UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2024
or
☐TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-51176
KENTUCKY FIRST FEDERAL BANCORP
(Exact Name of Registrant as Specified in Its
Charter)
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including
area code: (502)223-1638
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
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 definitions 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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by a check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock
held by nonaffiliates was $20.2 million as of December 31, 2023.
Number of shares of common stock outstanding
as of September 24, 2024: 8,086,715
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated
by reference and the Part of the Form 10-K into which the document is incorporated:
INDEX
PAGE
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 18
Item 1B. Unresolved Staff Comments 27
Item 1C. Cybersecurity 27
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Mine Safety Disclosures 29
Item 6. [Reserved] 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9A. Controls and Procedures 31
Item 9B. Other Information 33
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 33
PART III 34
Item 10. Directors, Executive Officers and Corporate Governance 34
Item 11. Executive Compensation 34
Item 14. Principal Accountant Fees and Services 35
Item 15. Exhibits and Financial Statement Schedules 36
SIGNATURES 38
i
PART I
Item 1. Business.
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 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; 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 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. 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
References in this Annual Report on Form 10-K
to “we,” “us” and “our” refer to Kentucky First, and where appropriate, collectively to Kentucky
First, First Federal of Hazard and First Federal of Kentucky.
Kentucky First Federal Bancorp. Kentucky
First Federal Bancorp (“Kentucky First Federal” or 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 Savings and Loan Association
of Hazard (“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 Savings Bank 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, Kentucky First Federal
acquired CFK Bancorp, Inc., the savings and loan holding company for Central Kentucky Federal Savings Bank, a federally chartered savings
bank located in Danville, Kentucky. Central Kentucky Federal Savings Bank was merged into First Federal of Kentucky and now operates
as a division of First Federal of Kentucky under the name “Central Kentucky Federal Savings Bank” through its two offices
in Danville, Kentucky and its Lancaster, Kentucky branch. With the acquisition, the Company expanded its customer base in the central
Kentucky area with an institution that shared its community banking orientation and thrift heritage and enjoyed a favorable reputation
within the new Danville-Lancaster market area.
Kentucky First’s and First Federal of Hazard’s
executive offices are located at 655 Main Street, Hazard, Kentucky, 41702 and the telephone number for investor relations is (888) 818-3372.
1
At June 30, 2024, Kentucky First had total assets
of $375.0 million, deposits of $256.1 million and stockholders’ equity of $48.0 million. The discussion in this Annual Report on
Form 10-K relates primarily to the businesses of First Federal of Hazard and First Federal of Kentucky, as Kentucky First’s operations
consist primarily of operating the Banks and investing funds retained in the Reorganization.
First Federal of Hazard and First Federal of
Kentucky are subject to examination and comprehensive regulation by the Office of the Comptroller of the Currency and their deposits
are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.
Both of the Banks are members of the Federal Home Loan Bank of Cincinnati, which is one of the 11 regional banks in the FHLB System.
See “Regulation and Supervision.”
First Federal Savings and Loan Association
of Hazard. First Federal of Hazard was formed as a federally chartered mutual savings and loan association in 1960. First Federal
of Hazard operates from a single office located at 655 Main Street, Hazard, Kentucky as a community-oriented savings and loan association
offering traditional financial services to consumers in Perry and surrounding counties in eastern Kentucky. It engages primarily in the
business of attracting deposits from the general public and using such funds to originate, when available, loans secured by first mortgages
on owner-occupied, residential real estate and occasionally other loans secured by real estate. To the extent there is insufficient loan
demand in its market area, and where appropriate under its investment policies, First Federal of Hazard has historically invested in
mortgage-backed and investment securities, although since the reorganization, First Federal of Hazard has been purchasing whole loans
and participations in loans originated at First Federal of Kentucky. At June 30, 2024, First Federal of Hazard had total assets of $89.8
million, net loans of $81.1 million, total mortgage-backed and other securities of $3.4 million, deposits of $54.4 million and total
capital of $18.0 million.
First Federal Savings Bank of Kentucky.
