Item 1A. Risk Factors.
Interest Rate Risk
Rising interest rates may hurt our profits
and asset values.
Beginning in March, 2022, the Federal Reserve
Board’s Open Market Committee (“FOMC”) started raising interest rates to combat elevated inflation and a strong labor
market. Rates continued to increase through August 2023 which caused significant deterioration in our profits and asset values. Net interest
income in the year ended June 30, 2024 decreased $1.8 million or 20.3% compared to the fiscal year ended June 30, 2023. In September
2024, the FOMC began to lower the target range for the federal funds rate by 50 basis points and has subsequently lowered rates by another
75 basis points, as of September 17, 2025. This has caused improvement in the company’s net interest income from $6.9 million in
the year ended June 30, 2024 to $8.3 million in the year ended June 30, 2025. This was primarily the result of higher returns on assets
while the cost of funds continued to increase in the earlier part of the year before beginning to decline.
Nevertheless, if interest rates rise in the future,
our net interest income may decline in the short term since, due to the generally shorter terms of interest-bearing liabilities, interest
expense paid on interest-bearing liabilities, increases more quickly than interest income earned on interest-earning assets, such as
loans and investments. In addition, rising interest rates may hurt our income because of reduced demand for new loans and refinancing
loans may in turn result in reduced interest and fee income earned on new loans and loan refinancings. While we believe that modest interest
rate increases will not significantly hurt our interest rate spread over the long term due to our high level of liquidity and the presence
of a significant amount of adjustable-rate mortgage loans in our loan portfolio, interest rate increases may initially reduce our interest
rate spread until such time as our loans and investments reprice to higher levels.
Changes in interest rates also affect the value
of our interest-earning assets, and in particular our securities portfolio. Generally, the value of fixed-rate securities fluctuates
inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as separate components
of equity. Decreases in the fair value of securities available for sale resulting from increases in interest rates therefore could have
an adverse effect on stockholders’ equity. At June 30, 2025, this decrease in fair value of the securities, otherwise known as
Accumulated other comprehensive loss totaled $145,000 or 1.5% of our securities portfolio.
Rising interest rates may adversely affect
the ability of borrowers to repay loans.
We offer fixed-rate and adjustable-rate mortgage
loans with terms of up to 30 years; however, across our loan portfolio, interest rates and payments adjust annually after a one-, three-,
five- or seven-year initial fixed period. At June 30, 2025, 93.8% of our residential real estate loan portfolio was adjustable-rate
loans. Rising interest rates could have a negative impact on our results of operations by reducing the ability of borrowers to repay
their current loan obligations as interest rates rise, the borrower’s payments rise, increasing the potential for delinquencies
and defaults.
18
Risks Related to Our Lending Activities
Inflationary pressures and rising prices
may affect our results of operations and financial condition.
Inflation has risen sharply since the end of
2021 to levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2025. Inflation
could lead to increased costs to our customers, making it more difficult for them to repay their loans or other obligations. While interest
rates have declined since September 2024, higher interest rates may be needed to tame persistent inflationary price pressures, which
could also push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets
could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand
for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations.
If our allowance for credit losses is not
sufficient to cover actual loan losses, our results of operations would be negatively affected.
In determining the amount of the allowance for
credit loss, we analyze our loss and delinquency experience by loan categories and we consider the effect of existing economic conditions.
In addition, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness
of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If the
actual results are different from our estimates, or our analyses are incorrect, our allowance for credit loss may not be sufficient to
cover losses inherent in our loan portfolio, which would require additions to our allowance and would decrease our net income. An emphasis
on loan growth or shifting the types of loans the banks make, as well as any future credit deterioration, could require us to increase
our allowance further in the future. In addition, our banking regulators periodically review our allowance for loan losses and could
require us to increase our provision for loan losses. Any increase in our allowance for credit loss or loan charge-offs as required by
regulatory authorities may have a material adverse effect on our results of operations and financial condition.
A large percentage of our loans are collateralized
by real estate and disruptions in the real estate market may result in losses and hurt our earnings.
Approximately 99.3% of our loan portfolio at
June 30, 2025 was comprised of loans collateralized by real estate. Disruptions in the real estate market could significantly impair
the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral in each case provides
an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.
If real estate values decline, it will become more likely that we would be required to increase our allowance for loan losses. If during
a period of reduced real estate values, we are required to liquidate the collateral securing a loan to satisfy the debt or to increase
our allowance for credit losses, it could materially reduce our profitability and adversely affect our financial condition.
