Exhibit 13

 

 

Parent company of

First Federal Savings and Loan Association of Hazard

and

First Federal Savings Bank of Frankfort

2015

Annual Report

 

 

 

KENTUCKY FIRST FEDERAL BANCORP

 

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

 

First Federal of Hazard is a federally chartered savings and loan association offering traditional financial services to consumers in Perry and surrounding counties in eastern Kentucky. First Federal of Hazard engages primarily in the business of attracting deposits from the general public and using such funds to originate, when available, loans secured by first mortgages on owner-occupied, residential real estate and, occasionally, other loans secured by real estate. To the extent there is insufficient loan demand in its market area, and where appropriate under its investment policies, First Federal of Hazard has historically invested in mortgage-backed and other securities, although since formation of the Company in 2005, First Federal of Hazard has been purchasing whole loans and participations in loans originated at First Federal of Frankfort.

 

First Federal of Frankfort is a federally chartered savings bank which is primarily engaged in the business of attracting deposits from the general public and the origination primarily of adjustable-rate loans secured by first mortgages on owner-occupied and non-owner-occupied one-to four-family residences in Franklin, Boyle, Garrard and surrounding counties in Kentucky. First Federal of Frankfort also originates, to a lesser extent, home equity loans, loans secured by churches, multi-family properties, professional office buildings and other types of property, as well as consumer loans and commercial and industrial loans.

 

MARKET INFORMATION

 

The Company’s common stock began trading under the symbol “KFFB” on the Nasdaq National Market on March 3, 2005. There are currently 8,439,515 shares of common stock outstanding and approximately 686 holders of record of the common stock. Following are the high and low closing prices, by fiscal quarter, as reported on the Nasdaq National Market during the periods indicated, as well as dividends declared on the common stock during each quarter.

 

		High				Low				Dividends Per Share
Fiscal 2015
First quarter		$	8.89			$	8.00			$	0.10
Second quarter			8.50				7.47				0.10
Third quarter			8.45				7.94				0.10
Fourth quarter			8.79				8.00				0.10

 

		High				Low				Dividends Per Share
Fiscal 2014
First quarter		$	8.97			$	7.55			$	0.10
Second quarter			8.45				7.87				0.10
Third quarter			8.97				8.03				0.10
Fourth quarter			8.88				8.00				0.10

 

 

TABLE OF CONTENTS

 

Kentucky First Federal Bancorp	(ii)
Market Information	(ii)
Letter to Shareholders	1
Selected Consolidated Financial and Other Data	2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Consolidated Financial Statements	27

 

 

 

Dear Shareholder:

 

We are pleased to present the 2015 Annual Report for Kentucky First Federal Bancorp.  We encourage you to read both the Annual Report and Proxy Statement.  We encourage you to vote and, if possible, to attend our annual meeting on November 12, 2015. Please note that, as always, our meeting will be held on the campus of the Hazard Community and Technical College, but this year we will be in the Challenger Learning Center, just across the parking lot.

 

The enclosed report shows a pretty good year.  We continue to have trouble with loan growth in the communities we serve, but despite a decrease in loan balances, net income improved compared to the previous year.  Our stock price remains pretty flat, but we remain proud to offer an attractive dividend yield.  We certainly appreciate the help from our staff and our depositors at First Federal of Hazard for approving  the First Federal MHC dividend waiver for the fourth year in a row. 

 

We have a number of exciting things happening at our banks.  First Federal of Hazard has purchased a new building just up the street from their current Main Street location.  The new building affords lots of parking and a drive-through window.  In Frankfort, a new building has been purchased to house our Versailles Road branch.  This will allow expanded drive-through capability and more office space.  Both will allow us to continue to improve customer service.

 

We have debuted new logos for both banks, and First Federal of Frankfort will soon have a new name:  First Federal  Savings Bank of Kentucky, to reflect our expanded footprint.

 

We wish the best to Deloris Justice, who retired this year from First Federal of Hazard after 43 years. 

 

We also had a retirement on our Board.  Herman Regan has served on the Frankfort bank board since 1988 and on the KFFB board since we formed the company in 2005.  C. Michael Davenport, who has served on the Frankfort bank board since 1996, has been appointed to serve in his place and will stand for election at the upcoming annual meeting.

 

We appreciate your continued support and confidence. Please call us with any questions or concerns and please think of us for your banking needs.

 

Sincerely,

 

Don Jennings

 

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

Selected Financial Condition Data

 

		At June 30,
		2015				2014				2013				2012				2011
		(Dollars in thousands)
Total assets		$	296,298			$	299,655			$	324,062			$	222,949			$	226,135
Cash and cash equivalents			13,635				11,511				16,540				5,735				5,049
Interest-bearing deposits			—				—				—				100				100
Securities held to maturity			6,423				9,018				12,232				4,756				6,810
Securities available for sale			159				247				205				189				203
Loans, net			243,815				246,788				262,491				182,473				182,796
Deposits			199,701				213,142				230,981				134,552				139,940
Federal Home Loan Bank advances			26,635				17,200				24,310				27,065				25,261
Shareholders’ equity			67,313				67,205				66,622				58,853				58,697
Allowance for loan losses			1,568				1,473				1,310				875				764
Nonperforming loans (90 days delinquent and nonaccrual)			6,512				9,740				7,987				1,794				876

 

Selected Operating Data

 

		Year Ended June 30,
		2015				2014				2013				2012				2011
		(Dollars in thousands, except per share data)
Total interest income		$	12,389			$	13,150			$	11,958			$	10,156			$	10,749
Total interest expense			1,428				1,618				1,686				2,179				3,181
Net interest income			10,961				11,532				10,272				7,977				7,568
Provision for losses on loans			343				580				662				139				668
Net interest income after provision for losses on loans			10,618				10,952				9,610				7,838				6,900
Total non-interest income			514				344				1,525				140				242
Total non-interest expenses			8,042				8,410				6,911				5,423				5,282
Income before federal income taxes			3,090				2,886				4,224				2,555				1,860
Federal income taxes			1,021				952				1,308				840				104
Net income		$	2,069			$	1,934			$	2,916			$	1,715			$	1,756
Net earnings per share – basic		$	0.25			$	0.23			$	0.37			$	0.23			$	0.23
Net earnings per share – diluted		$	0.25			$	0.23			$	0.37			$	0.23			$	0.23
Cash dividends declared per common share		$	0.40			$	0.40			$	0.40			$	0.40			$	0.40

 

 

Selected Financial Ratios and Other Data (1)

 

		Year Ended June 30,
		2015				2014				2013				2012				2011
Performance Ratios:
Return  on average assets (net income divided by average total assets)			0.70	%			0.63	%			1.05	%			0.75	%			0.75	%
Return  on average equity (net income divided by average equity)			3.07				2.90				4.70				2.91				3.04
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)			3.96				3.99				3.97				3.68				3.29
Net interest margin (net interest income divided by  average interest-earning assets)			4.07				4.10				4.09				3.93				3.61
Ratio of average interest-earning assets to average interest-bearing liabilities			120.33				119.14				118.57				123.34				121.00
Ratio of total general administrative and other expenses to average total assets			2.71				2.74				2.49				2.39				2.26
Efficiency ratio (1)			70.08				70.82				58.58				66.81				67.63
Dividend payout ratio (2)			66.94				78.13				44.00				93.53				63.58
Asset Quality Ratios:
Nonperforming loans as a percent of total loans at end of period (3)			2.67				3.95				3.04				0.98				0.48
Nonperforming assets as a percent of total assets at end of period (3)			2.74				3.87				2.82				1.90				2.29
Allowance for loan losses as a percent of total loans at end of period			0.64				0.60				0.50				0.48				0.42
Allowance for loan losses as a percent of nonperforming loans at end of period			24.08				18.44				16.40				48.77				87.21
Provision for loan losses to total loans			0.14				0.24				0.25				0.08				0.36
Net charge-offs to average loans outstanding			0.10				0.17				0.10				0.02				0.76
Capital Ratios:
Average equity to average assets			22.64				21.76				22.31				25.91				24.76
Shareholders’ equity or capital to total assets at end of period			22.72				22.43				20.56				26.40				25.96
Regulatory Capital Ratios:
Common equity Tier 1			31.91				N/A				N/A				N/A				N/A
Total capital to risk-weighted assets			32.88				33.37				28.12				38.57				39.01
Tier 1 (core) capital to risk-weighted assets			31.91				32.77				31.17				37.82				38.34
Tier 1 leverage capital to average assets			18.66				17.99				19.77				20.83				20.14
Number of banking offices			7				7				7				4				4

 

(1)

Efficiency ratio represents the ratio of non-interest expenses divided by the sum of net interest income and total non-interest income.

(2)

Represents dividends paid as a percent of net earnings. Dividends paid does not include dividends waived by First Federal MHC. In May 2012 dividends of $473,000 were paid to First Federal MHC.

(3)

Nonperforming loans consist of nonaccrual loans, accruing loans greater than 90 days delinquent, and restructured loans not performing according to their revised terms, while nonperforming assets consist of nonperforming loans and real estate acquired through foreclosure.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

References in this Annual Report to “we,” “us,” and “our” refer to Kentucky First Federal Bancorp and where appropriate, collectively to Kentucky First Federal Bancorp, First Federal of Hazard and First Federal of Frankfort.

 

Forward-Looking Statements

 

Certain statements contained in this Annual Report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties.  When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements.  The Company’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements.  Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company’s market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services and the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We wish to advise readers that the factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

General

 

The Company was incorporated as a mid-tier holding company under the laws of the United States on March 2, 2005 upon the completion of the reorganization of First Federal of Hazard into a federal mutual holding company form of organization (the “Reorganization”). On that date, Kentucky First completed its minority stock offering and issued a total of 8,596,064 shares of common stock, of which 4,727,938 shares, or 55%, were issued to First Federal MHC, a federally chartered mutual holding company formed in connection with the Reorganization, in exchange for the transfer of all of First Federal of Hazard’s capital stock, and 2,127,572 shares were sold at a cash price of $10.00 per share. On such date, Kentucky First completed its acquisition of Frankfort First and its wholly owned subsidiary, First Federal of Frankfort (the “Merger”). First Federal of Hazard and First Federal of Frankfort are operated as two independent savings institutions with separate charters. Each bank retains its own management and boards of directors. The members of management of Kentucky First also serve in a management capacity at one of the two subsidiary Banks, and the directors of Kentucky First also serve on the board of one of the two subsidiary Banks.

 

On December 31, 2012, the Company acquired CKF Bancorp, Inc., a savings and loan holding company which operated three banking locations in Boyle and Garrard Counties in Kentucky. In accounting for the transaction the assets and liabilities of CKF Bancorp were recorded on the books of First Federal of Frankfort in accordance with accounting standard ASC 805, Business Combinations.

 

Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for losses on loans and service charges and fees collected on our deposit accounts. Our general, administrative and other expense primarily consists of employee compensation and benefits expense, occupancy and equipment expense, data processing expense, other operating expenses and state franchise and federal income taxes. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.

 

 

Income. We have two primary sources of pre-tax income. The first is net interest income, which is the difference between interest income, the income that we earn on our loans and investments, and interest expense, the interest that we pay on our deposits and borrowings.

 

To a much lesser extent, we also recognize pre-tax income from fee and service charges, which is the compensation we receive from providing financial products and services.

 

Expenses. The expenses we incur in operating our business consist of compensation, taxes and benefits, office occupancy, data processing fees, taxes and other expenses.

 

Compensation, taxes and benefits consist primarily of the salaries and wages paid to our employees and directors, payroll taxes and expenses for retirement and other employee benefits.

 

Office occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of taxes, depreciation charges, maintenance and costs of utilities.

 

Data processing fees primarily include fees paid to our third-party data processing providers.

 

Taxes consist of the current and deferred portion of federal income taxes as well as franchise taxes paid to the Commonwealth of Kentucky by the subsidiary Banks.

 

Other expenses include expenses for attorneys, accountants and consultants, advertising, telephone, employee training and education, charitable contributions, insurance, office supplies, postage and other miscellaneous operating activities.

 

Critical Accounting Policies

 

Our accounting and reporting policies comply with U.S. GAAP and conform to general practices within the banking industry. We believe that of our significant accounting policies, the following may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

 

Allowance for Loan Losses

 

The allowance for loan losses is the estimated amount considered necessary to cover probable incurred losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans, which is charged against income.

 

The management and the Boards of the Company and of First Federal of Hazard and First Federal of Frankfort review the allowance for loan losses on a quarterly basis. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews, volume and mix of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to change. Management considers the economic climate in the Banks’ respective lending areas to be among the factors most likely to have an impact on the level of the required allowance for loan losses.

 

 

Management continues to monitor and evaluate factors which could have an impact on the required level of the allowance. Management watches for national issues that may negatively affect a significant percentage of homeowners in the Banks’ lending areas. These may include significant increases in unemployment or significant depreciation in home prices. Management reviews employment statistics periodically when determining the allowance for loan losses and generally finds the unemployment rates in both lending areas to be high in relation to historical trends. Management has no current plans to alter the type of lending or collateral currently offered, but if such plans change or market conditions result in large concentrations of certain types of loans, such as commercial real estate or high loan-to-value ratio residential loans, management would respond with an increase in the overall allowance for loan losses.

 

The analysis has two components, specific and general allocations. Loans are classified as either homogenous or other. Homogenous loans are analyzed in the aggregate according to various criteria. Non-homogenous loans receive additional scrutiny and are classified as impaired or unimpaired. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. A loan is considered to be collateral-dependent when the circumstances of the borrower indicate that we can no longer rely upon the overall financial strength of that borrower to comply with the terms of the loan and that the loan will likely be repaid in whole or in part by proceeds from the sale of the collateral. Updated independent appraisals are ordered in most situations where management has determined to evaluate a loan for impairment. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established and, if so, this could have a material negative effect on our financial results.

 

Goodwill

 

We test goodwill for impairment at least annually and more frequently, if circumstances indicate its value may not be recoverable. We test goodwill for impairment by comparing the fair value of the reporting unit to the book value of the reporting unit. If the fair value exceeds book value, then goodwill is not considered to be impaired. Based on the annual goodwill impairment test as of March 31, 2015, and consideration of potential triggering events through year end, management does not believe any of the goodwill is impaired. Different conditions or assumptions, or changes in cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the impairment evaluation and financial condition or future results of operations.

 

Deferred Taxes

 

We evaluate deferred tax assets and liabilities quarterly. We will realize these assets and liabilities to the extent profitable or carry back tax losses to periods in which we paid income taxes. Our determination of the realization of the deferred tax asset will be based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income we will earn and the implementation of various tax plans to maximize realization of the deferred tax assets. Management believes the Company will generate sufficient operating earnings to realize the deferred tax benefits. Examinations of our income tax returns or changes in tax law may impact the tax liabilities and resulting provisions for income taxes.

