Exhibit 13

 

 

Parent company of

First Federal Savings and Loan Association of Hazard

and

First Federal Savings Bank of Kentucky

 

2022

 

Annual Report

 

 

 

 

 

KENTUCKY FIRST FEDERAL BANCORP

 

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

 

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

 

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

 

MARKET INFORMATION

 

The Company’s common stock began trading under the symbol “KFFB” on the Nasdaq National Market on March 3, 2005. There are currently 8,154,695 shares of common stock outstanding and approximately 536 holders of record of the common stock. Following are the high and low closing prices, by fiscal quarter, as reported on the Nasdaq National Market during the periods indicated, as well as dividends declared on the common stock during each quarter.

 

Fiscal 2022  High   Low   Dividends
Per Share
 
First quarter  $7.59   $6.95   $0.10 
Second quarter   7.79    6.95    0.10 
Third quarter   8.00    6.98    0.10 
Fourth quarter   8.69    7.00    0.10 

 

Fiscal 2021  High   Low   Dividends
Per Share
 
First quarter  $6.80   $5.65   $0.10 
Second quarter   8.15    5.67    0.10 
Third quarter   8.16    6.15    0.10 
Fourth quarter   7.50    6.46    0.10 

 

i

 

 

TABLE OF CONTENTS

 

Kentucky First Federal Bancorp   i
Market Information   i
Letter to Shareholders   1
Selected Consolidated Financial and Other Data   2
Management’s Discussion and Analysis of Financial Condition and Results of Operations   4
Consolidated Financial Statements   25

 

ii

 

 

 

Dear Shareholder:

 

We are pleased to present the 2022 Annual Report for Kentucky First Federal Bancorp. We encourage you to read both the Annual Report and Proxy Statement. We encourage you to vote and, if possible, to attend our annual meeting on November 17, 2022. We are excited to return to The Challenger Center on the campus of Hazard Community and Technical College for this year’s meeting. The location is One Community College Drive in Hazard, KY.

 

The past year was an interesting one as we emerged from the COVID-19 pandemic and navigated two different interest rate scenarios. The beginning of the year saw real estate prices rise significantly due to continued low interest rates and strong demand caused partially by the inability to conduct business as usual for the previous period. In times of uncertainty people gravitate toward the safety that can be found in community banks. Consequently, we saw significant deposit increases during the pandemic as deposits increased $13.0 million or 5.7% year over year. On the other side of the ledger, we experienced a reduction in loans as some of our borrowers took advantage of the strong real estate market by selling their holdings. Other borrowers sold real estate holdings because of death or other reasons. Loans, net decreased $23.3 million or 7.8% year to year. However, in March 2022 the Federal Open Market Committee began raising interest rates in its attempt to tame high inflation. The end of the fiscal year showed promise as the hot real estate market began to cool and we were able to add $33.7 million in new loans to our portfolio. We responded by paying down advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) by $22.8 million or 40.1% and investing in short-lived mortgage-backed securities to increase yield on our excess liquidity. We continue to focus on community banking during this difficult time by concentrating on our core business, which is attracting local deposits and lending funds primarily for one-to-four family residences. We continue to leverage the Banks’ infrastructure by offering long-term, fixed-rate mortgages to customers through our relationship with the FHLB. This relationship allows us to help customers with financial products they want without exposing the Banks to undue interest rate risk, all while maintaining our customer relationship through the servicing of the loan.

 

As shareholders, we appreciate the members of First Federal Savings and Loan for their continued support of the dividend waiver. For the eleventh year in a row, they have voted overwhelmingly to allow us to waive the dividend which allows Kentucky First to pay a competitive dividend.

 

I would like to take this opportunity to congratulate two long-term employees on their retirements. Bill Johnson retired in February after serving as our Danville/Lancaster Area President since our combination with Central Kentucky Federal Savings Bank in 2012. Bill’s banking career spans over 48 years in central Kentucky, but he is well-respected across our Commonwealth. Although Bill retired from day-to-day operations, he continues serving as Director on the Company’s Board of Directors, as well as that of First Federal of Kentucky. Loan Officer Jim Baxter had a long career in banking and retired in December after working in Danville for 16 years.

 

In July 2022 eastern Kentucky suffered devastating flash floods that resulted in several deaths, impacted thousands of people, and caused billions of dollars in damage. Our Company is committed to helping our family and friends in Hazard and the surrounding area rebuild after this tragedy.

 

Please keep First Federal in mind for your banking needs in Frankfort, Danville, Lancaster, and Hazard and to recommend us to family and friends. All of our markets are very competitive and, while we market to offer attractive rates and useful products, often it is word of mouth or any additional help our shareholders can provide is appreciated. When you bank with us, you help yourself (and we think you will enjoy our excellent products and services.) Please let us know if there’s anything we can do for you.

 

Sincerely,

Don Jennings

 

1

 

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

Selected Financial Condition Data

 

   At June 30, 
(Dollars in thousands)  2022   2021   2020   2019   2018 
Total assets  $328,080   $338,063   $321,136   $330,771   $318,394 
Cash and cash equivalents   25,823    21,648    13,702    9,861    9,343 
Time deposits   -    247    2,229    6,962    5,692 
Securities held to maturity   339    462    598    775    1,002 
Securities available for sale   10,477    33    541    1,045    48 
Loans, net   274,583    297,902    285,887    280,969    270,310 
Deposits   239,857    226,843    212,273    195,836    195,653 
Federal Home Loan Bank advances   34,066    56,873    54,715    66,703    53,052 
Shareholders’ equity   52,025    52,296    51,911    66,278    67,203 
Allowance for loan losses   1,529    1,622    1,488    1,456    1,576 
Nonperforming loans (90 days delinquent and nonaccrual)   5,819    6,655    7,395    8,028    7,665 

 

Selected Financial Condition Data

 

   Year Ended June 30, 
(Dollars in thousands, except share data)  2022   2021   2020   2019   2018 
Total interest income  $10,914   $12,152   $12,823   $12,700   $11,886 
Total interest expense   1,754    2,141    3,499    3,252    2,161 
Net interest income   9,160    10,011    9,324    9,448    9,725 
Provision (credit) for losses on loans   (60)   192    103    11    185 
Net interest income after provision for losses on loans   9,220    9,819    9,221    9,437    9,540 
Total non-interest income   515    595    399    243    691 
Goodwill impairment   -    -    13,560    -    - 
Total non-interest expenses   7,668    8,242    8,343    8,727    8,945 
Income (loss) before income taxes   2,067    2,172    (12,283)   953    1,286 
Income taxes (benefit)   477    352    264    141    (37)
Net income (loss)  $1,590   $1,820   $(12,547)  $812   $1,323 
                          
Net earnings (loss) per share-basic and diluted  $0.19   $0.22   $(1.52)  $0.10   $0.16 
                          
Cash dividends declared per common share  $0.40   $0.40   $0.40   $0.40   $0.40 

 

2

 

 

Selected Financial Ratios and Other Data (1)

 

   Year Ended June 30, 
   2022   2021   2020   2019   2018 
                     
Performance Ratios:                    
Return on average assets (net income (loss) divided by average total assets)   0.47%   0.55%   -3.80%   0.25%   0.43%
Return on average equity (net income (loss) divided by average equity)   3.04%   3.50%   -19.01%   1.21%   1.97%
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)   2.68%   3.00%   2.82%   2.97%   3.28%
Net interest margin (net interest income divided by average interest-earning assets)   2.81%   3.14%   3.05%   3.19%   3.43%
Ratio of average interest-earning assets to average interest-bearing liabilities   122.95%   120.39%   119.57%   120.03%   120.11%
Ratio of total general administrative and other expenses to average total assets   2.28%   2.50%   6.63%   2.72%   2.88%
Efficiency ratio1   78.77%   79.14%   225.27%   90.05%   85.88%
Dividend payout ratio2   87.67%   76.26%   -11.06%   176.85%   109.75%
                          
Asset Quality Ratios:                         
Nonperforming loans as a percent of total loans at end of period3   2.12%   2.22%   2.57%   2.84%   2.80%
Nonperforming assets as a percent of total assets at the end of period   1.78%   1.99%   2.54%   2.64%   2.64%
Allowance for loan losses as a percent of total loans at end of period   0.55%   0.54%   0.52%   0.52%   0.58%
Allowance for loan losses as a percent of total nonperforming loans at end of period   26.28%   24.47%   20.12%   18.14%   20.56%
(Credit) provision for loan losses to total loans   -0.02%   0.06%   0.04%   0.00%   0.07%
Net charge-offs to average loans outstanding   0.01%   0.02%   0.03%   0.05%   0.05%
                          
Capital Ratios:                         
Average equity to average assets   15.53%   15.79%   19.97%   20.89%   21.66%
Shareholders’ equity to total assets at end of period   15.86%   15.47%   16.16%   20.05%   21.15%
                          
Consolidated Regulatory Capital Ratios:                         
Common equity Tier 1   N/A    N/A    N/A    26.79%   29.46%
Tier 1 (core) capital to risk-weighted assets   N/A    N/A    N/A    26.79%   29.46%
Total capital to risk-weighted assets   N/A    N/A    N/A    27.54%   30.34%
Tier 1 leverage capital to average assets   N/A    N/A    N/A    16.65%   17.51%
Community Bank Leverage Ratio   15.21%   15.35%   15.67%   N/A    N/A 
                          
Number of banking offices   7    7    7    7    7 

 

1Efficiency ratio represents the ratio of non-interest expenses divided by the sum of net interest income and total non-interest income.
2Represents dividends paid as a percent of net (loss) earnings. Dividends paid does not include dividends waived by First Federal MHC.
3Nonperforming loans consist of nonaccrual loans, accruing loans greater than 90 days delinquent, and restructured loans not performing according to their revised terms, while nonperforming assets consist of nonperforming loans and real estate acquired through foreclosure.

 

3

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 

Forward-Looking Statements

 

Certain statements contained in this Annual Report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Kentucky First Federal’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company’s market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services, the potential effects of COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic), and the other matters described in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2022. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

 

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 such statements or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

General

 

The Company was incorporated as a mid-tier holding company under the laws of the United States on March 2, 2005, upon the completion of the reorganization of First Federal of Hazard into a federal mutual holding company form of organization (the “Reorganization”). On that date, Kentucky First Federal also completed its minority stock offering and its concurrent acquisition of Frankfort First Bancorp, Inc. (“Frankfort First Bancorp”) and its wholly owned subsidiary, First Federal of Kentucky, Frankfort Kentucky (“First Federal of Kentucky”) (the “Merger”). Following the Reorganization and Merger, the Company has operated First Federal of Hazard and First Federal of Kentucky (collectively, the “Banks”) as two independent, community-oriented savings institutions.

