Kentucky First Federal Bancorp 10-Q for FY2020 Q2
Kentucky First Federal Bancorp (KFFB)
About this 10-Q
Kentucky First Federal Bancorp filed this 10-Q on February 14, 2020, covering the quarter ended December 31, 2019 (FY2020 Q2).
Headline figures
Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $248K
- up 48.5% from net income of $167K a year earlier
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 December 31, 2019
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 shall 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 February 12, 2020, the latest practicable date, the Corporation had 8,288,015 shares of $.01 par value common stock outstanding.
INDEX
i
Kentucky First Federal Bancorp
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
| December 31, | June 30, | |||||||
| 2019 | 2019 | |||||||
| ASSETS | ||||||||
| Cash and due from financial institutions | $ | 1,499 | $ | 1,870 | ||||
| Interest-bearing demand deposits | 10,385 | 7,991 | ||||||
| Cash and cash equivalents | 11,884 | 9,861 | ||||||
| Time deposits in other financial institutions | 2,970 | 6,962 | ||||||
| Securities available-for-sale | 545 | 1,045 | ||||||
| Securities held-to-maturity, at amortized cost- approximate fair value of $659 and $775 at December 31, and June 30, 2019, respectively | 652 | 775 | ||||||
| Loans held for sale | 251 | – | ||||||
| Loans, net of allowance of $1,447 and $1,456 at December 31, and June 30, 2019, respectively | 281,568 | 280,969 | ||||||
| Real estate owned, net | 766 | 710 | ||||||
| Premises and equipment, net | 5,036 | 5,028 | ||||||
| Federal Home Loan Bank stock, at cost | 6,482 | 6,482 | ||||||
| Accrued interest receivable | 690 | 758 | ||||||
| Bank-owned life insurance | 2,557 | 2,518 | ||||||
| Goodwill | 14,507 | 14,507 | ||||||
| Prepaid federal income taxes | 145 | 266 | ||||||
| Prepaid expenses and other assets | 723 | 890 | ||||||
| Total assets | $ | 328,776 | $ | 330,771 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits | $ | 199,959 | $ | 195,836 | ||||
| Federal Home Loan Bank advances | 61,615 | 66,703 | ||||||
| Advances by borrowers for taxes and insurance | 231 | 763 | ||||||
| Accrued interest payable | 30 | 28 | ||||||
| Deferred federal income taxes | 701 | 701 | ||||||
| Other liabilities | 431 | 462 | ||||||
| Total liabilities | 262,967 | 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 | 35,011 | 35,056 | ||||||
| Retained earnings | 33,663 | 33,867 | ||||||
| Unearned employee stock ownership plan (ESOP), 38,269 shares and 47,607 shares at, December 31, and June 30, 2019, respectively | (383 | ) | (476 | ) | ||||
| Treasury shares at cost, 308,049 and 266,549 common shares at December 31, and June 30, 2019, respectively | (2,571 | ) | (2,259 | ) | ||||
| Accumulated other comprehensive income | 3 | 4 | ||||||
| Total shareholders’ equity | 65,809 | 66,278 | ||||||
| Total liabilities and shareholders’ equity | $ | 328,776 | $ | 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)
| Six months ended December 31, | Three months ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Interest income | ||||||||||||||||
| Loans, including fees | $ | 6,297 | $ | 5,894 | $ | 3,125 | $ | 3,006 | ||||||||
| Mortgage-backed securities | 11 | 16 | 5 | 8 | ||||||||||||
| Other securities | 11 | 4 | 5 | 3 | ||||||||||||
| Interest-bearing deposits and other | 272 | 310 | 128 | 161 | ||||||||||||
| Total interest income | 6,591 | 6,224 | 3,263 | 3,178 | ||||||||||||
| Interest expense | ||||||||||||||||
| Interest-bearing demand deposits | 11 | 12 | 6 | 6 | ||||||||||||
| Savings | 103 | 110 | 51 | 56 | ||||||||||||
| Certificates of Deposit | 1,082 | 807 | 551 | 425 | ||||||||||||
| Deposits | 1,196 | 929 | 608 | 487 | ||||||||||||
| Borrowings | 673 | 568 | 314 | 310 | ||||||||||||
| Total interest expense | 1,869 | 1,497 | 922 | 797 | ||||||||||||
| Net interest income | 4,722 | 4,727 | 2,341 | 2,381 | ||||||||||||
| Provision for loan losses | 64 | 11 | 5 | – | ||||||||||||
| Net interest income after provision for loan losses | 4,658 | 4,716 | 2,336 | 2,381 | ||||||||||||
| Non-interest income | ||||||||||||||||
| Earnings on bank-owned life insurance | 38 | 37 | 19 | 18 | ||||||||||||
| Net gain on sales of loans | 40 | 20 | 34 | 6 | ||||||||||||
| Net gain on sales of real estate owned | 7 | 12 | 7 | 7 | ||||||||||||
| Valuation adjustment for real estate owned | (24 | ) | (54 | ) | (24 | ) | (36 | ) | ||||||||
| Other | 91 | 97 | 42 | 48 | ||||||||||||
| Total non-interest income | 152 | 112 | 78 | 43 | ||||||||||||
| Non-interest expense | ||||||||||||||||
| Employee compensation and benefits | 2,768 | 2,917 | 1,408 | 1,463 | ||||||||||||
| Occupancy and equipment | 279 | 335 | 136 | 165 | ||||||||||||
| Voice and data communications | 100 | 133 | 39 | 68 | ||||||||||||
| Advertising | 92 | 131 | 44 | 64 | ||||||||||||
| Outside service fees | 94 | 72 | 43 | 34 | ||||||||||||
| Data processing | 239 | 214 | 134 | 109 | ||||||||||||
| Auditing and accounting | 99 | 66 | 52 | 32 | ||||||||||||
| Franchise and other taxes | 129 | 126 | 64 | 63 | ||||||||||||
| Foreclosure and real estate owned expenses (net) | 40 | 60 | 6 | 37 | ||||||||||||
| Other | 370 | 400 | 182 | 195 | ||||||||||||
| Total non-interest expense | 4,210 | 4,454 | 2,108 | 2,230 | ||||||||||||
| Income before income taxes | 600 | 374 | 306 | 194 | ||||||||||||
| Federal income tax expense | 118 | 69 | 58 | 27 | ||||||||||||
| NET INCOME | $ | 482 | $ | 305 | $ | 248 | $ | 167 | ||||||||
| EARNINGS PER SHARE | ||||||||||||||||
| Basic and diluted | $ | 0.06 | $ | 0.04 | $ | 0.03 | $ | 0.02 | ||||||||
| DIVIDENDS PER SHARE | $ | 0.20 | $ | 0.20 | $ | 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)
| Six months ended December 31, | Three months ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net income | $ | 482 | $ | 305 | $ | 248 | $ | 167 | ||||||||
| Other comprehensive gains (losses), net of tax: | ||||||||||||||||
| Unrealized holding Gains (losses) on securities designated as available-for-sale, net of taxes of $0, $0, $0 and $1 during the respective periods | (1 | ) | 1 | (1 | ) | 2 | ||||||||||
| Comprehensive income | $ | 481 | $ | 306 | $ | 247 | $ | 169 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
Kentucky First Federal Bancorp
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the six months ended
(Dollar amounts in thousands, except per share data)
