Kentucky First Federal Bancorp 10-Q

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; the interest rate environment and the impact of the interest rate environment on our business, financial condition and results of operations; our ability to successfully execute our strategy to increase earnings, increase core deposits, reduce reliance on higher cost funding sources and shift more of our loan portfolio towards higher-earning loans; our ability to pay future dividends and if so at what level; our ability to receive any required regulatory approval or non-objection to pay dividends to shareholders; our ability to pay dividends from First Federal Savings and Loan Association of Hazard and First Federal Savings Bank of Kentucky to the Company in order for the Company to pay dividends to shareholders; the ability of First Federal MHC to receive approval of its members to waive the payment of any Company dividends to First Federal MHC; competitive conditions in the financial services industry; changes in the level of inflation; the impacts of tariffs, sanctions and other trade policies of the United States and its global trading counterparts; 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; competitive pressures among financial services companies; the ability to attract, develop and retain qualified employees; 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, and the other matters mentioned in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2025. 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. General The Company was incorporated as a mid-tier holding company under the laws of the United States on March 2, 2005, upon the completion of the reorganization of First Federal of Hazard into a federal mutual holding company form of organization (the “Reorganization”). On that date, Kentucky First Federal also completed its minority stock offering and its concurrent acquisition of Frankfort First Bancorp, Inc. (“Frankfort First Bancorp”) and its wholly owned subsidiary, First Federal of Kentucky, Frankfort Kentucky (“First Federal of Kentucky”) (the “Merger”). Following the Reorganization and Merger, the Company has operated First Federal of Hazard and First Federal of Kentucky (collectively, the “Banks”) as two independent, community-oriented savings institutions. On December 31, 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. Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for losses on loans and service charges and fees collected on our deposit accounts. Our general, administrative, and other expense primarily consists of employee compensation and benefits expense, occupancy and equipment expense, data processing expense, other operating expenses and state and federal income taxes. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Management Transition On October 2, 2025, the Boards of Kentucky First Federal Bancorp and First Federal Savings Bank of Kentucky, an indirect wholly-owned bank subsidiary of the Company (“First Federal of Kentucky”), appointed R. Clay Hulette as Chief Executive Officer of the Company and as President and Chief Executive Officer of First Federal of Kentucky, respectively. Such appointments were subject to regulatory approval. On December 10, 2025, the Company and First Federal of Kentucky received final regulatory non-objection, effective immediately, to these appointments. In connection with this transition, Don D. Jennings was appointed Director of Operations of First Federal of Kentucky and continues to serve as President of the Company and Chairman of the Board of Directors of First Federal of Kentucky. 31 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Regulatory Developments Regarding First Federal of Kentucky On August 13, 2024, First Federal of Kentucky entered into a formal written agreement (the “Agreement”) with the OCC, which became effective as of the same date. On February 19, 2026, the OCC published notification that it has terminated the Agreement. As a result of the termination of the Agreement, First Federal of Kentucky is no longer considered to be in “troubled condition” pursuant to 12 C.F.R. § 5.51(c)(7)(ii) and is an “eligible savings association” for purposes of 12 C.F.R. § 5.3. In addition to terminating the Agreement, the OCC also lifted the individual minimum capital requirements imposed on First Federal of Kentucky in connection with the Agreement. For additional information, see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 19, 2026. , see Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange on February 19, 2026. 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. Geopolitical volatility and recent inflation results lead general market participants to conclude there will likely be no interest rate decreases by the FOMC in this calendar year. Our March 31, 2026 EVE is anticipated to decrease by approximately 1.9% and increase by 7.5% under sudden and sustained decrease in prevailing market interest rates of 100 basis points and 200 basis points, respectively, and increase by 0.8% under a sudden and sustained increase in prevailing market rates of 100 basis points The company continues to strive for acceptable EVE in both increasing and decreasing interest rate environments. 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. 