Kentucky First Federal Bancorp 10-K for FY2023
Kentucky First Federal Bancorp (KFFB)
About this 10-K
Kentucky First Federal Bancorp filed this 10-K on September 28, 2023, covering the fiscal year ended June 30, 2023 (FY2023).
Headline figures
Fiscal year ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $933K
- down 41.3% from net income of $1.59M a year earlier
- Diluted EPS
- $0.11
- down 42.1% from $0.19 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the fiscal year ended
or
For the transition period from _______ to _______
Commission file number
(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:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
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 ☐
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 ☐
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.
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).
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 | ☐ | |
| ☒ | 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 $
Number of shares of common stock outstanding as
of September 24, 2023:
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:
| 1. | Portions of the Annual Report to Stockholders for the Fiscal Year Ended June 30, 2023. (Part II) |
| 2. | Portions of Proxy Statement for the 2023 Annual Meeting of Stockholders. (Part III) |
INDEX
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PART I
Item 1. Business.
Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to Kentucky First Federal Bancorp or its management are intended to identify such forward looking statements. 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, interest rate environment, competitive conditions in the financial services industry; changes in 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; the impact of the interest rate environment on our business, financial condition and results of operations; competitive pressures among financial services companies; the ability to attract, develop and retain qualified employees; the ability to pay future dividends at currently expected rates; 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, the potential effects of the COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic), the impacts related to or resulting from Russia’s military action in Ukraine, including the broader impacts to financial markets, and the other matters mentioned in Item 1A of this 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. Accordingly, actual results may differ from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that results expressed therein will be achieved.
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.
At June 30, 2023, Kentucky First had total assets of $349.0 million, deposits of $226.3 million and stockholders’ equity of $50.7 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.”
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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, 2023, First Federal of Hazard had total assets of $89.1 million, net loans of $81.0 million, total mortgage-backed and other securities of $4.3 million, deposits of $45.5 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, 2023, First Federal of Kentucky had total assets of $260.4 million, net loans of $232.7 million, total mortgage-backed and other securities of $8.1 million, deposits of $182.8 million and total capital of $30.5 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 three distinct 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 $43,931 compared to personal income of $52,326 in Kentucky and $74,580 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, consists service sector (50.4%), retail trade (23.6%), public administration (7.0%), and finance, insurance and real estate (6.8%). During the last five years, the unemployment rate (not seasonally adjusted) has been higher than most regions, and in July 2023, was 6.6%, compared to 3.8% in Kentucky and 3.8% 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 services sector employs about 33.4% of the workforce followed by public administration (31.0%), followed by the retail (11.4%), and construction (7.8%.). The unemployment rate was 4.1% for July 2023. The median household income in Franklin County is $64,016.
Boyle County has a population of approximately 31,000. The services sector employs about 43.6% of the work force, while retail trade represents the next largest job counts with approximately 18.6% of the workforce. The transportation and communications sector and the manufacturing sector represent approximately 10.8% and 10.6% of the workforces, respectively. Centre College is one of the larger employers in the community. The unemployment rate was 5.1% in July 2023, while the median household income in Boyle County is $59,250.
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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. 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, 2023, residential mortgage loans including construction loans and multi-family totaled $271.4 million, or 85.9%, 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, 2023, the Company’s loan portfolio included $237.4 million in adjustable-rate residential mortgage loans, or 87.5% 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.
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. As interest rates declined and remained low over the past few years, we have experienced high levels of loan repayments and refinancings.
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. At June 30, 2023, construction loans totaled $12.3 million, or 3.9%, 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.
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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, 2023, multi-family loans totaled $19.1 million, or 6.0%, 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, 2023, nonresidential real estate loans totaled $30.2 million, or 9.6% 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, 2023, commercial non-mortgage loans totaled $1.2 million, or 0.4%, 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, 2023, our consumer loan balance totaled $10.8 million, or 3.5%, of our total loan portfolio. Of the consumer loan balance at June 30, 2023, $9.2 million were home equity loans, $855,000 were loans secured by savings deposits and $715,000 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, 2023, the total outstanding home equity loans amounted to 2.9% of the Company’s total loan portfolio.
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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, 2023, loans on savings accounts totaled 0.3% 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, 2023, 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, 2023, $21.7 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 committee can approve or deny loans on one- to four-family properties 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 which are one- to four-family properties. 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, 2023, the regulatory limit on loans to one borrower was $2.8 million for First Federal of Hazard and $4.6 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. As residential loans are approved in the normal course of business, and those loans are underwritten to the standards of the Banks, management does not believe alteration of the allowance for loan losses is warranted. At June 30, 2023, no commitment losses were reflected in a separate liability.
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.
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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, 2023, 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 $2.8 million at June 30, 2023. 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 $21.0 million in such deposits at June 30, 2023. 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 $5.2 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, 2022, the latest date for which data is available, First Federal of Hazard had a deposit market share of 6.9% 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 38.7%, 24.0% and 27.6%, 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, 2022, First Federal of Kentucky had deposit market share of 8.2%, 7.0% and 16.9% 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 24.5%, Wesbanco Bank, Inc. (Wesbanco) at 17.3% and Community Trust Bancorp, Inc., (Community Trust Bank) at 6.8% market share in the three-county area. Wesbanco Bank, Inc., Boyle Bancorp, Inc., and Community Trust Bancorp, Inc. had assets at June 30, 2023, of $17.4 billion, $921.0 million and $5.5 billion, respectively. The Bank also faces considerable competition from credit unions including the Commonwealth Credit Union ($1.8 billion in assets) and the Expree Credit Union ($92.0 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, 2023, we had 60 full-time employees and two 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.
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.
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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, 2023, 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.
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 savings associations, the severity of which depends upon the association’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized association, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OCC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and undercapitalized associations are subject to additional mandatory and discretionary measures.
Loans to One Borrower. Federal law provides that federal savings associations are generally subject to the limits on loans to one borrower applicable to national banks. Subject to certain exceptions, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral, which generally does not include real estate.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OCC determines that a federal savings association fails to meet any standard prescribed by the guidelines, the OCC may require the institution to submit an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the OCC may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease-and-desist order or the imposition of civil money penalties.
Limitation on Capital Distributions. OCC regulations impose limitations upon all capital distributions by a federal savings association, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OCC is required before any capital distribution if, among other circumstances the association will not remain an “eligible” savings association (i.e., generally, well capitalized and with examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the federal savings association is directly or indirectly controlled by a mutual savings and loan holding company or the distribution would otherwise be contrary to a statute, regulation or agreement with the. In addition, the federal savings association must provide 30 days prior notice to the Federal Reserve Board of the capital distribution if, like First Federal of Hazard and First Federal of Kentucky, it is a subsidiary of a holding company. If First Federal of Hazard’s or First Federal of Kentucky’s capital were ever to fall below its regulatory requirements or the OCC notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the OCC could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.
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Qualified Thrift Lender Test. Federal law requires federal savings associations to meet a qualified thrift lender test. Under the test, a federal savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, education loans, credit card loans and small business loans) in at least 9 months out of each 12-month period.
A savings association that fails the qualified thrift lender test is immediately subject to certain operating restrictions, including restrictions on new activities, branching and the payment of dividends. The Dodd-Frank Act also specifies that failing the qualified thrift lender test is a violation of law that could result in an enforcement action. Failure to correct the violation within 12 months will cause the association’s savings and loan holding company to register as and be deemed a bank holding company. At June 30, 2023, First Federal of Hazard and First Federal of Kentucky were in compliance with the qualified thrift lender test in each of the prior 12 months.
Transactions with Related Parties. Federal law limits the authority of First Federal of Hazard and First Federal of Kentucky to lend to, and engage in certain other transactions (collectively, “covered transactions”), with “affiliates” (e.g., any company that controls or is under common control with an insured depository institution, including Kentucky First, First Federal MHC and their non-savings institution subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Loans and other specified transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low-quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the association as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no federal savings association may purchase the securities of any affiliate other than a subsidiary. Transactions between sister depository institutions that are 80% or more owned by the same holding company are exempt from the quantitative limits and collateral requirements.
The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, that law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, First Federal of Hazard’s and First Federal of Kentucky’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law restricts both the individual and aggregate amount of loans First Federal of Hazard and First Federal of Kentucky may make to insiders based, in part, on First Federal of Hazard’s and First Federal of Kentucky’s respective capital positions and requires certain board approval procedures to be followed. Such loans must be made on terms, including rates and collateral, substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or any other unfavorable features. There are additional restrictions applicable to loans to executive officers.
Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement actions may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to appointment of a receiver or conservator or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has authority to recommend to the OCC that enforcement action to be taken with respect to a particular savings association. If action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations of law.
Assessments. Federal savings associations pay assessments to the OCC to fund its operations. The general assessments, paid on a semi-annual basis, are based upon the savings association’s total assets, including consolidated subsidiaries, its financial condition and the complexity of its portfolio.
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Insurance of Deposit Accounts. The deposits of both First Federal of Hazard and First Federal of Kentucky are insured up to applicable limits by the DIF administered by the FDIC. Deposit insurance per account owner is currently $250,000. Under the FDIC’s risk-based assessment system, insured depository are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower assessments. The FDIC may adjust the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No institution may pay a dividend if in default of the federal deposit insurance assessment. Assessment rates currently range from 1.5 to 30 basis points of total average assets (excluding PPP loans) less average tangible equity.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Banks. Management cannot predict what insurance assessment rates will be in the future.
Federal Home Loan Bank System. First Federal of Hazard and First Federal of Kentucky are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. As members of the Federal Home Loan Bank of Cincinnati, First Federal of Hazard and First Federal of Kentucky are each required to acquire and hold shares of capital stock in that Federal Home Loan Bank. First Federal of Hazard and First Federal of Kentucky were in compliance with this requirement with investments in Federal Home Loan Bank of Cincinnati stock at June 30, 2023, of $1.3 million and $3.4 million, respectively.
Reserve Requirements. Federal Reserve Board regulations require insured depository institutions to maintain non-interest earning reserves against their transaction accounts (primary interest-bearing and regular checking accounts). Required reserves must be in the form of vault cash and if vault cash does not fully satisfy the required reserves, requirements may be satisfied in the form of a balance maintained with the appropriate Federal Reserve Bank. The Federal Reserve Board generally makes annual adjustments to the tiered cash reserve requirements, however, effective March 26, 2020, the reserve requirement was set to zero for all depository institutions.
Community Reinvestment Act. All insured depository institutions, including federal savings associations have a continuing and affirmative obligation consistent with safe and sound operation to help meet the credit needs of their entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the OCC, in connection with its examination of a savings association, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications made by such association, including applications for mergers and acquisitions, and applications to open, relocate or close a branch or facility.
The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the OCC to provide a written evaluation of an institution’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system. First Federal of Hazard and First Federal of Kentucky each received a “Satisfactory” rating as a result of their most recent Community Reinvestment Act assessments.
Privacy Standards. The Banks are subject to FDIC regulations regarding the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require each of the Banks to disclose its privacy policy, including identifying with whom it shares “non-public personal information” to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require each of the Banks to provide its customers with initial notices that accurately reflect its privacy policies and practices, to make its privacy policies available to customers through its website, and to provide its customers with the ability to “opt-out” of having the Bank share their non-public personal information with unaffiliated third parties before it can disclose such information, subject to certain exceptions.
Cybersecurity. In addition to the provisions in the Gramm-Leach-Bliley Act (discussed above), the Company and its subsidiaries are subject to many federal and state laws, regulations and regulatory interpretations which impose standards and requirements related to cybersecurity. For example, federal regulatory statements regarding cybersecurity indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. Additionally, the statements indicate that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. Financial institutions that fail to observe this regulatory guidance on cybersecurity may be subject to various regulatory sanctions, including financial penalties.
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Anti-Money Laundering and OFAC. Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The U.S. Department of the Treasury’s Office of Foreign Assets Control, or “OFAC,” is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities. The U.S. Treasury Department’s Financial Crises Enforcement Network rules include customer due diligence requirements for banks, including a requirement to identify and verify the identity of beneficial owners of customers that are legal entities, subject to certain exclusions and exemptions.
Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Other Regulations. Interest and other charges collected or contracted for by First Federal of Hazard and First Federal of Kentucky are subject to state usury laws and federal laws concerning interest rates. The operations of First Federal of Hazard and First Federal of Kentucky are also subject to federal laws applicable to credit transactions, such as the:
| ● | Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
| ● | Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| ● | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
| ● | Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; |
| ● | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; |
| ● | Truth in Savings Act, prescribing disclosure and advertising requirements with respect to deposit accounts; and |
| ● | Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
The operations of First Federal of Hazard and First Federal of Kentucky also are subject to the:
| ● | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| ● | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
| ● | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and |
| ● | The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations. |
Holding Company Regulation
General. Kentucky First and First Federal MHC are savings and loan holding companies within the meaning of federal law. As such, they are registered with the Federal Reserve Board and are subject to Federal Reserve Board regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the Federal Reserve Board has enforcement authority over Kentucky First and First Federal MHC and their non-savings association subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to First Federal of Hazard and/or First Federal of Kentucky.
