |
| | |
| | | |
| | |
| Cash flows from financing activities: | |
| | | |
| | |
| Net change in deposits | |
| (13,229 | ) | |
| (17,425 | ) |
| Payments by borrowers for taxes and insurance, net | |
| 83 | | |
| 54 | |
| Proceeds from Federal Home Loan Bank advances | |
| 23,800 | | |
| 10,000 | |
| Repayments on Federal Home Loan Bank advances | |
| (14,365 | ) | |
| (17,054 | ) |
| Treasury stock repurchases | |
| (698 | ) | |
| (42 | ) |
| Dividends paid on common stock | |
| (1,385 | ) | |
| (1,511 | ) |
| Net cash used in financing activities | |
| (5,794 | ) | |
| (25,978 | ) |
| | |
| | | |
| | |
| Net increase (decrease) in cash and cash equivalents | |
| 2,124 | | |
| (5,029 | ) |
| | |
| | | |
| | |
| Beginning cash and cash equivalents | |
| 11,511 | | |
| 16,540 | |
| | |
| | | |
| | |
| Ending cash and cash equivalents | |
$ | 13,635 | | |
$ | 11,511 | |
The accompanying notes are an integral part of these
statements.
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the years ended June 30, 2015 and 2014
(Dollar amounts in thousands)
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Supplemental disclosure of cash flow information: | |
| | | |
| | |
| Cash paid during the year for: | |
| | | |
| | |
| Federal income taxes | |
$ | 330 | | |
$ | 1,275 | |
| | |
| | | |
| | |
| Interest on deposits and borrowings | |
$ | 1,640 | | |
$ | 2,092 | |
| | |
| | | |
| | |
| Supplemental disclosure of noncash investing activities: | |
| | | |
| | |
| Transfers from loans to real estate acquired through foreclosure | |
$ | 2,123 | | |
$ | 1,684 | |
| | |
| | | |
| | |
| Loans disbursed upon sales of real estate acquired through foreclosure | |
$ | 643 | | |
$ | 198 | |
The accompanying notes are an integral part of these statements.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentucky First Federal Bancorp
(the “Company”) is a savings and loan holding company whose activities are primarily limited to holding the stock
and managing the operations of First Federal Savings and Loan Association of Hazard, Kentucky (“First Federal of Hazard”)
and Frankfort First Bancorp, Inc., (“Frankfort First”) the holding company for First Federal Savings Bank of Frankfort
(“First Federal of Frankfort”). First Federal of Hazard and First Federal of Frankfort are collectively referred to
herein as “the Banks.” First Federal of Hazard is a community-oriented savings and loan association dedicated to serving
consumers in Perry and surrounding counties in eastern Kentucky, while First Federal of Frankfort operates through six banking
offices located in Frankfort, Danville and Lancaster, Kentucky. Both institutions engage primarily in the business of attracting
deposits from the general public and applying those funds to the origination of loans for residential and consumer purposes. First
Federal of Frankfort also originates, to a lesser extent, church loans, home equity and other loans. Other than a predominance
of one- to four-family residential property, which is common in most thrifts, there are no significant concentrations of loans
to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and
general economic conditions in the Banks’ specific operating areas. The Banks’ profitability is significantly dependent
on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and
investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest
income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received
or paid on these balances. The level of interest rates paid or received by the Banks can be significantly influenced by a number
of environmental factors, such as governmental monetary policy, that are outside of management’s control.
The following is a summary of
the Company’s significant accounting policies which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation:
The consolidated financial statements include the accounts of the Company, First Federal of Hazard, Frankfort First and First
Federal of Frankfort. All significant intercompany accounts and transactions have been eliminated in consolidation.
2. Use
of Estimates: The consolidated financial information presented herein has been prepared in accordance with U.S. generally
accepted accounting principles (“U.S. GAAP.”) To prepare financial statements in conformity with U.S. GAAP, management
makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in
the financial statements and the disclosures provided, and actual results could differ.
3. Securities: Debt
securities are classified as held to maturity or available for sale. Securities classified as held to maturity are to be carried
at cost only if the Company has the positive intent and ability to hold these securities to maturity. Securities designated as
available for sale are carried at fair value with resulting unrealized gains or losses recorded to shareholders’ equity,
net of tax.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
| 3. | Securities: (continued) |
Interest income includes amortization
of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating
prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on
the trade date and determined using the specific identification method.
Management evaluates securities
for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market
conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration
of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it
intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before
recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference
between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned
criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized
in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss
is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
4. Loans: Loans that
management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal
amount outstanding, adjusted for deferred loan origination fees, discounts on purchased loans, and the allowance for loan losses.
Interest income is accrued on the unpaid principal balance unless the collectability of the loan is in doubt. Loan origination
fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without
anticipating prepayments. Interest income on one- to four-family residential loans is generally discontinued at the time a loan
is 180 days delinquent and on other loans at the time a loan is 90 days delinquent. All other loans are moved to non-accrual status
in accordance with the Company’s policy, typically 90 days after the loan becomes delinquent. Past due status is based on
the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller
balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
All interest accrued but not
received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for
on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
5. Loans held for sale
and Mortgage Servicing Rights: Loans held for sale are carried at the lower of cost (less principal payments received) or
fair value, calculated on an aggregate basis. At June 30, 2015 the Company had $100,000 in loans held for sale, while at June
30, 2014 the Company had no loans held for sale.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
5. Loans held for sale
and Mortgage Servicing Rights: (continued)
In selling loans, the Company
utilizes a program with the Federal Home Loan Bank, retaining servicing on loans sold. Mortgage servicing rights on originated
loans that have been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and
over the period of estimated servicing revenues. The Company recorded amortization related to mortgage servicing rights totaling
$14,000 during each of the years ended June 30, 2015 and 2014. The carrying value of the Company’s mortgage servicing rights,
which approximated fair value, totaled approximately $96,000 and $104,000 at June 30, 2015 and 2014, respectively.
The Company was servicing mortgage
loans of approximately $11.9 million and $13.0 million that had been sold to the Federal Home Loan Bank at June 30, 2015 and 2014,
respectively. During the fiscal year ended June 30, 2015, we sold $599,000 in loans under the FHLB program and the average balance
of loans serviced was $12.3 million.
Servicing rights are evaluated
for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation
allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines
that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded
as an increase to income. Changes in valuation allowances are reported with other non-interest income on the income statement.
The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment
speeds and default rates and losses.
Servicing fee income which
is reported on the income statement as other non-interest income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of
mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $20,000 and $35,000 for the fiscal
years ended June 30, 2015 and 2014, respectively. Late fees and ancillary fees related to loan servicing are not material.
6. Allowance for Loan
Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged
against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance. Management estimates the allowance balance required using past loss experience, the nature
and volume of the portfolio, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower’s
ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the primary
lending area. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan
that, in management’s judgment, should be charged off.
The allowance consists of specific
and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise
classified as substandard or doubtful. The general component covers all loans and is based on historical loss experience adjusted
for current factors. In consultation with regulators, the Company considers a time frame of two years when estimating the appropriate
level of allowance for loan losses. This period may be shortened or extended based on anticipated trends in the banks or in the
banks’ markets.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Allowance for loan losses:
(continued)
The historical loss experience
is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent eight
quarters. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio
segment.
These economic factors include
consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and
recoveries; trends in volume and terms of loans; changes in lending policies, procedures and practices; experience, ability and
depth of lending management and other relevant staff; economic trends and conditions; industry conditions; and effects of changes
in credit concentrations. Our portfolio segments include residential real estate, nonresidential real estate and land, loans on
deposits and consumer and other loans. Risk factors associated with our portfolio segments are as follows:
Residential Real Estate
Our primary lending activity
is the origination of mortgage loans, which enable a borrower to purchase or refinance existing homes in the Banks’ respective
market areas. We further classify our residential real estate loans as one- to four-family (owner-occupied vs nonowner-occupied),
multi-family or construction. We believe that our first mortgage position on loans secured by residential real estate presents
lower risk than our other loans, with the exception of loans on deposits.
We offer a mix of adjustable-rate
and fixed-rate mortgage loans with terms up to 30 years for owner-occupied properties. For these properties a borrower may be able
to borrow up to 95% of the value with private mortgage insurance. Alternatively, the borrower may be able to borrow up to 90% of
the value with a traditional first mortgage and a second mortgage (bearing a higher rate of interest) on the additional 10% of
the value.
We offer loans on one- to four-family
rental properties at a maximum of 80% loan-to-value (“LTV”) ratio and we generally charge a slightly higher interest
rate on such loans.
We also originate loans to individuals
to finance the construction of residential dwellings for personal use or for use as rental property. We occasionally lend to builders
for construction of speculative or custom residential properties for resale, but on a limited basis. Construction loans are generally
less than one year in length, do not exceed 80% of the appraised value, and provide for the payment of interest only during the
construction phase. Funds are disbursed as progress is made toward completion of the construction.
Multi-family and Nonresidential
Loans
We offer mortgage loans secured
by residential multi-family (five or more units), and nonresidential real estate. Nonresidential real estate loans are comprised
generally of commercial office buildings, churches and properties used for other purposes. Generally, these loans are originated
for 25 years or less and do not exceed 80% of the appraised value. Loans secured by multi-family and commercial real estate generally
have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. These loans depend
on the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured
by income properties often depend on successful operation and management of the properties. As a result, repayment on such loans
may be subject to a greater extent to adverse conditions
in the real estate market or economy than owner-occupied residential loans.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Allowance for loan losses:
(continued)
Consumer lending
Our consumer loans include home
equity lines of credit, loans secured by savings deposits, automobile loans, and unsecured loans. Home equity loans are generally
second mortgage loans subordinate only to first mortgages also held by the bank and do not exceed 80% of the estimated value of
the property. We do offer home equity loans up to 90% of the estimated value to qualified borrowers and these loans carry a premium
rate. Loans secured by savings are originated up to 90% of the depositor’s savings account balance and bear interest at a
rate higher than the rate paid on the deposit account. Because the deposit account must be pledged as collateral to secure the
loan, the inherent risk of this type of loan is minimal. Loans secured by automobiles are made directly to consumers (there are
no relationships with dealers) and are based on the value of the vehicle and the borrower’s creditworthiness. Vehicle loans
present a higher level of risk because of the natural decline in the value of the property as well as its mobility. Unsecured loans
are based entirely on the borrower’s creditworthiness and present the highest level of risk to the bank.
The Banks account for impaired
loans by determining the present value of expected future cash flows discounted at the loan’s effective interest rate or,
as an alternative, at the loan’s observable market price or fair value of the collateral, reduced by estimated selling costs.
A loan is considered impaired
when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Although most of our loans are secured by collateral, we rely heavily on the capacity
of our borrowers to generate sufficient cash flow to service their debt. As a result, our loans do not become collateral-dependent
until there is deterioration in the borrower’s cash flow and financial condition, which makes it necessary for us to look
to the collateral for our sole source of repayment. Collateral-dependent loans which are more than ninety days delinquent are considered
to constitute more than a minimum delay in repayment and are evaluated for impairment under the policy at that time.
We utilize updated independent
appraisals to determine fair value for collateral-dependent loans, adjusted for estimated selling costs, in determining our specific
reserve. In some situations management does not secure an updated independent appraisal. These situations may involve small loan
amounts or loans that, in management’s opinion, have an abnormally low loan-to-value ratio.
With respect to the Banks’
investment in troubled debt restructurings, multi-family and nonresidential loans, and the evaluation of impairment thereof, such
loans are nonhomogenous and, as such, may be deemed to be collateral-dependent when they become more than ninety days delinquent.
