Kentucky First Federal Bancorp 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 OR ☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________ to _______________ Commission File Number: 0-51176 KENTUCKY FIRST FEDERAL BANCORP (Exact name of registrant as specified in its charter) United States of America 61-1484858 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 655 Main Street , Hazard , Kentucky 41702 (Address of principal executive offices)(Zip Code) (502) 223-1638 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading symbol(s) Name of each exchange on which registered Common Stock, $0.01 par value per share KFFB The NASDAQ Stock Market LLC Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-Accelerated filer ☒ Smaller Reporting Company ☒ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At May 12, 2023, the latest practicable date, the Corporation had 8,097,695 shares of $.01 par value common stock outstanding. INDEX Page PART I FINANCIAL INFORMATION 1 ITEM 1 FINANCIAL STATEMENTS 1 Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Operations 2 Condensed Consolidated Statements of Comprehensive Income 3 Consolidated Statements of Changes in Shareholders’ Equity 4 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 8 ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 36 ITEM 4 Controls and Procedures 36 PART II OTHER INFORMATION 37 SIGNATURES 40 i PART I-FINANCIAL INFORMATION ITEM 1: Financial Statements Kentucky First Federal Bancorp CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data) March 31, June 30, 2023 2022 ASSETS Cash and due from financial institutions $ 2,242 $ 2,002 Fed funds sold 656 14,824 Interest-bearing demand deposits 5,187 8,997 Cash and cash equivalents 8,085 25,823 Securities available-for-sale 12,863 10,477 Securities held-to-maturity, at amortized cost- approximate fair value of $ 273 and $ 323 at March 31, 2023 and June 30, 2022, respectively 289 339 Loans held for sale – 152 Loans, net of allowance of $ 1,633 and $ 1,529 at March 31, 2023 and June 30, 2022, respectively 306,960 274,583 Real estate owned, net 70 10 Premises and equipment, net 4,490 4,563 Federal Home Loan Bank stock, at cost 4,688 6,498 Accrued interest receivable 887 649 Bank-owned life insurance 2,811 2,750 Goodwill 947 947 Prepaid income taxes – 382 Deferred income taxes 49 – Prepaid expenses and other assets 775 907 Total assets $ 342,914 $ 328,080 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits $ 209,391 $ 239,857 Federal Home Loan Bank advances 80,899 34,066 Advances by borrowers for taxes and insurance 503 766 Accrued interest payable 48 12 Accrued income taxes 469 – Deferred income taxes – 889 Other liabilities 465 465 Total liabilities 291,775 276,055 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 34,891 34,892 Retained earnings 20,425 20,560 Unearned employee stock ownership plan (ESOP) – ( 5 ) Treasury shares at cost, 498,369 and 441,369 common shares at March 31, 2023 and June 30, 2022, respectively ( 3,902 ) ( 3,508 ) Accumulated other comprehensive income (loss) ( 361 ) – Total shareholders’ equity 51,139 52,025 Total liabilities and shareholders’ equity $ 342,914 $ 328,080 See accompanying notes to condensed consolidated financial statements. 1 Kentucky First Federal Bancorp CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share data) Nine months ended March 31, Three months ended March 31, 2023 2022 2023 2022 Interest income Loans, including fees $ 8,522 $ 8,190 $ 2,983 $ 2,513 Mortgage-backed securities 345 8 116 2 Interest-bearing deposits and other 359 118 111 46 Total interest income 9,226 8,316 3,210 2,561 Interest expense Interest-bearing demand deposits 29 29 9 10 Savings 235 203 62 68 Certificates of Deposit 844 823 383 258 Deposits 1,108 1,055 454 336 Borrowings 1,193 285 711 87 Total interest expense 2,301 1,340 1,165 423 Net interest income 6,925 6,976 2,045 2,138 Provision (credit) for loan losses 113 ( 106 ) – ( 106 ) Net interest income after provision for loan losses 6,812 7,082 2,045 2,244 Non-interest income Earnings on bank-owned life insurance 60 59 20 19 Net gain on sales of loans 6 231 – 23 Net gain (loss) on sales of real estate owned – ( 8 ) – – Net gain on sale of property and equipment held for sale 10 – – – Other 160 140 49 52 Total non-interest income 236 422 69 94 Non-interest expense Employee compensation and benefits 3,697 3,675 1,243 1,237 Data processing 330 416 100 109 Occupancy and equipment 469 460 156 159 FDIC insurance premiums 63 49 22 23 Voice and data communications 93 93 32 31 Advertising 110 106 31 20 Outside service fees 181 133 77 31 Auditing and accounting 212 128 36 48 Regulatory assessments 67 77 17 25 Foreclosure and real estate owned expenses (net) 77 67 32 23 Franchise and other taxes 107 114 29 23 Other 468 428 141 142 Total non-interest expense 5,874 5,746 1,916 1,871 Income before income taxes 1,174 1,758 198 467 Income tax expense 283 374 54 133 NET INCOME $ 891 $ 1,384 $ 144 $ 334 EARNINGS PER SHARE Basic and diluted $ 0.11 $ 0.17 $ 0.02 $ 0.04 DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.10 $ 0.10 See accompanying notes to condensed consolidated financial statements. 2 Kentucky First Federal Bancorp CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) Nine months ended March 31, Three months ended March 31, 2023 2022 2023 2022 Net income $ 891 $ 1,384 $ 144 $ 334 Other comprehensive gains (losses), net of tax: Unrealized holding gains (losses) on securities designated as available-for-sale, net of taxes (benefit) of $( 119 ), $ 0 , $( 6 ) and $ 0 during the respective periods ( 361 ) – ( 18 ) – Comprehensive income $ 530 $ 1,384 $ 126 $ 334 See accompanying notes to condensed consolidated financial statements. 3 Kentucky First Federal Bancorp CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the nine months ended (Unaudited) (Dollar amounts in thousands, except per share data) March 31, 2023 Common stock Additional paid-in capital Retained earnings Unearned employee stock ownership plan (ESOP) Treasury shares Accumulated other comprehensive loss Total Balance at June 30, 2022 $ 86 $ 34,892 $ 20,560 $ ( 5 ) $ ( 3,508 ) $ – $ 52,025 Net income – – 891 – – – 891 Allocation of ESOP shares – ( 1 ) – 5 – – 4 Acquisition of shares for Treasury – – – – ( 394 ) – ( 394 ) Other comprehensive loss ( 361 ) ( 361 ) Cash dividends of $ 0.30 per common share – – ( 1,026 ) – – – ( 1,026 ) Balance at March 31, 2023 $ 86 $ 34,891 $ 20,425 $ - $ ( 3,902 ) $ ( 361 ) $ 51,139 March 31, 2022 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, 2021 $ 86 $ 34,916 $ 20,364 $ ( 102 ) $ ( 2,968 ) $ – $ 52,296 Net income – – 1,384 – – – 1,384 Allocation of ESOP shares – ( 23 ) – 95 – – 72 Acquisition of shares for Treasury – – – – ( 61 ) – ( 61 ) Cash dividends of $ 0.30 per common share – – ( 1,045 ) – – – ( 1,045 ) Balance at March 31, 2022 $ 86 $ 34,893 $ 20,703 $ ( 7 ) $ ( 3,029 ) $ – $ 52,646 See accompanying notes to condensed consolidated financial statements. 