KENTUCKY FIRST FEDERAL BANCORP Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate toKentucky First Federal Bancorp or its management are intended to identify such forward-looking statements.Kentucky First Federal Bancorp's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company's market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services, the potential effects of the COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic), and the other matters mentioned in Item 1A of the Company's Annual Report on Form 10-K for the year endedJune 30, 2021 . Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. 18 Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Average Balance Sheets The following table represents the average balance sheets for the three-month periods endedSeptember 30, 2021 and 2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. Three Months Ended September 30, 2021 2020 Interest Interest Average And Yield/ Average And Yield/ Balance Dividends Cost Balance Dividends Cost (Dollars in thousands) Interest-earning assets: Loans 1$ 298,174 $ 2,934 3.94 %$ 289,262 $ 2,976 4.12 % Mortgage-backed securities 481 3 2.50 631 4 2.58 Other securities - - - 393 3 3.05 Other interest-earning assets 28,694 37 0.52 21,824 46 0.84 Total interest-earning assets 327,349 2,974 3.63 312,100 3,029 3.88 Less: Allowance for loan losses (1,616 ) (1,490 ) Non-interest-earning assets 11,566 12,526 Total assets$ 337,299 $ 323,136 Interest-bearing liabilities: Demand deposits$ 19,970 $ 9 0.18 %$ 17,171 $ 7 0.16 % Savings 70,123 68 0.39 57,485 59 0.41 Certificates of deposit 125,887 291 0.93 133,743 448 1.34 Total deposits 215,980 368 0.68 208,399 514 0.99 Borrowings 53,614 101 0.75 51,793 125 0.97 Total interest-bearing liabilities 269,594 469 0.69 260,192 639 0.98 Noninterest-bearing demand deposits 13,186 8,453 Noninterest-bearing liabilities 2,162 2,437 Total liabilities 284,942 271,082 Shareholders' equity 52,357 52,054 Total liabilities and shareholders' equity$ 337,299 $ 323,136 Net interest spread$ 2,505 2.94 %$ 2,390 2.90 % Net interest margin 3.06 % 3.06 % Average interest-earning assets to average interest-bearing liabilities 121.42 % 119.95 %
1 Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. Also includes loans on nonaccrual status.
19
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
Risks and Uncertainties Related to COVID-19- InMarch 2020 theWorld Health Organization determined that the spread of a new coronavirus, COVID-19, had risen to such a level as to constitute a worldwide pandemic. The spread of this virus has created a global public health crisis. Uncertainty related to the effects of the virus have disrupted financial markets, activity in all aspects of life including governmental, business and consumer routines and the markets in which the Company operates. In response to the crisis governmental authorities closed or limited the operations of many non-essential businesses and required various responses from individuals including stay-at-home restrictions and social distancing. These governmental restrictions, along with a fear of contracting the virus, have resulted in severe reduction of commercial and consumer activity, which is resulting in loss of revenues by businesses, a dramatic spike in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains and market volatility. Management continues to monitor the general impact of COVID-19, as well as certain provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, enacted onMarch 27, 2020 , and other more recent legislative and regulatory relief efforts including the Consolidated Appropriations Act, 2021. Because the impact is contingent upon the duration and severity of the economic downturn, management cannot determine or estimate the magnitude of the impact at this time. While the pandemic has affected the physical operations of the Banks, the business has been mostly unchanged with consistent levels of consumer transactions and loan originations. The potential for a deterioration in asset quality remains, but actual asset quality has improved. Classified assets atSeptember 30, 2021 , totaled$8.5 million compared to$10.5 million atMarch 31, 2020 . Management attributes some of this improved performance to the overall strengthening in the residential real estate market. Approximately 95% of the Company's loans are secured by residential real estate.
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. AtSeptember 30, 2021 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession resulting from the COVID-19 pandemic could adversely impact the Company's and the Banks' capital position and regulatory capital ratios due to a potential increase in credit losses.