We obtain updated independent appraisals in these situations or when we suspect that the previous appraisal may no longer be reflective
of the property’s current fair value. This process varies from loan to loan, borrower to borrower, and also varies based
on the nature of the collateral.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Federal Home Loan Bank
Stock: The banks are members of the FHLB system. Members are required to own a certain amount of stock based on the level of
borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security,
and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as
income.
8. Real Estate Owned:
Real estate acquired through or instead of foreclosure is initially recorded at fair value less estimated selling expenses at the
date of acquisition, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. If fair value declines subsequently, the carrying value is adjusted through a valuation allowance
and the amount is recorded through expense. Costs relating to holding real estate owned, net of rental income, are charged against
earnings as incurred.
9. Premises and Equipment:
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. The cost of premises and equipment
includes expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as
incurred. For financial reporting, depreciation is provided on the straight-line method over the useful lives of the assets, estimated
to be forty years for buildings, ten to forty years for building improvements, and five to ten years for furniture and equipment.
10. Income Taxes: Income
tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts
and tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets are recorded only to the extent
that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings,
carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management’s estimate of future taxable income. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized. Deferred tax liabilities are provided on the total amount of net temporary differences
taxable in the future.
A tax provision is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. The Company recognizes interest and/or penalties related to income tax matters as income tax expense.
Kentucky First Federal Bancorp
and Frankfort First Bancorp, Inc., each are subject to state income taxes in the Commonwealth of Kentucky. Neither of the Banks
are subject to state income tax in the Commonwealth. With few exceptions, the Company is no longer subject to U.S. federal, state
and local tax examinations by tax authorities for years before 2011.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Retirement and Employee
Benefit Plans: The Banks each participate in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra
DB Plan”), which is a tax-qualified, multi-employer defined benefit pension fund covering all employees who qualify as to
length of service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra
DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement
Income Security Act of 1974 and the Internal Revenue Code. The Pentegra DB Plan is a single plan under Internal Revenue Code Section
413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions
made by a participating employer may be used to provide benefits to participants of other participating employers. Total contributions
made to the Pentegra DB Plan, as reported on Form 5500, equal $190.8 million and $136.5 million for the plan years ended June 30,
2014 and 2013, respectively. Our contributions for fiscal 2015 and 2014 were not more than 5% of the total contributions made to
the Pentegra DB Plan. Pension expense is the net contributions, which are based upon covered employees’ ages and salaries
and are dependent upon the ultimate prescribed benefits of the participants and the funded status of the plan. The Company recognized
expense related to the plans totaling approximately $227,000 and $876,000 for the fiscal years ended June 30, 2015 and 2014. There
are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. As of July 1, 2014, the most
recent period for which information is available, First Federal of Hazard had an adjusted funding target attainment percentage
(“AFTAP”) of 108.5%, while First Federal of Frankfort had an AFTAP of 111.9%. There are no funding improvement plans
or surcharges to participants.
The Company also maintains a
nonqualified deferred compensation plan for the benefit of certain directors, which is closed to any future deferrals. The expense
incurred for the deferred compensation was $15,000 and $2,000 for the fiscal years ended June 30, 2015 and 2014, respectively,
while the liabilities totaled $177,000 and $206,000 at June 30, 2015 and 2014, respectively.
First Federal of Hazard has an
Employee Stock Ownership Plan (“ESOP”) which provides retirement benefits for substantially all full-time employees
who have completed one year of service and have attained the age of 21. Annual contributions are made to the ESOP equal to the
ESOP’s debt service less dividends received by the ESOP on unallocated shares. Shares in the ESOP were acquired using funds
provided by a loan from the Company and, accordingly, the cost of those shares is shown as a reduction of stockholders’ equity.
Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends
and charged to retained earnings. Dividends on unallocated shares are used to repay loan principal and accrued interest. Compensation
expense is recorded equal to the fair value of shares committed to be released during a given fiscal year. Allocation of shares
to the ESOP participants is contingent upon the repayment of a loan to Kentucky First Federal Bancorp totaling $1.6 million and
$1.8 million at June 30, 2015 and 2014, respectively. The Company recorded expense for the ESOP of approximately $154,000 and $155,000
for the years ended June 30, 2015 and 2014, respectively. Shares may be surrendered from the plan as employees leave employment.
Total shares surrendered from the plan totaled 73,266 at both June 30, 2015 and 2014. The amounts contributed to the ESOP were
$280,000 for each of the years 2015 and 2014.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| 11. | Retirement and Employee Benefit Plans: (continued) |
| | |
For the fiscal year ended | |
| | |
June 30, | |
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Allocated shares | |
| 132,058 | | |
| 116,028 | |
| Shares committed to be released | |
| 9,338 | | |
| 9,338 | |
| Unearned shares | |
| 122,311 | | |
| 140,987 | |
| Total ESOP shares | |
| 263,707 | | |
| 266,353 | |
| | |
| | | |
| | |
| Fair value of unearned shares at End of period (dollars in thousands) | |
$ | 1,025 | | |
$ | 1,212 | |
First Federal of Frankfort maintains
a 401(k) plan for the benefit of all full-time employees. No employer contributions have been made to the 401(k) plan.
12. Share-Based Compensation
Plans: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair
value of these awards at the date of the grant. A Black-Scholes model is utilized to estimate the fair value of stock options,
while the market price of the Company’s common stock at the date of the grant is used for restricted stock awards. Compensation
cost is recognized over the required service period, generally defined as the vesting period. In fiscal 2006, the Company initiated
the 2005 Equity Incentive Plan (“EIP” or the “Plan”) which provides for two share-based compensation plans,
which are described below.
No compensation cost was charged
against income for those share-based plans for the fiscal years ended June 30, 2015, or 2014 and, consequently, there was no income
tax benefit recognized for either of the fiscal years then ended.
The EIP provides for grants of
up to 421,216 stock options. It also provides that one-fifth of the options granted become vested and exercisable on the first
five anniversaries of the date of grant. The contractual term of the options is ten years. All option awards are granted with an
exercise price equal to the market price of the Company’s stock at the date of grant.
At June 30, 2015, the only options
outstanding are related to those granted in the fiscal year 2006.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Share-Based Compensation Plans: (continued)
A summary of the status of the
Company’s stock option plan as of June 30, 2015, and changes during the year then ended is presented below:
| | |
| | |
Weighted- | | |
Aggregate | |
| | |
| | |
average | | |
Intrinsic | |
| | |
| | |
exercise | | |
Value | |
| | |
Shares | | |
price | | |
($000) | |
| | |
| | |
| | |
| |
| Outstanding at beginning of year | |
| 325,800 | | |
$ | 10.10 | | |
| | |
| Granted | |
| - | | |
| - | | |
| | |
| Exercised | |
| - | | |
| - | | |
| | |
| Forfeited | |
| - | | |
| - | | |
| | |
| | |
| | | |
| | | |
| | |
| Outstanding at end of year | |
| 325,800 | | |
$ | 10.10 | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| Options exercisable at end of year | |
| 325,800 | | |
$ | 10.10 | | |
$ | - | |
As of June 30, 2015 and 2014, there was no unrecognized
compensation cost related to nonvested stock options granted under the Plan.
The EIP also provides for the
purchase of 168,486 shares of common stock and the issuance of such shares in the form of restricted stock awards to members of
the board of directors, management and certain employees. Common shares awarded under the restricted stock plan vest over a five
year period, commencing with the date of the grant and are expensed based on their fair value at the grant date.
As of June 30, 2015 and 2014,
there were no grants, forfeitures or nonvested shares and no unrecognized compensation cost related to the restricted stock awards.
13. 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. There is no adjustment to net earnings for the
calculation of diluted earnings per share. The factors used in the basic and diluted earnings per share computations for the fiscal
years ended June 30 follow:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Net income allocated to common shareholders, basic and diluted | |
$ | 2,069 | | |
$ | 1,934 | |
| | |
| | | |
| | |
| | |
2015 | | |
2014 | |
| Basic | |
| | | |
| | |
| Weighted-average common shares outstanding | |
| 8,348,785 | | |
| 8,374,624 | |
| | |
| | | |
| | |
| Diluted | |
| | | |
| | |
| Weighted-average common shares outstanding (diluted) | |
| 8,348,785 | | |
| 8,374,624 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Earnings Per Share:
(continued)
Basic earnings per share is
computed based upon the weighted-average shares outstanding during the year less average shares in the ESOP that are unallocated
and not committed to be released. For fiscal years 2015 and 2014 all options were antidilutive, as the exercise price was greater
than the average market price of the common stock.
14. Fair Value of Assets and Liabilities:
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. There are three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices in active markets
for identical assets or liabilities that the entity has the ability to access as of the measurement date.
Level 2 - Observable inputs other than Level
1 prices, such as quoted prices for similar assets or liabilities; quoted prices in 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 – Significant unobservable inputs
that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or
liability.
Following is a description of the valuation methodologies
used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheet, 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 matrix pricing, which is a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship
to other benchmark quoted securities (Level 2 inputs).
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Assets
and Liabilities (continued)
The following table presents the fair value measurements
of assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and 2014. The securities represented are
only those classified as available-for sale.
| | |
| | |
Fair Value Measurements Using | |
| | |
| | |
Quotes Prices | | |
| | |
| |
| | |
| | |
in Active | | |
Significant | | |
| |
| | |
| | |
Markets for | | |
Other | | |
Significant | |
| | |
| | |
Identical | | |
Observable | | |
Unobservable | |
| | |
| | |
Assets | | |
Inputs | | |
Inputs | |
| (in thousands) | |
Fair Value | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| | |
| | |
| | |
| | |
| |
| 2015 | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed: residential | |
$ | 96 | | |
$ | — | | |
$ | 96 | | |
$ | — | |
| FHLMC stock | |
| 63 | | |
| — | | |
| 63 | | |
| — | |
| | |
$ | 159 | | |
$ | — | | |
$ | 159 | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | |
| 2014 | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed: residential | |
$ | 136 | | |
$ | — | | |
$ | 136 | | |
$ | — | |
| FHLMC stock | |
| 111 | | |
| — | | |
| 111 | | |
| — | |
| | |
$ | 247 | | |
$ | — | | |
$ | 247 | | |
$ | — | |
There were no transfers between levels 1 and 2.
Impaired Loans
The fair value of impaired loans
with specific allocations of the allowance for loan losses is generally based on recent independent 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 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. Independent appraisals for collateral-dependent loans are updated periodically (usually every 12-24
months depending on the size of the loan and the loan-to-value ratio).
Real Estate Owned
Real estate properties acquired
through or instead of loan foreclosure are initially recorded as real estate owned (“REO”) 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 which are updated no less frequently
than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales
and the income approach with data from comparable properties. 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 were $87,000 and
$101,000 for the fiscal years 2015 and 2014, respectively, and resulted in a Level 3 classification of the inputs for determining
fair value.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Assets
and Liabilities (continued)
The following table presents the fair value measurements
of assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2015 and 2014.
| | |
| | |
Fair
Value Measurements Using | |
| | |
| | |
Quotes Prices | | |
| | |
| |
| | |
| | |
in Active | | |
Significant | | |
| |
| | |
| | |
Markets for | | |
Other | | |
Significant | |
| | |
| | |
Identical | | |
Observable | | |
Unobservable | |
| | |
| | |
Assets | | |
Inputs | | |
Inputs | |
| (in thousands) | |
Fair
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
| | |
| | |
| | |
| | |
| |
| 2015 | |
| | | |
| | | |
| | | |
| | |
| Other real estate owned, net | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 525 | | |
| - | | |
| - | | |
$ | 525 | |
| Land | |
| 15 | | |
| - | | |
| - | | |
| 15 | |
| | |
| | | |
| | | |
| | | |
| | |
| 2014 | |
| | | |
| | | |
| | | |
| | |
| Impaired loans | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 186 | | |
$ | - | | |
$ | - | | |
$ | 186 | |
| | |
| | | |
| | | |
| | | |
| | |
| Other real estate owned, net | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
| 1,140 | | |
| - | | |
| - | | |
| 1,140 | |
| Land | |
| 15 | | |
| - | | |
| - | | |
| 15 | |
Impaired loans, which are measured
for impairment using the fair value of the collateral for collateral dependent loans, had a carrying value of $200,000, with a
valuation allowance of $14,000 at June 30, 2014. At June 30, 2015, there were no impaired loans with a valuation allowance. There
was no additional provision recorded for the fiscal years ended June 30, 2015 and 2014.
