UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x

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

 

For the quarterly period ended                      September 30, 2015                         

OR

¨

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

 

For the transition period from ____________ to _______________

 

Commission File Number: 0-51176

 

KENTUCKY FIRST FEDERAL BANCORP

(Exact name of registrant as specified in its charter)

 

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

 

216 West Main Street, Frankfort, Kentucky  40601

(Address of principal executive offices)(Zip Code)

 

(502) 223-1638

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At November 9, 2015, the latest practicable date, the Corporation had 8,439,515 shares of $.01 par value common stock outstanding.

 

 

INDEX

 

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

 

 

PART I

ITEM 1: Financial Information

Kentucky First Federal Bancorp

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

		September 30,				June 30,
		2015				2015
ASSETS
Cash and due from financial institutions		$	2,793			$	3,864
Interest-bearing demand deposits			9,872				9,771
Cash and cash equivalents			12,665				13,635
Securities available for sale			155				159
Securities held-to-maturity, at amortized cost- approximate fair value of $5,723 and $6,534 at September 30, 2015 and June 30, 2015, respectively			5,625				6,423
Loans held for sale			121				100
Loans, net of allowance of $1,568 at September 30, 2015 and June 30, 2015			245,012				243,815
Real estate owned, net			1,260				1,593
Premises and equipment, net			5,768				5,235
Federal Home Loan Bank stock, at cost			6,482				6,482
Accrued interest receivable			747				725
Bank-owned life insurance			2,994				2,971
Goodwill			14,507				14,507
Prepaid expenses and other assets			582				653
Total assets		$	295,918			$	296,298
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits		$	196,253			$	199,701
Federal Home Loan Bank advances			29,231				26,635
Advances by borrowers for taxes and insurance			972				699
Accrued interest payable			33				32
Accrued federal income taxes			112				78
Deferred federal income taxes			578				569
Deferred revenue			606				610
Other liabilities			620				661
Total liabilities			228,405				228,985
Commitments and contingencies			-				-
Shareholders’ equity
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued and outstanding			-				-
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued			86				86
Additional paid-in capital			34,631				34,638
Retained earnings			34,871				34,711
Unearned employee stock ownership plan (ESOP), 117,642 shares and 122,311 shares at September 30, 2015 and June 30, 2015, repectively			(1,176	)			(1,223	)
Treasury shares at cost, 112,563 common shares at both September 30, 2015 and June 30, 2015			(937	)			(937	)
Accumulated other comprehensive income			38				38
Total shareholders’ equity			67,513				67,313
Total liabilities and shareholders’ equity		$	295,918			$	296,298

 

See accompanying notes.

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

		Three months ended September 30,
		2015				2014
Interest income
Loans, including fees		$	2,892			$	3,000
Mortgage-backed securities			23				29
Other securities			5				6
Interest-bearing deposits and other			64				64
Total interest income			2,984				3,099
Interest expense
Interest-bearing demand deposits			7				8
Savings			65				59
Certificates of Deposit			208				222
Deposits			280				289
Borrowings			70				62
Total interest expense			350				351
Net interest income			2,634				2,748
Provision for loan losses			11				56
Net interest income after provision for loan losses			2,623				2,692
Non-interest income
Earnings on bank-owned life insurance			23				23
Net gain on sales of loans			19				6
Net gain (loss) on sales of OREO			16				(1	)
Vaulation adjustments of OREO			(18	)			—
Other			74				68
Total non-interest income			114				96
Non-interest expense
Employee compensation and benefits			1,279				1,377
Occupancy and equipment			148				131
Outside service fees			48				38
Legal fees			29				7
Data processing			97				102
Auditing and accounting			67				65
FDIC insurance premiums			54				63
Franchise and other taxes			63				67
Foreclosure and OREO expenses (net)			28				53
Other			252				266
Total non-interest expense			2,065				2,169
Income before income taxes			672				619
Federal income tax expense			134				203
NET INCOME		$	538			$	416
EARNINGS PER SHARE
Basic and diluted		$	0.06			$	0.05
DIVIDENDS PER SHARE		$	0.10			$	0.10

 

See accompanying notes.

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

		Three months ended September 30,
		2015				2014
Net income		$	538			$	416
Other comprehensive loss, net of tax benefits: Unrealized holding gains (losses) on securities designated as available for sale, net of tax benefits of $0 and $11 during the respective periods			—				(24	)
Comprehensive income		$	538			$	392

 

See accompanying notes.

