Kentucky First Federal Bancorp

Purchased Loans:

The Company purchased loans during the fiscal year ended June 30, 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 $25,000 and $88,000, at June 30, 2024 and 2023, respectively, was as follows:

Accretable yield, or income expected to be collected on loans purchased during fiscal year 2013, for the years ended June 30 was as follows:

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the years ended June 30, 2024 or 2023, nor were any allowance for loan losses reversed during those years.

NOTE D - REAL ESTATE OWNED

Activity in real estate owned for the years ended June 30 was as follows:

NOTE E - PREMISES AND EQUIPMENT

Premises and equipment at June 30 are comprised of the following:

NOTE F - GOODWILL

Goodwill of $14.5 million was originally recorded in March 2005 when the Company, as part of its initial public offering, purchased Frankfort First Bancorp, Inc., with a portion of the stock and cash proceeds from the offering. The Company had $14.5 million of goodwill net of impairment losses of $13.6 million and $0 at June 30, 2020 and 2019, respectively. During the fiscal year ended June 30, 2020, a prolonged decline in the stock price of the Company exacerbated by the COVID-19 pandemic and its related economic impact led to management’s performance of a goodwill impairment analysis as of June 30, 2020. Based on the results of this analysis and in conjunction with management’s early adoption of ASU 2017-04,Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, the estimated fair value of the Company was less than book value, resulting in a $13.6 million goodwill impairment charge. Goodwill impairment exists when a Company’s reporting unit’s carrying value of goodwill exceeds its fair value. Subsequently, further decreases in stock price in the year ended June 30, 2024 led to the carrying value of goodwill exceeding the fair value. Testing done in the year of 2024 indicated this and led to an impairment charge of the entire amount of $947,000.

NOTE G - DEPOSITS

Deposits consist of the following major classifications at June 30:

Maturities of outstanding certificates of deposit at June 30 are summarized as follows:

At June 30, 2024 and 2023, the Company had certificate of deposit accounts with balances equal to or in excess of $250,000 totaling approximately $21.0 million and $14.7 million, respectively. Brokered certificates of deposit totaled $52.0 million at June 30, 2024 compared to 21.0 million at June 30, 2023.

NOTE H - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank, collateralized at June 30, 2024 and 2023 by pledges of collateral composed of first mortgage residential and multi-family loans totaling $200.5 million and $157.3 million, respectively, and the Banks’ investment in Federal Home Loan Bank stock, are summarized as follows:

At June 30, 2024 interest rates for advances were fixed ranging from 1.64% to 5.46%, with a weighted-average interest rate of 4.58%.

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. Based on collateral composed of first mortgage loans and the Company’s holdings of FHLB stock, the Company was eligible to borrow up to $87.3 million as of June 30, 2024. In addition, we have the ability to borrow from the Federal Reserve Bank Discount Window. At June 30, 2024, based on home equity loans and share loans we had pledged collateral which would enable us to borrow up to $5.6 million. First Federal Savings Bank of Kentucky at June 30, 2024, had a $2.0 million Fed Funds line of credit with the Independent Correspondent Bankers’ Bank.

NOTE I - INCOME TAXES

Federal income taxes on earnings differs from that computed at the statutory corporate tax rate for the years ended June 30, 2024 and 2023, as follows:

NOTE I - INCOME TAXES (continued)

The composition of the Company’s net deferred tax liability at June 30 is as follows:

The Company has federal and state net operating loss carryforward of $130,000 and $1.9 million, respectively. $1.0 million of the state net operating loss begins to expire in June of 2036 and fully expires in June of 2038, while the remaining $900,000 state net operating loss is carried forward indefinitely. The federal net operating loss of $130,000 is carried forward indefinitely.

Prior to 1997, the Banks were allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in excess of accumulated earnings and profits, such distributions will be subject to federal income taxes at the then current corporate income tax rate. Retained earnings at June 30, 2024 include approximately $5.2 million for which federal and state income taxes have not been provided. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $1.3 million at June 30, 2024.

NOTE J - LOAN COMMITMENTS

The Banks are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of the commitments reflect the extent of the Banks’ involvement in such financial instruments.

The Banks’ exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments.

NOTE J - LOAN COMMITMENTS (continued)

At June 30, 2024 and 2023, the Banks had the following outstanding loan commitments:

Commitments to make loans are generally made for periods of 60 days or less. There were no fixed rate loan commitments to fund real estate construction loans at June 30, 2024. Other unused commitments include real estate loan commitments, which represent the primary loans made by the Banks. Long-term, fixed rate mortgage loans are usually sold to the FHLB, as part of the Company’s interest rate risk strategy.

NOTE K - STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL

**Qualified Thrift Lender –**Federal regulations require the Banks comply with the Qualified Thrift Lender (“QTL”) test, which requires that 65% of assets be maintained in housing-related finance and other specified assets. If the QTL test is not met, limits are placed on growth, branching, new investment, FHLB advances, and dividends or the institutions must convert to a commercial bank charter. Management believes that the QTL test has been met.