Our concentration of residential mortgage
loans exposes us to increased lending risks.
At June 30, 2025, $275.3 million, or 83.6%, of
our loan portfolio was secured by one-to-four family real estate, all of which is located in the Commonwealth of Kentucky, and we intend
to continue this type of lending in the foreseeable future. One-to-four family residential mortgage lending is generally sensitive to
regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making
loss levels difficult to predict. A decline in residential real estate values as a result of a downturn in the local housing markets
or in the markets in neighboring states in which we originate residential mortgage loans could reduce the value of the real estate collateral
securing these types of loans. Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized,
which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
The distressed economy in First Federal
of Hazard’s market area could hurt our profits and slow our growth.
Our banks operate in three distinct market areas.
First Federal of Hazard’s market area consists of Perry and surrounding counties in eastern Kentucky. The economy in this market
area has been distressed in recent years due to the decline in the coal industry on which the economy has been dependent. While the region
has seen improvement in the economy from the influx of other industries, such as health care and manufacturing, the competition provided
by new methods of extracting natural gas has recently hurt the coal industry. As a consequence, the economy in First Federal of Hazard’s
market area continues to lag behind the economies of Kentucky and the United States and First Federal of Hazard has experienced insufficient
loan demand in its market area. Moreover, the slow economy in First Federal of Hazard’s market area will limit our ability to grow
our asset base in that market.
19
Our mortgage banking revenue and the value
of our mortgage servicing rights can be volatile.
We plan to continue to sell our longer-term,
conforming and non-conforming fixed-rate loans that we originate to generate noninterest income. We also earn revenue from fees we receive
for servicing mortgage loans. Changes in interest rates may impact our mortgage banking revenues, which could negatively impact our noninterest
income. When rates rise, the demand for mortgage loans usually tends to fall, reducing loan origination volume and the related amount
of gains on the sales of loans. Under the same conditions, net revenue from our mortgage servicing activities can increase due to slower
prepayments, which reduces our amortization expense for mortgage servicing rights. When rates fall, mortgage originations usually tend
to increase and the value of our mortgage servicing rights usually tends to decline, also with some offsetting revenue effect. During
the fiscal year ended June 30, 2025, non-interest income increased $249,000 or 99.2% and totaled $500,000, primarily due to increased
net gains on sales of loans of $187,000.
In addition, our results of operations are affected
by the amount of noninterest expenses associated with mortgage banking activities, such as salaries and employee benefits (including
commissions), occupancy, equipment and data processing expense, and other operating costs. During periods of reduced loan demand, our
results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in
mortgage loan origination activity.
Liquidity Risk
Financial challenges at other banking institutions
could lead to depositor concerns that spread within the banking industry causing disruptive and destabilizing deposit outflows.
In March 2023, Silicon Valley Bank and Signature
Bank experienced large deposit outflows coupled with insufficient liquidity to meet withdrawal demands, resulting in the institutions
being placed into FDIC receivership. In May 2023, First Republic Bank was also placed into FDIC receivership. In the aftermath of these
events, there has been substantial market disruption and concerns that diminished depositor confidence could spread across the banking
industry, leading to deposit outflows that could destabilize other institutions. To strengthen public confidence in the banking system,
the FDIC took action to protect funds held in uninsured deposit accounts at Silicon Valley Bank, Signature Bank and First Republic Bank.
However, the FDIC has not committed to protecting uninsured deposits in other institutions that experience outsized withdrawal demands.
To further bolster the banking system, the Federal Reserve Board created a new Bank Term Funding Program to provide an additional source
of liquidity. At June 30, 2025, we had $29.2 million in available liquidity, including $19.5 million in cash and cash equivalents. Our
uninsured deposits are estimated to be approximately $37.1 million or 13.4% of total deposits. At June 30, 2025, we had off-balance sheet
liquidity sources totaling $80.3 million, including $71.0 million in additional borrowing capacity at the Federal Home Loan Bank of Cincinnati.
Notwithstanding our significant liquidity, large deposit outflows could adversely affect our financial condition and results of operations
and could result in the closure of the Banks. Furthermore, the recent bank failures may result in strengthening of capital and liquidity
rules which, if the revised rules apply to us, could adversely affect our financial condition and results of operations.
Insufficient liquidity or liquidity related
concerns could impair our ability to fund operations, pay dividends on outstanding shares of stock, and jeopardize our financial condition,
growth and prospects.