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Three months ended September,
		2015				2014
Cash flows from operating activities:
Net income		$	538			$	416
Adjustments to reconcile net income to net cash provided by operating
Activities
Depreciation			72				66
Accretion of purchased loan credit discount			(39	)			(60	)
Amortization of purchased loan premium			5				4
Amortization (accretion) of deferred loan origination costs (fees)			5				(5	)
Amortization of premiums on investment securities			25				41
Amortization of premiums on deposits			(21	)			(98	)
Net gain on sale of loans			(19	)			(6	)
Net loss (gain) on sale of real estate owned			(16	)			1
Valuation adjustments of real estate owned			18				—
Deferred gain on sale of real estate owned			(4	)			(3	)
ESOP compensation expense			40				39
Earnings on bank-owned life insurance			(23	)			(23	)
Provision for loan losses			11				56
Origination of loans held for sale			(121	)			(326	)
Proceeds from loans held for sale			119				85
Increase (decrease) in cash, due to changes in:
Accrued interest receivable			(22	)			(9	)
Prepaid expenses and other assets			71				46
Accrued interest payable			1				2
Other liabilities			(41	)			215
Federal income taxes			43				203
Net cash provided by operating activities			642				644
Cash flows from investing activities:
Securities maturities, prepayments and calls:
Held to maturity			773				304
Available for sale			4				2
Loans originated for investment, net of principal collected			(1,278	)			2,625
Proceeds from sale of real estate owned			430				327
Additions to premises and equipment, net			(605	)			(69	)
Net cash provided by (used in) investing activities			(676	)			3,189
Cash flows from financing activities:
Net decrease in deposits			(3,427	)			(1,328	)
Payments by borrowers for taxes and insurance, net			273				251
Proceeds from Federal Home Loan Bank advances			6,200				2,500
Repayments on Federal Home Loan Bank advances			(3,604	)			(5,512	)
Dividends paid on common stock			(378	)			(380	)
Net cash used in financing activities			(936	)			(4,469	)
Net decrease in cash and cash equivalents			(970	)			(636	)
Beginning cash and cash equivalents			13,635				11,511
Ending cash and cash equivalents		$	12,665			$	10,875

 

See accompanying notes.

 

 

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

		Three months ended September 30,
		2015				2014
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes		$	110			$	—
Interest on deposits and borrowings		$	370			$	447
Transfers of loans to real estate owned, net		$	99			$	156
Loans made on sale of real estate owned		$	—			$	195

 

See accompanying notes.

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(unaudited)

 

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

 

1. Basis of Presentation

 

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

 

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

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

2. Earnings Per Share

 

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

 

		Three months ended September 30,
(in thousands)			2015				2014
Net income allocated to common shareholders, basic and diluted		$	538			$	416

 

		Three months ended September 30,
		2015				2014
Weighted average common shares outstanding, basic and diluted			8,317,255				8,383,191

 

There were 309,800 stock option shares outstanding for the three-month periods ended September 30, 2015 and 2014. The stock option shares outstanding were antidilutive for the respective periods.

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

3. Investment Securities

 

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

 

		September 30, 2015
(in thousands)		Amortized cost				Gross unrealized/ unrecognized gains				Gross unrealized/ unrecognized losses				Estimated fair value
Available-for-sale Securities
Agency mortgage-backed: residential		$	91			$	1			$	—			$	92
FHLMC stock			7				56				—				63
		$	98			$	57			$	—			$	155
Held-to-maturity Securities
Agency mortgage-backed: residential		$	2,543			$	97			$	2			$	2,638
Agency bonds			3,082				3				—				3,085
		$	5,625			$	100			$	2			$	5,723

 

		June 30, 2015
(in thousands)		Amortized cost				Gross unrealized/ unrecognized gains				Gross unrealized/ unrecognized losses				Estimated fair value
Available-for-sale Securities
Agency mortgage-backed: residential		$	94			$	2			$	—			$	96
FHLMC stock			8				55				—				63
		$	102			$	57			$	—			$	159
Held-to-maturity Securities
Agency mortgage-backed: residential		$	2,821			$	112			$	2			$	2,931
Agency bonds			3,602				2				1				3,603
		$	6,423			$	114			$	3			$	6,534

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

3.

Investment Securities (continued)

 

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

 

		September 30, 2015
(in thousands)		Amortized Cost				Fair Value
Held-to-maturity Securities
Within one year		$	1,522			$	1,523
One to five years			1,560				1,562
Mortgage-backed			2,543				2,638
		$	5,625			$	5,723

 

Our pledged securities totaled $2.2 million at September 30, 2015, and June 30, 2015.

 

There were no sales of investment securities during the three month periods ended September 30, 2015 and 2014.