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Restrictions Applicable to Mutual Holding Companies. Federal law and Federal Reserve Board regulations, limit the activities of a mutual holding company, such as First Federal MHC, to the following: (1) investing in the stock of insured savings association and acquiring them by means of a merger or acquisition; (2) investing in a corporation the capital stock of which may be lawfully purchased by a savings association under federal law; (3) furnishing or performing management services for a savings association subsidiary of a savings and loan holding company; (4) conducting an insurance agency or escrow business; (5) holding, managing or liquidating assets owned or acquired from a savings association subsidiary of the savings and loan holding company; (6) holding or managing properties used or occupied by a savings association subsidiary of the savings and loan holding company; (7) acting as trustee under deed of trust; (8) any activity permitted for multiple savings and loan holding companies by Federal Reserve Board regulations and; (9) any activity permitted by the Federal Reserve Board for bank holding companies and financial holding companies
Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings association, or its holding company, without prior written approval of the Federal Reserve Board. Federal law also prohibits a savings and loan holding company from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, except: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings association specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital Requirements. Savings and loan holding companies are generally subject to consolidated capital requirements. The Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and EGRRCP directed the Federal Reserve Board to increase the asset threshold for the exception to $3.0 billion, which was done in 2018. Consequently, savings and loan holding companies of less than $3.0 billion of assets, such as First Federal, MHC and Kentucky First, are exempt from consolidated capital requirements unless otherwise directed by the Federal Reserve Board in individual.
Source of Strength. Federal Reserve Board regulations require savings and loan holding companies to act as a source of financial and managerial strength to their subsidiary savings associations. The Dodd-Frank Act codified the requirement that savings and loan holding companies act as a source of financial strength to their insured depository institution subsidiaries. As a result, savings and loan holding companies are expected to commit resources to support subsidiary savings associations, including at times when the savings and loan holding company may not be in a financial position to provide such resources.
Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expressed the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt correction action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s insured depository institution subsidiary is classified as “undercapitalized.” See “Federal Savings Association Regulation – Prompt Corrective Regulatory Action.”
Stock Holding Company Subsidiary Regulation. Federal Reserve Board regulations govern the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies. Kentucky First is the stock holding company subsidiary of First Federal MHC. Kentucky First is only permitted to engage in activities that are permitted for First Federal MHC subject to the same restrictions and conditions.
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Waivers of Dividends by First Federal MHC. Federal Reserve Board regulations require First Federal MHC to notify the Federal Reserve Board if it proposes to waive the right to receive dividends declared by Kentucky First. The Dodd-Frank Act specified that dividends may be waived if certain conditions are met, including that the Federal Reserve Board does not object after being given written notice of the dividend and proposed waiver. The Federal Reserve Board may not object to such a waiver (i) if the mutual holding company involved has, prior to December 1, 2009, reorganized into a mutual holding company structure, engaged in a minority stock offering and waived dividends it had a right to receive; (ii) the board of directors of the mutual holding company expressly determines that a waiver of the dividend is consistent with its fiduciary duties to members and (iii) the waiver would not be detrimental to the safe and sound operation of the savings association subsidiaries of the holding company. Beginning with the dividend paid in September 2012, First Federal MHC has annually sought member approval to obtain Federal Reserve Board approval to waive the MHC’s dividends from the Company. This effort has been successful each year, including an approval in 2023, which will cover quarterly dividends of $0.10 per common share through May 2024. It is expected that First Federal MHC will continue to 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. For more information, see Item 1A, “Risk Factors – Our ability to pay dividends is subject to the ability of First Federal of Hazard and First Federal of Kentucky to make capital distributions to Kentucky First and the waiver of dividends by First Federal MHC.”
Conversion of First Federal MHC to Stock Form. Federal Reserve Board regulations permit First Federal MHC to convert from the mutual form of organization to the capital stock form of organization. In a conversion transaction, a new holding company would be formed as successor to First Federal MHC, its corporate existence would end, and certain depositors would receive the right to subscribe for additional shares of the new holding company. In a conversion transaction, each share of common stock held by stockholders other than First Federal MHC would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio determined at the time of conversion that ensures that stockholders other than First Federal MHC own the same percentage of common stock in the new holding company as they owned in us immediately before conversion. Under Federal Reserve Board regulations, stockholders other than First Federal MHC would not be diluted because of any dividends waived by First Federal MHC (and waived dividends would not be considered in determining an appropriate exchange ratio, provided that the mutual holding company involved was formed, engaged in a minority offering and waived dividends prior to December 1, 2009), in the event First Federal MHC converts to stock form. First Federal MHC was formed, engaged in a minority stock offering and waived dividends prior to December 1, 2009. The total number of shares held by stockholders other than First Federal MHC after a conversion transaction also would be increased by any purchases by stockholders other than First Federal MHC in the stock offering conducted as part of the conversion transaction.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings association or as otherwise defined by the Federal Reserve Board. Under the Change in Bank Control Act, the Federal Reserve Board has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.
Future Legislation. Federal and state legislatures may introduce legislation that will impact the financial services industry. In addition, federal banking agencies may introduce regulatory initiatives that are likely to impact the financial services industry, generally. Such initiatives may include proposals to expand or contract the powers of savings and loan holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, or, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to Kentucky First or any of its subsidiaries could have a material effect on the business of the Company.
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Federal and State Taxation
General. We report our income on a fiscal year basis using the cash method of accounting. See Note H-Federal Income Taxes in the Notes to Consolidated Financial Statements for a description of the change in accounting method available through the Tax Cuts and Jobs Act.
Federal Taxation. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly the reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. Our federal income tax returns are subject to examination for years 2017 and later. The federal statutory tax rate was 21% for the fiscal years ended June 30, 2023 and 2022.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted, which amended the Internal Revenue Code of 1986, reducing tax rates and modifying certain policies, credits, and deductions for individuals and businesses. Included in this legislation was a reduction of the federal corporate income tax rate from 35% to 21%. The Tax Cuts and Jobs Act also added limitations on the deductibility of business interest expense. While this limitation should not impact the deductibility of the Company’s interest expense, the limitation could impact our commercial borrowers. The Tax Cuts and Jobs Act also includes changes to personal income taxes, including: (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgages; (ii) the elimination of interest deductions for home equity loans; and (iii) a limitation on the deductibility of property taxes and state and local income taxes.
For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. First Federal of Hazard did not qualify for such favorable tax treatment for any years through 1996. Approximately $5.2 million of First Federal of Kentucky First’s accumulated bad debt reserves would not be recaptured into taxable income unless Frankfort First makes a “non-dividend distribution” to Kentucky First as described below. If First Federal of Hazard or First Federal of Kentucky makes “non-dividend distributions” to us, the distributions will be considered to have been made from First Federal of Hazard’s and First Federal of Kentucky’s unrecaptured tax bad debt reserves, including the balance of their reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from First Federal of Kentucky’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in First Federal of Kentucky’s taxable income. Non-dividend distributions include distributions in excess of First Federal of Kentucky’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of First Federal of Kentucky’s current or accumulated earnings and profits will not be so included in First Federal of Kentucky’s taxable income.
The amount of additional taxable income triggered by a non-dividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if First Federal of Kentucky makes a non-dividend distribution to us, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 21% federal corporate income tax rate. First Federal of Kentucky does not intend to pay dividends in the future that would result in a recapture of any portion of its bad debt reserves.
State Taxation. Although First Federal MHC and Kentucky First are subject to the Kentucky corporation income tax and state corporation license tax (franchise tax), the corporation license tax is repealed effective for tax periods ending on or after December 31, 2005. Gross income of corporations subject to Kentucky income tax is similar to income reported for federal income tax purposes except that dividend income, among other income items, is exempt from taxation. For First Federal MHC and Kentucky First tax years beginning July 1, 2005, the corporations are subject to an alternative minimum income tax. Corporations must pay the greater of the income tax, the alternative tax or $175. The corporations can choose between two methods to calculate the alternative minimum; 9.5 cents per $100 of the corporation’s gross receipts, or 75 cents per $100 of the corporation’s Kentucky gross profits. Kentucky gross profits means Kentucky gross receipts reduced by returns and allowances attributable to Kentucky gross receipts, less Kentucky cost of goods sold. The corporations, in their capacity as holding companies for financial institutions, do not have a material amount of cost of goods sold. Although the corporate license tax rate is 0.21% of total capital employed in Kentucky, a bank holding company, as defined in Kentucky Revised Statutes 287.900, is allowed to deduct from its taxable capital, the book value of its investment in the stock or securities of subsidiaries that are subject to the bank franchise tax.
First Federal of Hazard and First Federal of Kentucky are subject to both the Kentucky corporation income tax and corporation license tax. On March 26, 2019, HB 354 was enacted which sunsets the Savings and Loan Tax after 2020 and subjects financial institutions to the corporate income tax beginning January 1, 2021. Effective January 1, 2021, the Savings and Loan Tax no longer applies to financial institutions.
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Item 1A. Risk Factors.
Interest Rate Risk
Rising interest rates may hurt our profits and asset values.
In response to the COVID-19 virus pandemic, the Federal Reserve Board’s Open Market Committee (“FOMC”) decreased interest rates to near zero in March 2020. The low interest rate environment remained in effect until March 2022. However, in light of elevated inflation and a strong labor market, the FOMC commenced increasing the target range for the federal funds rate. Since maintaining a federal funds rate target in the range of 0% to 0.25% from March 2020 through 2021, the Federal Reserve Board made multiple rate increases during 2022 and 2023 increasing the target federal funds rate to a range of 5.00% to 5.25% as of June 2023, and subsequently to a range of 5.25% to 5.50% as of August 2023. The future direction and levels of interest rates remain uncertain.
The increase in interest rates has caused our net interest income to decline. Net income decreased $657,000 or 41.3% compared to the fiscal year ended June 30, 2022 primarily due to decreased net interest income, decreased non-interest income, increased provision for loan losses, and increased non-interest expenses, which were somewhat offset by decreased income taxes. Net interest income decreased $304,000 or 3.3% and totaled $8.9 million for the year just ended, as interest income increased $1.8 million or 16.9% to $12.8 million and interest expense increased $2.1 million or 122.5% to $3.9 million. Our funding sources repriced more quickly during the interest rate increases than our assets. Consequently, the increase in our interest expense was attributed primarily to higher average rates paid on both deposits and FHLB advances, while the increase in our interest income was a combination of both higher average balances and higher rates earned on those assets. If interest rates continue to rise, 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.
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, 2023, 87.5% of our residential real estate loan portfolio were 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.
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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 2023. Inflation could lead to increased costs to our customers, making it more difficult for them to repay their loans or other obligations. High 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 loan 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 loan losses, 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 loan losses 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. Our emphasis on loan growth and on increasing our portfolio, as well as any future credit deterioration, will 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 loan losses 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 96.3% of our loan portfolio at June 30, 2023 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 loan 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, 2023, $240.1 million, or 76.1%, 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.
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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, 2023, non-interest income decreased $213,000 or 41.4% and totaled $302,000, primarily due to decreased gains on loan sales.
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, 2023, we had $20.2 million in available liquidity, including $8.2 million in cash and cash equivalents. Our uninsured deposits are estimated to be approximately $13.8 million or 6.10% of total deposits. At June 30, 2023, we had off-balance sheet liquidity sources totaling $89.3 million, including $87.3 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.
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Risks Related to Our Business and Industry Generally
We expect that the implementation of a new accounting standard could require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Kentucky First, First Federal of Hazard and First Federal of Kentucky for our fiscal year beginning July 1, 2023. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which we expect could require us to increase our allowance for loan losses, and will likely greatly increase the data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have a material adverse effect on our financial condition and results of operations.
Our FDIC deposit insurance premiums and assessments may increase, which would reduce our profitability.
On March 12, 2023, the Department of the Treasury, the Federal Reserve and the FDIC issued a joint statement relating to the resolution of Silicon Valley Bank and Signature Bank that stated that losses to support uninsured deposits of those banks would be recovered via a special assessment on banks. On May 11, 2023 the FDIC Board of Directors approved a notice of proposed rulemaking, which would implement a special assessment to recover the cost associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. In general, large banks with large amounts of uninsured deposits benefitted most from the protection of uninsured depositors. Banking organizations with total assets over $50 billion would pay more than 95 percent of the special assessment and banking organizations with total assets under $5 billion would not be subject to the special assessment. Under the current provisions of this notice of proposed rulemaking, we believe that we would not be impacted by the special assessment associated with the most recent banking organization closures.
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
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 loan 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.
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.
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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, 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 recent 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, 2023, 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. See Note K-Stockholders’ Equity and Regulatory Capital of Notes to Consolidated Financial Statements.
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.”
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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.
If we are required to impair our goodwill, intangibles, or other long-lived assets, our financial condition and results of operations would be adversely affected.