First Federal of Kentucky is a federally chartered savings bank, which is primarily engaged in the business of attracting deposits
from the general public and originating primarily adjustable-rate loans secured by first mortgages on owner-occupied and nonowner-occupied
one- to four-family residences in Franklin, Boyle, Garrard and other counties in Kentucky. First Federal of Kentucky also originates,
to a lesser extent, home equity loans and loans secured by churches, multi-family properties, professional office buildings and other
types of property. At June 30, 2024, First Federal of Kentucky had total assets of $287.1 million, net loans of $251.9 million, total
mortgage-backed and other securities of $6.4 million, deposits of $204.4 million and total capital of $28.9 million.
First Federal of Kentucky’s main office
is located at 216 W. Main Street, Frankfort, Kentucky 40602 and its main telephone number is (502) 223-1638.
Market Areas
First Federal of Hazard and First Federal of Kentucky
operate in four market areas.
First Federal of Hazard’s market area consists
of Perry County, where the business office is located, as well as the surrounding counties of Letcher, Knott, Breathitt, Leslie and Clay
Counties in eastern Kentucky. The economy in its market area has been distressed in recent years. The local economy depends on the coal
industry and other industries, such as health care and manufacturing. Still, the economy in First Federal of Hazard’s market area
continues to lag behind the economies of Kentucky and the United States. In the most recent available data, using information from the
Commonwealth of Kentucky Economic Development and the United States Bureau of Labor Statistics, median household income in Perry County
is $48,328 compared to personal income of $61,118 in Kentucky and $80,610 in the United States. Total population in Perry County is approximately
28,000. However, as a regional economic center, Hazard tends to draw consumers and workers who commute from surrounding counties. Employment
in the market area, particularly in Perry County, is led by healthcare, followed by retail, education, and public administration. During
the last five years, the unemployment rate (not seasonally adjusted) has been higher than most regions, and in July 2024, was 7.0%, compared
to 5.1% in Kentucky and 4.2% in the United States.
First Federal of Kentucky’s primary lending
area includes the Kentucky counties of Franklin, Boyle, Garrard and surrounding counties, with the majority of lending originated on properties
located in Franklin and Boyle Counties.
Franklin County has a population of approximately
52,000, of which approximately 27,000 live within the city of Frankfort, which serves as the capital of Kentucky. The primary sources
of employment are public administration, education, other services, and health care. The median household income in Franklin County is
$67,788. The unemployment rate is 4.20%
Boyle County has a population of approximately
31,000. The primary sources of employment are health care, retail, information services, and manufacturing. The unemployment rate is 5.0%
while the median household income in Boyle County is $60,218.
Garrard County has a population of approximately
18,000. The primary sources of employment are education, health care, retail, and construction. There is a 4.5% unemployment rate and
$62,546 median household income.
2
Lending Activities
General. Our loan portfolio consists
primarily of one- to four-family residential mortgage loans. As opportunities arise, we also offer loans secured by churches, commercial
real estate, and multi-family real estate. We also offer loans secured by deposit accounts and home equity loans. Substantially all of
our loans are made within the Banks’ respective market areas.
Residential Mortgage Loans. Historically, our primary lending activity is the origination of mortgage
loans to enable borrowers to purchase or refinance existing homes in the Banks’ respective market areas. At June 30, 2024, residential
mortgage loans including construction loans and multi-family totaled $285.8 million, or 85.3%, of our total loan portfolio. We offer a
mix of adjustable-rate and fixed-rate mortgage loans with terms up to 30 years. Adjustable-rate loans have an initial fixed term of one,
three, five or seven years. After the initial term, the rate adjustments on most of our adjustable-rate loans are indexed to the MIRS
Transition Index, formerly known as PMMS+ Index. The interest rates on these mortgages are adjusted once a year, with limitations on adjustments
generally of one percentage point per adjustment period, and a lifetime cap of five percentage points. We determine loan fees charged,
interest rates and other provisions of mortgage loans on the basis of our own pricing criteria and competitive market conditions. Some
loans originated by the Banks have an additional advance clause which allows the borrower to obtain additional funds at prevailing interest
rates, subject to managements’ approval.
At June 30, 2024, the Company’s loan portfolio included $252.6
million in adjustable-rate residential mortgage loans, or 88.4% of the Company’s residential mortgage loan portfolio.