Lending Operations and Credit Risk
As noted herein the Company continues working with its borrowerswho are negatively impacted by COVID-19 by offering a payment deferral program. During the year endedJune 30, 2021 , a total of$815,000 in loans were accepted into the Company's loan payment deferral plan. AtJune 30, 2021 all of those loans had reached the end of their three-month deferral periods and returned to regular payment status. 20Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
The CARES Act and subsequent Consolidated Appropriations Act, 2021, 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
September 30, 2021 , First Federal of Kentucky had approved and closed with the
SBA 75 PPP loans representing $2.6 million in funding. Of those loans a total of
48 loans aggregating $2.0 million had been repaid at the end of the period. It
is our understanding that loans funded through the PPP are fully guaranteed by
the United States government. Should those circumstances change, the bank could
be required to increase its allowance for loan and lease losses related to these
loans resulting in an increase in the provision for loan and lease losses.
The Banks are prepared to continue to offer short-term assistance in accordance
with regulatory guidelines. Management continues to identify and monitor
weaknesses in the loan portfolio resulting from fallout from the pandemic. On a
portfolio level, management continues to monitor aggregate exposures to highly
sensitive segments such as residential rental properties for changes in asset
quality and payment performance. Management also monitors unfunded commitments
such as lines of credit and overdraft protection to determine liquidity and
funding issues that may arise with our customers. If economic conditions worsen,
the Company could need to increase its required allowance for loan losses
through additional provisions for loan losses. It is possible that the Company's
asset quality metrics could be materially and adversely impacted in future
periods, if the effects of COVID-19 are prolonged.
Assets: At September 30, 2021 , the Company's assets totaled $336.9 million , a
decrease of $1.2 million , or 0.3%, from total assets at June 30, 2021 . This
decrease was attributed primarily to a decrease in loans, net and loans
available-for sale, which were somewhat offset by an increase in cash and cash
equivalents.
Cash and cash equivalents: Cash and cash equivalents increased$4.3 million or 19.8% to$25.9 million atSeptember 30, 2021 . Most of the Company's cash and cash equivalents are held in interest-bearing demand deposits. Time deposits in other financial institutions: Time deposits in other financial institutions decreased by$247,000 or 100.0% to$0 atSeptember 30, 2021 . Extremely low interest rates make time deposits in other financial institutions unattractive at this time. Investment securities: AtSeptember 30, 2021 , our securities portfolio consisted of mortgage-backed securities, which decreased$28,000 or 5.7% to$467,000
atSeptember 30, 2021 . Loans: Loans, net and loans available-for sale in the aggregate decreased$5.1 million or 1.7% and totaled$294.0 million and$90,000 , respectively atSeptember 30, 2021 . Loans receivable, net, decreased by$3.9 million or 1.3% to$294.0 million atSeptember 30, 2021 . Loans available-for-sale decreased$1.2 million or 93.1% to$90,000 atSeptember 30, 2021 . Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies. Non-Performing and Classified Loans: AtSeptember 30, 2021 , the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately$6.9 million , or 2.4% of total loans (including acquired loans), compared to$6.7 million or 2.2%, of total loans atJune 30, 2021 . The Company's allowance for loan losses totaled$1.6 million atSeptember 30, 2021 andJune 30, 2021 . The allowance for loan losses atSeptember 30, 2021 , represented 23.2% of nonperforming loans and 0.5% of total loans (including acquired loans), while atJune 30, 2021 , the allowance represented 24.4% of nonperforming loans and 0.5% of total loans. The Company had$8.1 million in assets classified as substandard for regulatory purposes atSeptember 30, 2021 , including loans ($8.1 million ), loans acquired in theCKF Bancorp transaction, and real estate owned ("REO") ($51,000 .) Classified loans as a percentage of total loans (including loans acquired) was 2.7% and 3.0% atSeptember 30, 2021 andJune 30, 2021 , respectively. Of substandard loans, 100.0% were secured by real estate on which the Banks have priority lien position.
The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated:
September 30, June 30,
(dollars in thousands) 2021 2021
Substandard assets $ 8,133 $ 8,925
Doubtful assets - -
Loss assets - -
Total classified assets $ 8,133 $ 8,925
At September 30, 2021 , the Company's real estate acquired through foreclosure
represented 0.6% of substandard assets compared to 0.9% at June 30, 2021 . During
the period presented the Company made no loans to facilitate the purchase of its
other real estate owned by qualified buyers. Loans to facilitate the sale of
other real estate owned, which were included in substandard loans, totaled
$43,000 and $43,000 at September 30, 2021 and June 30, 2021 , respectively.