Pursuant to Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other and ASC 360, Property, Plant and Equipment, we are required to perform an annual impairment review of goodwill, intangibles and other long-lived assets which could result in an impairment charge if it is determined that the carrying value of the assets are in excess of the fair value. We perform the impairment test annually during our fourth fiscal quarter. Goodwill, intangibles and other long-lived assets are also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such as changes in the variables associated with the judgments, assumptions and estimates made in assessing the appropriate fair value indicate the carrying amount of certain assets may not be recoverable, the assets are evaluated for impairment. If actual operating results differ from these assumptions, it may result in an asset impairment. As of June 30, 2020, management early adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the required method for estimating the fair value of the Company. Future write-downs of intangibles and other long-lived assets could affect certain of the financial covenants under our debt agreements, could restrict our financial flexibility, and would impact our results of operations.
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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.
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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 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.
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, in which case 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. 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, 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.
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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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We conduct our business through seven offices. The following table sets forth certain information relating to our offices at June 30, 2023.
| Year Opened/ Acquired | Owned or Leased | Net Book Value at June 30, 2023 | Approximate Square Footage | |||||||||
| (Dollars in thousands) | ||||||||||||
| First Federal of Hazard Main Office: 655 Main Street Hazard, Kentucky 41701 | 2016 | Owned | $ | 667 | 5,600 | |||||||
First
Federal of Kentucky | 2005 | Owned | 875 | 14,000 | ||||||||
| 194 Versailles Road Frankfort, Kentucky 40601 | 2015 | Owned | 804 | 2,700 | ||||||||
| 1220 US 127 South Frankfort, Kentucky 40601 | 2005 | Owned | 428 | 2,480 | ||||||||
| 340 West Main Street Danville, Kentucky 40422 | 2012 | Owned | 483 | 8,700 | ||||||||
| 120 Skywatch Drive Danville, Kentucky 40422 | 2012 | Owned | 669 | 2,300 | ||||||||
| 208 Lexington Street Lancaster, Kentucky 40444 | 2012 | Owned | 388 | 4,300 | ||||||||
The net book value of our investment in premises and equipment was $4.4 million at June 30, 2023. 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.
25
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| (a) | The information contained under the sections captioned “Market Information” in the Company’s Annual Report to Stockholders for the Fiscal Year Ended June 30, 2023 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by reference. |
| (b) | Not applicable. |
| (c) | The Company repurchased the following equity securities registered under the Securities Exchange Act of 1934, as amended, during the fourth quarter of the fiscal year ended June 30, 2023. |
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||
| April 2023 Beginning date: April 1 Ending date: April 30 | — | — | — | 10,980 | ||||||||||||
| May 2023 Beginning date: May 1 Ending date: May 31 | 10,980 | $ | 6.05 | 10,980 | — | |||||||||||
| June 2023 Beginning date: June 1 Ending date: June 30 | — | — | — | — | ||||||||||||
| Total | 10,980 | $ | 6.05 | 10,980 | 10,980 | |||||||||||
| (1) | On May 18, 2023, the Company announced that it had substantially completed its program to repurchase up to 150,000 shares of its Common Stock, which was initiated on February 3, 2021. |
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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.
27
| (b) | Internal Control Over Financial Reporting |
Parent Company of First Federal Savings and Loan Association of Hazard and First Federal Savings Bank of Kentucky
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.
Management assessed the effectiveness of the company’s internal control over financial reporting as of June 30, 2023, based upon criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission – 2013 (“COSO”).
Based on this assessment and on the forgoing criteria, management has concluded that, as of June 30, 2023, the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
| /s/ Don D. Jennings | /s/ R. Clay Hulette | |
| Don D. Jennings | R. Clay Hulette | |
| Chief Executive Officer | Vice President and Chief Financial Officer |
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| (c) | Changes to Internal Control Over Financial Reporting |
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
29
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
Directors
The information contained under the section captioned “Item I – Election of Directors” in the Company’s definitive proxy statement for the Company’s 2023 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.
Executive Officers
The information regarding the Company’s executive officers is incorporated herein by reference to “Item I – Election of Directors” in the Proxy Statement.
Corporate Governance
Information regarding the Company’s Audit Committee and Audit Committee financial expert is incorporated herein by reference to the section captioned “Corporate Governance and Board Matters – Committees of the Board of Directors – Audit Committee” in the Proxy Statement.
Compliance with Section 16(a) of the Exchange Act
Information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference to section captioned “Other Information Relating to Directors and Executive Officers – Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Disclosure of Code of Ethics
Kentucky First has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers and employees. To obtain a copy of this document at no charge, please write to Kentucky First Federal Bancorp, P.O. Box 535, Frankfort, Kentucky 40602-0535, or call toll-free (888) 818-3372 and ask for Investor Relations.
Item 11. Executive Compensation.
The information contained under the section captioned “Executive Compensation” in the Proxy Statement is incorporated herein by reference.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
| (a) | Security Ownership of Certain Beneficial Owners. Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. |
| (b) | Security Ownership of Management. Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. |
| (c) | Changes in Control. Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. |
| (d) | Equity Compensation Plans. The following table sets forth certain information with respect to the Company’s equity compensation plans as of June 30, 2023. |
| (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted- average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||
| Equity compensation plans approved by security holders | — | — | — | |||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | — | — | — | |||||||||
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers – Transactions with Related Persons” in the Proxy Statement.
Corporate Governance
For information regarding director independence, the section captioned, “Corporate Governance and Board Matters – Director Independence” is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated herein by reference to the section captioned “Audit Related Matters” in the Proxy Statement.
31
PART IV
Item 15. Exhibits and Financial Statement Schedules.
| (a) | List of Documents Filed as Part of This Report |
| (1) | Financial Statements. The following consolidated financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13): |
| (2) | Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. |
32
| (3) | Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index. |
| † | Management contract or compensation plan or arrangement. |
| (1) | Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No. 333-119041). |
| (2) | Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the Year Ended June 30, 2012 (File No. 0-51176). |
| (3) | Incorporated herein by reference to the Company’s Form 8-K filed on August 25, 2017 (File No. 000-51176). |
| (4) | Incorporated herein by reference to the Company’s Form 8-K filed on September 28, 2020 (File No. 000-51176). |
| (5) | Incorporated herein by reference to the Company’s Form 8-K filed on February 2, 2022 (File No. 000-51176). |
| (6) | Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the Year Ended June 30, 2020 (File No. 0-51176). |
| (7) | Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 (File No. 0-51176). |
| (b) | Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein. |
| (c) | Financial Statements and Schedules Excluded from Annual Report. There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are required to be included herein. |
Item 16. Form 10-K Summary.
Not applicable.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KENTUCKY FIRST FEDERAL BANCORP | ||
| September 28, 2023 | By: | /s/ Don D. Jennings |
| Don D. Jennings | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Don D. Jennings | September 28, 2023 | |
| Don D. Jennings | ||
| Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| /s/ R. Clay Hulette | September 28, 2023 | |
| R. Clay Hulette | ||
| Vice President, Chief Financial Officer and Treasurer | ||
| (Principal Financial and Accounting Officer) | ||
| /s/ Tony D. Whitaker | September 28, 2023 | |
| Tony D. Whitaker | ||
| Chairman of the Board | ||
| /s/ Stephen G. Barker | September 28, 2023 | |
| Stephen G. Barker | ||
| Director | ||
| /s/ Walter G. Ecton, Jr. | September 28, 2023 | |
| Walter G. Ecton, Jr. | ||
| Director | ||
| /s/ Lou Ella Farler | September 28, 2023 | |
| Lou Ella Farler | ||
| Director | ||
| /s/ William D. Gorman, Jr. | September 28, 2023 | |
| William D. Gorman, Jr. | ||
| Director | ||
| /s/ David R. Harrod | September 28, 2023 | |
| David R. Harrod | ||
| Director | ||
| /s/ William H. Johnson | September 28, 2023 | |
| William H. Johnson | ||
| Director |
34
Exhibit 13
Parent company of
First Federal Savings and Loan Association of Hazard
and
First Federal Savings Bank of Kentucky
2023
Annual Report
KENTUCKY FIRST FEDERAL BANCORP
Kentucky First Federal Bancorp (“Kentucky First Federal” or the “Company”) was formed under federal law in March 2005 and is the holding company for First Federal Savings and Loan Association of Hazard, Hazard, Kentucky (“First Federal of Hazard”) and First Federal Savings Bank of Kentucky, Frankfort, Kentucky (“First Federal of Kentucky”) (collectively, the “Banks”). Kentucky First Federal’s operations consist primarily of operating the Banks as two independent, community-oriented savings institutions.
First Federal of Hazard is a federally chartered savings and loan association offering traditional financial services to consumers in Perry and surrounding counties in eastern Kentucky. First Federal of Hazard 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 other securities, although since formation of the Company in 2005, First Federal of Hazard has been purchasing whole loans and participations in loans originated at First Federal 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 the origination primarily of adjustable-rate loans secured by first mortgages on owner-occupied and non-owner-occupied one-to four-family residences in Franklin, Boyle, Garrard and surrounding counties in Kentucky. First Federal of Kentucky also originates, to a lesser extent, home equity loans, loans secured by churches, multi-family properties, professional office buildings and other types of property, as well as consumer loans and commercial and industrial loans.
MARKET INFORMATION
The Company’s common stock began trading under the symbol “KFFB” on the Nasdaq National Market on March 3, 2005. There are currently 8,086,715 shares of common stock outstanding and approximately 522 holders of record of the common stock. Following are the high and low closing prices, by fiscal quarter, as reported on the Nasdaq National Market during the periods indicated, as well as dividends declared on the common stock during each quarter.
| Fiscal 2023 | High | Low | Dividends Per Share | |||||||||
| First quarter | $ | 8.05 | $ | 7.10 | $ | 0.10 | ||||||
| Second quarter | 7.88 | 6.62 | 0.10 | |||||||||
| Third quarter | 7.32 | 6.00 | 0.10 | |||||||||
| Fourth quarter | 6.84 | 5.48 | 0.10 | |||||||||
| Fiscal 2022 | High | Low | Dividends Per Share | |||||||||
| First quarter | $ | 7.59 | $ | 6.95 | $ | 0.10 | ||||||
| Second quarter | 7.79 | 6.95 | 0.10 | |||||||||
| Third quarter | 8.00 | 6.98 | 0.10 | |||||||||
| Fourth quarter | 8.69 | 7.00 | 0.10 | |||||||||
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TABLE OF CONTENTS
ii
Dear Shareholder:
We are pleased to present the 2023 Annual Report for Kentucky First Federal Bancorp. We encourage you to read both the Annual Report and Proxy Statement. We encourage you to vote and, if possible, to attend our annual meeting on November 16, 2023. We are excited to return to The Challenger Center on the campus of Hazard Community and Technical College for this year’s meeting. The location is One Community College Drive in Hazard, KY.
We indeed are living in interesting times. The past two years have seen the pendulum swing perhaps from one extreme to the other. As we began fiscal 2022 we saw relatively higher real estate prices and low interest rates and higher levels of deposits in general, while the year closed with a couple of interest rate increases from the Federal Open Market Committee (FOMC). Fiscal 2023 brought additional FOMC interest rate increases, which at the time of this writing constitute the highest and fasted interest rate increases in the history of the United States. The dramatic increase in interest rates proved challenging for nearly all banks and some were less prepared than others. In the spring of 2023 three large regional banks failed sending shock waves through the market and causing regulatory intervention in an attempt to quell concerns. Our preparation for higher general interest rates proved useful, but the extent of the increases required somewhat different tactics. We continue to focus on community banking during this difficult time by concentrating on our core business, which is attracting local deposits and lending funds primarily residential real estate. We are exploring additional sources of funding in response to migration of many deposits to larger banks caused by concerns about the large regional banks.
As shareholders, we appreciate the members of First Federal Savings and Loan for their continued support of the dividend waiver. For the eleventh year in a row, they have voted overwhelmingly to allow us to waive the dividend which allows Kentucky First to pay a competitive dividend.
I would like to take this opportunity to congratulate one long-term employee on her retirement. Yvonne Thornberry retired in September after serving in Frankfort in the loan department for 52 years. Yvonne started working for First Federal immediately out of high school and became a fixture in our community by working on countless loans over her career. At one time she was known for having memorized each customer’s loan number. Yvonne exemplifies the dedication and commitment for which our employees are known. Yvonne continues to serve in a part-time capacity by working a few days each week.
It is with great sadness that we acknowledge the passing of William C. Jennings, whose banking career spanned in excess of 50 years. Bill was a strong leader and mentor to many of us through the years. Without his talent, leadership and vision, First Federal of Kentucky would not be the institution that it is today. He is and will continue to be missed in the future.
Please keep First Federal in mind for your banking needs in Frankfort, Danville, Lancaster, and Hazard and to recommend us to family and friends. All of our markets are very competitive and, while we market to offer attractive rates and useful products, it is often word of mouth or any additional help our shareholders can provide is appreciated. When you bank with us, you help yourself (and we think you will enjoy our excellent products and services.) Please let us know if there’s anything we can do for you.