4 Kentucky First Federal Bancorp CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the three months ended (Unaudited) (Dollar amounts in thousands, except per share data) March 31, 2023 Common stock Additional paid-in capital Retained earnings Unearned employee stock ownership plan (ESOP) Treasury shares Accumulated other comprehensive loss Total Balance at December 31, 2022 $ 86 $ 34,892 $ 20,622 $ – $ ( 3,616 ) $ ( 343 ) $ 51,641 Net income – – 144 – – – 144 Allocation of ESOP shares – ( 1 ) – – – ( 1 ) Acquisition of shares for Treasury – – – – ( 286 ) ( 286 ) Other comprehensive loss ( 18 ) ( 18 ) Cash dividends of $ 0.10 per common share – – ( 341 ) – – – ( 341 ) Balance at March 31, 2023 $ 86 $ 34,891 $ 20,425 $ – $ ( 3,902 ) $ ( 361 ) $ 51,139 March 31, 2022 Common stock Additional paid-in capital Retained earnings Unearned employee stock ownership plan (ESOP) Treasury shares Accumulated other comprehensive income Total Balance at December 31, 2021 $ 86 $ 34,893 $ 20,718 $ ( 9 ) $ ( 3,029 ) $ – $ 52,659 Net income – – 334 – – – 334 Allocation of ESOP shares – – – 2 – – 2 Cash dividends of $ 0.10 per common share – – ( 349 ) – – – ( 349 ) Balance at March 31, 2022 $ 86 $ 34,893 $ 20,703 $ ( 7 ) $ ( 3,029 ) $ – $ 52,646 See accompanying notes to condensed consolidated financial statements. 5 Kentucky First Federal Bancorp CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine months ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 891 $ 1,384 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 195 194 Accretion of purchased loan credit discount ( 34 ) ( 38 ) Amortization of deferred loan origination costs (fees) ( 19 ) ( 88 ) Amortization of premiums on investment securities ( 22 ) 2 Net gain on sale of loans ( 6 ) ( 231 ) Net loss on sale of real estate owned – 8 Net gain on sale of property & equipment ( 10 ) – ESOP compensation expense 4 72 Earnings on bank-owned life insurance ( 60 ) ( 59 ) Provision (credit) for loan losses 113 ( 106 ) Origination of loans held for sale ( 157 ) ( 6,283 ) Proceeds from loans held for sale 315 6,479 Increase (decrease) in cash, due to changes in: Accrued interest receivable ( 238 ) 63 Prepaid expenses and other assets ( 38 ) ( 118 ) Accrued interest payable 36 ( 4 ) Other liabilities – ( 63 ) Income taxes 32 ( 68 ) Net cash provided by operating activities 1,002 1,144 Cash flows from investing activities: Purchase of investments available for sale ( 4,974 ) – Purchase of FHLB stock ( 251 ) – Maturities of time deposits in other financial institutions – 247 Securities maturities, prepayments and calls: Held to maturity 46 102 Available for sale 2,133 4 Proceeds from redemption of FHLB stock 2,061 – Loans originated for investment, net of principal collected ( 32,497 ) 28,724 Proceeds from sale of property and equipment held for sale 180 – Proceeds from sale of real estate owned – 26 Additions to premises and equipment, net ( 122 ) ( 127 ) Net cash provided by (used in) investing activities ( 33,424 ) 28,976 Cash flows from financing activities: Net increase (decrease) in deposits ( 30,466 ) 11,799 Payments by borrowers for taxes and insurance, net ( 263 ) ( 309 ) Proceeds from Federal Home Loan Bank advances 119,750 8,000 Repayments on Federal Home Loan Bank advances ( 72,917 ) ( 24,091 ) Treasury stock purchased ( 394 ) ( 61 ) Dividends paid on common stock ( 1,026 ) ( 1,045 ) Net cash provided by (used in) financing activities 14,684 ( 5,707 ) Net increase (decrease) in cash and cash equivalents ( 17,738 ) 24,413 Beginning cash and cash equivalents 25,823 21,648 Ending cash and cash equivalents $ 8,085 $ 46,061 See accompanying notes to condensed consolidated financial statements. 6 Kentucky First Federal Bancorp CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (In thousands) Nine months ended March 31, 2023 2022 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 250 $ 500 Interest on deposits and borrowings $ 2,265 $ 1,344 Transfers of loans to real estate owned, net $ 60 $ 45 Loans made on sale of real estate owned $ – $ 32 See accompanying notes to condensed consolidated financial statements. 7 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2023 (unaudited) The Kentucky First Federal Bancorp (“Kentucky First” or the “Company”) was incorporated under federal law in March 2005 and is the mid-tier holding company for First Federal Savings and Loan Association of Hazard, Hazard, Kentucky (“First Federal of Hazard”) and Frankfort First Bancorp, Inc. (“Frankfort First”). Frankfort First is the holding company for First Federal Savings Bank of Kentucky, Frankfort, Kentucky (“First Federal of Kentucky”). First Federal of Hazard and First Federal of Kentucky (hereinafter collectively the “Banks”) are Kentucky First’s primary operations, which consist of operating the Banks as two independent, community-oriented savings institutions. In December 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. 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements, which represent the condensed consolidated balance sheets and results of operations of the Company, were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the condensed consolidated financial statements have been included. The results of operations for the three-month and nine-month periods ended March 31, 2023, are not necessarily indicative of the results which may be expected for an entire fiscal year. The condensed consolidated balance sheet as of June 30, 2022, has been derived from the audited consolidated balance sheet as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2022 filed with the Securities and Exchange Commission. Principles of Consolidation - The consolidated financial statements include the accounts of the Company, Frankfort First, and its wholly-owned banking subsidiaries, First Federal of Hazard and First Federal of Kentucky (collectively hereinafter “the Banks”). All intercompany transactions and balances have been eliminated in consolidation. 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. 8 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 1. Basis of Presentation (continued) New Accounting Standards (continued) We have selected and engaged a third-party software provider for modeling our data. We have run parallel calculations using both our traditional allowance calculation methodology and the new CECL software for the two most recent quarterly periods. We are pleased with the progress being made on the fine tuning of the data inputs for the model. 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 write-offs 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. 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. 2. 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. The factors used in the basic and diluted earnings per share computations follow: Nine months ended March 31, Three months ended March 31, 2023 2022 2023 2022 Net income allocated to common shareholders, basic and diluted $ 891,000 $ 1,384,000 $ 144,000 $ 334,000 EARNINGS PER SHARE $ 0.11 $ 0.17 $ 0.02 $ 0.04 Weighted average common shares outstanding, basic and diluted 8,144,767 8,216,989 8,129,006 8,215,825 There were no stock option shares outstanding for the nine- or three-month periods ended March 31, 2023 and 2022. 