 

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

 

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

 

4

 

 

Business Continuity, Processes and Controls

 

 In response to the Covid-19 pandemic the Banks are considered essential businesses and have remained open for business. We implemented our pandemic preparedness plan and generally maintained regular business hours through drive-through facilities, automated teller machines, remote deposit capture and online and mobile banking applications. We offer by-appointment options for transactions requiring in-person contact while maintaining social distancing mandates and surface cleaning protocols. Our staff is practicing recommended personal hygiene protocols and social distancing while working on premises. We do not face current material resource constraints through the implementation of our pandemic preparedness plan and do not anticipate incurring any material cost related to its implementation. We have not identified any material operational or internal control challenges or risks, nor do we anticipate any significant challenges to our ability to maintain our systems and controls, related to operational changes resulting from implementation of the pandemic preparedness plan.

 

Financial Position and Results of Operations

 

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

 

At June 30, 2022 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession resulting from the COVID-19 pandemic could adversely impact the Company’s and the Banks’ capital position and regulatory capital ratios due to a potential increase in credit losses.

 

Lending Operations and Credit Risk

 

The CARES Act includes a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”) and is designed to aid small- and medium-sized businesses through federally-guaranteed loans disbursed through banks. These loans are intended to provide eight weeks of payroll and other costs to assist those businesses to either remain open or to re-open quickly and allow their workers to pay their bills. First Federal of Kentucky qualified as an SBA lender to assist the small business community in securing this important funding. As of the date of this filing, First Federal of Kentucky had outstanding 22 PPP loans representing $367,000 in funding. It is our understanding that loans funded through the PPP are fully guaranteed by the United States government and, if the borrower complies with provisions of the program, will be forgiven by the SBA. Should those circumstances change, the bank could be required to increase its allowance for loan and lease losses related to these loans resulting in an increase in the provision for loan and lease losses.

 

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

 

5

 

 

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

 

To a much lesser extent, we also recognize pre-tax income from fee and service charges, which is the compensation we receive from providing financial products and services. However, during the twelve months ended June 30, 2022, we generated significant revenue from the sale of loans.

 

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

 

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

 

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

 

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

 

Taxes consist of the current and deferred portion of federal and state income taxes. Effective January 1, 2021, the Banks became subject to state income tax in the Commonwealth of Kentucky in lieu of the Savings and Loan tax to which they had previously been subject.

 

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

 

Critical Accounting Policies  

 

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

 

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

 

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

 

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

 

6

 

 

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

 

Goodwill. We test goodwill for impairment at least annually and more frequently, if circumstances indicate its value may not be recoverable. We test goodwill for impairment by comparing the fair value of the reporting unit to the book value of the reporting unit. If the fair value exceeds book value, then goodwill is not considered to be impaired. Based on the annual goodwill impairment test at June 30, 2022, and consideration of potential triggering events through year end, management does not believe goodwill is impaired.

 

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

 

Our Operating Strategy

 

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

 

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

 

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

 

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

 

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

 

  managing our net interest margin and interest rate risk; and

 

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

 

7

 

 

Market Risk Analysis

 

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

 

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

 

In March 2022 the Federal Open Market Committee (“FOMC”) of the Federal Reserve Bank began raising the target range for the fed funds rate of interest and since that time has raised the short-term interest rate by 225 basis points. At June 30, 2022, we believe our risk associated with rising interest rates was low. Our IRR model indicated that at June 30, 2022, in the event of a sudden and sustained increase in prevailing market interest rates of 300 basis points, our EVE would be expected to decrease $11.7 million or 17.4% to $55.4 million, at which level our fair value of tangible equity to fair value of tangible assets would be expected to be 18.5%. The projected decrease in EVE in the event of a sudden and sustained 300 basis point increase in prevailing interest rates is within the parameters established by each subsidiary Bank’s Board of Directors. Computations or prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and deposit run-offs. These computations should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Banks may undertake in response to changes in interest rates. Certain shortcomings are inherent in this method of computing EVE. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

 

Statement of Financial Condition

 

General. At June 30, 2022, assets totaled $328.1 million, a decrease of $10.0 million, or 3.0%, compared to June 30, 2021. The decrease was related primarily to a decrease of $23.3 million or 7.8% in loans, net, which totaled $274.6 million at June 30, 2022. Somewhat offsetting the decrease in loans was an increase of $10.3 million in investment securities and a $4.2 million or 19.3% increase in cash and cash equivalents. Total liabilities decreased $9.7 million, or 3.4%, to $276.0 million at June 30, 2022, primarily as a result of decreased FHLB advances, which decreased $22.8 million or 40.1% and totaled $34.1 million at June 30, 2022, and were somewhat offset by increased deposits, which increased $13.0 million or 5.7% to $239.9 million at June 30, 2022.

 

8

 

 

Loans. Our primary lending activity is the origination of loans for the purchase, refinance, or construction of one- to four-family residential real estate located in our market areas. As opportunities arise, we also originate church loans, commercial real estate loans, and multi-family and nonresidential real estate loans. At June 30, 2022, one- to four- family residential real estate loans totaled $216.4 million, or 78.4% of total loans, compared to $224.1 million, or 74.8% of total loans, at June 30, 2021, caused by several reasons. Some borrowers decided to take advantage of high prices and sold all or part of their real estate holdings, while other borrowers sold their properties due to age or death. Other loans were lost to competing financial institutions who offered terms that we did not believe were prudent to match. Please refer to Note C-Loans of the Notes to Consolidated Financial Statements for a further breakdown of consumer and other loans.

 

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

 

   At June 30, 
   2022   2021   2020   2019   2018 
   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
Real estate loans:                                        
One-to four-family  $  216,432    78.4%  $  224,125    74.8%  $  222,489    77.4%  $  216,066    76.5%  $  206,908    76.1%
Construction   1,363    0.5%   5,433    1.8%   4,045    1.4%   3,757    1.13%   2,919    1.1%
Multi-family   14,252    5.1%   19,781    6.6%   12,373    4.3%   15,928    5.7%   15,113    5.6%
Land   1,062    0.4%   1,308    0.4%   765    0.3%   852    0.3%   677    0.3%
Farm   1,338    0.5%   2,234    0.8%   2,354    0.8%   3,157    1.1%   2,295    0.8%
Nonresidential real estate   31,441    11.4%   35,492    11.9%   33,503    11.7%   30,419    10.8%   32,413    11.39%
Commercial and industrial   1,006    0.4%   2,259    0.7%   2,214    0.8%   2,075    0.7%   1,917    0.7%
Consumer:                                                  
Consumer and other   8,327    3.0%   7,763    2.6%   8,387    2.9%   8,756    3.1%   8,174    3.0%
Loans on deposits   891    0.3%   1,129    0.4%   1,245    0.4%   1,415    0.5%   1,470    0.5%
Total loans   276,112    100%   299,524    100%   287,375    100%   282,425    100%   271,886    100%
                                                   
Allowance for loan losses   (1,529)        (1,622)        (1,488)        (1,456)        (1,576)     
Loans receivable, net  $274,583        $297,902        $285,887        $280,969        $270,310      

 

The following table sets forth certain information at June 30, 2022 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated maturity are reported as due in one year or less.

 

(in thousands)  Real Estate
Loans
   Commercial
Loans
   Consumer
Loans
   Total
Loans
 
One year or less  $55,028   $601   $493   $56,122 
More than one year to five years   131,113    405    8,725    140,243 
More than five years   79,747    -    -    79,747 
   $265,888   $1,006   $9,218   $276,112 

 

As of June 30, 2022, there were $54.5 million fixed-rate and $152.4 million adjustable-rate real estate loans maturing in more than a year, while there were $405,000 fixed-rate and $0 adjustable-rate commercial loans maturing in more than a year.

 

9

 

 

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

 

   Year Ended June 30, 
(in thousands)  2022   2021   2020 
Net loans at beginning of year  $297,902   $285,887   $280,969 
Loans originated:               
Real estate loans:               
Residential one-to four-family   60,146    67,859    53,601 
Construction   4,692    8,697    14,787 
Multi-family   9,871    1,720    2,287 
Farm   570    523    146 
Nonresidential real estate   4,706    7,038    8,667 
Commercial and industrial   1,309    1,343    1,502 
Consumer loans   4,209    2,179    4,419 
Total loans originated   85,503    89,359    85,409 
                
Deduct:               
Loan principal repayments and other   (108,993)   (76,742)   (80,136)
Decrease (increase) in allowance   93    (134)   (32)
Transfer to real estate acquired through foreclosure   (45)   (358)   (304)
Other   123    (110)   (19)
Net loan activity   (23,319)   12,015    4,918 
Net loans at end of period  $274,583   $297,902    285,887 

 

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

 

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

 

The allowance for loan losses totaled $1.5 million and $1.6 million at June 30, 2022 and 2021, respectively, which represented 0.55% and 0.54% of total loans, respectively. The allowance included no specific reserves at June 30, 2022 or 2021. Such reserves are calculated when a non-homogenous loan is considered impaired. An impaired loan is one in which it is likely that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Most of the Company’s loans are collateral-based and, in case of impairment, the loans are carried at the lower of cost or fair value less disposal costs.

 

10

 

 

Nonperforming loans, which consist of all loans 90 days or more past due and nonaccrual loans, totaled $5.8 million and $6.7 million at June 30, 2022 and 2021, respectively, a decrease of $836,000 or 12.6%. The allowance for loan losses totaled 26.2% and 24.4% of nonperforming loans at June 30, 2022 and 2021, respectively. In determining the allowance for loan losses at any point in time, management and the boards of directors of the subsidiary Banks apply a systematic process focusing on the risk of loss in the portfolio. First, the loan portfolio is segregated by loan types to be evaluated collectively and loan types to be evaluated individually. Delinquent multi-family and nonresidential loans are evaluated individually for potential impairment. Second, the allowance for loan losses is evaluated using historic loss experience adjusted for significant factors by applying these loss percentages to the loan types to be evaluated collectively in the portfolio. Our loss reserves do not include $427,000 in remaining discounts on acquired loans at June 30, 2022.

