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EX-32.2 - CERTIFICATION - Kentucky First Federal Bancorpf10q0320ex32-2_kentucky.htm
EX-32.1 - CERTIFICATION - Kentucky First Federal Bancorpf10q0320ex32-1_kentucky.htm
EX-31.2 - CERTIFICATION - Kentucky First Federal Bancorpf10q0320ex31-2_kentucky.htm
EX-31.1 - CERTIFICATION - Kentucky First Federal Bancorpf10q0320ex31-1_kentucky.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2020

 

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
incorporation or organization)   Identification No.)

 

655 Main Street, Hazard, Kentucky 41702

(Address of principal executive offices)(Zip Code)

 

(502) 223-1638

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
Common Stock, $0.01 par value per share   KFFB   The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-Accelerated filer   Smaller Reporting Company
      Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At May 12, 2020, the latest practicable date, the Corporation had 8,262,215 shares of $.01 par value common stock outstanding.

 

 

 

 

 

 

INDEX

 

      Page
PART I - FINANCIAL INFORMATION 1
       
ITEM 1 FINANCIAL STATEMENTS  
       
    Condensed Consolidated Balance Sheets 1
       
    Condensed Consolidated Statements of Income 2
       
    Condensed Consolidated Statements of Comprehensive Income 3
       
    Consolidated Statements of Changes in Shareholders’ Equity 4
       
    Condensed Consolidated Statements of Cash Flows 6
       
    Notes to Condensed Consolidated Financial Statements 8
       
  ITEM 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
       
  ITEM 3  Quantitative and Qualitative Disclosures About Market Risk 41
       
  ITEM 4 Controls and Procedures 41
       
PART II - OTHER INFORMATION 42
       
SIGNATURES 44

 

i

 

  

PART I

 

ITEM 1: Financial Statements

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   March 31,   June 30, 
   2020   2019 
ASSETS        
         
Cash and due from financial institutions  $1,663   $1,870 
Interest-bearing demand deposits   15,362    7,991 
Cash and cash equivalents   17,025    9,861 
           
Time deposits in other financial institutions   2,723    6,962 
Securities available-for-sale   545    1,045 
Securities held-to-maturity, at amortized cost- approximate fair value of $641 and $775 at March 31, 2020 and June 30, 2019, respectively   625    775 
Loans held for sale   560     
Loans, net of allowance of $1,448 and $1,456 at March 31, 2020 and June 30, 2019, respectively   278,639    280,969 
Real estate owned, net   748    710 
Premises and equipment, net   4,979    5,028 
Federal Home Loan Bank stock, at cost   6,498    6,482 
Accrued interest receivable   712    758 
Bank-owned life insurance   2,576    2,518 
Goodwill   14,507    14,507 
Prepaid federal income taxes   88    266 
Prepaid expenses and other assets   755    890 
           
Total assets  $330,980   $330,771 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $208,555   $195,836 
Federal Home Loan Bank advances   55,042    66,703 
Advances by borrowers for taxes and insurance   517    763 
Accrued interest payable   33    28 
Deferred federal income taxes   703    701 
Other liabilities   561    462 
Total liabilities   265,411    264,493 
           
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   34,998    35,056 
Retained earnings   33,551    33,867 
Unearned employee stock ownership plan (ESOP), 33,600 shares and 47,607 shares at March 31, 2020 and June 30, 2019, respectively   (336)   (476)
Treasury shares at cost, 333,849 and 266,549 common shares at March 31, 2020 and June 30, 2019, respectively   (2,734)   (2,259)
Accumulated other comprehensive income   4    4 
Total shareholders’ equity   65,569    66,278 
           
Total liabilities and shareholders’ equity  $330,980   $330,771 

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
   2020   2019   2020   2019 
Interest income                
Loans, including fees  $9,401   $8,907   $3,104   $3,013 
Mortgage-backed securities   17    24    6    8 
Other securities   14    7    3    3 
Interest-bearing deposits and other   364    478    92    168 
Total interest income   9,796    9,416    3,205    3,192 
                     
Interest expense                    
Interest-bearing demand deposits   16    18    5    6 
Savings   154    163    51    53 
Certificates of Deposit   1,654    1,255    572    448 
Deposits   1,824    1,436    628    507 
Borrowings   927    906    254    338 
Total interest expense   2,751    2,342    882    845 
Net interest income   7,045    7,074    2,323    2,347 
Provision for loan losses   64    11         
Net interest income after provision for loan losses   6,981    7,063    2,323    2,347 
                     
Non-interest income                    
Earnings on bank-owned life insurance   58    56    20    19 
Net gain on sales of loans   75    29    35    9 
Net gain (loss) on sales of real estate owned   6    7    (1)   (5)
Valuation adjustment for real estate owned   (36)   (54)   (12)    
Other   130    155    39    58 
Total non-interest income   233    193    81    81 
Non-interest expense                    
Employee compensation and benefits   4,168    4,369    1,400    1,452 
Occupancy and equipment   420    506    141    171 
Voice and data communications   128    187    28    54 
Advertising   133    172    41    41 
Outside service fees   137    114    43    42 
Data processing   388    330    149    116 
Auditing and accounting   151    76    52    10 
Franchise and other taxes   194    191    65    65 
Foreclosure and real estate owned expenses (net)   57    78    17    18 
Other   540    604    170    204 
Total non-interest expense   6,316    6,627    2,106    2,173 
                     
Income before income taxes   898    629    298    255 
                     
Federal income tax expense   176    117    58    48 
                     
NET INCOME  $722   $512   $240   $207 
                     
EARNINGS PER SHARE                    
Basic and diluted  $0.09   $0.06   $0.03   $0.02 
DIVIDENDS PER SHARE  $0.30   $0.30   $0.10   $0.10 

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
   2020   2019   2020   2019 
                 
Net income  $722   $512   $240   $207 
                     

Other comprehensive income, net of tax:

                    

Unrealized holding gains on securities designated as available-for-sale, net of taxes of $0, $1, $0 and $0 during the respective periods

       2    1    1 
Comprehensive income  $722   $514   $241   $208 

  

See accompanying notes to condensed consolidated financial statements.

 

3

 

  

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the nine months ended

(Dollar amounts in thousands, except per share data)

 

March 31, 2020

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at June 30, 2019  $86   $35,056   $33,867   $(476)  $(2,259)  $    4   $66,278 
                                    
Net income           722                722 
Allocation of ESOP shares       (58)       140            82 
Acquisition of shares for Treasury                   (475)       (475)
Cash dividends of $0.30 per common share           (1,038)               (1,038)
                                    
Balance at March 31, 2020  $86   $34,998   $33,551   $(336)  $(2,734)  $4   $65,569 

  

March 31, 2019

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at June 30, 2018  $86   $35,085   $34,050   $(663)  $(1,355)  $   –   $67,203 
                                    
Net income           512                512 
Allocation of ESOP shares       (29)       140            111 
Acquisition of shares for treasury                   (674)       (674)
Change in accounting method           441                441 
Other comprehensive income                       2    2 
Cash dividends of $0.30 per common share           (1,087)               (1,087)
                                    
Balance at March 31, 2019  $86   $35,056   $33,916   $(523)  $(2,029)  $2   $66,508 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

  

Kentucky First Federal Bancorp

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended

(Dollar amounts in thousands, except per share data)

 

March 31, 2020

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at December 31, 2019  $86   $35,011   $33,663   $(383)  $(2,571)  $3   $65,809 
                                    
Net income           240                240 
Allocation of ESOP shares       (13)       47            34 
Acquisition of shares for Treasury                   (163)       (163)
Other comprehensive income                       1    1 
Cash dividends of $0.10 per common share           (352)               (352)
                                    