 

 

Our Operating Strategy

 

Our mission is to operate and grow profitable, community-oriented financial institutions serving primarily retail customers in our market areas. We plan to pursue a strategy of:

 

•

operating two community-oriented savings institutions, First Federal of Hazard, which serves customers in Perry and surrounding counties in eastern Kentucky, and First Federal of Frankfort, which serves customers primarily in the central Kentucky counties of Franklin, Boyle and Garrard, as well as their surrounding counties. Each Bank emphasizes traditional thrift activities of accepting deposits and originating primarily residential mortgage loans for portfolio;

 

•

continuing our historic heavy reliance on our deposit base to fund our lending and investment activities and to supplement deposits with Federal Home Loan Bank of Cincinnati (“FHLB”) advances when advantageous or necessary. We expect our projected deposit mix to generally retain its existing composition of passbook, transaction and certificate of deposit accounts;

 

•

gradually pursuing opportunities to increase and diversify lending in our market areas;

 

•

applying conservative underwriting practices to maintain the high quality of our loan portfolios;

 

•

managing our net interest margin and interest rate risk; and

 

•

entertaining possibilities of expansion into other markets through branching or acquisition, if such possibilities are beneficial to the Company’s shareholders, provide a good fit within the Company’s mutual holding company framework and can be accomplished without undue encumbrance of the Company’s other operational areas.

 

Market Risk Analysis

 

Qualitative Aspects of Market Risk. Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities (or rate adjustment periods), while maintaining an acceptable interest rate spread. Still, when market rates increase rapidly, increases in the cost of deposits and borrowings outpace the increases in the return on assets. The Company’s assets are primarily comprised of adjustable rate mortgages (all of which have some contractual limits in their ability to react to market changes) and short-term securities. Those assets will, over time, re-price to counteract the increased costs of deposits and borrowings.

 

Asset/Liability Management. Management and the boards of the subsidiary Banks are responsible for the asset/liability management issues that affect the individual Banks. Either Bank may work with its sister Bank to mitigate potential asset/liability risks to the Banks and to the Company as a whole. Management utilizes a third-party to perform interest rate risk calculations for each of the Banks. Management monitors and considers methods of managing the rate sensitivity and repricing characteristics of each of the Bank’s balance sheet components in an effort to maintain acceptable levels of change in the economic value of equity (“EVE”) as well as evaluating the impact on earnings in the event of changes in prevailing market interest rates. Interest rate sensitivity analysis is used to measure our interest rate risk by computing estimated changes in EVE that are a result of changes in the net present value of its cash flows from assets, liabilities, and off-balance sheet items. These changes in cash flow are estimated based on hypothetical instantaneous and permanent increases and decreases in market interest rates.

 

 

Because the interest rates at June 30, 2015, were practically zero, we believe our risk associated with falling interest rates was minimal. The model indicated that at June 30, 2015, in the event of a sudden and sustained increase in prevailing market interest rates of 300 basis points, our EVE would be expected to decrease $10.0 million or 15.0% to $57.6 million, at which level our fair value of tangible equity to fair value of tangible assets would be expected to be 15.8% and our fair value of equity to fair value of risk-weighted assets would be expected to be 37.8%. The projected decrease in EVE in the event of a sudden and sustained 300 basis point increase in prevailing interest rates is within the parameters established by each subsidiary Bank’s Board of Directors. Computations or prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and deposit run-offs. These computations should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Banks may undertake in response to changes in interest rates. Certain shortcomings are inherent in this method of computing EVE. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

 

Statement of Financial Condition

 

General. At June 30, 2015, total assets were $296.3 million, a decrease of $3.4 million, or 1.1%, from the $299.7 million total at June 30, 2014. The decrease in total assets was related primarily to decreases in loans, net. At June 30, 2015, total liabilities were $229.0 million, a decrease of $3.5 million, or 1.5%, from total liabilities at June 30, 2014. The decrease in total liabilities was related primarily to decreases in deposits.

 

Loans. Our primary lending activity is the origination of loans for the purchase, refinance or construction of one- to four-family residential real estate located in our market areas. As opportunities arise, we also originate church loans, commercial real estate loans, and multi-family and nonresidential real estate loans. At June 30, 2015, one- to four- family residential real estate loans totaled $191.7 million, or 77.3% of total loans, compared to $196.4 million, or 78.8% of total loans, at June 30, 2014, caused primarily by lower demand for home financing in the Banks’ markets. Construction real estate loans totaled $3.8 million, or 1.5% of total loans, at June 30, 2015, compared to $2.1 million, or 0.9% of total loans at June 30, 2014. At June 30, 2015, multi-family real estate loans totaled $16.6 million, or 6.7% of total loans, compared to $14.0 million or 5.6% of total loans at June 30, 2014. Nonresidential real estate loans totaled $22.1 million, or 8.9% of total loans at June 30, 2015, compared to $21.9 million, or 8.8% of total loans, at June 30, 2014. Commercial and industrial loans totaled $1.8 million or 0.7% of total loans at June 30, 2015, compared to $2.1 million or 0.8% of total loans at June 30, 2014. Farm loans totaled $1.6 million at both June 30, 2015 and 2014, respectively, while consumer loans including automobile and unsecured loans totaled $8.4 million and $8.6 million at June 30, 2015 and 2014, respectively. At June 30, 2015, consumer loans were comprised of loans secured by deposits of $2.3 million or 0.9% of total loans and other consumer loans of $6.2 million or 2.5% of total loans. Please refer to Note C-Loans of the Notes to Consolidated Financial Statements for a further breakdown of Consumer and other loans.

 

 

The following table sets forth the composition of our loan portfolio at the dates indicated.

 

		At June 30,
		2015								2014								2013								2012								2011
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in thousands)
Real estate loans:
One- to four-family		$	191,721				77.3	%		$	196,381				78.8	%		$	209,092				79.0	%		$	149,086				81.1	%		$	158,821				86.4	%
Construction			3,780				1.5	%			2,122				0.9	%			1,753				0.7	%			964				0.5	%			1,062				0.3	%
Multi-family			16,621				6.7	%			14,002				5.6	%			14,506				5.5	%			15,495				8.4	%			4,504				2.5	%
Nonresidential and other																																			12,211				6.6	%
Land			2,021				0.8	%			2,362				1.0	%			2,821				1.1	%			1,259				0.7	%			—				—
Farm			1,567				0.7	%			1,644				0.7	%			1,843				0.7	%			—				—				—				—
Nonresidential real estate			22,118				8.9	%			21,945				8.8	%			22,092				8.3	%			9,839				5.3	%			—				—
Commercial and industrial			1,782				0.7	%			2,080				0.8	%			3,189				1.2	%			—				—				—				—
Consumer:
Consumer and other			6,155				2.5	%			6,061				2.4	%			6,537				2.5	%			4,865				2.7	%			4,824				2.6	%
Loans on deposits			2,262				0.9	%			2,564				1.0	%			2,710				1.0	%			2,281				1.3	%			2,405				1.3	%
Total loans			248,027				100	%			249,161				100	%			264,543				100	%			183,789				100	%			183,827				100	%
Allowance for loan losses			(1,568	)							(1,473	)							(1,310	)							(875	)							(764	)
Undisbursed portion of loans in process			(2,753	)							(952	)							(833	)							(544	)							(353	)
Deferred loan origination costs			109								52								91								8103								86
Loans receivable, net		$	243,815							$	246,788							$	262,491							$	182,473							$	182,796

 

The following table sets forth certain information at June 30, 2015 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated maturity are reported as due in one year or less.

 

(In thousands)		Real Estate Loans				Commercial Loans				Consumer Loans				Total Loans
One year or less		$	77,680			$	1,142			$	8,074			$	86,896
More than one year to five years			91,692				640				343				92,675
More than five years			68,456				—				—				68,456
Total		$	237,828			$	1,782			$	8,417			$	248,027

 

As of June 30, 2015, there were $66.7 million fixed-rate and $172.0 million adjustable-rate real estate loans maturing in more than a year, while there were $37,000 fixed-rate and $603,000 adjustable-rate commercial loans maturing in more than a year.

 

 

The following table shows loan origination activity during the periods indicated.

 

		Year Ended June 30,
(In thousands)		2015				2014				2013
Net loans at beginning of year		$	246,788			$	262,491			$	182,473
Loans acquired in CKF Bancorp transaction			—				—				94,086
Loans originated:
Real estate loans:
Residential one- to four-family			23,827				23,782				18,089
Construction			4,082				2,366				1,702
Multi-family			4,550				1,838				747
Land			132				104				118
Farm			—				21				13
Nonresidential real estate			1,542				1,432				3,316
Commercial and industrial			220				80				1,060
Consumer loans			2,668				1,670				3,914
Total loans originated			37,021				31,293				28,959
Deduct:
Real estate loan principal repayments and other			(37,891	)			(45,725	)			(42,215	)
Decrease (increase) in allowance			(95	)			(163	)			(435	)
Transfer to real estate acquired through foreclosure			(2,122	)			(1,069	)			(367	)
Other			114				(39	)			(10	)
Net loan activity			(2,973	)			(15,703	)			80,018
Net loans at end of period		$	243,815			$	246,788			$	262,491

 

Allowance for Loan Losses and Asset Quality. The allowance for loan losses is a valuation allowance for the probable incurred losses in the loan portfolio. We evaluate the allowance for loan losses no less than quarterly. When additional allowances are needed a provision for losses on loans is charged against earnings. The recommendations for increases or decreases to the allowance are presented by management to the Banks’ boards of directors. The Company’s board of directors oversees the overall allowance level for the Company and may propose increases or decreases for allowance levels at the banks.

 

The allowance for loan losses is established to recognize the probable incurred losses associated with lending activities. Loss and risk factors are based on our historical loss experience and industry averages and are adjusted for significant factors that in management’s judgment affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience, duration of the current business cycle and bank regulatory examination results.

 

At June 30, 2015, the allowance for loan losses was $1.6 million, or 0.64% of total loans, compared to $1.5 million, or 0.60% of total loans at June 30, 2014. The allowance included $14,000 designated as specific reserves at June 30, 2014 and no specific reserves at June 30, 2015. Such reserves are calculated when a non-homogenous loan is considered impaired. An impaired loan is one in which it is likely that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Most of the Company’s loans are collateral-based and, in case of impairment, the loans are carried at the lower of cost or fair value less disposal costs.

 

 

Nonperforming loans, which consist of all loans 90 days or more past due and nonaccrual loans, totaled $6.5 million at June 30, 2015 and $9.7 million at June 30, 2014, a decrease of $3.2 million. The allowance for loan losses totaled 24.1% and 18.4% of nonperforming loans at June 30, 2015 and 2014, respectively. In determining the allowance for loan losses at any point in time, management and the boards of directors of the subsidiary Banks apply a systematic process focusing on the risk of loss in the portfolio. First, the loan portfolio is segregated by loan types to be evaluated collectively and loan types to be evaluated individually. Delinquent multi-family and nonresidential loans are evaluated individually for potential impairment. Second, the allowance for loan losses is evaluated using historic loss experience adjusted for significant factors by applying these loss percentages to the loan types to be evaluated collectively in the portfolio. To the best of management’s knowledge, all known and probable incurred losses that can be reasonably estimated have been recorded at June 30, 2015. Although management believes that its allowance for loan losses conforms with generally accepted accounting principles based upon the available facts and circumstances, there can be no assurance that additions to the allowance will not be necessary in future periods, which would adversely affect our results of operations.

 

Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examinations may require us to make additional provisions for loan losses based on judgments different from ours. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

Summary of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to the allowance.

 

		Year Ended June 30,
		2015				2014				2013				2012				2011
		(Dollars in thousands)
Allowance at beginning of period		$	1,473			$	1,310			$	875			$	764			$	1,535
Provision for loan losses			343				580				662				139				668
Charge-offs:
Real estate loans			(274	)			(467	)			(229	)			(28	)			(1,439	)
Consumer loans			—				—				—				—				—
Total charge-offs			(274	)			(467	)			(229	)			(28	)			(1,439	)
Recoveries:
Real estate loans			26				49				—				—				—
Consumer and other loans			—				1				2				—				—
Total recoveries			26				50				2				—				—
Net charge-offs		$	(248	)		$	(417	)		$	(227	)		$	(28	)		$	(1,439	)
Allowance at end of period		$	1,568			$	1,473			$	1,310			$	875			$	764
Allowance to nonperforming loans			24.1	%			18.4	%			16.4	%			48.8	%			87.21	%
Allowance to total loans outstanding at end of period			0.64	%			0.60	%			0.50	%			0.48	%			0.42	%
Net charge-offs to average loans outstanding during the period			0.10	%			0.17	%			0.10	%			0.02	%			0.76	%

 

 

The following table sets forth the breakdown of the allowance for loan losses by loan category, which management believes can be allocated on an approximate basis, at the dates indicated.

 

		At June 30,
		2015												2014												2013												2012												2011
		Amount				% of Allowance to Total Allowance				% of Loans in Category To Total Loans				Amount				% of Allowance to Total Allowance				% of Loans in Category To Total Loans				Amount				% of Allowance to Total Allowance				% of Loans in Category To Total Loans				Amount				% of Allowance to Total Allowance				% of Loans in Category To Total Loans				Amount				% of Allowance to Total Allowance				% of Loans in Category To Total Loans
		(Dollars in thousands)
Loans category:
Residential one- to four-family		$	1,059				67.5	%			77.4	%		$	1,003				68.1	%			78.8	%		$	874				66.7	%			79.0	%		$	565				64.6	%			81.1	%		$	494				64.7	%			86.4	%
Construction			21				1.3				1.5				11				0.7				0.9				8				0.6				0.7				3				0.3				0.5				3				0.4				0.6
Multi-family			94				6.0				6.7				73				5.0				5.6				63				4.8				5.5				49				5.6				8.4				13				1.7				2.5
Land			7				0.4				0.8				10				0.7				1.0				12				0.9				1.1				—				—				—				—				—				—
Farm			9				0.6				0.6				9				0.6				0.7				6				0.5				0.7				—				—				—				—				—				—
Nonresidential real estate			121				7.8				8.9				112				7.6				8.8				94				7.2				8.3				35				4.0				6.0				34				4.4				6.6
Commercial and industrial			10				0.6				0.7				11				0.7				0.8				13				1.0				1.2				—				—				—				—				—				—
Consumer and other			34				2.2				2.5				31				2.1				2.4				28				2.1				2.5				16				1.8				2.7				13				1.7				2.6
Loans on deposits			13				0.8				0.9				13				0.9				1.0				12				0.9				1.0				7				0.8				1.3				7				0.9				1.3
Unallocated			200				12.8				—				200				13.6				—				200				15.3				—				200				22.9				—				200				26.2				—
Total allowance for loan losses		$	1,568				100	%			100	%		$	1,473				100	%			100	%		$	1,310				100	%			100	%		$	875				100.0	%			100.0	%		$	764				100.0	%			100.0	%

 

 

Nonperforming and Classified Assets. When a loan becomes 90 days delinquent, the loan may be placed on nonaccrual status at which time the accrual of interest ceases, the interest previously accrued to income is reversed and interest income is thereafter recognized on a cash basis. Payments on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan or applied entirely to principal, depending on management’s assessment of ultimate collectibility. In situations where management believes collection of interest due is likely even if the loan is more than 90 days delinquent, then management may decide not to place the loan on non-accrual status.

 

We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of carrying value of the investment or fair value less estimated selling costs at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income.

 

Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. We consider one- to four-family mortgage loans and deposit loans to be homogeneous and collectively evaluate them for impairment. Other loans are evaluated for impairment on an individual basis. At June 30, 2015, 16 loans were individually considered impaired with valuations.

 

The following table provides information with respect to our nonperforming assets at the dates indicated.