 

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

 

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

 

   Year Ended June 30, 
   2022   2021   2020   2019   2018 
                     
Allowance at beginning of period  $1,622   $1,488   $1,456   $1,576   $1,533 
Provision (credit) for loan losses   (60)   192    103    11    185 
Charge-offs:                         
Real estate loans   (31)   (23)   (65)   (190)   (240)
Consumer loans   (4)   (45)   (8)   -    - 
Total charge-offs   (35)   (68)   (73)   (190)   (240)
Recoveries:                         
Real estate loans   -    -    2    39    98 
Consumer loans   2    10    -    20    - 
Total recoveries   2    10    2    59    98 
Net charge-offs   (33)   (58)   (71)   (131)   (142)
Allowance at end of period  $1,529   $1,622   $1,488   $1,456   $1,576 
                          
Allowance to nonperforming loans   26.28%   24.47%   20.12%   18.14%   20.6%
Allowance to total loans outstanding at end of period   0.55%   0.54%   0.52%   0.52%   0.58%
Net charge-offs to average loans outstanding during the period   0.01%   0.02%   0.03%   0.05%   0.05%

 

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

 

11

 

 

   At June 30, 
   2022   2021   2020   2019   2018 
(Dollars in thousands)  Amount   % of Allowance to Total Allowance   % of Loans in Category to Total Loans   Amount   % of Allowance to Total Allowance   % of Loans in Category to Total Loans   Amount   % of Allowance to Total Allowance   % of Loans in Category to Total Loans   Amount   % of Allowance to Total Allowance   % of Loans in Category to Total Loans   Amount   % of Allowance to Total Allowance   % of Loans in Category to Total Loans 
Loans category:                                                                           
Residential one- to-four-family  $800    52.3%   78.4%  $749    49.0%   74.8%  $671    45.1%   77.4%  $685    47.1%   76.5%  $795    50.4%   75.5%
Construction   4    0.3%   0.5%   12    0.7%   1.8%   6    0.4%   1.4%   6    0.4%   1.3%   8    0.5%   1.8%
Multi-family   231    15.1%   5.1%   291    17.9%   6.6%   184    12.4%   4.3%   200    13.7%   5.7%   225    14.3%   5.5%
land   3    0.2%   0.4%   3    0.2%   0.4%   1    0.1%   0.3%   1    0.1%   0.3%   1    0.1%   0.3%
Farm   5    0.3%   0.5%   5    0.3%   0.8%   4    0.3%   0.8%   6    0.4%   1.1%   6    0.4%   0.9%
Nonresidential real estate   461    30.2%   11.4%   494    30.5%   11.9%   405    27.2%   11.7%   336    23.1%   10.8%   321    20.3%   11.8%
Commercial and industrial   2    0.1%   0.4%   5    0.3%   0.7%   3    0.2%   0.8%   5    0.3%   0.7%   3    0.2%   0.7%
Consumer and other   22    1.4%   3.0%   16    1.0%   2.6%   12    0.8%   2.9%   14    1.0%   3.1%   14    0.9%   3.0%
Loans on deposits   1    0.1%   0.3%   2    0.1%   0.4%   2    0.1%   0.4%   3    0.2%   0.5%   3    0.2%   0.5%
Unallocated   -    0.0%   0.0%   -    0.0%   0.0%   200    13.4%   0.0%   200    13.7%   0.0%   200    12.7%   0.0%
Total allowance for loan losses  $1,529    100.0%   100.0%  $1,577    100.0%   100.0%  $1,488    100.0%   100.0%  $1,456    100.0%   100.0%  $1,576    100.0%   100.0%

 

12

 

 

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

 

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

 

Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. Loans identified as impaired are evaluated on an individual basis. At June 30, 2022, there were no loans individually considered impaired with valuation adjustments.

 

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

 

   Year Ended June 30, 
   2022   2021   2020   2019   2018 
Nonaccrual loans:                    
Real estate loans  $4,048   $4,660   $4,415   $4,936   $3,668 
Commercial loans   -    -    4    1    7 
Consumer loans   75    21    5    9    2 
Total nonaccrual loans   4,123    4,681    4,424    4,946    3,677 
Accruing loans past due 90 days or more:                         
Real estate loans   287    243    1,135    1,747    2,419 
Commercial loans   1    -    -    49    - 
Consumer loans   -    -    -    -    - 
Total accruing loans past due 90 days or more   288    243    1,135    1,796    2,419 
Restructured loans not performing as agreed   1,408    1,731    1,836    1,286    1,569 
Total nonperforming loans   5,819    6,655    7,395    8,028    7,665 
Restructured loans performing as agreed   -    -    36    163    161 
Real estate acquired through foreclosure   10    82    640    710    710 
Total nonperforming assets and performing restructured loans  $5,829   $6,737   $8,071   $8,901   $8,536 
                          
Total nonperforming loans to total loans   2.11%   2.22%   2.57%   2.84%   2.80%
Total nonperforming loans to total assets   1.77%   1.97%   2.33%   2.43%   2.41%
Total nonperforming assets to total assets   1.78%   1.99%   2.54%   2.64%   2.64%

 

Interest income that would have been recorded for the years ended June 30, 2022 and 2021, had nonaccrual loans been current according to their original terms amounted to $27,000, and $27,000, respectively. Income related to nonaccrual loans included in interest income for the years ended June 30, 2022 and 2021 amounted to $48,000, and $49,000, respectively.

 

13

 

 

Federal regulations require us to regularly review and classify our assets. In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. Special mention assets totaled $896,000 and $1.6 million at June 30, 2022 and 2021, respectively.

 

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

 

   At June 30, 
(in thousands)  2022   2021   2020 
Substandard assets  $7,458   $8,925   $9,587 
Doubtful assets   -    -    - 
Loss assets   -    -    - 
Total classified assets  $7,458   $8,925   $9,587 

 

Substandard assets at June 30, 2022, consisted of 142 loans totaling $7.4 million and one parcel of real estate owned with an aggregate carrying value of $10,000, compared to substandard assets at June 30, 2021 which consisted of 157 loans totaling $8.8 million and two parcels of real estate owned with an aggregate carrying value of $82,000. At June 30, 2022, 0.1% of the Company’s substandard assets were represented by real estate acquired through foreclosure compared to 0.9% at June 30, 2021. During the fiscal years ended June 30, 2022 and 2021, the Company made loans to facilitate the purchase of its other real estate owned by qualified borrowers. The Company sold property with carrying values of $117,000 and $75,000 for $82,000 and $72,000 during the fiscal years ended June 30, 2022 and 2021, respectively. Such loans are considered loans to facilitate an exchange. Loans to facilitate the sale of other real estate owned and which were included in substandard loans totaled $0 and $43,000 at June 30, 2022 and 2021, respectively.

 

The table below summarizes other real estate owned at June 30, 2022:

 

(Dollars in thousands)  Number of Properties   Net carrying value 
Single-family   1   $10 
Building lots   -    - 
Total   1   $10 

 

14

 

 

 

The table below summarizes substandard loans at June 30, 2022:

 

   Number   Net carrying 
(Dollars in thousands)  of Loans   value 
One- to four-family   127   $5,408 
Multi-family   1    570 
Nonresidential real estate   3    1,073 
Farm   1    270 
Consumer   10    127 
Total   142   $7,448 

  

Other than disclosed above, there are no other loans at June 30, 2022 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

 

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

   At June 30, 
   2022   2021 
   30-59 Days   60-89 Days   30-59 Days   60-89 Days 
(in thousands)  Past Due   Past Due   Past Due   Past Due 
Real estate loans  $2,303   $364   $2,165   $408 
Commercial and industrial   72    -    6    - 
Consumer loans   169    19    116    4 
Total  $2,544   $383   $2,287   $412 

 

Securities. Our securities portfolio consists of mortgage-backed securities with maturities of 30 years or less, which totaled $10.8 million at June 30, 2022, an increase of $10.3 million, compared to the $495,000 total at June 30, 2021. The increase in these securities resulted from Management’s investment plan to earn additional interest spread on excess liquidity by investing in short-lived mortgage-backed securities. All of our mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie Mac.

 

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

 

   At June 30, 
   2022   2021   2020 
   Amortized   Fair   Amortized   Fair   Amortized   Fair 
(Dollars in thousands)  Cost   Value   Cost   Value   Cost   Value 
Available for sale securities:                        
Agency mortgage-backed: residential  $10,477   $10,477   $33   $33   $38   $38 
Agency bonds   -    -    -    -    500    503 
   $10,477   $10,477   $33   $33   $538   $541 
Held to maturity securities:                              
Agency mortgage-backed: residential  $339   $323   $462   $476   $598   $611 

 

15

 

 

At June 30, 2022 and 2021, we did not own any securities that had an aggregate book value in excess of 10% of our equity at that date.

  

At June 30, 2022 the book value of debt securities maturing in one to five years was $10.8 million with a weighted average yield of 3.16%, while those maturing in five to ten years totaled $58,000 with a weighted average yield of 1.90%. At June 30, 2022, we had no agency securities with adjustable rates.

 

Other Assets. Other assets at June 30, 2022 and 2021 include goodwill of $947,000, which was a result of the Company’s acquisition of Frankfort First, and bank owned life insurance policies with a carrying value of $2.8 million and $2.7 million at June 30, 2022 and 2021, respectively, of which First Federal of Kentucky is the owner and beneficiary. Both subsidiary Banks are members and stockholders of the Federal Home Loan Bank. FHLB stock, at cost, totaled $6.5 million at June 30, 2022 and 2021.

 

Deposits. Our primary source of funds is retail deposit accounts held primarily by individuals within our market areas. Deposits totaled $239.9 million at June 30, 2022, increasing $13.0 million or 5.7% between the two periods.

 

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

 

   At June 30, 
(in thousands)  2022   2021   2020 
Certificate of deposit accounts  $124,705   $124,892   $134,155 
Demand, transaction and savings accounts   115,152    101,951    78,118 
Total classified assets  $239,857   $226,843   $212,273 

 

The following table indicates at June 30, 2022, the amount of certificate of deposit accounts with balances equal to or greater than $100,000, by time remaining until maturity. The Federal Deposit Insurance Corporation (“FDIC”) currently insures deposits up to $250,000 in most cases, making certificate of deposit accounts with balances equal to or greater than $100,000 less volatile as before the limit was raised.

 

   Certificates 
(in thousands)  of Deposit 
Maturity period:    
Three months or less  $12,690 
Over three months through six months   13,405 
Over six months through twelve months   19,879 
Over twelve months   20,159 
Total  $66,133 

 

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

 

   At June 30, 
(in thousands)  2022   2021   2020 
Interest rate            
0.01-0.99%  $96,937   $69,400   $30,125 
1.00-1.99%   20,521    36,613    75,796 
2.00-2.99%   7,247    18,879    28,234 
Total  $124,705   $124,892   $134,155 

 

16

 

 

The following table sets forth the amount and maturities of certificate accounts at June 30, 2022.

