UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended                                   March 31, 2016                    

OR

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

 

For the transition period from ____________ to _______________

 

Commission File Number: 0-51176   

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller Reporting Company x

(Do not check if a smaller reporting company)

 

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

Yes ¨                No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

 

 

 

INDEX

 

    Page
     
PART I - ITEM 1 FINANCIAL INFORMATION  
     
  Consolidated Balance Sheets 3
     
  Consolidated Statements of Income 4
     
  Consolidated Statements of Comprehensive Income 5
     
  Consolidated Statements of Cash Flows 6
     
  Notes to Consolidated Financial Statements 8
     
  ITEM 2 Management’s Discussion and Analysis of  Financial Condition and Results of Operations 31
     
  ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 42
     
  ITEM 4 Controls and Procedures 42
     
PART II - OTHER INFORMATION 43
SIGNATURES   44

 

  2  

 

 

PART I

ITEM 1: Financial Information

Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

    March 31,     June 30,  
    2016     2015  
             
ASSETS                
Cash and due from financial institutions   $ 4,658     $ 3,864  
Interest-bearing demand deposits     12,909       9,771  
Cash and cash equivalents     17,567       13,635  
                 
Securities available for sale     128       159  
Securities held-to-maturity, at amortized cost- approximate fair value of $4,825 and $6,534 at March 31, 2016 and June 30, 2015, respectively     4,751       6,423  
Loans held for sale           100  
Loans, net of allowance of $1,573 and $1,568 at March 31, 2016 and June 30, 2015, respectively     239,064       243,815  
Real estate owned, net     1,196       1,593  
Premises and equipment, net     6,039       5,235  
Federal Home Loan Bank stock, at cost     6,482       6,482  
Accrued interest receivable     690       725  
Bank-owned life insurance     3,041       2,971  
Goodwill     14,507       14,507  
Prepaid federal income taxes     52        
Prepaid expenses and other assets     542       653  
                 
Total assets   $ 294,059     $ 296,298  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
Deposits   $ 190,401     $ 199,701  
Federal Home Loan Bank advances     33,792       26,635  
Advances by borrowers for taxes and insurance     486       699  
Accrued interest payable     30       32  
Accrued federal income taxes           78  
Deferred federal income taxes     661       569  
Deferred revenue     599       610  
Other liabilities     643       661  
Total liabilities     226,612       228,985  
                 
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     34,636       34,638  
Retained earnings     34,723       34,711  
Unearned employee stock ownership plan (ESOP), 108,304 shares and 122,311 shares at March 31, 2016 and June 30, 2015, repectively     (1,083 )     (1,223 )
Treasury shares at cost, 112,563 common shares at March 31, 2016 and June 30, 2015     (937 )     (937 )
Accumulated other comprehensive income     22       38  
Total shareholders’ equity     67,447       67,313  
                 
Total liabilities and shareholders’ equity   $ 294,059     $ 296,298  

 

See accompanying notes.

 

  3  

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

    Nine months ended March 31,     Three months ended March 31,  
    2016     2015     2016     2015  
Interest income                                
Loans, including fees   $ 8,542     $ 9,093     $ 2,756     $ 3,038  
Mortgage-backed securities     73       84       29       27  
Other securities     17       19       7       6  
Interest-bearing deposits and other     195       195       66       65  
Total interest income     8,827       9,391       2,858       3,136  
                                 
Interest expense                                
Interest-bearing demand deposits     19       23       5       7  
Savings     195       177       65       59  
Certificates of Deposit     591       698       187       246  
Deposits     805       898       257       312  
Borrowings     228       180       84       61  
Total interest expense     1,033       1,078       341       373  
Net interest income     7,794       8,313       2,517       2,763  
Provision for loan losses     11       302             36  
Net interest income after provision for loan losses     7,783       8,011       2,517       2,727  
                                 
Non-interest income                                
Earnings on bank-owned life insurance     70       70       23       23  
Net gain on sales of loans     41       28             13  
Net gain (loss) on sales of OREO     52       124       (1 )     (18 )
Valuation adjustments of OREO     (150 )     (27 )     (111 )     (13 )
Other     208       201       70       63  
Total non-interest income (loss)     221       396       (19 )     68  
Non-interest expense                                
Employee compensation and benefits     4,082       3,698       1,443       1,189  
Occupancy and equipment     483       469       167       198  
Outside service fees     121       153       30       66  
Legal fees     67       58       27       32  
Data processing     290       327       99       118  
Auditing and accounting     195       189       65       59  
FDIC insurance premiums     159       173       49       54  
Franchise and other taxes     188       198       61       64  
Foreclosure and OREO expenses (net)     73       155       20       34  
Other     815       697       278       176  
Total non-interest expense     6,473       6,117       2,239       1,990  
                                 
Income before income taxes     1,531       2,290       259       805  
                                 
Federal income tax expense     411       756       81       266  
                                 
NET INCOME   $ 1,120     $ 1,534     $ 178     $ 539  
                                 
EARNINGS PER SHARE                                
Basic and diluted   $ 0.13     $ 0.18     $ 0.02     $ 0.06  
DIVIDENDS PER SHARE   $ 0.30     $ 0.30     $ 0.10     $ 0.10  

 

See accompanying notes.

 

  4  

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

    Nine months ended March 31,     Three months ended March 31,  
    2016     2015     2016     2015  
                         
Net income   $ 1,120     $ 1,534     $ 178     $ 539  
                                 
Other comprehensive gain (loss), net of tax benefits: Unrealized holding gains (losses) on securities designated as available for sale, net of tax benefits of $(8), $(15), $(3) and $2 during the respective periods     (16 )     (30 )     (5 )     4  
Comprehensive income   $ 1,104     $ 1,504     $ 173     $ 543  

 

See accompanying notes.

 

  5  

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

    Nine months ended  
    March 31,  
    2016     2015  
Cash flows from operating activities:                
Net income   $ 1,120     $ 1,534  
Adjustments to reconcile net income to net cash provided by operating activities                
Depreciation     212       206  
Accetion of purchased loan credit discount     (116 )     (270 )
Amortization of purchased loan premium     13       14  
Amortization of deferred loan origination costs     23       44  
Amortization of premiums on investment securities     59       117  
Amortization of premiums on deposits     (63 )     (191 )
Net gain on sale of loans     (41 )     (28 )
Net loss on sale of real estate owned     (52 )     (89 )
Valuation adjustments of real estate owned     150       27  
Deferred gain on sale of real estate owned     (11 )     (17 )
ESOP compensation expense     138       115  
Earnings on bank-owned life insurance     (70 )     (70 )
Provision for loan losses     11       302  
Origination of loans held for sale     (1,019 )     (599 )
Proceeds from loans held for sale     1,160       627  
Increase (decrease) in cash, due to changes in:                
Accrued interest receivable     35       119  
Prepaid expenses and other assets     111       76  
Accrued interest payable     (2 )      
Other liabilities     (18 )     319  
Federal income taxes     (33 )     488  
Net cash provided by operating activities     1,607       2,724  
                 
