Kentucky First Federal Bancorp(KFFB) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets The company's total assets and liabilities decreased slightly, while shareholders' equity also saw a minor decline Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2019 | Jun 30, 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total assets | $328,776 | $330,771 | $(1,995) | -0.6% | | Cash and cash equivalents | $11,884 | $9,861 | $2,023 | 20.5% | | Time deposits in other financial institutions | $2,970 | $6,962 | $(3,992) | -57.3% | | Loans, net | $281,568 | $280,969 | $599 | 0.2% | | Total liabilities | $262,967 | $264,493 | $(1,526) | -0.6% | | Deposits | $199,959 | $195,836 | $4,123 | 2.1% | | Federal Home Loan Bank advances | $61,615 | $66,703 | $(5,088) | -7.6% | | Total shareholders' equity | $65,809 | $66,278 | $(469) | -0.7% | Condensed Consolidated Statements of Income Net income increased significantly for both the three and six-month periods, driven by higher interest income and lower non-interest expenses Key Income Statement Metrics (in thousands, except per share data) | Metric | 6 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $6,591 | $6,224 | $367 | 5.9% | | Total interest expense | $1,869 | $1,497 | $372 | 24.9% | | Net interest income | $4,722 | $4,727 | $(5) | -0.1% | | Provision for loan losses | $64 | $11 | $53 | 481.8% | | Total non-interest income | $152 | $112 | $40 | 35.7% | | Total non-interest expense | $4,210 | $4,454 | $(244) | -5.5% | | Federal income tax expense | $118 | $69 | $49 | 71.0% | | NET INCOME | $482 | $305 | $177 | 58.0% | | Basic and diluted EPS | $0.06 | $0.04 | $0.02 | 50.0% | | Dividends per share | $0.20 | $0.20 | $0.00 | 0.0% | | Metric | 3 Months Ended Dec 31, 2019 | 3 Months Ended Dec 31, 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $3,263 | $3,178 | $85 | 2.7% | | Total interest expense | $922 | $797 | $125 | 15.7% | | Net interest income | $2,341 | $2,381 | $(40) | -1.7% | | Provision for loan losses | $5 | $0 | $5 | N/A | | Total non-interest income | $78 | $43 | $35 | 81.4% | | Total non-interest expense | $2,108 | $2,230 | $(122) | -5.5% | | Federal income tax expense | $58 | $27 | $31 | 114.8% | | NET INCOME | $248 | $167 | $81 | 48.5% | | Basic and diluted EPS | $0.03 | $0.02 | $0.01 | 50.0% | | Dividends per share | $0.10 | $0.10 | $0.00 | 0.0% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income rose in line with net income, with a minor unrealized loss on available-for-sale securities Comprehensive Income (in thousands) | Metric | 6 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net income | $482 | $305 | | Unrealized holding gains (losses) on AFS securities, net of tax | $(1) | $1 | | Comprehensive income | $481 | $306 | | Metric | 3 Months Ended Dec 31, 2019 | 3 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net income | $248 | $167 | | Unrealized holding gains (losses) on AFS securities, net of tax | $(1) | $1 | | Comprehensive income | $247 | $169 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased as cash dividends and treasury share acquisitions outpaced net income Changes in Shareholders' Equity (in thousands) | Metric | 6 Months Ended Dec 31, 2019 | | :--- | :--- | | Balance at June 30, 2019 | $66,278 | | Net income | $482 | | Allocation of ESOP shares | $48 | | Acquisition of shares for Treasury | $(312) | | Other comprehensive loss | $(1) | | Cash dividends ($0.20 per share) | $(686) | | Balance at December 31, 2019 | $65,809 | | Metric | 3 Months Ended Dec 31, 2019 | | :--- | :--- | | Balance at September 30, 2019 | $66,040 | | Net income | $248 | | Allocation of ESOP shares | $35 | | Acquisition of shares for Treasury | $(161) | | Other comprehensive loss | $(1) | | Cash dividends ($0.10 per share) | $(352) | | Balance at December 31, 2019 | $65,809 | Condensed Consolidated Statements of Cash Flows Net cash increased due to positive operating cash flow and a significant inflow from investing activities, despite an outflow from financing Cash Flow Summary (in thousands) | Cash Flow Activity | 6 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $780 | $469 | | Net cash provided by (used in) investing activities | $3,738 | $(2,627) | | Net cash provided by (used in) financing activities | $(2,495) | $2,357 | | Net increase in cash and cash equivalents | $2,023 | $199 | | Ending cash and cash equivalents | $11,884 | $10,142 | - Investing activities saw a