 

   Amount Due   Percentage of 
(in thousands)  Less than One Year   More than One Year to Two Years   More than Two Years to Three Years   More than Three Years   Total   Total Certificate Accounts 
Interest rate                        
0.01-0.99%  $76,213   $20,672   $52   $-   $96,937    77.7%
1.00-1.99%   3,941    6,882    6,661    3,037    20,521    16.5%
2.00-2.99%   5,170    766    1,311    -    7,247    5.8%
Total  $85,324   $28,320   $8,024   $3,037   $124,705    100.0%

 

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

 

   Year Ended June 30, 
   2022   2021   2020 
(in thousands)  Average
Balance
   Average
Rate
   Average
Balance
   Average
Rate
   Average
Balance
   Average
Rate
 
Noninterest-bearing demand  $16,033    0.00%  $10,472    0.00%  $6,796    0.00%
Interest-bearing demand   18,519    0.22%   18,438    0.16%   14,181    0.16%
Savings accounts   73,688    0.37%   64,611    0.42%   51,123    0.41%
Certificates of deposit   126,371    0.85%   127,371    1.11%   131,728    1.65%

 

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

 

   At June 30, 
(in thousands)  2022   2021   2020 
Beginning balance  $226,843   $212,273   $195,836 
                
Increase (decrease) before interest credited   11,627    12,859    14,032 
Interest credited   1,387    1,711    2,405 
Net increase (decrease) in deposits   13,014    14,570    16,437 
Ending balance  $239,857   $226,843   $212,273 

 

Borrowings. Advances from the Federal Home Loan Bank of Cincinnati amounted to $34.1 million and $56.9 million at June 30, 2022 and 2021, respectively.

 

17

 

 

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

 

   Year Ended June 30, 
(in thousands)  2022   2021   2020 
Balance outstanding at end of period  $34,066   $56,873   $54,715 
Maximum amount of advances outstanding at any month during the period  $55,369   $61,048   $65,198 
Average advances outstanding during the period  $46,843   $54,319   $58,788 
Weighted average interest rate during the period   0.78%   0.79%   1.86%
Weighted average interest rate at end of period   0.96%   0.71%   0.99%

 

Capital. Total shareholders’ equity totaled $52.0 million at June 30, 2022, a decrease of $271,000 or 0.5%, compared to June 30, 2021. The decrease resulted primarily from repurchase of common stock by the Company for placement in treasury.

 

Effective January 1, 2015, the Company and the Banks became subject to the capital regulations in accordance with Basel III. These regulations established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conservation buffer (“CCB”). The regulations also included a revised definition of capital and changed the risk-weighting of certain assets. For purposes of prompt corrective action, the new regulations establish definitions of “well capitalized” as follows:

 

   Minimum for banks to be
well-capitalized under
regulatory requirements
Tier 1 Capital to Total Average Assets  5.0%
Common Equity Tier 1 Capital  6.5%
Tier 1 Capital to Risk-Weighted Assets  8.0%
Total Capital to Risk-Weighted Assets  10.0%

 

Additionally, the CCB of Common Equity Tier 1 Risk-Based capital above the minimum risk-based capital requirements was introduced. The CCB is 2.5%. The Company and the Banks, in order to avoid limitations on capital distributions, including dividend payments, engaging in share repurchases and certain discretionary bonus payments to executive officers, must maintain the CCB at the appropriate level.

 

Community Bank Leverage Ratio

 

Certain community banks and holding companies (which include the Company, Frankfort First, First Federal of Kentucky and First Federal of Hazard) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The CBLR ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets as reported on the banking organization’s applicable regulatory filings. The Banks elected to utilize the CBLR framework effective for the quarter ended March 31, 2021. See Note K-Stockholders’ Equity and Regulatory Capital in audited financial statements.

 

At June 30, 2022, both First Federal of Hazard’s and First Federal of Kentucky’s regulatory capital substantially exceeded all minimum regulatory capital requirements. Management is not aware of any recent event that would cause this classification to change. See Note K-Stockholders’ Equity and Regulatory Capital in the Notes to Financial Statements.

 

18

 

 

Results of Operations for the Years Ended June 30, 2022 and 2021

 

General. Net income totaled $1.6 million or $0.19 diluted earnings per share for the year ended June 30, 2022, compared to net income of $1.8 million or $0.22 per common share for the twelve months ended June 30, 2021.

 

Net income decreased $230,000 or 12.6% year to year primarily due to decreased net interest income, decreased non-interest income and increased income taxes, which were somewhat offset by decreased non-interest expenses and decreased provision for loan losses. Net interest income decreased $851,000 or 8.5% totaling $9.2 million for the year just ended.

 

Interest Income. Total interest income for the fiscal year ended June 30, 2022 was $10.9 million, a decrease of $1.2 million, or 10.2%, compared to the fiscal year ended June 30, 2021. The decrease in interest income was due primarily to lower average rates earned on interest-earning assets, as well as lower average balances.

 

Interest income from loans decreased $1.3 million or 11.0% to $10.7 million for the year ended June 30, 2022 due to a decrease in the average rate earned on the portfolio, which decreased 28 basis points to 3.76% for the year just ended, while the average balance of the loan portfolio decreased $12.9 million or 4.4% to $283.3 million for the year just ended. Loans are the largest component of our interest-earning assets and came under pricing pressure until March 2022 when the Federal Open Market Committee began raising the overnight interest rates in an attempt to fight high inflation. During that time we encountered rate competition for existing as well as for new loans in our portfolio, which resulted in a decreased average rate earned on the loan portfolio. In addition to a relatively low interest rate environment in the first nine months of our fiscal year, loans receivable, net, decreased as some borrowers decided to take advantage of high prices and sold all or part of their real estate holdings. Some borrowers sold their properties due to age or death and some loans were lost to competing financial institutions who offered terms that our Banks did not believe were prudent to match.

 

Interest income from mortgage-backed securities increased $9,000 or 64.3% to $23,000 for the recently ended fiscal year primarily due to a decrease in the volume of assets, as we invested in short-lived mortgage-backed securities to take advantage of higher interest rates available in the latter part of the fiscal year. Interest income from other investment securities decreased $3,000 for the recently ended year. Income from other interest-earning assets increased $76,000 or 48.7% year over year and totaled $232,000 for the recently ended fiscal year.

 

Interest Expense. Interest expense totaled $1.8 million for the fiscal year ended June 30, 2022, a decrease of $387,000, or 18.1%, from fiscal 2021. The decrease in interest expense resulted primarily from lower average costs of deposits along with lower average balances of interest-bearing liabilities. Interest expense on deposits decreased $324,000 or 18.9% to $1.4 million for the 2022 fiscal year primarily due to a decrease in the average rate paid on those deposits, which decreased 17 basis points to 0.64% for the recently-ended fiscal year. The average balance of deposits increased $8.2 million or 3.9% to $218.6 million for the year just ended. Interest expense on certificates of deposit was primarily responsible for the decrease in interest expense on deposits for the year and was due principally to a decrease in the rate paid on certificates of deposits. The average rate paid on certificates of deposit decreased 26 basis points to 0.85% for the year, while the average balance outstanding decreased $1.0 million or 0.8% to $126.4 million for the recently-ended year. The average balance of savings and interest-bearing demand deposits increased $9.1 million or 14.1% and $81,000 or 0.4%, respectively, totaling $73.7 million and $18.5 million for the 2022 fiscal year, respectively. Interest expense on borrowings decreased $63,000 or 14.7% to $367,000 for the twelve months ended June 30, 2022, primarily due to a decrease in the average balance of FHLB advances outstanding. The average balance of borrowings decreased $7.5 million or 13.8% to $46.8 million for the year just ended rate, while the average rate paid on borrowings decreased one basis point year over year to 0.78% for the recently-ended period.

 

Net Interest Income. As a result of the aforementioned changes in interest income and interest expense, net interest income before provision for loan losses decreased $851,000 or 8.5% to $9.2 million for the 2022 year. As indicated on the following table, our net interest margin decreased from 3.14% for the 2021 fiscal year to 2.81% for the year just ended. The Banks’ net interest margins began to shrink in response to the accommodative policy begun in March 2021.

 

19

 

 

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

 

   2022   2021   2020 
       Interest           Interest           Interest     
   Average   And   Yield/   Average   And   Yield/   Average   And   Yield/ 
(Dollars in thousands)  Balance   Dividends   Cost   Balance   Dividends   Cost   Balance   Dividends   Cost 
Interest-earning assets:                                    
Loans  $283,323   $10,659    3.76%  $296,247   $11,979    4.04%  $282,154   $12,364    4.38%
Mortgage-backed securities   1,232    23    1.87    567    14    2.47    708    22    3.11 
Other securities   -    -    -    99    3    3.03    670    18    2.69 
Other interest-earning assets   41,771    232    0.56    21,816    156    0.72    22,345    419    1.88 
Total interest-earning assets   326,326    10,914    3.34    318,729    12,152    3.81    305,877    12,823    4.19 
Less: ALLL   (1,578)             (1,569)             (1,446)          
Noninterest-earning assets   12,107              12,073              26,063           
Total assets  $336,855             $329,233             $330,494           
                                              
Interest-bearing liabilities:                                             
Demand deposits  $18,519   $40    0.22%  $18,438   $30    0.16%  $14,181   $22    0.16%
Savings   73,688    273    0.37    64,611    268    0.42    51,123    208    0.41 
Certificates of deposit   126,371    1,074    0.85    127,371    1,413    1.11    131,728    2,175    1.65 
Total deposits   218,578    1,387    0.64    210,420    1,711    0.81    197,032    2,405    1.22 
Borrowings   46,843    367    0.78    54,319    430    0.79    58,788    1094    1.86 
Total interest-bearing liabilities   265,421    1,754    0.66    264,739    2,141    0.81    255,820    3,499    1.37 
Noninterest-bearing demand deposits   16,032              10,472              6,796           
Noninterest-bearing liabilities   3,072              2,047              1,876           
Total liabilities   284,525              276,958              264,492           
                                              
Shareholders’ equity   52,330              51,975              66,002           
Total liabilities and shareholders’ Equity  $336,855             $329,233             $330,494           
Net interest income/average yield       $9,160    2.68%       $10,011    3.00%       $9,324    2.82%
                                              
Net interest margin             2.81%             3.14%             3.05%
                                              
Average interest-earning assets to Average interest-bearing liabilities             122.95%             120.39%             119.57%

 

20

 

 

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

 

   Twelve months ended
June 30, 2022
   Twelve months ended
June 30, 2021
 
   Increase (Decrease) Due to
Changes In
   Increase (Decrease) Due to
Changes In
 
(In thousands)  Volume   Rate   Total   Volume   Rate   Total 
Interest-earning assets:                        
Loans  $(509)  $(811)  $(1,320)  $707   $(1,092)  $(385)
Mortgage-backed securities   11    (2)   9    (4)   (4)   (8)
Other securities   (3)   -    (3)   (18)   3    (15)
Other interest-earning assets   101    (25)   76    (10)   (253)   (263)
Total interest-earning assets   (400)   (838)   (1,238)   675    (1,346)   (671)
                               
Interest-bearing liabilities:                              
Demand deposits  $-   $10   $10   $7   $1   $8 
Savings   21    (16)   5    56    4    60 
Certificates of deposit   (11)   (328)   (339)   (70)   (692)   (762)
Borrowings   (59)   (4)   (63)   (78)   (586)   (664)
Total interest-bearing liabilities   (49)   (338)   (387)   (85)   (1,273)   (1,358)
Increase (decrease) in net interest income  $(351)  $(500)  $(851)  $760   $(73)  $687 

 

Provision for Losses on Loans. A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments and other factors related to the collectability of the loan portfolio. Based upon an analysis of these factors, management recorded a credit of $60,000 for losses on loans for the fiscal year ended June 30, 2022, a decrease of $252,000, compared to a provision of $192,000 for fiscal 2021. Management believes all nonperforming loans are adequately collateralized or have been written down to their realizable value. See discussion of Allowance for Loan Losses and Asset Quality above.