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

 

		September 30,				June 30,
(in thousands)		2015				2015
Residential real estate
One- to four-family		$	192,729			$	191,721
Multi-family			17,196				16,621
Construction			2,742				3,780
Land			1,641				2,021
Farm			1,562				1,567
Nonresidential real estate			22,046				22,118
Commercial nonmortgage			1,787				1,782
Consumer and other:
Loans on deposits			2,262				2,262
Home equity			5,551				5,477
Automobile			69				73
Unsecured			373				605
			247,958				248,027
Undisbursed portion of loans in process			(1,505	)			(2,753	)
Deferred loan origination costs			127				109
Allowance for loan losses			(1,568	)			(1,568	)
		$	245,012			$	243,815

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

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

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2014:

 

(in thousands)		Beginning balance				Provision for loan losses				Loans charged off				Recoveries				Ending balance
Residential real estate:
One- to four-family		$	1,003			$	52			$	37			$	2			$	1,020
Multi-family			73				—				—				—				73
Construction			11				—				—				—				11
Land			10				1				—				—				11
Farm			9				—				—				—				9
Nonresidential real estate			112				2				—				—				114
Commercial nonmortgage			11				(1	)			—				—				10
Consumer and other:
Loans on deposits			13				1				—				—				14
Home equity			28				2				—				—				30
Autombile			—				—				—				—				—
Unsecured			3				(1	)			—				—				2
Unallocated			200				—				—				—				200
Totals		$	1,473			$	56			$	37			$	2			$	1,494

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2015. The recorded investment in loans excludes accrued interest receivable and deferred loan costs, net due to immateriality.

 

September 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		$	3,566			$	2,172			$	5,738			$	—			$	—			$	—
Land			—				285				285				—				—
Nonresidential real estate			—				523				523				—				—				—
			3,566				2,980				6,546				—				—				—
Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family										$	186,991			$	1,060			$	—			$	1,060
Multi-family											17,196				97				—				97
Construction											2,742				16				—				16
Land											1,356				8				—				8
Farm											1,562				9				—				9
Nonresidential real estate											21,523				122				—				122
Commercial nonmortgage											1,787				10				—				10
Consumer:
Loans on deposits											2,262				13				—				13
Home equity											5,551				31				—				31
Automobile											69				—				—				—
Unsecured											373				2				—				2
Unallocated											—				—				200				200
											241,412				1,368				200				1,568
										$	247,958			$	1,368			$	200			$	1,568

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

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

 

June 30, 2015:

 

(in thousands)		Loans individually evaluated				Loans acquired with deteriorated credit quality				Ending loans balance				Ending allowance attributed to loans				Unallocated allowance				Total allowance
Loans individually evaluated for impairment:
Residential real estate:
One- to four-family		$	1,743			$	2,565			$	4,308			$	—			$	—			$	—
Land			476				381				857				—				—
Nonresidential real estate			241				526				767				—				—				—
Consumer and other:
Home equity			28				—				28
Unsecured			18				—				18				—				—				—
			2,506				3,472				5,978				—				—				—
Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family										$	187,413			$	1,059			$	—			$	1,059
Multi-family											16,621				94				—				94
Construction											3,780				21				—				21
Land											1,164				7				—				7
Farm											1,567				9				—				9
Nonresidential real estate											21,351				121				—				121
Commercial nonmortgagel											1,782				10				—				10
Consumer:
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)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2015 and 2014:

 

September 30, 2015:

 

(in thousands)		Unpaid Principal Balance and Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
With no related allowance recorded:
One- to four-family		$	3,566			$	—			$	3,036			$	3			$	3
Purchased credit-impaired loans			2,980				—				3,226				23				23
			6,546				—				6,262				26				26
With an allowance recorded:
One- to four-family			—				—				—				—				—
		$	6,546			$	—			$	6,262			$	26			$	26

 

September 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:
One- to four-family		$	1,441			$	—			$	1,701			$	1			$	1
Purchased credit-impaired loans			3,568				—				3,635				29				29
			5,009				—				5,336				30				30
With an allowance recorded:
One- to four-family			70				9				135				1				1
		$	5,079			$	9			$	5,471			$	31			$	31

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

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

 

		September 30, 2015								June 30, 2015
(in thousands)		Nonaccrual				Loans Past Due Over 90 Days Still Accruing				Nonaccrual				Loans Past Due Over 90 Days Still Accruing
One- to four-family residential real estate		$	4,676			$	1,195			$	4,331			$	1,745
Nonresidential real estate and land			409				—				410				—
Consumer			25				—				26				—
		$	5,110			$	1,195			$	4,767			$	1,745

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Bank would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.” At September 30, 2015 and June 30, 2015, the Company had $1.6 million and $1.9 million of loans classified as TDRs, respectively. Of the TDRs at September 30, 2015, approximately 40.2% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