December 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, 2019 | $ | 86 | $ | 35,056 | $ | 33,867 | $ | (476 | ) | $ | (2,259 | ) | $ | 4 | $ | 66,278 | ||||||||||||
| Net income | – | – | 482 | – | – | – | 482 | |||||||||||||||||||||
| Allocation of ESOP shares | – | (45 | ) | – | 93 | – | – | 48 | ||||||||||||||||||||
| Acquisition of shares for Treasury | – | – | – | – | (312 | ) | – | (312 | ) | |||||||||||||||||||
| Other comprehensive loss | – | – | – | – | – | (1 | ) | (1 | ) | |||||||||||||||||||
| Cash dividends of $0.20 per common share | – | – | (686 | ) | – | – | – | (686 | ) | |||||||||||||||||||
| Balance at December 31, 2019 | $ | 86 | $ | 35,011 | $ | 33,663 | $ | (383 | ) | $ | (2,571 | ) | $ | 3 | $ | 65,809 | ||||||||||||
December 31, 2018
| 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 | – | – | 305 | – | – | – | 305 | |||||||||||||||||||||
| Allocation of ESOP shares | – | (29 | ) | – | 94 | – | – | 65 | ||||||||||||||||||||
| Acquisition of shares for treasury | – | – | – | – | (487 | ) | – | (487 | ) | |||||||||||||||||||
| Change in accounting method | – | – | 441 | – | – | – | 441 | |||||||||||||||||||||
| Other comprehensive income | – | – | – | – | – | 1 | 1 | |||||||||||||||||||||
| Cash dividends of $0.20 per common share | – | – | (718 | ) | – | – | – | (718 | ) | |||||||||||||||||||
| Balance at December 31, 2018 | $ | 86 | $ | 35,056 | $ | 34,078 | $ | (569 | ) | $ | (1,842 | ) | $ | 1 | $ | 66,810 | ||||||||||||
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)
December 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 September 30, 2019 | $ | 86 | $ | 35,022 | $ | 33,767 | $ | (429 | ) | $ | (2,410 | ) | $ | 4 | $ | 66,040 | ||||||||||||
| Net income | – | – | 248 | – | – | – | 248 | |||||||||||||||||||||
| Allocation of ESOP shares | – | (11 | ) | – | 46 | – | – | 35 | ||||||||||||||||||||
| Acquisition of shares for Treasury | – | – | – | – | (161 | ) | – | (161 | ) | |||||||||||||||||||
| Other comprehensive loss | – | – | – | – | – | (1 | ) | (1 | ) | |||||||||||||||||||
| Cash dividends of $0.10 per common share | – | – | (352 | ) | – | – | – | (352 | ) | |||||||||||||||||||
| Balance at December 31, 2019 | $ | 86 | $ | 35,011 | $ | 33,663 | $ | (383 | ) | $ | (2,571 | ) | $ | 3 | $ | 65,809 | ||||||||||||
December 31, 2018
| Unearned | ||||||||||||||||||||||||||||
| employee | ||||||||||||||||||||||||||||
| stock | Accumulated | |||||||||||||||||||||||||||
| Additional | ownership | other | ||||||||||||||||||||||||||
| Common | paid-in | Retained | plan | Treasury | comprehensive | |||||||||||||||||||||||
| stock | capital | earnings | (ESOP) | shares | income | Total | ||||||||||||||||||||||
| Balance at September 30, 2018 | $ | 86 | $ | 35,085 | $ | 34,264 | $ | (616 | ) | $ | (1,444 | ) | $ | (1 | ) | $ | 67,374 | |||||||||||
| Net income | – | – | 167 | – | – | – | 167 | |||||||||||||||||||||
| Allocation of ESOP shares | – | (29 | ) | – | 47 | – | – | 18 | ||||||||||||||||||||
| Acquisition of shares for treasury | – | – | – | – | (398 | ) | – | (398 | ) | |||||||||||||||||||
| Change in accounting method | – | – | – | – | – | – | – | |||||||||||||||||||||
| Other comprehensive income | – | – | – | – | – | 2 | 2 | |||||||||||||||||||||
| Cash dividends of $0.10 per common share | – | – | (353 | ) | – | – | – | (353 | ) | |||||||||||||||||||
| Balance at December 31, 2018 | $ | 86 | $ | 35,056 | $ | 34,078 | $ | (569 | ) | $ | (1,842 | ) | $ | 1 | $ | 66,810 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
Kentucky First Federal Bancorp
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Six months ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 482 | $ | 305 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| Depreciation | 133 | 151 | ||||||
| Accretion of purchased loan credit discount | (56 | ) | (41 | ) | ||||
| Amortization of purchased loan premium | 5 | 6 | ||||||
| Amortization of deferred loan origination costs (fees) | 45 | 35 | ||||||
| Amortization of premiums on investment securities | 5 | 4 | ||||||
| Net gain on sale of loans | (40 | ) | (20 | ) | ||||
| Net gain on sale of real estate owned | (7 | ) | (12 | ) | ||||
| Valuation adjustments of real estate owned | 24 | 54 | ||||||
| ESOP compensation expense | 48 | 65 | ||||||
| Earnings on bank-owned life insurance | (38 | ) | (37 | ) | ||||
| Provision for loan losses | 64 | 11 | ||||||
| Origination of loans held for sale | (1,376 | ) | (600 | ) | ||||
| Proceeds from loans held for sale | 1,165 | 620 | ||||||
| Increase (decrease) in cash, due to changes in: | ||||||||
| Accrued interest receivable | 68 | (6 | ) | |||||
| Prepaid expenses and other assets | 167 | 141 | ||||||
| Accrued interest payable | 2 | 2 | ||||||
| Other liabilities | (32 | ) | (179 | ) | ||||
| Federal income taxes | 121 | (30 | ) | |||||
| Net cash provided by operating activities | 780 | 469 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of available-for-sale securities | – | (501 | ) | |||||
| Purchase of time deposits in other financial institutions | – | (990 | ) | |||||
| Maturities of time deposits in other financial institutions | 3,992 | 1,728 | ||||||
| Securities maturities, prepayments and calls: | ||||||||
| Held to maturity | 118 | 142 | ||||||
| Available for sale | 499 | 2 | ||||||
| Loans originated for investment, net of principal collected | (882 | ) | (2,878 | ) | ||||
| Proceeds from sale of real estate owned | 172 | – | ||||||
| Additions to real estate owned | (20 | ) | (76 | ) | ||||
| Additions to premises and equipment, net | (141 | ) | (54 | ) | ||||
| Net cash provided by (used in) investing activities | 3,738 | (2,627 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Net increase in deposits | 4,123 | 1,624 | ||||||
| Payments by borrowers for taxes and insurance, net | (532 | ) | (546 | ) | ||||
| Proceeds from Federal Home Loan Bank advances | 10,800 | 16,600 | ||||||
| Repayments on Federal Home Loan Bank advances | (15,888 | ) | (14,116 | ) | ||||
| Treasury stock purchased | (312 | ) | (487 | ) | ||||
| Dividends paid on common stock | (686 | ) | (718 | ) | ||||
| Net cash provided by (used in) financing activities | (2,495 | ) | 2,357 | |||||
| Net increase in cash and cash equivalents | 2,023 | 199 | ||||||
| Beginning cash and cash equivalents | 9,861 | 9,943 | ||||||
| Ending cash and cash equivalents | $ | 11,884 | $ | 10,142 | ||||
See accompanying notes to condensed consolidated financial statements.