The retention of adjustable-rate loans in the
portfolio helps reduce our exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods
of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Further,
although adjustable-rate loans allow us to increase the sensitivity of our interest-earning assets to changes in interest rates, the extent
of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the periodic and lifetime interest
rate adjustment limitations. Accordingly, there can be no assurance that yields on our adjustable-rate loans will fully adjust to compensate
for increases in our cost of funds. Finally, adjustable-rate loans may decrease at a pace faster than decreases in our cost of funds,
resulting in reduced net income. In recent months, the Company has attempted to shift direction from adjustable-rate loans secured by
owner-occupied homes. The Company is well-positioned to originate fixed-rate loans secured by owner-occupied homes for sale into the secondary
market. Doing so will free capital and liquidity for potential investment in higher-yielding types of assets.
While one- to four-family residential real estate
loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because
borrowers often prepay their loans in full upon sale of the mortgaged property or upon refinancing the original loan. Therefore, average
loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest
rates and the interest rates payable on outstanding loans.
The Banks offer various programs for the purchase
and refinance of one- to four-family loans. Most of these loans have loan-to-value ratios of 80% or less, based on an appraisal provided
by a state licensed or certified appraiser. For owner-occupied properties, the borrower may be able to borrow up to 95% of the value if
they secure and pay for private mortgage insurance or they may be able to obtain a second mortgage (at a higher interest rate) in which
they borrow up to 90% of the value. The Boards of Directors of the Banks may approve a loan above the 80% loan-to-value ratio without
such enhancements.
Construction Loans. We originate
loans for a term of one year or less to individuals to finance the construction of residential dwellings for personal use or for use
as rental property. On a case-by-case basis we consider construction loans on other than owner-occupied, residential property. Due to
demand in our local markets, we have also increased lending to borrowers who are building homes to sell. These tend to be established
borrowers building one or a few moderately-priced homes. At June 30, 2024 construction loans totaled $13.8 million, or 4.1%, of our total
loan portfolio. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually
less than one year. Loans generally can be made with a maximum loan to value ratio of 80% of the appraised value. Funds are disbursed
as progress is made toward completion of the construction based on site inspections by qualified bank staff.
3
Construction financing is generally considered
to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction
loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development
and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays
and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted,
at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the
foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success
of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose
on a project before or at completion due to a default, there can be no assurance that we will be able to recover the unpaid balance and
accrued interest on the loan, as well as related foreclosure and holding costs.
Multi-Family Loans. We offer mortgage
loans secured by multi-family property (residential real estate comprised of five or more units.) At June 30, 2024, multi-family loans
totaled $15.8 million, or 4.7%, of our total loan portfolio. We originate multi-family real estate loans for terms of generally 25 years
or less. Loan amounts generally do not exceed 80% of the appraised value and tend to range much lower.
Nonresidential Loans. As opportunities
arise, we offer mortgage loans secured by nonresidential real estate, which is generally secured by commercial office buildings, churches,
and properties used for other purposes. At June 30, 2024, nonresidential real estate loans totaled $34.3 million, or 10.2% of our total
loan portfolio. We originate nonresidential real estate loans for terms of generally 25 years or less and loan amounts generally do not
exceed 80% of the appraised value and tend to range much lower.
Loans secured by multi-family and nonresidential
real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans.
Of primary concern in multi-family and nonresidential real estate lending is 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 of such loans may be subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and/or loan guarantors
to provide annual financial statements on larger multi-family and commercial real estate loans. In reaching a decision on whether to
make a multi-family or nonresidential real estate loan, we consider the net cash flow of the project, the borrower’s expertise,
credit history and the value of the underlying property.
Commercial Non-mortgage Loans. At
June 30, 2024, commercial non-mortgage loans totaled $700,000, or 0.2%, of our total loan portfolio. We do not emphasize commercial non-mortgage
loans, which may be secured by vehicles used in business or by inventory and equipment of the business or may be unsecured, although
we do originate such loans on a limited basis and generally require a pre-existing relationship with the Bank. These loans are made only
to businesses in our local market and we generally require personal guarantees of well-established individuals for these loans. Commercial
loans involve an even greater degree of risk than real estate loans.