The following table presents TDR’s by loan type at September 30, 2015 and June 30, 2015, and their performance, by modification type:

 

(dollars in thousands)		Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				TDRs Performing to Modified Terms				TDRs Not Performing to Modified Terms
September 30, 2015
Residential Real Estate:
1-4 Family			36			$	1,888			$	1,626			$	1,199			$	427
June 30, 2015
Residential Real Estate:
1-4 Family			38			$	2,110			$	1,851			$	1,710			$	141

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table summarizes TDR loan modifications for the three months ended September 30, 2015 and 2014, and their performance, by modification type:

 

(in thousands)		Troubled Debt Restructurings Performing to Modified Terms				Troubled Debt Restructurings Not Performing to Modified Terms				Total Troubled Debt Restructurings
Three months ended September 30, 2015
Residential real estate:
Rate reduction		$	3			$	—			$	3
Bankruptcies			—				—				—
Total troubled debt restructures		$	3			$	—			$	3
Three months ended September 30, 2014
Residential real estate:
Rate reduction		$	—			$	—			$	—
Bankruptcies			—				—				—
Total troubled debt restructures		$	—			$	—			$	—

 

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

 

There were no TDRs that defaulted during the three-month periods ended September 30, 2015 or 2014.

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of September 30, 2015, by class of loans:

 

(in thousands)		30-89 Days Past Due				90 Days or Greater Past Due				Total Past Due				Loans Not Past Due				Total
Residential real estate:
One-to four-family		$	6,572			$	3,230			$	9,802			$	182,927			$	192,729
Multi-family			—				—				—				17,196				17,196
Construction			—				—				—				2,742				2,742
Land			—				509				509				1,132				1,641
Farm			—				—				—				1,562				1,562
Nonresidential real estate			505				388				893				21,153				22,046
Commercial non-mortgage			—				—				—				1,787				1,787
Consumer and other:
Loans on deposits			—				—				—				2,262				2,262
Home equity			37				—				37				5,514				5,551
Automobile			—				—				—				69				69
Unsecured			1				18				19				354				373
Total		$	7,115			$	4,145			$	11,260			$	236,698			$	247,958

 

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

 

 

(in thousands)		30-89 Days Past Due				90 Days or Greater  Past Due				Total Past Due				Loans Not Past Due				Total
Residential real estate:
One-to four-family		$	5,129			$	3,233			$	8,362			$	183,359			$	191,721
Multi-family			—				—				—				16,621				16,621
Construction			—				—				—				3,780				3,780
Land			344				262				606				1,415				2,021
Farm			—				—				—				1,567				1,567
Nonresidential real estate			142				388				530				21,588				22,118
Commercial nonmortgage			—				—				—				1,782				1,782
Consumer:
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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

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

 

(in thousands)		Pass				Special Mention				Substandard				Doubtful				Not rated
Residential real estate:
One- to four-family		$	—			$	7,970			$	10,664			$	—			$	174,095
Multi-family			16,848				—				348				—				—
Construction			2,742				—				—				—				—
Land			1,128				—				513				—				—
Farm			1,562				—				—				—				—
Nonresidential real estate			20,139				1,119				788				—				—
Commercial nonmortgage			1,755				32								—				—
Consumer:
Loans on deposits			2,262				—				—				—				—
Home equity			5,525				—				26				—				—
Automobile			69				—				—				—				—
Unsecured			373				—				—				—				—
		$	52,403			$	9,121			$	12,339			$	—			$	174,095

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)		Pass				Special Mention				Substandard				Doubtful				Not rated
Residential real estate:
One- to four-family		$	—			$	6,914			$	9,371			$	—			$	175,436
Multi-family			16,621				—				—				—				—
Construction			3,780				—				—				—				—
Land			1,164				—				857				—				—
Farm			1,567				—				—				—				—
Nonresidential real estate			20,198				1,131				789				—				—
Commercial nonmortgage			1,750				32				—				—				—
Consumer:
Loans on deposits			2,262				—				—				—				—
Home equity			5,448				—				29				—				—
Automobile			73				—				—				—				—
Unsecured			605				—				—				—				—
		$	53,468			$	8,077			$	11,046			$	—			$	175,436

 

Purchased Credit Impaired Loans:

 

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $512,000 and $616,000 at September 30, 2015 and June 30, 2015, respectively, is as follows:

 

(in thousands)		September 30, 2015				June 30, 2015
One- to four-family residential real estate		$	2,172			$	2,565
Land			285				381
Nonresidential real estate			523				526
Commercial nonmortgage			—				—
Outstanding balance		$	2,980			$	3,472

