KENTUCKY FIRST FEDERAL BANCORP AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate 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, 2020 . 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. 24 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, 2020 and 2019, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. Three Months Ended September 30, 2020 2019 Interest Average And Yield/ Average Interest Yield/ Balance Dividends Cost Balance And Dividends Cost (Dollars in thousands) Interest-earning assets: Loans 1$ 289,262 $ 2,976 4.12 %$ 281,646 $ 3,172 4.50 % Mortgage-backed securities 621 4 2.58 789 6 3.04 Other securities 393 3 3.05 1,002 6 2.40 Other interest-earning assets 21,824 46 0.84 21,366 144 2.70 Total interest-earning assets 312,100 3,029 3.88 304,803 3,328 4.37 Less: Allowance for loan losses (1,490 ) (1,436 ) Non-interest-earning assets 12,526 26,129 Total assets$ 323,136 $ 329,496 Interest-bearing liabilities: Demand deposits$ 17,171 $ 7 0.16 %$ 14,384 $ 5 0.14 % Savings 57,485 59 0.41 51,157 52 0.41 Certificates of deposit 133,743 448 1.34 126,937 531 1.67 Total deposits 208,399 514 0.99 192,478 588 1.22 Borrowings 51,793 125 0.97 62,796 359 2.29 Total interest-bearing liabilities 260,192 639 0.98 255,274 947 1.48 Noninterest-bearing demand deposits 8,453 5,793 Noninterest-bearing liabilities 2,437 2,128 Total liabilities 271,082 263,195 Shareholders' equity 52,054
66,301
Total liabilities and shareholders' equity$ 323,136 $ 329,496 Net interest spread$ 2,390 2.90 % $ 2,381 2.89 % Net interest margin 3.06 % 3.13 % Average interest-earning assets to average interest-bearing liabilities 119.95 % 119.40 %
1 Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. Also includes loans on nonaccrual status.
25
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 have closed non-essential businesses and required various responses from individuals including stay-at-home restrictions and social distancing. These governmental restrictions, along with a fear of contracting the virus, have resulted in severe reduction of commercial and consumer activity, which is resulting in loss of revenues by businesses, a dramatic spike in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains and market volatility. Management expects 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, to have a material impact on the Company's operations. Because the impact is contingent upon the duration and severity of the economic downturn, management cannot determine or estimate the magnitude of the impact at this time. However, we are disclosing potentially material items of which we are currently aware.
Business Continuity, Processes and Controls
As a financial institution, the Banks are considered essential businesses and have remained open for business. We have implemented our pandemic preparedness plan and have maintained regular business hours except for closing for business on Fridays at4:30 p.m. We continue to offer customer service through drive-thru facilities, automated teller machines, remote deposit capture and online and mobile banking applications. We are offering by-appointment options for transactions requiring in-person contact while maintaining social distancing mandates and surface cleaning protocols. Our staff is practicing recommended personal hygiene protocols and social distancing while working on premises. A small number of employees are working remotely. We do not face current material resource constraints through the implementation of our pandemic preparedness plan and do not anticipate incurring any material cost related to its implementation. We have not identified any material operational or internal control challenges or risks, nor do we anticipate any significant challenges to our ability to maintain our systems and controls, related to operational changes resulting from implementation of the pandemic preparedness plan. 26Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
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, 2020 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession resulting from the COVID-19 pandemic could adversely impact the Company's and the Banks' capital position and regulatory capital ratios due to a potential increase in credit losses.
Lending Operations and Credit Risk
As noted herein the Company is working with its borrowerswho are negatively impacted by COVID-19 by offering a payment deferral program. As ofSeptember 30, 2020 , we had 96 customers to avail themselves of our payment deferral program with a total principal balance of$18.1 million in loans modified. Of those 81 customers with principal balances totaling$16.2 million had returned to amortizing status, while 15 customers (with principal totaling$1.9 million ) had not completed the allowed deferral period and three customers (with principal totaling$226,000 ) had not returned to amortizing status. The CARES Act includes a Paycheck Protection Program ("PPP"), which is administered by theSmall 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 ofKentucky qualified as an SBA lender to assist the small business community in securing this important funding. As ofSeptember 30, 2020 , First Federal ofKentucky had approved and closed with the SBA 44 PPP loans representing$1.4 million in funding. It is our understanding that loans funded through the PPP are fully guaranteed bythe 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. 27Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
Assets: AtSeptember 30, 2020 , the Company's assets totaled$327.7 million , an increase of$6.5 million , or 2.0%, from total assets atJune 30, 2020 . This increase was attributed primarily to an increase in loans, net, and an increase in cash and cash equivalents.