Consumer Lending. Our consumer loans include home equity lines of credit, loans secured
by savings deposits, automobile loans and unsecured or personal loans. At June 30, 2024, our consumer loan balance totaled $12.2 million,
or 3.6%, of our total loan portfolio. Of the consumer loan balance at June 30, 2024, $10.6 million were home equity loans, $819,000 were
loans secured by savings deposits and $117,000 were automobile or unsecured loans. Our home equity loans are made on the security of residential
real estate and have terms of up to 15 years. Most of our home equity loans are second mortgages subordinate only to first mortgages also
held by the bank and do not exceed 80% of the estimated value of the property, less the outstanding principal of the first mortgage, although
we do offer home equity loans up to 90% of the value less the balance of the first mortgage at a premium rate to qualified borrowers.
These loans are not secured by private mortgage insurance. Our home equity loans require the monthly payment of 1.0% to 2.0% of the unpaid
principal until maturity, when the remaining unpaid principal, if any, is due. Home equity loans bear variable rates of interest indexed
to the prime rate for loans with 80% or less loan-to-value ratio, and 2% above the prime rate for loans with a loan-to-value ratio in
excess of 80%. Interest rates on these loans can be adjusted monthly. At June 30, 2024, the total outstanding home equity loans amounted
to 3.2% of the Company’s total loan portfolio.
4
Loans secured by savings are originated for up
to 90% of the depositor’s savings account balance. The interest rate is varying percentage points above the rate paid on the savings
account, and the account must be pledged as collateral to secure the loan. At June 30, 2024, loans on savings accounts totaled 0.2% of
the Company’s total loan portfolio.
Consumer loans generally entail greater risk
than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable
assets. Automobile and unsecured loans at June 30, 2024, totaled 0.2% of the Company’s total loan portfolio.
Loan Originations, Purchases and Sales.
Loan originations come from a number of sources. The primary source of loan originations are our in-house loan originators, and to
a lesser extent, advertising and referrals from customers and real estate agents. First Federal of Kentucky sells fixed-rate loans with
longer maturities to the Federal Home Loan Bank of Cincinnati (“FHLB-Cincinnati”). We earn income on the loans sold through
fees we charge on the origination, interest spread premiums earned when we sell the loans, and loan servicing fees on an on-going basis,
because servicing rights are retained on such loans. At June 30, 2024, $20.4 million in loans were being serviced by First Federal of
Kentucky for the FHLB-Cincinnati.
Loan Approval Procedures and Authority.
Our lending activities follow written, nondiscriminatory, underwriting
standards and loan origination procedures established by each Bank’s Board of Directors and management. Each Bank’s loan staff
can approve or deny loans totaling $500,000 or less. First Federal of Hazard’s loan committee consists of its two senior officers,
while First Federal of Kentucky’s loan approval process allows for various combinations of experienced bank officers to approve
or deny loans. Loans that do not conform to this criteria must be submitted to the Board of Directors or Loan Committee composed of at
least three directors, for approval.
It is the Company’s practice to record
a lien on the real estate securing a loan. The Banks generally do not require title insurance, although it may be required for loans
made in certain programs. The Banks do require fire and casualty insurance on all security properties and flood insurance when the collateral
property is located in a designated flood hazard area.
Loans to One Borrower. The maximum
amount either Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of
that Bank’s stated capital and the allowance for loan losses. At June 30, 2024, the regulatory limit on loans to one borrower was
$2.8 million for First Federal of Hazard and $4.7 million for First Federal of Kentucky. Neither of the Banks had lending relationships
in excess of their respective lending limits. However, loans or participations in loans may be sold among the Banks, which may allow
a borrower’s total loans with the Company to exceed the limit of either individual bank.
Loan Commitments. The Banks issue
commitments for the funding of mortgage loans. Generally, these commitments exist from the time the underwriting of the loan is completed
and the closing of the loan. Generally, these commitments are for a maximum of 30 or 60 days but management routinely extends the commitment
if circumstances delay the closing. Management reserves the right to verify or re-evaluate the borrower’s qualifications and to
change the rates and terms of the loan at that time.
If conditions exist whereby either Bank experiences a significant increase
in loans outstanding or commits to originate loans that are riskier than a typical one- to four-family mortgage, management and the boards
will consider reflecting the anticipated loss exposure in a separate liability. Upon implementation of ASU 2016-13 or the current expected
credit loss (CECL) model at July 1, 2023, the Banks began to utilize a separate liability to reflect anticipated credit losses on loan
commitments. At June 30, 2024, this amount totaled $60,000.