We require sufficient liquidity to fund loan
commitments, satisfy depositor withdrawal requests, make payments on our debt obligations as they become due, and meet other cash commitments.
Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate
assets or obtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. Our sources
of liquidity consist primarily of cash, assets readily convertible to cash (such as investment securities), increases in deposits, advances,
as needed, from the FHLB, borrowings, as needed, from the Federal Reserve Bank of Cleveland and other borrowings. Our access to funding
sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization
specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level
or cost of liquidity, or any liquidity related requirements imposed by our regulators, could impair our ability to fund operations, pay
dividends on outstanding shares of stock, enact stock repurchases, and meet our obligations as they become due and could have a material
adverse effect on our business, financial condition and results of operations.
On January 16, 2024, the Company announced
the suspension of quarterly dividends indefinitely. The suspension of our quarterly cash dividend could have an adverse impact on the
market price of our common stock.
On January 16, 2024, the Company announced the suspension of quarterly dividends indefinitely. Holders of our common stock are only entitled
to receive such dividends as our Board of Directors may declare out of funds available for such payments under applicable law and regulatory
guidance. We cannot predict when or whether the Company will be able to pay future common stock dividends and if so, the amount of any
such common stock dividends. Our ability to pay future dividends and if so at what level will also be dependent on numerous factors, including:
our ability to receive any required regulatory approval or non-objection to pay dividends to our shareholders; our ability to receive
regulatory approval or non-objection to pay dividends from First Federal Savings and Loan Association of Hazard and First Federal Savings
Bank of Kentucky to the Company in order for the Company to pay dividends to shareholders; our ability to fully and timely address the
deficiencies that resulted in the formal Agreement that First Federal Savings Bank of Kentucky entered into with the OCC on August 13,
2024, or any other deficiencies identified by the OCC or the Federal Reserve Bank of Cleveland; 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 First Federal Savings Bank of Kentucky’s ability to satisfy the IMCR’s imposed by the OCC, which
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 June 30, 2025, our common equity
tier 1 capital ratio was 16.83%, its tier 1 capital ratio was 16.83%, its total capital ratio was 16.83%, and its leverage ratio was 9.97%.
For additional information on the formal Agreement that First Federal Savings Bank of Kentucky has entered into with the OCC and the IMCR’s
imposed on First Federal Savings Bank of Kentucky by the OCC, please see “Management’s Discussion and Analysis-Regulatory
Developments Regarding First Federal of Kentucky.”
20
As the mutual holding company and majority
shareholder of Kentucky First Federal Bancorp, First Federal MHC must receive the approval of the Federal Reserve Board and the members
of First Federal MHC in order to waive the receipt of any dividends declared and paid by Kentucky First Federal Bancorp to its shareholders.
While Kentucky First Federal has previously received such approvals, those approvals have expired. The inability to receive those approvals
in the future would adversely impact Kentucky First Federal’s ability to pay dividends to its shareholders in the future.
In previous years, First Federal MHC has received Federal Reserve Board approval to waive quarterly dividends otherwise payable by the
Company totaling $0.40 per share annually beginning with the dividend paid on September 28, 2012 and continuing through the dividend payable
in the third quarter of 2024. However, First Federal MHC did not seek to obtain regulatory approval to waive dividends for periods after
the third quarter of 2024, and the prior Federal Reserve Boad approval to waive the payment of quarterly dividends that would otherwise
be payable to First Federal MHC has expired. To the extent the Company resumes the payment of dividends in future periods, it is expected
that First Federal MHC will again waive future dividends, except to the extent dividends are needed to fund First Federal MHC’s
continuing operations, subject to the ability of First Federal MHC to obtain regulatory approval of its requests to waive dividends and
to its ability to obtain member approval of dividend waivers. We cannot predict whether members will continue to approve annual dividend
waiver requests or whether the Federal Reserve Board will grant future dividend waiver requests and, if granted, there can be no assurance
as to the conditions, if any, the Federal Reserve Board will place on future dividend waiver requests by grandfathered mutual holding
companies such as First Federal MHC. If First Federal MHC is unable to waive the receipt of dividends, the Company’s ability to
pay dividends to our stockholders may be substantially impaired and the amounts of any such dividends may be significantly reduced.
Risks Related to Our Business and Industry
Generally
Strong competition within our market areas
could hurt our profits and slow growth.