Balance at March 31, 2020  $86   $34,998   $33,551   $(336)  $(2,734)  $4   $65,569 

  

March 31, 2019

 

               Unearned             
               employee             
               stock       Accumulated     
       Additional       ownership       other     
   Common   paid-in   Retained   plan   Treasury   comprehensive     
   stock   capital   earnings   (ESOP)   shares   income   Total 
                             
Balance at December 31, 2018  $86   $35,056   $34,078   $(569)  $(1,842)  $     1   $66,810 
                                    
Net income           207                207 
Allocation of ESOP shares               46            46 
Acquisition of shares for treasury                   (187)       (187)
Other comprehensive income                       1    1 
Cash dividends of $0.10 per common share           (369)               (369)
                                    
Balance at March 31, 2019  $86   $35,056   $33,916   $(523)  $(2,029)  $2   $66,508 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Nine months ended 
   March 31, 
   2020   2019 
         
Cash flows from operating activities:        
Net income  $722   $512 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   205    220 
Accretion of purchased loan credit discount   (83)   (61)
Amortization of purchased loan premium   8    9 
Amortization of deferred loan origination costs (fees)   70    56 
Amortization of premiums on investment securities   6    6 
Net gain on sale of loans   (75)   (29)
Net gain on sale of real estate owned   (6)   (7)
Valuation adjustments of real estate owned   36    54 
ESOP compensation expense   82    111 
Earnings on bank-owned life insurance   (58)   (56)
Provision for loan losses   64    11 
Origination of loans held for sale   (2,655)   (821)
Proceeds from loans held for sale   2,170    850 
Increase (decrease) in cash, due to changes in:          
Accrued interest receivable   46    (39)
Prepaid expenses and other assets   135    109 
Accrued interest payable   5    7 
Other liabilities   99    (152)
Federal income taxes   180    15 
Net cash provided by operating activities   951    795 
           
Cash flows from investing activities:          
Purchase of available-for-sale securities       (501)
Purchase of time deposits in other financial institutions   (2,500)   (1,486)
Maturities of time deposits in other financial institutions   6,739    2,226 
Securities maturities, prepayments and calls:          
Held to maturity   144    187 
Available for sale   500    4 
Purchase of FHLB stock   (16)    
Loans originated for investment, net of principal collected   2,062    (1,423)
Proceeds from sale of real estate owned   180    80 
Additions to real estate owned   (39)   (98)
Additions to premises and equipment, net   (156)   (55)
Net cash provided by (used in) investing activities   6,914    (1,066)
           
Cash flows from financing activities:          
Net increase (decrease) in deposits   12,719    (417)
Payments by borrowers for taxes and insurance, net   (246)   (287)
Proceeds from Federal Home Loan Bank advances   13,800    23,200 
Repayments on Federal Home Loan Bank advances   (25,461)   (20,214)
Treasury stock purchased   (475)   (674)
Dividends paid on common stock   (1,038)   (1,087)
Net cash provided by (used in) financing activities   (701)   521 
           
Net increase in cash and cash equivalents   7,164    250 
           
Beginning cash and cash equivalents   9,861    9,943 
           
Ending cash and cash equivalents  $17,025   $10,193 

 

See accompanying notes to condensed consolidated financial statements.

6

 

 

Kentucky First Federal Bancorp

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(In thousands)

 

   Nine months ended 
   March 31, 
   2020   2019 
         
Supplemental disclosure of cash flow information:        
Cash paid during the period for:        
Federal income taxes  $   $100 
           
Interest on deposits and borrowings  $2,746   $2,335 
           
Transfers of loans to real estate owned, net  $304   $262 
           
Loans made on sale of real estate owned  $95   $214 

 

See accompanying notes to condensed consolidated financial statements.

 

7

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(unaudited)

 

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

 

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

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements, which represent the condensed 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 condensed consolidated financial statements have been included. The results of operations for the nine-month period ended March 31, 2020, are not necessarily indicative of the results which may be expected for an entire fiscal year. The condensed consolidated balance sheet as of June 30, 2019 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 condensed 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 2019 filed with the Securities and Exchange Commission.

 

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

 

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

 

8

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

1. Basis of Presentation (continued)

  

New Accounting Standards

 

FASB ASC 326 - In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The Company will now use forward-looking information to enhance its credit loss estimates. The amendment requires enhanced disclosures to aid investors and other users of financial statements to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of our portfolio. The largest impact to the Company will be on its allowance for loan and lease losses, although the ASU also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard is effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2019. However, the FASB has delayed the implementation of the ASU for smaller reporting companies until years beginning after December 15, 2022, or in the Company’s case the fiscal year beginning July 1, 2023.  ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective transition approach is required for these debt securities. We have formed a functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. However, the Company does expect ASU 2016-13 to add complexity and costs to its current credit loss evaluation process.

 

FASB ASC 842 – In March 2017, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance changes lease accounting by introducing the core principle that a lessee should recognize the assets and liabilities that arise from operating leases under the premise that all leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements. The Company adopted this ASU effective July 1, 2019, with no recordation of right-to-use lease assets or operating lease liabilities, because the level of operating leases was determined to be immaterial.

 

FASB ASC 350 – In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. This guidance modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. For public business entities, the amendments in this update are effective for fiscal years, and the interim periods within those fiscal years, beginning after December 15, 2019, or July 1, 2020, with respect to the Company.

  

FASB ASC 820 – In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This guidance reduces the level of detail surrounding the processes used by the Company in determining the fair value of some of its assets. For public business entities, the amendments in this update are effective for fiscal years, and the interim periods within those fiscal years, beginning after December 15, 2019, or July 1, 2020, with respect to the Company.

 

9

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

1. Basis of Presentation (continued)

 

New Accounting Standards (continued)

 

FASB ASC 740– In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes during interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, or July 1, 2021, with respect to the Company. Early adoption is permitted. We do not anticipate a significant impact to our consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

2. Earnings Per Share

 

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

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
(in thousands)  2020   2019   2020   2019 
Net income allocated to common shareholders, basic and diluted  $722   $512   $240   $207 

 

   Nine months ended
March 31,
   Three months ended
March 31,
 
   2020   2019   2020   2019 
Weighted average common shares outstanding, basic and diluted   8,259,807    8,348,242    8,246,574    8,319,122 

  

There were no stock option shares outstanding for the nine- or three-month periods ended March 31, 2020 and 2019.

 

10

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

3. Investment Securities

 

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at March 31, 2020 and June 30, 2019, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:

 

   March 31, 2020 
(in thousands)  Amortized
cost
   Gross
unrealized/
unrecognized
gains
   Gross
unrealized/
unrecognized
losses
   Estimated
fair value
 
                 
Available-for-sale Securities                
Agency mortgage-backed: residential  $39   $         –   $         –   $39 
Agency bonds   501    5        506 
   $540   $5   $   $545 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $625   $19   $3   $641 

 

   June 30, 2019 
(in thousands)  Amortized
cost
   Gross
unrealized/
unrecognized
gains
   Gross
unrealized/
unrecognized
losses
   Estimated
fair value
 
                 
Available-for-sale Securities                
U.S. Treasury securities  $496   $         1   $       –   $497 
Agency bonds   501    4        505 
Agency mortgage-backed: residential   43            43 
   $1,040   $5   $   $1,045 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $775   $14   $14   $775 

 

The amortized cost and fair market value of securities as of March 31, 2020, 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 securities, are not shown.

 

(in thousands)  Amortized Cost   Fair Value 
Available for sale:        
Within one year  $      500   $506 

 

11

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

3. Investment Securities (continued)

 

Our pledged securities (including overnight and time deposits in other financial institutions) totaled $1.9 million and $2.0 million at March 31, 2020 and June 30, 2019, respectively.