Both Banks offer construction loans that either
have a separate construction period of one year or less, approved with a simultaneous commitment for permanent financing, or a loan that
has a construction phase of one year or less that is convertible to permanent financing.
Interest Rates and Loan Fees. Interest
rates charged on mortgage loans are primarily determined by competitive loan rates offered in our market areas and our yield objectives.
Mortgage loan rates reflect factors such as prevailing market interest rate levels, the supply of money available to the savings industry
and the demand for such loans. These factors are in turn affected by general economic conditions, the monetary policies of the federal
government, including the Board of Governors of the Federal Reserve System, the general supply of money in the economy, tax policies
and governmental budget matters.
5
We receive fees in connection with late payments
on our loans. Depending on the type of loan and the competitive environment for mortgage loans, we may charge an origination fee on all
or some of the loans we originate. We may also offer a menu of loans whereby the borrower may pay a higher fee to receive a lower rate
or to pay a smaller or no fee for a higher rate.
Delinquencies. When a borrower
fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current
status. We make initial contact with the borrower when the loan becomes 15 days past due. Subsequently, bank staff, under the direct
supervision of senior management and with consultation by the Banks’ attorneys, attempt to contact the borrower and determine their
status and plans for resolving the delinquency. However, once a delinquency reaches 90 days, management considers foreclosure and, if
the borrower has not provided a reasonable plan (such as selling the collateral, securing a commitment from another lender to refinance
the loan or submitting a plan to repay the delinquent principal, interest, escrow, and late charges) the foreclosure suit may be initiated.
In some cases, management may delay initiating the foreclosure suit if, in management’s opinion, the Banks’ chance of loss
is minimal (such as with loans where the estimated value of the property greatly exceeds the amount of the loan) or if the original borrower
is deceased or incapacitated. If a foreclosure action is initiated and the loan is not brought current, paid in full, or refinanced with
another lender before the foreclosure sale, the real property securing the loan is sold at foreclosure. The Banks are represented at
the foreclosure sale and in most cases will bid an amount equal to the Banks’ investment (including interest, advances for taxes
and insurance, foreclosure costs, and attorney’s fees). If another bidder outbids the Bank, the Bank’s investment is received
in full. If another bidder does not outbid the Banks, the Banks acquire the property and attempt to sell it to recover their investment.
A borrower’s filing for bankruptcy can
alter the methods available to the Banks to seek collection. In such cases, the Banks work closely with legal counsel to resolve the
delinquency as quickly as possible.
We may consider loan workout arrangements with
certain borrowers under certain conditions. Management of each bank provides a report to its board of directors on a monthly basis of
all loans more than 60 days delinquent, including loans in foreclosure, and all property acquired through foreclosure.
Investment Activities
We have legal authority to invest in various
types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and state and municipal governments,
mortgage-backed securities and certificates of deposit of federally insured institutions. We also are required to maintain an investment
in FHLB-Cincinnati stock, the level of which is largely dependent on our level of borrowings from the FHLB.
At June 30, 2024, our investment portfolio consisted
of mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years
or less. The Company held no equity position with Fannie Mae or Freddie Mac.
Our investment objectives are to provide an alternate
source of low-risk investments when loan demand is insufficient, to provide and maintain liquidity, to maintain a balance of high quality,
diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest
rate risk, and to generate a favorable return. The Banks’ Board of Directors has the overall responsibility for each institution’s
investment portfolio, including approval of investment policies. The management of each Bank may authorize investments as prescribed
in each of the Bank’s investment policies.
Bank Owned Life Insurance
First Federal of Kentucky owns several Bank Owned
Life Insurance policies totaling $2.9 million at June 30, 2024. The purpose of these policies is to offset future escalation of the costs
of non-salary employee benefit plans such as First Federal of Kentucky’s defined benefit retirement plan and First Federal of Kentucky’s
health insurance plan. The lives of certain key Bank employees are insured, and First Federal of Kentucky is the sole beneficiary and
will receive any benefits upon the employee’s death. The policies were purchased from four highly-rated life insurance companies.