Cash flows from investing activities:                
Purchase of held-to-maturity U.S. Treasury notes     (11,000 )     (8,500 )
Securities maturities, prepayments and calls:                
Held to maturity     12,613       9,712  
Available for sale     9       34  
Loans originated for investment, net of principal collected     4,422       724  
Proceeds from sale of real estate owned     812       1,064  
Improvements to real estate owned     (114 )      
Additions to premises and equipment, net     (1,016 )     (161 )
Net cash provided by investing activities     5,726       2,873  
                 
Cash flows from financing activities:                
Net decrease in deposits     (9,237 )     (10,778 )
Payments by borrowers for taxes and insurance, net     (213 )     (161 )
Proceeds from Federal Home Loan Bank advances     28,700       19,300  
Repayments on Federal Home Loan Bank advances     (21,543 )     (13,856 )
Dividends paid on common stock     (1,108 )     (1,082 )
Treasury stock repurchases           (698 )
Net cash used in financing activities     (3,401 )     (7,275 )
                 
Net increase (decrease) in cash and cash equivalents     3,932       (1,678 )
                 
Beginning cash and cash equivalents     13,635       11,511  
                 
Ending cash and cash equivalents   $ 17,567     $ 9,833  

 

See accompanying notes.

 

  6  

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

    Nine months ended  
    March 31,  
    2016     2015  
             
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Federal income taxes   $ 460     $ 255  
                 
Interest on deposits and borrowings   $ 1,098     $ 1,269  
                 
Transfers of loans to real estate owned, net   $ 399     $ 1,780  
                 
Loans made on sale of real estate owned   $ 534     $ 439  

 

See accompanying notes.

 

  7  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(unaudited)

 

On March 2, 2005, First Federal Savings and Loan Association of Hazard (“First Federal of Hazard” or the “Association”) completed a Plan of Reorganization (the “Plan” or the “Reorganization”) pursuant to which the Association reorganized into the mutual holding company form of ownership with the incorporation of a stock holding company, Kentucky First Federal Bancorp (the “Company”) as parent of the Association. Coincident with the Reorganization, the Association converted to the stock form of ownership, followed by the issuance of all the Association’s outstanding stock to Kentucky First Federal Bancorp. Completion of the Plan of Reorganization culminated with Kentucky First Federal Bancorp issuing 4,727,938 common shares, or 55% of its common shares, to First Federal Mutual Holding Company (“First Federal MHC”), a federally chartered mutual holding company, with 2,127,572 common shares, or 24.8% of its shares offered for sale at $10.00 per share to the public and a newly formed Employee Stock Ownership Plan (“ESOP”). The Company received net cash proceeds of $16.1 million from the public sale of its common shares. The Company’s remaining 1,740,554 common shares were issued as part of the $31.4 million cash and stock consideration paid for 100% of the common shares of Frankfort First Bancorp (“Frankfort First”) and its wholly-owned subsidiary, First Federal Savings Bank of Kentucky (“First Federal of Kentucky”). The acquisition was accounted for using the purchase method of accounting and resulted in the recordation of goodwill and other intangible assets totaling $15.4 million.

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements, which represent the consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the nine- and three-month periods ended March 31, 2016, are not necessarily indicative of the results which may be expected for an entire fiscal year. The consolidated balance sheet as of June 30, 2015 has been derived from the audited consolidated balance sheet as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2015 filed with the Securities and Exchange Commission.

 

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

 

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

 

  8  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

2. Earnings Per Share

 

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

 

    Nine months ended
March 31,
    Three months ended
March 31,
 
(in thousands)   2016     2015     2016     2015  
Net income allocated to common shareholders, basic and diluted   $ 1,120     $ 1,534     $ 178     $ 539  

 

    Nine months ended
March 31,
    Three months ended
March 31,
 
    2016     2015     2016     2015  
Weighted average common shares outstanding, basic and diluted     8,321,890       8,360,824       8,326,593       8,317,518  

 

There were 189,322 and 309,800 weighted stock option shares outstanding for the nine-month periods ended March 31, 2016 and 2015, respectively. There were no stock option shares outstanding for the three-month period ended March 31, 2016, because all of the options previously granted expired on December 13, 2015. There were 309,800 weighted stock option shares outstanding for the three-month period ended March 31, 2015. The stock option shares outstanding were antidilutive for the nine-month periods ended March 31, 2016 and 2015, as well as the three-month period ended March 31, 2015.

 

  9  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at March 31, 2016 and June 30, 2015, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

    March 31, 2016  
(in thousands)   Amortized
cost
    Gross
unrealized/
unrecognized
gains
    Gross
unrealized/
unrecognized
losses
    Estimated
fair value
 
                         
Available-for-sale Securities                                
Agency mortgage-backed: residential   $ 87     $ 3     $     $ 90  
FHLMC stock     8       30             38  
    $ 95     $ 33     $     $ 128  
                                 
Held-to-maturity Securities                                
Agency mortgage-backed: residential   $ 2,204     $ 72     $     $ 2,276  
Agency bonds     2,547       2             2,549  
    $ 4,751     $ 74     $     $ 4,825  

 

                June 30, 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  

 

  10  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

3. Investment Securities (continued)

 

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

 

    March 31, 2016  
(in thousands)   Amortized Cost     Fair Value  
             
Held-to-maturity Securities                
Within one year   $ 2,024     $ 2,025  
One to five years     523       524  
Mortgage-backed     2,204       2,276  
    $ 4,751     $ 4,825  

 

Our pledged securities totaled $2.2 million at both March 31, 2016, and June 30, 2015.

 

There were no sales of investment securities during the nine month periods ended March 31, 2016 and 2015.

 

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

 

  11  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

 

    March 31,     June 30,  
(in thousands)   2016     2015  
             
Residential real estate                
One- to four-family   $ 189,402     $ 191,721  
Multi-family     15,908       16,621  
Construction     1,889       3,780  
Land     1,318       2,021  
Farm     1,317       1,567  
Nonresidential real estate     25,429       22,118  
Commercial nonmortgage     2,676       1,782  
Consumer and other:                
Loans on deposits     1,901       2,262  
Home equity     5,626       5,477  
Automobile     71       73  
Unsecured     434       605  
      245,971       248,027  
                 
Undisbursed portion of loans in process     (5,446 )     (2,753 )
Deferred loan origination costs     112       109  
Allowance for loan losses     (1,573 )     (1,568 )
    $ 239,064     $ 243,815  

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2016:

 

(in thousands)   Beginning
balance
    Provision
for loan
losses
    Loans
charged
off
    Recoveries     Ending
balance
 
                               
Residential real estate:                                        
One- to four-family   $ 1,059     $ (190 )   $ (17 )   $ 11     $ 863  
Multi-family     94       102                   196  
Construction     21       (14 )                 7  
Land     7       (3 )                     4  
Farm     9       (5 )                 4  
Nonresidential real estate     121       123                   244  
Commercial nonmortgage     10       (1 )                 9  
Consumer and other:                                        
Loans on deposits     13       (6 )                 7  
Home equity     31       (11 )                 20  
Automobile                              
Unsecured     3       (1 )                 2  
Unallocated     200       17                   217  
Totals   $ 1,568     $ 11     $ (17 )   $ 11     $ 1,573  