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)		Three months ended September 30, 2015				Twelve months ended June 30,  2015
Balance at beginning of period		$	1,021			$	1,478
Accretion of income			(39	)			(457	)
Reclassifications from nonaccretable difference			106				—
Disposals			—				—
Balance at end of period		$	1,088			$	1,021

 

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

 

5. Disclosures About Fair Value of Assets and Liabilities

 

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

 

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

 

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

 

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

 

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

 

Securities

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

 

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

 

		Fair Value Measurements Using
(in thousands)		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
September 30, 2015
Agency mortgage-backed: residential		$	92			$	—			$	92			$	—
FHLMC stock			63				—				63				—
		$	155			$	—			$	155			$	—
June 30, 2015
Agency mortgage-backed: residential		$	96			$	—			$	96			$	—
FHLMC stock			63				—				63				—
		$	159			$	—			$	159			$	—

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

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

 

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

 

		Fair Value Measurements Using
(in thousands)		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
September 30, 2015
Other real estate owned, net
One- to four-family		$	511				—				—				511
Land			121				—				—				121
June 30, 2015
Other real estate owned, net
One- to four-family		$	525				—				—			$	525
Land			15				—				—				15

 

There were no impaired loans, which were measured using the fair value of the collateral for collateral-dependent loans, at September 30, 2015, and June 30, 2015. There was no specific provision made for the three month periods ended September 30, 2015 or 2014.

 

Other real estate owned measured at fair value less costs to sell, had carrying amounts of $632,000 and $540,000 at September 30, 2015 and June 30, 2015, respectively. Other real estate owned was written down $18,000 during the three months ended September 30, 2015, while there was no write-down of other real estate owned during the three months ended September 30, 2014.

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

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

 

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

 

										Range
		Fair Value				Valuation		Unobservable		(Weighted
September 30, 2015		(in thousands)				Technique(s)		Input(s)		Average)
Foreclosed and repossessed assets:
1-4 family		$	511			Sales comparison approach		Adjustments for differences between comparable sales		-10.8% to 11.7% (0.1%)
Land			121			Sales comparison approach		Adjustments for differences between comparable sales		3.5% to 6.6% (5.4%)

 

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

 

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

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

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

 

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

 

				Fair Value Measurements at
(in thousands)				September 30, 2015 Using
		Carrying Value				Level 1				Level 2				Level 3				Total
Financial assets
Cash and cash equivalents		$	12,665			$	12,665											$12,665
Available-for-sale securities			155							$	155							155
Held-to-maturity securities			5,625								5,723							5,723
Loans held for sale			121								125							125
Loans receivable – net			245,012											$	249,484			249,484
Federal Home Loan Bank stock			6,482															n/a
Accrued interest receivable			747								25				722			747
Financial liabilities
Deposits		$	196,253			$	83,781			$	112,672							196,453
Federal Home Loan Bank advances			29,231								29,922							29,922
Advances by borrowers for taxes and insurance			972				972											972
Accrued interest payable			33								33							33

 

 

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

 

 

Kentucky First Federal Bancorp

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2015

(unaudited)

 

6. Other Comprehensive Income (Loss)

 

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

 

		Balance at June 30, 2015				Current Year Change				Balance at September 30, 2015
Unrealized gains on available-for-sale securities		$	38			$	—			$	38

 

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

 

		Three months ended September 30,
(in thousands)		2015				2014
Unrealized holding gains (losses) on available-for-sale securities		$	—			$	(35	)
Tax effect			—				11
Net-of-tax amount		$	—			$	(24	)

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

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

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the three month periods ended September 30, 2015 and 2014, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

		Three Months Ended September 30,
		2015												2014
		Average Balance				Interest And Dividends				Yield/ Cost				Average Balance				Interest And Dividends				Yield/ Cost
		(Dollars in thousands)
Interest-earning assets:
Loans 1		$	246,319			$	2,892				4.70	%		$	246,603			$	3,000				4.87	%
Mortgage-backed securities			2,814				23				3.27				3,795				29				3.06
Other securities			3,328				5				0.60				5,327				6				0.45
Other interest-earning assets			15,439				64				1.66				14,213				64				1.80
Total interest-earning assets			267,900				2,984				4.46				269,938				3,099				4.59
Less: Allowance for loan losses			(1,568	)											(1,466	)
Non-interest-earning assets			30,664												29,331
Total assets		$	296,996											$	297,803
Interest-bearing liabilities:
Demand deposits		$	17,444			$	7				0.16	%		$	15,974			$	8				0.20	%
Savings			63,734				65				0.41				58,792				59				0.40
Certificates of deposit			113,926				208				0.73				134,988				222				0.66
Total deposits			195,104				280				0.57				209,754				289				0.55
Borrowings			27,866				70				1.01				14,660				62				1.69
Total interest-bearing liabilities			222,970				350				0.63				224,414				351				0.63
Noninterest-bearing demand deposits			3,800												4,002
Noninterest-bearing liabilities			2,944												2,321
Total liabilities			229,714												230,737
Shareholders’ equity			67,282												67,066
Total liabilities and shareholders’ equity		$	296,996											$	297,803
Net interest income/average yield						$	2,634				3.83	%						$	2,748				3.97	%
Net interest margin											3.93	%											4.07	%
Average interest-earning assets to average interest-bearing liabilities											120.15	%											120.29	%

