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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-05-15 · 256 added, 273 removed, 94 unchanged (85% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

6 unchanged sentences

of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

regarding the quality of our loan and investment portfolios;

statements regarding our ability to fully and timely address the deficiencies that resulted

in the Agreement that First Federal Savings Bank of Kentucky has entered into with the Office of the Comptroller of the Currency (“OCC”);

First Federal Savings Bank of Kentucky’s ability to satisfy the Individual Minimum Capital Requirements imposed by the OCC;

regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment

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

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

our ability to pay future dividends and if so at what level;

our ability to receive any required regulatory approval or non-objection

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;

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 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;

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;

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, 2023 and in the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2023 and for

the period ended September 30, 2023.

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.

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;

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, 2024.

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.

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,

(“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.

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.

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.

Kentucky First Federal Bancorp

Regulatory Developments

Regarding First Federal of Kentucky

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.

The Agreement will remain effective until it is amended by First Federal of Kentucky and the OCC, or the

OCC modifies, waives or terminates the Agreement.

As a result of the Agreement, pursuant to 12 C.F.R.

§ 5.51(c)(7)(ii), First Federal

of Kentucky is in “troubled condition,” and is not an “eligible savings association” for purposes of 12 C.F.R.

§ 5.3, unless otherwise informed in writing by the OCC.

In addition to the Agreement, the OCC has also imposed individual minimum

capital requirements (“IMCRs”) on First Federal of Kentucky.

The IMCRs require First Federal of Kentucky to 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%.

the terms of the Agreement, First Federal of Kentucky is required to take the following actions within the time frames specified in the Agreement:

create a compliance committee composed of at least three of First Federal of Kentucky’s directors to monitor and oversee First Federal of Kentucky’s compliance with the provisions of the Agreement and submit quarterly evaluation reports to First Federal of Kentucky’s board of directors regarding actions First Federal of Kentucky has taken to comply with the Agreement and the results and status of such actions;

submit to the OCC, adopt and implement an acceptable revised written three-year strategic plan establishing objectives for First Federal of Kentucky’s overall risk profile, balance sheet mix, funding structure, interest rate risk, liquidity and capital adequacy, earnings performance, and asset and core deposit growth, together with strategies to achieve those objectives;

submit to the OCC, adopt and implement an acceptable revised written succession plan for First Federal of Kentucky that is designed to promote adequate staffing and continuity of capable management;

adopt a revised written liquidity risk management program for First Federal of Kentucky that provides for the identification, measurement, monitoring, and control of First Federal of Kentucky’s liquidity risk exposure, and that emphasizes the importance of cash flow projections, diversified funding sources, a cushion of highly liquid assets, robust liquidity stress testing scenario analyses, and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk;

adopt a revised written interest rate risk program that includes risk management systems to identify, measure, monitor, and control interest rate risk.

The Agreement requires First Federal of Kentucky’s Board to (i)

ensure that First Federal of Kentucky timely adopts and implements all corrective actions required by the Agreement and (ii) verify that

First Federal of Kentucky adheres to the corrective actions and that they are effective in addressing First Federal of Kentucky’s

deficiencies that resulted in the Agreement.

First Federal of Kentucky’s Board and management are committed to fully addressing

the provisions of the Agreement within the required time frames.

As of the date of this filing, First Federal of Kentucky’s Board

and management believe that First Federal of Kentucky has made progress toward addressing the deficiencies that resulted in the Agreement

and intends to satisfy the Agreement’s requirements as expeditiously as possible.

For additional information, see Exhibit 10.1

to the Company Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2024 and Item 1A, “Risk

Factors - We are required to comply with the terms of a formal written agreement and IMCRs issued by the OCC, and lack of compliance

could result in monetary penalties and /or additional regulatory actions ” and Note K - Stockholders’ Equity and Regulatory

Capital of the Notes to Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form 10-K filed with

the Securities and Exchange Commission on October 3, 2024

Asset/Liability Management

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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

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, 2024, we believe our risk associated with rising interest rates

was moderate.

Our IRR model indicated that at December 31, 2023, our EVE was approximately 16.4%, 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 December 31, 2023 EVE is anticipated to be approximately 14.7% and 10.6% 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

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

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.