**Dividend Restrictions –**Dividends from the Banks are the primary source of funds for the Company. Banking regulations limit the amount of dividends that may be paid to the Company by the Banks without prior approval of the Office of the Controller of the Currency (the “OCC.”) Under these regulations the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years.

**Regulatory Capital Requirements –**The Banks are subject to minimum regulatory capital standards promulgated by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In August 2024, First Federal of Kentucky entered into an Agreement with the OCC. The OCC has also imposed individual minimum capital requirements (“IMCRs”) which require First Federal of Kentucky to achieve and maintain capital levels in excess of the minimum capital standards required under OCC’s Prompt Corrective Action framework. Under the IMCRs, First Federal of Kentucky must achieve and maintain a common equity tier 1 capital ratio of at least 9.0%, a tier 1 capital ratio of at least 11.0%, a total capital ratio of at least 12.0%, and a leverage ratio of at least 9.0%. At June 30, 2024, First Federal of Kentucky exceeded the requirements of the IMCRs as its common equity tier 1 capital ratio was 16.25%, its tier 1 capital ratio was 16.25%, its total capital ratio was 16.25%, and its leverage ratio was 10.24%.

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

**Capital Standards –**Effective January 1, 2020, the Company and the Banks became subject to the Community Bank Leverage Ratio (“CBLR”) framework. Previously the Company and the Banks were subject to regulatory capital reforms in accordance with Basel III.

NOTE K - STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL (continued)

Community Bank Leverage Ratio

Certain community banks and holding companies (which include the Company, Frankfort First, First Federal of Kentucky and First Federal of Hazard) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The CBLR ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets as reported on the banking organization’s applicable regulatory filings. The Banks elected to utilize the CBLR framework effective for the quarter ended March 31, 2020.

In April 2020, federal banking regulators issued temporary changes to the CBLR framework according to certain directives of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. These changes were adopted as a final rule and applied to those banking organizations otherwise meeting the other existing qualifying criteria. The changes temporarily reduced the minimum ratio from 9% to 8% through the end of 2020 and established a two-quarter grace period for qualifying community banking organizations. The final rule provided for a transition from the temporary 8% CBLR requirement to a 9% requirement by establishing a minimum CBLR of 8.5% for 2021 and 9% thereafter, while maintaining a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

Under this framework the Company and the Banks would be considered well-capitalized under the applicable guidelines.

The Basel III, which became effective January 1, 2015, established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conservation buffer (“CCB.”) The regulations also included revisions to the definition of capital and changes in the risk-weighting of certain assets, in addition to redefining “well capitalized” as a 6.5% common equity Tier 1 risk-based capital ratio, an 8.0% Tier 1 risk-based capital ratio, a 10.0% total risk-based capital ratio and a 5.0% Tier 1 leverage ratio. The CCB is 2.5% and, if the Company and the Banks were unable to qualify for the CBLR framework, in order to avoid limitations on capital distributions, including dividend payments, engaging in share repurchases and certain discretionary bonus payments to executive officers, must maintain the CCB at the appropriate level.

In August 2024, First Federal of Kentucky entered into an Agreement with the OCC. The OCC has also imposed IMCRs which require First Federal of Kentucky to achieve and maintain capital levels in excess of the minimum capital standards required under OCC’s Prompt Corrective Action framework. Under the IMCRs, First Federal of Kentucky must achieve and maintain a common equity tier 1 capital ratio of at least 9.0%, a tier 1 capital ratio of at least 11.0%, a total capital ratio of at least 12.0%, and a leverage ratio of at least 9.0%. At June 30, 2024, First Federal of Kentucky exceeded the requirements of the IMCRs as its common equity tier 1 capital ratio was 16.25%, its tier 1 capital ratio was 16.25%, its total capital ratio was 16.25%, and its leverage ratio was 10.24%.

The Company’s and Banks’ regulatory capital as of June 30, 2024 and 2023 is presented in the following table.

NOTE K - STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL (continued)

As of June 30, 2024 and 2023, management believes that First Federal of Hazard and First Federal of Kentucky met all capital adequacy requirements to which the Banks were subject. There are no conditions or subsequent events that have occurred that managements believes have changed the Banks’ categories.

Regulations of the Board of Governors of the Federal Reserve System governing mutual holding companies require First Federal MHC to meet certain criteria before the company may waive the receipt by it of any common stock dividend declared by Kentucky First Federal Bancorp.

Dividends of $950,000 and $1.9 million were waived in fiscal years ended June 30, 2024 and 2023 respectively.

NOTE L - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP

The following condensed financial statements summarize the financial position of Kentucky First Federal Bancorp as of June 30, 2024 and 2023, and the results of its operations and its cash flows for the fiscal years ended June 30, 2024 and 2023.