Sincerely,
Don Jennings
President and Chief Executive Officer
1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Selected Financial Condition Data
| At June 30, | ||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||
| Total assets | $ | 349,022 | $ | 328,080 | $ | 338,063 | $ | 321,136 | $ | 330,771 | ||||||||||
| Cash and cash equivalents | 8,167 | 25,823 | 21,648 | 13,702 | 9,861 | |||||||||||||||
| Time deposits | - | - | 247 | 2,229 | 6,962 | |||||||||||||||
| Securities held to maturity | 274 | 339 | 462 | 598 | 775 | |||||||||||||||
| Securities available for sale | 12,080 | 10,477 | 33 | 541 | 1,045 | |||||||||||||||
| Loans, net | 313,807 | 274,583 | 297,902 | 285,887 | 280,969 | |||||||||||||||
| Deposits | 226,309 | 239,857 | 226,843 | 212,273 | 195,836 | |||||||||||||||
| Federal Home Loan Bank advances | 70,087 | 34,066 | 56,873 | 54,715 | 66,703 | |||||||||||||||
| Shareholders’ equity | 50,711 | 52,025 | 52,296 | 51,911 | 66,278 | |||||||||||||||
| Allowance for loan losses | 1,634 | 1,529 | 1,622 | 1,488 | 1,456 | |||||||||||||||
| Nonperforming loans (90 days delinquent and nonaccrual) | 4,701 | 5,819 | 6,655 | 7,395 | 8,028 | |||||||||||||||
Selected Financial Condition Data
| Year Ended June 30, | ||||||||||||||||||||
| (Dollars in thousands, except share data) | 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||
| Total interest income | $ | 12,758 | $ | 10,914 | $ | 12,152 | $ | 12,823 | $ | 12,700 | ||||||||||
| Total interest expense | 3,902 | 1,754 | 2,141 | 3,499 | 3,252 | |||||||||||||||
| Net interest income | 8,856 | 9,160 | 10,011 | 9,324 | 9,448 | |||||||||||||||
| Provision (credit) for losses on loans | 113 | (60 | ) | 192 | 103 | 11 | ||||||||||||||
| Net interest income after provision for losses on loans | 8,743 | 9,220 | 9,819 | 9,221 | 9,437 | |||||||||||||||
| Total non-interest income | 302 | 515 | 595 | 399 | 243 | |||||||||||||||
| Goodwill impairment | - | - | - | 13,560 | - | |||||||||||||||
| Total non-interest expenses | 7,818 | 7,668 | 8,242 | 8,343 | 8,727 | |||||||||||||||
| Income (loss) before income taxes | 1,227 | 2,067 | 2,172 | (12,283 | ) | 953 | ||||||||||||||
| Income taxes (benefit) | 294 | 477 | 352 | 264 | 141 | |||||||||||||||
| Net income (loss) | $ | 933 | $ | 1,590 | $ | 1,820 | $ | (12,547 | ) | $ | 812 | |||||||||
| Net earnings (loss) per share-basic and diluted | $ | 0.11 | $ | 0.19 | $ | 0.22 | $ | (1.52 | ) | $ | 0.10 | |||||||||
| Cash dividends declared per common share | $ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.40 | $ | 0.40 | ||||||||||
2
Selected Financial Ratios and Other Data (1)
| Year Ended June 30, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| Performance Ratios: | ||||||||||||||||||||
| Return on average assets (net income (loss) divided by average total assets) | 0.28 | % | 0.47 | % | 0.55 | % | -3.80 | % | 0.25 | % | ||||||||||
| Return on average equity (net income (loss) divided by average equity) | 1.81 | % | 3.04 | % | 3.50 | % | -19.01 | % | 1.21 | % | ||||||||||
| Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost) | 2.48 | % | 2.68 | % | 3.00 | % | 2.82 | % | 2.97 | % | ||||||||||
| Net interest margin (net interest income divided by average interest-earning assets) | 2.73 | % | 2.81 | % | 3.14 | % | 3.05 | % | 3.19 | % | ||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 120.50 | % | 122.95 | % | 120.39 | % | 119.57 | % | 120.03 | % | ||||||||||
| Ratio of total general administrative and other expenses to average total assets | 2.33 | % | 2.28 | % | 2.50 | % | 6.63 | % | 2.72 | % | ||||||||||
| Efficiency ratio 1 | 86.43 | % | 78.77 | % | 79.14 | % | 225.27 | % | 90.05 | % | ||||||||||
| Dividend payout ratio 2 | 146.09 | % | 87.67 | % | 76.26 | % | -11.06 | % | 176.85 | % | ||||||||||
| Asset Quality Ratios: | ||||||||||||||||||||
| Nonperforming loans as a percent of total loans at end of period 3 | 1.49 | % | 2.11 | % | 2.22 | % | 2.57 | % | 2.84 | % | ||||||||||
| Nonperforming assets as a percent of total assets at the end of period | 1.37 | % | 1.78 | % | 1.99 | % | 2.50 | % | 2.64 | % | ||||||||||
| Allowance for loan losses as a percent of total loans at end of period | 0.52 | % | 0.55 | % | 0.54 | % | 0.52 | % | 0.52 | % | ||||||||||
| Allowance for loan losses as a percent of total nonperforming loans at end of period | 34.76 | % | 26.28 | % | 24.37 | % | 20.12 | % | 18.14 | % | ||||||||||
| Provision (credit) for loan losses to total loans | 0.04 | % | -0.02 | % | 0.06 | % | 0.04 | % | 0.00 | % | ||||||||||
| Net charge-offs to average loans outstanding | 0.00 | % | 0.01 | % | 0.02 | % | 0.03 | % | 0.05 | % | ||||||||||
| Capital Ratios: | ||||||||||||||||||||
| Average equity to average assets | 15.35 | % | 15.53 | % | 15.79 | % | 19.97 | % | 20.89 | % | ||||||||||
| Shareholders’ equity to total assets at end of period | 14.53 | % | 15.86 | % | 15.47 | % | 16.16 | % | 20.05 | % | ||||||||||
| Consolidated Regulatory Capital Ratios: | ||||||||||||||||||||
| Common equity Tier 1 | N/A | N/A | N/A | N/A | 26.79 | % | ||||||||||||||
| Tier 1 (core) capital to risk-weighted assets | N/A | N/A | N/A | N/A | 26.79 | % | ||||||||||||||
| Total capital to risk-weighted assets | N/A | N/A | N/A | N/A | 27.54 | % | ||||||||||||||
| Tier 1 leverage capital to average assets | N/A | N/A | N/A | N/A | 16.65 | % | ||||||||||||||
| Community Bank Leverage Ratio | 15.02 | % | 15.21 | % | 15.35 | % | 15.67 | % | N/A | |||||||||||
| Number of banking offices | 7 | 7 | 7 | 7 | 7 | |||||||||||||||
| 1 | Efficiency ratio represents the ratio of non-interest expenses divided by the sum of net interest income and total non-interest income. |
| 2 | Represents dividends paid as a percent of net (loss) earnings. Dividends paid does not include dividends waived by First Federal MHC. |
| 3 | Nonperforming loans consist of nonaccrual loans, accruing loans greater than 90 days delinquent, and restructured loans not performing according to their revised terms, while nonperforming assets consist of nonperforming loans and real estate acquired through foreclosure. |
3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
References in this Annual Report to “we,” “us,” and “our” refer to Kentucky First Federal Bancorp and where appropriate, collectively to Kentucky First Federal Bancorp, First Federal of Hazard and First Federal of Kentucky.
Forward-Looking Statements
Certain statements contained in this Annual Report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. 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, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services, the potential effects of COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic), and the other matters described in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2023. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
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 such statements or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
General
The Company was incorporated as a mid-tier holding company under the laws of the United States on March 2, 2005, upon the completion of the reorganization of First Federal of Hazard into a federal mutual holding company form of organization (the “Reorganization”). On that date, Kentucky First Federal also completed its minority stock offering and its concurrent acquisition of Frankfort First Bancorp, Inc. (“Frankfort First Bancorp”) and its wholly owned subsidiary, First Federal of Kentucky, Frankfort Kentucky (“First Federal of Kentucky”) (the “Merger”). Following the Reorganization and Merger, the Company has operated First Federal of Hazard and First Federal of Kentucky (collectively, the “Banks”) as two independent, community-oriented savings institutions.
On December 31, 2012, the Company acquired CKF Bancorp, Inc., a savings and loan holding company which operated three banking locations in Boyle and Garrard Counties in Kentucky. In accounting for the transaction, the assets and liabilities of CKF Bancorp were recorded on the books of First Federal of Kentucky in accordance with accounting standard ASC 805, Business Combinations.
Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for losses on loans and service charges and fees collected on our deposit accounts. Our general, administrative, and other expense primarily consists of employee compensation and benefits expense, occupancy and equipment expense, data processing expense, other operating expenses and state and federal income taxes. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.
Business Continuity, Processes and Controls
In response to the Covid-19 pandemic the Banks are considered essential businesses and have remained open for business. We implemented our pandemic preparedness plan and generally maintained regular business hours through drive-through facilities, automated teller machines, remote deposit capture and online and mobile banking applications. We offer by-appointment options for transactions requiring in-person contact while maintaining social distancing mandates and surface cleaning protocols. Our staff is practicing recommended personal hygiene protocols and social distancing while working on premises. We do not face current material resource constraints through the implementation of our pandemic preparedness plan and do not anticipate incurring any material cost related to its implementation. We have not identified any material operational or internal control challenges or risks, nor do we anticipate any significant challenges to our ability to maintain our systems and controls, related to operational changes resulting from implementation of the pandemic preparedness plan.
4
Financial Position and Results of Operations
Bank regulators have issued guidance and are encouraging banks to work with customers affected by COVID-19. Accordingly, we have been actively working with borrowers affected by COVID-19 by offering a payment deferral program providing for either a three-month interest-only period or a full payment deferral for three months. While interest and fees will continue to accrue to income, under normal GAAP accounting if eventual credit losses on these deferred payments emerge, interest and/or fee income accrued may need to be reversed. As a result, interest income in future periods could be negatively impacted. At this time management anticipates that the deferral program will have an immaterial impact to the Company’s financial condition and results of operation, while recognizing that a sustained negative economic impact from COVID-19 could change this assessment, as borrowers’ ability to repay is impacted in future periods.
At June 30, 2023 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession resulting from the COVID-19 pandemic could adversely impact the Company’s and the Banks’ capital position and regulatory capital ratios due to a potential increase in credit losses.
Lending Operations and Credit Risk
The CARES Act includes a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”) and was designed to aid small- and medium-sized businesses through federally-guaranteed loans disbursed through banks in response t the COVID-19 pandemic. These loans were intended to provide eight weeks of payroll and other costs to assist those businesses to either remain open or to re-open quickly and allow their workers to pay their bills. First Federal of Kentucky qualified as an SBA lender to assist the small business community in securing this important funding. As of the date of this filing, First Federal of Kentucky had outstanding 10 PPP loans representing $111,000 in funding. It is our understanding that loans funded through the PPP are fully guaranteed by the United States government and, if the borrower complies with provisions of the program, will be forgiven by the SBA. Should those circumstances change, the bank could be required to increase its allowance for loan and lease losses related to these loans resulting in an increase in the provision for loan and lease losses.
Income. We have two primary sources of pre-tax income. The first is net interest income, which is the difference between interest income, the income that we earn on our loans and investments, and interest expense, the interest that we pay on our deposits and borrowings.
To a much lesser extent, we also recognize pre-tax income from fee and service charges, which is the compensation we receive from providing financial products and services. However, during the twelve months ended June 30, 2022, we generated significant revenue from the sale of loans.
Expenses. The expenses we incur in operating our business consist of compensation, taxes and benefits, office occupancy, data processing fees, taxes, and other expenses.
Compensation, taxes, and benefits consist primarily of the salaries and wages paid to our employees and directors, payroll taxes and expenses for retirement and other employee benefits.
Office occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of taxes, depreciation charges, maintenance, and costs of utilities.
Data processing fees primarily include fees paid to our third-party data processing providers.
Taxes consist of the current and deferred portion of federal and state income taxes.
Other expenses include expenses for attorneys, accountants and consultants, advertising, telephone, employee training and education, charitable contributions, insurance, office supplies, postage, and other miscellaneous operating activities.
Critical Accounting Policies
Our accounting and reporting policies comply with U.S. GAAP and conform to general practices within the banking industry. We believe that of our significant accounting policies, the following may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover probable incurred losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans, which is charged against income.
5
The management and the Boards of the Company and of First Federal of Hazard and First Federal of Kentucky review the allowance for loan losses on a quarterly basis. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews, volume and mix of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to change. Management considers the economic climate in the Banks’ respective lending areas to be among the factors most likely to have an impact on the level of the required allowance for loan losses.
Management continues to monitor and evaluate factors which could have an impact on the required level of the allowance. Management watches for national issues that may negatively affect a significant percentage of homeowners in the Banks’ lending areas. These may include significant increases in unemployment or significant depreciation in home prices. Management reviews employment statistics periodically when determining the allowance for loan losses and generally finds the unemployment rates in both lending areas to be high in relation to historical trends. Management has no current plans to alter the type of lending or collateral currently offered, but if such plans change or market conditions result in large concentrations of certain types of loans, such as commercial real estate or high loan-to-value ratio residential loans, management will respond with an increase in the overall allowance for loan losses.