The design of the plan allows for the cash value of the policy to be designated as an asset of First Federal of Kentucky. The asset’s
value will increase by the crediting rate, which is a rate set by each insurance company and is subject to change on an annual basis.
The growth of the value of the asset will be recorded as other operating income. Management does not foresee any expense associated with
the plan. Because this is a life insurance product, current federal tax laws exempt the income from federal income taxes.
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Bank owned life insurance is not secured by any
government agency nor are the policies’ asset values or death benefits secured specifically by tangible property. Great care was
taken in selecting the insurance companies, and the bond ratings and financial condition of these companies are monitored on a quarterly
basis. The failure of one of these companies could result in a significant loss to First Federal of Kentucky. Other risks include the
possibility that the favorable tax treatment of the income could change, that the crediting rate will not be increased in a manner comparable
to market interest rates, or that this type of plan will no longer be permitted by First Federal of Kentucky’s regulators. This
asset is considered illiquid because, although First Federal of Kentucky may terminate the policies and receive the original premium
plus all earnings, such an action would require the payment of federal income taxes on all earnings since the policies’ inception.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments
and maturities, redemptions, sales and repayments of investment and mortgage-backed securities are the major sources of our funds for
lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. The vast majority
of our depositors are residents of the Banks’ respective market areas. Deposits are attracted from within our market areas through
the offering of passbook savings and certificate accounts, and, at First Federal of Kentucky, checking accounts and individual retirement
accounts (“IRAs”). We began utilizing brokered funds in June 2023 and had $52.0 million in such deposits at June 30, 2024.
Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability
to us, asset liability management and customer preferences and concerns. We review our deposit mix and pricing on an ongoing basis as
needed.
Borrowings. First Federal of Hazard
and First Federal of Kentucky borrow from the FHLB-Cincinnati to supplement their supplies of investable funds and to meet deposit withdrawal
requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As members,
each Bank is required to own capital stock in the FHLB-Cincinnati and is authorized to apply for advances on the security of such stock
and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States),
provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having
its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a
fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness.
Subsidiary Activities
The Company has no other wholly owned subsidiaries
other than First Federal of Hazard and Frankfort First Bancorp. Frankfort First Bancorp has one subsidiary, First Federal of Kentucky.
As federally chartered savings institutions,
the Banks are permitted to invest an amount equal to 2% of assets in subsidiaries, with an additional investment of 1% of assets where
such investment serves primarily community, inner-city and community-development purposes. Under such limitations, as of June 30, 2023,
First Federal of Hazard and First Federal of Kentucky were authorized to invest up to $1.8 million and $5.7 million, respectively, in
the stock of or loans to subsidiaries, including the additional 1% investment for community, inner-city and community development purposes.
Competition
We face significant competition for the attraction
of deposits and origination of loans. Our most direct competition for deposits has historically come from the banks and credit unions
operating in our market areas and, to a lesser extent, from other financial services companies, such as investment brokerage firms. We
also face competition for depositors’ funds from money market funds and other corporate and government securities. Several of our
competitors are significantly larger than us and, therefore, have significantly greater resources. We expect competition to increase
in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial
services industry. Technological advances, for example, have lowered the barriers to enter new market areas, allowed banks to expand
their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products
and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms
and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the
origination of loans could limit our growth in the future.
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According to the Federal Deposit Insurance Corporation
(“FDIC”), at June 30, 2024, the latest date for which data is available, First Federal of Hazard had a deposit market share
of 7.8% in Perry County. Its largest competitors, Hazard Bancorp (Peoples Bank & Trust Company of Hazard,) 1st Trust Bank,
Inc., and Community Trust Bancorp, Inc. (Community Trust Bank, Inc.) had Perry County deposit market shares of 42.7%, 23.6% and 28.7%,
respectively. First Federal of Hazard’s competition for loans comes primarily from financial institutions in its market area and,
to a lesser extent, from other financial services providers, such as mortgage companies and mortgage brokers. Competition for loans also
comes from the increasing number of non-depository financial services companies entering the mortgage market, such as insurance companies,
securities companies and specialty finance companies.
First Federal of Kentucky’s principal competitors for deposits
in its market area are other banking institutions, such as commercial banks and credit unions, as well as mutual funds and other investments.