Other real estate owned measured
at fair value less costs to sell, had a carrying amount of $540,000 and $1.2 million at June 30, 2015 and 2014, respectively, after
write-down of $54,000 and $53,000 for the years ended June 30, 2015 and 2014, respectively.
KENTUCKY
FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. 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 June 30, 2015 and 2014:
| | |
| | |
| |
| |
Range |
| | |
Fair Value | | |
Valuation | |
Unobservable | |
(Weighted |
| June 30,
2015 | |
(in thousands) | | |
Technique(s) | |
Input(s) | |
Average) |
| | |
| | |
| |
| |
|
| Foreclosed and repossessed assets: | |
| | | |
| |
| |
|
| 1-4 family | |
$ | 525 | | |
Sales comparison approach | |
Adjustments for differences between comparable sales | |
1.5% to 11.7% (2.9%) |
| Land | |
| 15 | | |
Sales comparison approach | |
Adjustments for differences between comparable sales | |
20.2% to 38.9% (20.8%) |
| | |
| | |
| |
| |
Range |
| | |
Fair Value | | |
Valuation | |
Unobservable | |
(Weighted |
| June 30,
2014 | |
(in thousands) | | |
Technique(s) | |
Input(s) | |
Average) |
| Impaired Loans: | |
| | | |
| |
| |
|
| Residential real estate | |
| | | |
| |
| |
|
| 1-4 family | |
$ | 186 | | |
Sales comparison approach | |
Adjustments for differences between comparable sales | |
3.1% to 19.8% (4.3%) |
| | |
| | | |
| |
| |
|
| Foreclosed and repossessed assets: | |
| | | |
| |
| |
|
| 1-4 family | |
$ | 1,140 | | |
Sales comparison approach | |
Adjustments for differences between comparable sales | |
-37.1% to 30.2% (1.1%) |
| Land | |
| 15 | | |
Sales comparison approach | |
Adjustments for differences between comparable sales | |
20.2% to 38.9% (20.8%) |
The following disclosure of the
fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated balance sheet,
is based on the assumptions presented for each particular item and 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.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Assets
and Liabilities (continued)
The following methods were used
to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than
fair value at June 30, 2015 and 2014:
| | Cash and cash equivalents: The carrying amounts presented in the consolidated balance sheets
for cash and cash equivalents are deemed to approximate fair value. |
| | Held-to-maturity securities: For held-to-maturity securities, fair value methods for securities
were previously described. |
| | Loans held for sale: Loans originated and intended for sale in the secondary market are
carried at the lower of cost or fair value 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. Impaired loans are valued at the lower of cost or fair value as
previously described. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
| | Federal Home Loan Bank stock: It was not practicable to determine the fair value of FHLB
stock due to restrictions placed on its transferability. |
Accrued interest receivable
and payable: 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 June 30, 2015 and 2014, was not material. |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. 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 June 30, 2015 and June 30, 2014
are as follows:
| | |
| | |
Fair Value Measurements at | |
| (in thousands) | |
| | |
June
30, 2015 Using | |
| | |
Carrying | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| | |
Value | | |
| | |
| | |
| | |
| |
| Financial assets | |
| | | |
| | | |
| | | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 13,635 | | |
$ | 13,635 | | |
| | | |
| | | |
$ | 13,635 | |
| Available-for-sale securities | |
| 159 | | |
| | | |
$ | 159 | | |
| | | |
| 159 | |
| Held-to-maturity securities | |
| 6,423 | | |
| | | |
| 6,534 | | |
| | | |
| 6,534 | |
| Loans held for sale | |
| 100 | | |
| | | |
| 101 | | |
| | | |
| 101 | |
| Loans receivable - net | |
| 243,815 | | |
| | | |
| | | |
$ | 248,265 | | |
| 248,265 | |
| Federal Home Loan Bank stock | |
| 6,482 | | |
| | | |
| | | |
| | | |
| n/a | |
| Accrued interest receivable | |
| 725 | | |
| | | |
| 27 | | |
| 698 | | |
| 725 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Financial liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
| Deposits | |
$ | 199,701 | | |
$ | 83,603 | | |
$ | 116,304 | | |
| | | |
$ | 199,907 | |
| Federal Home Loan Bank advances | |
| 26,635 | | |
| | | |
| 27,265 | | |
| | | |
| 27,265 | |
| Advances by borrowers for taxes and insurance | |
| 699 | | |
| | | |
| 699 | | |
| | | |
| 699 | |
| Accrued interest payable | |
| 32 | | |
| | | |
| 32 | | |
| | | |
| 32 | |
The carrying amounts and estimated fair values of
financial instruments at June 30, 2014, are as follows:
| | |
Fair Value Measurements at | |
| (in thousands) | |
June 30, 2014 Using | |
| | |
Carrying | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| | |
Value | | |
| | |
| | |
| | |
| |
| Financial assets | |
| | |
| | |
| | |
| | |
| |
| Cash and cash equivalents | |
$ | 11,511 | | |
$ | 11,511 | | |
| | | |
| | | |
$ | 11,511 | |
| Available-for-sale securities | |
| 247 | | |
| | | |
$ | 247 | | |
| | | |
| 247 | |
| Held-to-maturity securities | |
| 9,018 | | |
| | | |
| 9,195 | | |
| | | |
| 9,195 | |
| Loans held for sale | |
| — | | |
| | | |
| — | | |
| | | |
| — | |
| Loans receivable - net | |
| 246,788 | | |
| | | |
| | | |
$ | 253,780 | | |
| 253,780 | |
| Federal Home Loan Bank stock | |
| 6,482 | | |
| | | |
| | | |
| | | |
| n/a | |
| Accrued interest receivable | |
| 891 | | |
| | | |
| 891 | | |
| | | |
| 891 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Financial liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
| Deposits | |
$ | 213,142 | | |
$ | 88,854 | | |
$ | 124,390 | | |
| | | |
$ | 213,244 | |
| Federal Home Loan Bank advances | |
| 17,200 | | |
| | | |
| 18,303 | | |
| | | |
| 18,303 | |
| Advances by borrowers for taxes and insurance | |
| 616 | | |
| | | |
| 616 | | |
| | | |
| 616 | |
| Accrued interest payable | |
| 32 | | |
| | | |
| 32 | | |
| | | |
| 32 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in
other financial institutions with original maturities of less than ninety days.
16. Goodwill: Goodwill
resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of
the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined
as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree,
over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for
impairment at least annually. The Company has selected March 31 as the date to perform the annual impairment test. Intangible assets
with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the
only intangible asset with an indefinite life on our balance sheet.
17. Cash Surrender Value of
Life Insurance: First Federal of Frankfort has purchased life insurance policies on certain key executives. Bank-owned life
insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement.
18. Treasury Stock: Treasury
stock is stated at cost. Cost is determined by the first-in, first-out method.
19. Related Party Transactions:
Loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) at June 30,
2015 and 2014 are summarized as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Outstanding principal, beginning of year | |
$ | 1,265 | | |
$ | 1,246 | |
| Changes in composition of related parties | |
| 157 | | |
| 447 | |
| Principal disbursed during the year | |
| 146 | | |
| — | |
| Principal repaid and refinanced during the year | |
| (175 | ) | |
| (428 | ) |
| Outstanding principal, end of year | |
$ | 1,393 | | |
$ | 1,265 | |
Deposits from related parties
held by the Company at June 30, 2015 and 2014 totaled $4.2 million and $4.5 million, respectively.
20. Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale, net of tax, which are also recognized as separate components of equity.
21. Loss Contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe
there now are such matters that will have a material effect on the financial statements.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
22. Loan Commitments and Related
Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure
to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
23. Dividend Restriction:
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the banks to the holding company
or by the holding company to shareholders.
24. Operating Segments:
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments
are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable
operating segment.
25. Reclassifications:
Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had
no effect on prior year net income or shareholders’ equity.
26. New Accounting Standards:
In January 2014, FASB issued Accounting Standards Update (“ASU”) 2014-04, Receivables—Troubled
Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession
or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing
a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to
real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest
in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement.
Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and
the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The
new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December
15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements,
but will result in additional disclosures.
In May 2014 the FASB issued
ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU amended existing guidance related to revenue from
contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific
guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized
over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures
about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer.
Although the new guidance was originally effective for annual reporting periods, and interim reporting periods within those annual
periods, beginning after December 15, 2016, with early adoption not permitted, in April 2015 the FASB deferred the effective date
by one year. Therefore, ASU 2014-09 will be effective for the Company’s annual reporting periods, and interim reporting periods
within those annual periods, beginning after December 15, 2017. Companies have the option to apply ASU 2014-09 as of the original
effective date. Upon adoption, the amendments should be applied retrospectively to all periods presented or retrospectively with
the cumulative effect recognized at the date of initial application. Management is currently evaluating the impact of the adoption
of this guidance on the Company’s consolidated financial statements.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| 26. | New Accounting Standards: (continued) |
In June 2014 the FASB issued ASU 2014-12, Compensation-Stock
Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target
Could Be Achieved After the Requisite Service Period. The ASU amended existing guidance related to the accounting for share-based
payments when the terms of an award provide that a performance target could be achieved after the requisite service period. These
amendments require that a performance target that affects vesting and that could be achieved after the requisite service period
be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation-Stock Compensation,
as it relates to awards with performance conditions that affect vesting to account for such awards. The total amount of compensation
cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and
should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease
rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments are effective
for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted.
Entities may apply the amendments in this amendment either: (a) prospectively to all awards granted or modified after the effective
date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the financial statements and to all new or modified awards thereafter. The adoption of this standard is not
expected to have a material effect on the Company’s operating results or financial condition.
In November 2014 the FASB issued ASU 2014-17, Pushdown
Accounting (a consensus of the FASB Emerging Issues Task Force), which relates to Business Combinations (Topic 805.) The ASU
amended existing guidance related to the accounting by an acquired entity upon a change-in-control event. The amendments provide
an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event
in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting
in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply
pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If
pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will
have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent
change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the
change-in-control event occurred should be considered a change in accounting principle. If pushdown accounting is applied to an
individual change-in-control event, that election is irrevocable. If an acquired entity elects the option to apply pushdown accounting
in its separate financial statements, it should disclose information in the current reporting period that enables users of financial
statements to evaluate the effect of pushdown accounting. The amendments are effective on November 18, 2014. After the effective
date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in
control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already
have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The
adoption of this standard did not have a material effect on the Company’s operating results or financial condition.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
27. Purchased Credit Impaired Loans: The Company
purchased groups of loans through its whole bank acquisition, some of which have shown evidence of credit deterioration since origination.
These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s
allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased
credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such
as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each
loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the
loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected
cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated.
If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected
cash flows is greater than the carrying amount, it is recognized as part of future interest income.