Cash and cash equivalents: Cash and cash equivalents increased$3.4 million or 24.9% to$17.1 million atSeptember 30, 2020 . Most of the Company's cash and cash equivalents are held in interest-bearing demand deposits. Time deposits in other financial institutions: Time deposits in other financial institutions decreased by$988,000 or 44.3% to$1.2 million atSeptember 30, 2020 . As short-term time deposits matured the funds were used to repay FHLB advances, reinvested at the highest earning level possible or simply carried as interest-bearing demand deposits. Investment securities: AtSeptember 30, 2020 , our securities portfolio consisted of mortgage-backed securities. Investment securities decreased$539,000 or 47.3% to$600,000 atSeptember 30, 2020 . Loans: Loans receivable, net, increased by$4.6 million or 1.6% to$290.5 million atSeptember 30, 2020 . Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies.
Non-Performing and Classified Loans: AtSeptember 30, 2020 , 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$7.4 million or 2.6%, of total loans atJune 30, 2020 . The Company's allowance for loan losses totaled$1.5 million and$1.5 million atSeptember 30, 2020 andJune 30, 2020 , respectively. The allowance for loan losses atSeptember 30, 2020 , represented 22.4% of nonperforming loans and 0.5% of total loans (including acquired loans), while atJune 30, 2020 , the allowance represented 20.1% of nonperforming loans and 0.5% of total loans. The Company had$9.2 million in assets classified as substandard for regulatory purposes atSeptember 30, 2020 , including loans ($8.5 million ), including loans acquired in theCKF Bancorp transaction and also including real estate owned ("REO") ($679,000 .) Classified loans as a percentage of total loans (including loans acquired) was 2.9% and 3.1% atSeptember 30, 2020 andJune 30, 2020 , respectively. Of substandard loans, 99.9% 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) 2020 2020
Substandard assets $ 9,197 $ 9,587
Doubtful assets - -
Loss assets - -
Total classified assets $ 9,197 $ 9,587
At September 30, 2020 , the Company's real estate acquired through foreclosure
represented 7.4% of substandard assets compared to 6.7% at June 30, 2020 . During
the periods 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
$46,000 and $23,000 at September 30, 2020 and June 30, 2020 , respectively.
28
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, 2020 June 30, 2020
Number Net Number Net
of Carrying of Carrying
Properties Value Properties Value
One- to four-family 5 $ 679 5 $ 640
Building lot 1 - 1 -
Total REO 6 $ 679 6 $ 640
At September 30, 2020 and June 30, 2020 , the Company had $1.7 million and $1.7
million of loans classified as special mention, respectively (including loans
acquired in the CKF Bancorp transaction on December 31, 2012 .) This category
includes assets which do not currently expose us to a sufficient degree of risk
to warrant classification, but do possess credit deficiencies or potential
weaknesses deserving our close attention.
Liabilities: Total liabilities increased $6.6 million , or 2.5% to $275.9 million
at September 30, 2020 , primarily as a result of increases in advances and
deposits. Advances increased $3.7 million or 6.7% to $58.4 million at September
30, 2020 , while deposits increased $2.8 million or 1.3% to $215.1 million at
September 30, 2020 .
Shareholders' Equity: At September 30, 2020 , the Company's shareholders' equity
totaled $51.8 million , a decrease of $82,000 or 0.2% from the June 30, 2020
total. The change in shareholders' equity was primarily associated with common
shares purchased by the Company to hold as treasury shares, and net profits for
the period less dividends paid on common stock.
The Company paid dividends of $344,000 or 120.7% of net income for the
three-month period just ended. On July 7, 2020 , 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
2021. 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, 2020 for
additional discussion regarding dividends.