First Federal of Kentucky principally competes for deposits by offering a variety of deposit accounts, convenient business hours and branch
locations, customer service and a well-trained staff. According to the FDIC, at June 30, 2024, First Federal of Kentucky had deposit market
share of 7.0%, 7.1% and 13.6% for the Kentucky counties of Franklin, Boyle and Garrard. Its largest competitors for depositors are the
Boyle Bancorp, Inc. (The Farmers National Bank of Danville) at 28.1%, Wesbanco Bank, Inc. (Wesbanco) at 15.5% and Community Trust Bancorp,
Inc., (Community Trust Bank) at 8.3% market share in the three-county area. Boyle Bancorp, Wesbanco, Inc., and Community Trust Bancorp,
Inc. had assets at June 30, 2024, of $940.3 million, $18.1 billion, and $5.8 billion, respectively. The Bank also faces considerable competition
from credit unions including the Commonwealth Credit Union ($2.3 billion in assets) and the Expree Credit Union ($102.1 million in assets).
First Federal of Kentucky competes for loans with other depository institutions, as well as specialty mortgage lenders and brokers and
consumer finance companies. First Federal of Kentucky principally competes for loans on the basis of interest rates and the loan fees
it charges, the types of loans it originates and the convenience and service it provides to borrowers. In addition, First Federal of Kentucky
believes it has developed strong relationships with the businesses, real estate agents, builders and general public in its market area.
Personnel
At June 30, 2024, we had 56 full-time employees
and three part-time employees, none of whom was represented by a collective bargaining unit. We believe our relationship with our employees
is good.
Regulation and Supervision
General. First Federal of Hazard
and First Federal of Kentucky are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the
Currency (OCC), as their primary federal regulator, and the Federal Deposit Insurance Corporation (FDIC), as insurer of deposits. First
Federal of Hazard and First Federal of Kentucky are each members of the Federal Home Loan Bank System and their deposit accounts are
insured up to applicable limits by the Deposit Insurance Fund (DIF) of the FDIC. First Federal of Hazard and First Federal of Kentucky
must each file reports with the OCC and the FDIC concerning their activities and financial condition in addition to obtaining regulatory
approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OCC and, under certain circumstances, the FDIC to evaluate First Federal of Hazard’s and First Federal
of Kentucky’s safety and soundness and compliance with various regulatory requirements. The Board of Governors of the Federal Reserve
System (Federal Reserve Board), the agency that regulates and supervises bank and savings and loan holding companies, supervises and
regulates Kentucky First and First Federal MHC. Kentucky First and First Federal MHC, as savings and loan holding companies, are required
to file certain reports with, and are subject to examination by, and otherwise are required to comply with the rules and regulations
of the Federal Reserve Board. This regulatory structure is intended primarily for the protection of the DIF and depositors.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act) significantly changed the financial regulatory regime in the United States. Since the enactment
of the Dodd-Frank Act, U.S. banks and financial services firms have been subject to enhanced regulation and oversight. Several provisions
of the Dodd-Frank Act remain subject to further rulemaking, guidance, and interpretation by the federal banking agencies.
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Enacted in 2018, the Economic Growth, Regulatory
Relief, and Consumer Protection Act of 2018 (EGRRCPA) amended certain provisions of the Dodd-Frank Act. EGRRCPA provides limited regulatory
relief to certain financial institutions, while preserving the existing framework under which U.S. financial institutions are regulated.
In addition to amending the Dodd-Frank Act, EGRRCPA also includes several provisions that positively affect smaller banking institutions
(e.g., those with less than $10 billion in assets) like the Banks. Specific provisions of the EGRRCPA that benefit smaller banks include
modifications to the “qualified mortgage” criteria under the “ability to repay” rules for certain mortgages that
are held and maintained on the Bank’s retained portfolio as well as relief from certain capital requirements with the creation
of a “community bank leverage ratio.” See “Federal Savings Association Regulation – Capital Requirements.”
Certain of the regulatory requirements that are
applicable to First Federal of Hazard, First Federal of Kentucky, Kentucky First and First Federal MHC are described below. This discussion
does not purport to be a complete description of the laws and regulations involved and is qualified in its entirety by the actual laws
and regulations. Moreover, laws and regulations are subject to changes by the U.S. Congress or the regulatory agencies as applicable.