21
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
The following table presents the aggregate carrying value of REO at the dates
indicated:
September 30, 2021 June 30, 2021
Number Net Number Net
of Carrying of Carrying
Properties Value Properties Value
One- to four-family 1 $ 51 2 $ 82
Building lot 1 - 1 -
Total REO 2 $ 51 3 $ 82
At September 30, 2021 and June 30, 2021 , the Company had $1.5 million and $1.6
million of loans classified as special mention, respectively (including loans
acquired in the CKF Bancorp transaction on December 31, 2012 ). This category
includes assets which do not currently expose us to a sufficient degree of risk
to warrant classification, but do possess credit deficiencies or potential
weaknesses deserving our close attention.
Liabilities: Total liabilities decreased $1.4 million , or 0.5% to $284.4 million
at September 30, 2021 , primarily as a result of decreases in advances and was
somewhat offset by an increase in deposits. Advances decreased $6.5 million or
11.5% to $50.4 million at September 30, 2021 . Deposits increased $4.6 million or
2.0% to $231.5 million at September 30, 2021 .
Shareholders' Equity: At September 30, 2021 , the Company's shareholders' equity
totaled $52.5 million , an increase of $253,000 or 0.5% from the June 30, 2021
total. The change in shareholders' equity was primarily associated with net
profits for the period less dividends paid on common stock.
The Company paid dividends of $351,000 or 61.8% of net income for the
three-month period just ended. On July 8, 2021 , the members of First Federal MHC
again approved a dividend waiver on annual dividends of up to $0.40 per share of
Kentucky First Federal Bancorp common stock. The Board of Directors of First
Federal MHC applied for approval of another waiver. The Federal Reserve Bank of
Cleveland has notified the Company that it did not object to the waiver of
dividends paid by the Company to First Federal MHC , and, as a result, First
Federal MHC will be permitted to waive the receipt of dividends for quarterly
dividends up to $0.10 per common share through the third calendar quarter of
2022. Management believes that the Company has sufficient capital to continue
the current dividend policy without affecting the well-capitalized status of
either subsidiary bank. Management cannot speculate on future dividend levels,
because various factors, including capital levels, income levels, liquidity
levels, regulatory requirements and overall financial condition of the Company
are considered before dividends are declared. However, management continues to
believe that a strong dividend is consistent with the Company's long-term
capital management strategy. See "Risk Factors" in Part II, Item 1A, of the
Company's Annual Report on Form 10-K for the year ended June 30, 2021 for
additional discussion regarding dividends.
22
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Three-month Periods Ended
General Net income totaled$568,000 or$0.07 diluted earnings per share for the three months endedSeptember 30, 2021 , an increase of$283,000 or 99.3% from net income of$285,000 or$0.04 diluted earnings per share for the same period in 2020. The increase in net income was primarily attributable to higher net interest income, higher non-interest income, lower non-interest expense, and lower provision for loan loss, which were partially offset by increased provision for income tax. Net Interest Income Net interest income increased$115,000 or 4.8% to$2.5 million for the recently-ended quarter primarily due to decreased interest expense, which decreased$170,000 or 26.6% to$469,000 for the three months endedSeptember 30, 2021 compared to the 2020 quarterly period, while interest income decreased by$55,000 , or 1.8%, to$3.0 million for the current period. The decrease in interest income period-to-period was due primarily to a decrease in the average rate earned on interest-earning assets.. The average rate decreased 25 basis points to 3.63% for the recently-ended three-month period compared to the prior year period, while the average balance of interest-earning assets increased$15.2 million or 4.9% to$327.3 million for the three months endedSeptember 30, 2021 . Interest income on loans decreased$42,000 or 1.4% to$2.9 million , due to a decrease of 18 basis points in the average rate earned on the loan portfolio, which totaled 3.94% for the three-month period endedSeptember 30, 2021 , while the average balance increased$8.9 million or 3.1% to$298.2 million for the period. Interest income from interest-bearing deposits and other income decreased$9,000 or 19.6% to$37,000 for the three months just ended due primarily to a decrease in the average rate earned, which decreased 33 basis points to 0.52% for the recently-ended period compared to the period
a year ago. The decrease in interest expense was due primarily to a decrease of 29 basis points on the average rate paid on funding sources, which totaled 0.69% for the three months endedSeptember 30, 2021 . The Company's interest-bearing liabilities have repriced quickly in the low interest rate environment that currently exists. Interest expense on deposits decreased$146,000 or 28.4% to$368,000 for the three months endedSeptember 30, 2021 , while interest expense on borrowings decreased$24,000 or 19.2% to$101,000 for the same period. The decrease in interest expense on deposits was attributed to a decrease in the average rate paid on interest-bearing deposits, which decreased 31 basis points to 0.68% for the recently ended period, while the average balance of interest-bearing deposits increased$7.6 million or 3.6% to$216.0 million for the most recent period. The decrease in interest expense on borrowings was attributed to a lower average rate paid on the borrowings, which decreased 22 basis points to 0.75% for the three months endedSeptember 30, 2021 . The average balance of borrowings outstanding increased$1.8 million or 3.5% to$53.6 million for the recently ended three-month period.