NOTE B - SECURITIES
The following table summarizes
the amortized cost and fair value of the available for sale securities and held to maturity investment securities portfolio at
June 30, 2015 and 2014 and the corresponding amounts of gross unrealized or unrecognized gains and losses. Unrealized gains or
losses apply to available-for-sale securities and are recognized in accumulated other comprehensive income, while unrecognized
gains or losses on held-to-maturity securities are not recognized in the financial statements. The gains and losses are as follows:
| | |
2015 | |
| (in thousands) | |
Amortized
cost | | |
Gross
unrealized/
unrecognized
gains | | |
Gross
unrealized/
unrecognized
losses | | |
Estimated
fair value | |
| | |
| | |
| | |
| | |
| |
| Available-for-sale Securities | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed:residential | |
$ | 94 | | |
$ | 2 | | |
$ | - | | |
$ | 96 | |
| FHLMC stock | |
| 8 | | |
| 55 | | |
| - | | |
| 63 | |
| | |
$ | 102 | | |
$ | 57 | | |
$ | - | | |
$ | 159 | |
| | |
| | | |
| | | |
| | | |
| | |
| Held-to-maturity Securities | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed: residential | |
$ | 2,821 | | |
$ | 112 | | |
$ | 2 | | |
$ | 2,931 | |
| Agency bonds | |
| 3,602 | | |
| 2 | | |
| 1 | | |
| 3,603 | |
| | |
$ | 6,423 | | |
$ | 114 | | |
$ | 3 | | |
$ | 6,534 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE B – SECURITIES (continued)
| | |
2014 | |
| (in thousands) | |
Amortized
cost | | |
Gross
unrealized/
unrecognized
gains | | |
Gross
unrealized/
unrecognized
losses | | |
Estimated
fair value | |
| | |
| | |
| | |
| | |
| |
| Available-for-sale Securities | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed:residential | |
$ | 134 | | |
$ | 2 | | |
$ | - | | |
$ | 136 | |
| FHLMC stock | |
| 8 | | |
| 103 | | |
| - | | |
| 111 | |
| | |
$ | 142 | | |
$ | 105 | | |
$ | - | | |
$ | 247 | |
| | |
| | | |
| | | |
| | | |
| | |
| Held-to-maturity Securities | |
| | | |
| | | |
| | | |
| | |
| Agency mortgage-backed: residential | |
$ | 3,792 | | |
$ | 180 | | |
$ | 1 | | |
$ | 3,971 | |
| Agency bonds | |
| 5,226 | | |
| 3 | | |
| 5 | | |
| 5,224 | |
| | |
$ | 9,018 | | |
$ | 183 | | |
$ | 6 | | |
$ | 9,195 | |
The amortized cost and estimated
fair value of securities as of June 30, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual
maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities
without a single maturity, primarily mortgage-backed, are not shown.
| (in thousands) | |
Amortized Cost | | |
Fair Value | |
| | |
| | |
| |
| Held to maturity: | |
| | | |
| | |
| Within one year | |
$ | 1,005 | | |
$ | 1,005 | |
| One to five years | |
| 2,597 | | |
| 2,598 | |
| | |
$ | 3,602 | | |
$ | 3,603 | |
There were no sales of securities
during the fiscal years ended June 30, 2015 or 2014. At June 30, 2015 the Company had $1.2 million in securities with unrealized
losses totaling $3,000, while at June 30, 2014, the Company had $2.7 million in securities with unrealized losses totaling $6,000.
Unrealized losses on corporate bonds have not been recognized into income because the issuers’ bonds are of high credit quality
(rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities
prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market
conditions. The fair value is expected to recover as the bonds reach maturity.
At June 30, 2015 and 2014, pledged
securities totaled $2.2 million and $2.6 million, respectively.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS
The composition of the loan portfolio
at June 30 was as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Residential real estate | |
| | | |
| | |
| One- to four-family | |
$ | 191,721 | | |
$ | 193,381 | |
| Multi-family | |
| 16,621 | | |
| 14,002 | |
| Construction | |
| 3,780 | | |
| 2,122 | |
| Land | |
| 2,021 | | |
| 2,362 | |
| Farm | |
| 1,567 | | |
| 1,644 | |
| Nonresidential real estate | |
| 22,118 | | |
| 21,945 | |
| Commercial and industrial | |
| 1,782 | | |
| 2,080 | |
| Consumer and other | |
| | | |
| | |
| Loans on deposits | |
| 2,262 | | |
| 2,564 | |
| Home equity | |
| 5,477 | | |
| 5,359 | |
| Automobile | |
| 73 | | |
| 64 | |
| Unsecured | |
| 605 | | |
| 638 | |
| | |
| 248,027 | | |
| 249,161 | |
| | |
| | | |
| | |
| Undisbursed portion of loans in process | |
| (2,753 | ) | |
| (952 | ) |
| Deferred loan origination costs, net | |
| 109 | | |
| 52 | |
| Allowance for loan losses | |
| (1,568 | ) | |
| (1,473 | ) |
| | |
$ | 243,815 | | |
$ | 246,788 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
The following tables present
the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method
as of June 30, 2015 and 2014. There were $3.5 million and $3.8 million in loans acquired with deteriorated credit quality at June
30, 2015 and 2014, respectively.
| June 30, 2015: | |
| | |
| | |
| | |
| | |
| | |
| |
| (in thousands) | |
Loans
individually
evaluated | | |
Loans
acquired
with
deteriorated
credit
quality | | |
Ending
loans
balance | | |
Ending
allowance
attributed to
loans | | |
Unallocated
allowance | | |
Total
allowance | |
| Loans individually evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 1,743 | | |
$ | 2,565 | | |
$ | 4,308 | | |
$ | — | | |
$ | — | | |
$ | — | |
| Land | |
| 476 | | |
| 381 | | |
| 857 | | |
| — | | |
| — | | |
| — | |
| Nonresidential real estate | |
| 241 | | |
| 526 | | |
| 767 | | |
| — | | |
| — | | |
| — | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Home equity | |
| 28 | | |
| — | | |
| 28 | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| 18 | | |
| — | | |
| 18 | | |
| — | | |
| — | | |
| — | |
| | |
| 2506 | | |
| 3,472 | | |
| 5,978 | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans collectively evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
| | | |
| | | |
$ | 187,413 | | |
$ | 1,059 | | |
$ | — | | |
$ | 1,059 | |
| Multi-family | |
| | | |
| | | |
| 16,621 | | |
| 94 | | |
| — | | |
| 94 | |
| Construction | |
| | | |
| | | |
| 3,780 | | |
| 21 | | |
| — | | |
| 21 | |
| Land | |
| | | |
| | | |
| 1,164 | | |
| 7 | | |
| — | | |
| 7 | |
| Farm | |
| | | |
| | | |
| 1,567 | | |
| 9 | | |
| — | | |
| 9 | |
| Nonresidential real estate | |
| | | |
| | | |
| 21,351 | | |
| 121 | | |
| — | | |
| 121 | |
| Commercial and industrial | |
| | | |
| | | |
| 1,782 | | |
| 10 | | |
| — | | |
| 10 | |
| Consumer and other | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| | | |
| | | |
| 2,262 | | |
| 13 | | |
| — | | |
| 13 | |
| Home equity | |
| | | |
| | | |
| 5,449 | | |
| 31 | | |
| — | | |
| 31 | |
| Automobile | |
| | | |
| | | |
| 73 | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| | | |
| | | |
| 587 | | |
| 3 | | |
| — | | |
| 3 | |
| Unallocated | |
| | | |
| | | |
| — | | |
| — | | |
| 200 | | |
| 200 | |
| | |
| | | |
| | | |
| 242,049 | | |
| 1,368 | | |
| 200 | | |
| 1,568 | |
| | |
| | | |
| | | |
$ | 248,027 | | |
$ | 1,368 | | |
$ | 200 | | |
$ | 1,568 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
| June 30, 2014: | |
| | |
| | |
| | |
| | |
| | |
| |
| (in thousands) | |
Loans
individually
evaluated | | |
Loans
acquired
with
deteriorated
credit
quality* | | |
Ending
loans
balance | | |
Ending
allowance
attributed to
loans | | |
Unallocated
allowance | | |
Total
allowance | |
| Loans individually evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 2,159 | | |
$ | 2,735 | | |
$ | 4,894 | | |
$ | 14 | | |
$ | — | | |
$ | 14 | |
| Farm | |
| — | | |
| 444 | | |
| 444 | | |
| — | | |
| — | | |
| — | |
| Nonresidential real estate | |
| — | | |
| 529 | | |
| 529 | | |
| — | | |
| — | | |
| — | |
| Commercial and industrial | |
| — | | |
| 68 | | |
| 68 | | |
| — | | |
| — | | |
| — | |
| | |
| 2,159 | | |
| 3,776 | | |
| 5,935 | | |
| 14 | | |
| — | | |
| 14 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans collectively evaluated for impairment: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
| | | |
| | | |
$ | 191,487 | | |
$ | 989 | | |
$ | — | | |
$ | 989 | |
| Multi-family | |
| | | |
| | | |
| 14,002 | | |
| 73 | | |
| — | | |
| 73 | |
| Construction | |
| | | |
| | | |
| 2,122 | | |
| 11 | | |
| — | | |
| 11 | |
| Land | |
| | | |
| | | |
| 1,918 | | |
| 10 | | |
| — | | |
| 10 | |
| Farm | |
| | | |
| | | |
| 1,644 | | |
| 9 | | |
| — | | |
| 9 | |
| Nonresidential real estate | |
| | | |
| | | |
| 21,416 | | |
| 112 | | |
| — | | |
| 112 | |
| Commercial and industrial | |
| | | |
| | | |
| 2,012 | | |
| 11 | | |
| — | | |
| 11 | |
| Consumer and other | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| | | |
| | | |
| 2,564 | | |
| 13 | | |
| — | | |
| 13 | |
| Home equity | |
| | | |
| | | |
| 5,359 | | |
| 28 | | |
| — | | |
| 28 | |
| Automobile | |
| | | |
| | | |
| 64 | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| | | |
| | | |
| 638 | | |
| 3 | | |
| — | | |
| 3 | |
| Unallocated | |
| | | |
| | | |
| — | | |
| — | | |
| 200 | | |
| 200 | |
| | |
| | | |
| | | |
| 243,226 | | |
| 1,259 | | |
| 200 | | |
| 1,459 | |
| | |
| | | |
| | | |
$ | 249,161 | | |
$ | 1,273 | | |
$ | 200 | | |
$ | 1,473 | |
*These loans were evaluated
at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
The following tables present
impaired loans by class of loans as of and for the years ended June 30, 2015 and 2014:
June 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: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 4,308 | | |
$ | — | | |
$ | 4,075 | | |
$ | 84 | | |
$ | 84 | |
| Land | |
| 857 | | |
| — | | |
| 554 | | |
| 31 | | |
| 31 | |
| Nonresidential real estate | |
| 767 | | |
| — | | |
| 618 | | |
| 26 | | |
| 26 | |
| Commercial and industrial | |
| — | | |
| — | | |
| 19 | | |
| 6 | | |
| 6 | |
| Consumer and other | |
| | | |
| | | |
| | | |
| | | |
| | |
| Home equity | |
| 28 | | |
| — | | |
| 28 | | |
| — | | |
| — | |
| Unsecured | |
| 18 | | |
| — | | |
| 7 | | |
| — | | |
| — | |
| Total | |
$ | 5,978 | | |
$ | — | | |
$ | 5,301 | | |
$ | 147 | | |
$ | 147 | |
June 30, 2014: (in thousands) | |
Unpaid
Principal
Balance and
Recorded
Investment | | |
Allowance
for Loan
Losses
Allocated | | |
Average
Recorded
Investment | | |
Interest
Income
Recognized | | |
Cash Basis Income Recognized | |
| | |
| | |
| | |
| | |
| | |
| |
| With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 4,694 | | |
$ | — | | |
$ | 6,887 | | |
$ | 7 | | |
$ | 7 | |
| Farm | |
| 444 | | |
| — | | |
| 465 | | |
| — | | |
| — | |
| Nonresidential real estate | |
| 529 | | |
| — | | |
| 538 | | |
| — | | |
| — | |
| Commercial and industrial | |
| 68 | | |
| — | | |
| 94 | | |
| — | | |
| — | |
| | |
$ | 5,735 | | |
$ | — | | |
$ | 7,984 | | |
$ | 7 | | |
$ | 7 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
| 200 | | |
| 14 | | |
| 206 | | |
| — | | |
| — | |
| Total | |
$ | 5,935 | | |
$ | 14 | | |
$ | 8,190 | | |
$ | 7 | | |
$ | 7 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
The following tables
present the recorded investment in nonaccrual and loans past due over 90 days still on accrual status by class of loans as of June
30, 2015 and 2014. At June 30, 2015, the table below includes approximately $1.6 million of loans on nonaccrual and $1.5 million
of loans past due over 90 days and still accruing that were acquired with deteriorated credit quality, while approximately $2.7
million of loans on nonaccrual and $1.7 million of loans past due over 90 days and still accruing that were acquired with deteriorated
credit quality at June 30, 2014.