 

  12  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016:

 

(in thousands)   Beginning
balance
    Provision for
loan losses
    Loans
charged off
    Recoveries     Ending
balance
 
                               
Residential real estate:                                        
One- to four-family   $ 1,045     $ (187 )   $ (4 )   $ 9     $ 863  
Multi-family     96       100                   196  
Construction     14       (7 )                 7  
Land     8       (4 )                 4  
Farm     9       (5 )                 4  
Nonresidential real estate     143       101                   244  
Commercial nonmortgage     10       (1 )                 9  
Consumer and other:                                        
Loans on deposits     11       (4 )                 7  
Home equity     30       (10 )                 20  
Automobile                              
Unsecured     2                         2  
Unallocated     200       17                   217  
Totals   $ 1,568     $     $ (4 )   $ 9     $ 1.573  

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2015:

 

(in thousands)   Beginning
balance
    Provision for
loan losses
    Loans
charged off
    Recoveries     Ending
balance
 
                               
Residential real estate:                                        
One- to four-family   $ 1,003     $ 254     $ (202 )   $ 20     $ 1,075  
Multi-family     73       21                   94  
Construction     11       6                   17  
Land     10       1                       11  
Farm     9       2                   11  
Nonresidential real estate     112       14                   126  
Commercial nonmortgage     11       (1 )                 10  
Consumer and other:                                        
Loans on deposits     13       2                   15  
Home equity     28       4                   32  
Automobile                              
Unsecured     3       (1 )                 2  
Unallocated     200                         200  
Totals   $ 1,473     $ 302     $ (202 )   $ 20     $ 1,593  

 

  13  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015:

 

(in thousands)   Beginning
balance
    Provision for
loan losses
    Loans
charged off
    Recoveries     Ending
balance
 
                               
Residential real estate:                                        
One- to four-family   $ 1,086     $ 13     $ (37 )   $ 13     $ 1,075  
Multi-family     80       14                   94  
Construction     7       10                   17  
Land     13       (2 )                 11  
Farm     9       2                   11  
Nonresidential real estate     123       3                   126  
Commercial nonmortgage     12       (2 )                 10  
Consumer and other:                                        
Loans on deposits     15                         15  
Home equity     32                         32  
Autombile                              
Unsecured     4       (2 )                 2  
Unallocated     200                         200  
Totals   $ 1,581     $ 36     $ (37 )   $ 13     $ 1.593  

 

  14  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of March 31, 2016. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality.

 

March 31, 2016:                                    
(in thousands)   Loans
individually
evaluated
    Loans
acquired
with
deteriorated
credit
quality
    Ending
loans
balance
    Ending
allowance
attributed to
loans
    Unallocated
allowance
   

Total
allowance

 
Loans individually evaluated for impairment:                                                
Residential real estate:                                                
One- to four-family   $ 3,260     $ 2,109     $ 5,369     $     $     $  
Land           132       132                    
Nonresidential real estate           150       150                    
      3,260       2,391       5,651                    
                                                 
Loans collectively evaluated for impairment:                                                
Residential real estate:                                                
One- to four-family                   $ 184,033     $ 863     $     $ 863  
Multi-family                     15,908       196             196  
Construction                     1,889       7             7  
Land                     1,186       4             4  
Farm                     1,317       4             4  
Nonresidential real estate                     25,279       244             244  
Commercial nonmortgage                     2,676       9             9  
Consumer and other:                                                
Loans on deposits                     1,901       7             7  
Home equity                     5,626       20             20  
Automobile                     71                    
Unsecured                     434       2             2  
Unallocated                                 217       217  
                      240,320       1,356       217       1,573  
                    $ 245,971     $ 1,356     $ 217     $ 1,573  

 

  15  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2015.

 

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                    
      2,506       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 nonmortgagel                     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  

 

  16  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine months ended March 31, 2016 and 2015:

 

March 31, 2016:

 

(in thousands)   Unpaid
Principal
Balance and
Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Average
Recorded
Investment
    Interest
Income
Recognized
    Cash Basis
Income
Recognized
 
                               
With no related allowance recorded:                                        
One- to four-family   $ 3,260     $     $ 3,081     $ 7     $ 7  
Purchased credit-impaired loans     2,391             2,833       53       53  
      5,651             5,914       60       60  
With an allowance recorded:                                        
One- to four-family                              
    $ 5,651     $     $ 5,914     $ 60     $ 60  

 

March 31, 2015:

 

(in thousands)   Unpaid
Principal
Balance and
Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Average
Recorded
Investment
    Interest
Income
Recognized
    Cash Basis
Income
Recognized
 
                               
With no related allowance recorded:                                        
One- to four-family   $ 1,658     $     $ 1,516     $ 26     $ 26  
Purchased credit-impaired loans     3,426             3,552       191       83  
      5,084             5,068       217       109  
With an allowance recorded:                                        
One- to four-family     67       8       104       4       4  
    $ 5,151     $ 8     $ 5,172     $ 221     $ 113  

 

  17  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2016 and 2015:

 

March 31, 2016:

 

(in thousands)   Unpaid
Principal
Balance and
Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Average
Recorded
Investment
    Interest
Income
Recognized
    Cash Basis
Income
Recognized
 
                               
With no related allowance recorded:                                        
One- to four-family   $ 3,260     $     $ 3,127     $ 2     $ 2  
Purchased credit-impaired loans     2,391             2,439       19       19  
      5,651             5,566       21       21  
With an allowance recorded:                                        
One- to four-family                              
    $ 5,651     $     $ 5,566     $ 21     $ 21  

 

March 31, 2015:

 

(in thousands)   Unpaid
Principal
Balance and
Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Average
Recorded
Investment
    Interest
Income
Recognized
    Cash Basis
Income
Recognized
 
                               
With no related allowance recorded:                                        
One- to four-family   $ 1,658     $     $ 1,332     $ 26     $ 26  
Purchased credit-impaired loans     3,426             3,468       116       65  
      5,084             4,800       142       91  
With an allowance recorded:                                        
One- to four-family     67       8       73       4       4  
    $ 5,151     $ 8     $ 4,873     $ 146     $ 95  

 

  18  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2016, and June 30, 2015:

 

    March 31, 2016     June 30, 2015  
(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   $ 4,666     $ 1,651     $ 4,331     $ 1,745  
Nonresidential real estate and land     171       130       410        
Consumer     7             26        
    $ 4,844     $ 1,781     $ 4,767     $ 1,745  

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Bank would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.” At March 31, 2016 and June 30, 2015, the Company had $1.6 million and $1.9 million of loans classified as TDRs, respectively. Of the TDRs at March 31, 2016, approximately 31.9% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

The following table presents TDR’s by loan type at March 31, 2016 and June 30, 2015, 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
 