 

		Year Ended June 30,
		2015				2014				2013				2012				2011
		(Dollars in thousands)
Nonaccrual loans:
Real estate loans		$	2,856			$	4,361			$	3,720			$	1,593			$	876
Commercial loans			388				47				40				—				—
Consumer loans			18				29				18				—				—
Total			3,262				4,437				3,778				1,593				876
Accruing loans past due 90 days or more:
Real estate loans			1,745				3,513				1,945				201				—
Commercial loans			—				—				—				—				—
Consumer loans			—				—				27				—				—
Total of accruing loans past due 90 days or more			1,745				3,513				1,972				201				—
Restructured loans not performing as agreed			1,505				1,790				2,211				—				—
Total nonperforming loans			6,512				9,740				7,961				1,794				876
Restructured loans performing as agreed			346				207				659				187				—
Real estate acquired through foreclosure			1,593				1,846				1,163				2,445				4,304
Total nonperforming assets and performing restructured loans		$	8,451			$	11,793			$	9,783			$	4,426			$	5,180
Total nonperforming loans to total loans			2.67	%			3.95	%			3.04	%			0.98	%			0.48	%
Total nonperforming loans to total assets			2.20	%			3.25	%			2.47	%			1.10	%			0.39	%
Total nonperforming assets to total assets			2.74	%			3.87	%			2.82	%			1.90	%			2.29	%

 

Interest income that would have been recorded for the years ended June 30, 2015 and 2014, had nonaccrual loans been current according to their original terms amounted to $155,000, and $371,000, respectively. Income related to nonaccrual loans included in interest income for the years ended June 30, 2015 and 2014 amounted to $147,000, and $7,000, respectively.

 

 

Federal regulations require us to regularly review and classify our assets. In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. Special mention assets totaled $8.1 million and $3.9 million at June 30, 2015 and 2014, respectively.

 

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

 

		At June 30,
		2015				2014				2013
		(In thousands)
Substandard assets		$	12,639			$	16,284			$	16,315
Doubtful assets			—				—				—
Loss assets			—				—				—
Total classified assets		$	12,639			$	16,284			$	16,315

 

Substandard assets at June 30, 2015, consisted of 159 loans totaling $11.0 million and 20 parcels of real estate owned with an aggregate carrying value of $1.6 million. At June 30, 2015, 12.6% of the Company’s substandard assets were represented by real estate acquired through foreclosure compared to 11.3% at June 30, 2014. During the fiscal years ended June 30, 2015 and 2014, the Company made loans to facilitate the purchase of its other real estate owned by qualified borrowers. The Company sold property with carrying values of $590,000 and $189,000 for $702,000 and $204,000 during the fiscal years ended June 30, 2015 and 2014, respectively. Such loans are considered loans to facilitate an exchange and, as such, the Company defers recognition of the gain until the proper time in the future. Loans to facilitate the sale of other real estate owned which were included in substandard loans and totaled $292,000 and $309,000 at June 30, 2015, and 2014, respectively.

 

The table below summarizes other real estate owned at June 30, 2015:

 

(Dollars in thousands)		Number of  properties				Net  carrying  value
Single family			15			$	1,440
Building lots			5				153
Total			20			$	1,593

 

 

The table below summarizes substandard loans at June 30, 2015:

 

(Dollars in thousands)		Number  of  properties				Net carrying  value
Single family, owner occupied			106			$	5,895
Single family, non-owner occupied			32				2,207
Two- to four-family, non-owner occupied			6				1,269
Nonresidential real estate			7				789
Commercial and industrial			1				—
Land			4				857
Consumer			3				29
Total			159			$	11,046

 

Other than disclosed above, there are no other loans at June 30, 2015 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

 

Delinquencies. The following table provides information about delinquencies in our loan portfolios at the dates indicated.

 

		At June 30,
		2015								2014
		30-59 Days Past Due				60-89 Days Past Due				30-59 Days Past Due				60-89 Days Past Due
		(In thousands)
Real estate loans		$	3,140			$	2,474			$	1,987			$	3,212
Consumer loans			31				3				68				—
Total		$	3,171			$	2,477			$	2,055			$	3,212

 

Securities. Our securities portfolio consists of agency bonds and mortgage-backed securities with maturities of 30 years or less. Investment and mortgage-backed securities totaled $6.6 million at June 30, 2015, a decrease of $2.7 million, or 29.0%, compared to the $9.3 million total at June 30, 2014. The decrease in these securities resulted from scheduled maturities and normal repayment/prepayment from the mortgage-backed securities. All of our mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie Mac.

 

 

The following table sets forth the carrying values and fair values of our securities portfolio at the dates indicated.

 

		At June 30,
		2015								2014								2013
		Amortized Cost				Fair Value				Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Available-for-sale securities:
Agency mortgage-backed: residential		$	94			$	96			$	134			$	136			$	162			$	166
FHLMC stock			8				63				8				111				8				39
		$	102			$	159			$	142			$	247			$	170			$	205
Held-to-maturity securities
Agency mortgage-backed: residential		$	2,821			$	2,931			$	3,792			$	3,971			$	5,341			$	5,502
Agency bonds			3,602				3,603				5,226				5,224				6,891				6,852
		$	6,423			$	6,534			$	9,018			$	9,195			$	12,232			$	12,354

 

At June 30, 2015 and 2014, we did not own any securities that had an aggregate book value in excess of 10% of our equity at that date.

 

 

The following table sets forth the maturities and weighted average yields of debt securities at June 30, 2015. At June 30, 2015, we had no U.S. Government agency securities with adjustable rates.

 

		One Year or Less								More Than One Year to  Five Years								More Than Five Years to  Ten Years								More Than Ten Years								Total Investment Portfolio
		Amortized Cost				Weighted Average Yield				Amortized Cost				Weighted Average Yield				Amortized Cost				Weighted Average Yield				Amortized Cost				Weighted Average Yield				Amortized Cost				Fair Value				Weighted Average Yield
		(Dollars in thousands)
Available for sale securities:
Mortgage-backed securities		$	4				1.92	%		$	19				1.92	%		$	26				1.92	%		$	45				1.92	%		$	94			$	96				1.92	%
Held to maturity securities:
Mortgage-backed securities		$	345				1.41	%		$	1,535				1.41	%		$	731				1.41	%		$	210				1.41	%		$	2,821			$	2,931				1.41	%
Agency bonds			1,512				0.48				2,090				0.71				—								—								3 602				3,603				0.61	%
			1,857								3,625								731								210								6,423				6,534
		$	1,861							$	3,644							$	757							$	255							$	6,517			$	6,630

 

 

Other Assets. Other assets at June 30, 2015, include goodwill of $14.5 million, which was a result of the Company’s acquisition of Frankfort First, and bank owned life insurance policies with a carrying value of $3.0 million and $2.9 million at June 30, 2015 and 2014, respectively, of which First Federal of Frankfort is the owner and beneficiary. Both subsidiary Banks are members and stockholders of the Federal Home Loan Bank of Cincinnati (“FHLB”). FHLB stock, at cost, totaled $6.5 million and $6.5 million at June 30, 2015 and 2014, respectively. During the fiscal year ended June 30, 2014, the FHLB redeemed $1.2 million of its stock owned by the Company pursuant to the FHLB’s capital program.

 

Deposits. Our primary source of funds is retail deposit accounts held primarily by individuals within our market areas. Deposits totaled $199.7 million at June 30, 2015, a decrease of $13.4 million or 6.3%, compared to the $213.1 million total at June 30, 2014. The decrease in deposits was a result of deposit customers’ shift to more liquidity in their deposit balances and redeploying some cash reserves.

 

The following table sets forth the balances of our deposit products at the dates indicated.

 

		At June 30,
		2015				2014				2013
		(In thousands)
Certificate of deposit accounts		$	116,098			$	136,705			$	154,934
Demand, transaction and savings accounts			83,603				76,427				76,047
Total		$	199,701			$	213,142			$	230,981

 

The following table indicates the amount of certificate of deposit accounts with balances equal to or greater than $100,000, by time remaining until maturity at June 30, 2015. The Federal Deposit Insurance Corporation (“FDIC”) currently insures deposits up to $250,000 in most cases, making certificate of deposit accounts with balances equal to or greater than $100,000 less volatile as before the limit was raised.

 

Maturity Period		Certificates  of Deposit
		(In thousands)
Three months or less		$	7,032
Over three months through six months			10,330
Over six months through twelve months			15,358
Over twelve months			13,489
Total		$	46,209

 

The following table sets forth our certificate of deposit accounts classified by rates at the dates indicated.

 

		At June 30,
		2015				2014				2013
		(In thousands)
Rate
0.01 -  0.99%		$	87,765			$	91,979			$	87,108
1.00 -  1.99			18,522				27,104				43,399
2.00 -  2.99			8,868				11,478				14,407
3.00 -  3.99			934				6,128				8,148
4.00 -  4.99			9				16				1,811
5.00 -  5.99			—				—				61
Total		$	116,098			$	136,705			$	154,934

 

 

The following table sets forth the amount and maturities of certificate accounts at June 30, 2015.

 

		Amount Due
		Less Than One Year				More Than One Year to Two Years				More Than Two Years to Three Years				More Than Three Years				Total				Percentage of Total Certificate Accounts
		(Dollars in thousands)
0.01 –0.99%		$	67,618			$	12,330			$	4,143			$	3,674			$	87,765				75.6	%
1.00 – 1.99			6,579				7,196				3,595				1,152				18,522				16.0
2.00 – 2.99			5,947				2,921				—				—				8,868				7.6
3.00 – 3.99			934				—				—				—				934				1.8
4.00 – 4.99			9				—				—				—				9				—
Total		$	81,087			$	22,447			$	7,738			$	4,826			$	116,098				100.0	%

 

The following table sets forth the average balances and rates paid on deposits.

 

		Year Ended June 30,
		2015								2014								2013
		Average				Average				Average				Average				Average				Average
		Balance				Rate				Balance				Rate				Balance				Rate
		(Dollars in thousands)
Noninterest-bearing demand		$	4,138				0.00	%		$	3,721				0.00	%		$	2,579				0.00	%
Interest-bearing demand			16,648				0.18	%			14,969				0.19	%			24,402				0.20	%
Savings accounts			59,276				0.40	%			58,436				0.42	%			37,579				0.57	%
Certificates of deposit			127,361				0.73	%			141,296				0.76	%			119,595				0.83	%

 

The following table sets forth the deposit activities for the periods indicated.

 

		Year Ended June 30,
		2015				2014				2013
		(In thousands)
Beginning balance		$	213,142			$	230,981			$	134,552
Deposits acquired from CKF Bancorp			—				—				101,477
Increase (decrease) before interest credited			(14,631	)			(19,180	)			(6,303	)
Interest credited			1,190				1,341				1,255
Net increase (decrease) in deposits			(13,441	)			(17,839	)			96,429
Ending balance		$	199,701			$	213,142			$	230,981

 

Borrowings. Advances from the Federal Home Loan Bank of Cincinnati amounted to $26.6 million and $17.2 million at June 30, 2015 and 2014, respectively.

 

 

The following table presents certain information regarding our Federal Home Loan Bank of Cincinnati advances during the periods and at the dates indicated.

 

		Year Ended June 30,
		2015				2014				2013
		(Dollars in thousands)
Balance outstanding at end of period		$	26,635			$	17,200			$	24,310
Maximum amount of advances outstanding at any month end during the period		$	29,047			$	27,016			$	43,808
Average advances outstanding during the period		$	20,375			$	19,413			$	30,050
Weighted average interest rate during the period			1.17	%			1.43	%			1.43	%
Weighted average interest rate at end of period			1.04	%			1.39	%			2.17	%

 

Shareholders’ Equity. Shareholders’ equity totaled $67.3 million at June 30, 2015, a $108,000 or 0.2%, increase compared to June 30, 2014. The increase resulted primarily from earnings exceeding dividends paid in the year.

 

The Banks are required to maintain minimum regulatory capital pursuant to federal regulations. At June 30, 2015, both First Federal of Hazard’s and First Federal of Frankfort’s regulatory capital substantially exceeded all minimum regulatory capital requirements. Management is not aware of any recent event that would cause this classification to change.

 

Results of Operations for the Years Ended June 30, 2015 and 2014

 

General. Net earnings totaled $2.1 million for the fiscal year ended June 30, 2015, an increase of $135,000, or 7.0%, from the net earnings recorded for the fiscal year ended June 30, 2014. The increase in earnings year over year was due primarily to decreases in non-interest expense and provision for losses on loans, as well as an increase in non-interest income. Non-interest expense decreased $368,000 or 4.4% from $8.4 million for the prior year end to $8.0 million for the recent year end primarily due to lower costs associated with the Company’s employee compensation and benefits. Provision for losses on loans decreased $237,000 or 40.9% to $343,000 for the year just ended due primarily to improving quality in the loan portfolio, while non-interest income increased $170,000 or 49.4% to $514,000. The increase non-interest income was due primarily to gains recognized on sales of real estate owned by the Company. Net interest income decreased $571,000 or 5.0% to $11.0 million for the recently ended fiscal year as interest income decreased more than interest expense decreased. Interest income decreased $761,000 or 5.8% due chiefly to lower yield earned on the Company’s loan portfolio. Interest expense decreased $190,000 or 11.7% to $1.4 million.

 

Interest Income. Total interest income for the fiscal year ended June 30, 2015 was $12.4 million, a decrease of $761,000, or 5.8%, compared to the fiscal year ended June 30, 2014. The decrease in interest income was due primarily to a decrease in interest income on loans, which decreased by $685,000, or 5.4% to $12.0 million for the fiscal year ended June 30, 2015, compared to fiscal 2014.

 

Interest income from loans decreased due to a decrease in the average rate earned on the portfolio as well as a decrease in the average balance outstanding. The average rate earned on the portfolio decreased 18 basis points from 5.05% for fiscal year 2014 to 4.87% for fiscal 2015, while the average balance of loans outstanding decreased $4.9 million or 2.0% from $251.2 million for the 2014 fiscal year to $246.3 million for the 2015 fiscal year. The decrease in the average rate earned on loans for fiscal 2015 occurred primarily as a result of borrowers refinancing to lower rates and to a lesser degree by loans repricing as scheduled, as many adjustable-rate loans are at their rate floors, because of the extended period of historically low interest rate environment. Income from other interest-earning assets also decreased year over year. Income on interest-bearing deposits and other decreased $50,000 or 16.2% to $258,000 for the fiscal year ended June 30, 2015, while income on the Company’s investment portfolio decreased $26,000 or 16.1% to $135,000 for the year just ended.

 

 

Interest Expense. Interest expense totaled $1.4 million for the fiscal year ended June 30, 2015, a decrease of $190,000, or 11.7%, from fiscal 2014. The decrease in interest expense resulted primarily from lower costs of deposits and borrowings. Interest expense on deposits decreased $151,000 or 11.3% to $1.2 million for the 2015 fiscal year, while the cost of borrowings decreased $39,000 or 14.1% to $238,000 for the 2015 fiscal year. Decreased costs on deposits were attributable primarily to a decrease in the average balance of those deposits, while a decrease in the interest rates paid on deposits also contributed to the overall decrease in cost. The average balance of deposits decreased $11.4 million or 5.3% to $203.3 million for the year just ended, while the rate paid on deposits decreased 4 basis points to 0.59% for the 2015 year. The average balance of certificates of deposit was $127.4 million for the recently-ended year. This category registered the largest decrease in volume by decreasing $13.9 million or 9.9% from fiscal 2014 to fiscal 2015, as depositors sought higher returns on their funds. The Company utilized FHLB advances to fund the decrease in deposits. Average borrowings increased by $962,000 or 5.0% to $20.4 million for the year ended June 30, 2015, while the average rate paid on borrowings decreased 26 basis points to 1.17% for fiscal 2015.

