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, 2022 . 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. 28 Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Average Balance Sheets The following table represents the average balance sheets for the six-month periods endedDecember 31, 2022 and 2021, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. Six Months Ended December 31, 2022 2021 Interest Interest Average And Yield/ Average And Yield/ Balance Dividends Cost Balance Dividends Cost (Dollars in thousands) Interest-earning assets: Loans 1$ 290,100 $ 5,539 3.82 %$ 293,644 $ 5,677 3.87 % Mortgage-backed securities 13,961 229 3.28 467 6 2.57 Other interest-earning assets 15,253 248 3.25 34,924 72 0.41 Total interest-earning assets 319,314 6,016 3.77 329,035 5,755 3.50 Less: Allowance for loan losses (1,587 )
(1,611 )
Non-interest-earning assets 11,873 12,254
Total assets $ 329,600 $ 339,678
Interest-bearing liabilities:
Demand deposits $ 20,905 $ 20 0.19 % $ 20,786 $ 19 0.18 %
Savings 74,545 173 0.46 71,762 135 0.38
Certificates of deposit 117,080 461 0.79 126,564 565 0.89
Total deposits 212,530 654 0.62 219,112 719 0.66
Borrowings 49,879 482 1.93 52,423 198 0.76Total interest-bearing liabilities 262,409 1,136 0.87 271,535
917 0.68
Noninterest-bearing demand deposits 13,957 13,766
Noninterest-bearing liabilities 1,512
2,131
Total liabilities 277,878 287,432
Shareholders' equity 51,722 52,246
Total liabilities and shareholders'
equity $ 329,600 $ 339,678
Net interest spread $ 4,880 2.90 % $ 4,838 2.82 %
Net interest margin 3.06 % 2.94 %
Average interest-earning assets to
average interest-bearing liabilities 121.69 % 121.18 %
1 Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. Also includes loans on nonaccrual status.
29
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Average Balance Sheets
The following table represents the average balance sheets for the three-month
periods ended December 31, 2022 and 2021, along with the related calculations of
tax-equivalent net interest income, net interest margin and net interest spread
for the related periods.
Three Months Ended December 31,
2022 2021
Interest Interest
Average And Yield/ Average And Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans 1 $ 297,640 $ 2,895 3.89 % $ 289,434 $ 2,743 3.79 %
Mortgage-backed securities 14,048 115 3.27 453 3 2.65
Other securities - - - - - -
Other interest-earning assets 11,161 121 4.34 38,318 35 0.37
Total interest-earning assets 322,849 3,131 3.88 328,205 2,781 3.39
Less: Allowance for loan losses (1,642 )
(1,607 )
Non-interest-earning assets 11,948 12,549
Total assets $ 333,155 $ 339,147
Interest-bearing liabilities:
Demand deposits $ 20,234 $ 9 0.18 % $ 20,423 $ 10 0.20 %
Savings 75,546 71 0.39 73,086 67 0.37
Certificates of deposit 112,888 224 0.79 127,088 274 0.86
Total deposits 205,668 304 0.59 220,597 351 0.64
Borrowings 61,965 379 2.45 49,963 97 0.78
Total interest-bearing liabilities 267,633 683 1.02 270,560 448 0.66
Noninterest-bearing demand deposits 12,738 14,129
Noninterest-bearing liabilities 1,247
2,042
Total liabilities 281,618 286,731
Shareholders' equity 51,537 52,416
Total liabilities and shareholders'
equity $ 333,155 $ 339,147
Net interest spread $ 2,448 2.86 % $ 2,333 2.73 %
Net interest margin 3.03 % 2.84 %
Average interest-earning assets to
average interest-bearing liabilities 121.31 % 121.31 %
1 Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. Also includes loans on nonaccrual status.
30
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
Financial Position and Results of Operations
AtDecember 31, 2022 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession could adversely impact the Company's and the Banks' capital position and regulatory capital ratios due to a potential increase in credit losses.