                               
March 31, 2016                                        
Residential Real Estate:                                        
1-4 Family     34     $ 1,858     $ 1,572     $ 1,053     $ 519  
                                         
June 30, 2015                                        
Residential Real Estate:                                        
1-4 Family     38     $ 2,110     $ 1,851     $ 1,710     $ 141  

 

  19  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

There was one TDR loan modification which totaled $3,000 for the nine month period ended March 31, 2016. There were no TDR loan modifications for the three month period ended March 31, 2016. There was one TDR loan modification totaling $20,000 for the nine- and three-month periods ended March 31, 2015, which resulted in extension of the term of the loan with no additional principal or change in interest rate. The following table summarizes TDR loan modifications that occured during the nine months ended March 31, 2016, and their performance, by modification type:

 

(in thousands)   Troubled Debt
Restructurings
Performing to
Modified Terms
    Troubled Debt
Restructurings
Not Performing
to Modified
Terms
    Total Troubled
Debt
Restructurings
 
                   
Nine months ended March 31, 2016                        
Residential real estate:                        
Extension of loan term   $ 3     $     $ 3  

 

The Company had no allocated specific reserves to customers whose loan terms had been modified in troubled debt restructurings as of March 31, 2016, or at June 30, 2015. The Company had no commitments to lend on loans classified as TDRs at March 31, 2016 or June 30, 2015.

 

There were no TDRs that defaulted during the nine- or three- month periods ended March 31, 2016 or 2015.

 

  20  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of March 31, 2016, by class of loans:

 

(in thousands)   30-89 Days
Past Due
    90 Days or
Greater
Past Due
    Total
Past
Due
    Loans Not
Past Due
    Total  
                               
Residential real estate:                                        
One-to four-family   $ 4,067     $ 3,602     $ 7,669     $ 181,733     $ 189,402  
Multi-family                       15,908       15,908  
Construction     8             8       1,881       1,889  
Land                       1,318       1,318  
Farm                       1,317       1,317  
Nonresidential real estate           280       280       25,149       25,429  
Commercial non-mortgage                       2,676       2,676  
Consumer and other:                                        
Loans on deposits                       1,901       1,901  
Home equity     19       27       46       5,580       5,626  
Automobile                       71       71  
Unsecured                       434       434  
Total   $ 4,094     $ 3,909     $ 8,003     $ 237,968     $ 245,971  

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2015, by class of loans:

 

(in thousands)   30-89 Days
Past Due
    90 Days or
Greater Past
Due
    Total
Past Due
    Loans Not
Past Due
    Total  
                               
Residential real estate:                                        
One-to four-family   $ 5,129     $ 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 nonmortgage                       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  

 

  21  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of March 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(in thousands)   Pass     Special
Mention
    Substandard     Doubtful     Not rated  
                               
Residential real estate:                                        
One- to four-family   $     $ 7,367     $ 12,155     $     $ 169,880  
Multi-family     15,566             342              
Construction     1,889                          
Land     1,185             133              
Farm     1,317                          
Nonresidential real estate     24,363       895       171              
Commercial nonmortgage     2,644       32                    
Consumer:                                        
Loans on deposits     1,901                          
Home equity     5,619             7              
Automobile     71                          
Unsecured     434                          
    $ 54,989     $ 8,294     $ 12,808     $     $ 169,880  

 

  22  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2015, the risk category of loans by class of loans was as follows:

 

(in thousands)   Pass     Special
Mention
    Substandard     Doubtful     Not rated  
                               
Residential real estate:                                        
One- to four-family   $     $ 6,914     $ 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 nonmortgage     1,750       32                    
Consumer:                                        
Loans on deposits     2,262                          
Home equity     5,448             29              
Automobile     73                          
Unsecured     605                          
    $ 53,468     $ 8,077     $ 11,046     $     $ 175,436  

 

Purchased Credit Impaired Loans:

 

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $472,000 and $616,000 at March 31, 2016 and June 30, 2015, respectively, is as follows:

 

(in thousands)   March 31, 2016     June 30, 2015  
             
One- to four-family residential real estate   $ 2,109     $ 2,565  
Land     132       381  
Nonresidential real estate     150       526  
Commercial nonmortgage            
Outstanding balance   $ 2,391     $ 3,472  

 

  23  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)   Three months
ended
March 31, 2016
    Nine months
ended
March 31, 2016
    Twelve
months ended
June 30, 2015
 
                   
Balance at beginning of period   $ 1,072     $ 1,021     $ 1,478  
Accretion of income     (38 )     (116 )     (457 )
Reclassifications from nonaccretable difference     2       151        
Disposals     (17 )     (37 )      
Balance at end of period   $ 1,019     $ 1,019     $ 1,021  

 

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2015, nor for the nine- or three-month periods ended March 31, 2016. Neither were any allowance for loan losses reversed during those periods.

 

5. Disclosures About Fair Value of Assets and Liabilities

 

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

 

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

 

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

 

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

 

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

 

Securities

 

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

 

  24  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

 

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

 

          Fair Value Measurements Using
(in thousands)   Fair Value     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
                         
March 31, 2016                                
Agency mortgage-backed: residential   $ 90     $     $ 90     $  
FHLMC stock     38             38        
    $ 128     $     $ 128     $  
June 30, 2015                                
Agency mortgage-backed: residential   $ 96     $     $ 96     $  
FHLMC stock     63             63        
    $ 159     $     $ 159     $  

 

  25  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

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

 

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

 

          Fair Value Measurements Using
(in thousands)   Fair Value     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
                         
March 31, 2016                                
Other real estate owned, net                                
One- to four-family   $ 835                 $ 835  
Land     79                   79  
                                 
June 30, 2015                                
Other real estate owned, net                                
One- to four-family   $ 525                 $ 525  
Land     15                   15  

 

There were no impaired loans, which were measured using the fair value of the collateral for collateral-dependent loans, at March 31, 2016, and June 30, 2015. There was no specific provision made for the nine month periods ended March 31, 2016 or 2015.

 

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $914,000 and $540,000 at March 31, 2016 and June 30, 2015, respectively. Other real estate owned was written down $150,000 and $27,000 during the nine months ended March 31, 2016 and 2015, respectively.

 

Other real estate was written down $111,000 and $13,000 during the three months ended March 31, 2016 and 2015, respectively.

 

  26  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

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

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2016 and June 30, 2015:

 

                  Range
    Fair Value     Valuation   Unobservable   (Weighted
March 31, 2016   (in thousands)     Technique(s)   Input(s)   Average)
Foreclosed and repossessed assets:                    
1-4 family   $ 835     Sales comparison approach   Adjustments for differences between comparable sales   -28.4% to 17.4% (1.3%)
Land   $ 79     Sales comparison approach   Adjustments for differences between comparable sales   3.5% to 6.6% (5.4%)

 

                  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%)

 

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

 

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

 

  27  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

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

 

The following methods were used to estimate the fair value of all other financial instruments at March 31, 2016 and June 30, 2015:

 

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

 

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

 

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

 

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

 

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

 

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

 

Accrued interest receivable : The carrying amount is the estimated fair value.