 

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 mortgage backed securities, 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.

 

4. Loans receivable

 

The composition of the loan portfolio was as follows:

  

   March 31,   June 30, 
(in thousands)  2020   2019 
         
Residential real estate        
One- to four-family  $217,808   $216,066 
Multi-family   12,251    15,928 
Construction   4,450    3,757 
Land   1,189    852 
Farm   2,227    3,157 
Nonresidential real estate   31,052    30,419 
Commercial nonmortgage   1,199    2,075 
Consumer and other:          
Loans on deposits   1,287    1,415 
Home equity   7,822    8,214 
Automobile   67    91 
Unsecured   735    451 
    280,087    282,425 
Allowance for loan losses   (1,448)   (1,456)
   $278,639   $280,969 

  

12

 

   

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2020:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                    
One- to four-family  $685   $59   $(65)  $               1   $680 
Multi-family   200    (31)           169 
Construction   6    1            7 
Land   1    1            2 
Farm   6    (2)           4 
Nonresidential real estate   336    32            368 
Commercial nonmortgage   5    (2)           3 
Consumer and other:                         
Loans on deposits   3    (1)           2 
Home equity   14    (2)           12 
Automobile       8    (8)        
Unsecured       1            1 
Unallocated   200                200 
Totals  $1,456   $64   $(73)  $1   $1,448 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                    
One- to four-family  $684   $(5)  $     –   $     1   $680 
Multi-family   172    (3)           169 
Construction   6    1            7 
Land   2                2 
Farm   4                4 
Nonresidential real estate   361    7            368 
Commercial nonmortgage   4    (1)           3 
Consumer and other:                         
Loans on deposits   2                2 
Home equity   11    1            12 
Automobile                    
Unsecured   1                1 
Unallocated   200                200 
Totals  $1,447   $   $   $1   $1,448 

  

13

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2019:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                    
One- to four-family  $795   $     27   $(117)  $     39   $744 
Multi-family   225    (9)           216 
Construction   8    (4)           4 
Land   1                1 
Farm   6    (1)           5 
Nonresidential real estate   321    20            341 
Commercial nonmortgage   3                3 
Consumer and other:                         
Loans on deposits   3                3 
Home equity   13    (1)           12 
Automobile                    
Unsecured   1    (21)       20     
Unallocated   200                200 
Totals  $1,576   $11   $(117)  $59   $1,529 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019:

 

(in thousands)  Beginning
balance
   Provision for
loan losses
   Loans
charged off
   Recoveries   Ending
balance
 
                     
Residential real estate:                    
One- to four-family  $734   $10   $    --   $       --   $744 
Multi-family   220    (4)           216 
Construction   3    1            4 
Land   1                1 
Farm   5                5 
Nonresidential real estate   346    (5)           341 
Commercial nonmortgage   3                3 
Consumer and other:                         
Loans on deposits   3                3 
Home equity   13    (1)           12 
Automobile                    
Unsecured   1    (1)            
Unallocated   200                200 
Totals  $1,529   $   $   $   $1,529 

 

14

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of March 31, 2020. The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

March 31, 2020:                        
                         
(in thousands)  Loans
individually
evaluated
   Loans
acquired
with
deteriorated
credit
quality
   Unpaid
principal
balance
and
recorded
investment
   Ending
allowance
attributed
to loans
   Unallocated
allowance
   Total
allowance
 
Loans individually evaluated for impairment:                        
Residential real estate:                        
One- to four-family  $3,894   $768   $4,662   $   $      –   $ 
Multi-family   677        677             
Farm   310        310             
Nonresidential real estate   713        713             
    5,594    768    6,362             
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $213,146   $680   $   $680 
Multi-family             11,574    169        169 
Construction             4,450    7        7 
Land             1,189    2        2 
Farm             1,917    4        4 
Nonresidential real estate             30,339    368        368 
Commercial nonmortgage             1,199    3        3 
Consumer:                              
Loans on deposits             1,287    2        2 
Home equity             7,822    12        12 
Automobile             67             
Unsecured             735    1        1 
Unallocated                     200    200 
              273,725    1,248    200    1,448 
             $280,087   $1,248   $200   $1,448 

   

15

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(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, 2019.

 

June 30, 2019:                        
                         
(in thousands)  Loans
individually
evaluated
   Loans
acquired
with
deteriorated
credit
quality
   Unpaid
principal
balance
and
recorded
investment
   Ending
allowance
attributed
to loans
   Unallocated
allowance
   Total
allowance
 
Loans individually evaluated for impairment:                        
Residential real estate:                        
One- to four-family  $3,837   $949   $4,786   $   $   $ 
Multi-family   685        685             
Farm   309        309             
Nonresidential real estate   683        683             
    5,514    949    6,463             
                               
Loans collectively evaluated for impairment:                              
Residential real estate:                              
One- to four-family            $210,595   $685   $   $685 
Multi-family             15,928    200        200 
Construction             3,757    6        6 
Land             852    1        1 
Farm             2,848    6        6 
Nonresidential real estate             29,736    336        336 
Commercial nonmortgage             2,075    5        5 
Consumer:                              
Loans on deposits             1,415    3        3 
Home equity             8,214    14        14 
Automobile             91             
Unsecured             451             
Unallocated                     200    200 
              275,962    1,256    200    1,456 
             $282,425   $1,256   $200   $1,456 

 

16

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

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

   

(in thousands)  Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
   2020   2019 
With no related allowance recorded:                        
Residential real estate:                        
One- to four-family  $3,866   $74   $74   $3,900   $120   $120 
Multi-family   681    25    25             
Farm   310    11    11    310         
Nonresidential real estate   698    23    23    399    28    28 
Purchased credit-impaired loans   859    60    60    1,035    45    45 
    6,413    193    193    5,644    193    193 
With an allowance recorded:                              
One- to four-family                        
   $6,413   $193   $193   $5,644   $193   $193 

 

The following table presents interest income on loans individually evaluated for impairment by class of loans for the three months ended March 31:

 

(in thousands)  Average Recorded Investment   Interest
Income Recognized
   Cash Basis Income Recognized   Average Recorded Investment   Interest
Income
Recognized
   Cash Basis Income Recognized 
   2020   2019 
With no related allowance recorded:                        
Residential real estate:                        
One- to four-family  $3,951   $12   $12   $4,577   $45   $45 
Multi-family   680    8    8             
Farm   310    6    6    310         
Nonresidential real estate   717    9    9    686    14    14 
Purchased credit-impaired loans   846    25    25    963    9    9 
    6,503    60    60    6,536    68    68 
With an allowance recorded:                              
One- to four-family                        
   $6,503   $60   $60   $6,536   $68   $68 

 

17

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2020 and June 30, 2019:

 

   March 31, 2020   June 30, 2019 
(in thousands)  Nonaccrual  

Loans

Past Due Over
90 Days Still
Accruing

   Nonaccrual   Loans
Past Due Over
90 Days Still
Accruing
 
                 
Residential real estate:                
One- to four-family residential real estate  $4,373   $1,117   $4,545   $1,747 
Multifamily   677        685     
Construction   11             
Farm   310        309     
Nonresidential real estate and land   713    331    683    49 
Commercial and industrial   1        1     
Consumer   5        9     
   $6,090   $1,448   $6,232   $1,796 

  

One- to four-family loans in process of foreclosure totaled $654,000 and $1.2 million at March 31, 2020 and June 30, 2019, respectively.

 

Troubled Debt Restructurings:

 

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Banks would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.”

 

The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. 