 

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

 

 

Kentucky First Federal Bancorp

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

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to September 30, 2015

 

Assets: At September 30, 2015, the Company’s assets totaled $295.9 million, a decrease of $380,000, or 0.1%, from total assets at June 30, 2015. This decrease was attributed primarily to decreases in both cash and cash equivalents and investment securities and was somewhat offset by an increase in loans.

 

Cash and cash equivalents: Cash and cash equivalents decreased $970,000 or 7.1% to $12.7 million at September 30, 2015, primarily as we seek to maintain the appropriate level of liquidity. Our strategy is to balance our need for liquidity to meet day-to-day operational cash flows against keeping too much idle cash on hand. We keep a minimum of 8.0% of our liquidity base for normal cash flow needs and borrow short-term using FHLB advances when cash is low. Likewise, we pay down FHLB advances with any excess funds we might have.

 

Investment securities: Investment securities decreased $802,000 or 12.2% to $5.8 million at September 30, 2015, due to maturity of a $500,000 agency bond and cash flows associated with mortgage-backed securities.

 

Loans: Loans receivable, net, increased by $1.2 million or 0.5% to $245.0 million at September 30, 2015. Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies.

 

Non-Performing and Classified Loans:  At September 30, 2015, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $6.3 million, or 2.6% of total loans (including loans purchased in the acquisition), compared to $6.5 million or 2.7%, of total loans at June 30, 2015.  The Company’s allowance for loan losses totaled $1.6 million at both September 30, 2015, and June 30, 2015. The allowance for loan losses at September 30, 2015, represented 24.9% of nonperforming loans and 0.6% of total loans (including loans purchased in the acquisition), while at June 30, 2015, the allowance represented 24.1% of nonperforming loans and 0.6% of total loans.

 

The Company had $13.6 million in assets classified as substandard for regulatory purposes at September 30, 2015, including loans ($12.3 million) and real estate owned (“REO”) ($1.3 million), including loans acquired in the CKF Bancorp transaction. Classified loans as a percentage of total loans (including loans acquired on December 31, 2012) were 5.0% and 4.5% at September 30, 2015 and June 30, 2015, respectively. The increase in substandard loans was due primarily to classification of two of our larger residential real estate borrowers. Our analysis of the cash flow of these two unrelated credits indicated that a downgrade in classification was warranted. Each of these loans are well-secured and neither was delinquent at September 30, 2015. Of substandard loans at September 30, 2015, 99.8% were secured by real estate on which the Banks have priority lien position.

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to September 30, 2015 (continued)

 

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

 

(dollars in thousands)		September 30, 2015				June 30, 2015
Substandard assets		$	13,599			$	12,639
Doubtful assets			—				—
Loss assets			—				—
Total classified assets		$	13,599			$	12,639

 

At September 30, 2015, the Company’s real estate acquired through foreclosure represented 9.3% of substandard assets compared to 12.6% at June 30, 2015. During the three months ended September 30, 2015, the Company sold property with carrying value of $478,000 for $493,000, while during the year ended June 30, 2015, property with a carrying value of $590,000 was sold for $702,000. During the three months ended September 30, 2015, the Company made no loan(s) to facilitate the purchase of its other real estate owned by qualified borrowers, while for the fiscal year ended June 30, 2015, $424,000 loans to facilitate an exchange were made. The Company defers recognition of any gain on loans to facilitate an exchange until the proper time in the future. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $236,000 and $292,000 at September 30, 2015 and June 30, 2015, respectively.

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to September 30, 2015 (continued)

 

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

  

		September 30, 2015								June 30, 2015
		Number				Net				Number				Net
		of				Carrying				of				Carrying
		Properties				Value				Properties				Value
Single family, non-owner occupied			11			$	1,099				15			$	1,440
Building lot			4				161				5				153
Total REO			15			$	1,260				20			$	1,593

 

At September 30, 2015, and June 30, 2015, the Company had $9.1 million and $8.1 million of loans classified as special mention, respectively (including loans purchased at December 31, 2012.) This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. The primary reason for this increase was related to two larger borrowers who each experienced some weakness in cash flow, but had no delinquency and their loans were well secured by real estate.