 

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

 

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

 

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

 

Commitments to extend credit : For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The fair value of outstanding loan commitments at March 31, 2016 and June 30, 2015, was not material.

 

  28  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at March 31, 2016 and June 30, 2015 are as follows:

 

          Fair Value Measurements at  
    Carrying     March 31, 2016 Using  
(in thousands)   Value     Level 1     Level 2     Level 3     Total  
Financial assets                                        
Cash and cash equivalents   $ 17,567     $ 17,567                     $ 17,567  
Available-for-sale securities     128             $ 128               128  
Held-to-maturity securities     4,751               4,825               4,825  
Loans held for sale                                  
Loans receivable - net     239,064                       243,038       243,038  
Federal Home Loan Bank stock     6,482                               n/a  
Accrued interest receivable     690               23       667       690  
                                         
Financial liabilities                                        
Deposits   $ 190,401     $ 82,908     $ 107,498               190,406  
Federal Home Loan Bank advances     33,792               34,112               34,112  
Advances by borrowers for taxes and insurance     486               486               486  
Accrued interest payable     30               30               30  

 

          Fair Value Measurements at  
    Carrying     June 30, 2015 Using  
(in thousands)   Value     Level 1     Level 2     Level 3     Total  
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  

 

  29  

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2016

(unaudited)

 

6. Other Comprehensive Income (Loss)

 

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

 

    Balance at
June 30, 2015
    Current Year
Change
    Balance at
March 31, 2016
 
                         
Unrealized gains (losses) on available-for-sale securities   $ 38     $ (16 )   $ 22  

 

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

 

    Nine months ended March 31,  
(in thousands)   2016     2015  
             
Unrealized holding gains (losses) on available-for-sale securities   $ (24 )   $ (45 )
Tax effect     (8 )     (15 )
Net-of-tax amount   $ (16 )   $ (30 )

 

    Three months ended March 31,  
(in thousands)   2016     2015  
             
Unrealized holding gains (losses) on available-for-sale securities   $ (8 )   $ 6  
Tax effect     (3 )     2  
Net-of-tax amount   $ (5 )   $ 4  

 

  30  

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to Kentucky First Federal Bancorp or its management are intended to identify such forward looking statements. Kentucky First Federal Bancorp’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company’s market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services and the other matters mentioned in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.

 

  31  

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the nine month periods ended March 31, 2016 and 2015, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

    Nine Months Ended March 31,  
    2016     2015  
   

Average

Balance

   

Interest

And

Dividends

   

Yield/

Cost

    Average
Balance
   

Interest

And
Dividends

   

Yield/

Cost

 
    (Dollars in thousands)  
Interest-earning assets:                                                
Loans 1   $ 245,362     $ 8,542       4.64 %   $ 246,297     $ 9,093       4.92 %
Mortgage-backed securities     2,582       73       3.77       3,529       84       3.17  
Other securities     3,951       17       0.57       5,814       19       0.44  
Other interest-earning assets     16,954       195       1.53       13,974       195       1.86  
Total interest-earning assets     268,849       8,827       4.38       269,614       9,391       4.64  
                                                 
Less: Allowance for loan losses     (1,568 )                     (1,513 )                
Non-interest-earning assets     30,126                       29,490                  
Total assets   $ 297,407                     $ 297,591                  
                                                 
Interest-bearing liabilities:                                                
Demand deposits   $ 6,511     $ 19       0.39 %   $ 16,296     $ 23       0.19 %
Savings     74,156       195       0.35       58,815       177       0.40  
Certificates of deposit     110,958       591       0.71       129,991       698       0.72  
Total deposits     191,625       805       0.56       205,102       898       0.58  
Borrowings     32,234       228       0.94       18,960       180       1.27  
Total interest-bearing liabilities     223,859       1,033       0.62       224,062       1,078       0.64  
                                                 
Noninterest-Bearing demand deposits     3,752                       4,154                  
Noninterest-bearing liabilities     2,522                       2,117                  
Total liabilities     230,133                       230,333                  
                                                 
Shareholders’ equity     67,274                       67,258                  
Total liabilities and shareholders’ equity   $ 297,407                     $ 297,591                  
Net interest income/average yield           $ 7,794       3.76 %           $ 8,313       4.00 %
Net interest margin                     3.87 %                     4.11 %
Average interest-earning assets to average interest-bearing liabilities                     120.10 %                     120.33 %

 

 

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

 

  32  

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets (continued)

 

The following table represents the average balance sheets for the three month periods ended March 31, 2016 and 2015, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

    Three Months Ended March 31,  
    2016     2015  
   

Average

Balance

   

Interest

And

Dividends

   

Yield/

Cost

    Average
Balance
   

Interest

And
Dividends

   

Yield/

Cost

 
    (Dollars in thousands)  
Interest-earning assets:                                                
Loans 2   $ 243,726     $ 2,756       4.52 %   $ 245,935     $ 3,038       4.94 %
Mortgage-backed securities     2,377       29       4.88       3,277       27       3.30  
Other securities     5,020       7       0.56       6,038       6       0.40  
Other interest-earning assets     18,757       66       1.41       13,070       65       1.99  
Total interest-earning assets     269,880       2,858       4.23       268,320       3,136       4.68  
                                                 
Less: Allowance for loan losses     (1,568 )                     (1,281 )                
Non-interest-earning assets     31,441                       29,785                  
Total assets   $ 299,753                     $ 296,824                  
                                                 
Interest-bearing liabilities:                                                
Demand deposits   $ 8,179     $ 5       0.25 %   $ 16,185     $ 7       0.17 %
Savings     71,795       65       0.36       59,228       59       0.40  
Certificates of deposit     108,452       187       0.69       124,467       246       0.79  
Total deposits     188,426       257       0.55       199,880       312       0.62  
Borrowings     37,283       84       0.90       23,637       61       1.03  
Total interest-bearing liabilities     225,709       341       0.60       223,517       373       0.67  
                                                 
Noninterest-bearing demand deposits     3,704                       4,306                  
Noninterest-bearing liabilities     2,285                       1,759                  
Total liabilities     231,698                       229,582                  
                                                 
Shareholders’ equity     68,055                       67,242                  
Total liabilities and shareholders’ equity   $ 299,753                     $ 296,824                  
Net interest income/average yield           $ 2,517       3.63 %           $ 2,763       4.01 %
Net interest margin                     3.73 %                     4.12 %
Average interest-earning assets to average interest-bearing liabilities                     119.57 %                     120.05 %

 

 

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

 

  33  

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to March 31, 2016

 

Assets: At March 31, 2016, the Company’s assets totaled $294.1 million, a decrease of $2.2 million, or 0.8%, from total assets at June 30, 2015. This decrease was attributed primarily to a decrease in loans and investment securities.

 

Cash and cash equivalents: Cash and cash equivalents increased by $3.9 million or 28.8% to $17.6 million at March 31, 2016, as the Company has begun to invest some of the excess cash in First Federal of Hazard.