6
Kentucky First Federal Bancorp
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(In thousands)
| Six months ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Federal income taxes | $ | – | $ | 100 | ||||
| Interest on deposits and borrowings | $ | 1,872 | $ | 1,495 | ||||
| Transfers of loans to real estate owned, net | $ | 295 | $ | 262 | ||||
| Loans made on sale of real estate owned | $ | 70 | $ | 196 | ||||
See accompanying notes to condensed consolidated financial statements.
7
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
(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 six-month period ended December 31, 2019, 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)
December 31, 2019
(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)
December 31, 2019
(unaudited)
1. Basis of Presentation (continued)
New Accounting Standards (continued)
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:
| Six months ended December 31, | Three months ended December 31, | |||||||||||||||
| (in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net income allocated to common shareholders, basic and diluted | $ | 482 | $ | 305 | $ | 248 | $ | 167 | ||||||||
| Six months ended December 31, | Three months ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Weighted average common shares outstanding, basic and diluted | 8,266,204 | 8,362,486 | 8,255,255 | 8,348,165 | ||||||||||||
There were no stock option shares outstanding for the six- or three-month periods ended December 31, 2019 and 2018.
10
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(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 December 31, 2019 and June 30, 2019, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses:
| December 31, 2019 | ||||||||||||||||
| (in thousands) | Amortized cost | Gross unrealized/ unrecognized gains | Gross unrealized/ unrecognized losses | Estimated fair value | ||||||||||||
| Available-for-sale Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | 41 | $ | 1 | $ | – | $ | 42 | ||||||||
| Agency bonds | 500 | 3 | – | 503 | ||||||||||||
| $ | 541 | $ | 4 | $ | – | $ | 545 | |||||||||
| Held-to-maturity Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | 652 | $ | 12 | $ | 5 | $ | 659 | ||||||||
| 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 December 31, 2019, 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 | $ | 503 | ||||
11
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(unaudited)
3. Investment Securities (continued)
Our pledged securities (including overnight and time deposits in other financial institutions) totaled $1.9 million and $2.1 million at both December 31 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:
| December 31, | June 30, | |||||||
| (in thousands) | 2019 | 2019 | ||||||
| Residential real estate | ||||||||
| One- to four-family | $ | 220,496 | $ | 216,066 | ||||
| Multi-family | 12,626 | 15,928 | ||||||
| Construction | 4,193 | 3,757 | ||||||
| Land | 1,226 | 852 | ||||||
| Farm | 2,087 | 3,157 | ||||||
| Nonresidential real estate | 31,111 | 30,419 | ||||||
| Commercial nonmortgage | 1,502 | 2,075 | ||||||
| Consumer and other: | ||||||||
| Loans on deposits | 1,372 | 1,415 | ||||||
| Home equity | 7,653 | 8,214 | ||||||
| Automobile | 83 | 91 | ||||||
| Unsecured | 666 | 451 | ||||||
| 283,015 | 282,425 | |||||||
| Allowance for loan losses | (1,447 | ) | (1,456 | ) | ||||
| $ | 281,568 | $ | 280,969 | |||||
12
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(unaudited)
4. Loans receivable (continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2019:
| (in thousands) | Beginning balance | Provision for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate: | ||||||||||||||||||||
| One- to four-family | $ | 685 | $ | 64 | $ | (65 | ) | $ | – | $ | 684 | |||||||||
| Multi-family | 200 | (28 | ) | – | – | 172 | ||||||||||||||
| Construction | 6 | – | – | – | 6 | |||||||||||||||
| Land | 1 | 1 | – | – | 2 | |||||||||||||||
| Farm | 6 | (2 | ) | – | – | 4 | ||||||||||||||
| Nonresidential real estate | 336 | 25 | – | – | 361 | |||||||||||||||
| Commercial nonmortgage | 5 | (1 | ) | – | – | 4 | ||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | 3 | (1 | ) | – | – | 2 | ||||||||||||||
| Home equity | 14 | (3 | ) | – | – | 11 | ||||||||||||||
| Automobile | – | 8 | 8 | – | – | |||||||||||||||
| Unsecured | – | 1 | – | – | 1 | |||||||||||||||
| Unallocated | 200 | – | – | – | 200 | |||||||||||||||
| Totals | $ | 1,456 | $ | 64 | $ | (73 | ) | $ | – | $ | 1,447 | |||||||||
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2019:
| (in thousands) | Beginning balance | Provision for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate: | ||||||||||||||||||||
| One- to four-family | $ | 686 | $ | (2 | ) | $ | – | $ | – | $ | 684 | |||||||||
| Multi-family | 193 | (21 | ) | – | – | 172 | ||||||||||||||
| Construction | 6 | – | – | – | 6 | |||||||||||||||
| Land | 1 | 1 | – | – | 2 | |||||||||||||||
| Farm | 6 | (2 | ) | – | – | 4 | ||||||||||||||
| Nonresidential real estate | 339 | 22 | – | – | 361 | |||||||||||||||
| Commercial nonmortgage | 5 | (1 | ) | – | – | 4 | ||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | 2 | – | – | – | 2 | |||||||||||||||
| Home equity | 12 | (1 | ) | – | – | 11 | ||||||||||||||
| Automobile | – | 8 | (8 | ) | – | – | ||||||||||||||
| Unsecured | – | 1 | – | – | 1 | |||||||||||||||
| Unallocated | 200 | – | – | – | 200 | |||||||||||||||
| Totals | $ | 1,450 | $ | 5 | $ | (8 | ) | $ | – | $ | 1,447 | |||||||||
13
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(unaudited)
4. Loans receivable (continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended December 31, 2018:
| (in thousands) | Beginning balance | Provision for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate: | ||||||||||||||||||||
| One- to four-family | $ | 795 | $ | 17 | $ | (117 | ) | $ | 39 | $ | 734 | |||||||||
| Multi-family | 225 | (5 | ) | – | – | 220 | ||||||||||||||
| Construction | 8 | (5 | ) | – | – | 3 | ||||||||||||||