Although we consider ourselves competitive in
our market areas, we face intense competition both in making loans and attracting deposits. Price competition for loans and deposits
might result in our earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions
with which we compete have substantially greater resources than we have and may offer services that we do not provide. 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. Our profitability will depend upon our continued ability to compete successfully in our market areas.
Risks Related to Laws and Regulations
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.
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. 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 formal written 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%. At June
30, 2025, First Federal of Kentucky exceeded the requirements of the IMCRs as its common equity tier 1 capital ratio was 16.83%, its
tier 1 capital ratio was 16.83%, its total capital ratio was 16.83%, and its leverage ratio was 9.97%.
21
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.
The Agreement will remain in effect until it
is amended by First Federal of Kentucky and the OCC, or the OCC modifies, waives or terminates the Agreement. While First Federal of
Kentucky is subject to the Agreement, we expect that the Board and management will be required to focus considerable time and attention
on taking corrective actions to comply with its terms.
First Federal of Kentucky’s Board and management
are committed to fully addressing the provisions of the Agreement within the required time frames. The OCC may determine, however, in
its sole discretion that the issues raised by the Agreement have not been addressed satisfactorily, or that any current or past actions,
violations or deficiencies could be the subject of further regulatory enforcement actions. If the OCC were to determine that First Federal
of Kentucky was not in compliance with the Agreement, it would have available various remedies, including among others, the power to
enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation
or practice, to direct an increase in capital, to restrict the growth of First Federal of Kentucky, to remove officers and/or directors,
to assess civil monetary penalties, and to impose limitations on our business at First Federal of Kentucky, any of which could negatively
affect our ability to implement our business plan and pay dividends on or our common stock, and may negatively affect the value of our
common stock as well as our financial condition and results of operations.
Changes in laws and regulations and the
cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.
The Banks are subject to extensive regulation,
supervision and examination by the OCC. The Company is subject to extensive regulation, supervision and examination by the Federal Reserve
Board. Such regulation and supervision govern the activities in which an institution and its holding company may engage and is intended
primarily for the protection of the federal deposit insurance fund and the depositors of the Banks rather than the protection of the
Company’s stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including
the imposition of restrictions on our operations, the classification of our assets and determination of the adequacy of the level of
our allowance for credit losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules,
standards, policies, and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives
and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form
of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes
in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results
of operations.
22
Non-compliance with the USA PATRIOT Act,
Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require
financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities.
If such activities are suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s
Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and
verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in
fines or sanctions, including restrictions on pursuing any acquisitions or establishing or acquiring new branches. The policies and procedures
we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations
of these laws and regulations. Furthermore, these rules and regulations continue to evolve and expand. We have not been subject to fines
or other penalties, or have suffered business or reputational harm, as a result of money laundering activities in the past.
Monetary policies and regulations of the
Federal Reserve Board could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic
conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve
Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these
objectives are open market purchases and sales of U.S. government securities, adjustments to the discount rate and changes in banks’
reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and
the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial
institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial
condition and results of operations cannot be predicted.
We may be adversely affected by recent
changes in U.S. tax laws and regulations.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, and the legislation commonly known as
the “One Big Beautiful Bill Act” signed into law on July 4, 2025, include a number of provisions that will have an impact
on the banking industry, borrowers and the market for residential real estate. Included in this legislation were: (i) a lower limit on
the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home
equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property
taxes and state and local income taxes.
The changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand
for such loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive,
demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as
a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce
our profitability and could materially adversely affect our business, financial condition and results of operations.
We may be subject to more stringent capital
requirements which could result in lower returns on equity, require the raising of additional capital, and limit our ability to pay dividends
or repurchase shares of our common stock.
Federal regulations establish minimum capital
requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital”
for calculating these ratios. The minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier
1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and
(iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation” buffer of 2.5%, and will result
in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%; (ii) a Tier 1 to risk-based assets capital ratio of
8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was phased in beginning in January 2016
at 0.625% of risk-weighted assets and increased 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. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
As of June 30, 2025, the capital levels of First Federal of Hazard and First Federal of Kentucky exceed the required capital amounts
according to the Community Bank Leverage Ratio regulations and we believe they also meet the fully-phased in minimum capital requirements.