 

Net Interest Income. As a result of the aforementioned changes in interest income and interest expense, net interest income before provision for loan losses decreased $571,000 or 5.0% to $11.0 million for the 2015 year. As indicated on the following table, our net interest margin decreased from 4.13% for the 2014 fiscal year to 4.07% for the year just ended, primarily as a result of interest-bearing assets repricing to lower interest rates at a faster pace than our interest-earning liabilities repriced to lower interest rates. The pace at which the rates for interest-bearing liabilities has continued to decline as the low interest rate environment persists. As those liabilities reprice ever closer to nil, they will likely level off at the lowest levels. Also in the current historically-low interest rate environment, we might be forced to meet competing lenders’ low rates in order to retain our loan portfolio.

 

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of daily balances and nonaccrual loans are included in average balances only. We did not hold any non-taxable securities during any of the periods presented in the table.

 

		2015												2014												2013
						Interest												Interest												Interest
		Average				And				Yield/				Average				And				Yield/				Average				And				Yield/
(Dollars in thousands)		Balance				Dividends				Cost				Balance				Dividends				Cost				Balance				Dividends				Cost
Interest-earning assets:
Loans		$	246,252			$	11,996				4.87	%		$	251,181			$	12,681				5.05	%		$	225,153			$	11,466				5.09	%
Mortgage-backed securities			3,412				110				3.22				4,515				132				2.92				6,510				185				2.84
Other securities			5,409				25				0.46				6,749				29				0.43				3,795				17				0.45
Other interest-earning assets			14,063				258				1.84				16,483				308				1.87				15,458				290				1.88
Total interest-earning assets			269,136				12,389				4.60				278,928				13,150				4.71				250,916				11,958				4.77
Less: ALLL			(1,533	)											(1,391	)
Noninterest-earning assets			29,693												29,445												27,007
Total assets		$	297,296											$	306,982											$	277,923
Interest-bearing liabilities:
Demand deposits		$	16,648			$	30				0.18	%		$	14,969			$	29				0.19	%		$	24,402			$	49				0.20	%
Savings			59,276				237				0.40				58,436				243				0.42				37,579				213				0.57
Certificates of deposit			127,361				923				0.73				141,296				1,069				0.76				119,595				993				0.83
Total deposits			203,285				1,190				0.59				214,701				1,341				0.63				181,576				1,255				0.69
Borrowings			20,375				238				1.17				19,413				277				1.43				30,050				431				1.43
Total interest-bearing liabilities			223,660				1,428				0.64				234,114				1,618				0.69				211,626				1,686				0.80
Noninterest-bearing demand deposits			4,138												3,721												2,579
Noninterest-bearing liabilities			2,190												2,344												1,708
Total liabilities			229,988												240,179												215,913
Shareholders’ equity			67,308												66,803												62,010
Total liabilities and shareholders’
Equity		$	297,296											$	306,982											$	277,923
Net interest income/average yield						$	10,961				3.96	%						$	11,532				4.02	%						$	10,272				3.97	%
Net interest margin											4.07	%											4.13	%											4.09	%
Average interest-earning assets to Average interest-bearing liabilities											120.33	%											119.14	%											118.57	%

 

 

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior year volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior year rate). For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.

 

		Twelve months ended June 30, 2015 to June 30, 2014 Increase (Decrease) Due to Changes In												Twelve months ended June 30, 2014 to June 30, 2013 Increase (Decrease) Due to Changes In
(in thousands)		Volume				Rate				Total				Volume				Rate				Total
Interest-earning assets:
Loans receivable		$	(244	)		$	(441	)		$	(685	)		$	1,311			$	(96	)		$	1,215
Mortgage-backed securities			(38	)			16				(22	)			(59	)			6				(53	)
Investment securities			(6	)			2				(4	)			13				(1	)			12
Other interest-earning assets			(44	)			(6	)			(50	)			19				(1	)			18
Total interest-earning assets			(332	)			(429	)			(761	)			1,284				(92	)			1,192
Interest-bearing liabilities:
Demand deposits			2				(1	)			1				(18	)			(2	)			(20	)
Savings			3				(9	)			(6	)			56				(26	)			30
Certificates of deposit			(100	)			(46	)			(146	)			147				(71	)			76
Borrowings			14				(53	)			(39	)			(152	)			(2	)			(154	)
Total interest-bearing liabilities			(81	)			(109	)			(190	)			33				(101	)			(68	)
Increase (decrease) in net interest income		$	(251	)		$	(320	)		$	(571	)		$	1,251			$	9			$	1,260

 

Provision for Losses on Loans. A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments and other factors related to the collectability of the loan portfolio. Based upon an analysis of these factors, management recorded a provision of $343,000 for losses on loans for the fiscal year ended June 30, 2015, a decrease of $237,000 compared to a provision of $580,000 for fiscal 2014. Management believes all nonperforming loans are adequately collateralized or have been written down to their realizable value; however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. See discussion about Allowance Loan Losses and Asset Quality.

 

 

Non-interest Income. Other non-interest income increased $170,000 or 49.4% to $514,000 for the fiscal year ended June 30, 2015, due primarily to gains recognized on sales of real estate owned by the Company. During fiscal 2015 we recognized gain of $207,000 in gains on sales of real estate owned compared to a loss of $14,000 for fiscal 2014. We experienced a decline of $27,000 or 49.1% on gain on sale of loans as fewer loan customers chose our 30-year fixed rate mortgages, which we sell to the FHLB. During fiscal 2015 we were able to sell fewer long-term, fixed rate loans into the secondary market than during the previous year because of waning market demand. The number of loans sold as well as their aggregate value declined year over year. The number of loans sold decreased by 8 or 66.7% from 12 for the year ended June 30, 2014 to just four for the year ended June 30, 2015, while the principal amount of loans sold decreased $1.1 million or 64.2% from $1.7 million for the 2014 fiscal year to $599,000 for the recently ended fiscal year. Contributing to the increase in non-interest income was a decrease in the valuation adjustment for real estate owned. Impairment charges on other real estate decreased from $101,000 for the 2014 fiscal year to $87,000 for the year just ended.

 

Non-interest Expense. Non-interest expense decreased $368,000 or 4.4% to $8.0 million for the fiscal year ended June 30, 2015 compared to fiscal 2014 primarily due to lower costs associated with the Company’s employee compensation and benefits, which decreased $ 494,000 or 9.2% from the 2014 fiscal year and totaled $4.9 million for the year just ended. Favorable funding levels for the Company’s defined benefit pension plan allowed us to recognize expense of $227,000 for the fiscal year ended June 30, 2015, compared to $876,000 for the immediately preceding year. See NOTEA-Summary of Significant Accounting Policies, Item 11. Retirement and Employee Benefit Plans.) Somewhat offsetting the decrease in employee compensation and benefits were increases in legal fees, outside service fees and occupancy and equipment. Legal fees increased $59,000 or 168.6% to $94,000 for the year ended June 30, 2015, while outside service fees increased $58,000 or 41.4%, to $198,000 for the year ended June 30, 2015, compared to fiscal 2014. The increase in outside service fees was attributable both to technology and communications capability as well as efforts to strengthen the Company’s internal audit processes.

 

Federal Income Taxes. The provision for federal income tax increased $69,000 or 7.2% from $952,000 for the fiscal year ended June 30, 2014 to $1.0 million for the fiscal year ended June 30, 2015. The effective income tax rate for each of the years ended June 30, 2015 and 2014, was 33.0%.

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of cash and deposits at other banks, deposit inflows, loan repayments and maturities, calls and sales of investment and mortgage-backed securities and advances from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

We periodically assess our available liquidity and projected upcoming liquidity demands. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits, federal funds and short- and intermediate-term U.S. Government agency obligations.

 

Our most liquid assets are cash, federal funds sold and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2015 and June 30, 2014, cash and cash equivalents totaled $13.6 million and $11.5 million, respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $159,000 and $247,000 at June 30, 2015 and 2014, respectively.

 

We are not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material protracted decrease in liquidity. We expect that all of our liquidity needs, including the contractual commitments set forth in the table below can be met by our currently available liquid assets and cash flows. In the event any unforeseen demand or commitments were to occur, we would access our borrowing capacity with the FHLB. We expect that our currently available liquid assets and our ability to borrow from the FHLB would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.

 

 

Our primary investing activities are the origination of loans and the purchase of investment securities. In fiscal 2015 and 2014, we originated $37.0 million and $31.3 million of loans, respectively. During fiscal 2015, these activities were funded primarily by proceeds from principal repayments on loans of $37.9 million. During fiscal 2014, these activities were funded primarily by proceeds from the principal repayments on loans of $45.7 million.

 

Financing activities consist primarily of activity in deposit accounts and in FHLB advances. Total deposits decreased $13.4 million (net of amortization of purchased premium) for the year ended June 30, 2015, compared to a net decrease of $17.4 million for the year ended June 30, 2014. FHLB advances increased $9.4 million from June 30, 2014 to June 30, 2015. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships.

 

Commitments and Contractual Obligations

 

At June 30, 2015, we had $3.8 million in mortgage commitments. Certificates of deposit due within one year of June 30, 2015 totaled $75.9 million, or 38.0% of total deposits. If these deposits do not remain with us, we might be required to seek other sources of funds, including FHLB advances or other certificates of deposit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2016. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

For the year ended June 30, 2015, other than loan commitments, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

 

Dividend Policy

 

In fiscal 2015, the Company’s net income exceeded its aggregate dividend of $1.4 million by $684,000. In fiscal 2014, the Company’s net income exceeded its aggregate dividend of $1.5 million by $423,000. Approximately 56.0% of the shares of Kentucky First Federal are held by First Federal MHC, a mutual holding company created in 2005. Under regulations of the board of governors of the federal reserve system mutual holding companies, who have waived their dividends prior to December 1, 2009, may continue to waive these dividends provided there is no objection by the Federal Reserve. This waiver action is conditioned on providing appropriate notice and absent the Federal Reserve’s determination that the waiver would be detrimental to the safe and sound operations of the banks. An interim final rule issued by the Federal Reserve raises some question whether we will continue to be allowed to waive these dividends without detriment to the Company as a whole. The Federal Reserve did not object to dividend waivers in August 2011, November 2011 or February 2012. However, they refused to allow the waiver for the May 2012 dividend. As a result, the dividend was paid to the MHC as well as to public shareholders. In an effort to comply with Regulation MM and to be able to continue to waive the dividend, First Federal MHC put the issue to a vote of the members and on August 23, 2012, again on July 9, 2013, again on July 8, 2014, and again on July 7, 2015. Members of First Federal MHC voted in favor of the dividend waiver on all four occasions and the Federal Reserve Bank of Cleveland subsequently approved the waiver of dividends. As a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 2016. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Indeed, the Banks still far exceed all regulatory required capital levels. Therefore, we expect to continue to seek approval from the Federal Reserve to allow First Federal MHC to waive its right to dividends. If management should anticipate a long-term trend in which dividends consistently exceed net income (either due to regulatory mandate or a drop in income levels), the dividend policy would be reconsidered. Management cautions that comparison between the Company’s published earnings per share and the Company’s published dividends per share does not lead to an accurate portrayal of the relationship between net income and dividends paid.

  

Impact of Inflation and Changing Prices

 

Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

 

Report of Independent Registered Public Accounting Firm

 

Kentucky First Federal Bancorp

Frankfort, Kentucky

 

We have audited the accompanying consolidated balance sheets of Kentucky First Federal Bancorp as of June 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2015 and 2014, and the results of its operations and its cash flows for the two years then ended, in conformity with U.S. generally accepted accounting principles.

 

Crowe Horwath LLP

 

Louisville, Kentucky

September 28, 2015

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED BALANCE SHEETS

June 30, 2015 and 2014

(Dollar amounts in thousands, except per share data)

 

		2015				2014
ASSETS
Cash and due from financial institutions		$	3,864			$	4,191
Interest-bearing demand deposits			9,771				7,320
Cash and cash equivalents			13,635				11,511
Securities available for sale			159				247
Securities held-to-maturity, at amortized cost- approximate fair value of $6,534 and $9,195 at June 30, 2015 and 2014, respectively			6,423				9,018
Loans held for sale			100				—
Loans, net of allowance of $1,568 and $1,473 at June 30, 2015 and 2014, respectively			243,815				246,788
Real estate owned, net			1,593				1,846
Premises and equipment, net			5,235				4,629
Federal Home Loan Bank stock, at cost			6,482				6,482
Accrued interest receivable			725				891
Bank-owned life insurance			2,971				2,878
Goodwill			14,507				14,507
Prepaid federal income taxes			—				227
Prepaid expenses and other assets			653				631
Total assets		$	296,298			$	299,655
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits		$	199,701			$	213,142
Federal Home Loan Bank advances			26,635				17,200
Advances by borrowers for taxes and insurance			699				616
Accrued interest payable			32				32
Accrued federal income taxes			78				—
Deferred federal income taxes			569				210
Deferred revenue			610				631
Other liabilities			661				619
Total liabilities			228,985				232,450
Commitments and contingencies			-				-
Shareholders’ equity
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued and outstanding			-				-
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued			86				86
Additional paid-in capital			34,638				34,671
Retained earnings			34,711				34,027
Unearned employee stock ownership plan (ESOP)			(1,223	)			(1,410	)
Treasury shares at cost, 112,563 and 27,886 common shares at June 30, 2015 and 2014, respectively			(937	)			(239	)
Accumulated other comprehensive income			38				70
Total shareholders’ equity			67,313				67,205
Total liabilities and shareholders’ equity		$	296,298			$	299,655

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME

For the years ended June 30, 2015 and 2014

(Dollar amounts in thousands, except per share data)

 

		2015				2014
Interest income
Loans, including fees		$	11,996			$	12,681
Mortgage-backed securities			110				132
Other securities			25				29
Interest-bearing deposits and other			258				308
Total interest income			12,389				13,150
Interest expense
Deposits			1,190				1,341
Borrowings			238				277
Total interest expense			1,428				1,618
Net interest income			10,961				11,532
Provision for loan losses			343				580
Net interest income after provision for loan losses			10,618				10,952
Non-interest income
Net gains on sales of loans			28				55
Earnings on bank-owned life insurance			93				91
Net gain (loss) on sales of REO			207				(14	)
Valuation adjustment for REO			(87	)			(101	)
Other			273				313
Total non-interest income			514				344
Non-interest expense
Employee compensation and benefits			4,859				5,353
Occupancy and equipment			610				552
Legal fees			94				35
Outside service fees			198				140
Data processing			429				457
Audit and accounting			252				263
FDIC insurance premiums			230				230
Franchise and other taxes			261				269
Foreclosure and REO expense, net			180				160
Other			929				951
Total non-interest expense			8,042				8,410
Income before income taxes			3,090				2,886
Federal income tax expense (benefit)
Current			646				1,056
Deferred			375				(104	)
Total federal income taxes			1,021				952
NET INCOME		$	2,069			$	1,934
EARNINGS PER SHARE
Basic and diluted		$	0.25			$	0.23

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended June 30, 2015 and 2014

(Dollar amounts in thousands)

 

		2015				2014
Net income		$	2,069			$	1,934
Other comprehensive income (loss), net of tax-related effects:
Unrealized holding gains (losses) on securities available for sale  during the year, net of tax expense (benefit) of $(16) and $24 in 2015 and 2014, respectively			(32	)			47
Comprehensive income		$	2,037			$	1,981