9 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 3. Investment Securities The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at March 31, 2023 and June 30, 2022, the corresponding amounts of gross unrealized gains recognized in accumulated other comprehensive income and gross unrecognized gains and losses: March 31, 2023 (in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Available-for-sale Securities Agency mortgage-backed: residential $ 13,343 $ – $ 480 $ 12,863 Held-to-maturity Securities Agency mortgage-backed: residential $ 289 $ – $ 16 $ 273 June 30, 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 Our pledged securities (including overnight and time deposits in other financial institutions) totaled $ 6.2 million and $ 1.7 million at March 31, 2023 and June 30, 2022, respectively. We evaluated securities in unrealized loss positions for evidence of other-than-temporary impairment, considering duration, severity, financial condition of the issuer, our intention to sell or requirement to sell. Those securities were agency mortgage-backed securities, which carry a very limited amount of risk, and have had values impacted by increased interest rates. Also, we have no intention to sell nor feel that we will be compelled to sell such securities before maturity. Based on our evaluation, no impairment has been recognized through earnings. 10 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 3. Investment Securities (continued) As of March 31, 2023: Available-for-Sale (in thousands) Amortized Cost Gross Unrealized Losses Fair Value Less Than 12 Months Mortgage-backed securities $ 13,343 $ 480 $ 12,863 12 Months or More Mortgage-backed securities – – – Total temporarily impaired AFS securities $ 13,343 $ 480 $ 12,863 Held to Maturity (in thousands) Amortized Cost Gross Unrealized Losses Fair Value Less Than 12 Months Mortgage-backed securities $ – $ – $ – 12 Months or More Mortgage-backed securities 289 16 273 Total temporarily impaired HTM securities $ 289 $ 16 $ 273 As of June 30, 2022: There were no available-for-sale investment securities in an unrealized loss position at June 30, 2022. Held to Maturity (in thousands) Amortized Cost Gross Unrealized Losses Fair Value Less Than 12 Months Mortgage-backed securities $ 197 $ 15 $ 182 12 Months or More Mortgage-backed securities 45 3 42 Total temporarily impaired HTM securities $ 242 $ 18 $ 273 11 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable 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. The composition of the loan portfolio was as follows: March 31, June 30, (in thousands) 2023 2022 Residential real estate One- to four-family $ 236,796 $ 216,432 Multi-family 19,859 14,252 Construction 9,234 1,363 Land 507 1,062 Farm 1,290 1,338 Nonresidential real estate 30,014 31,441 Commercial nonmortgage 960 1,006 Consumer and other: Loans on deposits 806 891 Home equity 8,656 7,670 Automobile 112 117 Unsecured 359 540 308,593 276,112 Allowance for loan losses ( 1,633 ) ( 1,529 ) $ 306,960 $ 274,583 The amounts above include net deferred loan costs of $ 336,000 and $ 290,000 as of March 31, 2023 and June 30, 2022, respectively. 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. 12 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (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 97 % 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. 13 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (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. 14 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2023: (in thousands) Beginning balance Provision (credit) for loan losses Loans charged off Recoveries Ending balance Residential real estate: One-to four-family $ 800 $ 44 $ ( 22 ) $ 13 $ 835 Multi-family 231 96 – – 327 Construction 4 29 – – 33 Land 3 ( 2 ) – – 1 Farm 5 – – – 5 Nonresidential real estate 461 ( 53 ) – – 408 Commercial nonmortgage 2 – – – 2 Consumer and other: Loans on deposits 1 – – – 1 Home equity 21 – – – 21 Automobile – – – – – Unsecured 1 ( 1 ) – – – Totals $ 1,529 $ 113 $ ( 22 ) $ 13 $ 1,633 The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2023: (in thousands) Beginning balance Provision (credit) for loan losses Loans charged off Recoveries Ending balance Residential real estate: One- to four-family $ 778 $ 79 $ ( 22 ) $ – $ 835 Multi-family 363 ( 36 ) – – 327 Construction 26 7 – – 33 Land 1 – – – 1 Farm 5 – – – 5 Nonresidential real estate 457 ( 49 ) – – 408 Commercial nonmortgage 2 – – – 2 Consumer and other: Loans on deposits 1 – – – 1 Home equity 21 – – – 21 Automobile – – – – – Unsecured 1 ( 1 ) – – – Totals $ 1,655 $ – $ ( 22 ) $ – $ 1,633 15 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended March 31, 2022: (in thousands) Beginning balance Provision (credit) for loan losses Loans charged off Recoveries Ending balance Residential real estate: One- to four-family $ 794 $ ( 4 ) $ ( 31 ) $ – $ 759 Multi-family 291 ( 68 ) – – 223 Construction 12 ( 7 ) – – 5 Land 3 1 – – 4 Farm 5 1 – – 6 Nonresidential real estate 494 ( 33 ) – – 461 Commercial nonmortgage 5 ( 3 ) – – 2 Consumer and other: Loans on deposits 2 ( 1 ) – – 1 Home equity 15 7 – – 22 Automobile – – – – – Unsecured 1 1 ( 3 ) 2 1 Totals $ 1,622 $ ( 106 ) $ ( 34 ) $ 2 $ 1,484 The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2022: (in thousands) Beginning balance Provision (credit) for loan losses Loans charged off Recoveries Ending balance Residential real estate: One- to four-family $ 831 $ ( 58 ) $ ( 14 ) $ – $ 759 Multi-family 212 11 – – 223 Construction 6 ( 1 ) – – 5 Land – 4 – – 4 Farm 6 – – – 6 Nonresidential real estate 526 ( 65 ) – – 461 Commercial nonmortgage 3 ( 1 ) – – 2 Consumer and other: Loans on deposits 1 – – – 1 Home equity 17 5 – – 22 Automobile – – – – – Unsecured 1 ( 1 ) – 1 1 Totals $ 1,603 $ ( 106 ) $ ( 14 ) $ 1 $ 1,484 16 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of March 31, 2023. The recorded investment in loans excludes accrued interest receivable due to immateriality. March 31, 2023: (in thousands) Loans individually evaluated Loans acquired with deteriorated credit quality* Unpaid principal balance and recorded investment Ending allowance attributed to loans Loans individually evaluated for impairment: Residential real estate: One- to four-family $ 3,233 $ 366 $ 3,599 $ – Multi-family 552 – 552 – Farm 270 – 270 – Nonresidential real estate 1,036 – 1,036 – 5,091 366 5,457 – Loans collectively evaluated for impairment: Residential real estate: One- to four-family $ 233,197 $ 835 Multi-family 19,307 327 Construction 9,234 33 Land 507 1 Farm 1,020 5 Nonresidential real estate 28,978 408 Commercial nonmortgage 960 2 Consumer: Loans on deposits 806 1 Home equity 8,656 21 Automobile 112 – Unsecured 359 – 303,136 1,633 $ 308,593 $ 1,633 * These loans were evaluated at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition. 17 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (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. 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 collectively 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. 