 

At March 31, 2020 and June 30, 2019, the Company had $1.8 million and $1.6 million of loans classified as TDRs, respectively. Of the TDRs at March 31, 2020, approximately 22.5% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

During the nine months ended March 31, 2020, the Company had three loans restructured as TDRs. One borrower refinanced a piece of one- to four-family, non-owner occupied, residential property to bring to current amounts owed on other loans with the Bank. Because the borrower’s financial condition had deteriorated, it was unlikely that the borrower could have secured financing elsewhere. The restructured loan is collateralized and cross-collateralized by real estate. Another single family residential borrower filed for Chapter 7 bankruptcy protection and did not reaffirm the debt personally, although the Company’s collateral position remains intact. Finally, a first and second mortgage on an 8-plex were refinanced into a single loan with a slightly extended maturity term and a lower interest rate, which was consistent with similarly-priced comparable loans at the time of refinance.

 

During the nine months ended March 31, 2019, the Company had two loans restructured as TDRs. A second mortgage loan of $219,000 was renewed and an additional $30,000 was loaned to a borrower to finish construction of an 8-plex, because construction project had experienced cost overruns. The Company carries the first mortgage on this project and both the primary and secondary loans are secured by the 8-plex and additional real estate collateral. The Company also refinanced an existing single-family mortgage loan and provided additional funds to a borrower attempting to consolidate his debt.

 

18

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

The following table summarizes TDR loan modifications that occurred during the nine months ended March 31, 2020 and 2019, and their performance, by modification type:

 

(in thousands)  Troubled Debt
Restructurings
Performing to
Modified
Terms
   Troubled Debt
Restructurings
Not
Performing to
Modified
Terms
   Total
Troubled Debt
Restructurings
 
             
Nine months ended March 31, 2020            
Residential real estate:            
Terms extended  $     677   $          –   $677 
Terms extended and additional funds advanced  $119   $   $119 
Chapter 7 bankruptcy  $21   $   $21 
                
Nine months ended March 31, 2019               
Residential real estate:               
Terms extended  $324   $   $324 

  

There were no TDR loan modifications during the three months ended March 31, 2020 or 2019. No TDRs defaulted during the nine-month periods ended March 31, 2020 or 2019.

 

19

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

The following table presents the aging of the principal balance outstanding in past due loans as of March 31, 2020, 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  $2,899   $2,605   $5,504   $212,304   $217,808 
Multi-family               12,251    12,251 
Construction   154    11    165    4,285    4,450 
Land               1,189    1,189 
Farm   109    310    419    1,808    2,227 
Nonresidential real estate   659    634    1,293    29,759    31,052 
Commercial non-mortgage               1,199    1,199 
Consumer and other:                         
Loans on deposits               1,287    1,287 
Home equity               7,822    7,822 
Automobile               67    67 
Unsecured   6        6    729    735 
Total  $3,827   $3,560   $7,387   $272,700   $280,087 

  

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2019, by class of loans:

 

(in thousands)  30-89 Days
Past Due
   90 Days or
Greater
Past Due
   Total Past
Due
   Loans Not
Past Due
   Total 
                     
Residential real estate:                    
One-to four-family  $4,021   $3,479   $7,500   $208,566   $216,066 
Multi-family       248    248    15,680    15,928 
Construction   753        753    3,004    3,757 
Land               852    852 
Farm   2        2    3,155    3,157 
Nonresidential real estate   362    49    411    30,008    30,419 
Commercial nonmortgage               2,075    2,075 
Consumer:                         
Loans on deposits               1,415    1,415 
Home equity   38        38    8,176    8,214 
Automobile   8        8    83    91 
Unsecured               451    451 
Total  $5,184   $3,776   $8,960   $273,465   $282,425 

  

20

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of March 31, 2020, 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  
                         
Residential real estate:                        
One- to four-family   $ 209,367     $ 996     $ 7,445     $  
Multi-family     11,574             677        
Construction     4,439             11        
Land     1,189                    
Farm     1,917             310        
Nonresidential real estate     29,017       941       1,094        
Commercial nonmortgage     1,057             142        
Consumer:                                
Loans on deposits     1,287                    
Home equity     7,681       40       101        
Automobile     67                    
Unsecured     730             5        
    $ 268,325     $ 1,977     $ 9,785     $  

 

  

21

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

At June 30, 2019, the risk category of loans by class of loans was as follows:

 

(in thousands)  Pass   Special
Mention
   Substandard   Doubtful 
                 
Residential real estate:                
One- to four-family  $206,489   $894   $8,683   $     – 
Multi-family   15,243        685     
Construction   3,757             
Land   852             
Farm   2,848        309     
Nonresidential real estate   28,990    746    683     
Commercial nonmortgage   1,584        491     
Consumer:                    
Loans on deposits   1,415             
Home equity   8,053    137    24     
Automobile   91             
Unsecured   446        5     
   $269,768   $1,777   $10,880   $ 

 

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 $351,000 and $351,000 at March 31, 2020 and June 30, 2019, respectively, is as follows:

 

(in thousands)   March 31,
2020
    June 30,
2019
 
                 
One- to four-family residential real estate   $        768     $ 949  

 

22

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

4. Loans receivable (continued)

 

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

 

(in thousands)  Nine months
ended
March 31,
2020
   Twelve months
ended
June 30,
2019
 
         
Balance at beginning of period  $544   $634 
Accretion of income   (83)   (90)
Disposals, net of recoveries        
Balance at end of period  $461   $544 

  

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2019, nor for the nine-month period ended March 31, 2020. 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 (exit price) 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 six 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 and agency bonds.

 

23

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

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

 

Impaired Loans

 

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

 

Other Real Estate

 

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

 

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

  

   Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
                 
March 31, 2020                
Agency bonds  $506   $          –   $506   $           – 
Agency mortgage-backed: residential   39        39     
   $545   $   $545   $ 
                     
June 30, 2019                    
U.S. Treasury notes  $497   $   $497   $ 
Agency bonds   505        505     
Agency mortgage-backed: residential   43        43     
   $1,045   $   $1,045   $ 

 

24

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

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

 

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

 

   Fair Value Measurements Using 
(in thousands)  Fair Value   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
                 
March 31, 2020                
Other real estate owned, net                
One- to four-family  $577            –          –   $577 
                     
June 30, 2019                    
Loans                    
One- to four-family  $593   $   $   $593 
                     
Other real estate owned, net                    
One- to four-family  $117   $   $   $117 

 

There were no impaired loans, which was measured using the fair value of the collateral for collateral-dependent loans, at March 31, 2020, and seven impaired loans at June 30, 2019. Amounts charged off were $9,000 for the nine-month period ended March 31, 2020 and $23,000 off for the nine-month period ended March 31, 2019.

 

Other real estate owned was written down $36,000 and $12,000 during the nine- and three-months ended March 31, 2020. Other real estate owned measured at fair value less costs to sell, had a carrying amount of $577,000 and $117,000 at March 31, 2020 and June 30, 2019, respectively. Other real estate owned was written down $54,000 and $0 during the nine- and three-month periods ended March 31, 2019, respectively.