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the years ended June 30, 2015 and 2014

(Dollar amounts in thousands, except per share data)

 

														Unearned
														employee
														stock								Accumulated
						Additional								ownership								other
		Common				paid-in				Retained				plan				Treasury				comprehensive
		stock				capital				earnings				(ESOP)				shares				income				Total
Balance at July 1, 2013		$	86			$	34,732			$	33,604			$	(1,626	)		$	(197	)		$	23			$	66,622
Net income			-				-				1,934				-				-				-				1,934
Allocation of ESOP shares			-				(61	)			-				216				-				-				155
Acquisition of 5,000 shares for Treasury			-				-				-				-				(42	)			-				(42	)
Unrealized gains on securities designated as available for sale, net of related tax effects			-				-				-				-				-				47				47
Cash dividends of $0.40 per common share			-				-				(1,511	)			-				-				-				(1,511	)
Balance at June 30, 2014			86				34,671				34,027				(1,410	)			(239	)			70				67,205
Net income			-				-				2,069				-				-				-				2,069
Allocation of ESOP shares			-				(33	)			-				187				-				-				154
Acquisition of 84,677 shares for Treasury			-				-				-				-				(698	)			-				(698	)
Unrealized gains on securities designated as available for sale, net of related tax effects			-				-				-				-				-				(32	)			(32	)
Cash dividends of $0.40 per common share			-				-				(1,385	)			-				-				-				(1,385	)
Balance at June 30, 2015		$	86			$	34,638			$	34,711			$	(1,223	)		$	(937	)		$	38			$	67,313

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended June 30, 2015 and 2014

(Dollar amounts in thousands)

 

		2015				2014
Cash flows from operating activities:
Net income		$	2,069			$	1,934
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation			278				288
Accretion of purchased loan discount			(310	)			(155	)
Amortization of purchased loan premium			18				11
Amortization of discounts and premiums on investment securities, net			148				216
Amortization (accretion) of deferred loan origination costs (fees)			55				(18	)
Accretion of premiums on Federal Home Loan Bank advances			—				(56	)
Accretion of premiums on deposits			(212	)			(414	)
Net gain on sale of loans			(28	)			(55	)
Valuation adjustment of REO			87				101
Net loss (gain) on real estate owned			(186	)			7
Deferred gain on sale of real estate owned			(21	)			(10	)
ESOP compensation expense			154				155
Earnings on bank-owned life insurance			(93	)			(91	)
Provision for loan losses			343				580
Origination of loans held for sale			(699	)			(1,420	)
Proceeds from loans held for sale			627				1,671
Increase (decrease) in cash, due to changes in:
Accrued interest receivable			166				28
Prepaid expenses and other assets			(22	)			51
Accrued interest payable			—				(4	)
Accounts payable and other liabilities			42				(5	)
Federal income tax (benefit)
Current			305				(223	)
Deferred			375				(104	)
Net cash provided by operating activities			3,096				2,487
Cash flows from investing activities:
Purchase of investment securities held to maturity			(8,500	)			(10,000	)
Investment securities maturities, prepayments and calls:
Held to maturity			10,947				13,000
Available for sale			40				27
Loans originated for investment, net of principal collected			1,388				13,794
Proceeds from Federal Home Loan Bank stock repurchase			—				1,250
Proceeds from sale of real estate owned			1,831				700
Additions to premises and equipment, net			(884	)			(309	)
Net cash provided by investing activities			4,822				18,462
Cash flows from financing activities:
Net change in deposits			(13,229	)			(17,425	)
Payments by borrowers for taxes and insurance, net			83				54
Proceeds from Federal Home Loan Bank advances			23,800				10,000
Repayments on Federal Home Loan Bank advances			(14,365	)			(17,054	)
Treasury stock repurchases			(698	)			(42	)
Dividends paid on common stock			(1,385	)			(1,511	)
Net cash used in financing activities			(5,794	)			(25,978	)
Net increase (decrease) in cash and cash equivalents			2,124				(5,029	)
Beginning cash and cash equivalents			11,511				16,540
Ending cash and cash equivalents		$	13,635			$	11,511

 

The accompanying notes are an integral part of these statements.

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the years ended June 30, 2015 and 2014

(Dollar amounts in thousands)

 

		2015				2014
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes		$	330			$	1,275
Interest on deposits and borrowings		$	1,640			$	2,092
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure		$	2,123			$	1,684
Loans disbursed upon sales of real estate acquired through foreclosure		$	643			$	198

 

The accompanying notes are an integral part of these statements.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Kentucky First Federal Bancorp (the “Company”) is a savings and loan holding company whose activities are primarily limited to holding the stock and managing the operations of First Federal Savings and Loan Association of Hazard, Kentucky (“First Federal of Hazard”) and Frankfort First Bancorp, Inc., (“Frankfort First”) the holding company for First Federal Savings Bank of Frankfort (“First Federal of Frankfort”). First Federal of Hazard and First Federal of Frankfort are collectively referred to herein as “the Banks.” First Federal of Hazard is a community-oriented savings and loan association dedicated to serving consumers in Perry and surrounding counties in eastern Kentucky, while First Federal of Frankfort operates through six banking offices located in Frankfort, Danville and Lancaster, Kentucky. Both institutions engage primarily in the business of attracting deposits from the general public and applying those funds to the origination of loans for residential and consumer purposes. First Federal of Frankfort also originates, to a lesser extent, church loans, home equity and other loans. Other than a predominance of one- to four-family residential property, which is common in most thrifts, there are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the Banks’ specific operating areas. The Banks’ profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Banks can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management’s control.

 

The following is a summary of the Company’s significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements.

 

1.    Principles of Consolidation: The consolidated financial statements include the accounts of the Company, First Federal of Hazard, Frankfort First and First Federal of Frankfort. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

2.    Use of Estimates: The consolidated financial information presented herein has been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP.”) To prepare financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

3.    Securities: Debt securities are classified as held to maturity or available for sale. Securities classified as held to maturity are to be carried at cost only if the Company has the positive intent and ability to hold these securities to maturity. Securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to shareholders’ equity, net of tax.

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3.

Securities: (continued)

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

 

4.    Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, adjusted for deferred loan origination fees, discounts on purchased loans, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance unless the collectability of the loan is in doubt. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on one- to four-family residential loans is generally discontinued at the time a loan is 180 days delinquent and on other loans at the time a loan is 90 days delinquent. All other loans are moved to non-accrual status in accordance with the Company’s policy, typically 90 days after the loan becomes delinquent. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

5.    Loans held for sale and Mortgage Servicing Rights: Loans held for sale are carried at the lower of cost (less principal payments received) or fair value, calculated on an aggregate basis. At June 30, 2015 the Company had $100,000 in loans held for sale, while at June 30, 2014 the Company had no loans held for sale.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

5.    Loans held for sale and Mortgage Servicing Rights: (continued)

 

In selling loans, the Company utilizes a program with the Federal Home Loan Bank, retaining servicing on loans sold. Mortgage servicing rights on originated loans that have been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. The Company recorded amortization related to mortgage servicing rights totaling $14,000 during each of the years ended June 30, 2015 and 2014. The carrying value of the Company’s mortgage servicing rights, which approximated fair value, totaled approximately $96,000 and $104,000 at June 30, 2015 and 2014, respectively.

 

The Company was servicing mortgage loans of approximately $11.9 million and $13.0 million that had been sold to the Federal Home Loan Bank at June 30, 2015 and 2014, respectively. During the fiscal year ended June 30, 2015, we sold $599,000 in loans under the FHLB program and the average balance of loans serviced was $12.3 million.

 

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with other non-interest income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

 

Servicing fee income which is reported on the income statement as other non-interest income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $20,000 and $35,000 for the fiscal years ended June 30, 2015 and 2014, respectively. Late fees and ancillary fees related to loan servicing are not material.

 

6.    Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loss experience, the nature and volume of the portfolio, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers all loans and is based on historical loss experience adjusted for current factors. In consultation with regulators, the Company considers a time frame of two years when estimating the appropriate level of allowance for loan losses. This period may be shortened or extended based on anticipated trends in the banks or in the banks’ markets.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

6. Allowance for loan losses: (continued)

 

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent eight quarters. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

 

These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Our portfolio segments include residential real estate, nonresidential real estate and land, loans on deposits and consumer and other loans. Risk factors associated with our portfolio segments are as follows:

 

Residential Real Estate

 

Our primary lending activity is the origination of mortgage loans, which enable a borrower to purchase or refinance existing homes in the Banks’ respective market areas. We further classify our residential real estate loans as one- to four-family (owner-occupied vs nonowner-occupied), multi-family or construction. We believe that our first mortgage position on loans secured by residential real estate presents lower risk than our other loans, with the exception of loans on deposits.

 

We offer a mix of adjustable-rate and fixed-rate mortgage loans with terms up to 30 years for owner-occupied properties. For these properties a borrower may be able to borrow up to 95% of the value with private mortgage insurance. Alternatively, the borrower may be able to borrow up to 90% of the value with a traditional first mortgage and a second mortgage (bearing a higher rate of interest) on the additional 10% of the value.

 

We offer loans on one- to four-family rental properties at a maximum of 80% loan-to-value (“LTV”) ratio and we generally charge a slightly higher interest rate on such loans.

 

We also originate loans to individuals to finance the construction of residential dwellings for personal use or for use as rental property. We occasionally lend to builders for construction of speculative or custom residential properties for resale, but on a limited basis. Construction loans are generally less than one year in length, do not exceed 80% of the appraised value, and provide for the payment of interest only during the construction phase. Funds are disbursed as progress is made toward completion of the construction.

 

Multi-family and Nonresidential Loans

 

We offer mortgage loans secured by residential multi-family (five or more units), and nonresidential real estate. Nonresidential real estate loans are comprised generally of commercial office buildings, churches and properties used for other purposes. Generally, these loans are originated for 25 years or less and do not exceed 80% of the appraised value. Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. These loans depend on the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment on such loans may be subject to a greater extent to adverse conditions in the real estate market or economy than owner-occupied residential loans.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

6. Allowance for loan losses: (continued)

 

Consumer lending

 

Our consumer loans include home equity lines of credit, loans secured by savings deposits, automobile loans, and unsecured loans. Home equity loans are generally second mortgage loans subordinate only to first mortgages also held by the bank and do not exceed 80% of the estimated value of the property. We do offer home equity loans up to 90% of the estimated value to qualified borrowers and these loans carry a premium rate. Loans secured by savings are originated up to 90% of the depositor’s savings account balance and bear interest at a rate higher than the rate paid on the deposit account. Because the deposit account must be pledged as collateral to secure the loan, the inherent risk of this type of loan is minimal. Loans secured by automobiles are made directly to consumers (there are no relationships with dealers) and are based on the value of the vehicle and the borrower’s creditworthiness. Vehicle loans present a higher level of risk because of the natural decline in the value of the property as well as its mobility. Unsecured loans are based entirely on the borrower’s creditworthiness and present the highest level of risk to the bank.

 

The Banks account for impaired loans by determining the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loan’s observable market price or fair value of the collateral, reduced by estimated selling costs.

 

A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Although most of our loans are secured by collateral, we rely heavily on the capacity of our borrowers to generate sufficient cash flow to service their debt. As a result, our loans do not become collateral-dependent until there is deterioration in the borrower’s cash flow and financial condition, which makes it necessary for us to look to the collateral for our sole source of repayment. Collateral-dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under the policy at that time.

 

We utilize updated independent appraisals to determine fair value for collateral-dependent loans, adjusted for estimated selling costs, in determining our specific reserve. In some situations management does not secure an updated independent appraisal. These situations may involve small loan amounts or loans that, in management’s opinion, have an abnormally low loan-to-value ratio.

 

With respect to the Banks’ investment in troubled debt restructurings, multi-family and nonresidential loans, and the evaluation of impairment thereof, such loans are nonhomogenous and, as such, may be deemed to be collateral-dependent when they become more than ninety days delinquent. We obtain updated independent appraisals in these situations or when we suspect that the previous appraisal may no longer be reflective of the property’s current fair value. This process varies from loan to loan, borrower to borrower, and also varies based on the nature of the collateral.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

7. Federal Home Loan Bank Stock: The banks are members of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

 

8. Real Estate Owned: Real estate acquired through or instead of foreclosure is initially recorded at fair value less estimated selling expenses at the date of acquisition, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequently, the carrying value is adjusted through a valuation allowance and the amount is recorded through expense. Costs relating to holding real estate owned, net of rental income, are charged against earnings as incurred.

 

9. Premises and Equipment: Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. The cost of premises and equipment includes expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation is provided on the straight-line method over the useful lives of the assets, estimated to be forty years for buildings, ten to forty years for building improvements, and five to ten years for furniture and equipment.

 

10. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future.

 

A tax provision is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters as income tax expense.

 

Kentucky First Federal Bancorp and Frankfort First Bancorp, Inc., each are subject to state income taxes in the Commonwealth of Kentucky. Neither of the Banks are subject to state income tax in the Commonwealth. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before 2011.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

11. Retirement and Employee Benefit Plans: The Banks each participate in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”), which is a tax-qualified, multi-employer defined benefit pension fund covering all employees who qualify as to length of service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits to participants of other participating employers. Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $190.8 million and $136.5 million for the plan years ended June 30, 2014 and 2013, respectively. Our contributions for fiscal 2015 and 2014 were not more than 5% of the total contributions made to the Pentegra DB Plan. Pension expense is the net contributions, which are based upon covered employees’ ages and salaries and are dependent upon the ultimate prescribed benefits of the participants and the funded status of the plan. The Company recognized expense related to the plans totaling approximately $227,000 and $876,000 for the fiscal years ended June 30, 2015 and 2014. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. As of July 1, 2014, the most recent period for which information is available, First Federal of Hazard had an adjusted funding target attainment percentage (“AFTAP”) of 108.5%, while First Federal of Frankfort had an AFTAP of 111.9%. There are no funding improvement plans or surcharges to participants.

 

The Company also maintains a nonqualified deferred compensation plan for the benefit of certain directors, which is closed to any future deferrals. The expense incurred for the deferred compensation was $15,000 and $2,000 for the fiscal years ended June 30, 2015 and 2014, respectively, while the liabilities totaled $177,000 and $206,000 at June 30, 2015 and 2014, respectively.

 

First Federal of Hazard has an Employee Stock Ownership Plan (“ESOP”) which provides retirement benefits for substantially all full-time employees who have completed one year of service and have attained the age of 21. Annual contributions are made to the ESOP equal to the ESOP’s debt service less dividends received by the ESOP on unallocated shares. Shares in the ESOP were acquired using funds provided by a loan from the Company and, accordingly, the cost of those shares is shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares are used to repay loan principal and accrued interest. Compensation expense is recorded equal to the fair value of shares committed to be released during a given fiscal year. Allocation of shares to the ESOP participants is contingent upon the repayment of a loan to Kentucky First Federal Bancorp totaling $1.6 million and $1.8 million at June 30, 2015 and 2014, respectively. The Company recorded expense for the ESOP of approximately $154,000 and $155,000 for the years ended June 30, 2015 and 2014, respectively. Shares may be surrendered from the plan as employees leave employment. Total shares surrendered from the plan totaled 73,266 at both June 30, 2015 and 2014. The amounts contributed to the ESOP were $280,000 for each of the years 2015 and 2014.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

11.