The analysis has two components, specific and general allocations. Loans are classified as either homogenous or other. Homogenous loans are analyzed in the aggregate according to various criteria. Non-homogenous loans receive additional scrutiny and are classified as impaired or unimpaired. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. A loan is considered collateral-dependent when the circumstances of the borrower indicate that we can no longer rely upon the overall financial strength of that borrower to comply with the terms of the loan and that the loan will likely be repaid in whole or in part by proceeds from the sale of the collateral. Updated independent appraisals are ordered in most situations where management has determined to evaluate a loan for impairment. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions, and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established and, if so, this could have a material negative effect on our financial results.
Goodwill. We test goodwill for impairment at least annually and more frequently, if circumstances indicate its value may not be recoverable. We test goodwill for impairment by comparing the fair value of the reporting unit to the book value of the reporting unit. If the fair value exceeds book value, then goodwill is not considered to be impaired. Based on the annual goodwill impairment test at June 30, 2023, and consideration of potential triggering events through year end, management does not believe goodwill is impaired.
Deferred Taxes. We evaluate deferred tax assets and liabilities quarterly. We will realize these assets and liabilities to the extent profitable or carry back tax losses to periods in which we paid income taxes. Our determination of the realization of the deferred tax asset will be based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income we will earn and the implementation of various tax plans to maximize realization of the deferred tax assets. Management believes the Company will generate sufficient operating earnings to realize the deferred tax benefits. Examinations of our income tax returns or changes in tax law may impact the tax liabilities and resulting provisions for income taxes.
6
Our Operating Strategy
Our mission is to operate and grow profitable, community-oriented financial institutions serving primarily retail customers in our market areas. We plan to pursue a strategy of:
| ● | operating two community-oriented savings institutions, First Federal of Hazard, which serves customers in Perry and surrounding counties in eastern Kentucky, and First Federal of Kentucky, which serves customers primarily in the central Kentucky counties of Franklin, Boyle, and Garrard, as well as their surrounding counties. Each Bank emphasizes traditional thrift activities of accepting deposits and originating primarily residential mortgage loans for portfolio; |
| ● | continuing our historic heavy reliance on our deposit base to fund our lending and investment activities and to supplement deposits with FHLB advances when advantageous or necessary. We expect our projected deposit mix to generally retain its existing composition of passbook, transaction, and certificate of deposit accounts; |
| ● | gradually pursuing opportunities to increase and diversify lending in our market areas; |
| ● | applying conservative underwriting practices to maintain the high quality of our loan portfolios; |
| ● | managing our net interest margin and interest rate risk; and |
| ● | entertaining possibilities of expansion into other markets through branching or acquisition, if such possibilities are beneficial to the Company’s shareholders, provide a good fit within the Company’s mutual holding company framework and can be accomplished without undue encumbrance of the Company’s other operational areas. |
Market Risk Analysis
Qualitative Aspects of Market Risk. Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities (or rate adjustment periods), while maintaining an acceptable interest rate spread. Still, when market rates increase rapidly, increases in the cost of deposits and borrowings outpace the increases in the return on assets. The Company’s assets are primarily comprised of adjustable-rate mortgages (all of which have some contractual limits in their ability to react to market changes) and short-term securities. Those assets will, over time, re-price to counteract the increased costs of deposits and borrowings.
Asset/Liability Management. Management and the boards of the subsidiary Banks are responsible for the asset/liability management issues that affect the individual Banks. Either Bank may work with its sister Bank to mitigate potential asset/liability risks to the Banks and to the Company as a whole. Management utilizes a third-party to perform interest rate risk (“IRR”) calculations for each of the Banks. Management monitors and considers methods of managing the rate sensitivity and repricing characteristics of each of the Bank’s balance sheet components to maintain acceptable levels of change in the economic value of equity (“EVE”) as well as evaluating the impact on earnings in the event of changes in prevailing market interest rates. Interest rate sensitivity analysis is used to measure our interest rate risk by computing estimated changes in EVE that are a result of changes in the net present value of its cash flows from assets, liabilities, and off-balance sheet items. These changes in cash flow are estimated based on hypothetical instantaneous and permanent increases and decreases in market interest rates.
In March 2022 the Federal Open Market Committee (“FOMC”) of the Federal Reserve Bank began raising the target range for the fed funds rate of interest and since that time has raised the short-term interest rate by 525 basis points. At June 30, 2023, we believe our risk associated with rising interest rates was low but had increased. Our IRR model indicated that at June 30, 2023, in the event of a sudden and sustained increase in prevailing market interest rates of 300 basis points, our EVE would be expected to decrease $34.9 million or 64.0% to $19.6 million, at which level our fair value of tangible equity to fair value of tangible assets would be expected to be 6.9%. The projected decrease in EVE in the event of a sudden and sustained 300 basis point increase in prevailing interest rates is not within the parameters established by each subsidiary Bank’s Board of Directors. Computations or prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and deposit run-offs. These computations should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Banks may undertake in response to changes in interest rates. Certain shortcomings are inherent in this method of computing EVE. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Finally, after the considerable market rate increases of the last few months, neither management nor most market analysts believe that a continued increase of 300 basis points is likely.
7
Statement of Financial Condition
General. At June 30, 2023, assets totaled $349.0 million, an increase of $20.9 million, or 6.4%, compared to June 30, 2022. The increase was related primarily to an increase of $39.2 million or 14.3% in loans, net, which totaled $313.8 million at June 30, 2023. Somewhat offsetting the increase in loans was a decrease of $17.7 million in cash and cash equivalents. Total liabilities increased $22.3 million, or 8.1%, to $298.3 million at June 30, 2023, primarily as a result of increased FHLB advances, which increased $36.0 million or 105.7% to $70.1 million at June 30, 2023 and were somewhat offset by decreased deposits, which decreased $13.5 million or 5.6% to $226.3 million.
Loans. Our primary lending activity is the origination of loans for the purchase, refinance, or construction of one- to four-family residential real estate located in our market areas. As opportunities arise, we also originate church loans, commercial real estate loans, and multi-family and nonresidential real estate loans. At June 30, 2023, one- to four- family residential real estate loans totaled $240.1 million, or 76.1% of total loans, compared to $216.4 million, or 78.4% of total loans, at June 30, 2022. Please refer to Note C-Loans of the Notes to Consolidated Financial Statements for a further breakdown of consumer and other loans.
The following table sets forth the composition of our loan portfolio at the dates indicated.
| At June 30, | ||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||||
| One- to four-family | $ | 240,076 | 76.1 | % | $ | 216,432 | 78.4 | % | $ | 224,125 | 74.8 | % | $ | 222,489 | 77.4 | % | $ | 216,066 | 76.5 | % | ||||||||||||||||||||
| Construction | 12,294 | 3.9 | % | 1,363 | 0.5 | % | 5,433 | 1.8 | % | 4,045 | 1.4 | % | 3,757 | 1.3 | % | |||||||||||||||||||||||||
| Multi-family | 19,067 | 6.0 | % | 14,252 | 5.1 | % | 19,781 | 6.6 | % | 12,373 | 4.3 | % | 15,928 | 5.7 | % | |||||||||||||||||||||||||
| Land | 470 | 0.2 | % | 1,062 | 0.4 | % | 1,308 | 0.4 | % | 765 | 0.3 | % | 852 | 0.3 | % | |||||||||||||||||||||||||
| Farm | 1,346 | 0.4 | % | 1,338 | 0.5 | % | 2,234 | 0.8 | % | 2,354 | 0.8 | % | 3,157 | 1.1 | % | |||||||||||||||||||||||||
| Nonresidential real estate | 30,217 | 9.6 | % | 31,441 | 11.4 | % | 35,492 | 11.9 | % | 33,503 | 11.7 | % | 30,419 | 10.8 | % | |||||||||||||||||||||||||
| Commercial and industrial | 1,184 | 0.4 | % | 1,006 | 0.4 | % | 2,259 | 0.7 | % | 2,214 | 0.8 | % | 2,075 | 0.7 | % | |||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||||||||||
| Consumer and other | 9,932 | 3.1 | % | 8,327 | 3.0 | % | 7,763 | 2.6 | % | 8,387 | 2.9 | % | 8,756 | 3.1 | % | |||||||||||||||||||||||||
| Loans on deposits | 855 | 0.3 | % | 891 | 0.3 | % | 1,129 | 0.4 | % | 1,245 | 0.4 | % | 1,415 | 0.5 | % | |||||||||||||||||||||||||
| Total loans | $ | 315,441 | 100 | % | $ | 276,112 | 100 | % | $ | 299,524 | 100 | % | $ | 287,375 | 100 | % | $ | 282,425 | 100 | % | ||||||||||||||||||||
| Allowance for loan losses | (1,634 | ) | (1,529 | ) | (1,622 | ) | (1,488 | ) | (1,456 | ) | ||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 313,807 | $ | 274,583 | $ | 297,902 | $ | 285,887 | $ | 280,969 | ||||||||||||||||||||||||||||||
The following table sets forth certain information at June 30, 2023 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated maturity are reported as due in one year or less.
| (in thousands) | Real Estate Loans | Commercial Loans | Consumer Loans | Total Loans | ||||||||||||
| One year or less | $ | 104,868 | $ | 616 | $ | 9,583 | $ | 115,067 | ||||||||
| More than one year to five years | 155,431 | 568 | 1,204 | 157,203 | ||||||||||||
| More than five years | 43,171 | - | - | 43,171 | ||||||||||||
| $ | 303,470 | $ | 1,184 | $ | 10,787 | $ | 315,441 | |||||||||
8
As of June 30, 2023, there were $32.0 million fixed-rate and $166.6 million adjustable-rate real estate loans maturing in more than a year, while there were $366,000 fixed-rate and $202,000 adjustable-rate commercial loans maturing in more than a year.
The following table shows loan origination activity during the periods indicated.
| Year Ended June 30, | ||||||||||||
| (in thousands) | 2023 | 2022 | 2021 | |||||||||
| Net loans at beginning of year | $ | 274,583 | $ | 297,902 | $ | 285,887 | ||||||
| Loans originated: | ||||||||||||
| Real estate loans: | ||||||||||||
| Residential one-to four-family | 53,509 | 60,146 | 67,859 | |||||||||
| Construction | 20,840 | 4,692 | 8,697 | |||||||||
| Multi-family | 11,794 | 9,871 | 1,720 | |||||||||
| Farm | - | 570 | 523 | |||||||||
| Nonresidential real estate | 3,791 | 4,706 | 7,038 | |||||||||
| Commercial and industrial | 1,440 | 1,309 | 1,343 | |||||||||
| Consumer loans | 6,833 | 4,209 | 2,179 | |||||||||
| Total loans originated | 98,207 | 85,503 | 89,359 | |||||||||
| Deduct: | ||||||||||||
| Real estate loan principal repayments and other | (58,858 | ) | (108,993 | ) | (76,742 | ) | ||||||
| Decrease (increase) in allowance | (105 | ) | 93 | (134 | ) | |||||||
| Transfer to real estate acquired through foreclosure | (60 | ) | (45 | ) | (358 | ) | ||||||
| Other | 40 | 123 | (110 | ) | ||||||||
| Net loan activity | 39,224 | (23,319 | ) | 12,015 | ||||||||
| Net loans at end of period | $ | 313,807 | $ | 274,583 | $ | 297,902 | ||||||
Allowance for Loan Losses and Asset Quality. The allowance for loan losses is a valuation allowance for the probable incurred losses in the loan portfolio. We evaluate the allowance for loan losses no less than quarterly. When additional allowances are needed a provision for losses on loans is charged against earnings. The recommendations for increases or decreases to the allowance are presented by management to the Banks’ boards of directors. The Company’s board of directors oversees the overall allowance level for the Company and may propose increases or decreases for allowance levels at the Banks.
The allowance for loan losses is established to recognize the probable incurred losses associated with lending activities. Loss and risk factors are based on our historical loss experience and industry averages and are adjusted for significant factors that in management’s judgment affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience, duration of the current business cycle and bank regulatory examination results.
The allowance for loan losses totaled $1.6 million and $1.5 million at June 30, 2023 and 2022, respectively, which represented 0.52% and 0.55% of total loans, respectively. The allowance included no specific reserves at June 30, 2023 or 2022. Such reserves are calculated when a non-homogenous loan is considered impaired. An impaired loan is one in which it is likely that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Most of the Company’s loans are collateral-based and, in case of impairment, the loans are carried at the lower of cost or fair value less disposal costs.
Nonperforming loans, which consist of all loans 90 days or more past due and nonaccrual loans, totaled $4.7 million and $5.8 million at June 30, 2023 and 2022, respectively, a decrease of $1.1 million or 19.2%. The allowance for loan losses totaled 34.8% and 26.3% of nonperforming loans at June 30, 2023 and 2022, respectively. In determining the allowance for loan losses at any point in time, management, and the boards of directors of the subsidiary Banks apply a systematic process focusing on the risk of loss in the portfolio. First, the loan portfolio is segregated by loan types to be evaluated collectively and loan types to be evaluated individually. Delinquent multi-family and nonresidential loans are evaluated individually for potential impairment. Second, the allowance for loan losses is evaluated using historic loss experience adjusted for significant factors by applying these loss percentages to the loan types to be evaluated collectively in the portfolio. Our loss reserves do not include $382,000 in remaining discounts on acquired loans at June 30, 2023.