 

Liabilities: At September 30, 2015, the Company’s liabilities totaled $228.4 million, a decrease of $580,000, or 0.3%, from total liabilities at June 30, 2015. The decrease in liabilities was attributed primarily as a result of a decrease in deposits, which decreased $3.4 million or 1.7% to $196.3 million at September 30, 2015, and was partially offset by an increase in FHLB advances, which totaled $29.2 million at quarter end, an increase of $2.6 million or 9.7% compared to June 30, 2015. Deposit customers continue seeking higher yields on their funds after growing impatient in the current low-rate environment and some are turning to non-insured investments. As deposits have continued to decrease, we have utilized short-term FHLB advances as replacement funding.

 

Shareholders’ Equity: At September 30, 2015, the Company’s shareholders’ equity totaled $67.5 million, an increase of $200,000 or 0.3% from the June 30, 2015 total. The change in shareholders’ equity was chiefly associated with net profits for the period less dividends paid on common stock.

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2015 to September 30, 2015 (continued)

 

The Company paid dividends of $378,000 or 70.3% of net income for the three month period just ended. On July 7, 2015, the members of First Federal MHC for the fourth time approved a dividend waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock. The Board of Directors of First Federal MHC applied for approval of another waiver. The Federal Reserve Bank of Cleveland has notified the Company that there would be no objection to a waiver of dividends paid by the Company to First Federal MHC, and, as a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 2016. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Management cannot speculate on future dividend levels, because various factors, including capital levels, income levels, liquidity levels, regulatory requirements and overall financial condition of the Company are considered before dividends are declared. However, management continues to believe that a strong dividend is consistent with the Company’s long-term capital management strategy. See “Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Three Month Periods Ended September 30, 2015 and 2014

 

General

 

Net income totaled $538,000 for the three months ended September 30, 2015, an increase of $122,000 or 29.3% from net income of $416,000 for the same period in 2014. The net increase in net earnings for the recently-ended quarter was primarily attributable to lower non-interest expenses and lower income tax expense.

 

Net Interest Income

 

Net interest income after provision for loan losses decreased $69,000 or 2.6% to $2.6 million for the three month period just ended compared to $2.7 million for the prior year quarter primarily due to reduced net interest income and partially offset by a decrease in provision for loan loss. Net interest income before provision for loan loss decreased $114,000 or 4.1% to $2.6 million for the quarter ended September 30, 2015. Provision for losses on loans decreased $45,000 to $11,000 for the recently-ended quarter compared to a provision of $56,000 in the prior year period. Interest income decreased by $115,000, or 3.7%, to $3.0 million, while interest expense decreased $1,000 or 0.3% to $350,000 for the three months ended September 30, 2015, after amortization of fair value adjustments on interest bearing accounts.

 

Interest income on loans decreased $108,000 or 3.6% to $2.9 million, due primarily to a decrease in the average rate earned on the loan portfolio, which decreased 17 basis points to 4.70% for the recently ended quarter compared to the prior year period. The average balance of loans outstanding for the three month period ended September 30, 2015, decreased $284,000 or 0.1% to $246.3 million. Interest income on mortgage-backed securities decreased $6,000 or 20.7% to $23,000 for the three months ended September 30, 2015, due to lower balances resulting from normal cash flows associated with the securities.

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Three Month Periods Ended September 30, 2015 and 2014 (continued)

 

Interest expense on deposits totaled $280,000 and $289,000 for the three month periods ended September 30, 2015 and 2014, respectively, while interest expense on borrowings increased $8,000 or 12.9% to $70,000 for the most recently ended period. The average balance of deposits decreased $14.7 million or 7.0% to $195.1 million for the most recent period, while the average ratepaid on deposits increased 2 basis points to 0.57%. The decrease in average deposits was primarily attributed to rate-sensitive deposit customers withdrawing funds to seek additional yield as the historically low interest rate environment continues. The increase in interest expense on borrowings also was attributed to higher outstanding balances of FHLB advances, which were used to offset deposit funding. The average balance of outstanding borrowings increased $13.2 million or 90.1% to $27.9 million for the quarter ended September 30, 2015, compared to $14.7 million for the prior year quarterly period. The average rate paid on borrowings decreased 68 basis points to 1.01% for the recently ended quarter.

 

Net interest margin decreased from 4.07% for the prior year quarterly period to 3.93% for the quarter ended September 30, 2015.