Retirement and Employee Benefit Plans: (continued)

 

		For the fiscal year ended
		June 30,
		2015				2014
Allocated shares			132,058				116,028
Shares committed to be released			9,338				9,338
Unearned shares			122,311				140,987
Total ESOP shares			263,707				266,353
Fair value of unearned shares at End of period (dollars in thousands)		$	1,025			$	1,212

 

First Federal of Frankfort maintains a 401(k) plan for the benefit of all full-time employees. No employer contributions have been made to the 401(k) plan.

 

12. Share-Based Compensation Plans: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of the grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of the grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. In fiscal 2006, the Company initiated the 2005 Equity Incentive Plan (“EIP” or the “Plan”) which provides for two share-based compensation plans, which are described below.

 

No compensation cost was charged against income for those share-based plans for the fiscal years ended June 30, 2015, or 2014 and, consequently, there was no income tax benefit recognized for either of the fiscal years then ended.

 

The EIP provides for grants of up to 421,216 stock options. It also provides that one-fifth of the options granted become vested and exercisable on the first five anniversaries of the date of grant. The contractual term of the options is ten years. All option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant.

 

At June 30, 2015, the only options outstanding are related to those granted in the fiscal year 2006.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

12. Share-Based Compensation Plans: (continued)

 

A summary of the status of the Company’s stock option plan as of June 30, 2015, and changes during the year then ended is presented below:

 

						Weighted-				Aggregate
						average				Intrinsic
						exercise				Value
		Shares				price				($000)
Outstanding at beginning of year			325,800			$	10.10
Granted			-				-
Exercised			-				-
Forfeited			-				-
Outstanding at end of year			325,800			$	10.10			$	-
Options exercisable at end of year			325,800			$	10.10			$	-

 

As of June 30, 2015 and 2014, there was no unrecognized compensation cost related to nonvested stock options granted under the Plan.

 

The EIP also provides for the purchase of 168,486 shares of common stock and the issuance of such shares in the form of restricted stock awards to members of the board of directors, management and certain employees. Common shares awarded under the restricted stock plan vest over a five year period, commencing with the date of the grant and are expensed based on their fair value at the grant date.

 

As of June 30, 2015 and 2014, there were no grants, forfeitures or nonvested shares and no unrecognized compensation cost related to the restricted stock awards.

 

13. Earnings Per Share: Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued or released under the Company’s share-based compensation plans. There is no adjustment to net earnings for the calculation of diluted earnings per share. The factors used in the basic and diluted earnings per share computations for the fiscal years ended June 30 follow:

 

(in thousands)		2015				2014
Net income allocated to common shareholders, basic and diluted		$	2,069			$	1,934
		2015				2014
Basic
Weighted-average common shares outstanding			8,348,785				8,374,624
Diluted
Weighted-average common shares outstanding (diluted)			8,348,785				8,374,624

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

13. Earnings Per Share: (continued)

 

Basic earnings per share is computed based upon the weighted-average shares outstanding during the year less average shares in the ESOP that are unallocated and not committed to be released. For fiscal years 2015 and 2014 all options were antidilutive, as the exercise price was greater than the average market price of the common stock.

 

14. Fair Value of Assets and Liabilities: Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access as of the measurement date.

 

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

 

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

14. Fair Value of Assets and Liabilities (continued)

 

The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and 2014. The securities represented are only those classified as available-for sale.

 

						Fair Value Measurements Using
						Quotes Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(in thousands)		Fair Value				(Level 1)				(Level 2)				(Level 3)
2015
Agency mortgage-backed: residential		$	96			$	—			$	96			$	—
FHLMC stock			63				—				63				—
		$	159			$	—			$	159			$	—
2014
Agency mortgage-backed: residential		$	136			$	—			$	136			$	—
FHLMC stock			111				—				111				—
		$	247			$	—			$	247			$	—

 

There were no transfers between levels 1 and 2.

 

Impaired Loans

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent independent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Independent appraisals for collateral-dependent loans are updated periodically (usually every 12-24 months depending on the size of the loan and the loan-to-value ratio).

 

Real Estate Owned

 

Real estate properties acquired through or instead of loan foreclosure are initially recorded as real estate owned (“REO”) at fair value, less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments were $87,000 and $101,000 for the fiscal years 2015 and 2014, respectively, and resulted in a Level 3 classification of the inputs for determining fair value.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

14. Fair Value of Assets and Liabilities (continued)

 

The following table presents the fair value measurements of assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2015 and 2014.

 

						Fair Value Measurements Using
						Quotes Prices
						in Active				Significant
						Markets for				Other				Significant
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
(in thousands)		Fair Value				(Level 1)				(Level 2)				(Level 3)
2015
Other real estate owned, net
One- to four-family		$	525				-				-			$	525
Land			15				-				-				15
2014
Impaired loans
One- to four-family		$	186			$	-			$	-			$	186
Other real estate owned, net
One- to four-family			1,140				-				-				1,140
Land			15				-				-				15

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying value of $200,000, with a valuation allowance of $14,000 at June 30, 2014. At June 30, 2015, there were no impaired loans with a valuation allowance. There was no additional provision recorded for the fiscal years ended June 30, 2015 and 2014.

 

Other real estate owned measured at fair value less costs to sell, had a carrying amount of $540,000 and $1.2 million at June 30, 2015 and 2014, respectively, after write-down of $54,000 and $53,000 for the years ended June 30, 2015 and 2014, respectively.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

14. Fair Value of Assets and Liabilities (continued)

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2015 and 2014:

 

										Range
		Fair Value				Valuation		Unobservable		(Weighted
June 30, 2015		(in thousands)				Technique(s)		Input(s)		Average)
Foreclosed and repossessed assets:
1-4 family		$	525			Sales comparison approach		Adjustments for differences between comparable sales		1.5% to 11.7% (2.9%)
Land			15			Sales comparison approach		Adjustments for differences between comparable sales		20.2% to 38.9% (20.8%)

 

										Range
		Fair Value				Valuation		Unobservable		(Weighted
June 30, 2014		(in thousands)				Technique(s)		Input(s)		Average)
Impaired Loans:
Residential real estate
1-4 family		$	186			Sales comparison approach		Adjustments for differences between comparable sales		3.1% to 19.8% (4.3%)
Foreclosed and repossessed assets:
1-4 family		$	1,140			Sales comparison approach		Adjustments for differences between comparable sales		-37.1% to 30.2% (1.1%)
Land			15			Sales comparison approach		Adjustments for differences between comparable sales		20.2% to 38.9% (20.8%)

 

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

 

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

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

14. Fair Value of Assets and Liabilities (continued)

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value at June 30, 2015 and 2014:

 

Cash and cash equivalents: The carrying amounts presented in the consolidated balance sheets for cash and cash equivalents are deemed to approximate fair value.

 

Held-to-maturity securities: For held-to-maturity securities, fair value methods for securities were previously described.

 

Loans held for sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value determined by FHLB pricing schedules.

 

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

 

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

 

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

 

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

 

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

 

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

 

Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. The fair value of outstanding loan commitments at June 30, 2015 and 2014, was not material.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

14. Fair Value of Assets and Liabilities (continued)

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at June 30, 2015 and June 30, 2014 are as follows:

  

						Fair Value Measurements at
(in thousands)						June 30, 2015 Using
		Carrying				Level 1				Level 2				Level 3				Total
		Value
Financial assets
Cash and cash equivalents		$	13,635			$	13,635											$	13,635
Available-for-sale securities			159							$	159								159
Held-to-maturity securities			6,423								6,534								6,534
Loans held for sale			100								101								101
Loans receivable - net			243,815											$	248,265				248,265
Federal Home Loan Bank stock			6,482																n/a
Accrued interest receivable			725								27				698				725
Financial liabilities
Deposits		$	199,701			$	83,603			$	116,304							$	199,907
Federal Home Loan Bank advances			26,635								27,265								27,265
Advances by borrowers for taxes and insurance			699								699								699
Accrued interest payable			32								32								32

 

The carrying amounts and estimated fair values of financial instruments at June 30, 2014, are as follows:

 

						Fair Value Measurements at
(in thousands)						June 30, 2014 Using
		Carrying				Level 1				Level 2				Level 3				Total
		Value
Financial assets
Cash and cash equivalents		$	11,511			$	11,511											$	11,511
Available-for-sale securities			247							$	247								247
Held-to-maturity securities			9,018								9,195								9,195
Loans held for sale			—								—								—
Loans receivable - net			246,788											$	253,780				253,780
Federal Home Loan Bank stock			6,482																n/a
Accrued interest receivable			891								891								891
Financial liabilities
Deposits		$	213,142			$	88,854			$	124,390							$	213,244
Federal Home Loan Bank advances			17,200								18,303								18,303
Advances by borrowers for taxes and insurance			616								616								616
Accrued interest payable			32								32								32

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

15. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in other financial institutions with original maturities of less than ninety days.

 

16. Goodwill: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected March 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

 

17. Cash Surrender Value of Life Insurance: First Federal of Frankfort has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

 

18. Treasury Stock: Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.

 

19. Related Party Transactions: Loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) at June 30, 2015 and 2014 are summarized as follows:

 

(in thousands)		2015				2014
Outstanding principal, beginning of year		$	1,265			$	1,246
Changes in composition of related parties			157				447
Principal disbursed during the year			146				—
Principal repaid and refinanced during the year			(175	)			(428	)
Outstanding principal, end of year		$	1,393			$	1,265

 

Deposits from related parties held by the Company at June 30, 2015 and 2014 totaled $4.2 million and $4.5 million, respectively.

 

20. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of tax, which are also recognized as separate components of equity.

 

21. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

22. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

23. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the banks to the holding company or by the holding company to shareholders.

 

24. Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

25. Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

 

26. New Accounting Standards: In January 2014, FASB issued Accounting Standards Update (“ASU”) 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.

 

In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. Although the new guidance was originally effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016, with early adoption not permitted, in April 2015 the FASB deferred the effective date by one year. Therefore, ASU 2014-09 will be effective for the Company’s annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Companies have the option to apply ASU 2014-09 as of the original effective date. Upon adoption, the amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

26.

New Accounting Standards: (continued)

 

In June 2014 the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The ASU amended existing guidance related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. These amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this amendment either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

 

In November 2014 the FASB issued ASU 2014-17, Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force), which relates to Business Combinations (Topic 805.) The ASU amended existing guidance related to the accounting by an acquired entity upon a change-in-control event. The amendments provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. If an acquired entity elects the option to apply pushdown accounting in its separate financial statements, it should disclose information in the current reporting period that enables users of financial statements to evaluate the effect of pushdown accounting. The amendments are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

27. Purchased Credit Impaired Loans: The Company purchased groups of loans through its whole bank acquisition, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

 

NOTE B - SECURITIES

 

The following table summarizes the amortized cost and fair value of the available for sale securities and held to maturity investment securities portfolio at June 30, 2015 and 2014 and the corresponding amounts of gross unrealized or unrecognized gains and losses. Unrealized gains or losses apply to available-for-sale securities and are recognized in accumulated other comprehensive income, while unrecognized gains or losses on held-to-maturity securities are not recognized in the financial statements. The gains and losses are as follows:

 

		2015
(in thousands)		Amortized cost				Gross unrealized/ unrecognized gains				Gross unrealized/ unrecognized losses				Estimated fair value
Available-for-sale Securities
Agency mortgage-backed:residential		$	94			$	2			$	-			$	96
FHLMC stock			8				55				-				63
		$	102			$	57			$	-			$	159
Held-to-maturity Securities
Agency mortgage-backed: residential		$	2,821			$	112			$	2			$	2,931
Agency bonds			3,602				2				1				3,603
		$	6,423			$	114			$	3			$	6,534

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE B – SECURITIES (continued)

 

		2014
(in thousands)		Amortized cost				Gross unrealized/ unrecognized gains				Gross unrealized/ unrecognized losses				Estimated fair value
Available-for-sale Securities
Agency mortgage-backed:residential		$	134			$	2			$	-			$	136
FHLMC stock			8				103				-				111
		$	142			$	105			$	-			$	247
Held-to-maturity Securities
Agency mortgage-backed: residential		$	3,792			$	180			$	1			$	3,971
Agency bonds			5,226				3				5				5,224
		$	9,018			$	183			$	6			$	9,195

 

The amortized cost and estimated fair value of securities as of June 30, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities without a single maturity, primarily mortgage-backed, are not shown.

 

(in thousands)		Amortized Cost				Fair Value
Held to maturity:
Within one year		$	1,005			$	1,005
One to five years			2,597				2,598
		$	3,602			$	3,603

 

There were no sales of securities during the fiscal years ended June 30, 2015 or 2014. At June 30, 2015 the Company had $1.2 million in securities with unrealized losses totaling $3,000, while at June 30, 2014, the Company had $2.7 million in securities with unrealized losses totaling $6,000. Unrealized losses on corporate bonds have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds reach maturity.

 

At June 30, 2015 and 2014, pledged securities totaled $2.2 million and $2.6 million, respectively.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS

 

The composition of the loan portfolio at June 30 was as follows:

 

(in thousands)		2015				2014
Residential real estate
One- to four-family		$	191,721			$	193,381
Multi-family			16,621				14,002
Construction			3,780				2,122
Land			2,021				2,362
Farm			1,567				1,644
Nonresidential real estate			22,118				21,945
Commercial and industrial			1,782				2,080
Consumer and other
Loans on deposits			2,262				2,564
Home equity			5,477				5,359
Automobile			73				64
Unsecured			605				638
			248,027				249,161
Undisbursed portion of loans in process			(2,753	)			(952	)
Deferred loan origination costs, net			109				52
Allowance for loan losses			(1,568	)			(1,473	)
		$	243,815			$	246,788

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2015 and 2014. There were $3.5 million and $3.8 million in loans acquired with deteriorated credit quality at June 30, 2015 and 2014, respectively.

 

June 30, 2015:
(in thousands)		Loans individually evaluated				Loans acquired with deteriorated credit quality				Ending loans balance				Ending allowance attributed to loans				Unallocated allowance				Total allowance
Loans individually evaluated for impairment:
Residential real estate:
One- to four-family		$	1,743			$	2,565			$	4,308			$	—			$	—			$	—
Land			476				381				857				—				—				—
Nonresidential real estate			241				526				767				—				—				—
Consumer and other:
Home equity			28				—				28				—				—				—
Unsecured			18				—				18				—				—				—
			2506				3,472				5,978				—				—				—
Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family										$	187,413			$	1,059			$	—			$	1,059
Multi-family											16,621				94				—				94
Construction											3,780				21				—				21
Land											1,164				7				—				7
Farm											1,567				9				—				9
Nonresidential real estate											21,351				121				—				121
Commercial and industrial											1,782				10				—				10
Consumer and other
Loans on deposits											2,262				13				—				13
Home equity											5,449				31				—				31
Automobile											73				—				—				—
Unsecured											587				3				—				3
Unallocated											—				—				200				200
											242,049				1,368				200				1,568
										$	248,027			$	1,368			$	200			$	1,568

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

June 30, 2014:
(in thousands)		Loans individually evaluated				Loans acquired with deteriorated credit quality*				Ending loans balance				Ending allowance attributed to loans				Unallocated allowance				Total allowance
Loans individually evaluated for impairment:
Residential real estate:
One- to four-family		$	2,159			$	2,735			$	4,894			$	14			$	—			$	14
Farm			—				444				444				—				—				—
Nonresidential real estate			—				529				529				—				—				—
Commercial and industrial			—				68				68				—				—				—
			2,159				3,776				5,935				14				—				14
Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family										$	191,487			$	989			$	—			$	989
Multi-family											14,002				73				—				73
Construction											2,122				11				—				11
Land											1,918				10				—				10
Farm											1,644				9				—				9
Nonresidential real estate											21,416				112				—				112
Commercial and industrial											2,012				11				—				11
Consumer and other
Loans on deposits											2,564				13				—				13
Home equity											5,359				28				—				28
Automobile											64				—				—				—
Unsecured											638				3				—				3
Unallocated											—				—				200				200
											243,226				1,259				200				1,459
										$	249,161			$	1,273			$	200			$	1,473

 

*These loans were evaluated at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition.