 

Securities: At March 31, 2016 and 2015 our securities portfolio consisted of agency bonds, mortgage-backed securities and FHLMC stock. Investment securities totaled $4.9 million at March 31, 2016, compared to $6.6 million at June 30, 2015, a decrease of $1.7 million or 25.9% due to scheduled maturities of agency bonds and principal repayments received on mortgage-backed securities.

 

Loans : Loans receivable, net, decreased by $4.8 million or 1.9% to $239.1 million at March 31, 2016. During the period gross loans decreased $2.1 million or 0.8% to $246.0 million, while undisbursed portion of loans in process increased $2.7 million or 97.8% to $5.4 million. One- to four-family residential loans and construction loans decreased $2.3 million or 1.2% and $1.9 million or 50.0%, respectively during the period, while nonresidential real estate loans increased $3.3 million or 15.0%. Construction loans typically have building periods that range from four to twelve months and management expects that most of the Company’s construction loans will be fully disbursed within the next six months. Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies. However, our local markets have not fully recovered from the downturn in the housing markets and we have not yet seen a sustained increase in demand for home loans.

 

Non-Performing Loans:  At March 31, 2016, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $6.6 million, or 2.7% of total loans (including loans purchased in the acquisition), compared to $6.5 million or 2.7%, of total loans at June 30, 2015.  The Company’s allowance for loan losses totaled $1.6 million at March 31, 2016, and June 30, 2015, respectively. The allowance for loan losses at March 31, 2016, represented 23.7% of nonperforming loans and 0.64% of total loans (including loans purchased in the acquisition), while at June 30, 2015, the allowance represented 24.1% of nonperforming loans and 0.63% of total loans.

 

Assets classified as substandard for regulatory purposes totaled $14.0 million at March 31, 2016, an increase of $1.4 million or 10.8% compared to June 30, 2015, and was comprised of loans ($12.8 million) and real estate owned (“REO”) ($1.2 million), including loans acquired in the CKF Bancorp transaction. Substandard loans increased $1.8 million during the nine months just ended, while REO decreased $397,000.

 

  34  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to March 31, 2016 (continued)

 

Classified loans as a percentage of total loans (including loans acquired) were 5.2% and 4.5% at March 31, 2016 and June 30, 2015, respectively. Of substandard loans, 99.8% were secured by real estate on which the Banks have priority lien position. The increase in substandard loans from June 30, 2015, was primarily associated with residential rental properties, while decreases occurred in loan classifications for commercial properties and land. One- to four-family and multi-family residential rental loans accounted for approximately $2.4 million of the increase in classified loans, while upgrades and/or payoffs resulted in decreases of $724,000 and $618,000 in land loans and commercial loans, respectively during the nine month period. The increase in substandard loans was attributed to a relatively few large borrowers whose financial positions have developed some weakness according to the Company’s analysis of their cash flow, although no serious delinquencies have developed. These loans are secured by one- to four-family residential rental properties and to a lesser degree multi-family residential rental properties and management considers these credits generally well-secured. In addition there has also been an increase of approximately $720,000 among single-family owner-occupied properties in the Hazard area, which is due to difficult economic circumstances. Those classifications are most often the result of delinquency.

 

REO decreased $397,000 or 24.9% to $1.2 million at March 31, 2016, as the Company continued working through properties taken back pursuant to foreclosure action.

 

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

 

(dollars in thousands)   March 31, 2016     June 30, 2015  
             
Substandard assets   $ 14,004     $ 12,639  
Doubtful assets            
Loss assets            
Total classified assets   $ 14,004     $ 12,639  

 

At March 31, 2016, the Company’s real estate acquired through foreclosure represented 8.5% of substandard assets compared to 12.6% at June 30, 2015. During the nine months ended March 31, 2016, the Company sold property with a carrying value of $762,000 for $812,000, while during the year ended June 30, 2015, property with a carrying value of $590,000 was sold for $702,000. During the nine months ended March 31, 2016, the Company made $534,000 in loans to facilitate the purchase of its other real estate owned by qualified borrowers, while in the fiscal year ended June 30, 2015, $424,000 in loans to facilitate an exchange were made. The Company defers recognition of any gain on loans to facilitate an exchange until the proper time in the future. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $271,000 and $292,000 at March 31, 2016 and June 30, 2015, respectively.

 

  35  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to March 31, 2016 (continued)

 

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

 

    March 31, 2016     June 30, 2015  
    Number     Net     Number     Net  
    of     Carrying     of     Carrying  
    Properties     Value     Properties     Value  
                         
Single family, non-owner occupied     11     $ 1,114       15     $ 1,440  
Building lot     3       82       5       153  
Total REO     14     $ 1,196       20     $ 1,593  
                                 

 

At March 31, 2016, and June 30, 2015, the Company had $8.3 million and $8.1 million of loans classified as special mention, respectively (including loans purchased at December 31, 2012.) This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. The primary reason for this increase was related to two larger borrowers who each experienced some weakness in cash flow, but had no delinquency and their loans were well secured by real estate.

 

Liabilities: At March 31, 2016, the Company’s liabilities totaled $226.6 million, a decrease of $2.4 million, or 1.0%, from total liabilities at June 30, 2015. The decrease in liabilities was attributed primarily to a decrease of $9.3 million or 4.7% in deposits which totaled $190.4 million at March 31, 2016, and was partially offset by an increase of $7.2 million or 26.9% in FHLB advances compared to June 30, 2015. Deposit customers continue seeking higher yields on their funds after growing impatient in the current low-rate environment and some are turning to non-insured investments. As deposits have continued to decrease, we have utilized short-term FHLB advances as replacement funding.

 

Shareholders’ Equity: At March 31, 2016, the Company’s shareholders’ equity totaled $67.4 million, an increase of $134,000 or 0.2% from the June 30, 2015 total. The change in shareholders equity was chiefly associated with net profits for the period less dividends paid on common stock.

 

  36  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to March 31, 2016 (continued)

 

The Company paid dividends of $1.1 million or 98.9% of net income for the nine month period just ended. On July 7, 2015, the members of First Federal MHC for the fourth time approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock. The Board of Directors of First Federal MHC applied for approval of another waiver. The Federal Reserve Bank of Cleveland has notified the Company that there was no objection to a waiver of dividends paid by the Company to First Federal MHC, and, as a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 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. Management cannot speculate on future dividend levels, because various factors, including capital levels, income levels, liquidity levels, regulatory requirements and overall financial condition of the Company are considered before dividends are declared. However, management continues to believe that a strong dividend is consistent with the Company’s long-term capital management strategy. See “Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Nine Month Periods Ended March 31, 2016 and 2015

 

General

 

Net income totaled $1.1 million for the nine months ended March 31, 2016, a decrease of $414,000 or 27.0% from net income of $1.5 million for the same period in 2015. The decrease in net earnings for the recently-ended nine-month period was primarily attributable to lower net interest income, higher non-interest expense, and lower non-interest income, while partially offset by lower provision for loan losses.