| | |
June
30, 2015 | | |
June
30, 2014 | |
| (in thousands) | |
Nonaccrual | | |
Loans Past
Due Over 90
Days Still
Accruing | | |
Nonaccrual | | |
Loans Past
Due Over 90
Days Still
Accruing | |
| | |
| | |
| | |
| | |
| |
| One- to four-family residential real estate | |
$ | 4,331 | | |
$ | 1,745 | | |
$ | 5,767 | | |
$ | 3,513 | |
| Nonresidential real estate | |
| 410 | | |
| — | | |
| 384 | | |
| — | |
| Commercial and industrial | |
| — | | |
| — | | |
| 47 | | |
| — | |
| Consumer | |
| 26 | | |
| — | | |
| 29 | | |
| — | |
| | |
$ | 4,767 | | |
$ | 1,745 | | |
$ | 6,227 | | |
$ | 3,513 | |
Troubled Debt Restructurings:
During the year ended June 30,
2015, the terms of a single one- to four family residential real estate loan totaling $20,000 was modified as a troubled debt restructuring
(“TDR.”) The loan was modified because the borrower was exhibiting financial difficulty in making the original debt
payments. The borrower was allowed to pay interest only for five months and the maturity date of the loan was extended accordingly.
During the year ended June 30,
2014, the terms of ten one- to four family residential real estate loans totaling $511,000 were modified as TDRs. Five of the loans
were classified as TDRs because the borrower filed Chapter 7 bankruptcy without reaffirming their personal obligation to pay the
debt. The other loans were modified because the borrower was exhibiting financial difficulty in making the original debt payments.
Some of the loans were modified to lower the interest rate to prevailing rates offered by the bank at the time, while some other
loans had the terms extended to provide the borrower with lower monthly payments.
In order to determine whether
a borrower is experiencing financial difficulty, we consider the probability that the borrower will be in payment default on any
of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal
underwriting policy.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
The following table presents
loans classified as TDRs as of June 30, 2015 and 2014, 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 | |
| June 30, 2015: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential Real Estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| 1-4 Family | |
| 38 | | |
$ | 2,110 | | |
$ | 1,851 | | |
$ | 1,710 | | |
$ | 141 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
| Residential Real Estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| 1-4 Family | |
| 39 | | |
$ | 2,230 | | |
$ | 1,997 | | |
$ | 1,621 | | |
$ | 376 | |
The Company had no allocated
specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2015 or 2014.
At June 30, 2015, $1.5 million in TDR loans were on nonaccrual status. The Company had no commitments to lend additional amounts
as of June 30, 2015 and 2014, to customers with outstanding loans that are classified as troubled debt restructurings. The Company
had no TDR loans default during fiscal 2015 and one TDR loan to default during the year ended June 30, 2014. The defaulted loan
has not been included in the table above. The borrower had exhibited credit weaknesses when the loan was refinanced, which was
the reason for the TDR classification initially. The borrower declared bankruptcy during fiscal 2014 and the loan, which had a
carrying value of $486,000, was foreclosed upon in fiscal 2015 with the Company taking possession of the real estate property.
The following tables present
the aging of the principal balance outstanding in past due loans as of June 30, 2015 and 2014, by class of loans. At June 30, 2015,
the table below includes approximately $666,000 of loans 30-89 days past due and $1.0 million of loans past due over 90 days that
were acquired with deteriorated credit quality, while approximately $978,000 of loans 30-89 days past due and $1.8 million of loans
past due over 90 days that were acquired with deteriorated credit quality at June 30, 2014.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
June 30, 2015:
| (in thousands) | |
30-89 Days
Past Due | | |
Greater
than 90
Days Past
Due | | |
Total
Past
Due | | |
Loans
Not
Past
Due | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One-to four-family | |
$ | 5,129 | | |
$ | 3,233 | | |
$ | 8,362 | | |
$ | 183,359 | | |
$ | 191,721 | |
| Multi-family | |
| — | | |
| — | | |
| — | | |
| 16,621 | | |
| 16,621 | |
| Construction | |
| — | | |
| — | | |
| — | | |
| 3,780 | | |
| 3,780 | |
| Land | |
| 344 | | |
| 262 | | |
| 606 | | |
| 1,415 | | |
| 2,021 | |
| Farm | |
| — | | |
| — | | |
| — | | |
| 1,567 | | |
| 1,567 | |
| Nonresidential real estate | |
| 142 | | |
| 388 | | |
| 530 | | |
| 21,588 | | |
| 22,118 | |
| Commercial and industrial | |
| — | | |
| — | | |
| — | | |
| 1,782 | | |
| 1,782 | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| — | | |
| — | | |
| — | | |
| 2,262 | | |
| 2,262 | |
| Home equity | |
| 20 | | |
| — | | |
| 20 | | |
| 5,457 | | |
| 5,477 | |
| Automobile | |
| — | | |
| — | | |
| — | | |
| 73 | | |
| 73 | |
| Unsecured | |
| 13 | | |
| 18 | | |
| 31 | | |
| 574 | | |
| 605 | |
| Total | |
$ | 5,648 | | |
$ | 3,901 | | |
$ | 9,549 | | |
$ | 238,478 | | |
$ | 248,027 | |
| June 30, 2014: | |
| | |
| | |
| | |
| | |
| |
| (in thousands) | |
30-89 Days
Past Due | | |
Greater
than 90
Days
Past Due | | |
Total
Past
Due | | |
Loans
Not Past
Due | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One-to four-family | |
$ | 4,481 | | |
$ | 9,060 | | |
$ | 13,541 | | |
$ | 182,840 | | |
$ | 196,381 | |
| Multi-family | |
| — | | |
| — | | |
| — | | |
| 14,002 | | |
| 14,002 | |
| Construction | |
| 343 | | |
| — | | |
| 343 | | |
| 1,779 | | |
| 2,122 | |
| Land | |
| — | | |
| 364 | | |
| 364 | | |
| 1,998 | | |
| 2,362 | |
| Farm | |
| — | | |
| — | | |
| — | | |
| 1,644 | | |
| 1,644 | |
| Nonresidential real estate | |
| 375 | | |
| 396 | | |
| 771 | | |
| 21,174 | | |
| 21,945 | |
| Commercial and industrial | |
| — | | |
| 88 | | |
| 88 | | |
| 1,992 | | |
| 2,080 | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| — | | |
| — | | |
| — | | |
| 2,564 | | |
| 2,564 | |
| Home equity | |
| — | | |
| 33 | | |
| 33 | | |
| 5,326 | | |
| 5,359 | |
| Automobile | |
| — | | |
| — | | |
| — | | |
| 64 | | |
| 64 | |
| Unsecured | |
| 68 | | |
| — | | |
| 68 | | |
| 570 | | |
| 638 | |
| Total | |
$ | 5,267 | | |
$ | 9,941 | | |
$ | 15,208 | | |
$ | 233,953 | | |
$ | 249,161 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (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 June 30, 2015, and 2014, and based on the most recent analysis performed, the
risk category of loans by class of loans was as follows:
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
| June 30, 2015: | |
| | |
| | |
| | |
| | |
| |
| (in thousands) | |
Pass | | |
Special
Mention | | |
Substandard | | |
Doubtful | | |
Not
rated | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | — | | |
$ | 6,914 | | |
$ | 9,371 | | |
$ | — | | |
$ | 175,436 | |
| Multi-family | |
| 16,621 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Construction | |
| 3,780 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Land | |
| 1,164 | | |
| — | | |
| 857 | | |
| — | | |
| — | |
| Farm | |
| 1,567 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Nonresidential real estate | |
| 20,198 | | |
| 1,131 | | |
| 789 | | |
| — | | |
| — | |
| Commercial and industrial | |
| 1,750 | | |
| 32 | | |
| — | | |
| — | | |
| — | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| 2,262 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Home equity | |
| 5,448 | | |
| — | | |
| 29 | | |
| — | | |
| — | |
| Automobile | |
| 73 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| 605 | | |
| — | | |
| — | | |
| — | | |
| — | |
| June 30, 2014: | |
| | |
| | |
| | |
| | |
| |
| (in thousands) | |
Pass | | |
Special
Mention | | |
Substandard | | |
Doubtful | | |
Not
rated | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | - | | |
$ | 2,928 | | |
$ | 11,287 | | |
$ | — | | |
$ | 182,166 | |
| Multi-family | |
| 14,002 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Construction | |
| 2,122 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Land | |
| 1,366 | | |
| — | | |
| 996 | | |
| — | | |
| — | |
| Farm | |
| 1,644 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Nonresidential real estate | |
| 18,920 | | |
| 965 | | |
| 2,060 | | |
| — | | |
| — | |
| Commercial and industrial | |
| 2,014 | | |
| — | | |
| 66 | | |
| — | | |
| — | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| 2,564 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Home equity | |
| 5,359 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Automobile | |
| 64 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| 606 | | |
| 3 | | |
| 29 | | |
| — | | |
| — | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
The activity in the allowance
for loan losses is summarized as follows for the years ended June 30:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Balance at beginning of year | |
$ | 1,473 | | |
$ | 1,310 | |
| Provision for losses on loans | |
| 343 | | |
| 580 | |
| Charge-offs, net | |
| (248 | ) | |
| (417 | ) |
| Balance at end of year | |
$ | 1,568 | | |
$ | 1,473 | |
The following tables present the activity in the
allowance for loan losses by portfolio segment for the years ended June 30, 2015 and 2014:
June 30, 2015:
| (in thousands) | |
Beginning
balance | | |
Provision
for loan
losses | | |
Loans
charged off | | |
Recoveries | | |
Ending balance | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 999 | | |
$ | 307 | | |
$ | (274 | ) | |
$ | 26 | | |
$ | 1,058 | |
| Multi-family | |
| 74 | | |
| 19 | | |
| — | | |
| — | | |
| 93 | |
| Construction | |
| 11 | | |
| 10 | | |
| — | | |
| — | | |
| 21 | |
| Land | |
| 10 | | |
| (1 | ) | |
| — | | |
| — | | |
| 9 | |
| Farm | |
| 9 | | |
| — | | |
| — | | |
| — | | |
| 9 | |
| Nonresidential real estate | |
| 114 | | |
| 7 | | |
| — | | |
| — | | |
| 121 | |
| Commercial and industrial | |
| 11 | | |
| (1 | ) | |
| — | | |
| — | | |
| 10 | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| 14 | | |
| (1 | ) | |
| — | | |
| — | | |
| 13 | |
| Home equity | |
| 28 | | |
| 3 | | |
| — | | |
| — | | |
| 31 | |
| Automobile | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| 3 | | |