18 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) The following table presents interest income on loans individually evaluated for impairment by class of loans for the nine months ended March 31: (in thousands) Average Recorded Investment Interest Income Recognized Cash Basis Income Recognized Average Recorded Investment Interest Income Recognized Cash Basis Income Recognized 2023 2022 With no related allowance recorded: One- to four-family $ 3,227 $ 147 $ 147 $ 3,494 $ 94 $ 94 Multi-family 561 15 15 610 16 16 Farm 270 – – 274 – – Nonresidential real estate 1,055 41 41 1,229 40 40 Consumer 46 6 6 54 1 1 Purchased credit-impaired loans 383 17 17 546 19 19 5,542 226 226 6,207 170 170 With an allowance recorded: One- to four-family – – – – – – $ 5,542 $ 226 $ 226 $ 6,207 $ 170 $ 170 The following table presents interest income on loans individually evaluated for impairment by class of loans for the three months ended March 31: (in thousands) Average Recorded Investment Interest Income Recognized Cash Basis Income Recognized Average Recorded Investment Interest Income Recognized Cash Basis Income Recognized 2023 2022 With no related allowance recorded: Residential real estate: One- to four-family $ 3,240 $ 66 $ 66 $ 3,329 $ 83 $ 83 Multi-family 555 5 5 577 5 5 Farm 265 – – 274 – – Nonresidential real estate 1,047 12 12 1,215 12 12 Consumer – – – 57 1 1 Purchased credit-impaired loans 371 6 6 487 5 5 5,478 89 89 5,939 106 106 With an allowance recorded: One- to four-family – – – – – – $ 5,478 $ 89 $ 89 $ 5,939 $ 106 $ 106 19 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2023 and June 30, 2022: March 31, 2023 June 30, 2022 (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 residential real estate $ 3,513 $ 466 $ 3,528 $ 287 Multifamily 552 – 570 – Farm 270 – 270 – Nonresidential real estate and land 1,036 – 1,073 – Commercial and industrial – – – 1 Consumer 4 38 90 – $ 5,375 $ 504 $ 5,531 $ 288 One- to four-family loans in process of foreclosure totaled $ 1.2 million and $ 489,000 at March 31, 2023 and June 30, 2022, 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.” 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 the TDR relief under the CARES Act until the earlier of December 31, 2022 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 data period and returned to regular payment status. At March 31, 2023 and June 30, 2022, the Company had $ 1.2 million and $ 1.4 million of loans classified as TDRs, respectively. Of the TDRs at March 31, 2023, approximately 15.9 % were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks. During the nine- and three-months ended March 31, 2023, the Company restructured no loans as TDRs. No TDRs defaulted during the nine-month periods ended March 31, 2023 or 2022. 20 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) The following table presents the aging of the principal balance outstanding in past due loans as of March 31, 2023, by class of loans: (in thousands) 30-89 Days Past Due 90 Days or Greater Past Due Total Past Due Loans Not Past Due Total Residential real estate: One-to four-family $ 2,465 $ 2,163 $ 4,628 $ 232,168 $ 236,796 Multi-family – – – 19,859 19,859 Construction 93 – 93 9,141 9,234 Land – – – 507 507 Farm – – – 1,290 1,290 Nonresidential real estate – – – 30,014 30,014 Commercial non-mortgage – – – 960 960 Consumer and other: Loans on deposits – – – 806 806 Home equity 443 10 453 8,203 8,656 Automobile – – – 112 112 Unsecured 9 28 37 322 359 Total $ 3,010 $ 2,201 $ 5,211 $ 303,382 $ 308,593 The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2022, by class of loans: June 30, 2022: (in thousands) 30-89 Days Past Due Greater than 90 Days Past Due Total Past Due Loans Not Past Due Total Residential real estate One- to four-family $ 2,662 $ 1,326 $ 3,988 $ 212,444 $ 216,432 Multi-family – – – 14,252 14,252 Construction 5 – 5 1,358 1,363 Land – – – 1,062 1,062 Farm – – – 1,338 1,338 Nonresidential real estate – – – 31,441 31,441 Commercial and industrial 72 1 73 933 1,006 Consumer and other Loans on deposits – – – 891 891 Home equity 188 71 259 7,411 7,670 Automobile – – – 117 117 Unsecured – – – 540 540 $ 2,927 $ 1,398 $ 4,325 $ 271,787 $ 276,112 21 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings: Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of March 31, 2023, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands) Pass Special Mention Substandard Doubtful Residential real estate: One- to four-family $ 230,964 $ 179 $ 5,653 $ – Multi-family 19,307 – 552 – Construction 9,234 – – – Land 507 – – – Farm 1,020 – 270 – Nonresidential real estate 28,290 688 1,036 – Commercial nonmortgage 960 – – – Consumer: Loans on deposits 806 – – – Home equity 8,613 – 43 – Automobile 112 – – – Unsecured 354 – 5 – $ 300,167 $ 867 $ 7,559 $ – 22 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 4. Loans receivable (continued) At June 30, 2022, the risk category of loans by class of loans was as follows: (in thousands) Pass Special Mention Substandard Doubtful Residential real estate: One- to four-family $ 210,830 $ 194 $ 5,408 $ – Multi-family 13,682 – 570 – Construction 1,363 – – – Land 1,062 – – – Farm 1,068 – 270 – Nonresidential real estate 29,666 702 1,073 – Commercial nonmortgage 1,006 – – – Consumer: Loans on deposits 891 – – – Home equity 7,548 – 122 – Automobile 117 – – – Unsecured 535 – 5 – $ 267,768 $ 896 $ 7,448 $ – Purchased Credit Impaired Loans: The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $ 88,000 and $ 88,000 at March 31, 2023 and June 30, 2022, respectively, is as follows: (in thousands) March 31, 2023 June 30, 2022 One- to four-family residential real estate $ 366 $ 400 Accretable yield, or income expected to be collected, is as follows: (in thousands) Nine months ended March 31, 2023 Twelve months ended June 30, 2022 Balance at beginning of period $ 339 $ 390 Accretion of income ( 34 ) ( 51 ) Balance at end of period $ 305 $ 339 For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2022, nor for the nine-month period ended March 31, 2023. Neither were any allowance for loan losses reversed during those periods. 23 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 5. Disclosures About Fair Value of Assets and Liabilities ASC topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (exit price) at the measurement date. ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes six levels of inputs that may be used to measure fair value: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active 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 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the valuation methodologies used for instruments measured at fair value, 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 pricing models, quoted prices of securities with similar characteristics. Level 2 securities include agency mortgage-backed securities and agency bonds. Financial assets measured at fair value on a recurring basis are summarized below: Fair Value Measurements Using (in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2023 Agency mortgage-backed: residential $ 12,863 $ – $ 12,863 $ – June 30, 2022 Agency mortgage-backed: residential $ 10,477 $ – $ 10,477 $ – Impaired Loans Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheet as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. 24 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 5. Disclosures About Fair Value of Assets and Liabilities (continued) At the time a loan is considered impaired, it is evaluated for loss based on the fair value of collateral securing the loan if the loan is collateral dependent. If a loss is identified, a specific allocation will be established as part of the allowance for loan losses such that the loan’s net carrying value is at its estimated fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. There were no loans measured on a nonrecurring basis using the fair value of the collateral for collateral-dependent loans, at March 31, 2023 or at June 30, 2022. Other Real Estate Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. There was no other real estate owned (“OREO”) written down during the nine- or three-month periods ended March 31, 2023 or 2022. There was no OREO measured on a nonrecurring basis during the period at fair value less costs to sell at March 31, 2023 or June 30, 2022. The following is a disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated balance sheet, 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. 