As previously discussed, in August 2024, First Federal of Kentucky entered into an Agreement with the OCC. The OCC has also imposed IMCRs
which require First Federal of Kentucky to achieve and maintain capital levels in excess of the minimum capital standards required under
OCC’s Prompt Corrective Action framework. Under the IMCRs, First Federal of Kentucky must achieve and maintain a common equity
tier 1 capital ratio of at least 9.0%, a tier 1 capital ratio of at least 11.0%, a total capital ratio of at least 12.0%, and a leverage
ratio of at least 9.0%. At June 30, 2025, First Federal of Kentucky exceeded the requirements of the IMCRs as its common equity tier
1 capital ratio was 16.83%, its tier 1 capital ratio was 16.83%, its total capital ratio was 16.83%, and its leverage ratio was 9.97%.
See Note K-Stockholders’ Equity and Regulatory Capital of Notes to Consolidated Financial Statements.
23
The application of more stringent capital requirements
for us could among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory
actions constraining us from paying dividends or repurchasing shares if we were unable to comply with such requirements. See “Regulation
and Supervision—Regulation of Federal Savings Associations—Capital Requirements.”
The Federal Reserve Board may require us to commit capital resources
to support the Banks.
Federal law requires that a holding company act
as a source of financial and managerial strength to its subsidiary banks and to commit resources to support such subsidiary banks. Under
the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into
a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources
to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it
and therefore may be required to borrow the funds or raise capital. Thus, any borrowing or funds needed to raise capital required to
make a capital injection may be more expensive or difficult to obtain and could have an adverse effect on our business, financial condition
and results of operations.
Risks Related to Accounting Matters
Changes in management’s estimates
and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.
In preparing the periodic reports and consolidated
financial statements we file under the Securities Exchange Act of 1934, as amended, our management is and will be required under applicable
rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s
best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur
as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management
include our evaluation of the adequacy of our allowance for loan losses, the valuation of mortgage servicing rights, and the fair value
of financial instruments.
Changes in accounting standards could affect reported earnings.
The bodies responsible for establishing accounting
standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically
change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be
hard to predict and can materially impact how we record and report our consolidated financial condition and results of operations. In
some cases, we could be required to apply new or revised guidance retroactively.
24
Risks Related to Operational Matters
We are subject to certain risks in connection
with our use of technology.
Our security measures may not be sufficient to
mitigate the risk of a cyber attack. Communications and information systems are essential to the conduct of our business, as we use such
systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely
on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although
we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and
networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that
could have a security impact. If one or more of these events occur, this could jeopardize our or our customers’ confidential and
other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions
or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional
resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject
to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We
could also suffer significant reputational damage.
Security breaches in our Internet banking activities
could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from
using our Internet banking services that involve the transmission of confidential information. We rely on standard Internet security
systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect
our systems from compromises or breaches of our security measures, which could result in significant legal liability and significant
damage to our reputation and our business.
Our security measures may not protect us
from systems failures or interruptions.
While we have established policies and procedures
to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that
they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational
functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating
with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely
impacted. Threats to information security also exist in the processing of customer information through various other vendors and their
personnel.
The occurrence of any failures or interruptions
may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable
to us or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources,
if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers
and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could
have a material adverse effect on our financial condition and results of operations.
We must keep pace with technological change
to remain competitive.
Financial products and services have become increasingly
technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the
ability to keep pace with technological advances and to invest in new technology as it becomes available, as well as related essential
personnel. In addition, technology has lowered barriers to entry into the financial services market and made it possible for financial
technology companies and other non-bank entities to offer financial products and services traditionally provided by banks. The ability
to keep pace with technological change is important, and the failure to do so, due to cost, proficiency or otherwise, could have a material
adverse impact on our business and therefore on our financial condition and results of operations.
25
Risks Related to Our Holding Company Structure
First Federal MHC owns a majority of our
common stock and is able to exercise voting control over most matters put to a vote of stockholders, including preventing sale or merger
transactions you may like or a second-step conversion by First Federal MHC.
First Federal MHC owns a majority of our common
stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of stockholders. As a federally
chartered mutual holding company, the board of directors of First Federal MHC must ensure that the interests of depositors of First Federal
of Hazard are represented and considered in matters put to a vote of stockholders of Kentucky First. Therefore, the votes cast by First
Federal MHC may not be in your personal best interests as a stockholder. For example, First Federal MHC may exercise its voting control
to prevent a sale or merger transaction in which stockholders could receive a premium for their shares, prevent a second-step conversion
transaction by First Federal MHC or defeat a stockholder nominee for election to the Board of Directors of Kentucky First Federal. However,
implementation of a stock-based incentive plan will require approval of Kentucky First Federal’s stockholders other than First
Federal MHC. Federal Reserve Board regulations would likely prevent an acquisition of Kentucky First other than by another mutual holding
company or a mutual institution.