| — | | |
| — | | |
| — | | |
| 3 | |
| Unallocated | |
| 200 | | |
| — | | |
| — | | |
| — | | |
| 200 | |
| Totals | |
$ | 1,473 | | |
$ | 343 | | |
$ | (274 | ) | |
$ | 26 | | |
$ | 1,568 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
June 30, 2014:
| (in thousands) | |
Beginning
balance | | |
Provision
for loan
losses | | |
Loans
charged off | | |
Recoveries | | |
Ending
balance | |
| | |
| | |
| | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | | |
| | | |
| | | |
| | |
| One- to four-family | |
$ | 871 | | |
$ | 546 | | |
$ | (467 | ) | |
$ | 49 | | |
$ | 999 | |
| Multi-family | |
| 63 | | |
| 11 | | |
| — | | |
| — | | |
| 74 | |
| Construction | |
| 8 | | |
| 3 | | |
| — | | |
| — | | |
| 11 | |
| Land | |
| 12 | | |
| (2 | ) | |
| — | | |
| — | | |
| 10 | |
| Farm | |
| 6 | | |
| 3 | | |
| — | | |
| — | | |
| 9 | |
| Nonresidential real estate | |
| 94 | | |
| 20 | | |
| — | | |
| — | | |
| 114 | |
| Commercial and industrial | |
| 13 | | |
| (2 | ) | |
| — | | |
| — | | |
| 11 | |
| Consumer and other: | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loans on deposits | |
| 12 | | |
| 2 | | |
| — | | |
| — | | |
| 14 | |
| Home equity | |
| 25 | | |
| 3 | | |
| — | | |
| — | | |
| 28 | |
| Automobile | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| Unsecured | |
| 6 | | |
| (4 | ) | |
| — | | |
| 1 | | |
| 3 | |
| Unallocated | |
| 200 | | |
| — | | |
| — | | |
| — | | |
| 200 | |
| Totals | |
$ | 1,310 | | |
$ | 580 | | |
$ | (467 | ) | |
$ | 50 | | |
$ | 1,473 | |
Purchased Loans:
The Company purchased loans during the
fiscal year ended June 30, 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 credit quality component of $616,000 and $782,000, at June 30, 2015 and 2014, respectively, is as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Residential real estate: | |
| | | |
| | |
| One- to four-family | |
$ | 2,565 | | |
$ | 2,735 | |
| Land | |
| 381 | | |
| 444 | |
| Nonresidential real estate | |
| 526 | | |
| 529 | |
| Commercial non-mortgage loans | |
| — | | |
| 68 | |
| Outstanding balance | |
$ | 3,472 | | |
$ | 3,776 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE C - LOANS (continued)
Accretable yield, or income expected to be collected, for the
years ended June 30 was as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Balance at beginning of year | |
$ | 1,478 | | |
$ | 1,294 | |
| Accretion of income | |
| (457 | ) | |
| (155 | ) |
| Reclassifications from nonaccretable difference | |
| — | | |
| 339 | |
| Disposals | |
| — | | |
| — | |
| Balance at end of year | |
$ | 1,021 | | |
$ | 1,478 | |
For those purchased loans disclosed above, the Company made
no increase in allowance for loan losses for the years ended June 30, 2015 or 2014, nor were any allowance for loan losses reversed
during those years.
NOTE D – REAL ESTATE OWNED
Activity in real estate owned for the years ended June 30 was
as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Balance at beginning of year | |
$ | 1,846 | | |
$ | 1,163 | |
| Loans transferred to real estate owned | |
| 2,065 | | |
| 1,491 | |
| Capitalized expenditures | |
| 57 | | |
| — | |
| Valuation adjustments | |
| (87 | ) | |
| (101 | ) |
| Disposals | |
| (2,288 | ) | |
| (707 | ) |
| Balance at end of year | |
$ | 1,593 | | |
$ | 1,846 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment at June
30 are comprised of the following:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Land | |
$ | 1,693 | | |
$ | 1,493 | |
| Buildings and improvements | |
| 7,104 | | |
| 6,491 | |
| Furniture and equipment | |
| 2,219 | | |
| 2,159 | |
| Automobiles | |
| 64 | | |
| 64 | |
| | |
| 11,080 | | |
| 10,207 | |
| Less: accumulated depreciation | |
| 5,845 | | |
| 5,578 | |
| Balance at end of year | |
$ | 5,235 | | |
$ | 4,629 | |
NOTE F - DEPOSITS
Deposits consist of the following
major classifications at June 30:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Non-interest bearing checking accounts | |
$ | 4,073 | | |
$ | 3,786 | |
| Checking accounts | |
| 14,904 | | |
| 13,364 | |
| Savings accounts | |
| 51,371 | | |
| 46,277 | |
| Money market demand deposits | |
| 13,255 | | |
| 13,010 | |
| Total demand, transaction and passbook deposits | |
| 83,603 | | |
| 76,437 | |
| Certificates of deposit: | |
| | | |
| | |
| Original maturities of: | |
| | | |
| | |
| Less than 12 months | |
| 75,856 | | |
| 92,271 | |
| 12 months to 36 months | |
| 35,616 | | |
| 38,705 | |
| More than 36 months | |
| 4,626 | | |
| 5,729 | |
| Total certificates of deposit | |
| 116,098 | | |
| 136,705 | |
| Total deposits | |
$ | 199,701 | | |
$ | 213,142 | |
At June 30, 2015 and 2014, the
Banks had certificate of deposit accounts with balances equal to or in excess of $250,000 totaling approximately $4.8 million and
$5.2 million, respectively.
Maturities of outstanding certificates
of deposit at June 30 are summarized as follows:
| (in thousands) | |
2015 | |
| | |
| |
| 2016 | |
$ | 75,856 | |
| 2017 | |
| 28,011 | |
| 2018 | |
| 7,605 | |
| 2019 | |
| 1,573 | |
| 2020 and thereafter | |
| 3,053 | |
| | |
$ | 116,098 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home
Loan Bank, collateralized at June 30, 2015 and 2014 by pledges of certain residential mortgage loans totaling $35.2 million and
$22.7 million, respectively, and the Banks’ investment in Federal Home Loan Bank stock, are summarized as follows:
| Maturing year ended June 30, 2015 | |
| |
| (in thousands) | |
| |
| 2016 | |
$ | 13,923 | |
| 2017 | |
| 6,431 | |
| 2018 | |
| 2,328 | |
| 2019 | |
| 3,249 | |
| 2020 | |
| 189 | |
| 2021 | |
| 142 | |
| 2022 | |
| 107 | |
| 2023-2032 | |
| 266 | |
| | |
$ | 26,635 | |
At June 30, 2015 interest rates for advances were fixed ranging
from 0.15% to 6.95%, with a weighted-average interest rate of 1.04%.
| Maturing year ended June 30, 2014 | |
| |
| (in thousands) | |
| |
| 2015 | |
$ | 9,865 | |
| 2016 | |
| 623 | |
| 2017 | |
| 431 | |
| 2018 | |
| 2,328 | |
| 2019 | |
| 3,249 | |
| 2020 | |
| 189 | |
| 2021 | |
| 142 | |
| 2022-2031 | |
| 373 | |
| | |
$ | 17,200 | |
At June 30, 2014 interest rates for advances were fixed ranging
from 0.12% to 6.95%, with a weighted-average interest rate of 1.39%.
Each advance is payable at its maturity date, with a prepayment
penalty for fixed rate advances. Based on collateral composed of first mortgage loans and the Company’s holdings of FHLB
stock, the Company was eligible to borrow up to $99.5 million as of June 30, 2015.
At June 30, 2015, we had the ability to borrow a total $99.5
million from the FHLB, of which $26.6 million was outstanding. In addition, we have the ability to borrow from the Federal Reserve
Bank Discount Window. At June 30, 2015, we had pledged collateral which would enable us to borrow up to $4.7 million.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE H - FEDERAL INCOME TAXES
Federal income taxes on earnings
differs from that computed at the statutory corporate tax rate for the years ended June 30, 2015 and 2014, as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Federal income taxes at the statutory rate | |
$ | 1,051 | | |
$ | 981 | |
| Increase (decrease) resulting primarily from: | |
| | | |
| | |
| Cash surrender value of life insurance | |
| (31 | ) | |
| (31 | ) |
| Other | |
| 1 | | |
| 2 | |
| | |
$ | 1,021 | | |
$ | 952 | |
The composition of the Company’s
net deferred tax liability at June 30 is as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Taxes (payable) refundable on temporary differences at estimated corporate tax rate: | |
| | | |
| | |
| Deferred tax assets: | |
| | | |
| | |
| General loan loss allowance | |
$ | 533 | | |
$ | 501 | |
| Deferred compensation and benefits | |
| 243 | | |
| 249 | |
| Charitable contributions | |
| 1 | | |
| 2 | |
| Fair value accounting adjustments on acquisition | |
| 604 | | |
| 887 | |
| Nonaccrued interest on loans | |
| 129 | | |
| 154 | |
| Other real estate owned adjustments | |
| 254 | | |
| 315 | |
| Other | |
| 15 | | |
| 2 | |
| Total deferred tax assets | |
| 1,779 | | |
| 2,110 | |
| | |
| | | |
| | |
| Deferred tax liabilities: | |
| | | |
| | |
| Federal Home Loan Bank stock dividends | |
| (1,337 | ) | |
| (1,337 | ) |
| Deferred loan origination costs | |
| (26 | ) | |
| (21 | ) |
| Loan servicing rights | |
| (29 | ) | |
| (27 | ) |
| Fair value accounting adjustments on acquisition | |
| (795 | ) | |
| (795 | ) |
| Unrealized gain on investments | |
| (19 | ) | |
| (35 | ) |
| Depreciation | |
| (62 | ) | |
| (56 | ) |
| Other | |
| — | | |
| (49 | ) |
| Total deferred tax liabilities | |
| (2,268 | ) | |
| (2,320 | ) |
| Net deferred tax liability | |
$ | (489 | ) | |
$ | (210 | ) |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE H – FEDERAL INCOME TAXES (continued)
Prior to 1997, the Banks were
allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based
on aggregate loans and deposit account balances at the end of the year. If the amounts that qualified as deductions for federal
income taxes are later used for purposes other than bad debt losses, including distributions in excess of accumulated earnings
and profits, such distributions will be subject to federal income taxes at the then current corporate income tax rate. Retained
earnings at June 30, 2015, include approximately $5.2 million for which federal income taxes have not been provided.
The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $1.8 million
at June 30, 2015.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows:
| (in thousands) | |
2015 | | |
2014 | |
| | |
| | |
| |
| Balance at beginning of year | |
$ | 80 | | |
$ | 80 | |
| Additions/(reductions) based on tax positions for the current year | |
| — | | |
| — | |
| Balance at end of year | |
$ | 80 | | |
$ | 80 | |
Cash settlements occurred during the period July
1, 2012, through June 30, 2013. Because of uncertainty regarding proper inclusion or exclusion of income from bank-owned life insurance
(“BOLI”) in the earnings and profits calculation, the Company amended its June 30, 2009, federal income tax return
to report reduced tax liability of $80,000 and established the corresponding reserve. Its unrecognized benefits are expected to
change in the next twelve months.