 

25

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

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

  

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2020 and June 30, 2019:

 

                  Range
    Fair Value     Valuation   Unobservable   (Weighted
March 31, 2020   (in thousands)     Technique(s)   Input(s)   Average)
                   
Foreclosed and repossessed assets:                    
One- to four-family   $         577     Sales comparison approach   Adjustments for differences between comparable sales   -2.7% to 41.2%
(17.9%)

  

                  Range
    Fair Value     Valuation   Unobservable   (Weighted
June 30, 2019   (in thousands)     Technique(s)   Input(s)   Average)
                   
Loans:                  
One- to four-family   $        593     Sales comparison approach   Adjustment for differences between comparable sales   25.3% to -50.6%
(-5.2%)
                     
Foreclosed and repossessed assets:                    
One- to four-family   $ 117     Sales comparison approach   Adjustments for differences between comparable sales   8.6% to 31.0%
(29.0%)

  

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

 

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

 

26

 

 

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

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

 

Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at March 31, 2020 and June 30, 2019 are as follows:

  

          Fair Value Measurements at  
    Carrying     March 31, 2020 Using  
(in thousands)   Value     Level 1     Level 2     Level 3     Total  
Financial assets                              
Cash and cash equivalents   $ 17,025     $ 17,025                     $ 17,025  
Time deposits in other financial institutions     2,723       2,742                       2,742  
Available-for-sale securities     545             $ 545               545  
Held-to-maturity securities     625               641               641  
Loans held for sale     560                     $ 585       585  
Loans receivable - net     278,639                       292,765       292,765  
Federal Home Loan Bank stock     6,498                               n/a  
Accrued interest receivable     712               712               712  
                                         
Financial liabilities                                        
Deposits   $ 208,555     $ 71,275     $ 137,757               209,032  
Federal Home Loan Bank advances     55,042               55,681               55,681  
Advances by borrowers for taxes and insurance     517               517               517  
Accrued interest payable     33               33               33  

 

       Fair Value Measurements at 
   Carrying   June 30, 2019 Using 
(in thousands)  Value   Level 1   Level 2   Level 3   Total 
Financial assets                    
Cash and cash equivalents  $9,861   $9,861             $9,861 
Term deposits in other financial institutions   6,962    6,963              6,963 
Available-for-sale securities   1,045        $1,045         1,045 
Held-to-maturity securities   775         775         775 
Loans receivable – net   280,969             $285,700    285,700 
Federal Home Loan Bank stock   6,482                   n/a 
Accrued interest receivable   758         758         758 
                          
Financial liabilities                         
Deposits  $195,836   $69,944   $123,920        $193,864 
Federal Home Loan Bank advances   66,703         66,719         66,719 
Advances by borrowers for taxes and insurance   763         763         763 
Accrued interest payable   28         28         28 

 

27

 

  

Kentucky First Federal Bancorp

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2020

(unaudited)

 

6. Other Comprehensive Income (Loss)

 

The Company’s other comprehensive income is comprised solely of unrealized gains and losses on available-for-sale securities. The following is a summary of the accumulated other comprehensive income balances, net of tax:

 

   Nine months
ended
March 31,
2020
 
     
Beginning balance  $       4 
Current year change    
Ending balance  $4 

  

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

 

   Nine months ended
March 31,
 
(in thousands)  2020   2019 
         
Unrealized holding gains (losses) on available-for-sale securities  $       --   $            3 
Tax effect       1 
Net-of-tax amount  $   $2 

 

   Three months ended
March 31,
 
(in thousands)  2020   2019 
         
Unrealized holding gains (losses) on available-for-sale securities  $    1   $   2 
Tax effect       1 
Net-of-tax amount  $1   $1 

 

28

 

  

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, the potential effects of the COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic), and the other matters mentioned in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

29

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets

 

The following table represents the average balance sheets for the nine month periods ended March 31, 2020 and 2019, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

  

   Nine Months Ended March 31, 
   2020   2019 
  

Average

Balance

  

Interest

And

Dividends

  

Yield/

Cost

   Average
Balance
   Interest
And Dividends
  

Yield/

Cost

 
   (Dollars in thousands) 
Interest-earning assets:                        
Loans 1  $282,101   $9,401    4.44%  $272,014   $8,907    4.37%
Mortgage-backed securities   727    17    3.12    935    24    3.42 
Other securities   725    14    2.58    364    7    2.56 
Other interest-earning assets   21,992    364    2.21    20,554    478    3.10 
Total interest-earning assets   305,545    9,796    4.27    293,867    9,416    4.27 
                               
Less: Allowance for loan losses   (1,445)             (1,544)          
Non-interest-earning assets   26,080              26,351           
Total assets  $330,180             $318,674           
                               
Interest-bearing liabilities:                              
Demand deposits  $13,982   $16    0.15%  $15,236   $18    0.16%
Savings   50,331    154    0.41    54,767    163    0.40 
Certificates of deposit   130,379    1,654    1.69    122,612    1,255    1.37 
Total deposits   194,692    1,824    1.25    192,615    1,436    0.99 
Borrowings   61,176    927    2.02    51,912    906    2.33 
Total interest-bearing liabilities   255,868    2,751    1.43    244,527    2,342    1.28 
                               
Noninterest-bearing demand deposits   6,430              5,210           
Noninterest-bearing liabilities   1,844              1,866           
Total liabilities   264,142              251,603           
                               
Shareholders’ equity   66,038              67,071           
Total liabilities and shareholders’ equity  $330,180             $318,674           
Net interest spread       $7,045    2.84%       $7,074    3.00%
Net interest margin             3.07%             3.21%
Average interest-earning assets to average interest-bearing liabilities             119.42%             120.18%

 

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

 

30

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Average Balance Sheets (continued)

 

The following table represents the average balance sheets for the three-month periods ended March 31, 2020 and 2019, 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 December 31, 
   2020   2019 
  

Average

Balance

  

Interest

And

Dividends

  

Yield/

Cost

   Average
Balance
  

Interest

And Dividends

  

Yield/

Cost

 
   (Dollars in thousands) 
Interest-earning assets:                        
Loans 1  $281,881   $3,104    4.41%  $273,047   $3,013    4.41%
Mortgage-backed securities   678    6    3.54    879    8    3.64 
Other securities   504    3    2.38    502    3    2.39 
Other interest-earning assets   22,573    92    1.63    20,759    168    3.24 
Total interest-earning assets   305,636    3,205    4.20    295,187    3,192    4.33 
                               
Less: Allowance for loan losses   (1,448)             (1,524)          
Non-interest-earning assets   26,009              26,213           
Total assets  $330,197             $319,876           
                               
Interest-bearing liabilities:                              
Demand deposits  $13,532   $5    0.15%  $14,989   $6    0.16%
Savings   50,021    51    0.41    53,141    53    0.40 
Certificates of deposit   134,874    572    1.70    123,993    448    1.45 
Total deposits   198,427    628    1.27    192,123    507    1.06 
Borrowings   57,304    254    1.77    54,620    338    2.48 
Total interest-bearing liabilities   255,731    882    1.38    246,743    845    1.37 
                               
Noninterest-bearing demand deposits   7,068              4,958           
Noninterest-bearing liabilities   1,586              1,497           
Total liabilities   264,385              253,198           
                               
Shareholders’ equity   65,812              66,678           
Total liabilities and shareholders’ equity  $330,197             $319,876           
Net interest spread       $2,323    2.82%       $2,347    2.96%
Net interest margin             3.04%             3.18%
Average interest-earning assets to average interest-bearing liabilities             119.52%             119.63%

 

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

 

31

 

  

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

  

Discussion of Financial Condition Changes from June 30, 2019 to March 31, 2020

 

Risks and Uncertainties Related to COVID-19- In March 2020 the World Health Organization determined that the spread of a new coronavirus, COVID-19, had risen to such a level as to constitute a worldwide pandemic. The spread of this virus has created a global public health crisis. Uncertainty related to the effects of the virus have disrupted financial markets, activity in all aspects of life including governmental, business and consumer routines and the markets in which the Company operates. In response to the crisis governmental authorities have closed non-essential businesses and required various responses from individuals including stay-at-home restrictions and social distancing. These governmental restrictions, along with a fear of contracting the virus, have resulted in severe reduction of commercial and consumer activity, which is resulting in loss of revenues by businesses, a dramatic spike in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains and market volatility.