32 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, 2026 and 2025, 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, 2026 2025 Average Balance Interest And Dividends Yield/ Cost Average Balance Interest And Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans 1 $ 330,930 $ 14,536 5.86 % $ 334,305 $ 13,158 5.25 % Mortgage-backed securities 11,048 304 3.67 9,143 229 3.34 Other interest-earning assets 21,020 645 4.09 22,058 862 5.21 Total interest-earning assets 362,998 15,485 5.69 365,506 14,249 5.20 Less: Allowance for credit losses (2,177 ) (2,138 ) Non-interest-earning assets 12,219 12,713 Total assets $ 373,040 $ 376,081 Interest-bearing liabilities: Demand deposits $ 18,195 $ 88 0.65 % $ 15,208 $ 30 0.26 % Savings 46,669 149 0.43 49,778 169 0.45 Certificates of deposit 199,388 5,741 3.84 184,011 5,826 4.22 Total deposits 264,252 5,978 3.02 248,997 6,025 3.23 Borrowings 45,598 1,479 4.33 62,748 2,186 4.65 Total interest-bearing liabilities 309,850 7,457 3.21 311,745 8,211 3.51 Noninterest-bearing demand deposits 12,201 13,632 Noninterest-bearing liabilities 2,092 2,883 Total liabilities 324,143 328,260 Shareholders’ equity 48,897 47,821 Total liabilities and shareholders’ equity $ 373,040 $ 376,081 Net interest spread $ 8,028 2.48 % $ 6,038 1.69 % Net interest margin 2.95 % 2.20 % Average interest-earning assets to average interest-bearing liabilities 117.15 % 117.25 % 1 Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans. Also includes loans on nonaccrual status. 33 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Average Balance Sheets (continued) The following table represents the average balance sheets for the three-month periods ended March 31, 2026 and 2025, 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, 2026 2025 Average Balance Interest And Dividends Yield/ Cost Average Balance Interest And Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans 1 $ 332,305 $ 4,957 5.97 % $ 333,187 $ 4,456 5.35 % Mortgage-backed securities 10,907 99 3.63 8,574 72 3.36 Other interest-earning assets 21,861 201 3.68 25,536 318 4.98 Total interest-earning assets 365,073 5,257 5.76 367,297 4,846 5.28 Less: Allowance for credit losses (2,186 ) (2,146 ) Non-interest-earning assets 12,877 12,982 Total assets $ 375,764 $ 378,133 Interest-bearing liabilities: Demand deposits $ 19,652 33 0.67 % $ 17,037 12 0.28 % Savings 45,446 $ 50 0.44 50,340 $ 70 0.56 Certificates of deposit 200,188 1,810 3.62 193,060 2,013 4.17 Total deposits 265,286 1,893 2.85 260,437 2,095 3.22 Borrowings 47,567 497 4.18 56,172 620 4.42 Total interest-bearing liabilities 312,853 2,390 3.06 316,609 2,715 3.43 Noninterest-bearing demand deposits 11,806 11,752 Noninterest-bearing liabilities 1,766 1,623 Total liabilities 326,425 329,984 Shareholders’ equity 49,339 48,149 Total liabilities and shareholders’ equity $ 375,764 $ 378,133 Net interest spread $ 2,867 2.70 % $ 2,131 1.85 % Net interest margin 3.14 % 2.32 % Average interest-earning assets to average interest-bearing liabilities 116.69 % 116.01 % 1 Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans. Also includes loans on nonaccrual status. 34 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, 2025 to March 31, 2026 Financial Position and Results of Operations At March 31, 2026, 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. Assets: At March 31, 2026, the Company’s assets totaled $374.5 million, an increase of $3.3 million, or 0.9%, from total assets at June 30, 2025, due primarily to the increase in cash and cash equivalents, as well as increases in loans, net and securities available-for-sale. Cash and cash equivalents: Cash and cash equivalents overall increased $1.8 million or 9.3% to $21.3 million at March 31, 2026. Most of the Company’s cash and cash equivalents are held in interest-bearing demand deposits that increased $5.4 million or 62.8%, which were partially offset by fed funds sold decreasing $3.5 million or 40.9% compared to June 30, 2025. Debt securities: At March 31, 2026, our securities portfolio, which consisted of mortgage-backed securities, increased $580,000 or 5.2% and totaled $10.3 million, compared to June 30, 2025. Loans : Loans, net and loans held-for-sale in the aggregate increased $760,000 or 0.2% and totaled $328.9 million at March 31, 2026. Loans receivable, net, increased by $1.0 million or 0.3% to $328.2 million at March 31, 2026. Loans held-for-sale decreased $215,000 and totaled $662,000 at March 31, 2026. 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. Because market interest rates have become more favorable, the Company has had more success in selling mortgages into the secondary market, which has led to elevated balances of loans held-for-sale. Non-performing and classified loans: At March 31, 2026, the Company had non-performing loans (loans 90 or more days past due and still accruing or loans on nonaccrual status) of approximately $2.4 million, or 0.7% of total loans compared to $3.9 million or 1.2%, of total loans at June 30, 2025. The Company’s ACL totaled $2.2 million at both March 31, 2026 and June 30, 2025. The ACL at March 31, 2026, represented 92.3% of nonperforming loans and 0.7% of total loans, while at June 30, 2025, ACL represented 54.1% of nonperforming loans and 0.7% of total loans. The Company had $ 6.4 million in assets classified as substandard for regulatory purposes at March 31, 2026, with $0 in real estate owned (“REO”). Substandard loans as a percentage of total loans (including loans acquired) was 1.9% and 1.9% at March 31, 2026 and June 30, 2025, respectively. Of substandard loans, 100.0% were secured by real estate on which the Banks have priority lien position. 