9
Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examinations may require us to make additional provisions for loan losses based on judgments different from ours. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate because of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Summary of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to the allowance.
| Year Ended June 30, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| Allowance at beginning of period | $ | 1,529 | $ | 1,622 | $ | 1,488 | $ | 1,456 | $ | 1,576 | ||||||||||
| Provision (credit) for loan losses | 113 | (60 | ) | 192 | 103 | 11 | ||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Real estate loans | (29 | ) | (31 | ) | (23 | ) | (65 | ) | (190 | ) | ||||||||||
| Consumer loans | - | (4 | ) | (45 | ) | (8 | ) | - | ||||||||||||
| Total charge-offs | (29 | ) | (35 | ) | (68 | ) | (73 | ) | (190 | ) | ||||||||||
| Recoveries: | ||||||||||||||||||||
| Real estate loans | 21 | - | - | 2 | 39 | |||||||||||||||
| Consumer loans | - | 2 | 10 | - | 20 | |||||||||||||||
| Total recoveries | 21 | 2 | 10 | 2 | 59 | |||||||||||||||
| Net charge-offs | (8 | ) | (33 | ) | (58 | ) | (71 | ) | (131 | ) | ||||||||||
| Allowance at end of period | $ | 1,634 | $ | 1,529 | $ | 1,622 | $ | 1,488 | $ | 1,456 | ||||||||||
| Allowance to nonperforming loans | 34.76 | % | 26.28 | % | 24.37 | % | 20.12 | % | 18.14 | % | ||||||||||
| Allowance to total loans outstanding at end of period | 0.52 | % | 0.55 | % | 0.54 | % | 0.52 | % | 0.52 | % | ||||||||||
| Net charge-offs to average loans outstanding during the period | 0.00 | % | 0.01 | % | 0.02 | % | 0.03 | % | 0.05 | % | ||||||||||
The following table sets forth the breakdown of the allowance for loan losses by loan category, which management believes can be allocated on an approximate basis, at the dates indicated.
| At June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | Amount | % of Allowance to Total Allowance | % of Loans in Category to Total Loans | |||||||||||||||||||||||||||||||||||||||||||||
| Loans category: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential one- to-four-family | $ | 857 | 52.4 | % | 76.0 | % | $ | 800 | 52.3 | % | 78.4 | % | $ | 749 | 49.0 | % | 74.8 | % | $ | 671 | 45.1 | % | 77.4 | % | $ | 685 | 47.1 | % | 76.5 | % | ||||||||||||||||||||||||||||||
| Construction | 41 | 2.5 | % | 3.9 | % | 4 | 0.3 | % | 0.5 | % | 12 | 0.7 | % | 1.8 | % | 6 | 0.4 | % | 1.4 | % | 6 | 0.4 | % | 1.3 | % | |||||||||||||||||||||||||||||||||||
| Multi-family | 278 | 17.0 | % | 6.0 | % | 231 | 15.1 | % | 5.1 | % | 291 | 17.9 | % | 6.6 | % | 184 | 12.4 | % | 4.3 | % | 200 | 13.7 | % | 5.7 | % | |||||||||||||||||||||||||||||||||||
| Land | 1 | 0.1 | % | 0.2 | % | 3 | 0.2 | % | 0.4 | % | 3 | 0.2 | % | 0.4 | % | 1 | 0.1 | % | 0.3 | % | 1 | 0.1 | % | 0.3 | % | |||||||||||||||||||||||||||||||||||
| Farm | 4 | 0.2 | % | 0.4 | % | 5 | 0.3 | % | 0.5 | % | 5 | 0.3 | % | 0.8 | % | 4 | 0.3 | % | 0.8 | % | 6 | 0.4 | % | 1.1 | % | |||||||||||||||||||||||||||||||||||
| Nonresidential real estate | 405 | 24.8 | % | 9.6 | % | 461 | 30.2 | % | 11.4 | % | 494 | 30.5 | % | 11.9 | % | 405 | 27.2 | % | 11.7 | % | 336 | 23.1 | % | 10.8 | % | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | 23 | 1.4 | % | 0.4 | % | 2 | 0.1 | % | 0.4 | % | 5 | 0.3 | % | 0.7 | % | 3 | 0.2 | % | 0.8 | % | 5 | 0.3 | % | 0.7 | % | |||||||||||||||||||||||||||||||||||
| Consumer and other | 24 | 1.5 | % | 3.2 | % | 22 | 1.4 | % | 3.0 | % | 16 | 1.0 | % | 2.6 | % | 12 | 0.8 | % | 2.9 | % | 14 | 1.0 | % | 3.1 | % | |||||||||||||||||||||||||||||||||||
| Loans on deposits | 1 | 0.1 | % | 0.3 | % | 1 | 0.1 | % | 0.3 | % | 2 | 0.1 | % | 0.4 | % | 2 | 0.1 | % | 0.4 | % | 3 | 0.2 | % | 0.5 | % | |||||||||||||||||||||||||||||||||||
| Unallocated | - | 0.0 | % | 0.0 | % | - | 0.0 | % | 0.0 | % | - | 0.0 | % | 0.0 | % | 200 | 13.4 | % | 0.0 | % | 200 | 13.7 | % | 0.0 | % | |||||||||||||||||||||||||||||||||||
| Total allowance for loan losses | 1,634 | 100.0 | % | 100.0 | % | 1,529 | 100.0 | % | 100.0 | % | 1,577 | 100.0 | % | 100.0 | % | 1,488 | 100.0 | % | 100.0 | % | 1,456 | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||||||||||||
10
Nonperforming and Classified Assets. When a loan becomes 90 days delinquent, the loan may be placed on nonaccrual status at which time the accrual of interest ceases, the interest previously accrued to income is reversed and interest income is thereafter recognized on a cash basis. Payments on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan or applied entirely to principal, depending on management’s assessment of ultimate collectability. In situations where management believes collection of interest due is likely even if the loan is more than 90 days delinquent, then management may decide not to place the loan on non-accrual status.
We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Real estate that we acquire because of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired, it is recorded at the lower of carrying value of the investment or fair value less estimated selling costs at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income.
Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. Loans identified as impaired are evaluated on an individual basis. At June 30, 2023, there were no loans individually considered impaired with valuation adjustments.
The following table provides information with respect to our nonperforming assets at the dates indicated.
| Year Ended June 30, | ||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||
| Nonaccrual loans: | ||||||||||||||||||||
| Real estate loans | $ | 4,199 | $ | 4,048 | $ | 4,660 | $ | 4,415 | $ | 4,936 | ||||||||||
| Commercial loans | - | - | - | 4 | 1 | |||||||||||||||
| Consumer loans | - | 75 | 21 | 5 | 9 | |||||||||||||||
| Total nonaccrual loans | 4,199 | 4,123 | 4,681 | 4,424 | 4,946 | |||||||||||||||
| Accruing loans past due 90 days or more: | ||||||||||||||||||||
| Real estate loans | 365 | 287 | 243 | 1,135 | 1,747 | |||||||||||||||
| Commercial loans | - | 1 | - | - | 49 | |||||||||||||||
| Consumer loans | 28 | - | - | - | - | |||||||||||||||
| Total accruing loans past due 90 days or more | 393 | 288 | 243 | 1,135 | 1,796 | |||||||||||||||
| Restructured loans not performing as agreed | 109 | 1,408 | 1,731 | 1,836 | 1,286 | |||||||||||||||
| Total nonperforming loans | 4,701 | 5,819 | 6,655 | 7,395 | 8,028 | |||||||||||||||
| Restructured loans performing as agreed | - | - | - | 36 | 163 | |||||||||||||||
| Real estate acquired through foreclosure | 70 | 10 | 82 | 640 | 710 | |||||||||||||||
| Total nonperforming assets and performing restructured loans | $ | 4,771 | $ | 5,829 | $ | 6,737 | $ | 8,071 | $ | 8,901 | ||||||||||
| Total nonperforming loans to total loans | 1.49 | % | 2.11 | % | 2.22 | % | 2.57 | % | 2.84 | % | ||||||||||
| Total nonperforming loans to total assets | 1.35 | % | 1.77 | % | 1.97 | % | 2.33 | % | 2.43 | % | ||||||||||
| Total nonperforming assets to total assets | 1.37 | % | 1.78 | % | 1.99 | % | 2.54 | % | 2.64 | % | ||||||||||
Interest income that would have been recorded for the years ended June 30, 2023 and 2022, had nonaccrual loans been current according to their original terms amounted to $53,000, and $27,000, respectively. Income related to nonaccrual loans included in interest income for the years ended June 30, 2023 and 2022 amounted to $45,000, and $48,000, respectively.
Federal regulations require us to regularly review and classify our assets. In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. Special mention assets totaled $854,000 and $896,000 at June 30, 2023 and 2022, respectively.
11
The following table shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated.
| At June 30, | ||||||||||||
| (in thousands) | 2023 | 2022 | 2021 | |||||||||
| Substandard assets | $ | 7,266 | $ | 7,458 | $ | 8,925 | ||||||
| Doubtful assets | - | - | - | |||||||||
| Loss assets | - | - | - | |||||||||
| Total classified assets | $ | 7,266 | $ | 7,458 | $ | 8,925 | ||||||
Substandard assets at June 30, 2023, consisted of 123 loans totaling $6.5 million and two parcels of real estate owned with an aggregate carrying value of $70,000, compared to substandard assets at June 30, 2022 which consisted of 142 loans totaling $7.4 million and one parcel of real estate owned with an aggregate carrying value of $10,000. At June 30, 2023, 0.1% of the Company’s substandard assets were represented by real estate acquired through foreclosure compared to 0.1% at June 30, 2022. During the fiscal year ended June 30, 2022, the Company made loans to facilitate the purchase of its other real estate owned by qualified borrowers. The Company sold property with a carrying value of $117,000 for $82,000 during the fiscal year ended June 30, 2022. Such loans are considered loans to facilitate an exchange. Loans to facilitate the sale of other real estate owned and which were included in substandard loans totaled $0 and $0 at June 30, 2023 and 2022, respectively.
The table below summarizes other real estate owned at June 30, 2023:
| Number | Net carrying | |||||||
| (Dollars in thousands) | of Properties | value | ||||||
| Single-family | 2 | $ | 70 | |||||
| Building lots | - | - | ||||||
| Total | 2 | $ | 70 | |||||
The table below summarizes substandard loans at June 30, 2023:
| Number | Net carrying | |||||||
| (Dollars in thousands) | of Loans | value | ||||||
| One- to four-family | 114 | $ | 5,141 | |||||
| Nonresidential real estate | 3 | 1,716 | ||||||
| Consumer | 7 | 338 | ||||||
| Total | 124 | $ | 7,195 | |||||
Other than disclosed above, there are no other loans at June 30, 2023 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms.
Delinquencies. The following table provides information about delinquencies in our loan portfolios at the dates indicated.
| At June 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| 30-59 Days | 60-89 Days | 30-59 Days | 60-89 Days | |||||||||||||
| (in thousands) | Past Due | Past Due | Past Due | Past Due | ||||||||||||
| Real estate loans | $ | 3,215 | $ | 862 | $ | 2,303 | $ | 364 | ||||||||
| Commercial and industrial | - | - | 72 | - | ||||||||||||
| Consumer loans | 98 | 87 | 169 | 19 | ||||||||||||
| Total | $ | 3,313 | $ | 949 | $ | 2,544 | $ | 383 | ||||||||
Securities. Our securities portfolio consists of mortgage-backed securities with maturities of 30 years or less, which totaled $12.4 million at June 30, 2023, an increase of $1.5 million or 14.2%, compared to the $10.8 million total at June 30, 2022. The increase in these securities resulted from Management’s investment plan to earn additional interest spread on excess liquidity held at the time by investing in short-lived mortgage-backed securities. All of our mortgage-backed securities were issued by Ginnie Mae, Fannie Mae or Freddie Mac.
12
The following table sets forth the carrying values and fair values of our securities portfolio at the dates indicated.
| At June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
| (in thousands) | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||
| Agency mortgage-backed: residential | $ | 12,649 | $ | 12,080 | $ | 10,477 | $ | 10,477 | $ | 33 | $ | 33 | ||||||||||||
| Held to maturity securities: | ||||||||||||||||||||||||
| Agency mortgage-backed: residential | $ | 274 | $ | 259 | $ | 339 | $ | 323 | $ | 462 | $ | 476 | ||||||||||||
At June 30, 2023 and 2022, we did not own any securities that had an aggregate book value in excess of 10% of our equity at that date.