 

The federal government has taken several actions designed to mitigate the impact of the economic disruption. Three pieces of legislation that were enacted in March 2020 included emergency funding for federal agencies to respond to the coronavirus outbreak related to developing a vaccine, medical supplies, grants for public health agencies, small business loans, guaranteeing free coronavirus testing, establishing paid leave for employees, enhanced unemployment insurance, expanded food security initiatives and increased Medicaid funding. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, enacted on March 27, 2020, was a $2.0 trillion relief bill responsible for sending $1,200 to Americans making $75,000 or less, adding $600 per week to unemployment benefits for four months, giving $100 billion to hospitals and health providers, making $500 billion of loans or investments to businesses, states and municipalities and $32 billion in grants to the airline industries and more.

 

Management expects the general impact of COVID-19, as well as certain provisions of the CARES Act and other recent legislative and regulatory relief efforts, to have a material impact on the Company’s operations. Because the impact is contingent upon the duration and severity of the economic downturn, management cannot determine or estimate the magnitude of the impact at this time. However, we are disclosing potentially material items of which we are currently aware.

 

Business Continuity, Processes and Controls

As a financial institution, the Banks are considered essential businesses and have remained open for business. We have implemented our pandemic preparedness plan and have maintained regular business hours except for closing for business on Fridays at 4:30 p.m. We continue to offer customer service through drive-thru facilities, automated teller machines, remote deposit capture and online and mobile banking applications. We are offering by-appointment options for transactions requiring in-person contact while maintaining social distancing mandates and surface cleaning protocols. Our staff is practicing recommended personal hygiene protocols and social distancing while working on premises. A small number of employeesare working remotely. We do not face current material resource constraints through the implementation of our pandemic preparedness plan and do not anticipate incurring any material cost related to its implementation. We have not identified any material operational or internal control challenges or risks, nor do we anticipate any significant challenges to our ability to maintain our systems and controls, related to operational changes resulting from implementation of the pandemic preparedness plan.

 

32

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Financial Position and Results of Operations

Bank regulators have issued guidance and are encouraging banks to work with customers affected by COVID-19. Accordingly, we have been actively working with borrowers affected by COVID-19 by offering a payment deferral program providing for either a three-month interest-only period or a full payment deferral for three months. While interest and fees will continue to accrue to income, under normal GAAP accounting if eventual credit losses on these deferred payments emerge, interest and/or fee income accrued may need to be reversed. As a result, interest income in future periods could be negatively impacted. At this time management anticipates that the deferral program will have an immaterial impact to the Company’s financial condition and results of operation, while recognizing that a sustained negative economic impact from COVID-19 could change this assessment, as borrowers’ ability to repay is impacted in future periods.

 

At March 31, 2020 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession resulting from the COVID-19 pandemic could adversely impact the Company’s and the Banks’ capital position and regulatory capital ratios due to a potential increase in credit losses.

 

Lending Operations and Credit Risk

As noted herein the Company is working with its borrowers who are negatively impacted by COVID-19 by offering a payment deferral program. As of May 12, 2020, we had 66 customers under our payment deferral program with a total principal balance of $12.9 million in loans modified.

 

The CARES Act includes a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”) and is designed to aid small- and medium-sized businesses through federally-guaranteed loans disbursed through banks. These loans are intended to provide eight weeks of payroll and other costs to assist those businesses to either remain open or to re-open quickly and allow their workers to pay their bills. First Federal of Kentucky qualified as an SBA lender to assist the small business community in securing this important funding. As of May 12, 2020, First Federal of Kentucky has approved and/or closed with the SBA 30 PPP loans representing $1.1 million in funding. It is our understanding that loans funded through the PPP are fully guaranteed by the United States government. Should those circumstances change, the bank could be required to increase its allowance for loan and lease losses related to these loans resulting in an increase in the provision for loan and lease losses.

 

The Banks are prepared to continue to offer short-term assistance in accordance with regulatory guidelines. Management continues to identify and monitor weaknesses in the loan portfolio resulting from fallout from the pandemic. On a portfolio level, management continues to monitor aggregate exposures to highly sensitive segments such as residential rental properties for changes in asset quality and payment performance. Management also monitors unfunded commitments such as lines of credit and overdraft protection to determine liquidity and funding issues that may arise with our customers. If economic conditions worsen, the Company could need to increase its required allowance for loan losses through additional provisions for loan losses. It is possible that the Company’s asset quality metrics could be materially and adversely impacted in future periods, if the effects of COVID-19 are prolonged.

 

33

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Assets: At March 31, 2020, the Company’s assets totaled $331.0 million, an increase of $209,000, or 0.1%, from total assets at June 30, 2019. This increase was attributed primarily to an increase in cash and cash equivalents and was somewhat offset by decreases in time deposits in other financial institutions and loans, net.

 

Cash and cash equivalents: Cash and cash equivalents increased $7.2 million or 72.6% to $17.0 million at March 31, 2020. Most of the Company’s cash and cash equivalents are held in interest-bearing demand deposits.

 

Time deposits in other financial institutions: Time deposits in other financial institutions decreased by $4.2 million or 60.9% to $2.7 million at March 31, 2020. As short-term time deposits matured the funds were used to repay FHLB advances, reinvested at the highest earning level possible or simply carried as interest-bearing demand deposits.

 

Investment securities: At March 31, 2020, our securities portfolio consisted of an agency bond and mortgage-backed securities. Investment securities decreased $650,000 or 35.7% to $1.2 million at March 31, 2020.

 

Loans: Loans receivable, net, decreased by $2.3 million or 0.8% to $278.6 million at March 31, 2020. 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 March 31, 2020, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $7.5 million, or 2.7% of total loans (including loans purchased in the acquisition), compared to $8.0 million or 2.8%, of total loans at June 30, 2019. The Company’s allowance for loan losses totaled $1.4 million and $1.5 million at March 31, 2020 and June 30, 2019, respectively. The allowance for loan losses at March 31, 2020, represented 19.2% of nonperforming loans and 0.5% of total loans (including loans purchased in the acquisition), while at June 30, 2019, the allowance represented 18.1% of nonperforming loans and 0.5% of total loans.

 

34

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2019 to March 31, 2020 (continued)

 

Non-Performing and Classified Loans: (continued) The Company had $10.5 million in assets classified as substandard for regulatory purposes at March 31, 2020, including loans ($9.8 million), including loans acquired in the CKF Bancorp transaction and real estate owned (“REO”) ($748,000.) Classified loans as a percentage of total loans (including loans acquired) was 3.5% and 3.9% at March 31, 2020 and June 30, 2019, respectively. Of substandard loans, 98.5% were secured by real estate on which the Banks have priority lien position.

  

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

 

(dollars in thousands)   March 31,
2020
    June 30,
2019
 
             
Substandard assets   $ 10,532     $ 11,590  
Doubtful assets            
Loss assets            
Total classified assets   $ 10,532     $ 11,590  

  

At March 31, 2020, the Company’s real estate acquired through foreclosure represented 7.1% of substandard assets compared to 6.1% at June 30, 2019. During the periods presented the Company made loans to facilitate the purchase of its other real estate owned by qualified buyers. During the nine months ended March 31, 2020, the Company sold property with a carrying value of $225,000 for $232,000 gross proceeds before costs to sell, while during the year ended June 30, 2019, property with a carrying value of $193,000 was sold for $206,000 gross proceeds before costs to sell. During the nine months ended March 31, 2020 the Company made three loans totaling $95,000 to facilitate the purchase of its other real estate owned by qualified borrowers, while for the fiscal year ended June 30, 2019 five loans were made totaling $214,000 to facilitate the purchases. Loans to facilitate the sale of other real estate owned, which were included in substandard loans, totaled $23,000 and $136,000 at March 31, 2020 and June 30, 2019, respectively.