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, 2024 and 2023, 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,

(Dollars in thousands)

Interest-earning assets:

Mortgage-backed securities

Other interest-earning assets

Total interest-earning assets

Allowance for credit losses

Non-interest-earning assets

Interest-bearing liabilities:

Demand deposits

Certificates of deposit

Total interest-bearing deposits

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Noninterest-bearing liabilities

Total liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest spread

Net interest margin

Average interest-earning assets to average interest-bearing liabilities

Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

Also includes loans on nonaccrual status.

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.

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 September 30, 2023, we believe our risk associated with rising interest rates was moderate.

IRR model indicated that at June 30, 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 June 30, 2023 EVE is anticipated to be approximately 14.6% and 11.9% 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.

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.

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.

Kentucky First Federal Bancorp

3 unchanged sentences

The following table represents the average balance

sheets for the three-month periods ended March 31, 2024 and 2023, 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,

sheets for the three-month periods ended September 30, 2024 and 2023, along with the related calculations of tax-equivalent net interest

income, net interest margin and net interest spread for the related periods.

Three Months Ended September 30,

(Dollars in thousands)

3 unchanged sentences

Total interest-earning assets

Allowance for credit losses

Allowance for loan losses

Non-interest-earning assets

2 unchanged sentences

Certificates of deposit

Total interest-bearing deposits

Total deposits

Total interest-bearing liabilities

7 unchanged sentences

Average interest-earning assets to average interest-bearing liabilities

Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

Also includes loans on nonaccrual status.

3 unchanged sentences

Discussion of Financial Condition Changes from

June 30, 2023 to March 31, 2024

June 30, 2024 to September 30, 2024

Financial Position and Results of Operations

At March 31, 2024 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.

At March 31, 2024, the Company’s

assets totaled $369.1 million, an increase of $20.1 million, or 5.8%, from total assets at June 30, 2023.

This increase was attributed

primarily to increases in loans, net, primarily in adjustable rate residential mortgage loans

At September 30, 2024 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 Company in its Current Report on Form 8-K filed on August 15, 2024, in addition to the formal

written Agreement, the OCC has also imposed individual minimum capital requirements (“IMCRs”) on First Federal Savings Bank

The IMCRs require First Federal Savings Bank of Kentucky to 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%.

As of September

30, 2024, First Federal Savings Bank of Kentucky’s common equity tier 1 capital ratio was 16.11%, its tier 1 capital ratio was 16.11%,

its total capital ratio was 16.11%, and its leverage ratio was 10.07%.

At September 30, 2024, the

Company’s assets totaled $375.7 million, an increase of $682,000, or 0.2%, from total assets at June 30, 2024, due primarily to

the increase in loans held for sale, as well as an increase in cash and due from financial institutions of $963,000 or 50.3%.

Cash and cash equivalents:

and cash equivalents increased $7.2 million or 88.8% to $15.4 million at March 31, 2024.

Most of the Company’s cash and cash equivalents

are held in interest-bearing demand deposits.

and cash equivalents overall decreased $1.0 million or 5.6% to $17.3 million at September 30, 2024.

Most of the Company’s cash and

cash equivalents are held in interest-bearing demand deposits.

Investment securities:

31, 2024, our securities portfolio, which consisted of mortgage-backed securities, decreased $1.9 million or 15.4% and totaled $10.4 million,

30, 2024, our securities portfolio, which consisted of mortgage-backed securities, decreased $246,000 or 2.5% and totaled $9.6 million,

compared to June 30, 2024.

Loans, net increased

$14.3 million or 4.6% and totaled $328.1 million at March 31, 2024.

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.

Loans, net and loans

held-for-sale in the aggregate increased $1.5 million or 0.5% and totaled $333.2 million and $1.5 million, respectively at September 30,

Loans receivable, net, increased by $150,000 or 0.1% to $333.2 million at September 30, 2024.

Loans held-for-sale increased to $1.4

million at September 30, 2024.

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 an

increase in loans held-for-sale.

Non-Performing and Classified Loans:

March 31, 2024, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $5.2 million,

or 1.6% of total loans (including acquired loans), compared to $5.4 million or 1.7%, of total loans at June 30, 2023.