The following table sets forth the maturities and weighted average yields of debt securities at June 30, 2023. At June 30, 2023, we had no agency securities with adjustable rates.
| More than | More than | |||||||||||||||||||||||||||||||
| One Year to | Five Years to | |||||||||||||||||||||||||||||||
| One Year or Less | Five Years | Ten Years | Total Investment Portfolio | |||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
| Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Fair | Average | ||||||||||||||||||||||||
| (Dollars in thousands) | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Value | Yield | |||||||||||||||||||||||
| Available for sale securities: | ||||||||||||||||||||||||||||||||
| Agency mortgage-backed: residential | $ | - | 0.00 | % | $ | 12,627 | 3.22 | % | $ | 22 | 4.00 | % | $ | 12,649 | $ | 12,080 | 3.22 | % | ||||||||||||||
| Held to maturity securities: | ||||||||||||||||||||||||||||||||
| Agency mortgage-backed: residential | $ | 7 | 5.09 | % | $ | 153 | 1.49 | % | $ | 114 | 4.40 | % | $ | 274 | $ | 259 | 2.80 | % | ||||||||||||||
Other Assets. Other assets at June 30, 2023 and 2022 include goodwill of $947,000, which was a result of the Company’s acquisition of Frankfort First, and bank owned life insurance policies with a carrying value of $2.8 million and $2.8 million at June 30, 2023 and 2022, respectively, of which First Federal of Kentucky is the owner and beneficiary. Both subsidiary Banks are members and stockholders of the FHLB. FHLB stock, at cost, totaled $4.6 million and $6.5 million at June 30, 2023 and 2022.
Deposits. Our primary source of funds is retail deposit accounts held primarily by individuals within our market areas. Deposits totaled $226.3 million at June 30, 2023, decreasing $13.5 million or 5.6% between the two periods. At June 30, 2023 the Company had $21.0 million in brokered certificates of deposit.
The following table sets forth the balances of our deposit products at the dates indicated.
| At June 30, | ||||||||||||
| (in thousands) | 2023 | 2022 | 2021 | |||||||||
| Certificate of deposit accounts | $ | 137,315 | $ | 124,705 | $ | 124,892 | ||||||
| Demand, transaction and savings accounts | 88,994 | 115,152 | 101,951 | |||||||||
| Total | $ | 226,309 | $ | 239,857 | $ | 226,843 | ||||||
13
The following table indicates at June 30, 2023, the amount of certificate of deposit accounts with balances equal to or greater than $100,000, by time remaining until maturity. The brokered certificates of deposit had a maximum face value of $100,000. The Federal Deposit Insurance Corporation (“FDIC”) currently insures deposits up to $250,000 in most cases, making certificate of deposit accounts with balances equal to or greater than $100,000 less volatile as before the limit was raised.
| Certificates | ||||
| (in thousands) | of Deposit | |||
| Maturity period: | ||||
| Three months or less | $ | 7,292 | ||
| Over three months through six months | 7,204 | |||
| Over six months through twelve months | 41,573 | |||
| Over twelve months | -- | |||
| Total | $ | 56,069 | ||
The following table sets forth our certificate of deposit accounts classified by rates at the dates indicated.
| At June 30, | ||||||||||||
| (in thousands) | 2023 | 2022 | 2021 | |||||||||
| Interest rate | ||||||||||||
| 0.01-0.99% | $ | 44,302 | $ | 96,937 | $ | 69,400 | ||||||
| 1.00-1.99% | 13,127 | 20,521 | 36,613 | |||||||||
| 2.00-2.99% | 1,826 | 7,247 | 18,879 | |||||||||
| 3.00-3.99% | 19,700 | - | - | |||||||||
| 4.00-4.99% | 58,360 | - | - | |||||||||
| Total | $ | 137,315 | $ | 124,705 | $ | 124,892 | ||||||
The following table sets forth the amount and maturities of certificate accounts at June 30, 2023.
| Amount Due | ||||||||||||||||||||||||
| (in thousands) | Less than One Year | More than One Year to Two Years | More than Two Years to Three Years | More than Three Years | Total | Percentage of Total Certificate Accounts | ||||||||||||||||||
| Interest rate | ||||||||||||||||||||||||
| 0.01-0.99% | $ | 36,738 | $ | 7,482 | $ | 82 | $ | - | $ | 44,302 | 32.3 | % | ||||||||||||
| 1.00-1.99% | 4,375 | 4,079 | 1,786 | 2,887 | 13,127 | 9.6 | % | |||||||||||||||||
| 2.00-2.99% | 664 | 1,162 | - | - | 1,826 | 1.3 | % | |||||||||||||||||
| 3.00-3.99% | 19,342 | 358 | - | - | 19,700 | 14.3 | % | |||||||||||||||||
| 4.00-4.99% | 58,360 | - | - | - | 58,360 | 42.5 | % | |||||||||||||||||
| Total | $ | 119,479 | $ | 13,081 | $ | 1,868 | $ | 2,887 | $ | 137,315 | 100.0 | % | ||||||||||||
The following table sets forth the average balances and rates paid on deposits.
| Year Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||||||
| (in thousands) | Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||||||||||
| Noninterest-bearing demand | $ | 13,308 | 0.00 | % | $ | 16,033 | 0.00 | % | $ | 10,472 | 0.00 | % | ||||||||||||
| Interest-bearing demand | 20,695 | 0.18 | % | 18,519 | 0.22 | % | 18,438 | 0.16 | % | |||||||||||||||
| Savings accounts | 68,255 | 0.44 | % | 73,688 | 0.37 | % | 64,611 | 0.42 | % | |||||||||||||||
| Certificates of deposit | 117,443 | 1.26 | % | 126,371 | 0.85 | % | 127,371 | 1.11 | % | |||||||||||||||
The following table sets forth the deposit activities for the periods indicated.
| At June 30, | ||||||||||||
| (in thousands) | 2023 | 2022 | 2021 | |||||||||
| Beginning balance | $ | 239,857 | $ | 226,843 | $ | 212,273 | ||||||
| Increase (decrease) before interest credited | (15,359 | ) | 11,627 | 12,859 | ||||||||
| Interest credited | 1,811 | 1,387 | 1,711 | |||||||||
| Net increase (decrease) in deposits | (13,548 | ) | 13,014 | 14,570 | ||||||||
| Ending balance | $ | 226,309 | $ | 239,857 | $ | 226,843 | ||||||
14
Borrowings. Advances from the Federal Home Loan Bank of Cincinnati amounted to $70.1 million and $34.1 million at June 30, 2023 and 2022, respectively.
The following table presents certain information regarding our Federal Home Loan Bank of Cincinnati advances during the periods and at the dates indicated.
| Year Ended June 30, | ||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2021 | |||||||||
| Balance outstanding at end of period | $ | 70,087 | $ | 34,066 | $ | 56,873 | ||||||
| Maximum amount of advances outstanding at any month during the period | $ | 83,489 | $ | 55,369 | $ | 61,048 | ||||||
| Average advances outstanding during the period | $ | 63,050 | $ | 46,843 | $ | 54,319 | ||||||
| Weighted average interest rate during the period | 3.32 | % | 0.78 | % | 0.79 | % | ||||||
| Weighted average interest rate at end of period | 4.85 | % | 0.96 | % | 0.71 | % | ||||||
Capital. Total shareholders’ equity totaled $50.7 million at June 30, 2023, a decrease of $1.3 million or 2.5%, compared to June 30, 2022. The decrease resulted primarily from repurchase of common stock by the Company for placement in treasury and well as an excess of dividends paid over earnings.
Effective January 1, 2015, the Company and the Banks became subject to the capital regulations in accordance with Basel III. These regulations established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conservation buffer (“CCB”). The regulations also included a revised definition of capital and changed the risk-weighting of certain assets. For purposes of prompt corrective action, the new regulations establish definitions of “well capitalized” as follows:
| Minimum for banks to be well-capitalized under regulatory requirements | ||||
| Tier 1 Capital to Total Average Assets | 5.0 | % | ||
| Common Equity Tier 1 Capital | 6.5 | % | ||
| Tier 1 Capital to Risk-Weighted Assets | 8.0 | % | ||
| Total Capital to Risk-Weighted Assets | 10.0 | % | ||
Additionally, the CCB of Common Equity Tier 1 Risk-Based capital above the minimum risk-based capital requirements was introduced. The CCB is 2.5%. The Company and the Banks, in order to avoid limitations on capital distributions, including dividend payments, engaging in share repurchases and certain discretionary bonus payments to executive officers, must maintain the CCB at the appropriate level.
Community Bank Leverage Ratio
Certain community banks and holding companies (which include the Company, Frankfort First, First Federal of Kentucky and First Federal of Hazard) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The CBLR ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets as reported on the banking organization’s applicable regulatory filings. The Banks elected to utilize the CBLR framework effective for the quarter ended March 31, 2021. See Note K-Stockholders’ Equity and Regulatory Capital in audited financial statements.
At June 30, 2023, both First Federal of Hazard’s and First Federal of Kentucky’s regulatory capital substantially exceeded all minimum regulatory capital requirements. Management is not aware of any recent event that would cause this classification to change. See Note K-Stockholders’ Equity and Regulatory Capital in the Notes to Financial Statements.
15
Results of Operations for the Years Ended June 30, 2023 and 2022
General. Net income totaled $933,000 or $0.11 diluted earnings per share for the year ended June 30, 2023, compared to net income of $1.6 million or $0.19 per common share for the twelve months ended June 30, 2022.
Net income decreased $657,000 or 41.3% year to year primarily due to decreased net interest income, decreased non-interest income, increased provision for loan losses, and increased non-interest expenses, which were somewhat offset by decreased income taxes. In the general economy the fiscal year was marked by historical interest rate increases as the Federal Open Market Committee continued its fight against inflation. As with most financial institutions, our funding sources repriced more quickly during the unprecedented interest rate increases than our assets. Consequently, the increase in our interest expense was attributed primarily to higher average rates paid on both deposits and FHLB advances, while the increase in our interest income was a combination of both higher average balances and higher rates earned on those assets. The Company sells its long-term fixed rate loans to the Federal Home Loan Bank of Cincinnati as part of its asset/liability management strategy and the sale of such loans decreased along with the rise in general interest rates during the fiscal year.
Interest Income. Total interest income for the fiscal year ended June 30, 2023 was $12.8 million, an increase of $1.8 million, or 16.9%, compared to the fiscal year ended June 30, 2022. The increase in interest income was due primarily to lower average rates earned on interest-earning assets, as well as lower average balances.
Interest income from loans increased $1.2 million or 10.8% to $11.8 million for the year ended June 30, 2023 due to both an increase in the average volume of the portfolio and the rate earned on it. The average balance of the loan portfolio increased $15.6 million or 5.5% to $298.9 million for the year just ended, while the average rate earned increased 19 basis points to 3.95% for the period. Loans are the largest component of our interest-earning assets.
Interest income from mortgage-backed securities increased $430,000 to $453,000 for the recently ended fiscal year primarily due to an increase in the volume of assets. Income from other interest-earning assets increased $261,000 and totaled $493,000 for the recently ended fiscal year.
Interest Expense. Interest expense totaled $3.9 million for the fiscal year ended June 30, 2023, an increase of $2.1 million, or 122.5%, from fiscal 2022. The increase in interest expense resulted primarily from higher average interest rates of funding sources, although the average balance of funding increased period to period. Interest expense on borrowings increased $1.7 million to $2.1 million for the twelve months ended June 30, 2023, primarily due to an increase in the average balance of FHLB advances outstanding, which increased $16.2 million or 34.6% to $63.1 million for the year just ended. Additional borrowings were used to offset decreased levels of deposits and to fund loan growth. The average rate paid on borrowings increased 253 basis points year over year to 3.32% for the recently-ended period.
Interest expense on deposits increased $424,000 or 30.6% to $1.8 million for the 2023 fiscal year primarily due to an increase in the average rate paid on those deposits, which increased 24 basis points to 0.88% for the recently-ended fiscal year. The average balance of deposits decreased $12.2 million or 5.6% to $206.4 million for the year just ended. Interest expense on certificates of deposit was primarily responsible for the increase in interest expense on deposits for the year and was due principally to an increase in the rate paid on certificates of deposits. The average rate paid on certificates of deposit increased 41 basis points to 1.26% for the year, while the average balance outstanding decreased $8.9 million or 7.1% to $117.4 million. The average balance of savings deposits decreased $5.4 million or 7.4% and totaled $68.3 million for fiscal 2023, while interest-bearing demand deposits increased $2.2 million or 11.8%, and totaled $20.7 million.
Net Interest Income. As a result of the aforementioned changes in interest income and interest expense, net interest income before provision for loan losses decreased $304,000 or 3.3% to $8.9 million for the 2023 year. As indicated on the following table, our net interest margin decreased from 2.81% for the 2022 fiscal year to 2.73% for the year just ended.
16
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of daily balances and nonaccrual loans are included in average balances only. We did not hold any non-taxable securities during any of the periods presented in the table.