35 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, 2025 to March 31, 2026 (continued) The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated: (dollars in thousands) March 31, 2026 June 30, 2025 Substandard assets $ 6,398 $ 6,086 Doubtful assets - – Loss assets - – Total classified assets $ 6,398 $ 6,086 The Company had no real estate acquired through foreclosure at March 31, 2026 or June 30, 2025. 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 31,2026 and June 30, 2025, respectively. At March 31, 2026 and June 30, 2025, the Company had $65,000 and $672,000 of loans classified as special mention, respectively. This category includes assets which do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. Liabilities: Total liabilities increased $2.0 million, or 0.6% to $324.9 million at March 31, 2026, as Federal Home Loan Bank advances increased $6.2 million or 14.4% to $48.9 million and demand deposit accounts increased $3.4 million or 11.4%. Savings account deposits decreased $4.9 million or 10.1% and totaled $43.7 million at March 31, 2026 primarily related to a decrease in savings accounts associated with distributions of funds in administration of various estate accounts. Certificates of deposit decreased $2.3 million or 1.2%, due to brokered certificates of deposit decreasing $5.7 million or 12.9% to $38.3 million, which were offset by national market deposits increasing $4.1 million and totaling $5.7 million. National market deposits are an online listing service that offer certificate of deposits to national customers, attracting additional certificates of deposit under $250,000. Shareholders’ Equity: At March 31, 2026, the Company’s shareholders’ equity totaled $49.7 million, an increase of $1.3 million or 2.7% from June 30, 2025. The increase in shareholders’ equity was primarily associated with net income of $1.2 million, as well as accumulated other comprehensive loss decreasing $60,000 or 41.4% from a loss of $145,000 at June 30, 2025 to a loss of $85,000 at March 31, 2026. On January 16, 2024, the Company announced the suspension of quarterly dividends indefinitely. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds available for such payments under applicable law and regulatory guidance. We cannot predict when or whether the Company will be able to pay future common stock dividends and if so, the amount of any such common stock dividends. Our ability to pay future dividends and if so at what level will also be dependent on numerous factors, including: our ability to receive any required regulatory approval or non-objection to pay dividends or for the payment of dividends from First Federal Savings and Loan Association of Hazard and First Federal Savings Bank of Kentucky to the Company or from the Company to shareholders, the ability of First Federal MHC to receive approval of its members to waive the payment of any Company dividends to First Federal MHC; and our ability to successfully execute our strategy to increase earnings and core deposits, reduce reliance on higher cost funding sources and shift more of our loan portfolio towards higher-earning loans. See “Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2025 for additional discussion regarding dividends. 36 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, 2026 and 2025 General Net income totaled $1.2 million or $0.15 diluted earnings per share for the nine-months ended March 31, 2026, an increase of $1.2 million from net earnings of $5,000 or $0.00 diluted earnings per share for the same period in 2025. The increase in net earnings for the nine months ended March 31, 2026, was primarily attributable to increased net interest income, which was partially offset by higher non-interest expense. Net Interest Income Net interest income increased $2.0 million or 33.0% to $8.0 million due primarily to increased interest income and decreased interest expense. Interest income increased $1.2 million or 8.7% due to an increase in the average rate earned on interest-earning assets, which increased 49 basis points to 5.69%. Average interest-earning assets decreased $2.5 million or 0.7% to $363.0 million for the recently-ended nine months. The average rate earned on assets was due primarily to an increase in the rate earned on loans, which was the result of new loan production carrying higher interest rates and adjustable rate mortgages continuing to reprice upward. Interest expense decreased $754,000 or 9.2% to $7.5 million for the nine-months recently ended due to a decrease in the average balance of interest-bearing liabilities as well as a decrease in the average rate paid on those funds. Average interest-bearing liabilities decreased $1.9 million or 0.6% to $309.9 million for the quarterly period just ended, while the average rate paid decreased 32 basis points to 4.33% for the period. The increase in interest income from loans period-to-period was due to the average rate earned on loans increasing 61 basis points to 5.86% despite the average balance of loans decreasing $3.4 million or 1.0% compared to the nine months ended March 31, 2025. The decrease in interest expense was primarily due to decreased interest expense on FHLB advances of $707,000 or 32.3%. The decrease in interest expense on FHLB advances was due