Net interest spread increased from 2.90% for the prior year quarterly period to
2.94% for the three-month period ended
Provision for Losses on Loans There was no provision for loan losses for the three-month period endedSeptember 30, 2021 , compared to a provision of$84,000 for the prior year period. The lower provision was primarily in response to favorable experience in the loan portfolio, strong real estate prices and positive overall sentiment in the economy. Non-interest Income Non-interest income increased$100,000 or 78.1% to$228,000 for the three months endedSeptember 30, 2021 , compared to the prior year period, primarily because of an increase in net gains on sales of loans. Net gain on sales of loans increased$104,000 to$162,000 for the recently-ended three-month period. In the current interest rate environment, many borrowers are choosing long-term, fixed rate loans, which the bank usually sells to theFederal Home Loan Bank of Cincinnati ("FHLB"). An increase in volume of these loans sold was responsible for the increase in gain on sale of loans. Non-interest Expense Non-interest expense decreased$102,000 or 4.9% and totaled$2.0 million for the three months endedSeptember 30, 2021 , primarily due to decreased franchise and other taxes as well as decreasedFDIC insurance premiums. 23Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Three-month Periods Ended
Franchise and other taxes decreased$64,000 to$1,000 for the three months endedSeptember 30, 2021 , due to a change to the tax system in theCommonwealth of Kentucky to which the Company and its Banks are subject. The income tax change primarily involves moving from a franchise tax for the Banks to an income tax system. The franchise tax incurred previously by the Banks was included in non-interest expense. BeginningJanuary 1, 2021 , the Company's income tax expense includes both federal andKentucky income taxes.FDIC insurance premiums decreased$53,000 or 93.0% to$4,000 for the three months endedSeptember 30, 2021 , due to an improvement in factors used to determine premiums. A non-cash$13.6 million goodwill impairment charge recorded in the quarter endedJune 30, 2020 , significantly impacted earnings during that period and indirectly resulted in higherFDIC premiums for the subsequent fiscal year by negatively impacting the financial ratio component used by theFDIC to determine the bank's assessment rate. Improved financial results for the three- and twelve-months endedJune 30, 2021 , had a positive impact on the financial ratio component of the bank's assessment rate and resulted in the lower expense period to period. Other non-interest expenses increased$45,000 or 34.9% to$174,000 for the quarter endedSeptember 30, 2021 , primarily due to expenses incurred in the banks' conversion of its core data processing systems during the period. Various small, noncapital expenditures were made to effect the transition to a new
core system. Income Tax Expense Income tax expense increased$118,000 or 178.8% to$184,000 for the three months endedSeptember 30, 2021 , compared to the prior year period. The effective tax rates for the three-month periods endedSeptember 30, 2021 and 2020, were 24.5% and 18.8%, respectively. The increase in the effective tax rate for the recently-ended period compared to the prior year period was related to the Banks becoming subject to state income taxes rather than state franchise taxes, as mentioned herein. 24Kentucky First Federal Bancorp
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