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

The following tables present impaired loans by class of loans as of and for the years ended June 30, 2015 and 2014:

 

June 30, 2015:   (in thousands)		Unpaid Principal Balance and Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
With no related allowance recorded:
Residential real estate:
One- to four-family		$	4,308			$	—			$	4,075			$	84			$	84
Land			857				—				554				31				31
Nonresidential real estate			767				—				618				26				26
Commercial and industrial			—				—				19				6				6
Consumer and other
Home equity			28				—				28				—				—
Unsecured			18				—				7				—				—
Total		$	5,978			$	—			$	5,301			$	147			$	147

 

June 30, 2014:   (in thousands)		Unpaid Principal Balance and Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
With no related allowance recorded:
Residential real estate:
One- to four-family		$	4,694			$	—			$	6,887			$	7			$	7
Farm			444				—				465				—				—
Nonresidential real estate			529				—				538				—				—
Commercial and industrial			68				—				94				—				—
		$	5,735			$	—			$	7,984			$	7			$	7
With an allowance recorded:
Residential real estate:
One- to four-family			200				14				206				—				—
Total		$	5,935			$	14			$	8,190			$	7			$	7

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual status by class of loans as of June 30, 2015 and 2014. At June 30, 2015, the table below includes approximately $1.6 million of loans on nonaccrual and $1.5 million of loans past due over 90 days and still accruing that were acquired with deteriorated credit quality, while approximately $2.7 million of loans on nonaccrual and $1.7 million of loans past due over 90 days and still accruing that were acquired with deteriorated credit quality at June 30, 2014.

 

		June 30, 2015								June 30, 2014
(in thousands)		Nonaccrual				Loans Past Due Over 90 Days Still Accruing				Nonaccrual				Loans Past Due Over 90 Days Still Accruing
One- to four-family residential real estate		$	4,331			$	1,745			$	5,767			$	3,513
Nonresidential real estate			410				—				384				—
Commercial and industrial			—				—				47				—
Consumer			26				—				29				—
		$	4,767			$	1,745			$	6,227			$	3,513

 

Troubled Debt Restructurings:

 

During the year ended June 30, 2015, the terms of a single one- to four family residential real estate loan totaling $20,000 was modified as a troubled debt restructuring (“TDR.”) The loan was modified because the borrower was exhibiting financial difficulty in making the original debt payments. The borrower was allowed to pay interest only for five months and the maturity date of the loan was extended accordingly.

 

During the year ended June 30, 2014, the terms of ten one- to four family residential real estate loans totaling $511,000 were modified as TDRs. Five of the loans were classified as TDRs because the borrower filed Chapter 7 bankruptcy without reaffirming their personal obligation to pay the debt. The other loans were modified because the borrower was exhibiting financial difficulty in making the original debt payments. Some of the loans were modified to lower the interest rate to prevailing rates offered by the bank at the time, while some other loans had the terms extended to provide the borrower with lower monthly payments.

 

In order to determine whether a borrower is experiencing financial difficulty, we consider the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

The following table presents loans classified as TDRs as of June 30, 2015 and 2014, and their performance, by modification type:

  

(Dollars in thousands)		Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				TDRs Performing to Modified Terms				TDRs Not Performing to Modified Terms
June 30, 2015:
Residential Real Estate:
1-4 Family			38			$	2,110			$	1,851			$	1,710			$	141
June 30, 2014
Residential Real Estate:
1-4 Family			39			$	2,230			$	1,997			$	1,621			$	376

 

The Company had no allocated specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2015 or 2014. At June 30, 2015, $1.5 million in TDR loans were on nonaccrual status. The Company had no commitments to lend additional amounts as of June 30, 2015 and 2014, to customers with outstanding loans that are classified as troubled debt restructurings. The Company had no TDR loans default during fiscal 2015 and one TDR loan to default during the year ended June 30, 2014. The defaulted loan has not been included in the table above. The borrower had exhibited credit weaknesses when the loan was refinanced, which was the reason for the TDR classification initially. The borrower declared bankruptcy during fiscal 2014 and the loan, which had a carrying value of $486,000, was foreclosed upon in fiscal 2015 with the Company taking possession of the real estate property.

 

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2015 and 2014, by class of loans. At June 30, 2015, the table below includes approximately $666,000 of loans 30-89 days past due and $1.0 million of loans past due over 90 days that were acquired with deteriorated credit quality, while approximately $978,000 of loans 30-89 days past due and $1.8 million of loans past due over 90 days that were acquired with deteriorated credit quality at June 30, 2014.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

June 30, 2015:

 

(in thousands)		30-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
Residential real estate:
One-to four-family		$	5,129			$	3,233			$	8,362			$	183,359			$	191,721
Multi-family			—				—				—				16,621				16,621
Construction			—				—				—				3,780				3,780
Land			344				262				606				1,415				2,021
Farm			—				—				—				1,567				1,567
Nonresidential real estate			142				388				530				21,588				22,118
Commercial and industrial			—				—				—				1,782				1,782
Consumer and other:
Loans on deposits			—				—				—				2,262				2,262
Home equity			20				—				20				5,457				5,477
Automobile			—				—				—				73				73
Unsecured			13				18				31				574				605
Total		$	5,648			$	3,901			$	9,549			$	238,478			$	248,027

 

June 30, 2014:
(in thousands)		30-89 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
Residential real estate:
One-to four-family		$	4,481			$	9,060			$	13,541			$	182,840			$	196,381
Multi-family			—				—				—				14,002				14,002
Construction			343				—				343				1,779				2,122
Land			—				364				364				1,998				2,362
Farm			—				—				—				1,644				1,644
Nonresidential real estate			375				396				771				21,174				21,945
Commercial and industrial			—				88				88				1,992				2,080
Consumer and other:
Loans on deposits			—				—				—				2,564				2,564
Home equity			—				33				33				5,326				5,359
Automobile			—				—				—				64				64
Unsecured			68				—				68				570				638
Total		$	5,267			$	9,941			$	15,208			$	233,953			$	249,161

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of June 30, 2015, and 2014, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

June 30, 2015:
(in thousands)		Pass				Special Mention				Substandard				Doubtful				Not rated
Residential real estate:
One- to four-family		$	—			$	6,914			$	9,371			$	—			$	175,436
Multi-family			16,621				—				—				—				—
Construction			3,780				—				—				—				—
Land			1,164				—				857				—				—
Farm			1,567				—				—				—				—
Nonresidential real estate			20,198				1,131				789				—				—
Commercial and industrial			1,750				32				—				—				—
Consumer and other:
Loans on deposits			2,262				—				—				—				—
Home equity			5,448				—				29				—				—
Automobile			73				—				—				—				—
Unsecured			605				—				—				—				—

 

June 30, 2014:
(in thousands)		Pass				Special Mention				Substandard				Doubtful				Not rated
Residential real estate:
One- to four-family		$	-			$	2,928			$	11,287			$	—			$	182,166
Multi-family			14,002				—				—				—				—
Construction			2,122				—				—				—				—
Land			1,366				—				996				—				—
Farm			1,644				—				—				—				—
Nonresidential real estate			18,920				965				2,060				—				—
Commercial and industrial			2,014				—				66				—				—
Consumer and other:
Loans on deposits			2,564				—				—				—				—
Home equity			5,359				—				—				—				—
Automobile			64				—				—				—				—
Unsecured			606				3				29				—				—

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

The activity in the allowance for loan losses is summarized as follows for the years ended June 30:

 

(in thousands)		2015				2014
Balance at beginning of year		$	1,473			$	1,310
Provision for losses on loans			343				580
Charge-offs, net			(248	)			(417	)
Balance at end of year		$	1,568			$	1,473

 

The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended June 30, 2015 and 2014:

 

June 30, 2015:

 

(in thousands)		Beginning balance				Provision for loan losses				Loans charged off				Recoveries				Ending balance
Residential real estate:
One- to four-family		$	999			$	307			$	(274	)		$	26			$	1,058
Multi-family			74				19				—				—				93
Construction			11				10				—				—				21
Land			10				(1	)			—				—				9
Farm			9				—				—				—				9
Nonresidential real estate			114				7				—				—				121
Commercial and industrial			11				(1	)			—				—				10
Consumer and other:
Loans on deposits			14				(1	)			—				—				13
Home equity			28				3				—				—				31
Automobile			—				—				—				—				—
Unsecured			3				—				—				—				3
Unallocated			200				—				—				—				200
Totals		$	1,473			$	343			$	(274	)		$	26			$	1,568

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

June 30, 2014:

 

(in thousands)		Beginning balance				Provision for loan losses				Loans charged off				Recoveries				Ending balance
Residential real estate:
One- to four-family		$	871			$	546			$	(467	)		$	49			$	999
Multi-family			63				11				—				—				74
Construction			8				3				—				—				11
Land			12				(2	)			—				—				10
Farm			6				3				—				—				9
Nonresidential real estate			94				20				—				—				114
Commercial and industrial			13				(2	)			—				—				11
Consumer and other:
Loans on deposits			12				2				—				—				14
Home equity			25				3				—				—				28
Automobile			—				—				—				—				—
Unsecured			6				(4	)			—				1				3
Unallocated			200				—				—				—				200
Totals		$	1,310			$	580			$	(467	)		$	50			$	1,473

 

Purchased Loans:

 

The Company purchased loans during the fiscal year ended June 30, 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a credit quality component of $616,000 and $782,000, at June 30, 2015 and 2014, respectively, is as follows:

 

(in thousands)		2015				2014
Residential real estate:
One- to four-family		$	2,565			$	2,735
Land			381				444
Nonresidential real estate			526				529
Commercial non-mortgage loans			—				68
Outstanding balance		$	3,472			$	3,776

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE C - LOANS (continued)

 

Accretable yield, or income expected to be collected, for the years ended June 30 was as follows:

 

(in thousands)		2015				2014
Balance at beginning of year		$	1,478			$	1,294
Accretion of income			(457	)			(155	)
Reclassifications from nonaccretable difference			—				339
Disposals			—				—
Balance at end of year		$	1,021			$	1,478

 

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the years ended June 30, 2015 or 2014, nor were any allowance for loan losses reversed during those years.

 

NOTE D – REAL ESTATE OWNED

 

Activity in real estate owned for the years ended June 30 was as follows:

 

(in thousands)		2015				2014
Balance at beginning of year		$	1,846			$	1,163
Loans transferred to real estate owned			2,065				1,491
Capitalized expenditures			57				—
Valuation adjustments			(87	)			(101	)
Disposals			(2,288	)			(707	)
Balance at end of year		$	1,593			$	1,846

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE E - PREMISES AND EQUIPMENT

 

Premises and equipment at June 30 are comprised of the following:

 

(in thousands)		2015				2014
Land		$	1,693			$	1,493
Buildings and improvements			7,104				6,491
Furniture and equipment			2,219				2,159
Automobiles			64				64
			11,080				10,207
Less: accumulated depreciation			5,845				5,578
Balance at end of year		$	5,235			$	4,629

 

NOTE F - DEPOSITS

 

Deposits consist of the following major classifications at June 30:

 

(in thousands)		2015				2014
Non-interest bearing checking accounts		$	4,073			$	3,786
Checking accounts			14,904				13,364
Savings accounts			51,371				46,277
Money market demand deposits			13,255				13,010
Total demand, transaction and passbook deposits			83,603				76,437
Certificates of deposit:
Original maturities of:
Less than 12 months			75,856				92,271
12 months to 36 months			35,616				38,705
More than 36 months			4,626				5,729
Total certificates of deposit			116,098				136,705
Total deposits		$	199,701			$	213,142

 

At June 30, 2015 and 2014, the Banks had certificate of deposit accounts with balances equal to or in excess of $250,000 totaling approximately $4.8 million and $5.2 million, respectively.

 

Maturities of outstanding certificates of deposit at June 30 are summarized as follows:

 

(in thousands)		2015
2016		$	75,856
2017			28,011
2018			7,605
2019			1,573
2020 and thereafter			3,053
		$	116,098

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

 

Advances from the Federal Home Loan Bank, collateralized at June 30, 2015 and 2014 by pledges of certain residential mortgage loans totaling $35.2 million and $22.7 million, respectively, and the Banks’ investment in Federal Home Loan Bank stock, are summarized as follows:

 

Maturing year ended June 30, 2015
(in thousands)
2016		$	13,923
2017			6,431
2018			2,328
2019			3,249
2020			189
2021			142
2022			107
2023-2032			266
		$	26,635

 

At June 30, 2015 interest rates for advances were fixed ranging from 0.15% to 6.95%, with a weighted-average interest rate of 1.04%.

 

Maturing year ended June 30, 2014
(in thousands)
2015		$	9,865
2016			623
2017			431
2018			2,328
2019			3,249
2020			189
2021			142
2022-2031			373
		$	17,200

 

At June 30, 2014 interest rates for advances were fixed ranging from 0.12% to 6.95%, with a weighted-average interest rate of 1.39%.

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. Based on collateral composed of first mortgage loans and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to $99.5 million as of June 30, 2015.

 

At June 30, 2015, we had the ability to borrow a total $99.5 million from the FHLB, of which $26.6 million was outstanding. In addition, we have the ability to borrow from the Federal Reserve Bank Discount Window. At June 30, 2015, we had pledged collateral which would enable us to borrow up to $4.7 million.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE H - FEDERAL INCOME TAXES

 

Federal income taxes on earnings differs from that computed at the statutory corporate tax rate for the years ended June 30, 2015 and 2014, as follows:

 

(in thousands)		2015				2014
Federal income taxes at the statutory rate		$	1,051			$	981
Increase (decrease) resulting primarily from:
Cash surrender value of life insurance			(31	)			(31	)
Other			1				2
		$	1,021			$	952

 

The composition of the Company’s net deferred tax liability at June 30 is as follows:

 

(in thousands)		2015				2014
Taxes (payable) refundable on temporary differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance		$	533			$	501
Deferred compensation and benefits			243				249
Charitable contributions			1				2
Fair value accounting adjustments on acquisition			604				887
Nonaccrued interest on loans			129				154
Other real estate owned adjustments			254				315
Other			15				2
Total deferred tax assets			1,779				2,110
Deferred tax liabilities:
Federal Home Loan Bank stock dividends			(1,337	)			(1,337	)
Deferred loan origination costs			(26	)			(21	)
Loan servicing rights			(29	)			(27	)
Fair value accounting adjustments on acquisition			(795	)			(795	)
Unrealized gain on investments			(19	)			(35	)
Depreciation			(62	)			(56	)
Other			—				(49	)
Total deferred tax liabilities			(2,268	)			(2,320	)
Net deferred tax liability		$	(489	)		$	(210	)

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE H – FEDERAL INCOME TAXES (continued)

 

Prior to 1997, the Banks were allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in excess of accumulated earnings and profits, such distributions will be subject to federal income taxes at the then current corporate income tax rate. Retained earnings at June 30, 2015, include approximately $5.2 million for which federal income taxes have not been provided. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $1.8 million at June 30, 2015.