 

Net Interest Income

 

Net interest income after provision for loan losses decreased $228,000 or 2.8% and totaled $7.8 million and $8.0 million for the nine months ended March 31, 2016 and 2015, respectively. Provision for loan losses decreased by $291,000 or 96.3% to $11,000 for the nine month period just ended compared to $302,000 for the prior year period. Interest income decreased $564,000 or 6.0%, to $8.8 million, while interest expense decreased $45,000 or 4.2% to $1.0 million for the nine months ended March 31, 2016, after amortization of fair value adjustments on interest bearing accounts.

 

Interest income on loans decreased $551,000 or 6.1% to $8.5 million, due primarily to a decrease in the average rate earned on the loan portfolio as borrowers modified their loans to lower interest rates currently offered by the Banks and new loans were originated at those lower rates. The average rate earned on loans outstanding decreased 28 basis points to 4.64% for the nine month period just ended, while the average balance of loans outstanding decreased $935,000 to $245.4 million. Interest income on mortgage-backed residential securities (“MBS”) decreased $11,000 or 13.1% to $73,000 for the nine months ended March 31, 2016, as the average balance decreased $947,000 or 26.8% to $2.6 million for the recently ended period, while the average rate earned increased 60 basis points to 3.77% compared to the period a year ago. Interest income on other securities, primarily composed of agency bonds, totaled $17,000 during the recent nine month period, compared to $19,000 for the prior year period. The average balance of other investment securities was $4.0 million for the nine month period just ended and the average rate earned on those securities was 57 basis points.

 

  37  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Nine Month Periods Ended March 31, 2016 and 2015 (continued)

 

Net Interest Income (continued)

 

Interest income on interest-bearing deposits and other was unchanged for the period just ended compared to the prior year period.

 

Interest expense on deposits decreased $93,000 or 10.4% to $805,000 for the nine month period ended March 31, 2016, due primarily to a decrease in the average balance of deposits outstanding. Average deposits outstanding decreased $13.5 million or 6.6% to $191.6 million for the recently ended nine month period, while the average rate paid on deposits decreased 2 basis points to 56 basis points for the current year period. Interest expense on borrowings increased $48,000 or 26.7% to $228,000 for the nine month period ended March 31, 2016, compared to the prior year period. The increase in interest expense on borrowings was attributed to a higher average balance outstanding as the average balance outstanding increased $13.3 million or 70.0% to $32.2 million, while the average rate paid on borrowings decreased 33 basis points to 94 basis points for the recently ended period.

 

Net interest margin decreased from 4.11% for the prior year period to 3.87% for the nine months ended March 31, 2016, primarily due to a decrease in rates earned on loans. In the current low interest rate environment the Company seeks to retain loans by allowing borrowers to modify their existing loans to prevailing interest rates. In addition to lower rates earned on loan modifications, the Company’s new loan production also carries lower interest rates. Because of the length of time that the interest rate cycle has remained low, most of the Company’s interest-bearing liabilities have already repriced lower, which prevents further reductions in interest expense. Although the loan portfolio is heavily weighted toward adjustable rate loan products, the loans are not expected to produce quick results when interest rates begin to rise. Therefore, the Company anticipates continued downward pressure on its net interest margin if the low interest rate environment continues.

 

Provision for Losses on Loans

 

The Company recorded $11,000 in provision for losses on loans during the nine months ended March 31, 2016, compared to a provision of $302,000 for the nine months ended March 31, 2015. The decreased provision was primarily due to improving asset quality, reduced loan charge-offs, some loan recoveries and slightly declining loan balances. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.

 

Non-interest Income

 

Non-interest income totaled $221,000 for the nine months ended March 31, 2016, a decrease of $175,000 or 44.2% from the same period in 2015. The decrease in non-interest income was primarily attributable to items associated with REO, as the Company recorded valuation adjustments totaling $150,000 or $123,000 higher in the recently ended period compared to the prior year period and net gain on sales of REO of $52,000, which totaled $72,000 lower than the prior year gain. Somewhat offsetting the decrease in non-interest income from REO activities was an increase in net gains on sales of loans, which totaled $41,000 for the nine month period ended March 31, 2016, an increase of $13,000 or 46.4% compared to the 2015 period.

 

  38  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Nine Month Periods Ended March 31, 2016 and 2015 (continued)

 

Non-interest Expense

 

Non-interest expense totaled $6.5 million and $6.1 million for the nine months ended March 31, 2016 and 2015, respectively, an increase of $356,000 or 5.8% period to period. The increase was primarily related to higher costs associated with employee compensation and benefits and an increase in other non-interest expense, while being somewhat offset by decreases in foreclosure and REO expenses as well as data processing and outside service fees. Employee compensation and benefits totaled $4.1 million for the nine months ended March 31, 2016, an increase of $384,000 or 10.4% over the prior year period due primarily to expenses associated with the Company’s defined benefit (“DB”) pension plan. Plan expenses totaled $557,000 during the nine-month period just ended compared to $226,000 in the nine-month period a year ago, an increase of $331,000 or 146.5%. In the previous fiscal year plan expenses for the DB plan were reduced because of sufficient funding levels, while acknowledging that additional expenses would be incurred in the current fiscal year. Management expects to reduce the DB expense levels for the next three months as it seeks to combine the plans of the banks into a single plan. Funding levels for both DB plans remain satisfactory in management’s opinion, while management continues its plans to realign its compensation practices. Other non-interest expenses increased $118,000 or 16.9% and totaled $815,000 for the recently ended period, primarily due to the Company’s promotional activities and communications costs. Along with newly-acquired facilities, the Company is currently promoting its lending and deposit services through media advertising and rebranding. First Federal of Hazard began occupying its newly-acquired main office during the quarter just ended, while First Federal of Kentucky began operating in its newly-acquired east Frankfort branch facility during the second quarter of this fiscal year. Advertising and communications expenses increased $46,000 or 61.6% and $34,000 or 49.1%, respectively from year to year. Advertising and rebranding expenses totaled $120,000 for the nine month period just ended compared to $74,000 in the prior year period, while telephone/communications expense totaled $103,000 compared to $69,000 in the last year period. Foreclosure and REO expenses totaled $73,000, a decrease of $82,000 or 52.9% for the nine months ended March 31, 2016, as the Company continued to work through its REO process. Data processing expense totaled $290,000, a decrease of $37,000 or 11.3%, for the recently ended nine month period compared to the prior year period. Outside service fees decreased $32,000 or 20.9% to $121,000 for the recently ended period.

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $411,000 for the nine months ended March 31, 2016, compared to $756,000 in the prior year period primarily due to lower income but also due to the reversal of a FIN 48 reserve related to a previously received federal tax refund. The effective tax rates were 26.9% and 33.0% for the nine month periods ended March 31, 2016 and 2015, respectively.