The Company’s

ACL totaled $2.1 million at March 31, 2024 and the Company’s allowance for loan loss totaled $1.6 million at June 30, 2023.

ACL at March 31, 2024, represented 40.4% of nonperforming loans and 0.6% of total loans, while at June 30, 2023, ALLL represented 34.8%

of nonperforming loans and 0.5% of total loans.

September 30, 2024, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $4.3

million, or 1.3% of total loans compared to $3.9 million or 1.2%, of total loans at June 30, 2024.

The Company’s ACL totaled $2.1

million at September 30, 2024 and the ACL totaled $2.1 million at June 30, 2024, respectively.

The ACL at September 30, 2024, represented

50.2% of nonperforming loans and 0.6% of total loans, while at June 30, 2023, ALLL represented 54.6% of nonperforming loans and 0.6% of

The Company had $6.6 million in assets classified

as substandard for regulatory purposes at March 31, 2024, and real estate owned (“REO”) of $10,000.

Classified loans as a

percentage of total loans (including loans acquired) was 2.4% and 2.3% at March 31, 2024 and June 30, 2023, respectively.

Of substandard

loans, 100.0% were secured by real estate on which the Banks have priority lien position.

as substandard for regulatory purposes at September 30, 2024, including real estate owned (“REO”) of $10,000.

Classified loans

as a percentage of total loans (including loans acquired) was 2.0% and 2.1% at September 30, 2024 and June 30, 2024, respectively.

substandard loans, 100.0% were secured by real estate on which the Banks have priority lien position.

The table below shows the aggregate amounts of

1 unchanged sentence

(dollars in thousands)

September 30,

Substandard assets

1 unchanged sentence

Total classified assets

At March 31, 2024, the Company’s real estate

acquired through foreclosure represented 0.1% of substandard assets compared to 0.1% at June 30, 2023.

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, 2024 and June 30, 2023, respectively.

At September 30, 2024, the Company’s real

estate acquired through foreclosure represented 0.2% of substandard assets compared to 0.1% at June 30, 2024.

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 September 30, 2024 and June 30, 2024, respectively.

Kentucky First Federal Bancorp

2 unchanged sentences

Discussion of Financial Condition Changes from

June 30, 2023 to March 31, 2024 (continued)

June 30, 2024 to September 30, 2024 (continued)

The following table presents the aggregate carrying

value of REO at the dates indicated:

March 31, 2024

September 30, 2024

June 30, 2024

One- to four-family

At March 31, 2024 and June 30, 2023, the Company

At September 30, 2024 and June 30, 2024, the Company

had $785,000 and $797,000 of loans classified as special mention, respectively.

2 unchanged sentences

close attention.

Total liabilities increased

$21.8 million, or 7.3% to $320.1 million at March 31, 2024, as deposits increased $19.8 million or 8.7% to $246.1 million and advances

increased $2.3 million or 3.2% to $72.3 million.

Certificates of deposit increased $26.7 million

or 19.4% and totaled $164.0 million at March 31, 2024, which included $43.9 million of brokered deposits, an increase of $22.9 million

Demand deposit accounts increased $1.6 million or 5.1% and totaled $33.0 million at quarter end.

Savings accounts decreased

$8.5 million or 14.7% and totaled $49.1 million at the end of the current period.

The cost of liabilities has been increasing rapidly

due to higher costs of both wholesale and retail funding.

Continued increases in liability costs, especially for wholesale funds,

will primarily be driven by future increases in market rates by the Federal Reserve.

It is believed that we are near the peak of

this rate cycle which, if so, will likely slow the increasing costs of our liabilities.

Total liabilities

increased $456,000, or 0.1% to $327.4 million at September 30, 2024, as Federal Home Loan Bank advances increased $1.1 million or 1.5%

to $70.1 million and advances to borrowers for taxes and insurance increased $333,000 or 36.6%.

Certificates of deposit decreased $350,000 or

0.2% and totaled $176.2 million at September 30, 2024, of which $46.0 million were brokered deposits.

Demand deposit accounts decreased

$753,000 or 2.3% and totaled $31.4 million at quarter end.