Our ability to pay future dividends is
subject to the ability of First Federal of Hazard and First Federal of Kentucky to make capital distributions to Kentucky First Federal
and the waiver of dividends by First Federal MHC. On January 16, 2024, we announced that the Board had determined to suspend the payment
of dividends indefinitely.
Our long-term ability to pay dividends to our
stockholders is based primarily upon the ability of the Banks to make capital distributions to Kentucky First Federal, and also on the
availability of cash at the holding company level in the event earnings are not sufficient to pay dividends according to the cash dividend
payout policy. Under Office of the Comptroller of the Currency safe harbor regulations, the Banks may each distribute to Kentucky First
capital not exceeding net retained income for the current calendar year and the prior two calendar years.
First Federal MHC owns a majority of Kentucky
First Federal’s outstanding stock. First Federal MHC has historically waived its right to dividends on the Kentucky First common
shares it owns and, without the waiver of such dividends, the amount of dividends paid to public stockholders is significantly higher
than it would be if First Federal MHC accepted dividends. First Federal MHC is not required to waive dividends, but Kentucky First expects
this practice to continue, subject to member and regulatory approval annually, to the extent Kentucky First continues to pay dividends
in future periods. First Federal MHC is required to obtain a waiver from the Federal Reserve Board allowing it to waive its right to
dividends.
The Federal Reserve Board in 2011 issued regulations
that govern the activities of Kentucky First Federal and First Federal MHC and the regulations were implemented in the fourth quarter
of 2011. Under Section 239.8(d) of the Federal Reserve Board’s Regulation MM governing dividend waivers, a mutual holding company
may waive its right to dividends on shares of its subsidiary if the mutual holding company gives written notice of the waiver to the
Federal Reserve Board and the Federal Reserve Board does not object. For a company such as First Federal MHC that waived dividends prior
to December 1, 2009, the Federal Reserve Board may not object to a dividend waiver if such waiver would not be detrimental to the safety
and soundness of the savings association subsidiary and the board of directors of the mutual holding company expressly determines that
such dividend waiver is consistent with the board’s fiduciary duties to the members of the mutual holding company.
To address concerns with respect to the conflict
of interest created by dividend waivers, Regulation MM requires the board of directors of the mutual holding company to adopt a resolution
that describes the conflict of interest that exists because of a director’s ownership of stock in the subsidiary declaring the
dividends and any actions the mutual holding company board have taken to eliminate the conflict of interest, such as the directors’
waiving their right to receive dividends. Also, the resolution must contain an affirmation that a majority of the mutual members eligible
to vote have, within the 12 months prior to the declaration date of the dividend, voted to approve the waiver of dividends.
First Federal MHC has received Federal Reserve
Board approval to waive quarterly dividends totaling $0.40 per share annually beginning with the dividend paid on September 28, 2012
and continuing through the dividend payable in the third quarter of 2024. It is expected that First Federal MHC will continue to waive
future dividends, to the extent Kentucky First continues to pay dividends in future periods, except to the extent dividends are needed
to fund First Federal MHC’s continuing operations, subject to the ability of First Federal MHC to obtain regulatory approval of
its requests to waive dividends and to its ability to obtain member approval of dividend waivers. We cannot predict whether members will
continue to approve annual dividend waiver requests or whether the Federal Reserve Board will grant future dividend waiver requests and,
if granted, there can be no assurance as to the conditions, if any, the Federal Reserve Board will place on future dividend waiver requests
by grandfathered mutual holding companies such as First Federal MHC. If First Federal MHC is unable to waive the receipt of dividends,
our ability to pay dividends to our stockholders may be substantially impaired and the amounts of any such dividends may be significantly
reduced.
On January 16, 2024, we announced that the Board
had determined to suspend the payment of dividends indefinitely. For additional information regarding suspension of our quarterly dividend,
please see “Liquidity Risk - On January 16, 2024, the Company announced the suspension of quarterly dividends
indefinitely. The suspension of our quarterly cash dividend could have an adverse impact on the market price of our common stock.”