| Land | 1 | – | – | – | 1 | |||||||||||||||
| Farm | 6 | (1 | ) | – | – | 5 | ||||||||||||||
| Nonresidential real estate | 321 | 25 | – | – | 346 | |||||||||||||||
| Commercial nonmortgage | 3 | – | – | – | 3 | |||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | 3 | – | – | – | 3 | |||||||||||||||
| Home equity | 13 | – | – | – | 13 | |||||||||||||||
| Automobile | – | – | – | – | – | |||||||||||||||
| Unsecured | 1 | (20 | ) | – | 20 | 1 | ||||||||||||||
| 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 December 31, 2018:
| (in thousands) | Beginning balance | Provision for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate: | ||||||||||||||||||||
| One- to four-family | $ | 781 | $ | (5 | ) | $ | (58 | ) | $ | 16 | $ | 734 | ||||||||
| Multi-family | 232 | (12 | ) | – | – | 220 | ||||||||||||||
| Construction | 4 | (1 | ) | – | – | 3 | ||||||||||||||
| Land | 1 | – | – | – | 1 | |||||||||||||||
| Farm | 6 | (1 | ) | – | – | 5 | ||||||||||||||
| Nonresidential real estate | 323 | 23 | – | – | 346 | |||||||||||||||
| Commercial nonmortgage | 4 | (1 | ) | – | – | 3 | ||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | 3 | – | – | – | 3 | |||||||||||||||
| Home equity | 16 | (3 | ) | – | – | 13 | ||||||||||||||
| Automobile | – | – | – | – | – | |||||||||||||||
| Unsecured | 1 | – | – | – | 1 | |||||||||||||||
| Unallocated | 200 | – | – | – | 200 | |||||||||||||||
| Totals | $ | 1,571 | $ | – | $ | (58 | ) | $ | 16 | $ | 1,529 | |||||||||
14
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(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 December 31, 2019. The recorded investment in loans excludes accrued interest receivable due to immateriality.
| December 31, 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 | $ | 4,007 | $ | 924 | $ | 4,931 | $ | – | $ | – | $ | – | ||||||||||||
| Multi-family | 682 | – | 682 | – | – | – | ||||||||||||||||||
| Farm | 310 | – | 310 | – | – | – | ||||||||||||||||||
| Nonresidential real estate | 720 | – | 720 | – | – | – | ||||||||||||||||||
| 5,719 | 924 | 6,643 | – | – | – | |||||||||||||||||||
| Loans collectively evaluated for impairment: | ||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||
| One- to four-family | $ | 215,565 | $ | 684 | $ | – | $ | 684 | ||||||||||||||||
| Multi-family | 11,944 | 172 | – | 172 | ||||||||||||||||||||
| Construction | 4,193 | 6 | – | 6 | ||||||||||||||||||||
| Land | 1,226 | 2 | – | 2 | ||||||||||||||||||||
| Farm | 1,777 | 4 | – | 4 | ||||||||||||||||||||
| Nonresidential real estate | 30,391 | 361 | – | 361 | ||||||||||||||||||||
| Commercial nonmortgage | 1,502 | 4 | – | 4 | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Loans on deposits | 1,372 | 2 | – | 2 | ||||||||||||||||||||
| Home equity | 7,653 | 11 | – | 11 | ||||||||||||||||||||
| Automobile | 83 | – | – | – | ||||||||||||||||||||
| Unsecured | 666 | 1 | – | 1 | ||||||||||||||||||||
| Unallocated | – | – | 200 | 200 | ||||||||||||||||||||
| 276,372 | 1,247 | 200 | 1,447 | |||||||||||||||||||||
| $ | 283,015 | $ | 1,247 | $ | 200 | $ | 1,447 | |||||||||||||||||
15
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(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)
December 31, 2019
(unaudited)
4. Loans receivable (continued)
The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended December 31:
| (in thousands) | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | ||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||
| One- to four-family | $ | 3,922 | $ | 62 | $ | 62 | $ | 3,654 | $ | 75 | $ | 75 | ||||||||||||
| Multi-family | 684 | 17 | 17 | – | – | – | ||||||||||||||||||
| Farm | 309 | 5 | 5 | 310 | – | – | ||||||||||||||||||
| Nonresidential real estate | 702 | 14 | 14 | 409 | 14 | 14 | ||||||||||||||||||
| Purchased credit-impaired loans | 936 | 35 | 35 | 1,066 | 36 | 36 | ||||||||||||||||||
| 6,553 | 133 | 133 | 5,439 | 125 | 125 | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| One- to four-family | – | – | – | – | – | – | ||||||||||||||||||
| $ | 6,553 | $ | 133 | $ | 133 | $ | 5,439 | $ | 125 | $ | 125 | |||||||||||||
The following table presents interest income on loans individually evaluated for impairment by class of loans for the three months ended December 31:
| (in thousands) | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | ||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||
| One- to four-family | $ | 3,780 | $ | 28 | $ | 28 | $ | 4,432 | $ | 59 | $ | 59 | ||||||||||||
| Multi-family | 682 | 6 | 6 | – | – | – | ||||||||||||||||||
| Farm | 309 | 5 | 5 | 310 | – | – | ||||||||||||||||||
| Nonresidential real estate | 724 | 7 | 7 | 698 | 14 | 14 | ||||||||||||||||||
| Purchased credit-impaired loans | 913 | 17 | 17 | 982 | 28 | 28 | ||||||||||||||||||
| 6,408 | 63 | 63 | 6,422 | 101 | 101 | |||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| One- to four-family | – | – | – | – | – | – | ||||||||||||||||||
| $ | 6,408 | $ | 63 | $ | 63 | $ | 6,422 | $ | 101 | $ | 101 | |||||||||||||
17
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(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 December 31, 2019 and June 30, 2019:
| December 31, 2019 | 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 | $ | 4,651 | $ | 1,228 | $ | 4,545 | $ | 1,747 | ||||||||
| Multifamily | 682 | – | 685 | – | ||||||||||||
| Construction | – | 63 | – | – | ||||||||||||
| Farm | 310 | – | 309 | – | ||||||||||||
| Nonresidential real estate and land | 720 | – | 683 | 49 | ||||||||||||
| Commercial and industrial | 1 | – | 1 | – | ||||||||||||
| Consumer | 5 | – | 9 | – | ||||||||||||
| $ | 6,369 | $ | 1,291 | $ | 6,232 | $ | 1,796 | |||||||||
One- to four-family loans in process of foreclosure totaled $860,000 and $1.2 million at December 31, 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.”
At December 31, 2019 and June 30, 2019, the Company had $1.9 million and $1.6 million of loans classified as TDRs, respectively. Of the TDRs at December 31, 2019, approximately 21.5% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.