 

35

 

  

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2019 to March 31, 2020 (continued)

 

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

 

   March 31, 2020   June 30, 2019 
   Number   Net   Number   Net 
   of   Carrying   of   Carrying 
   Properties   Value   Properties   Value 
                 
One- to four-family   6   $748    7   $710 
Building lot   1        1     
Total REO   7   $748    8   $710 

  

At March 31, 2020 and June 30, 2019, the Company had $2.0 million and $1.8 million of loans classified as special mention, respectively (including loans acquired in the CKF Bancorp transaction on 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.

 

Liabilities: Total liabilities increased $918,000, or 0.3% to $265.4 million at March 31, 2020, primarily as a result of an increase in deposits, which was somewhat offset by a decrease in advances. Deposits increased $12.7 million or 6.5% to $208.6 million at March 31, 2020, while advances decreased $11.7 million or 17.5% to $55.0 million at March 31, 2020.

 

Shareholders’ Equity: At March 31, 2020, the Company’s shareholders’ equity totaled $65.6 million, a decrease of $709,000 or 1.1% from the June 30, 2019 total. The change in shareholders’ equity was primarily associated with common shares purchased by the Company to hold as treasury shares, and net profits for the period less dividends paid on common stock.

 

36

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Discussion of Financial Condition Changes from June 30, 2019 to March 31, 2020 (continued)

 

The Company paid dividends of $1.0 million or 143.8% of net income for the nine-month period just ended. On July 2, 2019, the members of First Federal MHC for the seventh 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 it did not object to the 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 calendar quarter of 2020. 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, 2019 for additional discussion regarding dividends.

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2020 and 2019

 

General

 

Net income totaled $722,000 or $0.09 diluted earnings per share for the nine months ended March 31, 2020, an increase of $210,000 or 41.0% from net income of $512,000 for the same period in 2019.

 

Net Interest Income

 

Net interest income before provision for loan losses decreased $29,000 or 0.4% to $7.0 million for the nine-month period just ended. Interest income increased by $380,000, or 4.0%, to $9.8 million, while interest expense increased $409,000 or 17.5% to $2.8 million for the nine months ended March 31, 2020.

 

Interest income on loans increased $494,000 or 5.5% to $9.4 million, due primarily to an increase in the average volume of the loan portfolio. The average balance of the loan portfolio increased $10.1 million or 3.7% to $282.1 million for the nine-month period ended March 31, 2020, while the rate earned on the loan portfolio increased 8 basis points to 4.44%. Interest income on mortgage-backed securities decreased $7,000 or 29.2% to $17,000 for the nine-month period just ended due to lower asset levels and lower yields earned. Interest income from other securities increased $7,000 to $14,000 for the recently-ended period due primarily to a higher average volume of other securities period to period. Interest income from interest-bearing deposits and other decreased $114,000 or 23.8% to $364,000 for the nine months just ended primarily due to a decrease in the average rate earned, which decreased 89 basis points to 2.21% for the recently-ended period compared to the period a year ago.

 

37

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2020 and 2019 (continued)

 

Interest expense on deposits increased $388,000 or 27.0% to $1.8 million for the nine months ended March 31, 2020, while interest expense on borrowings increased $21,000 or 2.3% to $927,000 for the same period. The increase in interest expense on deposits was attributed primarily to an increase in the average rate paid on deposits, which increased 26 basis points to 1.25% for the recently ended period. The average balance of deposits increased $2.1 million or 1.1% to $194.7 million for the most recent period. The increase in interest expense on borrowings was attributed to higher average borrowings outstanding, as the average rate on those borrowings decreased period to period. The average balance of borrowings outstanding increased $9.3 million or 17.9% to $61.2 million for the recently ended nine-month period, while the average rate paid on borrowings decreased 31 basis points to 2.02% for the most recent period.

 

Net interest spread decreased from 3.00% for the prior year quarterly period to 2.84% for the nine-month period ended March 31, 2020.

 

Provision for Losses on Loans

 

The Company recorded an $64,000 provision for losses on loans during the nine months ended March 31, 2020, compared to a provision of $11,000 for the nine months ended March 31, 2019.

 

Non-interest Income

 

Non-interest income increased $40,000 or 20.7% to $233,000 for the nine months ended March 31, 2020, compared to the prior year period, primarily because of an increase in net gains on sales of loans and a decrease in valuation adjustment for REO. Net gain on sales of loans increased $46,000 or 158.6% to $75,000 for the recently-ended nine-month period over the prior year amount, while valuation adjustment for REO decreased $18,000 or 33.3% to $36,000. Somewhat offsetting these primary sources of increases in non-interest income was a decrease in other non-interest income, which decreased $24,000 or 15.5% to $131,000 for the recently-ended period, which was primarily due to a $13,000 gain on sale of assets recognized in the year ago period and decreased servicing fees in the current period. Decreased servicing fees include loan servicing fees, service charges on demand deposits, ATM surcharge fees and miscellaneous operating income.

 

Non-interest Expense

 

Non-interest expense decreased $311,000 or 4.7% and totaled $6.3 million for the nine months ended March 31, 2020, primarily due to cost-saving measures implemented by management.

 

Employee compensation and benefits for the nine months ended March 31, 2020 decreased $201,000 or 4.6% to $4.2 million primarily due to lower contributions to the Company’s Defined Benefit (“DB”) pension plan. DB pension contributions decreased $214,000 or 23.8% to $683,000 for the nine-month period recently ended compared to the prior year period. Lower DB pension contributions are a result of the freeze placed on the plan effective April 1, 2019, which is currently estimated to lower DB costs by $279,000 for the fiscal year ending June 30, 2020 compared to the prior fiscal year. Occupancy and equipment expenses decreased $86,000 or 17.0% to $420,000 for the recently ended nine-month period, as reduced maintenance and repair costs were experienced for both buildings and equipment and depreciation expense declined period to period. Voice and data communications expense decreased $59,000 or 31.6% to $128,000 for the nine months ended March 31, 2020, primarily due to upgraded data connections which provide better connectivity, faster data transfer speeds and a lower overall cost. Other non-interest expense decreased $64,000 or 10.5% to $540,000 primarily as a result of decreased FDIC insurance premiums. FDIC insurance premiums decreased from $63,000 for the nine months ended March 31, 2019 to zero for the recently ended period, because the banks were able to utilize their Small Bank Assessment Credits (“SBAC”) during the period. Because the Banks did not pay surcharges at least once during the credit calculation period (third quarter 2016 through third quarter 2018), the FDIC determined the Banks to be eligible for credits against their insurance premiums when the Deposit Insurance Fund (“DIF”) reserve ratio equals or exceeds 1.38%. The DIF reserve ratio as of June 30, 2019 was 1.40%. The FDIC automatically applies SBACs to offset regular deposit insurance assessments for assessment periods where the DIF reserve ratio is at or above 1.38%. Assessments for the nine months ended March 31, 2020 totaled $63,000. The Banks’ remaining credits as of March 31, 2020 totaled $9,000. The determination on whether credits can be applied in any assessment period can only be made after the FDIC determines the reserve ratio. This information becomes publicly available approximately one month before that quarter’s assessments are paid. Although management expects to be able to utilize the remaining credits going forward, use of the credits is dependent on the DIF exceeding the 1.38% level.

 

Somewhat offsetting the decreases in various non-interest expense items were increases in auditing and accounting, and data processing expenses. Auditing and accounting expenses increased $75,000 or 98.7% to $151,000 for the nine months ended March 31, 2020.  Data processing increased $58,000 or 17.6% to $388,000 for the period just ended as the Company expanded its digital banking platform.