26
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity Risk Management and Strategy
The Company regards information and data as valuable
assets. As a result, we have implemented safeguards to protect corporate informational and data assets. Associated and established technology
resources maintain the integrity, availability, and privacy of confidential information of the respective assets. Additionally, we maintain
a similar risk-based approach to our third-party vendors including identifying and overseeing cybersecurity risks they present.
Integration into Overall Risk Management System
The Company employs comprehensive methodologies
for risk assessment and diligently identifies and evaluates potential cybersecurity threats and vulnerabilities across our systems, networks
and data assets. This process involves regular examinations of emerging threats, conducting penetration tests, vulnerability scanning
and thorough analysis of industry-specific risks.
The Company continues to expand investments in
information technology security, including continuous end-user training, layered defenses, identifying and protecting critical assets,
strengthening monitoring and alerting.
The Company’s Information Security Officer
(“ISO”) is responsible for completing additional mandatory training to understand the processes, procedures, and technical
requirements for securing information assets across the Company.
The Company has developed an Incident Response
Plan to guide its actions in responding to real and suspected information security incidents. This includes unlawful, unauthorized, or
unacceptable actions that involve a computer system or a computer network such as Distributed Denial of Service attacks, Corporate Account
Takeover schemes, or ransomware. Cybersecurity threats that are identified and deemed material are escalated and communicated directly
to the Incident Response Team, in collaboration with relevant information technology personnel, insurance providers, legal counsels and
when necessary, external cybersecurity firms specializing in forensic investigations.
The Company sets forth enterprise-wide coordinated
responses to identified threats, ensuring timely mitigation and remediation, and facilitating awareness and communication. Tabletop exercises
are held regularly at the senior and executive management levels to validate roles and responsibilities, and response protocols respective
to cybersecurity threats.
Third-party Access
The Company has a fully integrated third-party
risk management program to identify, assess, monitor and mitigate risks associated with third-party relationships, including cybersecurity
risks. Under the program, risk ratings are assigned to each of the vendors based on an assessment of the vendor and its access to networks,
systems, and confidential information. An assessment is conducted on each vendor to identify and measure the risks from cybersecurity
threats that could impact our customer’s data and our environment. Third parties that have access to our systems or customer data
must have appropriate technical and organizational security measures and security control principles based on commercially acceptable
security standards, and we require third parties in this class to agree by contract to manage their cybersecurity risks.
Material Cybersecurity Threat Risks
The Company has not experienced any material
losses relating to cybersecurity threats or incidents for the year ended June 30, 2025. We are not aware of any risks from cybersecurity
threats, including as a result of any previous cybersecurity incidents that have materially affected or are reasonably likely to materially
affect the Company, including our business strategy, results of operations or financial condition. Although we have a robust cybersecurity
program that is designed to assess, identify, and manage material risks from cybersecurity threats, we cannot provide absolute surety
that we have properly identified or mitigated all vulnerabilities or risks of incidents. The Company, and the third parties that the
Company engages, are subject to constant and evolving threats of attack and cybersecurity incidents may be more difficult to detect for
periods of time. A cybersecurity incident could harm our business strategy, results of operations, financial condition, reputation, and/or
subject us to regulatory actions or litigation which may result in fines, judgments or indictments.
27
Cybersecurity Governance
The Board of Directors is acutely aware of the
critical nature of managing risks associated with cybersecurity threats. The Board has oversight responsibilities to ensure effective
governance in managing these risks because it recognizes the significance of these threats to our operational integrity, shareholder
and customer confidence and reputation.
Board of Directors Oversight
The Board is responsible for the oversight of
cybersecurity risk management and is composed of members with expertise in risk management, technology, and finance, thereby equipping
them to manage and prevent cybersecurity risks effectively.
Management’s Role in Managing Risk
The ISO plays a pivotal role in informing the
Board of Directors on cybersecurity risks. The ISO, other information security staff, and members of senior management meet regularly
as the Technology Steering Committee. Reports of their meetings are shared with the boards of our subsidiary banks. Committee reports
provide comprehensive briefings to both the Board and the Audit Committee as part of managements reporting. These briefings encompass
a broad range of topics, including:
● Current cybersecurity landscape and emerging threats;
● Status of ongoing cybersecurity initiatives and strategies;
● Incident reports and issues identified from any cybersecurity events; and
● Compliance with regulatory requirements and industry standards.
In addition to our regularly scheduled Board
meetings, the ISO regularly communicates with senior staff regarding emerging or potential cybersecurity risks. They discuss any significant
developments in the cybersecurity domain, which when reported to the Board, ensures the Board’s oversight is proactive and responsive.