to both the average rate paid decreasing 32 basis points to 4.33% and the average balance decreasing $17.2 million to $45.6 million compared to the same period last year. Net interest spread increased from 1.69% for the prior year nine-month period to 2.48% for the nine-month period ended March 31, 2026. Provision for Credit Losses Management determined that a $51,000 provision for credit loss was prudent during the recently-ended nine month period due to shifts in loan concentrations. Non-interest Income Non-interest income increased $81,000 or 20.8% to $470,000 for the nine-months ended March 31, 2026 compared to the prior year period, primarily because of an increase in net gains from sale of loans of $66,000 or 40.7%. Recently, the market has become more conducive to the sale of fixed rate mortgages to the secondary market. Non-interest Expense Non-interest expense increased $446,000 or 7.0% to $6.8 million for the nine months ended March 31, 2026, primarily due to higher data processing expense, outside service fees, and employee compensation and benefits. Data processing expense increased $244,000 or 54.1% due to increased core processing rates, outside service fees increased $134,000 or 35.5%, and employee compensation and benefits increased $198,000 or 5.5% due to annual performance-based adjustments and higher health insurance costs. These were partially offset by professional fees decreasing $142,000 or 49.0%. Income Tax Income tax expense increased $386,000 to an income tax expense of $380,000 for the nine months ended March 31, 2026, compared to the prior year period due to increased earnings. The effective tax rate for the nine-month period ended March 31, 2026 was 23.6%. Included in net income is earnings of $66,000 on bank-owned life insurance which is non-taxable. 37 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, 2026 and 2025 General Net income totaled $581,000 or $0.07 diluted earnings per share for the three months ended March 31, 2026, an increase of $574,000 from net income of $7,000 or $0.00 diluted earnings per share for the same period in 2025. The increase in net earnings for the quarter ended March 31, 2026 was primarily attributable to higher net interest income, which was partially offset by higher non-interest expense, higher provision for credit losses, and higher income taxes. Net Interest Income Net interest income increased $736,000 or 34.5% to $2.9 million due primarily to interest income increasing while interest expense decreased period to period. Interest income increased $411,000 or 8.5% to $5.3 million, while interest expense decreased $325,000 or 12.0% to $2.4 million for the recently-ended quarter. As market rates have begun to decrease, liabilities have repriced down while our assets continue to reprice upward. The average rate earned on interest-earning assets increased 48 basis points to 5.76% and was the primary reason for the increase in interest income, as average interest-earning assets decreased $2.2 million or 0.6% to $365.1 million for the recently-ended quarterly period. The increase in interest income was due primarily to an increase of $501,000 or 11.2% in interest income from loans, which totaled $5.0 million for the period. The increase in interest income from loans period-to-period was due to the average rate earned on loans increasing 62 basis points to 5.97%. The average balance of loans decreased $882,000 or 0.3% to $332.3 million for the three months ended March 31, 2026. The average balance of interest-bearing liabilities decreased $3.8 million or 1.2% to $312.9 million for the quarter just ended, and the average rate paid decreased 37 basis points to 3.06%. The cost of liabilities decreased primarily due to decreased certificates of deposit expense, which was $203,000 or 10.1% less than the same period ended March 31, 2025. The average rate paid on certificates of deposit decreasing 55 basis points to 3.62% is the primary reason for the decrease. Interest expense on FHLB advances also decreased $123,000 as the average balance decreased $8.6 million or 15.3% and the average rate paid decreased 24 basis points to 4.18% period to period. Net interest spread increased from 1.85% for the prior year quarterly period to 2.70% for the three-month period ended March 31, 2026. Provision for Credit Losses Management determined that a $41,000 provision for credit loss was prudent due to our current expected credit loss analysis performed during the recently-ended quarter and shifting loan concentrations. Non-interest Income Non-interest income increased $58,000 or 71.6% to $139,000 for the recently ended quarter primarily due to increased net gain of sale on loans, increasing $41,000 or 186.4% for the three months recently ended. Recently, the market has become more conducive to the sale of fixed rate mortgages to the secondary market. Non-interest Expense Non-interest expense increased $34,000 or 1.6% and totaled $2.2 million for the three months ended March 31, 2026, primarily due to increased data processing expense and employee compensation and benefits. Income taxes expense increased $166,000 to $174,000 for the three months ended March 31, 2026. The effective tax rate for the three-month period ended March 31, 2026, was 23.0%. Included in net income is earnings of $29,000 on bank-owned life insurance which is non-taxable. 38 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.