 

38

 

 

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2020 and 2019 (continued)

 

Federal Income Tax Expense

 

Federal income tax expense increased $59,000 or 50.4% to $176,000 for the nine months ended March 31, 2020, compared to the prior year period. The effective tax rates for the nine-month periods ended March 31, 2020 and 2019, were 19.6% and 18.6%, respectively.

 

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2020 and 2019

 

General

 

Net income totaled $240,000 for the three months ended March 31, 2020, an increase of $33,000 or 15.9% from net income of $207,000 for the same period in 2019.

 

Net Interest Income

 

Net interest income before provision for loan losses decreased $24,000 or 1.0% to $2.3 million for the three-month period just ended. Interest income increased by $13,000, or 0.4%, to $3.2 million, while interest expense increased $37,000 or 4.4% to $882,000 for the three months ended March 31, 2020.

 

Interest income on loans increased $91,000 or 3.0% to $3.1 million, due primarily to an increase in the average volume of the loan portfolio. The average balance of the loan portfolio increased $8.8 million or 3.2% to $281.9 million for the three-month period ended March 31, 2020, while the rate earned on the loan portfolio remained unchanged. Interest income on mortgage-backed securities decreased $2,000 to $6,000 for the quarterly period just ended due chiefly to a lower volume of the assets. Interest income from interest-bearing deposits and other decreased $76,000 or 45.2% to $92,000 for the quarter just ended primarily due to a decrease in the average rate earned on those assets, which decreased 161 basis points to 1.6% for the recently-ended quarterly period.

 

Interest expense on deposits increased $121,000 or 23.9% to $628,000 for the three months ended March 31, 2020, while interest expense on borrowings decreased $84,000 or 24.9% to $254,000 for the same period. The increase in interest expense on deposits was attributed primarily to an increase in the average rate paid on deposits, which increased 21 basis points to 1.27% for the recently ended quarter. The Company’s time deposits have increased overall, as new customers choose that particular deposit product and existing customers appear to have moved somewhat from savings and demand deposit accounts to certificates of deposit. The interest in time deposits began in response to the rising interest rate environment, which began in late 2015, but it has continued since the Federal Open Market Committee began reducing interest rates in mid-2019. Certificates of deposit usually bear a higher interest rate than demand deposits. During the three months ended March 31, 2020, average time deposits increased $10.9 million or 8.8% to $134.9 million, while the average cost of time deposits increased 25 basis points to 1.70% for the recently-ended period. The decrease in interest expense on borrowings was attributed to lower average rates paid on those funds, which decreased 71 basis points to 1.77% for the recent quarterly period, as the average outstanding balance increased $2.7 million or 4.9% to $57.3 million for the three months ended March 31, 2020 compared to the prior year quarterly period. Net interest spread decreased from 2.96% for the prior year quarterly period to 2.82% for the quarter ended March 31, 2020.

 

Provision for Losses on Loans

 

The Company recorded no provision for losses on loans during the three months ended March 31, 2020 and 2019.

 

39

 

  

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

 

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2020 and 2019 (continued)

 

Non-interest Income

 

Non-interest income remained constant at $81,000 for the three months ended March 31, 2020 and 2019. Net gain on sales of loans increased $26,000 to $35,000 for the recently-ended quarterly period and was largely offset by valuation adjustment on REO and decreased other non-interest income for the current period. The Company recorded a valuation adjustment for REO of $12,000 during the three months just ended compared to no adjustment in the prior year period and a decrease of $18,000 or 31.0% in other non-interest income period to period was attributed to recognition of a gain of $13,000 on sale of assets recorded in the prior year period which did not reoccur in the recently-ended period.

 

Non-interest Expense

 

Non-interest expense decreased $67,000 or 3.1% and totaled $2.1 million for the three months ended March 31, 2020, primarily due to decreases in employee compensation and benefits, occupancy and equipment, voice and data communications and other non-interest expenses.

 

Employee compensation and benefits for the three months ended March 31, 2020 decreased $52,000 or 3.6% to $1.4 million primarily due to lower contributions to the Company’s Defined Benefit (“DB”) pension plan. DB pension contributions decreased $66,000 or 20.7% to $252,000 for the three-month period recently ended compared to the prior year period due to factors described above. Occupancy and equipment expenses decreased $30,000 or 17.6% to $141,000 for the recently ended three-month period, as reduced maintenance and repair costs were experienced for both buildings and equipment and depreciation expense declined period to period. Voice and data communications expenses decreased $26,000 or 48.1% to $28,000 for the recently ended period primarily due to upgraded data connections which provide better connectivity, faster data transfer speeds and a lower overall cost. Other non-interest expense decreased $34,000 or 16.7% to $170,000 primarily as a result of decreased FDIC insurance premiums. FDIC insurance premiums decreased from $21,000 for the three months ended March 31, 2019, to zero for the recently ended period, because the banks were able to utilize their SBAC during the period.

 

Somewhat offsetting the decreases in various non-interest expense items were increases in auditing and accounting and data processing expenses. Auditing and accounting expenses increased $42,000 to $52,000 for the quarter ended March 31, 2020, due to higher cost accruals during the period. Data processing increased $33,000 or 28.4% to $149,000 for the quarter just ended as the Company expanded its digital banking platform.

 

Federal Income Tax Expense

 

The Company recorded a federal income tax expense of $58,000 and $48,000 for the three months ended March 31, 2020 and 2019, respectively.  The effective tax rates for the quarterly periods ended March 31, 2020 and 2019, were 19.5% and 18.8%, respectively.

 

40

 

 

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 effectiveness of 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 for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2020 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.

 

41

 

 

Kentucky First Federal Bancorp

 

PART II

 

ITEM 1. Legal Proceedings

 

None.

 

ITEM 1A. Risk Factors

 

The information below updates, and should be read in conjunction with, the risk factors disclosed in Part I, “Item 1A- Risk Factors” in the Form 10-K for the year ended June 30, 2019 that we filed with the Securities and Exchange Commission on September 30, 2019. These risk factors could materially affect our business, financial condition or future results. The risks described are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Except as presented below, there have been no material changes in the risk factors as discussed in our Form 10-K.

 

The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.

 

In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.

 

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the coronavirus pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.

 

Disruptions to our customers could result in increased risk of delinquencies, defaults, and foreclosures and losses on our loans. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.

 

The outbreak of COVID-19 and the US federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the coronavirus pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business, financial condition and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and results of operations. 

 

42

 

 

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

 

(c) The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended March 31, 2020.

  

Period  Total # of
shares
purchased
   Average
price paid
per share
(incl
commissions)
   Total # of
shares
purchased
as part of
publicly
announced
plans or
programs
   Maximum #
of shares
that may
yet be
purchased
under the
plans or
programs
 
                 
January 1-31, 2020      $        54,700 
February 1-29, 2020      $        54,700 
March 1-31, 2020   25,800   $6.31    25,800    28,900 

     

(1) On December 19, 2018, the Company announced that it had substantially completed its program initiated on January 16, 2014 to repurchase of up to 150,000 shares of its common stock and that it was initiating a new stock repurchase plan in which the Board of Directors authorized the purchase 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
3.22 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 March 31, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows: and (v) the related Notes.

 

(1)Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No. 333-119041).
(2)Incorporated herein by reference to the Company’s Current Report on Form 8-K filed August 25, 2017 (File No. 0-51176).

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Kentucky First Federal Bancorp

 

SIGNATURES

  

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

   

    KENTUCKY FIRST FEDERAL BANCORP
       
Date: May 14, 2020   By: /s/ Don D. Jennings
      Don D. Jennings
      Chief Executive Officer
       
Date: May 14, 2020   By: /s/ R. Clay Hulette
     

R. Clay Hulette

Vice President and Chief Financial Officer

 

 

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