NOTE I - LOAN COMMITMENTS
The Banks are a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers, including
commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess
of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of the commitments
reflect the extent of the Banks’ involvement in such financial instruments.
The Banks’ exposure to
credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented
by the contractual notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE I - LOAN COMMITMENTS (continued)
At June 30, 2015 and 2014, the
Banks had the following outstanding loan commitments:
| | |
2015 | | |
2014 | |
| (in thousands) | |
Fixed | | |
Variable | | |
Fixed | | |
Variable | |
| Unused commitment: | |
| | | |
| | | |
| | | |
| | |
| Revolving, open-end lines secured by real estate | |
$ | — | | |
$ | 8,153 | | |
$ | — | | |
$ | 8,543 | |
| Commitments to fund real estate construction loans | |
| 715 | | |
| 2,974 | | |
| 779 | | |
| 1,426 | |
| Other unused commitment: | |
| | | |
| | | |
| | | |
| | |
| Commercial and industrial loans | |
| 1,299 | | |
| — | | |
| 1,379 | | |
| — | |
| Other | |
| 631 | | |
| 415 | | |
| 225 | | |
| 1,034 | |
| Letters of credit | |
| — | | |
| — | | |
| — | | |
| — | |
Commitments to make loans are generally made for
periods of 60 days or less. The fixed rate loan commitments at June 30, 2015 totaled $1.0 million and had interest rates ranging
from 3.50% to 5.18% and maturities ranging from 10 years to 30 years. The fixed rate loan commitments at June 30, 2014 totaled
$336,000 and had interest rates ranging from 4.81% to 5.75% with maturities ranging from 10 years to 30 years.
NOTE J – STOCKHOLDERS’
EQUITY AND REGULATORY CAPITAL
Dividend Restrictions –
Dividends from the Banks are the primary source of funds for the Company. Banking regulations limit the amount of dividends
that may be paid to the Company by the Banks without prior approval of the Office of the Controller of the Currency (the “OCC.”)
Under these regulations the amount of dividends that may be paid in any calendar year is limited to the current year’s net
profits, combined with the retained net profits of the preceding two years. At June 30, 2015, the Banks could, without prior approval,
declare dividends of approximately $3.0 million.
Regulatory Capital Requirements
- The Banks are subject to minimum regulatory capital standards promulgated by the OCC. Failure to meet minimum capital requirements
can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken,
could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that
involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Prompt corrective action regulations
provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE J - REGULATORY
CAPITAL (continued)
New Capital Rules –
Effective January 1, 2015, the Company and the Banks became subject to the new capital regulations in accordance with Basel
III. The new regulations establish higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based
capital ratio and a new capital conversation buffer. The new regulations also include revisions to the definition of capital and
changes in the risk-weighting of certain assets. For prompt corrective action, the new regulations establish definitions of “well
capitalized” as a 6.5% common equity Tier 1 risk-based capital ratio, an 8.0% Tier 1 risk-based capital ratio, a 10.0% total
risk-based capital ratio and a 5.0% Tier 1 leverage ratio. Additionally, a 2.5% capital conservation buffer will be effective under
Basel III when effective and fully implemented in 2019.
To be categorized as “well-capitalized”
the Banks must maintain minimum capital ratios as set forth in the following tables:
| | |
As of June 30, 2015 | | |
| |
| | |
| | |
Minimum | |
| | |
| | |
Requirement | |
| | |
| | |
| | |
Minimum | | |
To be “Well- | |
| | |
| | |
| | |
Requirement | | |
Capitalized” Under | |
| | |
| | |
| | |
For Capital | | |
Prompt Corrective | |
| | |
Actual | | |
Adequacy Purposes | | |
Action Provisions | |
| | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
| | |
| | |
| | |
(Dollars in thousands) | | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Risk-based capital: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common Equity Tier 1 capital ratio | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Kentucky First Federal | |
$ | 52,768 | | |
| 31.9 | % | |
$ | 7,443 | | |
| 4.5 | % | |
| N/A | | |
| N/A | |
| First Federal of Hazard | |
| 16,478 | | |
| 43.8 | | |
| 1,694 | | |
| 4.5 | | |
$ | 2,447 | | |
| 6.5 | % |
| First Federal of Frankfort | |
| 32,104 | | |
| 25.1 | | |
| 5,763 | | |
| 4.5 | | |
| 8,324 | | |
| 6.5 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Tier 1 (core) capital ratio | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Kentucky First Federal | |
| 52,768 | | |
| 31.9 | | |
| 9,923 | | |
| 6.0 | | |
| N/A | | |
| N/A | |
| First Federal of Hazard | |
| 16,478 | | |
| 43.8 | | |
| 2,259 | | |
| 6.0 | | |
| 3,012 | | |
| 8.0 | |
| First Federal of Frankfort | |
| 32,104 | | |
| 25.1 | | |
| 7,684 | | |
| 6.0 | | |
| 10,245 | | |
| 8.0 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total capital ratio | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Kentucky First Federal | |
| 54,386 | | |
| 32.9 | | |
| 13,231 | | |
| 8.0 | | |
| N/A | | |
| N/A | |
| First Federal of Hazard | |
| 16,950 | | |
| 45.0 | | |
| 3,012 | | |
| 8.0 | | |
| 3,765 | | |
| 10.0 | |
| First Federal of Frankfort | |
| 33,101 | | |
| 25.9 | | |
| 10,245 | | |
| 8.0 | | |
| 12,806 | | |
| 10.0 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Leverage capital: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Tier 1 leverage capital to average assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Kentucky First Federal | |
| 52,768 | | |
| 18.7 | | |
| 11,312 | | |
| 4.0 | | |
| N/A | | |
| N/A | |
| First Federal of Hazard | |
| 16,478 | | |
| 21.8 | | |
| 3,023 | | |
| 4.0 | | |
| 3,779 | | |
| 5.0 | |
| First Federal of Frankfort | |
| 32,104 | | |
| 14.9 | | |
| 8,645 | | |
| 4.0 | | |
| 10,807 | | |
| 5.0 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE J - REGULATORY
CAPITAL (continued)
| | |
As of June 30, 2014 | | |
| |
| | |
| | |
| | |
To be “well- | |
| | |
| | |
| | |
capitalized” under | |
| | |
| | |
For capital | | |
prompt corrective | |
| | |
Actual | | |
adequacy
purposes | | |
action
provisions | |
| | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
| | |
| | |
| | |
(Dollars in thousands) | | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Tier 1 core capital | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| First Federal of Hazard | |
$ | 15,880 | | |
| 19.8 | % | |
≥$ | 3,206 | | |
| ≥4.0 | % | |
≥$ | 4,007 | | |
| ≥5.0 | % |
| First Federal of Frankfort | |
$ | 31,647 | | |
| 14.8 | % | |
≥$ | 9,154 | | |
| ≥4.0 | % | |
≥$ | 11,443 | | |
| ≥5.0 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total risk-based capital | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| First Federal of Hazard | |
$ | 16,368 | | |
| 42.0 | % | |
≥$ | 3,116 | | |
| ≥8.0 | % | |
≥$ | 3,895 | | |
| ≥10.0 | % |
| First Federal of Frankfort | |
$ | 32,531 | | |
| 26.4 | % | |
≥$ | 9,845 | | |
| ≥8.0 | % | |
≥$ | 12,306 | | |
| ≥10.0 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Tier 1 risk-based capital | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| First Federal of Hazard | |
$ | 15,880 | | |
| 40.8 | % | |
≥$ | 3,206 | | |
| ≥4.0 | % | |
≥$ | 2,337 | | |
| ≥6.0 | % |
| First Federal of Frankfort | |
$ | 31,647 | | |
| 25.7 | % | |
≥$ | 9,154 | | |
| ≥4.0 | % | |
≥$ | 7,384 | | |
| ≥6.0 | % |
As of June 30, 2015 and 2014, management
believes that First Federal of Hazard and First Federal of Frankfort met all capital adequacy requirements to which the Banks were
subject. There are no conditions or subsequent events that have occurred that managements believes have changed the Banks’
categories.
Regulations of the Board of Governors of
the Federal Reserve System governing mutual holding companies require First Federal MHC to meet certain criteria before the company
may waive the receipt by it of any common stock dividend declared by Kentucky First Federal Bancorp. During each of the fiscal
years ended June 30, 2015 and 2014, and pursuant to the provisions allowed by the Board of Governors of the Federal Reserve System,
First Federal MHC waived $1.9 million in dividends.
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST
FEDERAL BANCORP
The following condensed financial
statements summarize the financial position of Kentucky First Federal Bancorp as of June 30, 2015 and 2014, and the results of
its operations and its cash flows for the fiscal years ended June 30, 2015 and 2014.