During the six months ended December 31, 2019, the Company had two 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.
During the six months ended December 31, 2018, 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)
December 31, 2019
(unaudited)
4. Loans receivable (continued)
The following table summarizes TDR loan modifications that occurred during the six months ended December 31, 2019 and 2018, 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 | |||||||||
| Six months ended December 31, 2019 | ||||||||||||
| Residential real estate: | ||||||||||||
| Terms extended | $ | 682 | $ | – | $ | 682 | ||||||
| Terms extended and additional funds advanced | $ | 119 | $ | – | $ | 119 | ||||||
| Chapter 7 bankruptcy | $ | 21 | $ | – | $ | 21 | ||||||
| Six months ended December 31, 2018 | ||||||||||||
| Residential real estate: | ||||||||||||
| Terms extended | $ | 324 | $ | – | $ | 324 | ||||||
The following table summarizes TDR loan modifications that occurred during the three months ended December 31, 2019 and 2018, and their performance, by modification type:
| (in thousands) | Troubled Debt Restructurings Performing to Modified Terms | Troubled Debt Restructurings Not Performing to Modified Terms | Total Troubled Debt Restructurings | |||||||||
| Three months ended December 31, 2019 | ||||||||||||
| Residential real estate: | ||||||||||||
| Terms extended | $ | 682 | $ | – | $ | 682 | ||||||
| Chapter 7 bankruptcy | $ | 21 | $ | – | $ | 21 | ||||||
| Three months ended December 31, 2018 | ||||||||||||
| Residential real estate: | ||||||||||||
| Terms extended and additional funds advanced | $ | 75 | $ | – | $ | 75 | ||||||
No TDRs defaulted during the six-month periods ended December 31, 2019 or 2018.
19
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(unaudited)
4. Loans receivable (continued)
The following table presents the aging of the principal balance outstanding in past due loans as of December 31, 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 | $ | 2,563 | $ | 2,986 | $ | 5,549 | $ | 214,947 | $ | 220,496 | ||||||||||
| Multi-family | 250 | – | 250 | 12,376 | 12,626 | |||||||||||||||
| Construction | – | 63 | 63 | 4,130 | 4,193 | |||||||||||||||
| Land | 76 | – | 76 | 1,150 | 1,226 | |||||||||||||||
| Farm | 109 | 310 | 419 | 1,668 | 2,087 | |||||||||||||||
| Nonresidential real estate | 333 | 303 | 636 | 30,475 | 31,111 | |||||||||||||||
| Commercial non-mortgage | – | – | – | 1,502 | 1,502 | |||||||||||||||
| Consumer and other: | ||||||||||||||||||||
| Loans on deposits | – | – | – | 1,372 | 1,372 | |||||||||||||||
| Home equity | – | – | – | 7,653 | 7,653 | |||||||||||||||
| Automobile | – | – | – | 83 | 83 | |||||||||||||||
| Unsecured | – | – | – | 666 | 666 | |||||||||||||||
| Total | $ | 3,331 | $ | 3,662 | $ | 6,993 | $ | 276,022 | $ | 283,015 | ||||||||||
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)
December 31, 2019
(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 December 31, 2019, 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 | $ | 212,106 | $ | 619 | $ | 7,771 | $ | – | ||||||||
| Multi-family | 11,944 | – | 682 | – | ||||||||||||
| Construction | 4,193 | – | – | – | ||||||||||||
| Land | 1,226 | – | – | – | ||||||||||||
| Farm | 1,777 | – | 310 | – | ||||||||||||
| Nonresidential real estate | 29,322 | 736 | 1,053 | – | ||||||||||||
| Commercial nonmortgage | 1,267 | – | 235 | – | ||||||||||||
| Consumer: | ||||||||||||||||
| Loans on deposits | 1,372 | – | – | – | ||||||||||||
| Home equity | 7,634 | – | 19 | – | ||||||||||||
| Automobile | 83 | – | – | – | ||||||||||||
| Unsecured | 661 | – | 5 | – | ||||||||||||
| $ | 271,585 | $ | 1,355 | $ | 10,075 | $ | – | |||||||||
21
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(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 December 31, 2019 and June 30, 2019, respectively, is as follows:
| (in thousands) | December 31, 2019 |
June
30, 2019 |
||||||
| One- to four-family residential real estate | $ | 924 | $ | 949 | ||||
22
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(unaudited)
4. Loans receivable (continued)
Accretable yield, or income expected to be collected, is as follows
| (in thousands) | Six months ended December 31, 2019 | Twelve months ended June 30, 2019 | ||||||
| Balance at beginning of period | $ | 544 | $ | 634 | ||||
| Accretion of income | (56 | ) | (90 | ) | ||||
| Disposals, net of recoveries | – | – | ||||||
| Balance at end of period | $ | 488 | $ | 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 six-month period ended December 31, 2019. 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)
December 31, 2019
(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) | ||||||||||||
| December 31, 2019 | ||||||||||||||||
| Agency bonds | $ | 503 | $ | – | $ | 503 | $ | – | ||||||||
| Agency mortgage-backed: residential | 42 | – | 42 | – | ||||||||||||
| $ | 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)
December 31, 2019
(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) | ||||||||||||
| December 31, 2019 | ||||||||||||||||
| Loans | ||||||||||||||||
| One- to four-family | $ | 9 | $ | – | $ | – | $ | 9 | ||||||||
| 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 was one impaired loan, which was measured using the fair value of the collateral for collateral-dependent loans, at December 31, 2019, and seven impaired loans at June 30, 2019. Amounts charged off were $8,000 for the six-month period ended December 31, 2019 and $23,000 off for the six-month period ended December 31, 2018.
Other real estate owned was written down $24,000 during the six- and three-months ended December 31, 2019. Other real estate owned measured at fair value less costs to sell, had a carrying amount of $577,000 and $117,000 at December 31, 2019 and June 30, 2019, respectively. Other real estate owned was written down $54,000 and $36,000 during the six- and three-month periods ended December 31, 2018, respectively.