25 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 5. Disclosures About Fair Value of Assets and Liabilities (continued) Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at March 31, 2023 and June 30, 2022 are as follows: Fair Value Measurements at Carrying March 31, 2023 Using (in thousands) Value Level 1 Level 2 Level 3 Total Financial assets Cash and cash equivalents $ 8,085 $ 8,085 $ 8,085 Available-for-sale securities 12,863 $ 12,863 12,863 Held-to-maturity securities 289 273 273 Loans receivable, net 306,960 290,695 290,695 Federal Home Loan Bank stock 4,688 n/a Accrued interest receivable 887 887 887 Financial liabilities Deposits $ 209,391 $ 94,807 $ 114,326 209,133 Federal Home Loan Bank advances 80,899 80,562 80,562 Advances by borrowers for taxes and insurance 503 503 503 Accrued interest payable 48 48 48 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 26 Kentucky First Federal Bancorp NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) March 31, 2023 (unaudited) 6. Other Comprehensive Loss The Company’s other comprehensive loss is comprised solely of unrealized gains and losses on available-for-sale securities. The following is a summary of the accumulated other comprehensive loss balances, net of tax: (in thousands) Nine months ended March 31, 2023 Three months ended March 31, 2023 Balance at beginning of period $ – $ ( 343 ) Current period change ( 361 ) ( 18 ) Balance at end of period $ ( 361 ) $ ( 361 ) Other comprehensive income (loss) components and related tax effects for the periods indicated were as follows: Nine months ended Three months ended March 31, March 31, (in thousands) 2023 2022 2023 2022 Unrealized holding losses on available-for-sale securities $ ( 480 ) $ – $ ( 24 ) $ – Tax effect 119 – 6 – $ ( 361 ) $ – $ ( 18 ) $ – 27 Kentucky First Federal Bancorp ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements contained in this report, as well as other periodic reports filed with the Securities and Exchange Commission, that are not historical facts are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, that are subject to certain risks and uncertainties. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits. 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 the level of inflation; changes in the demand for loans, deposits and other financial services that we provide; the possibility that future credit losses may be higher than currently expected; the impact of the interest rate environment on our business, financial condition and results of operations; competitive pressures among financial services companies; the ability to attract, develop and retain qualified employees; the ability to pay future dividends at currently expected rates; our ability to maintain the security of our data processing and information technology systems; the outcome of pending or threatened litigation, or of matters before regulatory agencies; 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 ended June 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. 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 500 basis points. At March 31, 2023, we believe our risk associated with rising interest rates was moderate. Our IRR model indicated that at March 31, 2023, our EVE was approximately 16.5%, despite the historic interest rate increases during the previous twelve months. Although general market participants believe that the FOMC will now pause interest rate increases for a period of time, our March 31, 2023 EVE is anticipated to be approximately 14.7% and 11.7% under sudden and sustained increase in prevailing market interest rates of 100 basis points and 200 basis points, respectively. 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. 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 nine-month periods ended March 31, 2023 and 2022, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. Nine Months Ended March 31, 2023 2022 Average Balance Interest And Dividends Yield/ Cost Average Balance Interest And Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans 1 $ 294,651 $ 8,522 3.86 % $ 287,377 $ 8,190 3.80 % Mortgage-backed securities 13,787 345 3.34 445 8 2.40 Other interest-earning assets 13,241 359 3.61 40,067 118 0.39 Total interest-earning assets 321,679 9,226 3.82 327,889 8,316 3.38 Less: Allowance for loan losses (1,611 ) (1,607 ) Non-interest-earning assets 12,026 12,124 Total assets $ 332,094 $ 338,406 Interest-bearing liabilities: Demand deposits $ 20,415 $ 29 0.19 % $ 19,398 $ 29 0.20 % Savings 70,844 235 0.44 72,729 203 0.37 Certificates of deposit 115,822 844 0.97 126,614 823 0.87 Total interest-bearing deposits 207,081 1,108 0.71 218,741 1,055 0.64 Borrowings 58,348 1,193 2.73 49,934 285 0.76 Total interest-bearing liabilities 265,429 2,301 1.16 268,675 1,340 0.67 Noninterest-bearing demand deposits 13,588 15,155 Noninterest-bearing liabilities 1,467 2,246 Total liabilities 280,484 286,076 Shareholders’ equity 51,610 52,330 Total liabilities and shareholders’ equity $ 332,094 $ 338,406 Net interest spread $ 6,925 2.66 % $ 6,976 2.71 % Net interest margin 2.87 % 2.84 % Average interest-earning assets to average interest-bearing liabilities 120.19 % 122.04 % 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 March 31, 2023 and 2022, 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 March 31, 2023 2022 Average Balance Interest And Dividends Yield/ Cost Average Balance Interest And Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans 1 $ 304,014 $ 2,983 3.93 % $ 274,197 $ 2,513 3.67 % Mortgage-backed securities 13,498 116 3.44 405 2 2.96 Other interest-earning assets 9,562 111 4.64 51,544 46 0.35 Total interest-earning assets 327,074 3,210 3.93 326,146 2,561 3.14 Less: Allowance for loan losses (1,665 ) (1,599 ) Non-interest-earning assets 12,309 12,094 Total assets $ 337,718 $ 336,641 Interest-bearing liabilities: Demand deposits $ 19,370 $ 9 0.19 % $ 19,398 $ 10 0.21 % Savings 63,810 62 0.39 75,004 68 0.36 Certificates of deposit 112,683 383 1.36 126,964 258 0.81 Total interest-bearing deposits 195,863 454 0.93 221,366 336 0.61 Borrowings 76,888 711 3.70 45,302 87 0.77 Total interest-bearing liabilities 272,751 1,165 1.71 266,668 423 0.63 Noninterest-bearing demand deposits 12,418 15,155 Noninterest-bearing liabilities 1,109 2,282 Total liabilities 286,279 284,105 Shareholders’ equity 51,440 52,536 Total liabilities and shareholders’ equity $ 337,719 $ 336,641 Net interest spread $ 2,045 2.22 % $ 2,138 2.51 % Net interest margin 2.50 % 2.62 % Average interest-earning assets to average interest-bearing liabilities 119.92 % 122.30 % 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 June 30, 2022 to March 31, 2023 Financial Position and Results of Operations At March 31, 2023 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: At March 31, 2023, the Company’s assets totaled $342.9 million, an increase of $14.8 million, or 4.5%, from total assets at June 30, 2022. This increase was attributed primarily to increases in loans, net. Cash and cash equivalents: Cash and cash equivalents decreased $17.7 million or 68.7% to $8.1 million at March 31, 2023. Most of the Company’s cash and cash equivalents are held in interest-bearing demand deposits. Investment securities: At March 31, 2023, our securities portfolio, which consisted of mortgage-backed securities, increased $2.3 million or 21.6% and totaled $13.2 million, compared to June 30, 2022. Loans : Loans, net increased $32.4 million or 11.8% and totaled $307.0 million at March 31, 2023. Residential real estate loans comprise 86.2% of our loan portfolio at March 31, 2023, and approximately 86.6% of those loans have adjustable rates, although newly-originated loans have a period of time during which no rate adjustments can occur. After the initial period the applicable interest rates can change annually within limits and all such loans have ceiling rates. One- to four-family, multi-family and construction loans increased $20.4 million, $5.6 million and $7.9 million from June 30, 2022, respectively. Equity lines of credit, which have interest rates that can change monthly with the prime rate of interest, totaled $8.7 million at March 31, 2023. 