 

Non-interest Income. Other non-interest income decreased $80,000 or 13.4% to $515,000 for the fiscal year ended June 30, 2022, due primarily to a decrease of $125,000 in net gains on sales of loans, which totaled $255,000 for the year just ended. The Banks sell most of their long-term, fixed rate mortgages to FHLB as part of the overall interest rate risk strategy. Net losses on sales of REO increased $16,000 or 84.2% to $35,000 for the year just ended.

 

Non-interest Expense. Non-interest expense decreased $574,000 or 7.0% to $7.7 million for the fiscal year ended June 30, 2022 compared to fiscal 2021 primarily due to lower employee compensation and benefits cost, as well as lower data processing costs and FDIC insurance premiums.

 

21

 

 

Employee compensation and benefits expense decreased $505,000 or 9.4% and totaled $4.9 million for the fiscal year just ended primarily due to a decrease in the required contribution of the Company’s defined benefit (“DB”) pension plan. The Company’s DB plan administrator estimated contributions for the recently-ended fiscal year to be $375,000 compared to $955,000 for the previous fiscal year. Data processing expense decreased $102,000 or 15.8% and totaled $545,000 for the twelve months ended June 30, 2022, due chiefly to lower costs associated with the Banks’ core processing. FDIC insurance premiums decreased $97,000 or 57.7% to $71,000 for the year just ended as premiums returned to a normal level after rising tremendously in the prior fiscal year due to recognition of goodwill impairment in the fiscal year ended June 30, 2020.

 

Somewhat offsetting the decreases in various non-interest expenses were increases in auditing and accounting, and other non-interest expenses. Auditing and accounting expenses increased $58,000 or 36.7% and totaled $216,000 for the fiscal year just ended as the Banks outsourced additional internal audit functions. Other non-interest expenses increased $51,000 or 9.8% to $573,000 for the twelve months just ended and was due to several increased expenses including costs for the annual shareholders’ meeting, cost of insurance and other expenses incurred as the business transitioned out of the pandemic.

 

Income Taxes. Income tax expense increased $125,000 or 35.5% to $477,000 for the fiscal year just ended. The increase in income tax expense was primarily related to the Banks being subject to Kentucky corporate income tax during the entire fiscal year. The effective income tax rate for the years ended June 30, 2022 and 2021, was 23.1% and 16.2%, respectively.

 

Liquidity and Capital Resources

 

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

 

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

 

Our most liquid assets are cash, federal funds sold and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period. At June 30, 2022 and June 30, 2021, cash and cash equivalents totaled $25.8 million and $21.6 million, respectively. Time deposits in other financial institutions totaled $0 and $247,000 at June 30, 2022 and 2021, respectively, and securities classified as available-for-sale, which provide additional sources of liquidity, totaled $10.5 million and $33,000 at June 30, 2022 and 2021, respectively.

 

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

 

Our primary investing activities are the origination of loans and the purchase of investment securities. In fiscal 2022 we originated $85.5 million of loans, although loan prepayments and repayments exceeded that amount by $23.5 million. In fiscal 2021 we originated $89.4 million of loans, which exceeded loan prepayments and repayments by $12.2 million. During fiscal 2022 and 2021 proceeds from principal repayments on loans totaled $109.0 million and $76.8 million, respectively. During fiscal 2022 we invested $10.4 million in short-lived mortgage-backed securities to earn additional yield on excess liquidity.  

 

22

 

 

Financing activities consist primarily of activity in deposit accounts and in FHLB advances. Total deposits increased $13.0 million for the year ended June 30, 2022, compared to a net increase of $14.6 million for the year ended June 30, 2021. We decreased FHLB advances by $22.8 million from June 30, 2021 to June 30, 2022, using proceeds from loan repayments and increased deposits. Deposit flows are affected by the overall level of interest rates, the products and corresponding interest rates offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. FHLB advances are collateralized by a blanket mortgage on the 1-4 family residential mortgages owned by the banks. See Note H-Advances from the Federal Home Loan Bank in Notes to Consolidated financial Statements. At June 30, 2022, the Banks had combined additional FHLB borrowing capacity of $96.6 million.

 

Commitments and Contractual Obligations

 

At June 30, 2022, we had $6.0 million in mortgage commitments. Certificates of deposit due within one year of June 30, 2022 totaled $85.3 million, or 35.6% of total deposits. If these deposits do not remain with us, we might be required to seek other sources of funds, including FHLB advances or other certificates of deposit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2023. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Off-balance Sheet Arrangements

 

For the year ended June 30, 2022, other than loan commitments, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Dividend Policy

 

In fiscal 2022, the Company’s aggregate dividend of $1.4 million was less than its net income by $196,000. In fiscal 2021, the Company’s aggregate dividend of $1.4 million was less than its net income by $432,000. Approximately 58.0% of the shares of Kentucky First Federal are held by First Federal MHC, a mutual holding company created in 2005. Under regulations of the Board of Governors of the Federal Reserve System mutual holding companies, who have waived their dividends prior to December 1, 2009, may continue to waive these dividends provided there is no objection by the Federal Reserve. This waiver action is conditioned on providing appropriate notice and absent the Federal Reserve’s determination that the waiver would be detrimental to the safe and sound operations of the banks. First Federal MHC put the issue to a vote of the members August 2012 and each of the succeeding years since 2012. Members of First Federal MHC voted in favor of the dividend waiver on all occasions and the Federal Reserve Bank of Cleveland subsequently approved the waiver of the dividends including an approval in 2022. As a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 2023. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Indeed, the Banks still far exceed all regulatory required capital levels. Therefore, we expect to continue to seek approval from the Federal Reserve to allow First Federal MHC to waive its right to dividends. If management should anticipate a long-term trend in which dividends consistently exceed net income (either due to regulatory mandate or a drop in income levels), the dividend policy would be reconsidered. Management cautions that comparison between the Company’s published earnings per share and the Company’s published dividends per share does not lead to an accurate portrayal of the relationship between net income and dividends paid, because the published dividend per share is calculated with the inclusion of the shares owned by First Federal MHC.

 

23

 

 

Impact of Inflation and Changing Prices

 

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

 

24

 

 

Report of Independent Registered Public Accounting Firm

 

Shareholders, Board of Directors and Audit Committee

Kentucky First Federal Bancorp

Frankfort, Kentucky

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Kentucky First Federal Bancorp (“Company”) as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

 

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

25

 

 

Shareholders, Board of Directors and Audit Committee

Kentucky First Federal Bancorp

Page 2

 

Allowance for Loan and Lease Losses (ALLL)

 

As more fully described in Notes A and C to the consolidated financial statements, the Company estimates the ALLL for probable incurred loan losses. The ALLL consists of a specific component for loans that are classified as impaired and a general component for all other loans. Impairment on loans determined to be impaired is measured on a loan-by-loan basis.

 

Historical loss experience is an input applied to loans not considered impaired and is adjusted for current factors, including the nature and volume of the portfolio, trends in level of delinquent and problem loans, and economic conditions.

 

We identified the valuation of the ALLL as a critical audit matter. The primary reason for our determination that the ALLL is a critical audit matter is that auditing the estimated ALLL involved significant judgment and complex review. Further, auditing the ALLL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades.

 

Our audit procedures related to the estimated ALLL included the following procedures, among others.

 

Obtaining an understanding of the design of internal controls over the ALLL calculation.

 

Testing of completeness and accuracy of the information utilized in the calculation of the ALLL.

 

Testing clerical/computational accuracy of the calculation.

 

Evaluating the reasonableness of management’s qualitative adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. Our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period.

 

Evaluating management’s risk ratings of loans through utilizing internal professionals to assist us in evaluating the appropriateness of loan grades and identification of impaired loans.

 

Evaluating specific allowances and/or write-downs on impaired loans.

 

Preparation of an independent estimate of an acceptable range of the ALLL to compare to management’s estimate.

 

/s/ FORVIS, LLP

 

(Formerly, BKD, LLP)

 

We have served as the Company’s auditor since 2018.

 

Louisville, Kentucky

September 28, 2022

 

26

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED BALANCE SHEETS

June 30, 2022 and 2021

(Dollar amounts in thousands, except per share data)

 

   2022   2021 
ASSETS        
         
Cash and due from financial institutions  $2,002   $1,834 
Fed funds sold   14,824    5,001 
Interest-bearing demand deposits   8,997    14,813 
Cash and cash equivalents   25,823    21,648 
           
Time deposits in other financial institutions   
-
    247 
Securities available for sale   10,477    33 
Securities held-to-maturity, at amortized cost- approximate fair value of $323 and $476 at June 30, 2022 and 2021, respectively   339    462 
Loans held for sale   152    1,307 
Loans, net of allowance of $1,529 and $1,622 at June 30, 2022 and 2021, respectively   274,583    297,902 
Other real estate owned, net   10    82 
Premises and equipment, net   4,563    4,697 
Federal Home Loan Bank stock, at cost   6,498    6,498 
Accrued interest receivable   649    694 
Bank-owned life insurance   2,750    2,672 
Goodwill   947    947 
Prepaid income taxes   382    40 
Prepaid expenses and other assets   907    834 
           
Total assets  $328,080   $338,063 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Deposits  $239,857   $226,843 
Federal Home Loan Bank advances   34,066    56,873 
Advances by borrowers for taxes and insurance   766    838 
Accrued interest payable   12    20 
Deferred income taxes   889    614 
Other liabilities   465    579 
Total liabilities   276,055    285,767 
           
Commitments and contingencies   
-
    
-
 
           
Shareholders’ equity          
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued and outstanding   
-
    
-
 
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued   86    86 
Additional paid-in capital   34,892    34,916 
Retained earnings   20,560    20,364 
Unearned employee stock ownership plan (ESOP)   (5)   (102)
Treasury shares at cost, 441,369 and 369,349 common shares at June 30, 2022 and 2021, respectively   (3,508)   (2,968)
Accumulated other comprehensive income   
-
    
-
 
Total shareholders’ equity   52,025    52,296 
           
Total liabilities and shareholders’ equity  $328,080   $338,063 

 

The accompanying notes are an integral part of these statements.