25
Kentucky First Federal Bancorp
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2019
(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 December 31, 2019 and June 30, 2019:
| Range | ||||||||||
| Fair Value | Valuation | Unobservable | (Weighted | |||||||
| December 31, 2019 | (in thousands) | Technique(s) | Input(s) | Average) | ||||||
| Loans: | ||||||||||
| One- to four-family | $ | 9 | Sales comparison approach | Adjustments for differences between comparable sales | -82.2% to 151.3% (20.5%) | |||||
| 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% (-0.6%) | |||||
| 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)
December 31, 2019
(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 December 31, 2019 and June 30, 2019 are as follows:
| Fair Value Measurements at | ||||||||||||||||||||
| Carrying | December 31, 2019 Using | |||||||||||||||||||
| (in thousands) | Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 11,884 | $ | 11,884 | $ | 11,884 | ||||||||||||||
| Time deposits in other financial institutions | 2,970 | 2,979 | 2,979 | |||||||||||||||||
| Available-for-sale securities | 545 | $ | 545 | 545 | ||||||||||||||||
| Held-to-maturity securities | 652 | 659 | 659 | |||||||||||||||||
| Loans held for sale | 251 | $ | 251 | 251 | ||||||||||||||||
| Loans receivable - net | 281,568 | 285,831 | 285,831 | |||||||||||||||||
| Federal Home Loan Bank stock | 6,482 | n/a | ||||||||||||||||||
| Accrued interest receivable | 690 | 690 | 690 | |||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | 199,959 | $ | 68,113 | $ | 131,853 | 199,996 | |||||||||||||
| Federal Home Loan Bank advances | 61,615 | 61,741 | 61,741 | |||||||||||||||||
| Advances by borrowers for taxes and insurance | 231 | 231 | 231 | |||||||||||||||||
| Accrued interest payable | 30 | 30 | 30 | |||||||||||||||||
| 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)
December 31, 2019
(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:
| Six months ended December 31, 2019 | ||||
| Beginning balance | $ | 4 | ||
| Current year change | (1 | ) | ||
| Ending balance | $ | 3 | ||
Other comprehensive income (loss) components and related tax effects for the periods indicated were as follows:
| Six months ended December 31, | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| Unrealized holding gains (losses) on available-for-sale securities | $ | (1 | ) | $ | 1 | |||
| Tax effect | – | – | ||||||
| Net-of-tax amount | $ | (1 | ) | $ | 1 | |||
| Three months ended December 31, | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| 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 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 six month periods ended December 31, 2019 and 2018, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
| Six Months Ended December 31, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
Average Balance | Interest And Dividends | Yield/ Cost | Average Balance | Interest | Yield/ Cost | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans 1 | $ | 282,210 | $ | 6,297 | 4.46 | % | $ | 271,460 | $ | 5,894 | 4.34 | % | ||||||||||||
| Mortgage-backed securities | 749 | 11 | 2.94 | 963 | 16 | 3.32 | ||||||||||||||||||
| Other securities | 835 | 11 | 2.64 | 296 | 4 | 2.70 | ||||||||||||||||||
| Other interest-earning assets | 21,705 | 272 | 2.51 | 20,595 | 310 | 3.01 | ||||||||||||||||||
| Total interest-earning assets | 305,499 | 6,591 | 4.32 | 293,314 | 6,224 | 4.24 | ||||||||||||||||||
| Less: Allowance for loan losses | (1,443 | ) | (1,552 | ) | ||||||||||||||||||||
| Non-interest-earning assets | 26,110 | 26,450 | ||||||||||||||||||||||
| Total assets | $ | 330,166 | $ | 318,212 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | $ | 14,302 | $ | 11 | 0.15 | % | $ | 15,571 | $ | 12 | 0.15 | % | ||||||||||||
| Savings | 50,484 | 103 | 0.41 | 55,576 | 110 | 0.40 | ||||||||||||||||||
| Certificates of deposit | 128,156 | 1,082 | 1.69 | 121,947 | 807 | 1.32 | ||||||||||||||||||
| Total deposits | 192,942 | 1,196 | 1.24 | 193,094 | 929 | 0.96 | ||||||||||||||||||
| Borrowings | 63,091 | 673 | 2.13 | 50,562 | 568 | 2.25 | ||||||||||||||||||
| Total interest-bearing liabilities | 256,033 | 1,869 | 1.46 | 243,656 | 1,497 | 1.23 | ||||||||||||||||||
| Noninterest-bearing demand deposits | 6,019 | 5,227 | ||||||||||||||||||||||
| Noninterest-bearing liabilities | 2,066 | 2,035 | ||||||||||||||||||||||
| Total liabilities | 264,118 | 250,918 | ||||||||||||||||||||||
| Shareholders’ equity | 66,048 | 67,294 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 330,166 | $ | 318,212 | ||||||||||||||||||||
| Net interest spread | $ | 4,722 | 2.85 | % | $ | 4,727 | 3.02 | % | ||||||||||||||||
| Net interest margin | 3.09 | % | 3.22 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 119.32 | % | 120.83 | % | ||||||||||||||||||||
| 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 December 31, 2019 and 2018, 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, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
Average Balance |
Interest And Dividends |
Yield/ Cost |
Average
Balance |
Interest And Dividends |
Yield/ Cost |
|||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans 1 | $ | 282,774 | $ | 3,125 | 4.42 | % | $ | 272,616 | $ | 3,006 | 4.41 | % | ||||||||||||
| Mortgage-backed securities | 710 | 5 | 2.82 | 927 | 8 | 3.45 | ||||||||||||||||||
| Other securities | 668 | 5 | 2.99 | 500 | 3 | 2.40 | ||||||||||||||||||
| Other interest-earning assets | 22,043 | 128 | 2.32 | 20,803 | 161 | 3.10 | ||||||||||||||||||
| Total interest-earning assets | 306,195 | 3,263 | 4.26 | 294,846 | 3,178 | 4.31 | ||||||||||||||||||
| Less: Allowance for loan losses | (1,450 | ) | (1,559 | ) | ||||||||||||||||||||
| Non-interest-earning assets | 26,113 | 26,401 | ||||||||||||||||||||||
| Total assets | $ | 330,858 | $ | 319,688 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | $ | 14,202 | $ | 6 | 0.17 | % | $ | 15,856 | $ | 6 | 0.15 | % | ||||||||||||
| Savings | 49,854 | 51 | 0.41 | 54,855 | 56 | 0.41 | ||||||||||||||||||
| Certificates of deposit | 129,375 | 551 | 1.70 | 122,989 | 425 | 1.38 | ||||||||||||||||||
| Total deposits | 193,431 | 608 | 1.26 | 193,700 | 487 | 1.01 | ||||||||||||||||||
| Borrowings | 63,386 | 314 | 1.98 | 52,235 | 310 | 2.37 | ||||||||||||||||||
| Total interest-bearing liabilities | 256,817 | 922 | 1.44 | 245,935 | 797 | 1.30 | ||||||||||||||||||
| Noninterest-bearing demand deposits | 6,262 | 5,066 | ||||||||||||||||||||||
| Noninterest-bearing liabilities | 1,929 | 1,407 | ||||||||||||||||||||||
| Total liabilities | 265,008 | 252,408 | ||||||||||||||||||||||
| Shareholders’ equity | 65,850 | 67,280 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 330,858 | $ | 319,688 | ||||||||||||||||||||
| Net interest spread | $ | 2,341 | 2.83 | % | $ | 2,381 | 3.02 | % | ||||||||||||||||
| Net interest margin | 3.06 | % | 3.23 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 119.23 | % | 119.89 | % | ||||||||||||||||||||
| 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 December 31, 2019
Assets: At December 31, 2019, the Company’s assets totaled $328.8 million, a decrease of $2.0 million, or 0.6%, from total assets at June 30, 2019. This decrease was attributed primarily to a decrease in time deposits in other financial institutions, and was somewhat offset by increases in cash and cash equivalents and loans, net.