Agreements with Regulators. 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. 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%.
Under the terms of the Agreement, First Federal
of Kentucky is required to take the following actions within the time frames specified in the Agreement:
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 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 this Form 10-K.
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Regulation of Federal Savings Associations
Business Activities. Federal law
and regulations, primarily the Home Owners’ Loan Act and the regulations of the OCC, govern the activities of federal savings associations,
such as First Federal of Hazard and First Federal of Kentucky. These laws and regulations delineate the nature and extent of the activities
in which federal savings associations may engage. In particular, certain lending authority for federal savings associations (e.g.,
commercial, nonresidential real property loans and consumer loans) is limited to a specified percentage of the association’s capital
or assets.
Branching. Federal savings associations
are authorized to establish branch offices in any state or states of the United States and its territories, subject to the approval of
the OCC.
Capital Requirements. Federal regulations
require insured depository institutions, including federal savings associations to meet four minimum capital standards: a 4.0% Tier 1
leverage ratio; a 4.5% common equity Tier 1 ratio; a 6.0% Tier 1 capital to risk-weighted assets ratio; and an 8% Total capital to risk-weighted
assets ratio. These requirements were effective January 1, 2015, and are the result of a final rule implementing recommendations of the
Basel Committee on Banking Supervision (Basel III) and certain requirements of the Dodd Frank Act. The regulations also include a “capital
conservation buffer” of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier
1 capital and result in the following minimum ratios: (1) a common equity Tier 1 capital ratio of 7.0%, (2) a Tier 1 capital ratio of
8.5%, and (3) a total capital ratio of 10.5%. The capital conservation buffer requirement was phased in beginning in January 2016 at
0.625% of risk-weighted assets and increased by that amount each year until fully implemented in January 2019. An institution will be
subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls
below the buffer amount.
Tier 1 capital is generally defined as common
stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card
relationships. The regulations eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital.
Instruments issued before May 19, 2010, are grandfathered for companies with consolidated assets of $15 billion or less. The components
of Tier 2 capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted
assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall,
the amount of Tier 2 capital included as part of total capital cannot exceed 100% of core capital. Total capital is defined as core capital
and supplementary capital, less certain specified deductions from total capital such as reciprocal holdings of depository institution
capital, instruments and equity investments. For purposes of determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor
of 0% to 150%, as assigned by the capital regulation based on the risks believed inherent in the type of asset.
The EGRRCPA required the federal banking agencies,
including the OCC, to establish a “community bank leverage ratio” (CBLR) for qualifying community banking organizations having
less than $10 billion in average total consolidated assets and a leverage ratio of greater than 9%. The CBLR is an alternative framework
that permits qualifying institutions to calculate a leverage ratio to measure capital adequacy. Institutions opting into the CBLR framework
are not be required to calculate or report risk-based capital and are deemed to have met the “well capitalized” ratio requirements
and be in compliance with the generally applicable capital rule if they meet the CBLR ratio. 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 federal agencies published a final rule on October 9, 2020, effective November 9, 2020, that set the CBLR at
9% beginning on January 1, 2022. The CARES Act directed the federal banking agencies to issue an interim rule temporarily lowering the
CBLR ratio to 8% which the agencies did with a transition back to 9% by year-ended 2021. The Banks elected to use the CBLR framework
effective for the quarter ended March 31, 2020. As of June 30, 2024, the capital levels of First Federal of Hazard and First Federal
of Kentucky exceed the minimum required capital amounts for capital adequacy. See Note K-Stockholders’ Equity and Regulatory Capital
in notes to financial statements.
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%. For additional information, see 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 this Form 10-K.
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Prompt Corrective Regulatory Action.
Federal law requires the federal banking agencies to take “prompt corrective action” should an insured depository institution
fail to meet certain capital adequacy standards. Prompt corrective action regulations provide five capital classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. Under the regulations, an institution is deemed to be “well capitalized” if
it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of
5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has
a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or
greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based
capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common
equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total
risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or
a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has
a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
If less than adequately capitalized, regulatory
approval is required to accept broker deposits. The OCC is required to take certain supervisory actions against undercapitalized federal