 

27

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended June 30, 2022 and 2021

(Dollar amounts in thousands, except per share data)

 

   2022   2021 
Interest income        
Loans, including fees  $10,659   $11,979 
Mortgage-backed securities   23    14 
Other securities   
-
    3 
Interest-bearing deposits and other   232    156 
Total interest income   10,914    12,152 
           
Interest expense          
Deposits   1,387    1,711 
Borrowings   367    430 
Total interest expense   1,754    2,141 
Net interest income   9,160    10,011 
Provision (credit) for loan losses   (60)   192 
Net interest income after provision for loan losses   9,220    9,819 
           
Non-interest income          
Earnings on bank-owned life insurance   78    78 
Net gains on sales of loans   255    380 
Net loss on sales of REO   (35)   (19)
Valuation adjustment for REO   
-
    (19)
Net loss on sales of property   
-
    (2)
Other   217    177 
Total non-interest income   515    595 
           
Non-interest expense          
Employee compensation and benefits   4,853    5,358 
Data processing   545    647 
Occupancy and equipment   632    649 
FDIC insurance premiums   71    168 
Voice and data communications   123    109 
Advertising   135    153 
Outside service fees   166    179 
Audit and accounting   216    158 
Franchise and other taxes   150    131 
Foreclosure and REO expense, net   101    66 
Regulatory Assessments   103    102 
Other   573    522 
Total non-interest expense   7,668    8,242 
Income before income taxes   2,067    2,172 
           
Income tax expense          
Current   202    575 
Deferred   275    (223)
Total income tax expense   477    352 
           
NET INCOME  $1,590   $1,820 
           
EARNINGS  PER SHARE          
Basic and diluted
  $0.19   $0.22 

 

The accompanying notes are an integral part of these statements.

 

28

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

For the years ended June 30, 2022 and 2021

(Dollar amounts in thousands)

 

   2022   2021 
Net income  $1,590   $1,820 
           
Other comprehensive loss, net of tax-related effects:          
Unrealized holding losses on securities designated as available for sale during the year, net of tax benefits of $(0) and $(1) in 2022 and 2021, respectively   
-
    (2)
Comprehensive income  $1,590   $1,818 

 

The accompanying notes are an integral part of these statements.

 

29

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the years ended June 30, 2022 and 2021

(Dollar amounts in thousands, except per share data)

 

   Common
stock
   Additional
paid-in
capital
   Retained
earnings
   Unearned
employee stock
ownership plan
(ESOP)
   Treasury
shares
   Accumulated
other
comprehensive
income
   Total 
Balance at June 30, 2020  $86   $34,981   $19,932   $(289)  $(2,801)  $         2   $51,911 
Net income   -    
-
    1,820    
-
    
-
    
-
    1,820 
Allocation of ESOP shares   -    (65)   
-
    187    
-
    
-
    122 
Acquisition of shares for treasury   -    
-
    
-
    
-
    (167)   
-
    (167)
Other Comprehensive Loss   -    
-
    
-
    
-
    
-
    (2)   (2)
Cash dividends of $0.40 per common share   -    
-
    (1,388)   
-
    
-
    
-
    (1,388)
                                    
Balance at June 30, 2021  $86   $34,916   $20,364   $(102)  $(2,968)  $
-
   $52,296 
Net income   -    
-
    1,590    
-
    
-
    
-
    1,590 
Allocation of ESOP shares   -    (24)   
-
    97    
-
    
-
    73 
Acquisition of shares for treasury   -    
-
    
-
    
-
    (540)   
-
    (540)
Cash dividends of $0.40 per common share   -    
-
    (1,394)   
-
    
-
    
-
    (1,394)
                                    
Balance at June 30, 2022  $86   $34,892   $20,560   $(5)  $(3,508)  $
-
   $52,025 

 

The accompanying notes are an integral part of these statements.

 

30

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended June 30, 2022 and 2021

(Dollar amounts in thousands)

 

   2022   2021 
Cash flows from operating activities:        
Net income  $1,590   $1,820 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:          
           
Depreciation   285    288 
Accretion of purchased loan discount   (50)   (321)
Amortization of purchased loan premium   
-
    26 
Amortization of discounts and premiums on investment securities, net   6    
-
 
Amortization of deferred loan origination costs (fees)   (98)   7 
Net gain on sale of loans   (255)   (380)
Valuation adjustment of REO   
-
    19 
Net loss on real estate owned   35    19 
ESOP compensation expense   73    122 
Net loss on sale of property & equipment   
-
    2 
Earnings on bank-owned life insurance   (78)   (78)
Provision (credit) for loan losses   (60)   192 
Origination of loans held for sale   (4,789)   (9,963)
Proceeds from loans held for sale   6,199    9,703 
Deferred income tax   275    (223)
Changes in:          
Accrued interest receivable   45    136 
Prepaid expenses and other assets   (415)   213 
Accrued interest payable   (8)   (7)
Accounts payable and other liabilities   (114)   6 
Net cash provided by operating activities   2,641    1,581 
           
Cash flows from investing activities:          
Purchase of investments available for sale   (10,449)   
-
 
Maturities of time deposits in other financial institutions   247    1,982 
Investment securities maturities, prepayments and calls:          
Held to maturity   118    129 
Available for sale   4    506 
Proceeds from sale of premises & equipment   
-
    30 
Loans originated for investment, net of principal collected   23,514    (12,220)
Proceeds from sale of real estate owned   50    829 
Additions to real estate owned   
-
    (1)
Additions to premises and equipment, net   (151)   (101)
Net cash provided by (used in) investing activities   13,333    (8,846)
           
Cash flows from financing activities:          
Net change in deposits   13,014    14,570 
Payments by borrowers for taxes and insurance, net   (72)   38 
Proceeds from Federal Home Loan Bank advances   9,000    51,600 
Repayments on Federal Home Loan Bank advances   (31,807)   (49,442)
Treasury stock purchases   (540)   (167)
Dividends paid on common stock   (1,394)   (1,388)
Net cash (used in) provided by financing activities   (11,799)   15,211 
           
Net increase in cash and cash equivalents   4,175    7,946 
           
Beginning cash and cash equivalents   21,648    13,702 
           
Ending cash and cash equivalents  $25,823   $21,648 

 

The accompanying notes are an integral part of these statements.

 

31

 

 

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the years ended June 30, 2022 and 2021

(Dollar amounts in thousands)

 

   2022   2021 
Supplemental disclosure of cash flow information:        
Cash paid during the year for:        
Income taxes  $550   $475 
           
Interest on deposits and borrowings  $1,762   $2,148 
           
Supplemental disclosure of noncash investing activities:          
Transfers from loans to real estate acquired through foreclosure  $45   $358 
           
Loans disbursed upon sales of real estate acquired through foreclosure  $32   $50 

 

The accompanying notes are an integral part of these statements.

 

32

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

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

 

2. Use of Estimates: The consolidated financial information presented herein has been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP.”) To prepare financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Such estimates include, but are not limited to, the allowance for loan losses, goodwill, and deferred taxes.

 

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

 

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

33

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3. Debt Securities: (continued)

 

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

 

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

 

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

 

5. Loans held for sale, Mortgage Servicing Rights, and Lender Risk Account: Loans held for sale are carried at the lower of cost (less principal payments received) or fair value, calculated on an aggregate basis. At June 30, 2022 and 2021 the Company had $152,000 and $1.3 million in loans held for sale, respectively.

 

In selling loans, the Company utilizes a program with the Federal Home Loan Bank of Cincinnati, (“FHLB”), retaining servicing on loans sold. Mortgage servicing rights on originated loans that have been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. The Company recorded amortization related to mortgage servicing rights totaling $20,000 and $28,000 during the years ended June 30, 2022 and 2021, respectively. The carrying value of the Company’s mortgage servicing rights, which approximated fair value, totaled approximately $186,000 and $147,000 at June 30, 2022 and 2021, respectively.

 

The Company was servicing mortgage loans of approximately $23.2 million and $18.3 million that had been sold to the Federal Home Loan Bank at June 30, 2022 and 2021, respectively.

 

34

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

5. Loans held for sale, Mortgage Servicing Rights, and Lender Risk Account: (continued)

 

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

 

Servicing fee income which is reported on the income statement as other non-interest income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $42,000 and $14,000 for the fiscal years ended June 30, 2022 and 2021, respectively. Late fees and ancillary fees related to loan servicing are not material.

 

Certain loan sale transactions with FHLB provide for the establishment of a Lender Reserve Account (“LRA”). The LRA consists of amounts withheld by FHLB from loan sale proceeds for absorbing inherent losses that are probable on those sold loans. These withheld funds are an asset to the Company, as they are scheduled to be paid to the Company in future years, net of any credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are reevaluated at each measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis and the asset evaluated for impairment.

 

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

 

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

 

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

 

35

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

6. Allowance for loan losses: (continued)

 

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

 

Residential Real Estate

 

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

 

We offer a mix of adjustable-rate and fixed-rate mortgage loans with terms up to 30 years for owner-occupied properties. For these properties a borrower may be able to borrow up to 95% of the value with private mortgage insurance. Alternatively, the borrower may be able to borrow up to 90% of the value through other programs offered by the bank.

 

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

 

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

 

Multi-family and Nonresidential Loans

 

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

 

36

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

6. Allowance for loan losses: (continued)

 

Consumer lending

 

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

 

The Banks choose the most appropriate method for accounting for impaired loans. For secured loans, which make up the vast majority of the loans in the Banks’ portfolio, this method involves determining the fair value of the collateral, reduced by estimated selling costs. Where appropriate, the Banks would account for impaired loans by determining the present value of expected future cash flows discounted at the loan’s effective interest rate.