significant shift from net cash used ($2.6 million) in 2018 to net cash provided ($3.7 million) in 2019, largely driven by maturities of time deposits in other financial institutions[20] - Financing activities moved from a net cash inflow ($2.4 million) in 2018 to a net cash outflow ($2.5 million) in 2019, primarily due to higher repayments on Federal Home Loan Bank advances and treasury stock purchases[20] Notes to Condensed Consolidated Financial Statements The notes detail the basis of presentation, accounting standards, loan portfolio quality, and fair value measurements 1. Basis of Presentation The company operates as a mid-tier holding company and is assessing the impact of new accounting standards like CECL - The Company is a mid-tier holding company for First Federal Savings and Loan Association of Hazard and First Federal Savings Bank of Kentucky, operating as two independent, community-oriented savings institutions[25] - FASB ASC 326 (CECL model) is effective for the Company's fiscal year beginning July 1, 2023, and is expected to add complexity and costs to credit loss evaluation, with a one-time cumulative effect adjustment to the allowance for loan losses[31] - FASB ASC 842 (Leases) was adopted effective July 1, 2019, with no material impact on the financial statements due to immaterial operating leases[32] 2. Earnings Per Share Basic and diluted earnings per share increased from $0.04 to $0.06 for the six-month period, reflecting higher net income Earnings Per Share (in thousands, except per share data) | Metric | 6 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net income allocated to common shareholders | $482 | $305 | | Weighted average common shares outstanding | 8,266,204 | 8,362,486 | | Basic and diluted EPS | $0.06 | $0.04 | | Metric | 3 Months Ended Dec 31, 2019 | 3 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net income allocated to common shareholders | $248 | $167 | | Weighted average common shares outstanding | 8,255,255 | 8,348,165 | | Basic and diluted EPS | $0.03 | $0.02 | 3. Investment Securities The investment securities portfolio decreased by 34.2% to $1.2 million, consisting primarily of agency mortgage-backed securities Investment Securities (in thousands) | Type | Dec 31, 2019 (Fair Value) | Jun 30, 2019 (Fair Value) | | :--- | :--- | :--- | | Available-for-sale Securities | $545 | $1,045 | | Held-to-maturity Securities | $659 | $775 | | Total Investment Securities | $1,204 | $1,820 | - No other-than-temporary impairment was recognized on securities in unrealized loss positions, as the company has no intention or requirement to sell them before maturity[42] 4. Loans receivable The net loan portfolio increased slightly, while non-performing loans decreased to 2.7% of total loans Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2019 | Jun 30, 2019 | | :--- | :--- | :--- | | Residential real estate (One- to four-family) | $220,496 | $216,066 | | Multi-family | $12,626 | $15,928 | | Nonresidential real estate | $31,111 | $30,419 | | Total Loans | $283,015 | $282,425 | | Allowance for loan losses | $(1,447) | $(1,456) | | Loans, net | $281,568 | $280,969 | Non-Performing Loans and Allowance for Loan Losses (in thousands) | Metric | Dec 31, 2019 | Jun 30, 2019 | | :--- | :--- | :--- | | Non-performing loans | $7,700 | $8,000 | | Non-performing loans as % of total loans | 2.7% | 2.8% | | Allowance for loan losses | $1,447 | $1,456 | | Allowance for loan losses as % of non-performing loans | 18.7% | 18.1% | | Allowance for loan losses as % of total loans | 0.5% | 0.5% | Credit Quality Indicators (in thousands) - December 31, 2019 | Risk Category | Amount | | :--- | :--- | | Pass | $271,585 | | Special Mention | $1,355 | | Substandard | $10,075 | | Doubtful | $0 | - Troubled Debt Restructurings (TDRs) increased to $1.9 million at December 31, 2019, from $1.6 million at June 30, 2019[52] - No TDRs defaulted during the six-month periods ended December 31, 2019 or 2018[55] 5. Disclosures About Fair Value of Assets and Liabilities Fair value measurements are categorized into three levels, with securities primarily Level 2 and impaired loans Level 3 - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[65][66] - Securities are generally classified as Level 2, while impaired loans and other real estate owned (REO) are typically Level 3 due to reliance on appraisals with significant unobservable adjustments[68][70][71] Fair Value of