29
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$285,000 or$0.04 diluted earnings per share for the three months endedSeptember 30, 2020 , an increase of$51,000 or 21.8% from net income of$234,000 for the same period in 2019. Net Interest Income Net interest income before provision for loan losses increased$9,000 or 0.4% to$2.4 million for the three-month period just ended. Interest income decreased by$299,000 , or 9.0%, to$3.0 million , while interest expense decreased$308,000 or 32.5% to$639,000 for the three months endedSeptember 30, 2020 . Interest income on loans decreased$196,000 or 6.2% to$3.0 million , due primarily to a decrease in the average rate earned on the loan portfolio. The average rate earned on the loan portfolio decreased 39 basis points to 4.12%, while the average balance increased$7.6 million or 2.7% to$289.3 million for the three-month period endedSeptember 30, 2020 . Interest income on mortgage-backed securities decreased$2,000 or 33.3% to$4,000 for the three-month period just ended due to lower asset levels and lower yields earned. Interest income from other securities decreased$3,000 to$3,000 for the recently-ended period due primarily to a lower average volume of other securities period to period. Interest income from interest-bearing deposits and other decreased$98,000 or 68.1% to$46,000 for the three months just ended due to a decrease in the average rate earned, which decreased 186 basis points to 84 basis points for the recently-ended period compared to the period a year ago. Interest expense on deposits decreased$74,000 or 12.6% to$514,000 for the three months endedSeptember 30, 2020 , while interest expense on borrowings decreased$234,000 or 65.2% to$125,000 for the same period. The decrease in interest expense on deposits was attributed primarily to a decrease in the average rate paid on interest-bearing deposits, which decreased 23 basis points to 99 basis points for the recently ended period. The average balance of interest-bearing deposits increased$15.9 million or 8.3% to$208.4 million for the most recent period. The decrease in interest expense on borrowings was attributed to both to a lower average rate paid on the borrowings and a lower average balance of borrowings decreased period to period. The average balance of borrowings outstanding decreased$11.0 million or 17.5% to$51.8 million for the recently ended three-month period, while the average rate paid on borrowings decreased 132 basis points to 97 basis points for the most recent period.
Net interest spread increased from 2.89% for the prior year quarterly period to
2.90% for the three-month period ended
Provision for Losses on Loans
The Company recorded an
30
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
Non-interest Income Non-interest income increased$54,000 or 73.0% to$128,000 for the three months endedSeptember 30, 2020 , 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$52,000 to$58,000 for the recently-ended three-month period over the prior year amount. The Company has seen significant loan refinance activity since the emergency interest rate cut implemented by theFederal Open Market Committee in March of this year. The Company's long-term, fixed rate loans, which some borrowers are preferring at this time, are usually sold to the FHLB ofCincinnati after they are originated, which produced the gains. Non-interest Expense
Non-interest expense decreased$19,000 or 0.9% and totaled$2.1 million for the three months endedSeptember 30, 2020 , primarily due to cost-saving measures implemented by management.
Voice and data communications expense decreased$40,000 or 65.6% to$21,000 for the quarterly period just ended, as upgraded technology was implemented. Other non-interest expense decreased$19,000 or 10.9% to$155,000 for the three months endedSeptember 30, 2020 , primarily due to lower general loan expenses. Employee compensation and benefits decreased$17,000 or 1.3% to$1.3 million primarily due to lower employee compensation. The Banks were operating with two fewer full-time equivalent employees in the recently-ended quarterly period compared to the prior year quarter, which resulted in lower compensation cost, lower fringe benefit cost and lower payroll taxes period to period. Somewhat offsetting the decreases in other employee compensation and benefits expense was an increase in contributions to the Company's Defined Benefit ("DB") pension plan. DB pension contributions increased$73,000 or 41.2% to$252,000 for the three-month period recently ended compared to the prior year period. Higher DB pension contributions were a result of higher administrative fees andPension Benefit Guarantee Corporation premiums, as the Company's DB plan was frozen effectiveApril 1, 2019 . Foreclosure and OREO expenses, net decreased$17,000 or 50.0% to$17,000 for the quarter just ended, due to lower levels of such activity. Advertising expenses decreased$11,000 or 22.9% to$37,000 for the recently ended three-month period. Somewhat offsetting the decreases in various non-interest expense items were increases inFDIC insurance premiums, data processing expenses, and outside service fees.FDIC insurance premiums increased$43,000 to$57,000 for the three months endedSeptember 30, 2020 . In the prior year quarterly period the Banks were able to utilize their Small Bank Assessment Credits ("SBAC"). The SBAC were depleted in the quarterly period endedJune 30, 2020 . Data processing increased$42,000 or 40.0% to$147,000 for the period just ended as core processing costs increased and the Company expanded its technology infrastructure. Outside service fees increased$12,000 or 23.5% to$63,000 for the quarter endedSeptember 30, 2020 , primarily due to professional services related to the Company's goodwill impairment valuation during the period. Federal Income Tax Expense Federal income tax expense increased$6,000 or 10.0% to$66,000 for the three months endedSeptember 30, 2020 , compared to the prior year period. The effective tax rates for the three-month periods endedSeptember 30, 2020 and 2019, were 18.8% and 20.4%, respectively. 31Kentucky First Federal Bancorp
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