 

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

 

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

 

With respect to the Banks’ investment in troubled debt restructurings, multi-family and nonresidential loans, and the evaluation of impairment thereof, such loans are nonhomogenous and, as such, may be deemed to be collateral-dependent when they become more than 90 days delinquent. We obtain updated independent appraisals in these situations or when we suspect that the previous appraisal may no longer be reflective of the property’s current fair value. This process varies from loan to loan, borrower to borrower, and also varies based on the nature of the collateral.

 

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

 

37

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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

 

9. Premises and Equipment: Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. The cost of premises and equipment includes expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation is provided on the straight-line method over the useful lives of the assets, estimated to be forty years for buildings, ten to forty years for building improvements, and five to ten years for furniture and equipment. When management initiates a plan to dispose of assets, those assets are transferred to fixed assets held for sale and evaluated for potential impairment. At June 30, 2022 and 2021, the Company had fixed assets held for sale of $161,000 related to a branch office no longer in use and included in other assets on the balance sheet. No impairment losses have been taken on the property. The property was sold in July 2022 for $180,000.

 

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

 

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

 

Kentucky First Federal Bancorp and Frankfort First Bancorp, Inc., each are subject to state income taxes in the Commonwealth of Kentucky. Both of the Banks became subject to state income tax in the Commonwealth on January 1, 2021, according to legislation enacted in the spring of 2019. On March 26, 2019, Kentucky enacted H.B. 354 repealing the bank franchise tax. On April 9, 2019, Kentucky enacted related legislation, H.B. 458, which made technical corrections to H.B. 354. Beginning on or after January 1, 2021, the banks are subject to the corporation income tax and limited liability entity tax (“LLET”) instead of the savings and loan tax. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before 2018.

38

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

11. Retirement and Employee Benefit Plans: The Banks participate in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”), which is a tax-qualified, multi-employer defined benefit pension fund covering all employees who qualify as to length of service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a participating employer may be used to provide benefits to participants of other participating employers. Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $248.6 million and $253.2 million for the plan years ended June 30, 2021 and 2020, respectively. Our contributions for fiscal 2022 and 2021 were not more than 5% of the total contributions made to the Pentegra DB Plan. Pension expense is the net contributions, which are based upon covered employees’ age and salaries and are dependent upon the ultimate prescribed benefits of the participants and the funded status of the plan. The Company recognized expense related to the plans totaling approximately $375,000 and $955,000 for the fiscal years ended June 30, 2022 and 2021, respectively. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. As of July 1, 2021, the most recent period for which information is available, the Banks had an adjusted funding target attainment percentage (“AFTAP”) of 99.14%. There are no funding improvement plans or surcharges to participants. Effective July 1, 2016, sponsorship of the plan was transferred to the Company, benefits ratios were standardized and prospectively each bank will contribute to the plan based generally on its pro rata share of future benefits. Effective April 1, 2019, the Company elected to freeze benefits to its employee participants.

 

The Company also maintained a nonqualified deferred compensation plan for the benefit of certain directors, which was closed to any future deferrals. The expense incurred for the deferred compensation was $4,000 and $0 for the fiscal years ended June 30, 2022 and 2021, respectively. The plan terminated in fiscal year 2022 with the payment of all amounts due. As such, the liabilities totaled $0 and $51,000 at June 30, 2022 and 2021, respectively.

 

The Company maintains an Employee Stock Ownership Plan (“ESOP”) which provides retirement benefits for substantially all full-time employees who have completed one year of service and have attained the age of 21. Annual contributions are made to the ESOP equal to the ESOP’s debt service less dividends received by the ESOP on unallocated shares. Shares in the ESOP were acquired using funds provided by a loan from the Company and, accordingly, the cost of those shares is shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares are used to repay loan principal and accrued interest. Compensation expense is recorded equal to the fair value of shares committed to be released during a given fiscal year. Allocation of shares to the ESOP participants is contingent upon the repayment of a loan to Kentucky First Federal Bancorp totaling $14,000 and $277,000 at June 30, 2022 and 2021, respectively. The Company recorded expense for the ESOP of approximately $73,000 and $122,000 for the years ended June 30, 2022 and 2021, respectively. Shares may be surrendered from the plan as employees leave employment. Total shares surrendered from the plan totaled 218,894 and 217,706 at June 30, 2022 and 2021, respectively.

 

39

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

11. Retirement and Employee Benefit Plans: (continued)

 

The amounts contributed to the ESOP were $280,000 for each of the years 2022 and 2021.

 

   For the fiscal year ended 
   June 30, 
   2022   2021 
Allocated shares   117,065    99,668 
Shares committed to be released   463    9,338 
Unearned shares   461    10,261 
Total ESOP shares   117,989    119,267 
           
Fair value of unearned shares at End of period  $4,000   $76,000 

 

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

 

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

 

   For the fiscal year ended 
   June 30, 
   2022   2021 
Net income  allocated to common shareholders, basic and diluted
  $1,590,000   $1,820,000 
           
EARNINGS  PER SHARE  $0.19   $0.22 
           
Weighted average common shares outstanding, basic and diluted
   8,213,407    8,216,193 

 

Basic earnings per share is computed based upon the weighted-average shares outstanding during the year (which excludes treasury shares) less average shares in the ESOP that are unallocated and not committed to be released. There were no options outstanding for fiscal years 2022 and 2021.

 

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

 

40

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

13. Fair Value of Assets and Liabilities: (continued) 

 

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

 

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

 

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

 

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

 

Securities

 

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

 

The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis at June 30, 2022 and 2021. The securities represented are only those classified as available-for sale.

 

       Fair Value Measurements Using 
      

Quotes Prices
in Active
Markets for

Identical
Assets

  

Significant

Other
Observable
Inputs

   Significant
Unobservable
Inputs
 
(in thousands)  Fair Value   (Level 1)   (Level 2)   (Level 3) 
2022                
Agency mortgage-backed: residential  $10,477   $
-
   $10,477   $
             -
 
                     
2021                    
                     
Agency mortgage-backed: residential  $33   $
        -
   $33   $
  -
 

 

There were no transfers between levels 1 and 2. 

 

41

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

13. Fair Value of Assets and Liabilities (continued)

 

There were no assets or liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheet at June 30, 2022 and 2021.

 

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

 

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

 

The Company’s financial instruments at June 30, 2022 and 2021 are as follows:

 

       Fair Value Measurements at 
   Carrying   June 30, 2022 Using 
(in thousands)  Value   Level 1   Level 2   Level 3   Total 
Financial assets                    
Cash and cash equivalents  $25,823   $25,823    
 
    
 
   $25,823 
                          
Available-for-sale securities   10,477    
 
   $10,477    
 
    10,477 
Held-to-maturity securities   339    
 
    323    
 
    323 
Loans held for sale   152    
 
    153    
 
    153 
Loans receivable - net   274,583    
 
    
 
   $271,994    271,994 
Federal Home Loan Bank stock   6,498    
 
    
 
    
 
    n/a 
Accrued interest receivable   649    
 
    649    
 
    649 
                          
Financial liabilities                         
Deposits  $239,857   $115,152   $124,682        $239,834 
Federal Home Loan Bank advances   34,066    
 
    33,688    
 
    33,688 
Advances by borrowers for taxes and insurance   766    
 
    766    
 
    766 
Accrued interest payable   12    
 
    12    
 
    12 

 

42

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

13. Fair Value of Assets and Liabilities (continued)

 

   Carrying   Fair Value Measurements at
June 30, 2021 Using
 
(in thousands)  Value   Level 1   Level 2   Level 3   Total 
Financial assets                    
Cash and cash equivalents  $21,648   $21,648    
 
    
 
   $21,648 
Time deposits in other financial institutions   247    248    
 
    
 
    248 
Available-for-sale securities   33    
 
   $33    
 
    33 
Held-to-maturity securities   462    
 
    476    
 
    476 
Loans held for sale   1,307         1,336         1,336 
Loans receivable - net   297,902    
 
    
 
   $306,346    306,346 
Federal Home Loan Bank stock   6,498    
 
    
 
    
 
    n/a 
Accrued interest receivable   694    
 
    694    
 
    694 
                          
Financial liabilities                         
Deposits  $226,843   $101,951   $125,232        $227,183 
Federal Home Loan Bank advances   56,873    
 
    57,314    
 
    57,314 
Advances by borrowers for taxes and insurance   838    
 
    838    
 
    838 
Accrued interest payable   20    
 
    20    
 
    20 

 

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

 

15. Goodwill: Goodwill of $14.5 million was originally recorded in March 2005 when the Company, as part of its initial public offering, purchased Frankfort First Bancorp, Inc., with a portion of the stock and cash proceeds from the offering. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected March 31 as the date to perform its annual impairment test with more frequent monitoring if circumstances warrant. The Company adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, effective April 1, 2020. The carrying value of goodwill was $947,000 at June 30, 2022 and 2021. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

 

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

 

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

 

43

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

18. Related Party Transactions: Loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) at June 30, 2022 and 2021 are summarized as follows:

 

(in thousands)  2022   2021 
Outstanding principal, beginning of year  $1,405   $1,047 
Changes in composition of related parties   -    936 
Principal disbursed during the year   
-
    
-
 
Principal repaid and refinanced during the year   (717)   (578)
Outstanding principal, end of year  $688   $1,405 

 

Deposits from related parties held by the Company at June 30, 2022 and 2021 totaled $5.3 million and $4.3 million, respectively.

 

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

 

19. Comprehensive Income and Accumulated Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of tax, for the period which are also recognized as separate components of equity. Accumulated comprehensive income consists solely of unrealized gain or loss on available-for-sale securities at the end of the period.

 

20. Revenue Recognition: The Company’s revenue-generating activities accounted for under Topic 606 includes primarily service charges and fees on deposits and other service charges and fees and comprise the majority of other non-interest income on the statement of income. Service charges and fees on deposits are primarily debit card interchange fees and automatic teller machine (“ATM”) surcharge fees. To a lesser extend service charges and fees also include overdraft fees, dormant account fees, and service charges on checking and savings accounts. Overdraft fees are recognized at the time an account is overdrawn. Dormant account fees are recognized when an account is inactive for at least 365 days. Service charges on checking and savings accounts are primarily account maintenance services performed and recognized in the same calendar month. Other deposit-based service charges and fees include transaction-based services completed at the request of the customer and recognized at the time the transaction is completed. These transaction-based services include ATM usage and stop payment services. All service charges and fees on deposits are withdrawn from the customer’s account at the time the service is provided.

 

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

 

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

 

44

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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

 

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

 

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

 

26. New Accounting Standards:

 

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, held-to-maturity 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 selected and engaged a third-party software provider for modeling our data and plan to test our new system before implementing it. 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.