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: At March 31, 2023, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $5.9 million, or 1.9% of total loans (including acquired loans), compared to $5.8 million or 2.1%, of total loans at June 30, 2022. The Company’s allowance for loan losses totaled $1.6 million and $1.5 million at March 31, 2023 and June 30, 2022, respectively. The allowance for loan losses at March 31, 2023, represented 27.8% of nonperforming loans and 0.5% of total loans (including acquired loans), while at June 30, 2022, the allowance represented 26.3% of nonperforming loans and 0.6% of total loans. The Company had $7.6 million in assets classified as substandard for regulatory purposes at March 31, 2023, and real estate owned (“REO”) of $70,000. Classified loans as a percentage of total loans (including loans acquired) was 2.5% and 2.7% at March 31, 2023 and June 30, 2022, respectively. Of substandard loans, 99.0% 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: (dollars in thousands) March 31, 2023 June 30, 2022 Substandard assets $ 7,629 $ 7,458 Doubtful assets – – Loss assets – – Total classified assets $ 7,629 $ 7,458 At March 31, 2023, the Company’s real estate acquired through foreclosure represented 0.9% 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 March 31, 2023 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 Nine-month Periods Ended March 31, 2023 and 2022 General Net income totaled $891,000 or $0.11 diluted earnings per share for the nine months ended March 31, 2023, a decrease of $493,000 or 35.6% from net income of $1.4 million or $0.17 diluted earnings per share for the same period in 2022. The decrease in net income on a nine-month basis was primarily attributable to increased provision for loan losses, lower non-interest income, higher non-interest expense, and decreased net interest income. Net Interest Income Net interest income before provision for loan losses decreased $51,000 or 0.7% to $6.9 million for the nine-month period just ended, as interest expense increased by $961,000, or 71.7%, to $2.3 million, while interest income increased $910,000 or 10.9% to $9.2 million for the nine months ended March 31, 2023. The increase in interest expense period-to-period was due primarily to a 49 basis points increase in the average rate paid on interest-bearing liabilities, which increased to 1.16% for the recently-ended nine-month period compared to the prior year period despite a decrease in the average balance of interest-bearing liabilities by $3.2 million or 1.2% to $265.4 million for the nine months ended March 31, 2023. Deposits and FHLB advances are the primary funding sources utilized by the Company and interest expense on those funds increased in response to the 500 basis point increase in the discount rate implemented by the Federal Open Market Committee of the Federal Reserve Bank (“FOMC”) beginning March 2022. Although the yield on the Company’s assets generally changes in response to interest rate changes, those assets do not reprice as quickly as funding sources reprice. As such, interest expense on borrowings increased $908,000 or 318.6% to $1.2 million for the nine months just ended, while interest expense on deposits increased $53,000 or 5.0% to $1.1 million. Deposit balances decreased in the first two quarters of the fiscal year as general interest rates in the market rose and customers sought higher yields on their interest-bearing funds. Many financial institutions experienced an outflow of deposit balances in 2022 after balance sheets swelled during the COVID-19 pandemic due to government stimulus funding and limited spending opportunities for customers. Our deposit balances decreased approximately $13.6 million and $17.0 million for the quarterly periods ended September 30, and December 31, 2022, respectively, but increased approximately $8,000 for the recently-ended quarter. Unlike some financial institutions which have struggled with high levels of uninsured bank deposits on their books, our Banks maintain a relatively low 13% of deposits which are not insured by the Federal Deposit Insurance Corporation (“FDIC”). If the FOMC continues to increase, management expects net earnings to be negatively impacted as the cost of funding is expected to increase faster than the yield on assets increases. The extent of any such negative impact will be largely dependent on whether and how much the FOMC continues to escalate interest rates. The fed funds futures market at this time indicates a general belief that the FOMC is finished increasing rates for the time being, which is anticipated to benefit our Company by allowing assets to continue repricing while the repricing of deposits slows. Interest income increased year over year for all components of interest-earning assets due primarily to reallocation of the assets and an increase in the average rate earned on those assets, which increased 44 basis points to 3.82%. Although the average balance decreased $6.2 million or 1.9% to $321.7 million for the nine-month period ended March 31, 2023, we were able to redirect $26.8 million or 67.0% of our other interest-earning assets into loans and investments, which were able to earn higher yields. Interest income from loans increased $332,000 or 4.1% to $8.5 million, due chiefly to a $7.3 million or 2.5% increase in average balances, which totaled $294.7 million for the recently-ended period, while the average yield earned increased six basis points to 3.86%. Interest income from mortgage-backed securities increased $337,000 to $345,000 primarily due to an increase in average balance maintained during the period, which totaled $13.8 million for the current year period compared to $445,000 in the prior year and a 94 basis points increase in the average rate earned, which totaled 3.34% for the nine months just ended. Interest income on interest-bearing deposits and other increased $241,000 and totaled $359,000 for the nine months just ended due to an increase in the average rate earned on those assets, which totaled 3.61% for the nine months ended March 31, 2023, compared to 39 basis points for the prior year period. Net interest spread decreased from 2.71% for the prior year period to 2.66% for the nine-month period ended March 31, 2023. 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 $32.4 million or 11.8% and totaled $307.0 million at March 31, 2023, compared to $274.6 million at June 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 $5.6 million or 39.3% and totaled $19.9 million at March 31, 2023. 