Savings accounts decreased $121,000 or 0.3% and totaled $47.3 million at the

end of the current period.

The cost of liabilities has been increasing rapidly due to higher costs of both wholesale and retail funding.

Continued increases in liability costs, especially for wholesale funds, will primarily be driven by future increases in market rates by

the Federal Reserve.

It is believed that we are near the peak of this rate cycle which, if so, will likely slow the increasing costs

of our liabilities.

Shareholders’ Equity:

31, 2024, the Company’s shareholders’ equity totaled $49.0 million, a decrease of $1.7 million or 3.3% from the June 30, 2023

The decrease in shareholders’ equity was primarily associated with adoption of the CECL accounting standard which resulted

in a $414,000 net loss for the period and dividends paid on common stock.

The Company paid dividends of $671,000 and had

net loss of $643,000 for the nine-month period just ended.

On July 6, 2023, the members of First Federal MHC again approved a dividend

waiver on annual dividends of up to $0.40 per share of Kentucky First Federal Bancorp common stock.

The Board of Directors of First Federal

MHC applied for approval of another waiver.

The Federal Reserve Bank of Cleveland has notified the Company that it did not object to the

waiver of dividends paid by the Company to First Federal MHC, and, as a result, First Federal MHC was permitted to waive the receipt of

dividends for quarterly dividends up to $0.10 per common share through the third calendar quarter of 2024.

However, on October 13, 2023,

the Company announced that future dividends will be reduced primarily due to the recent decline in earnings of the Banks.

After careful

consideration, on January 16, 2024, the board determined that it would be prudent to suspend the payment of dividends completely until

such time as earnings and liquidity improve.

Our ability to pay future dividends and if so at what level will also be dependent on 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, and the receipt of required regulatory approval or non-objection for the

payment of dividends from the Banks to the Company or from the Company to shareholders.

Nevertheless, management continues to believe

that a strong dividend is consistent with the Company’s long-term capital management strategy.

See “Risk Factors” in

Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2023 for additional discussion regarding

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, 2024 and 2023

Net income totaled $(643,000) or $(0.08) diluted

earnings per share for the nine-months ended March 31, 2024, a decrease of $1.5 million or 172.2% from net income of $891,000 or $0.11

diluted earnings per share for the same period in 2023.

The decrease in net earnings for the nine months ended March 31, 2024 was primarily

attributable to lower net interest income, and higher non-interest expense, which were partially offset by lower income taxes and lower

provision for credit losses.

Net Interest Income

Net interest income decreased $1.8 million or

26.5% to $5.1 million due primarily to interest expense increasing more than interest income increased period to period.

Interest expense

increased $4.4 million or 193.0%, while interest income increased $2.6 million or 28.3% to $11.8 million for the nine months ended March

During the unprecedented interest rate increases experienced in the market since March 2022, our funding sources have repriced

more quickly than our assets have repriced, which has had a negative impact on net interest income.

The average rate earned on interest-earning assets

increased 69 basis points to 4.52% and was the primary reason for the increase in interest income.

The increase in interest income was

due primarily to an increase of $2.4 million or 28.2% in interest income from loans, which totaled $10.9 million for the period.

The increase in interest income from loans period-to-period

was due to increases in both the average balance of loans and the average rate earned on those loans.

The average balance of loans increased

$28.7 million or 9.8% to $323.4 million for the nine months ended March 31, 2024, while the average rate increased 65 basis points to

The average balance of interest-bearing liabilities

increased $28.5 million or 10.7% to $293.9 million for the nine months just ended, and the average rate paid increased 190 basis points

The cost of liabilities increased rapidly due to higher costs of both wholesale and retail funding.

Continued increases

in liability costs, especially for wholesale funds, will primarily be driven by future increases in market rates by the Federal Reserve.

It is widely believed that we are near the peak of this rate cycle which, if so, will likely slow the increasing costs of our liabilities.

Net interest spread decreased from 2.66% for the

prior year quarterly period to 1.46% for the nine-month period ended March 31, 2024.