Assets: AtDecember 31, 2022 , the Company's assets totaled$335.4 million , an increase of$7.3 million , or 2.2%, from total assets atJune 30, 2022 . This increase was attributed primarily to increases in loans, net, and investment securities. Cash and cash equivalents: Cash and cash equivalents decreased$18.2 million or 70.4% to$7.7 million atDecember 31, 2022 . Most of the Company's cash and cash equivalents are held in interest-bearing demand deposits. Investment securities: AtDecember 31, 2022 , our securities portfolio, which consisted of mortgage-backed securities, increased$3.0 million or 28.0% and totaled$13.8 million , compared toJune 30, 2022 . Loans: Loans, net increased$24.4 million or 8.9% and totaled$299.0 million atDecember 31, 2022 , as a significant amount of residential real estate loans, which represent the core of the Company's business were added to the portfolio. One- to four-family, multi-family and construction loans increased$15.2 million ,$5.9 million and$4.3 million fromJune 30, 2022 , respectively. 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: AtDecember 31, 2022 , the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately$6.1 million , or 2.0% of total loans (including acquired loans), compared to$5.8 million or 2.1%, of total loans atJune 30, 2022 . The Company's allowance for loan losses totaled$1.7 million and$1.5 million atDecember 31, 2022 andJune 30, 2022 , respectively. The allowance for loan losses atDecember 31, 2022 , represented 27.2% of nonperforming loans and 0.6% of total loans (including acquired loans), while atJune 30, 2022 , the allowance represented 26.3% of nonperforming loans and 0.6% of total loans. The Company had$7.5 million in assets classified as substandard for regulatory purposes atDecember 31, 2022 , and real estate owned ("REO") of$10,000 . Classified loans as a percentage of total loans (including loans acquired) was 2.5% and 2.7% atDecember 31, 2022 andJune 30, 2022 , 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:
December 31, June 30,
(dollars in thousands) 2022 2022
Substandard assets $ 7,523 $ 7,458
Doubtful assets - -
Loss assets - -
Total classified assets $ 7,523 $ 7,458
At December 31, 2022 , the Company's real estate acquired through foreclosure
represented 0.1% of substandard assets compared to 0.1% at June 30, 2022 . 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 $0
and $0 at December 31, 2022 and June 30, 2022 , respectively.
31
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-month Periods Ended
General
Net income totaled$747,000 or$0.09 diluted earnings per share for the six months endedDecember 31, 2022 , a decrease of$303,000 or 28.9% from net income of$1.1 million or$0.13 diluted earnings per share for the same period in 2021. The decrease in net income on a six-month basis was primarily attributable to lower non-interest income, increased provision for loan losses, and higher
non-interest expense. Net Interest Income Net interest income before provision for loan losses increased$42,000 or 0.9% to$4.9 million for the six-month period just ended. Interest income increased by$261,000 , or 4.5%, to$6.0 million , while interest expense increased$219,000 or 23.9% to$1.1 million for the six months endedDecember 31, 2022 . The increase in interest income period-to-period was due primarily to an increased average rate earned on interest-earning assets, which increased 27 basis points to 3.77% for the recently-ended six-month period compared to the prior year period. The average balance of interest-earning assets decreased$9.7 million or 3.0% to$319.3 million for the six months endedDecember 31, 2022 . Interest income on loans decreased$138,000 or 2.4% to$5.5 million , due primarily to a decrease in the average rate earned on the loan portfolio, which decreased five basis points to 3.82%, while the average balance decreased$3.5 million or 1.2% to$290.1 million for the six-month period endedDecember 31, 2022 . Interest income from mortgage-backed securities increased$223,000 $229,000 for the six months just ended due to increases in the average balance and average rate earned on those assets. The average balance increased$13.5 million to$14.0 million for the period, while the average rate earned increased 71 basis points to 3.28% for the recently-ended period. Interest income from interest-bearing deposits and other increased$176,000 to$248,000 for the six months just ended due to an increase in the average rate earned, which increased 2.84% to 3.25% for the recently-ended period. Interest expense increased$219,000 or 23.9% to$1.1 million for the six months endedDecember 31, 2022 , primarily due to increased average rate paid on funding sources, which increased 19 basis points to 0.87% for the recently-ended period. Interest expense on borrowings increased$284,000 or 143.4% to$482,000 for the six-month period just ended compared to the prior year period due chiefly to higher average rates paid on those funds, which increased 1.17% to 1.93%. The average balance of borrowings outstanding decreased$2.5 million or 4.9% to$49.9 million for the recently ended six-month period. Interest expense on deposits decreased$65,000 or 9.0% to$654,000 for the six months just ended, while the average balance of deposits decreased$6.6 million or 3.0% to$212.5 million . Interest expense on certificates of deposit decreased$104,000 or 18.4% to$461,000 , for the six months just ended primarily due to a decrease in the average cost, which decreased by 10 bps to 0.79%.