 

Comparison of Operating Results for the Three Month Periods Ended March 31, 2016 and 2015

 

General

 

Net income totaled $178,000 for the three months ended March 31, 2016, a decrease of $361,000 or 67.0% from net income of $539,000 for the same period in 2015, primarily due to lower net interest income, higher non-interest expense and lower non-interest income, while partially offset by lower provision for loan losses.

 

  39  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Three Month Periods Ended March 31, 2016 and 2015

(continued)

 

Net Interest Income

 

Net interest income decreased $246,000 or 8.9% to $2.5 million for the three month period ended March 31, 2016, while net interest income after provision for loan loss decreased $210,000 or 7.7% to $2.5 million. There was no provision for losses on loans in the recently-ended quarter compared to a provision of $36,000 in the prior year period. Interest income decreased by $278,000, or 8.9%, to $2.9 million, while interest expense decreased $32,000 or 8.6% to $341,000 for the three months ended March 31, 2016, after amortization of fair value adjustments on interest bearing accounts.

 

Interest income on loans decreased $282,000 or 9.3% to $2.8 million, due primarily to a decrease in the average rate earned on the loan portfolio as borrowers modified their loans to lower interest rates currently offered by the Banks and new loans were originated at those lower rates. The average rate earned on the loan portfolio decreased 42 basis points to 4.52% for the three month period ended March 31, 2016, while the average balance of the loan portfolio decreased $2.2 million or 0.9% to $243.7 million. Interest income on other interest-bearing investments increased only slightly from the prior year period to the recently ended quarterly period.

 

Interest expense on deposits decreased $55,000 or 17.7% to $257,000 for the three month period ended March 31, 2016, while interest expense on borrowings increased $23,000 or 37.7% to $84,000 for the same period. The decrease in interest expense on deposits was attributed to both a decrease in the average balance of deposits and to a decrease in the average rate paid on deposits. The average balance of deposits decreased $11.5 million or 5.7% to $188.4 million for the most recent period, while the average balance paid on deposits decreased 7 basis points to 55 basis points. The decrease in average deposits was attributed to rate-sensitive deposit customers withdrawing funds to seek additional yield as the historically low interest rate environment continues. The increase in interest expense on borrowings was attributed primarily to higher average outstanding balances, while the rate paid on amounts outstanding decreased period to period. The average balance of borrowings outstanding increased $13.6 million or 57.7% to $37.3 million for the recently ended three month period, while the average rate paid on borrowings decreased 13 basis points to 90 basis points for the most recent period.

 

Net interest margin decreased from 4.12% for the prior year quarterly period to 3.73% for the quarter ended March 31, 2016, as interest-earning assets reprice to lower interest rates. Borrowers are permitted to modify their existing loans to lower prevailing interest rates and new loan production also carries lower interest rates, while interest-bearing liabilities have already repriced to lower interest rates. Therefore, the Company anticipates continued downward pressure on its net interest margin if the lower interest rate environment continues.

 

Provision for Losses on Loans

 

The Company recorded no provision for losses on loans during the three months ended March 31, 2016, compared to a $36,000 provision for the three months ended March 31, 2015, primarily due to improving asset quality, reduced loan charge-offs, some loan recoveries and slightly declining loan balances. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.

 

Non-interest Income

 

Non-interest income totaled a $19,000 loss for the three months ended March 31, 2016, a decrease of $87,000 from the $68,000 income reported in same period in 2015, primarily due to valuation adjustments on REO. The Company wrote down $111,000 on its REO holdings during the recently ended quarter based on newly-acquired appraisals.

 

  40  

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Three Month Periods Ended March 31, 2016 and 2015

(continued)

 

Non-interest Expense

 

Non-interest expense totaled $2.2 million and $2.0 million for the three months ended March 31, 2016 and 2015, respectively, an increase of $249,000 or 12.5% period to period. The increase was primarily related to higher costs associated with employee compensation and benefits and an increase in other non-interest expense. Employee compensation and benefits totaled $1.4 million for the three months ended March 31, 2016, an increase of $254,000 or 21.4% over the prior year period due primarily to expenses associated with the Company’s defined benefit (“DB”) pension plan. Plan expenses totaled $203,000 during the three-month period just ended compared to nil in the three-month period a year ago. Other non-interest expenses increased $102,000 or 57.9% and totaled $278,000 for the recently ended quarter, primarily due to the Company’s promotional activities and communications costs. Advertising and communications expenses increased $23,000 or 93.0% and $18,000 or 64.5%, respectively from year to year. Advertising and rebranding expenses totaled $49,000 for the three month period just ended compared to $25,000 in the prior year period, while telephone/communications expense totaled $45,000 compared to $27,000 in the last year period. Outside service fees totaled $30,000, a decrease of $36,000 or 54.5% for the three months ended March 31, 2016, while occupancy and equipment expense totaled $167,000, a decrease of $31,000 or 15.7%, for the recently ended three month period compared to the prior year period.

 

Federal Income Tax Expense

 

Federal income taxes expense totaled $81,000 for the three months ended March 31, 2016, compared to $266,000 in the prior year period, principally due to lower pre-tax income. The effective tax rates were 31.4% and 33.0% for the three-month periods ended March 31, 2016 and 2015, respectively.

 

  41  

 

 

Kentucky First Federal Bancorp

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

This item is not applicable as the Company is a smaller reporting company.

 

ITEM 4: Controls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, and have concluded that the Company’s disclosure controls and procedures were effective.

 

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2016, in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

  42  

 

 

Kentucky First Federal Bancorp

 

PART II

 

ITEM 1. Legal Proceedings
   
  None.
   
ITEM 1A. Risk Factors

 

There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

 

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

 

(c)        The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended March 31, 2016.

 

                Total # of        
          Average     shares purchased     Maximum # of shares  
    Total     price paid     as part of publicly     that may yet be  
    # of shares     per share     announced plans     purchased under  
Period   purchased     (incl commissions)     or programs     the plans or programs  
                         
January 1-31, 2016         $             60,323  
February 1-29, 2016         $             60,323  
March 1-31, 2016         $             60,323  

 

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

 

ITEM 3. Defaults Upon Senior Securities
   
  Not applicable.
   
ITEM 4. Mine Safety Disclosures.
   
  Not applicable.
   
ITEM 5. Other Information
   
  None.

 

ITEM 6. Exhibits  
     
  3.1 1 Charter of Kentucky First Federal Bancorp
  3.2 1 Bylaws of Kentucky First Federal Bancorp, as amended and restated
  4.1 1 Specimen Stock Certificate of Kentucky First Federal Bancorp
  31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101.0 The following materials from Kentucky Firt Federal Bancorp’s Quarterly Report
     
    On Form 10-Q for the quarter ended March 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 

 

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

 

  43  

 

 

Kentucky First Federal Bancorp

 

SIGNATURES

 

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

 

      KENTUCKY FIRST FEDERAL BANCORP
         
Date: May 16, 2016   By: /s/Don D. Jennings
        Don D. Jennings
        Chief Executive Officer
         
Date: May 16, 2016   By: /s/ R. Clay Hulette
        R. Clay Hulette
        Vice President and Chief Financial Officer

 

  44  

 

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