Cash and cash equivalents: Cash and cash equivalents increased $2.0 million or 20.5% to $11.9 million at December 31, 2019. 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 $4.0 million or 57.3% to $3.0 million at December 31, 2019. As short-term time deposits matured the funds were used to repay FHLB advances or reinvested at the highest earning level possible.
Investment securities: At December 31, 2019 our securities portfolio consisted of an agency bond and mortgage-backed securities. Investment securities decreased $623,000 or 34.2% to $1.2 million at December 31, 2019.
Loans: Loans receivable, net, increased by $599,000 or 0.2% to $281.6 million at December 31, 2019. 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 December 31, 2019, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $7.7 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 December 31, 2019 and June 30, 2019, respectively. The allowance for loan losses at December 31, 2019, represented 18.7% 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.
The Company had $10.9 million in assets classified as substandard for regulatory purposes at December 31, 2019, including loans ($10.1 million), including loans acquired in the CKF Bancorp transaction and real estate owned (“REO”) ($766,000.) Classified loans as a percentage of total loans (including loans acquired) was 3.6% and 3.9% at December 31, 2019 and June 30, 2019, respectively. Of substandard loans, 97.6% were secured by real estate on which the Banks have priority lien position.
32
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 December 31, 2019 (continued)
The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated:
| (dollars in thousands) | December 31, 2019 | June 30, 2019 | ||||||
| Substandard assets | $ | 10,859 | $ | 11,590 | ||||
| Doubtful assets | – | – | ||||||
| Loss assets | – | – | ||||||
| Total classified assets | $ | 10,859 | $ | 11,590 | ||||
At December 31, 2019, 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 six months ended December 31, 2019, the Company sold property with a carrying value of $190,000 for $200,000, while during the year ended June 30, 2019, property with a carrying value of $193,000 was sold for $206,000. During the six months ended December 31, 2019 the Company made two loans totaling $70,000 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 $134,000 and $136,000 at December 31, 2019 and June 30, 2019, respectively.
33
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 December 31, 2019 (continued)
The following table presents the aggregate carrying value of REO at the dates indicated:
| December 31, 2019 | June 30, 2019 | |||||||||||||||
| Number | Net | Number | Net | |||||||||||||
| of | Carrying | of | Carrying | |||||||||||||
| Properties | Value | Properties | Value | |||||||||||||
| One- to four-family | 7 | $ | 766 | 7 | $ | 710 | ||||||||||
| Building lot | 1 | – | 1 | – | ||||||||||||
| Total REO | 8 | $ | 766 | 8 | $ | 710 | ||||||||||
At December 31, 2019 and June 30, 2019, the Company had $1.4 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 decreased $1.5 million, or 0.6% to $263.0 million at December 31, 2019, primarily as a result of a decrease in advances, which was somewhat offset by an increase in deposits. Advances decreased $5.1 million or 7.6% to $61.6 million at December 31, 2019, while deposits increased $4.1 million or 2.1% to $200.0 million at December 31, 2019.
Shareholders’ Equity: At December 31, 2019, the Company’s shareholders’ equity totaled $65.8 million, a decrease of $469,000 or 0.7% 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.
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 December 31, 2019 (continued)
The Company paid dividends of $686,000 or 142.3% of net income for the six 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 Six-Month Periods Ended December 31, 2019 and 2018
General
Net income totaled $482,000 or $0.06 diluted earnings per share for the six months ended December 31, 2019, an increase of $177,000 or 58.0% from net income of $305,000 for the same period in 2018.
Net Interest Income
Net interest income before provision for loan losses decreased $5,000 or 0.1% to $4.7 million for the six-month period just ended. Interest income increased by $367,000, or 5.9%, to $6.6 million, while interest expense increased $372,000 or 24.9% to $1.9 million for the six months ended December 31, 2019.
Interest income on loans increased $403,000 or 6.8% to $6.3 million, due primarily to an increase in the average volume of the loan portfolio. The average balance of the loan portfolio increased $10.8 million or 4.0% to $282.2 million for the six-month period ended December 31, 2019, while the rate earned on the loan portfolio increased 12 basis points to 4.46%. Interest income on mortgage-backed securities decreased $5,000 or 31.3% to $11,000 for the six-month period just ended due to lower asset levels and lower yields earned. Interest income from other securities increased $7,000 to $11,000 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 $38,000 or 12.3% to $272,000 for the six months just ended primarily due to a decrease in the average rate earned, which decreased 50 basis points to 2.51% for the recently-ended period compared to the period a year ago.
35
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2019 and 2018 (continued)
Interest expense on deposits increased $267,000 or 28.7% to $1.2 million for the six months ended December 31, 2019, while interest expense on borrowings increased $105,000 or 18.5% to $673,000 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 28 basis points to 1.24% for the recently ended period. The average balance of deposits decreased $152,000 or 0.1% to $192.9 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 $12.5 million or 24.8% to $63.1 million for the recently ended six-month period, while the average rate paid on borrowings decreased 11 basis points to 2.13% for the most recent period.
Net interest spread decreased from 3.02% for the prior year quarterly period to 2.85% for the six-month period ended December 31, 2019.
Provision for Losses on Loans
The Company recorded an $64,000 provision for losses on loans during the six months ended December 31, 2019, compared to a provision of $11,000 for the six months ended December 31, 2018.
Non-interest Income
Non-interest income increased $40,000 or 35.7% to $152,000 for the six months ended December 31, 2019, compared to the prior year period, primarily because of a decrease in valuation adjustment for REO and an increase in net gains on sales of loans. Valuation adjustment for REO decreased $30,000 or 55.6% to $24,000, while net gain on sales of loans increased $20,000 or 100.0% to $40,000 for the recently-ended six-month period over the prior year amount.
Non-interest Expense
Non-interest expense decreased $244,000 or 5.5% and totaled $4.2 million for the six months ended December 31, 2019, primarily due to decreases in employee compensation and benefits, occupancy and equipment, advertising, voice and data communications and other non-interest expenses.
Employee compensation and benefits for the six months ended December 31, 2019 decreased $149,000 or 5.1% to $2.8 million primarily due to lower contributions to the Company’s Defined Benefit (“DB”) pension plan. DB pension contributions decreased $148,000 or 25.6% to $431,000 for the six-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 $56,000 or 16.7% to $279,000 for the recently ended six-month period, as reduced maintenance and repair costs were experienced for both buildings and equipment and depreciation expense declined period to period. Advertising decreased $39,000 or 29.8% to $92,000 for the six months ended December 31, 2019, as the Company strategically concentrated its advertising focus. Voice and data communications expenses decreased $33,000 or 24.8% to $100,000 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 $30,000 or 7.5% to $370,000 primarily as a result of decreased FDIC insurance premiums. FDIC insurance premiums decreased from $42,000 for the six months ended December 31, 2018 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 six months ended December 31, 2019 totaled $42,000. The Banks’ remaining credits as of December 31, 2019 totaled $30,000. 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, data processing and outside service fee expenses. Auditing and accounting expenses increased $33,000 or 50.0% to $99,000 for the six months ended December 31, 2019. Data processing increased $25,000 or 11.7% to $239,000 for the period just ended as the Company expanded its digital banking platform. Outside service fees increased $22,000 or 30.6% to $94,000 for the semi-annual period just ended as the Company upgraded its telephonic and data communications capability.