 

Unrecognized Tax Benefits

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

(in thousands)		2015				2014
Balance at beginning of year		$	80			$	80
Additions/(reductions) based on tax positions for the current year			—				—
Balance at end of year		$	80			$	80

 

Cash settlements occurred during the period July 1, 2012, through June 30, 2013. Because of uncertainty regarding proper inclusion or exclusion of income from bank-owned life insurance (“BOLI”) in the earnings and profits calculation, the Company amended its June 30, 2009, federal income tax return to report reduced tax liability of $80,000 and established the corresponding reserve. Its unrecognized benefits are expected to change in the next twelve months.

 

NOTE I - LOAN COMMITMENTS

 

The Banks are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of the commitments reflect the extent of the Banks’ involvement in such financial instruments.

 

The Banks’ exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE I - LOAN COMMITMENTS (continued)

 

At June 30, 2015 and 2014, the Banks had the following outstanding loan commitments:

 

		2015								2014
(in thousands)		Fixed				Variable				Fixed				Variable
Unused commitment:
Revolving, open-end lines secured by real estate		$	—			$	8,153			$	—			$	8,543
Commitments to fund real estate construction loans			715				2,974				779				1,426
Other unused commitment:
Commercial and industrial loans			1,299				—				1,379				—
Other			631				415				225				1,034
Letters of credit			—				—				—				—

 

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at June 30, 2015 totaled $1.0 million and had interest rates ranging from 3.50% to 5.18% and maturities ranging from 10 years to 30 years. The fixed rate loan commitments at June 30, 2014 totaled $336,000 and had interest rates ranging from 4.81% to 5.75% with maturities ranging from 10 years to 30 years.

 

NOTE J – STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL

 

Dividend Restrictions – Dividends from the Banks are the primary source of funds for the Company. Banking regulations limit the amount of dividends that may be paid to the Company by the Banks without prior approval of the Office of the Controller of the Currency (the “OCC.”) Under these regulations the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At June 30, 2015, the Banks could, without prior approval, declare dividends of approximately $3.0 million.

 

Regulatory Capital Requirements - The Banks are subject to minimum regulatory capital standards promulgated by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE J - REGULATORY CAPITAL (continued)

 

New Capital Rules – Effective January 1, 2015, the Company and the Banks became subject to the new capital regulations in accordance with Basel III. The new regulations establish higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conversation buffer. The new regulations also include revisions to the definition of capital and changes in the risk-weighting of certain assets. For prompt corrective action, the new regulations establish definitions of “well capitalized” as a 6.5% common equity Tier 1 risk-based capital ratio, an 8.0% Tier 1 risk-based capital ratio, a 10.0% total risk-based capital ratio and a 5.0% Tier 1 leverage ratio. Additionally, a 2.5% capital conservation buffer will be effective under Basel III when effective and fully implemented in 2019.

 

To be categorized as “well-capitalized” the Banks must maintain minimum capital ratios as set forth in the following tables:

 

		As of June 30, 2015
																		Minimum
																		Requirement
										Minimum								To be “Well-
										Requirement								Capitalized” Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
										(Dollars in thousands)
Risk-based capital:
Common Equity Tier 1 capital ratio
Kentucky First Federal		$	52,768				31.9	%		$	7,443				4.5	%			N/A				N/A
First Federal of Hazard			16,478				43.8				1,694				4.5			$	2,447				6.5	%
First Federal of Frankfort			32,104				25.1				5,763				4.5				8,324				6.5
Tier 1 (core) capital ratio
Kentucky First Federal			52,768				31.9				9,923				6.0				N/A				N/A
First Federal of Hazard			16,478				43.8				2,259				6.0				3,012				8.0
First Federal of Frankfort			32,104				25.1				7,684				6.0				10,245				8.0
Total capital ratio
Kentucky First Federal			54,386				32.9				13,231				8.0				N/A				N/A
First Federal of Hazard			16,950				45.0				3,012				8.0				3,765				10.0
First Federal of Frankfort			33,101				25.9				10,245				8.0				12,806				10.0
Leverage capital:
Tier 1 leverage capital to average assets
Kentucky First Federal			52,768				18.7				11,312				4.0				N/A				N/A
First Federal of Hazard			16,478				21.8				3,023				4.0				3,779				5.0
First Federal of Frankfort			32,104				14.9				8,645				4.0				10,807				5.0

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE J - REGULATORY CAPITAL (continued)

 

		As of June 30, 2014
																		To be “well-
																		capitalized” under
										For capital								prompt corrective
		Actual								adequacy purposes								action provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
										(Dollars in thousands)
Tier 1 core capital
First Federal of Hazard		$	15,880				19.8	%		≥$	3,206				≥4.0	%		≥$	4,007				≥5.0	%
First Federal of Frankfort		$	31,647				14.8	%		≥$	9,154				≥4.0	%		≥$	11,443				≥5.0	%
Total risk-based capital
First Federal of Hazard		$	16,368				42.0	%		≥$	3,116				≥8.0	%		≥$	3,895				≥10.0	%
First Federal of Frankfort		$	32,531				26.4	%		≥$	9,845				≥8.0	%		≥$	12,306				≥10.0	%
Tier 1 risk-based capital
First Federal of Hazard		$	15,880				40.8	%		≥$	3,206				≥4.0	%		≥$	2,337				≥6.0	%
First Federal of Frankfort		$	31,647				25.7	%		≥$	9,154				≥4.0	%		≥$	7,384				≥6.0	%

 

As of June 30, 2015 and 2014, management believes that First Federal of Hazard and First Federal of Frankfort met all capital adequacy requirements to which the Banks were subject. There are no conditions or subsequent events that have occurred that managements believes have changed the Banks’ categories.

 

Regulations of the Board of Governors of the Federal Reserve System governing mutual holding companies require First Federal MHC to meet certain criteria before the company may waive the receipt by it of any common stock dividend declared by Kentucky First Federal Bancorp. During each of the fiscal years ended June 30, 2015 and 2014, and pursuant to the provisions allowed by the Board of Governors of the Federal Reserve System, First Federal MHC waived $1.9 million in dividends.

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP

 

The following condensed financial statements summarize the financial position of Kentucky First Federal Bancorp as of June 30, 2015 and 2014, and the results of its operations and its cash flows for the fiscal years ended June 30, 2015 and 2014.

 

KENTUCKY FIRST FEDERAL BANCORP

BALANCE SHEETS

June 30, 2015 and 2014

(In thousands)

		2015				2014
ASSETS
Interest-bearing deposits in First Federal of Hazard		$	572			$	869
Interest-bearing deposits in First Federal of Frankfort			985				1,133
Other interest-bearing deposits			15				13
Investment in First Federal of Hazard			17,795				17,384
Investment in Frankfort First			47,539				47,200
Prepaid expenses and other assets			580				639
Total assets		$	67,486			$	67,238
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable and other liabilities		$	173			$	33
Total liabilities			173				33
Shareholders’ equity
Common stock			86				86
Additional paid-in capital			34,638				34,671
Retained earnings			34,711				34,027
Unearned employee stock ownership plan (ESOP)			(1,223	)			(1,410	)
Treasury shares at cost, 112,563 and 27,886 common shares at June 30, 2015 and 2014, respectively			(937	)			(239	)
Accumulated other comprehensive income			38				70
Total shareholders’ equity			67,313				67,205
Total liabilities and shareholders’ equity		$	67,486			$	67,238

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP (continued)

 

KENTUCKY FIRST FEDERAL BANCORP

STATEMENTS OF INCOME

Years ended June 30, 2015 and 2014

(Dollar amounts in thousands)

 

		2015				2014
Income
Interest income		$	99			$	110
Dividends from First Federal of Hazard			—				—
Equity in undistributed (excess distributed) earnings of First Federal of Hazard			354				417
Dividends from Frankfort First			1,612				1,795
Equity in undistributed earnings of Frankfort First			370				(116	)
Total income			2,435				2,206
Non-interest expenses			495				387
Earnings before income taxes			1,940				1,819
Federal income tax expense (benefit)			(129	)			(115	)
NET INCOME		$	2,069			$	1,934

  

KENTUCKY FIRST FEDERAL BANCORP

STATEMENTS OF CASH FLOWS

For Years ended June 30, 2015 and 2014

(Dollar amounts in thousands)

 

		2015				2014
Cash flows from operating activities:
Net earnings for the year		$	2,069			$	1,934
Adjustments to reconcile net earnings to net cash provided by operating activities:
Excess (deficit) distributions over earnings (undistributed earnings) from consolidated subsidiaries			(815	)			(332	)
Noncash compensation expense			187				187
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets			59				(104	)
Other liabilities			140				(7	)
Net cash provided by operating activities			1,640				1,678

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2015 and 2014

 

NOTE K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP (continued)

 

KENTUCKY FIRST FEDERAL BANCORP

STATEMENTS OF CASH FLOWS (continued)

For Years ended June 30, 2015 and 2014

(Dollar Amounts in thousands)

 

		2015				2014
Cash flows from financing activities:
Dividends paid on common stock			(1,385	)			(1,511	)
Repurchase of treasury shares			(698	)			(42	)
Net cash used in financing activities			(2,083	)			(1,553	)
Net increase (decrease) in cash and cash equivalents			(443	)			125
Cash and cash equivalents at beginning of year			2,015				1,890
Cash and cash equivalents at end of year		$	1,572			$	2,015

 

 

Kentucky First Federal Bancorp would like to recognize our employees who work hard every day to maximize the value of your investment:

First Federal Savings Bank
Frankfort-Danville-Lancaster Lesa Asbery, Customer Service Manager		Nancy Long, Assistant Vice President/Customer Service Manager
Wick Asbury, Vice President/Head of Lending		Patty Luttrell, Compliance Assistant
Brenda Baldwin, Assistant Vice President/Chief Accountant		Kathy McBee, Branch Manager Tracey McCoun, Deposit Compliance Officer
James Baxter, Vice President/Lending Stan Betsworth, Vice President/Lending/		Katina Mickens, Customer Service Samantha Miller, Assistant Vice President/Loan
Head of Special Projects		Compliance and Loan Analysis
Phyllis Bowman, Loan Servicing		Kim Moore, Vice President/Deposit Operations
Lisa Brinley, Branch Manager Russell Brooks, Vice President/Chief Financial		Manager Carolyn Mulcahy, Accounting Assistant
Officer		Jeanie Murphy, Customer Service
Phyllis Bryant, Customer Service
Andrea Cline, Accounting		J. David Semones, Loan Processing
Becky Crowe, Customer Service		Cynthia Shank, Customer Service
Deryl Curtis, Loan Servicing
Betty Doolin, Customer Service		Martha Sowders, Customer Service
Carolyn Eades, Receptionist Diana Eads, Customer Service Supervisor		Jenny Stump, Loan Processing Virginia Stump, Vice President/Lancaster Branch
Tiffaney Elliott, Accounting/Human Resources Jamey Ensley, Information Technology Operations		Manager Yvonne Thornberry, Assistant Vice
Debra Freeman, Customer Service Manager/Training		President/Head of Loan Processing & Servicing
Coordinator		Mike Ware, Information Technology Manager
Matt Freire, Customer Service		Nancy Watts, Loan Processing
Stacey Greenawalt, Vice President/Lending		Jennifer Whalen, Loan Processing
Stan Harmon, Lending		Tiffany Williams, Customer Service
Karen Hatfield, Assistant Vice President/Customer
Service Manager Judy Hicks, Customer Service		First Federal Savings and Loan Association of Hazard
Lee Ann Hockensmith, Assistant Vice President/		Missy Kay Asher, Customer Service
Head of Credit Administration		Deborah C. Bersaglia, Vice President/Secretary
Barry Holder, Branch Manager Ronald Howard, Vice President/Lending		Holly Caudill, Vice President Jaime S. Coffey, Lending/Compliance Officer
Brittany Hulette, Lending Compliance and Loan		Kaye Craft, Vice President/Accounting
Analysis Clay Hulette, Frankfort Area President		Sandra C. Craft, Vice President/Lending Carlen Dixon, Information Technology/Lending
Teresa Hulette, Executive Vice President		Lou Ella Farler, Chief Executive Officer
Tammy Jeffries, Customer Service		Margaret P. Pelley, Vice President/Cashier
Don Jennings, Chief Executive Officer		Lauren Riley, Collection Manager/Customer
Kathy Johnica, Vice President/ Internal Audit		Service
Coordinator		Eliza Stacy, Customer Service
Bill Johnson, Danville Area President		Peggy H. Steele, Assistant Vice President/
Janet Lewis, Customer Service

 

 

Kentucky First Federal Bancorp Board of Directors:

Stephen G. Barker, Attorney and Executive Vice President and General Counsel to Kentucky River Properties, LLC

Walter G. Ecton, Jr., Attorney and principal of Ecton, Murphy and Shannon, PLLC

C. Michael Davenport, President/CEO of C. Michael Davenport, Inc.

William D. Gorman, Jr., former President and CEO of Hazard Insurance Agency

David R. Harrod, CPA, principal of Harrod and Associates, PSC

W. Banks Hudson, Retired Attorney

William H. Johnson, Danville/Lancaster area President, First Federal Savings Bank of Frankfort

Don D. Jennings, President, Kentucky First Federal Bancorp

Tony D. Whitaker, Chairman, Kentucky First Federal Bancorp

 

First Federal Savings and Loan Association of Hazard Board of Directors: 

Stephen G. Barker		Walter G. Ecton, Jr.		William D. Gorman, Jr.
Lou Ella Farler				Tony D. Whitaker, Chairman

  

First Federal Savings Bank Board of Directors:

Russell M. Brooks		Don D. Jennings, Chairman		Herman D. Regan, Jr.,
C. Michael Davenport		William H. Johnson		Director Emeritus
Danny A. Garland		William C. Jennings, Frankfort		Virginia R.S. Stump
J. Mark Goggans		Committee Chair		Charles A. Cotton, III
David R. Harrod		William M. Johnson		Director Emeritus
R. Clay Hulette		Yvonne Y. Morley
W. Banks Hudson, Danville		Jerry M. Purcell
Committee Chair

 

Special Counsel	Kilpatrick, Townsend, and Stockton  LLP
	Suite 900
	607 14th Street NW
	Washington, DC  20005-2018
Transfer Agent and	American Stock Transfer & Trust Company, LLC
Registrar	6201 15th Avenue
	Brooklyn, NY 11219
	(718) 921-8124

 

The Annual Meeting of Shareholders will be held on November 12, 2015 at 3:30 p.m. at the First

Federal Center on the campus of Hazard Community and Technical College located at

One Community College Drive in Hazard, KY.

 

Shareholder Inquiries and Availability of 10-K Reports: A COPY OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2015, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE FOR THE NOVEMBER 12, 2015, ANNUAL MEETING, UPON WRITTEN REQUEST TO

 

Investor Relations:	Don Jennings	djennings@ffsbfrankfort.com
	Clay Hulette	chulette@ffsbfrankfort.com
	(502) 223-1638  or  1-888-818-3372
	216 W Main St
	PO Box 535
	Frankfort, KY  40602