 

In March 2022 the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, as an update to its post-implementation review activities associated with ASU No. 2016-13. The amendments in this Update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance provided to determine whether a modification results in a new loan or a continuation of an existing loan. This Update also requires disclosure by public business entities of current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. Because the Company has not yet adopted amendments in Update 2016-13, the amendments in this Update are effective for the fiscal year beginning July 1, 2023.

 

45

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

26. New Accounting Standards: continued

 

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. The Company adopted this ASU effective July 1, 2020, with no material impact to the financial statements.

 

FASB ASC 740– In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes during interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The company adopted this ASU effective July 1, 2021, with no significant impact to our consolidated financial statements.

 

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

 

NOTE B - SECURITIES

 

The following table summarizes the amortized cost and fair value of the available for sale securities and held to maturity investment securities portfolio at June 30, 2022 and 2021 and the corresponding amounts of gross unrealized or unrecognized gains and losses. Unrealized gains or losses apply to available-for-sale securities and are recognized in accumulated other comprehensive income, while unrealized gains or losses on held-to-maturity securities are not recognized in the financial statements. The gains and losses are as follows:

 

   2022 
(in thousands) 

Amortized
cost

   Gross unrealized
gains
   Gross unrealized
losses
   Estimated
fair value
 
Available-for-sale Securities                
Agency mortgage-backed residential  $10,477   $
    -
   $
    -
   $10,477 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $339   $2   $18   $323 

 

 

   2021 
(in thousands) 

Amortized
cost

   Gross unrealized gains   Gross unrealized losses   Estimated
fair value
 
Available-for-sale Securities                
Agency mortgage-backed residential  $33   $
       -
   $
       -
   $33 
                     
Held-to-maturity Securities                    
Agency mortgage-backed: residential  $462   $16   $2   $476 

 

46

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE B - SECURITIES (continued)

 

At June 30, 2022, the Company’s debt securities consisted of mortgage-backed securities, which do not have a single maturity date. 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.

 

There were no sales of securities during the fiscal year ended June 30, 2022 or 2021. At June 30, 2022 the Company had $242,000 in held-to-maturity mortgage-backed securities with gross unrealized losses of $18,000, while at June 30, 2021, the Company had $258,000 in held-to-maturity mortgage-backed securities with gross unrealized losses of $2,000. Of the unrealized losses at June 30, 2022, $3,000 have been in an unrealized loss position for more than 12 months and $15,000 have been in an unrealized loss position for less than 12 months. Unrealized losses on agency mortgage-backed securities have not been recognized into income because they are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the investments reach maturity.

 

At June 30, 2022 and 2021, pledged securities totaled $1.7 million and $1.8 million, respectively. In addition, at June 30, 2022 and 2021, our pledged assets also included time deposits and/or overnight deposits of $1.5 million and $1.5 million, respectively.

 

NOTE C - LOANS

 

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

 

(in thousands)  2022   2021 
Residential real estate        
One- to four-family  $216,432   $224,125 
Multi-family   14,252    19,781 
Construction   1,363    5,433 
Land   1,062    1,308 
Farm   1,338    2,234 
Nonresidential real estate   31,441    35,492 
Commercial and industrial   1,006    2,259 
Consumer and other          
Loans on deposits   891    1,129 
Home equity   7,670    7,135 
Automobile   117    75 
Unsecured   540    553 
    276,112    299,524 
Allowance for loan losses   (1,529)   (1,622)
   $274,583   $297,902 

 

The amounts above include net deferred loan fees of $290,000 and $167,000 as of June 30, 2022 and 2021.

 

47

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE C - LOANS (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2022 and 2021. There were $400,000 and $595,000 in loans acquired with deteriorated credit quality at June 30, 2022 and 2021, respectively.

 

June 30, 2022:

 

(in thousands)  Loans
individually
evaluated
   Loans
acquired
with
deteriorated
credit
quality*
   Ending
loans
balance
   Ending
allowance
attributed to
loans
 
Loans individually evaluated for impairment:                
Residential real estate                
One- to four-family  $3,221   $400   $3,621   $- 
Multi-family   570    
-
    570    - 
Farm   270    
-
    270    - 
Nonresidential real estate   1,073    
-
    1,073    - 
Consumer and other                    
Home equity   87    
-
    87    - 
Unsecured   5    
-
    5    - 
    5,226    400    5,626    
-
 
                     
Loans collectivelly evaluated for impairment:                    
Residential real estate                    
One- to four-family            $212,811   $800 
Multi-family             13,682    231 
Construction             1,363    4 
Land             1,062    3 
Farm             1,068    5 
Nonresidential real estate             30,368    461 
Commercial and industrial             1,006    2 
Consumer and other                    
Loans on deposits             891    1 
Home equity             7,583    21 
Automobile             117    
-
 
Unsecured             535    1 
              270,486    1,529 
                                    $276,112   $1,529 

 

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

 

48

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE C - LOANS (continued)

 

June 30, 2021:

 

(in thousands)  Loans
individually
evaluated
   Loans
acquired
with
deteriorated
credit
quality*
   Ending
loans
balance
   Ending
allowance
attributed to
loans
 
Loans individually evaluated for impairment:                
Residential real estate                
One- to four-family  $3,738   $       595   $4,333   $
-
 
Multi-family   646    
-
    646    
-
 
Farm   274    
-
    274    
-
 
Nonresidential real estate   1,367    
-
    1,367    
-
 
Consumer and other             -    - 
Unsecured   16    
-
    16    
-
 
    6,041    595    6,636    
-
 
                     
Loans collectivelly evaluated for impairment:                    
Residential real estate                    
One- to four-family            $219,792   $794 
Multi-family             19,135    291 
Construction             5,433    12 
Land             1,308    3 
Farm             1,960    5 
Nonresidential real estate             34,125    494 
Commercial and industrial             2,259    5 
Consumer and other                    
Loans on deposits             1,129    2 
Home equity             7,135    15 
Automobile             75    
-
 
Unsecured             537    1 
              292,888    1,622 
             $299,524   $1,622 

 

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

 

49

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE C - LOANS (continued)

 

The following table presents impaired loans by class of loans as of and for the years ended June 30, 2022 and 2021:

 

(in thousands)  Unpaid
Principal
Balance and
Recorded
Investment
   Allowance
for Loan
Lossess
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
                     
June 30, 2022:                    
                     
With no related allowance recorded:                    
Residential real estate                    
One- to four-family  $   3,621   $
           -
   $   3,970   $            145   $              145 
Multi-family   570    
-
    608    19    19 
Farm   270    
-
    272    16    16 
Nonresidential real estate   1,073    
-
    1,220    59    59 
Consumer and other                         
Home equity   87    -    52    1    1 
Unsecured   5    -    11    -    - 
   $5,626   $
-
   $6,133   $240   $240 
                          
June 30, 2021:                         
                          
With no related allowance recorded:                         
Residential real estate                         
One- to four-family  $4,333   $
-
   $4,534   $107   $107 
Multi-family   646    
-
    659    24    24 
Construction             32    
-
    
-
 
Farm   274    
-
    292    35    35 
Nonresidential real estate   1,367    
-
    1,014    60    60 
Consumer and other             -    -    - 
Unsecured   16    
-
    8    1    1 
   $6,636   $-   $6,539   $227   $227 

 

50

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE C - LOANS (continued)

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual status by class of loans as of June 30, 2022 and 2021. The tables include loans acquired with deteriorated credit quality. At June 30, 2022, the table below includes approximately $301,000 of loans on nonaccrual and no loans past due over 90 days and still accruing of loans acquired with deteriorated credit quality, while at June 30, 2021, approximately $365,000 of loans on nonaccrual and no loans past due over 90 days and still accruing represent such loans.

 

   June 30, 2022   June 30, 2021 
(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  $3,528   $287   $4,104   $243 
Multi-family   570    
-
    646    
-
 
Farm   270    
-
    274    
-
 
Nonresidential real estate   1,073    
-
    1,367    
-
 
Commercial and industrial   
-
    1    
-
    
-
 
Consumer and other                    
Home equity   87    
-
    
-
    
-
 
Unsecured   3    
-
    21    
-
 
   $5,531   $288   $6,412   $243 

 

One- to four-family loans in process of foreclosure totaled $489,000 and $577,000 at June 30, 2022 and 2021, 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 June 30, 2022 and 2021, the Company had $1.4 million and $1.7 million of loans classified as TDRs, respectively. Of the TDRs at June 30, 2022, approximately 24.7% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

 

During the year ended June 30, 2022, the Company had no loans restructured as TDRs.

 

During the year ended June 30, 2021, the Company had two loans, which were associated with a single borrower and were both secured by a single-family residence, restructured as TDRs. The loans were classified as TDRs pursuant to court action under Chapter 7 bankruptcy proceedings without the borrower reaffirming the debt personally. Those two loans were current and totaled $142,000 at June 30, 2021.

 

51

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE C - LOANS (continued)

 

In December 2020, Congress amended the CARES Act through the Consolidated Appropriation Act of 2021, which provided additional COVID-19 relief to American families and businesses, including extending TDR relief under the CARES Act until the earlier of December 31, 2021 or 60 days following the termination of the national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. In response to the Covid-19 pandemic and the widespread economic downturn that immediately resulted, the Company adopted a loan forbearance plan in which then-current affected borrowers could request deferral of their loan payments for a period of three months. A total of $815,000 in loans were accepted into the plan for the twelve months ended June 30, 2021. At June 30, 2021 all of those loans had reached the end of their three-month deferral date period and returned to regular payment status.

 

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

 

The Company had no allocated specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2022 or 2021. At June 30, 2022 and 2021, TDR loans on nonaccrual status totaled $1.4 million and $1.7 million, respectively. The Company had no commitments to lend additional amounts as of June 30, 2022 and 2021, to customers with outstanding loans that are classified as troubled debt restructurings. The Company had no TDR loans which defaulted during fiscal 2022 or during fiscal 2021.

 

The following tables present the aging of the principal balance outstanding in accruing past due loans as of June 30, 2022 and 2021, by class of loans. The tables include loans acquired with deteriorated credit quality. At June 30, 2022, the table below includes $161,000 in loans 30-89 days past due and approximately $15,000 of loans past due over 90 days that were acquired with deteriorated credit quality, while at June 30, 2021, the table below includes $96,000 in loans 30-89 days past due and approximately $25,000 of loans past due over 90 days of such loans.

 

52

 

 

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2022 and 2021

 

NOTE C - LOANS (continued)

 

June 30, 2022:

 

(in thousands)  30-89 Days
Past Due
   Greater than
90 Days
Past Due
   Total
Past Due
   Loans
Not Past Due
   Total