36
Kentucky First Federal Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-Month Periods Ended December 31, 2019 and 2018 (continued)
Federal Income Tax Expense
Federal income tax expense increased $49,000 or 71.0% to $118,000 for the six months ended December 31, 2019, compared to the prior year period. The effective tax rates for the semi-annual periods ended December 31, 2019 and 2018, were 19.7% and 18.4%, respectively.
Comparison of Operating Results for the Three-Month Periods Ended December 31, 2019 and 2018
General
Net income totaled $248,000 for the three months ended December 31, 2019, an increase of $81,000 or 48.5% from net income of $167,000 for the same period in 2018.
Net Interest Income
Net interest income before provision for loan losses decreased $40,000 or 1.7% to $2.3 million for the three-month period just ended. Interest income increased by $90,000, or 2.8%, to $3.3 million, while interest expense increased $130,000 or 16.3% to $927,000 for the three months ended December 31, 2019.
Interest income on loans increased $119,000 or 4.0% 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 $10.2 million or 3.7% to $282.8 million for the three-month period ended December 31, 2019, while the rate earned on the loan portfolio increased one basis point to 4.42%. Interest income on mortgage-backed securities decreased $3,000 to $5,000 for the quarterly period just ended due chiefly to a lower volume of the assets. Interest income from interest-bearing deposits and other decreased $33,000 or 20.5% to $128,000 for the quarter just ended primarily due to a decrease in the average rate earned on those assets which decreased 77 basis points to 2.32% for the recently-ended quarterly period.
Interest expense on deposits increased $121,000 or 24.8% to $608,000 for the three months ended December 31, 2019, while interest expense on borrowings increased $4,000 or 1.3% to $314,000 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 25 basis points to 1.26% 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. The increase in interest expense on borrowings was attributed primarily to higher average outstanding balances of those funds. The average outstanding balance increased $11.2 million or 21.4% to $63.4 million for the three months ended December 31, 2019 compared to the prior year quarterly period. The average rate paid on borrowings decreased 39 basis points to 1.98% for the most recent period. Net interest spread decreased from 3.02% for the prior year quarterly period to 2.85% for the quarter ended December 31, 2019.
Provision for Losses on Loans
The Company recorded a provision for losses on loans of $5,000 during the three months ended December 31, 2019, compared to no provision for the three months ended December 31, 2018.
37
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 December 31, 2019 and 2018 (continued)
Non-interest Income
Non-interest income increased $35,000 or 81.4% to $78,000 for the three months ended December 31, 2019, compared to the prior year quarter, primarily because of an increase in net gain on sales of loans and a decrease in valuation adjustment for REO. Net gain on sales of loans increased $28,000 to $34,000 for the recently-ended quarterly period, while the Company recorded a valuation adjustment for REO of $24,000 compared to a $36,000 valuation adjustment recorded in the prior year period, a decrease of $12,000 or 33.3%.
Non-interest Expense
Non-interest expense decreased $122,000 or 5.5% and totaled $2.1 million for the three months ended December 31, 2019, primarily due to decreases in employee compensation and benefits, foreclosure and OREO expenses, net, occupancy and equipment, advertising, voice and data communications and other non-interest expenses.
Employee compensation and benefits for the three months ended December 31, 2019 decreased $55,000 or 3.8% 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. Foreclosure and OREO expenses, net, decreased $31,000 or 83.8% to $6,000 for the three months ended December 31, 2019, as the Company quickly disposed of some OREO properties and incurred lower costs for those properties it continued to carry. Occupancy and equipment expenses decreased $29,000 or 17.6% to $136,000 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 $29,000 or 42.6% to $39,000 for the recently ended period primarily due to upgraded data connections which provide better connectivity, faster data transfer speeds and a lower overall cost. Advertising decreased $20,000 or 31.3% to $64,000 for the three months ended December 31, 2019, as the Company concentrated its advertising focus. Other non-interest expense decreased $13,000 or 6.7% to $182,000 primarily as a result of decreased FDIC insurance premiums. FDIC insurance premiums decreased from $20,000 for the three months ended December 31, 2018, 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 data processing and auditing and accounting expenses. Data processing increased $25,000 or 22.9% to $134,000 for the quarter just ended as the Company expanded its digital banking platform. Auditing and accounting expenses increased $20,000 or 62.5% to $52,000 for the quarter ended December 31, 2019.
Federal Income Tax Expense
The Company recorded a federal income tax expense of $58,000 and $27,000 for the three months ended December 31, 2019 and 2018, respectively. The effective tax rates for the quarterly periods ended December 31, 2019 and 2018, were 19.0% and 13.9%, respectively.
38
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 December 31, 2019 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.
39
Kentucky First Federal Bancorp
PART II
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
There have been no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
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 December 31, 2019.
| 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 | ||||||||||||
| October 1-31, 2019 | – | $ | – | – | 76,200 | |||||||||||
| November 1-30, 2019 | 21,500 | $ | 7.51 | 21,500 | 54,700 | |||||||||||
| December 1-31, 2019 | – | $ | – | – | 54,700 | |||||||||||
(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 December 31, 2019 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). |
40
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: | February 14, 2020 | By: | /s/ Don D. Jennings | |
| Don D. Jennings | ||||
| Chief Executive Officer | ||||
| Date: | February 14, 2020 | By: | /s/ R. Clay Hulette | |
R. Clay Hulette Vice President and Chief Financial Officer | ||||
41
Exhibit 31.1
CERTIFICATION
I, Don D. Jennings, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kentucky First Federal Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: February 14, 2020 | /s/ Don D. Jennings |
| Don D. Jennings | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, R. Clay Hulette, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Kentucky First Federal Bancorp
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: February 14, 2020 | /s/ R. Clay Hulette |
| R. Clay Hulette | |
| Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kentucky First Federal Bancorp (the “Company”) on Form 10-Q for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Don D. Jennings, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| /s/ Don D. Jennings | |
| Don D. Jennings | |
| Chief Executive Officer | |
| February 14, 2020 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kentucky First Federal Bancorp (the “Company”) on Form 10-Q for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Clay Hulette, the Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| /s/ R. Clay Hulette | |
| R. Clay Hulette | |
| Vice President and Chief Financial Officer | |
| February 14, 2020 |