Financial Instruments (in thousands) - December 31, 2019 | Instrument | Carrying Value | Fair Value (Total) | | :--- | :--- | :--- | | Cash and cash equivalents | $11,884 | $11,884 | | Time deposits in other financial institutions | $2,970 | $2,979 | | Available-for-sale securities | $545 | $545 | | Held-to-maturity securities | $652 | $659 | | Loans held for sale | $251 | $251 | | Loans receivable - net | $281,568 | $285,831 | | Deposits | $199,959 | $199,996 | | Federal Home Loan Bank advances | $61,615 | $61,741 | 6. Other Comprehensive Income (Loss) Other comprehensive income reflected a minor net-of-tax loss from unrealized holding losses on available-for-sale securities Other Comprehensive Income (Loss) (in thousands) | Metric | 6 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Unrealized holding gains (losses) on AFS securities | $(1) | $1 | | Tax effect | $0 | $0 | | Net-of-tax amount | $(1) | $1 | | Metric | 3 Months Ended Dec 31, 2019 | 3 Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Unrealized holding gains (losses) on AFS securities | $(1) | $2 | | Tax effect | $0 | $1 | | Net-of-tax amount | $(1) | $1 | ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This section contains forward-looking statements subject to risks and uncertainties and disclaims any obligation to update them - Forward-looking statements are subject to risks and uncertainties such as general economic conditions, real estate prices, interest rate environment, competitive conditions, changes in law, governmental policies, and rapidly changing technology[82] - The Company disclaims any obligation to publicly release revisions to forward-looking statements to reflect events or circumstances after the statement date[82] Average Balance Sheets Average interest-earning assets increased, while the net interest spread and net interest margin both declined Average Balance Sheet Highlights (Six Months Ended Dec 31, in thousands) | Metric | 2019 Average Balance | 2018 Average Balance | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total interest-earning assets | $305,499 | $293,314 | $12,185 | 4.2% | | Loans (average balance) | $282,210 | $271,460 | $10,750 | 4.0% | | Total interest-bearing liabilities | $256,033 | $243,656 | $12,377 | 5.1% | | Net interest spread | 2.85% | 3.02% | -0.17% | -5.6% | | Net interest margin | 3.09% | 3.22% | -0.13% | -4.0% | Average Balance Sheet Highlights (Three Months Ended Dec 31, in thousands) | Metric | 2019 Average Balance | 2018 Average Balance | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total interest-earning assets | $306,195 | $294,846 | $11,349 | 3.8% | | Loans (average balance) | $282,774 | $272,616 | $10,158 | 3.7% | | Total interest-bearing liabilities | $256,817 | $245,935 | $10,882 | 4.4% | | Net interest spread | 2.83% | 3.02% | -0.19% | -6.3% | | Net interest margin | 3.06% | 3.23% | -0.17% | -5.3% | Discussion of Financial Condition Changes from June 30, 2019 to December 31, 2019 Total assets and liabilities decreased, driven by changes in time deposits and FHLB advances, while shareholders' equity declined Key Financial Condition Changes (in thousands) | Metric | Dec 31, 2019 | Jun 30, 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total assets | $328,776 | $330,771 | $(1,995) | -0.6% | | Cash and cash equivalents | $11,884 | $9,861 | $2,023 | 20.5% | | Time deposits in other financial institutions | $2,970 | $6,962 | $(3,992) | -57.3% | | Loans receivable, net | $281,568 | $280,969 | $599 | 0.2% | | Non-performing loans | $7,700 | $8,000 | $(300) | -3.8% | | Total classified assets | $10,859 | $11,590 | $(731) | -6.3% | | Total liabilities | $262,967 | $264,493 | $(1,526) | -0.6% | | Deposits | $199,959 | $195,836 | $4,123 | 2.1% | | Federal Home Loan Bank advances | $61,615 | $66,703 | $(5,088) | -7.6% | | Shareholders' equity | $65,809 | $66,278 | $(469) | -0.7% | - The Company paid dividends of $686,000, or 142.3% of net income, for the six months ended December 31, 2019[103] Comparison of Operating Results for the Six-Month Periods Ended December 31, 2019 and 2018 Net income increased by 58.0% due to stable net interest income, higher non-interest income, and lower non-interest expense Operating Results (Six Months Ended Dec 31, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net income | $482 | $305 | $177 | 58.0% | | Net interest income | $4,722 | $4,727 | $(5) | -0.1% | | Interest income on loans | $6,297 | $5,894 | $403 | 6.8% | | Interest expense on deposits | $1,196 | $929 | $267 | 28.7% | | Interest expense on borrowings | $673 | $568 | $105 | 18.5% | | Provision for loan losses | $64 | $11 | $53 | 481.8% | | Non-interest income | $152 | $112 | $40 | 35.7% | | Non-interest expense | $4,210 | $4,454 | $(244) | -5.5% | | Employee compensation and benefits | $2,768 | $2,917 | $(149) | -5.1% | | FDIC insurance premiums | $0 | $42 | $(42) | -100.0% | | Federal income tax expense | $118 | $69 | $49 | 71.0% | - Employee compensation and benefits decreased by $149,000 (5.1%) due to lower contributions to the Defined Benefit pension plan, a result of the plan freeze effective April 1, 2019[113] - FDIC insurance premiums decreased to zero as the banks utilized their Small Bank Assessment Credits (SBAC)[113] Comparison of Operating Results for the Three-Month Periods Ended December 31, 2019 and 2018 Net income increased by 48.5% driven by a surge in non-interest income and a decrease in non-interest expense Operating Results (Three Months Ended Dec 31, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net income | $248 | $167 | $81 | 48.5% | | Net interest income | $2,341 | $2,381 | $(40) | -1.7% | | Interest income on loans | $3,125 | $3,006 | $119 | 4.0% | | Interest expense on deposits | $608 | $487 | $121 | 24.8% | | Interest expense on borrowings | $314 | $310 | $4 | 1.3% | | Provision for loan losses | $5 | $0 | $5 | N/A | | Non-interest income | $78 | $43 | $35 | 81.4% | | Non-interest expense | $2,108 | $2,230 | $(122) | -5.5% | | Employee compensation and benefits | $1,408 | $1,463 | $(55) | -3.8% | | Foreclosure and OREO expenses, net | $6 | $37 | $(31) | -83.8% | | FDIC insurance premiums | $0 | $20 | $(20) | -100.0% | | Federal income tax expense | $58 | $27 | $31 | 114.8% | - The increase in interest expense on deposits was primarily due to a 25 basis point increase in the average rate paid on deposits, as customers shifted to higher-interest Certificates of Deposit[120] ITEM 3: Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for the Company as it is a smaller reporting company - The Company is a smaller reporting company, therefore, Item 3 (Quantitative and Qualitative Disclosures About Market Risk) is not applicable[129] ITEM 4: Controls and Procedures The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2019 - The CEO and CFO evaluated the effectiveness of the Company's disclosure controls and procedures and concluded they were effective as of December 31, 2019[130] - No significant changes in internal control over financial reporting were identified during the quarter ended December 31, 2019[131] PART II - OTHER INFORMATION ITEM 1. Legal Proceedings There are no legal proceedings to report - There are no legal proceedings to disclose[133] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report - No material changes in risk factors have occurred since the Annual Report on Form 10-K for the fiscal year ended June 30, 2019[134] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 21,500 shares of common stock during the quarter under a new stock repurchase plan Common Stock Repurchases (Quarter Ended Dec 31, 2019) | Period | Total of shares purchased | Average price paid per share | | :--- | :--- | :--- | | October 1-31, 2019 | 0 | $0 | | November 1-30, 2019 | 21,500 | $7.51 | | December 1-31, 2019 | 0 | $0 | - A new stock repurchase plan, authorizing the purchase of up to 150,000 shares of common stock, was initiated on December 19, 2018[136] ITEM 3. Defaults Upon Senior Securities This item is not applicable - Item 3 (Defaults Upon Senior Securities) is not applicable[137] ITEM 4. Mine Safety Disclosures. This item is not applicable - Item 4 (Mine Safety Disclosures) is not applicable[138] ITEM 5. Other Information There is no other information to report - No other information is reported under Item 5[139] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL formatted financial statements - Exhibits include the Company's Charter, Bylaws, Specimen Stock Certificate, CEO and CFO Certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL formatted financial statements[140] SIGNATURES Signatures The report is duly signed on behalf of the company by its CEO and CFO on February 14, 2020 - The report was signed by Don D. Jennings, Chief Executive Officer, and R. Clay Hulette, Vice President and Chief Financial Officer, on February 14, 2020[144]