Net interest spread increased from 2.82% for the prior year semiannual period to
2.90% for the six-month period ended
Provision for Losses on Loans
Management determined that a$113,000 provision for loan loss was appropriate in light of the relatively large increase in the loan portfolio during the period. Loans, net, increased$24.4 million or 8.9% and totaled$299.0 million atDecember 31, 2022 , compared to$274.6 million atJune 30, 2022 . The additional provision was appropriate not only for the increase in the loan portfolio but also, in part, to reflect an increase in multi-family loans, which increased$5.9 million or 41.2% and totaled$20.1 million atDecember 31, 2022 . Multi-family loans carry a slightly higher risk profile than 1-4 family residential loans, which makes up the greatest portion of the Company's loan portfolio. 32Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-month Periods Ended
Non-interest Income Non-interest income decreased$161,000 or 49.1% to$167,000 for the six months endedDecember 31, 2022 , compared to the prior year period, primarily due to decreased net gains on sales of loans. Net gain on sales of loans decreased$202,000 to$6,000 for the recently-ended six-month period. Interest rates in the general market have risen significantly sinceMarch 2022 , which has resulted in a reduced demand for long-term fixed rate loans. The Company routinely sells long-term, fixed rate loans to the FHLB ofCincinnati after they are originated. Non-interest Expense
Non-interest expense increased
Auditing and accounting costs increased
Other non-interest expense increased
Income Tax Expense
Income tax expense decreased$12,000 or 5.0% to$229,000 for the six months endedDecember 31, 2022 , compared to the prior year period. The effective tax rates for the six-month periods endedDecember 31, 2022 and 2021, were 23.5% and 18.7%, respectively. 33Kentucky 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$374,000 or$0.04 diluted earnings per share for the three months endedDecember 31, 2022 , a decrease of$108,000 or 22.4% from net income of$482,000 or$0.06 diluted earnings per share for the same period in 2021. The decrease in net earnings for the quarter endedDecember 31, 2022 was primarily attributable to higher non-interest expense, higher income taxes, and lower non-interest income, which were partially offset by increased net interest
income. Net Interest Income Net interest income increased$115,000 or 4.9% to$2.4 million for the three-month period just ended, as interest income increased at a faster pace than interest expense. Interest income increased by$350,000 , or 12.6%, to$3.1 million , while interest expense increased$235,000 or 52.5% to$683,000 for the three months endedDecember 31, 2022 . The increase in interest income period-to-period was led by an increase in interest income on loans but was strongly supported by increases in interest income on mortgage-backed securities and interest-bearing deposits and other. Interest income on loans increased$152,000 or 5.5% to$2.9 million for the quarterly period just ended due to both increased average balance of loans in the portfolio and increased average rate earned. The average balance of loans, net increased$8.2 million or 2.8% to$297.6 million for the period, while the average balance earned on those assets increased 10 basis points to 3.89%. Interest income on mortgage-backed securities increased$112,000 to$115,000 for the three months endedDecember 31, 2022 , and was due primarily to an increase in the average balance, which increased$13.6 million to$14.0 million for the quarter just ended, while the average rate increased 63 basis points to 3.27% for the period. Interest income on interest-bearing deposits and other increased$86,000 and totaled$121,000 for the quarter just ended due to increased average rate earned on those assets. The average rate earned increased 3.97% to 4.34%, which was attributed to the rise in short-term interest rates orchestrated by theFOMC during the previous nine months. The average balance of other interest-earning assets decreased$27.2 million or 70.9% to$11.2 million for the recently-ended quarter.
The increase in interest expense was attributed primarily to an increase in interest expense on borrowings, which increased$282,000 to$379,000 for the recently-ended quarterly period. Interest expense on deposits decreased$47,000 or 13.4% to$304,000 for the period. Interest expense on borrowings was chiefly attributed to an increase in the average rate, which increased 1.67% to 2.45% for the three months just ended, while the average balance increased$12.0 million or 24.0% to$62.0 million . Advances were used to replace deposits, whose average balance decreased$14.9 million or 6.8% to$205.7 million for the three months just ended. The average rate paid on interest-bearing deposits decreased 5 basis points to 0.59% for the recently ended period.
Net interest spread increased 13 basis points from 2.84% for the prior year
quarterly period to 2.83% for the three-month period ended
Provision for Losses on Loans
The Company recorded no provision for loan losses for the three-month periods
ended
34
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 decreased$31,000 or 31.0% to$69,000 for the recently ended quarter due primarily to decreased net gains on sales of loans. Interest rates have risen significantly sinceMarch 2022 , which has resulted in a reduced demand for long-term fixed rate loans, which the Company routinely sells to the FHLB ofCincinnati after they are originated. Non-interest Expense Non-interest expense increased$136,000 or 7.2% to$2.0 million for the quarter endedDecember 31, 2022 , due primarily to higher employee compensation and benefits, as well as higher auditing and accounting costs. Employee compensation and benefits costs increased quarter to quarter chiefly due to general salary increases as well as lower expense in the prior year quarter related to the
defined benefit pension plan. Income Tax Expense
Income tax expense increased
35
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