 

Provision for Losses on Loans

 

The Company recorded $11,000 in provision for losses on loans during the three months ended September 30, 2015, compared to a $56,000 provision for the three months ended September 30, 2014. There can be no assurance that the loan loss allowance will be adequate to absorb unidentified losses on loans in the portfolio, which could adversely affect the Company’s results of operations.

 

Non-interest Income

 

Non-interest income totaled $114,000 for the three months ended September 30, 2015, an increase of $18,000 from the same period in 2014 due primarily to gains on sales of loans and sales of REO. Net gains on sales of loans totaled $19,000 for the quarter just ended compared to $6,000 for the prior year quarter, an increase of $13,000 or 216.7%. Sales of REO during the period resulted in net gains of $16,000 compared to a net loss of $1,000 in the prior year period. The Company recorded a write-down on REO during the recently-ended quarter of $18,000, while there was no such write-down in the previous year period. There were no sales of investments during the three month periods ended September 30, 2015 and 2014.

 

Non-interest Expense

 

Non-interest expense decreased $104,000 or 4.8% and totaled $2.1 million for the three months ended September 30, 2015 compared to $2.2 million for the same period in 2014. Employee compensation and benefits decreased $98,000 or 7.1% to $1.3 million for the quarterly period, primarily due to lower expense to the Company’s defined benefit pension plan. The Company participates in a multiple-employer pension plan and has benefited from changes in the pension funding requirement laws. Contributions to the defined benefit pension plan totaled $151,000 and $226,000 for the three months ended September 30, 2015 and 2014, respectively. Foreclosure and REO expenses, net decreased $25,000 or 47.2% to $28,000 for the quarter just ended primarily due to reduced foreclosure activity and lower levels of REO period to period. Somewhat offsetting the decreased expenses were increases in legal fees and occupancy and equipment costs. Legal fees increased $22,000 or 314.3% to $29,000 for the quarter ended September 30, 2015, due to the Company’s attempt to merge its two banks, an event that is not expected to recur. Occupancy and equipment costs increased $17,000 or 13.0% to $148,000 for the quarter recently ended due chiefly to repairs made to aging facilities. The Company expects occupancy and equipment costs to increase in the future as recently-purchased buildings are placed in service. First Federal of Frankfort purchased a building which will enable it to expand service capabilities to east Frankfort customers, while First Federal of Hazard purchased facilities which are expected to increase service to Perry and surrounding counties in eastern Kentucky.

 

 

Federal Income Tax Expense

 

Federal income taxes expense decreased $69,000 or 34.0% and totaled $134,000 for the three months ended September 30, 2015, compared to $203,000 in the prior year quarter primarily due to the reversal of a FIN 48 reserve related to a previously received federal tax refund. The effective tax rates were 19.9% and 32.8% for the three-month periods ended September 30, 2015 and 2014, respectively.

 

 

Kentucky First Federal Bancorp

 

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

 

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

 

ITEM 4: Controls and Procedures

 

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

 

The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended September 30, 2015, in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Kentucky First Federal Bancorp

 

PART II

 

ITEM 1.

Legal Proceedings

 

None.

 

ITEM 1A.

Risk Factors

 

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

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)         The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended September 30, 2015.

 

										Total # of
						Average				shares purchased				Maximum # of shares
		Total				price paid				as part of publicly				that may yet be
		# of shares				per share				announced plans				purchased under
Period		Purchased				(incl commissions)				or programs				the plans or programs
July 1-31, 2015			—			$	—				—				60,323
August 1-31, 2015			—			$	—				—				60,323
September 1-30, 2015			—			$	—				—				60,323

 

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

 

ITEM 3.

Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.

Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5.

Other Information

 

None.

 

ITEM 6.

Exhibits

 

3.11

Charter of Kentucky First Federal Bancorp

3.21

Bylaws of Kentucky First Federal Bancorp, as amended and restated

4.11

Specimen Stock Certificate of Kentucky First Federal Bancorp

31.1

CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0

The following materials from Kentucky First Federal Bancorp’s Quarterly Report

 

On Form 10-Q for the quarter ended September 30, 2015 formatted in Extensivle Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Sttements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 ______________

(1)

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

 

 

Kentucky First Federal Bancorp

 

SIGNATURES

 

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

 

			KENTUCKY FIRST FEDERAL BANCORP
Date:	November 16, 2015		By:	/s/ Don D. Jennings
				Don D. Jennings
				Chief Executive Officer
Date:	November 16, 2015		By:	/s/ R. Clay Hulette
				R. Clay Hulette
				Vice President and Chief Financial Officer