Provision for (Recovery of) Credit Losses

Management determined that a $13,000 recovery

of credit losses was prudent in light of the strengthening loan portfolio overall during the recently ended nine-month period.

loans are now being individually evaluated for specific loss allocation and are therefore excluded from the homogeneous pooled loss analysis.

The result is a more targeted representation of currently expected credit losses on loans.

30, 2024, the Company’s shareholders’ equity totaled $48.2 million, a, increase of $226,000 or 0.5% from the June 30, 2024.

The increase in shareholders’ equity was primarily associated with accumulated other comprehensive loss decreasing $226,000 or 71.7%

from a loss of $336,000 at June 30, 2024 to a loss of $95,000 at September 30, 2024.

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.

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 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;

our ability to fully and timely address the deficiencies

that resulted in the Agreement that First Federal Savings Bank of Kentucky has entered into with the OCC;

First Federal Savings Bank of

Kentucky’s ability to satisfy the IMCR’s imposed by the OCC;

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.

“Risk Factors” in Part II, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended June 30, 2024 for

additional discussion regarding dividends.

Kentucky First Federal Bancorp

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AND RESULTS OF OPERATIONS (continued)

Comparison of Operating Results for the Nine-month

Periods Ended March 31, 2024 and 2023 (continued)

Non-interest Income

Non-interest income decreased $37,000 or 15.7%

to $199,000 for the nine months ended March 31, 2024, compared to the prior year period, primarily because of a decrease in other non-interest

income, which is comprised of various items including bank-related fees and services.

Non-interest Expense

Non-interest expense increased $273,000 or 4.6%

to $6.1 million for the nine months ended March 31, 2024, primarily due to higher outside service fee, FDIC insurance premiums, as well

as higher employee compensation and benefits.

Outside service fee expense increased $103,000

or 56.9% and totaled $284,000 due to additional professional expenses and costs associated with them.

FDIC insurance premiums expense increased $101,000

or 160.3% and totaled $164,000 due to the FDIC increasing premiums throughout the industry in their effort to get the Deposit Insurance

Fund closer to the statutory minimum of 1.35%.

The ratio dipped after the recent bank failures of Silicon Valley Bank and Signature Bank.

Employee compensation and benefits expense increased $64,000 or 1.7%

and totaled $3.8 million for the nine months just ended due to additional salary expense.

Income Tax Expense (Benefit)

Income tax expense decreased $483,000 or 170.7%

to an income tax benefit of $200,000 for the nine months ended March 31, 2024, compared to the prior year period due to decreased earnings.

The effective tax rates for the nine-month periods ended March 31, 2024 and 2023, were 23.7% and 24.1%, respectively.

Comparison of Operating Results for the Three-month

Periods Ended March 31, 2024 and 2023

Periods Ended September 30, 2024 and 2023

Net loss totaled $15,000 or ($0.00) diluted earnings

per share for the three months ended March 31, 2024, a decrease of $251,000 or 174.3% from net income of $144,000 or $0.02 diluted earnings

per share for the same period in 2023.

The decrease in net earnings for the quarter ended March 31, 2024, was primarily attributable to

lower net interest income, and higher non-interest expense, which were partially offset by lower income taxes.

Kentucky First Federal Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

per share for the three months ended September 30, 2024, an increase of $160,000 or 91.4% from net loss of $175,000 or ($0.02) diluted

earnings per share for the same period in 2023.

The decrease in net loss for the quarter ended September 30, 2024, was primarily attributable

to increased net interest income, and higher non-interest income, which were partially offset by lower income tax benefit.

Net Interest Income

Net interest income decreased $280,000 or 13.7%

to $1.8 million due primarily to interest expense increasing more than interest income increased period to period.

Interest expense increased

$1.2 million or 106.7%, while interest income increased $963,000 or 30.0% to $4.2 million for the recently-ended quarter.

During the unprecedented

interest rate increases seen in the market since March 2022, our funding sources have repriced more quickly than our assets have repriced,

which has had a negative impact on net interest income.

Net interest income increased $200,000 or 12.0%

to $1.9 million due primarily to interest income increasing more than interest expense increased period to period.

Interest income increased

$886,000 or 23.7%, while interest expense increased $686,000 or 33.2% to $2.8 million for the recently-ended quarter.