The Board actively participates in strategic decisions related to cybersecurity, offering guidance and approval for major initiatives.
This involvement ensures that cybersecurity considerations are integrated into the broader strategic objectives of the Company. The Board
closely reviews these reports of the Bank’s cybersecurity posture and the effectiveness of its risk management strategies prior
to approval. This review helps in identifying areas for improvement and ensuring the alignment of cybersecurity efforts with the overall
risk management framework.
Cyber Risk Management Personnel
The ISO directly reports to the CEO. The ISO
regularly meets with the CEO to update and discuss any cybersecurity risks and incidents affecting the Company. This ensures that the
highest levels of management are kept abreast of the cybersecurity posture and potential risks facing the Company. Furthermore, all significant
cybersecurity matters and strategic risk management decisions are promptly escalated to the Board of Directors, ensuring that they have
an up-to-date, comprehensive understanding of and can provide guidance on critical cybersecurity issues.
Primary responsibility for assessing and providing
strategic direction to our cybersecurity program resides with our ISO. The ISO’s experience includes prior leadership roles within
the Company, where they developed an expert level of understanding of the intersection between financial regulations and cloud-based
technologies. The ISO and other information systems staff possess in-depth knowledge and experience which are instrumental in developing
and executing our cybersecurity strategies. The ISO and the Tech Steering Committee oversee our governance programs, work with our technology-focused
leaders and partners to align security and compliance, and have developed our employee security awareness training program.
Monitoring Cybersecurity Incidents
The ISO and other information security staff
utilizes vendor relationships and various other internet based daily updates for the latest developments in cybersecurity, including
potential threats and innovative risk management techniques. This knowledge is crucial for the effective prevention, detection, mitigation,
and remediation of cybersecurity incidents. The ISO provides structure for clear processes to ensure the regular monitoring of our information
systems. This includes the deployment of advanced security measures and regular system audits to identify potential vulnerabilities.
In the event of a cybersecurity incident, we believe we are equipped with a well-defined Incident Response Plan that is adequately resourced.
This plan includes immediate actions to mitigate the impact and long-term strategies for remediation and prevent future incidents.
28
Item 2. Properties.
We conduct our business through seven offices.
The following table sets forth certain information relating to our offices at June 30, 2025.
(Dollars in thousands)
The net book value of our investment in premises
and equipment was $4.2 million at June 30, 2025. See Note E of Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings.
From time to time, we may be defendants in claims
and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests,
claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any
pending legal proceedings that we believe could have a material adverse effect on our financial condition, results of operations or cash
flows.
Item 4. Mine Safety Disclosures.
Not applicable.
29
PART II
Item 5.Market for the
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(b) Not applicable.
April 2025 Beginning date: April 1 Ending date: April 30 — — — —
May 2025 Beginning date: May 1 Ending date: May 31 — — — —
June 2025 Beginning date: June 1 Ending date: June 30 — — — —
Total — — — —
30
Item 6. [Reserved].
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
The information contained in the section captioned
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report,
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
This item is not applicable, as the Company is
a smaller reporting company.
Item 8. Financial Statements and Supplementary
Data.
The Consolidated Financial Statements, Notes
to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm and Selected Financial Data, which are
listed under Item 15 herein, are included in the Annual Report and are incorporated herein by reference.
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Disclosure Controls and Procedures
The Company’s management, including the
Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal
financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits
under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
(b) Internal Control Over Financial Reporting
Parent Company of First Federal Savings and Loan Association of
Hazard and First Federal Savings Bank of Kentucky
31
MANAGEMENT’S ANNUAL REPORT ON INTERNAL
CONTROL
OVER FINANCIAL REPORTING
Management of Kentucky First Federal Bancorp
(the “Company”) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements
included in this annual report. The Company’s consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and, as such, include some amounts that are based on the best estimates
and judgments of management.
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting. The internal control system is designed to provide
reasonable assurance to management and the Board of Directors regarding the reliability of the company’s financial reporting and
the preparation and presentation of financial statements for external reporting purposes in conformity with accounting principles generally
accepted in the United States of America, as well as to safeguard assets from unauthorized use or disposition. The system of internal
control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal
audit with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control
system, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of
the circumvention or overriding controls. Accordingly, even an effective internal control system can provide only reasonable assurance
with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over
time.