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. 32 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Comparison of Operating Results for the Nine-month Periods Ended March 31, 2023 and 2022 (continued) Non-interest Income Non-interest income decreased $186,000 or 44.1% to $236,000 for the nine months ended March 31, 2023, compared to the prior year period, primarily due to decreased net gains on sales of loans. Net gain on sales of loans decreased $225,000 to $6,000 for the recently-ended nine-month period. Interest rates in the general market have risen significantly since March 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 of Cincinnati after they are originated. Non-interest Expense Non-interest expense increased $128,000 or 2.2% to $5.9 million for the nine months ended March 31, 2023, primarily due to higher auditing and accounting costs and outside service fees. Auditing and accounting costs increased $84,000 or 65.6% to $212,000 for the recently-ended period due to increased internal and external audit expenses. Outside service fees increased $48,000 or 36.1% to $181,000 for the nine months just ended as we incurred additional costs across our banking business including loan review, computer technology services, and interest rate monitoring, as well as general business expenses associated with public company operation and operation of employee benefits. Other non-interest expense increased $40,000 or 9.3% to $468,000 for the nine months ended March 31, 2023 due primarily to costs associated with various administrative expenses including employee training, bank logistics and contributions to aid those who suffered historic flash flooding in our easternmost bank service area. Income Tax Expense Income tax expense decreased $91,000 or 24.3% to $283,000 for the nine months ended March 31, 2023, compared to the prior year period. The effective tax rates for the nine-month periods ended March 31, 2023 and 2022, were 24.1% and 21.3%, respectively. 33 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 March 31, 2023 and 2022 General Net income totaled $144,000 or $0.02 diluted earnings per share for the three months ended March 31, 2023, a decrease of $190,000 or 56.9% from net income of $334,000 or $0.04 diluted earnings per share for the same period in 2022. The decrease in net earnings for the quarter ended was primarily attributable to provision for losses on loans and lower net interest income. Net Interest Income Net interest income before provision for losses on loans decreased $93,000 or 4.4% to $2.0 million for the three-month period just ended, as interest expense increased at a faster pace than interest income. Interest expense increased by $742,000, or 175.4%, to $1.2 million, while interest income increased $649,000 or 25.3% to $3.2 million for the three months ended March 31, 2023. The increase in interest income period-to-period was led by an increase in interest income on loans and was strongly supported by increases in interest income on mortgage-backed securities. Interest income on loans increased $470,000 or 18.7% to $3.0 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 $29.8 million or 10.9% to $304.0 million for the period, while the average balance earned on those assets increased 26 basis points to 3.93%. Interest income on mortgage-backed securities increased $114,000 to $116,000 for the three months ended March 31, 2023, and was due primarily to an increase in the average balance, which increased $13.1 million to $13.5 million for the quarter just ended, while the average rate increased 48 basis points to 3.44% for the period. Interest income on interest-bearing deposits and other increased $65,000 and totaled $111,000 for the quarter just ended due to a 4.29% increase in the average rate earned on those assets, which totaled 4.64% for the period. The average balance of other interest-earning assets decreased $42.0 million or 81.4% to $9.6 million for the recently-ended quarter, as we redeployed assets primarily into loans. The increase in interest expense was attributed primarily to an increase in interest expense on borrowings, which increased $624,000 to $711,000 for the recently-ended quarterly period, while interest expense on deposits increased $118,000 or 35.1% to $454,000. Interest expense on borrowings increased chiefly due to an increase in the average rate paid on those funds, which increased 293 basis points to 3.70% for the three months just ended, while the average balance increased $31.6 million or 67.7% to $76.9 million. Advances were used to replace deposits, whose average balance decreased $25.5 million or 11.5% to $195.9 million for the three months just ended due to deposit decreases occurring in the first two quarters of this fiscal year, as described above. The average rate paid on interest-bearing deposits increased 32 basis points to 0.93% for the recently ended period. Net interest spread decreased 29 basis points from 2.51% for the prior year quarterly period to 2.22% for the three-month period ended March 31, 2023. Provision for Losses on Loans The Company recorded no provision for loan losses for the three-month period ended March 31, 2023, while a negative provision of $106,000 was made for the three-month period ended March 31, 2022. 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 March 31, 2023 and 2022 (continued) Non-interest Income Non-interest income decreased $25,000 or 26.6% to $69,000 for the recently ended quarter due primarily to decreased net gains on sales of loans. Interest rates have risen significantly since March 2022, which has resulted in a reduced demand for long-term fixed rate loans, which the Company routinely sells to the FHLB of Cincinnati after they are originated. Non-interest Expense Non-interest expense increased $45,000 or 2.4% to $1.9 million for the quarter ended March 31, 2023, due primarily to higher outside service fees. Outside service fees increased $46,000 or 148.4% to $77,000 for the three months just ended as we incurred additional costs across our banking business including loan review, computer technology services, and interest rate monitoring, as well as general business expenses associated with public company operation and operation of employee benefits. Management expects these higher costs to continue at the higher levels and, although in some cases these costs are related to expanded services, the primary cause of the higher costs was general inflation. Income Tax Expense Income tax expense decreased $79,000 or 59.4% to $54,000 for the three months ended March 31, 2023, compared to the prior year period. The effective tax rates for the three-month periods ended March 31, 2023 and 2022 were 27.3% and 28.5%, respectively. 