Over the last two

years, the repricing of many of our assets has been slowed by contractual limits on rate changes, whereas the cost of most liabilities

did not have this constraint.

As market rates have steadied and even fallen slightly, the increase in cost of liabilities has slowed while

we have begun to see our increase in interest income be greater than our increase in interest expense.

The average rate earned on interest-earning assets

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The average balance of loans increased

$24.4 million or 8.0% to $328.4 million for the three months ended March 31, 2024, while the average rate increased 75 basis points to

The average balance of interest-bearing liabilities

increased $28.8 million or 10.6% to $301.5 million for the quarter just ended, and the average rate paid increased 149 basis points to

$17.4 million or 5.5% to $336.0 million for the three months ended September 30, 2024, while the average rate increased 73 basis points

Although the average balance of interest-bearing

liabilities increased $22.3 million or 7.8% to $309.5 million for the quarter just ended, the average rate paid increased 68 basis points

The cost of liabilities increased rapidly due to higher costs of both wholesale and retail funding.

Continued increases in

liability costs, especially for wholesale funds, will primarily be driven by future increases in market rates by the Federal Reserve.

It is widely believed that we are near the peak of this rate cycle which, if so, will likely slow the increasing costs of our liabilities.

Net interest spread decreased from 2.22% for the

prior year quarterly period to 1.48% for the three-month period ended March 31, 2024.

Provision for (Recovery of) Credit Losses

Management determined that a $28,000 recovery

of credit losses was prudent in light of the strengthening loan portfolio overall during the recently ended three-month period.

loans are now being individually evaluated for specific loss allocation and are therefore excluded from the homogeneous pooled loss analysis.

The result is a more targeted representation of currently expected credit losses on loans.

We have seen interest

rate changes slow and even decrease, allowing the repricing of our liabilities to do the same.

Net interest spread increased from 1.49% for the

prior year quarterly period to 1.50% for the three-month period ended September 30, 2024.

Provision for Credit Losses

Management determined that a $15,000 provision

for credit loss was prudent in light of the slight increase in the loan portfolio during the recently-ended quarter.

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, 2024 and 2023 (continued)

Periods Ended September 30, 2024 and 2023 (continued)

Non-interest Income

Non-interest income increased $63,000 or 85.1%

to $78,000 for the recently ended quarter primarily due to net gain on sales of loans, which increased from $0 to $8,000 for the three

months ended March 31, 2024.

to $137,000 for the three months ended September 30, 2024, compared to the prior year period, primarily because of an increase in net

gains on sales of loans as the demand for fixed rate loans has increased in the quarter recently ended.

Non-interest Expense

Non-interest expense increased $31,000 or 1.6%

and totaled $2.0 million for the three months ended March 31, 2024, primarily due to increased auditing and accounting expense, FDIC insurance

premiums and other various bank expenses.

Income Tax Expense (Benefit)

Income taxes decreased $92,000 or 170.4% from

an expense of $58,000 for the three months ended March 31, 2023, to a benefit of $38,000 for the recently ended period.

The effective

tax rates for the three-month periods ended March 31, 2024 and 2023, were 26.2% and 27.3%, respectively.

and totaled $2.0 million for the three months ended September 30, 2024, primarily due to increased data processing charges and increased

FDIC insurance premiums.

Data processing costs increased $31,000 or 23.3%

and totaled $164,000 due to higher fees associated with expanded technology services offered to customers.

FDIC insurance premiums increased $28,000 or 80.0%

and totaled $63,000 due to overall higher rates.

First Federal Savings Bank of Kentucky also expects higher FDIC insurance costs due to

the Agreement with the OCC.

The continued use of brokered deposits will also cause increased FDIC insurance costs.

Income Tax Benefit

Income tax benefit decreased $63,000 or 91.3% from a benefit of $69,000

for the three months ended September 30, 2023, to a benefit of $6,000 for the recently-ended period.

The effective tax rates for the three-month

periods ended September 30, 2024 and 2023 were 28.6% and 28.3%, respectively.

Kentucky First Federal Bancorp

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What changed 10-Q

Item 2. Management’s Discussion and Analysis