KENTUCKY FIRST FEDERAL BANCORP
BALANCE SHEETS
June 30, 2015 and 2014
(In thousands)
| |
2015 | | |
2014 | |
| ASSETS | |
| | |
| |
| | |
| | |
| |
| Interest-bearing deposits in First Federal of Hazard | |
$ | 572 | | |
$ | 869 | |
| Interest-bearing deposits in First Federal of Frankfort | |
| 985 | | |
| 1,133 | |
| Other interest-bearing deposits | |
| 15 | | |
| 13 | |
| Investment in First Federal of Hazard | |
| 17,795 | | |
| 17,384 | |
| Investment in Frankfort First | |
| 47,539 | | |
| 47,200 | |
| Prepaid expenses and other assets | |
| 580 | | |
| 639 | |
| | |
| | | |
| | |
| Total assets | |
$ | 67,486 | | |
$ | 67,238 | |
| | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| | |
| | | |
| | |
| Accounts payable and other liabilities | |
$ | 173 | | |
$ | 33 | |
| | |
| | | |
| | |
| Total liabilities | |
| 173 | | |
| 33 | |
| | |
| | | |
| | |
| Shareholders’ equity | |
| | | |
| | |
| Common stock | |
| 86 | | |
| 86 | |
| Additional paid-in capital | |
| 34,638 | | |
| 34,671 | |
| | |
| | | |
| | |
| Retained earnings | |
| 34,711 | | |
| 34,027 | |
| | |
| | | |
| | |
| Unearned employee stock ownership plan (ESOP) | |
| (1,223 | ) | |
| (1,410 | ) |
| Treasury shares at cost, 112,563 and 27,886 common shares at June 30, 2015 and 2014, respectively | |
| (937 | ) | |
| (239 | ) |
| Accumulated other comprehensive income | |
| 38 | | |
| 70 | |
| Total shareholders’ equity | |
| 67,313 | | |
| 67,205 | |
| Total liabilities and shareholders’ equity | |
$ | 67,486 | | |
$ | 67,238 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST
FEDERAL BANCORP (continued)
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF INCOME
Years ended June 30, 2015 and
2014
(Dollar amounts in thousands)
| | |
2015 | | |
2014 | |
| Income | |
| | | |
| | |
| Interest income | |
$ | 99 | | |
$ | 110 | |
| Dividends from First Federal of Hazard | |
| — | | |
| — | |
| Equity in undistributed (excess distributed) earnings of First Federal of Hazard | |
| 354 | | |
| 417 | |
| Dividends from Frankfort First | |
| 1,612 | | |
| 1,795 | |
| Equity in undistributed earnings of Frankfort First | |
| 370 | | |
| (116 | ) |
| Total income | |
| 2,435 | | |
| 2,206 | |
| | |
| | | |
| | |
| Non-interest expenses | |
| 495 | | |
| 387 | |
| | |
| | | |
| | |
| Earnings before income taxes | |
| 1,940 | | |
| 1,819 | |
| | |
| | | |
| | |
| Federal income tax expense (benefit) | |
| (129 | ) | |
| (115 | ) |
| | |
| | | |
| | |
| NET INCOME | |
$ | 2,069 | | |
$ | 1,934 | |
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF CASH FLOWS
For Years ended June 30, 2015 and 2014
(Dollar amounts in thousands)
| | |
2015 | | |
2014 | |
| Cash flows from operating activities: | |
| | | |
| | |
| Net earnings for the year | |
$ | 2,069 | | |
$ | 1,934 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| | | |
| | |
| Excess (deficit) distributions over earnings (undistributed earnings) from consolidated subsidiaries | |
| (815 | ) | |
| (332 | ) |
| Noncash compensation expense | |
| 187 | | |
| 187 | |
| Increase (decrease) in cash due to changes in: | |
| | | |
| | |
| Prepaid expenses and other assets | |
| 59 | | |
| (104 | ) |
| Other liabilities | |
| 140 | | |
| (7 | ) |
| Net cash provided by operating activities | |
| 1,640 | | |
| 1,678 | |
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
June 30, 2015 and 2014
NOTE K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST
FEDERAL BANCORP (continued)
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF CASH FLOWS (continued)
For Years ended June 30, 2015 and 2014
(Dollar Amounts in thousands)
| | |
2015 | | |
2014 | |
| Cash flows from financing activities: | |
| | | |
| | |
| Dividends paid on common stock | |
| (1,385 | ) | |
| (1,511 | ) |
| Repurchase of treasury shares | |
| (698 | ) | |
| (42 | ) |
| Net cash used in financing activities | |
| (2,083 | ) | |
| (1,553 | ) |
| | |
| | | |
| | |
| Net increase (decrease) in cash and cash equivalents | |
| (443 | ) | |
| 125 | |
| | |
| | | |
| | |
| Cash and cash equivalents at beginning of year | |
| 2,015 | | |
| 1,890 | |
| | |
| | | |
| | |
| Cash and cash equivalents at end of year | |
$ | 1,572 | | |
$ | 2,015 | |
Kentucky First Federal Bancorp would like to recognize our employees
who work hard every day to maximize the value of your investment:
| |
|
|
| First Federal Savings Bank |
|
|
Frankfort-Danville-Lancaster
Lesa Asbery, Customer Service Manager |
|
Nancy Long, Assistant Vice President/Customer Service Manager |
| Wick Asbury, Vice President/Head of Lending |
|
Patty Luttrell, Compliance Assistant |
| Brenda Baldwin, Assistant Vice President/Chief Accountant |
|
Kathy McBee, Branch Manager
Tracey McCoun, Deposit Compliance Officer |
James Baxter, Vice President/Lending
Stan Betsworth, Vice President/Lending/ |
|
Katina Mickens, Customer Service
Samantha Miller, Assistant Vice President/Loan |
| Head of Special Projects |
|
Compliance and Loan Analysis |
| Phyllis Bowman, Loan Servicing |
|
Kim Moore, Vice President/Deposit Operations |
Lisa Brinley, Branch Manager
Russell Brooks, Vice President/Chief Financial |
|
Manager
Carolyn Mulcahy, Accounting Assistant |
| Officer |
|
Jeanie Murphy, Customer Service |
| Phyllis Bryant, Customer Service |
|
|
| Andrea Cline, Accounting |
|
J. David Semones, Loan Processing |
| Becky Crowe, Customer Service |
|
Cynthia Shank, Customer Service |
| Deryl Curtis, Loan Servicing |
|
|
| Betty Doolin, Customer Service |
|
Martha Sowders, Customer Service |
Carolyn Eades, Receptionist
Diana Eads, Customer Service Supervisor |
|
Jenny Stump, Loan Processing
Virginia Stump, Vice President/Lancaster Branch |
Tiffaney Elliott, Accounting/Human Resources
Jamey Ensley, Information Technology Operations |
|
Manager
Yvonne Thornberry, Assistant Vice |
| Debra Freeman, Customer Service Manager/Training |
|
President/Head of Loan Processing & Servicing |
| Coordinator |
|
Mike Ware, Information Technology Manager |
| Matt Freire, Customer Service |
|
Nancy Watts, Loan Processing |
| Stacey Greenawalt, Vice President/Lending |
|
Jennifer Whalen, Loan Processing |
| Stan Harmon, Lending |
|
Tiffany Williams, Customer Service |
| Karen Hatfield, Assistant Vice President/Customer |
|
|
Service Manager
Judy Hicks, Customer Service |
|
First Federal Savings and Loan Association of Hazard |
| Lee Ann Hockensmith, Assistant Vice President/ |
|
Missy Kay Asher, Customer Service |
| Head of Credit Administration |
|
Deborah C. Bersaglia, Vice President/Secretary |
Barry Holder, Branch Manager
Ronald Howard, Vice President/Lending |
|
Holly Caudill, Vice President
Jaime S. Coffey, Lending/Compliance Officer |
| Brittany Hulette, Lending Compliance and Loan |
|
Kaye Craft, Vice President/Accounting |
Analysis
Clay Hulette, Frankfort Area President |
|
Sandra C. Craft, Vice President/Lending
Carlen Dixon, Information Technology/Lending |
| Teresa Hulette, Executive Vice President |
|
Lou Ella Farler, Chief Executive Officer |
| Tammy Jeffries, Customer Service |
|
Margaret P. Pelley, Vice President/Cashier |
| Don Jennings, Chief Executive Officer |
|
Lauren Riley, Collection Manager/Customer |
| Kathy Johnica, Vice President/ Internal Audit |
|
Service |
| Coordinator |
|
Eliza Stacy, Customer Service |
| Bill Johnson, Danville Area President |
|
Peggy H. Steele, Assistant Vice President/ |
| Janet Lewis, Customer Service |
|
|
Kentucky First Federal Bancorp Board of Directors:
Stephen G. Barker, Attorney and Executive Vice President
and General Counsel to Kentucky River Properties, LLC
Walter G. Ecton, Jr., Attorney and principal of Ecton, Murphy
and Shannon, PLLC
C. Michael Davenport, President/CEO of C. Michael Davenport,
Inc.
William D. Gorman, Jr., former President and CEO of
Hazard Insurance Agency
David R. Harrod, CPA, principal of Harrod and Associates,
PSC
W. Banks Hudson, Retired Attorney
William H. Johnson, Danville/Lancaster area President, First
Federal Savings Bank of Frankfort
Don D. Jennings, President, Kentucky First Federal Bancorp
Tony D. Whitaker, Chairman, Kentucky First Federal Bancorp
First Federal Savings and Loan Association of Hazard Board
of Directors:
| Stephen G. Barker |
|
Walter G. Ecton, Jr. |
|
William D. Gorman, Jr. |
| Lou Ella Farler |
|
|
|
Tony D. Whitaker, Chairman |
First Federal Savings Bank Board of Directors:
| Russell M. Brooks |
|
Don D. Jennings, Chairman |
|
Herman D. Regan, Jr., |
| C. Michael Davenport |
|
William H. Johnson |
|
Director Emeritus |
| Danny A. Garland |
|
William C. Jennings, Frankfort |
|
Virginia R.S. Stump |
| J. Mark Goggans |
|
Committee Chair |
|
Charles A. Cotton, III |
| David R. Harrod |
|
William M. Johnson |
|
Director Emeritus |
| R. Clay Hulette |
|
Yvonne Y. Morley |
|
|
| W. Banks Hudson, Danville |
|
Jerry M. Purcell |
|
|
| Committee Chair |
|
|
|
|
| Special Counsel |
Kilpatrick, Townsend, and Stockton LLP |
|
| |
Suite 900 |
|
| |
607 14th Street NW |
|
| |
Washington, DC 20005-2018 |
|
| |
|
|
| Transfer Agent and |
American Stock Transfer & Trust Company, LLC |
|
| Registrar |
6201 15th Avenue |
|
| |
Brooklyn, NY 11219 |
|
| |
(718) 921-8124 |
|
The Annual Meeting of Shareholders will be held on November
12, 2015 at 3:30 p.m. at the First
Federal Center on the campus of Hazard Community and
Technical College located at
One Community College Drive in Hazard, KY.
Shareholder Inquiries and Availability of 10-K Reports: A
COPY OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2015, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE FOR THE NOVEMBER 12, 2015, ANNUAL MEETING, UPON
WRITTEN REQUEST TO
| Investor Relations: |
Don Jennings |
djennings@ffsbfrankfort.com |
| |
Clay Hulette |
chulette@ffsbfrankfort.com |
| |
(502) 223-1638 or 1-888-818-3372 |
|
| |
216 W Main St |
|
| |
PO Box 535 |
|
| |
Frankfort, KY 40602 |
|
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
| | |
State or Other | |
| |
| | |
Jurisdiction of | |
Percentage | |
| | |
Incorporation | |
Ownership | |
| Parent | |
| |
| | |
| | |
| |
| | |
| Kentucky First Federal Bancorp | |
United States | |
| N/A | |
| | |
| |
| | |
| Subsidiaries (1) | |
| |
| | |
| | |
| |
| | |
| First Federal Savings and Loan Association of Hazard | |
United States | |
| 100 | % |
| | |
| |
| | |
| Frankfort First Bancorp, Inc. | |
Delaware | |
| 100 | % |
| | |
| |
| | |
| First Federal Savings Bank of Frankfort (2) | |
United States | |
| 100 | % |
| (1) | The assets, liabilities and operations of the subsidiaries are included in the consolidated financial
statements contained in the Annual Report to Stockholders attached hereto as Exhibit 13. |
| (2) | Wholly owned subsidiary of Frankfort First Bancorp, Inc., which is a wholly-owned subsidiary of
Parent. |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We consent to the incorporation by reference in Registration
Statement No. 333-130243 on Form S-8 of Kentucky First Federal Bancorp of our report dated September 28, 2015 appearing in this
2015 Annual Report on Form 10-K of Kentucky First Federal Bancorp .
/s/ Crowe Horwath LLP
Louisville, Kentucky
September 28, 2015
EXHIBIT 31.1
Certification
I, Don D. Jennings,
certify that:
1. I have reviewed
this Annual Report on Form 10-K of Kentucky First Federal Bancorp;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-(15)(f) and 15d-15(f)) for the registrant and have:
(a) Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the
effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in
this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant
deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 28, 2015
| |
/s/ Don D. Jennings |
| |
Don D. Jennings |
| |
Chief Executive Officer |
EXHIBIT 31.2
Certification
I, R. Clay Hulette,
certify that:
1. I have reviewed
this Annual Report on Form 10-K of Kentucky First Federal Bancorp;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-(15)(f) and 15d-15(f)) for the registrant and have:
(a) Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the
effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in
this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant
deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: September 28, 2015
| |
/s/ R. Clay Hulette |
| |
R. Clay Hulette |
| |
Vice President, Chief Financial Officer and Treasurer |
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE
SARBANES-OXLEY ACT OF 2002
The undersigned executive
officers of Kentucky First Federal Bancorp (the “Registrant”) hereby certify that this Annual Report on Form 10-K for
the year ended June 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Registrant.
| |
By: |
/s/ Don D. Jennings |
| |
|
Name: |
Don D. Jennings |
| |
|
Title: |
Chief Executive Officer |
| |
|
|
|
| |
By: |
/s/ R. Clay Hulette |
| |
|
Name: |
R. Clay Hulette |
| |
|
Title: |
Vice President, Chief Financial Officer and |
| |
|
|
Treasurer |
Date: September 28, 2015
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