35 Kentucky First Federal Bancorp ITEM 3: Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the Company is a smaller reporting company. ITEM 4: Controls and Procedures The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, and have concluded that the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2023 in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 36 Kentucky First Federal Bancorp PART II-OTHER INFORMATION ITEM 1. Legal Proceedings None. ITEM 1A. Risk Factors In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, “Item 1A- Risk Factors” in the Form 10-K for the year ended June 30, 2022 that the Company filed with the SEC on September 28, 2022. The most significant risk factors affecting our business include the factors discussed in our Annual Report on Form 10-K for the year ended June 30, 2022 under the Item 1A, “Risk Factors” and the following additional factors: Financial challenges at other banking institutions could lead to depositor concerns that spread within the banking industry causing disruptive and destabilizing deposit outflows. In March 2023, Silicon Valley Bank and Signature Bank experienced large deposit outflows coupled with insufficient liquidity to meet withdrawal demands, resulting in the institutions being placed into FDIC receivership. In May 2023, First Republic Bank was also placed into FDIC receivership. In the aftermath of these events, there has been substantial market disruption and concerns that diminished depositor confidence could spread across the banking industry, leading to deposit outflows that could destabilize other institutions. To strengthen public confidence in the banking system, the FDIC took action to protect funds held in uninsured deposit accounts at Silicon Valley Bank, Signature Bank and First Republic Bank. However, the FDIC has not committed to protecting uninsured deposits in other institutions that experience outsized withdrawal demands. To further bolster the banking system, the Federal Reserve Board created a new Bank Term Funding Program to provide an additional source of liquidity. At March 31, 2023, we had $20.9 million in available liquidity, including $8.1 million in cash and cash equivalents. Our uninsured deposits are estimated to be approximately $27.8 million or 13.2% of total deposits. At March 31, 2023, we had off-balance sheet liquidity sources totaling $80.7 million, including $59.7 million in additional borrowing capacity at the Federal Home Loan Bank of Cincinnati. Notwithstanding our significant liquidity, large deposit outflows could adversely affect our financial condition and results of operations and could result in the closure of the Bank. Furthermore, the recent bank failures may result in strengthening of capital and liquidity rules which, if the revised rules apply to us, could adversely affect our financial condition and results of operations. Insufficient liquidity or liquidity related concerns could impair our ability to fund operations, pay dividends on outstanding shares of stock, and jeopardize our financial condition, growth and prospects. We require sufficient liquidity to fund loan commitments, satisfy depositor withdrawal requests, make payments on our debt obligations as they become due, and meet other cash commitments. Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. Our sources of liquidity consist primarily of cash, assets readily convertible to cash (such as investment securities), increases in deposits, advances, as needed, from the FHLB, borrowings, as needed, from the Federal Reserve Bank of Cleveland and other borrowings. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity, or any liquidity related requirements imposed by our regulators, could impair our ability to fund operations, pay dividends on outstanding shares of stock, enact stock repurchases, and meet our obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations. 37 These risk factors could materially affect our business, financial condition or future results. The risks described are not the only risks that the Company face. Additional risks and uncertainties not currently known or that the Company currently deem to be immaterial also may materially adversely affect its business, financial condition and/or operating results. Our FDIC deposit insurance premiums and assessments may increase, which would reduce our profitability. On March 12, 2023, the Department of the Treasury, the Federal Reserve and the FDIC issued a joint statement relating to the resolution of Silicon Valley Bank and Signature Bank that stated that losses to support uninsured deposits of those banks would be recovered via a special assessment on banks. On May 11, 2023 the FDIC Board of Directors approved a notice of proposed rulemaking, which would implement a special assessment to recover the cost associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. In general, large banks with large amounts of uninsured deposits benefitted most from the protection of uninsured depositors. Banking organizations with total assets over $50 billion would pay more than 95 percent of the special assessment and banking organizations with total assets under $5 billion would not be subject to the special assessment. Under the current provisions of this notice of proposed rulemaking, we believe that we would not be impacted by the special assessment associated with the most recent banking organization closures. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) The following table sets forth information regarding Company’s repurchases of its common stock during the quarter ended March 31, 2023. Period Total # of shares purchased Average price paid per share (including commissions) Total # of shares purchased as part of publicly announced plans or programs Maximum # of shares that may yet be purchased under the plans or programs January 1-31, 2023 – $ – – 52,980 February 1-28, 2023 10,000 $ 7.07 10,000 42,980 March 1-31, 2023 32,000 $ 6.75 32,000 10,980 (1) On February 3, 2021, the Company announced that it had substantially completed its program initiated on December 19, 2018 to repurchase of up to 150,000 shares of its common stock and that it was initiating a new stock repurchase plan in which the Board of Directors authorized the purchase of up to 150,000 shares of its common stock. ITEM 3. Defaults Upon Senior Securities Not applicable. ITEM 4. Mine Safety Disclosures. Not applicable. ITEM 5. Other Information None. 38 Kentucky First Federal Bancorp ITEM 6. Exhibits 3.1 1 Charter of Kentucky First Federal Bancorp 3.2 2 Bylaws of Kentucky First Federal Bancorp, as amended and restated 3.3 3 Amendment No. 1 to the Bylaws of Kentucky First Federal Bancorp 3.4 4 Amendment No. 2 to the Bylaws of Kentucky First Federal Bancorp 3.4 5 Amendment No. 3 to the Bylaws of Kentucky First Federal Bancorp 4.1 1 Specimen Stock Certificate of Kentucky First Federal Bancorp 31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.0 The following materials from Kentucky First Federal Bancorp’s Quarterly Report On Form 10-Q for the quarter ended March 31, 2023 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Shareholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows: and (vi) the related Notes. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). (1) Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No. 333-119041). (2) Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the Year Ended June 30, 2012 (File No. 0-51176). (3) Incorporated herein by reference to the Company’s Current Report on Form 8-K filed August 25, 2017 (File No. 0-51176). (4) Incorporated herein by reference to the Company’s Current Report on Form 8-K filed September 28, 2020 (File No. 0-51176). (5) Incorporated herein by reference to the Company’s Current Report on Form 8-K filed February 2, 2022 (File No. 51176). 39 Kentucky First Federal Bancorp SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENTUCKY FIRST FEDERAL BANCORP Date: May 15, 2023 By: /s/ Don D. Jennings Don D. Jennings Chief Executive Officer Date: May 15, 2023 By: /s/ R. Clay Hulette R. Clay Hulette Vice President and Chief Financial Officer 40