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Interest | Interest | Interest | ||||||||||||||||||||||||||||||||||
| Average | And | Yield/ | Average | And | Yield/ | Average | And | Yield/ | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance | Dividends | Cost | Balance | Dividends | Cost | Balance | Dividends | Cost | |||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Loans | $ | 298,911 | $ | 11,814 | 3.95 | % | $ | 283,323 | $ | 10,659 | 3.76 | % | $ | 296,247 | $ | 11,979 | 4.04 | % | ||||||||||||||||||
| Mortgage-backed securities | 13,516 | 453 | 3.35 | 1,232 | 23 | 1.87 | 567 | 14 | 2.47 | |||||||||||||||||||||||||||
| Other securities | - | - | - | - | - | - | 99 | 3 | 3.03 | |||||||||||||||||||||||||||
| Other interest-earning assets | 12,263 | 493 | 4.02 | 41,771 | 232 | 0.56 | 21,816 | 156 | 0.72 | |||||||||||||||||||||||||||
| Total interest-earning assets | 324,690 | 12,760 | 3.93 | 326,326 | 10,914 | 3.34 | 318,729 | 12,152 | 3.81 | |||||||||||||||||||||||||||
| Less: ALLL | (1,612 | ) | (1,578 | ) | (1,569 | ) | ||||||||||||||||||||||||||||||
| Noninterest-earning assets | 12,038 | 12,107 | 12,073 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 335,116 | $ | 336,855 | $ | 329,233 | ||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Demand deposits | $ | 20,695 | $ | 38 | 0.18 | % | $ | 18,519 | $ | 40 | 0.22 | % | $ | 18,438 | $ | 30 | 0.16 | % | ||||||||||||||||||
| Savings | 68,255 | 298 | 0.44 | 73,688 | 273 | 0.37 | 64,611 | 268 | 0.42 | |||||||||||||||||||||||||||
| Certificates of deposit | 117,443 | 1,475 | 1.26 | 126,371 | 1,074 | 0.85 | 127,371 | 1,413 | 1.11 | |||||||||||||||||||||||||||
| Total deposits | 206,393 | 1,811 | 0.88 | 218,578 | 1,387 | 0.64 | 210,420 | 1,711 | 0.81 | |||||||||||||||||||||||||||
| Borrowings | 63,050 | 2,091 | 3.32 | 46,843 | 367 | 0.78 | 54,319 | 430 | 0.79 | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 269,443 | 3,902 | 1.45 | 265,421 | 1,754 | 0.66 | 264,739 | 2,141 | 0.81 | |||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 13,308 | 16,032 | 10,472 | |||||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | 935 | 3,072 | 2,047 | |||||||||||||||||||||||||||||||||
| Total liabilities | 283,686 | 284,525 | 277,258 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 51,430 | 52,330 | 51,975 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ Equity | $ | 335,116 | $ | 336,855 | $ | 329,233 | ||||||||||||||||||||||||||||||
| Net interest income/average yield | $ | 8,858 | 2.48 | % | $ | 9,160 | 2.68 | % | $ | 10,011 | 3.00 | % | ||||||||||||||||||||||||
| Net interest margin | 2.73 | % | 2.81 | % | 3.14 | % | ||||||||||||||||||||||||||||||
| Average interest-earning assets to Average interest-bearing liabilities | 120.51 | % | 122.95 | % | 120.39 | % | ||||||||||||||||||||||||||||||
17
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior year volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior year rate). For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
| Twelve months ended June 30, 2023 | Twelve months ended June 30, 2022 | |||||||||||||||||||||||
| Increase (Decrease) Due to Changes In | Increase (Decrease) Due to Changes In | |||||||||||||||||||||||
| (In thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans | $ | 602 | $ | 553 | $ | 1,155 | $ | (509 | ) | $ | (811 | ) | $ | (1,320 | ) | |||||||||
| Mortgage-backed securities | 398 | 32 | 430 | 11 | (2 | ) | 9 | |||||||||||||||||
| Other securities | - | - | - | (3 | ) | - | (3 | ) | ||||||||||||||||
| Other interest-earning assets | (33 | ) | 294 | 261 | 101 | (25 | ) | 76 | ||||||||||||||||
| Total interest-earning assets | 967 | 879 | 1,846 | (400 | ) | (838 | ) | (1,238 | ) | |||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | $ | 7 | $ | (9 | ) | $ | (2 | ) | $ | - | $ | 10 | $ | 10 | ||||||||||
| Savings | (18 | ) | 43 | 25 | 21 | (16 | ) | 5 | ||||||||||||||||
| Certificates of deposit | (70 | ) | 471 | 401 | (11 | ) | (328 | ) | (339 | ) | ||||||||||||||
| Borrowings | 167 | 1,557 | 1,724 | (59 | ) | (4 | ) | (63 | ) | |||||||||||||||
| Total interest-bearing liabilities | 86 | 2,062 | 2,148 | (49 | ) | (338 | ) | (387 | ) | |||||||||||||||
| Increase (decrease) in net interest income | $ | 881 | $ | (1,183 | ) | $ | (302 | ) | $ | (351 | ) | $ | (500 | ) | $ | (851 | ) | |||||||
Provision for Losses on Loans. A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments and other factors related to the collectability of the loan portfolio. Based upon an analysis of these factors, management recorded a provision of $113,000 for losses on loans for the fiscal year ended June 30, 2023, an increase of $173,000, compared to a credit of $60,000 for fiscal 2022. Management believes all nonperforming loans are adequately collateralized or have been written down to their realizable value. See discussion of Allowance for Loan Losses and Asset Quality above.
Non-interest Income. Other non-interest income decreased $213,000 or 41.4% to $302,000 for the fiscal year ended June 30, 2023, due primarily to a decrease of $250,000 in net gains on sales of loans, which totaled $5,000 for the year just ended. The Banks sell most of their long-term, fixed rate mortgages to FHLB as part of the asset/liability management strategy and the sale of such loans decreased along with the rise in general interest rates during the fiscal year. There were no disposals of OREO in the recently-ended fiscal year compared to net losses of $35,000 for the prior year.
Non-interest Expense. Non-interest expense increased $150,000 or 2.0% to $7.8 million for the fiscal year ended June 30, 2023 compared to fiscal 2022 primarily due to higher outside service fees, employee compensation and benefits cost, FDIC insurance premiums and other non-interest expenses.
Outside service fees increased $76,000 or 45.8% and totaled $242,000, as stock transfer agency fees increased $22,000 or 89.4% year over year, loan review costs increased $21,000 or 65.2% and computer technology services increased $12,000 or 133.0%. Employee compensation and benefits expense increased $62,000 or 1.3% and totaled $4.9 million for the fiscal year just ended primarily due to an increase of two full-time equivalent employees from period to period as well as general compensation increases. FDIC insurance expense increased $46,000 or 64.8% and totaled $117,000 for the twelve months ended June 30, 2023, due chiefly to higher base assessments by the agency, which became effective January 1, 2023. Other non-interest expenses increased $35,000 or 6.1% to $608,000 for the most recently-ended fiscal year due primarily to higher levels of employee and community engagement, as well as some elevated general expense levels. Charitable contributions increased $22,000 or 62.4% primarily returning to historical levels, but also in response to devastating flooding which occurred in eastern Kentucky. Contributions were reduced in the wake of the COVID epidemic and returned to more normal levels. We also provided aid to individuals and family impacted by the flash flooding disaster. Dues and memberships expense increased as we increased employee engagement in civic organizations and employee training. Insurance expense increased $11,000 or 11.8% year over year primarily due to increased cybersecurity premiums.
Somewhat offsetting the increases in various non-interest expenses were decreases in data processing expense, occupancy and equipment, and regulatory assessments. Data processing expenses decreased $27,000 or 5.0% and totaled $518,000 for the fiscal year just ended as core processing conversion expenses were incurred in the FY22 year. Occupancy and equipment expenses decreased $22,000 or 3.5% and totaled $610,000 for the year ended June 30, 2023, primarily due to a decrease in depreciation.
18
Income Taxes. Income tax expense decreased $183,000 or 38.4% to $294,000 for the fiscal year just ended. The decrease in income tax expense was primarily related to lower overall earnings year to year. The effective income tax rate for the years ended June 30, 2023 and 2022, was 24.0% and 23.1%, respectively.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of cash and deposits at other banks, deposit inflows, loan repayments and maturities, calls and sales of investment and mortgage-backed securities and advances from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We periodically assess our available liquidity and projected upcoming liquidity demands. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits, federal funds, and short- and intermediate-term U.S. Government agency obligations.
Our most liquid assets are cash, federal funds sold and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period. At June 30, 2023 and June 30, 2022, cash and cash equivalents totaled $8.2 million and $25.8 million, respectively. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $12.1 million and $10.5 million at June 30, 2023 and 2022, respectively.
We are not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material protracted decrease in liquidity. We expect that all our liquidity needs, including the contractual commitments can be met by our currently available liquid assets and cash flows. In the event any unforeseen demand or commitments were to occur, we have access to brokered deposits, FHLB advances, the Federal Reserve Discount Window and an unsecured line of credit with a correspondent bank. We expect that our currently available liquid assets and our ability to access our other liquidity sources would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.
Our primary investing activities are the origination of loans and the purchase of investment securities. In fiscal 2023 we originated $98.2 million of loans, which exceeded loan prepayments and repayments by $39.3 million. In fiscal 2022 we originated $85.5 million of loans, although loan prepayments and repayments exceeded that amount by $23.5 million. During fiscal 2023 and 2022 proceeds from principal repayments on loans totaled $58.9 million and $109.0 million, respectively. During fiscal 2022 we invested $10.4 million in short-lived mortgage-backed securities to earn additional yield on excess liquidity.
Financing activities consist primarily of activity in deposit accounts and in FHLB advances. Total deposits decreased $13.5 million for the year ended June 30, 2023, compared to a net increase of $13.0 million for the year ended June 30, 2022. We increased FHLB advances by $36.0 million or 105.7% from June 30, 2022 to June 30, 2023, using proceeds to fund new loans and offset decreased deposits. Deposit flows are affected by the overall level of interest rates, the products and corresponding interest rates offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. The Banks began using brokered deposits in the latter part of the year just ended and had $21.0 million in such deposits as of June 30, 2023. FHLB advances are collateralized by a blanket mortgage on the 1-4 family residential mortgages and multi-family residential mortgages owned by the Banks. See Note H-Advances from the Federal Home Loan Bank in Notes to Consolidated financial Statements. At June 30, 2023, the Banks had combined additional FHLB borrowing capacity of $87.3 million.
Commitments and Contractual Obligations
At June 30, 2023, we had $15.2 million in mortgage commitments. Certificates of deposit due within one year of June 30, 2023 totaled $119.5 million, or 52.8% of total deposits. If these deposits do not remain with us, we might be required to seek other sources of funds, including FHLB advances or other certificates of deposit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2024. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
19
Off-balance Sheet Arrangements
For the year ended June 30, 2023, other than loan commitments, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Dividend Policy
In fiscal 2023, the Company’s aggregate dividend of $1.4 million was more than its net income by $430,000. In fiscal 2022, the Company’s aggregate dividend of $1.4 million was less than its net income by $196,000. Approximately 58.5% of the shares of Kentucky First Federal are held by First Federal MHC, a mutual holding company created in 2005. Under regulations of the Board of Governors of the Federal Reserve System mutual holding companies, who have waived their dividends prior to December 1, 2009, may continue to waive these dividends provided there is no objection by the Federal Reserve. This waiver action is conditioned on providing appropriate notice and absent the Federal Reserve’s determination that the waiver would be detrimental to the safe and sound operations of the Banks. First Federal MHC put the issue to a vote of the members August 2012 and each of the succeeding years since 2012. Members of First Federal MHC voted in favor of the dividend waiver on all occasions and the Federal Reserve Bank of Cleveland subsequently approved the waiver of the dividends including an approval in 2023. As a result, First Federal MHC will be permitted to waive the receipt of dividends for quarterly dividends up to $0.10 per common share through the third quarter of 2024. Management believes that the Company has sufficient capital to continue the current dividend policy without affecting the well-capitalized status of either subsidiary bank. Therefore, we expect to continue to seek approval from the Federal Reserve to allow First Federal MHC to waive its right to dividends. If management should anticipate a long-term trend in which dividends consistently exceed net income (either due to regulatory mandate or a drop in income levels), the dividend policy would be reconsidered. Management cautions that comparison between the Company’s published earnings per share and the Company’s published dividends per share does not lead to an accurate portrayal of the relationship between net income and dividends paid, because the published dividend per share is calculated with the inclusion of the shares owned by First Federal MHC.
Impact of Inflation and Changing Prices
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
20
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors, and Audit Committee
Kentucky First Federal Bancorp
Frankfort, Kentucky
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Kentucky First Federal Bancorp (the “Company”) as of June 30, 2023 and 2022, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
21
To the Shareholders, Board of Directors, and Audit Committee
Kentucky First Federal Bancorp
Page 2
Allowance for Loan and Lease Losses (ALLL) Qualitative Adjustments
As more fully described in Notes A and C to the consolidated financial statements, the Company estimates the ALLL for probable incurred loan losses. The ALLL consists of a specific component for loans that are classified as impaired and a general component for all other loans. Impairment on loans determined to be impaired is measured on a loan-by-loan basis.
Historical loss experience is an input applied to loans not considered impaired and is adjusted for current factors, including levels of and trends in delinquencies and impaired loans, levels of and trends in charge-offs and recoveries, trends in volume and terms of loans, changes in lending policies, procedures and practices, experience, ability and depth of lending management and other relevant staff, economic trends and conditions, industry conditions and effects of changes in credit concentrations.
We identified the qualitative adjustments for current factors of the ALLL as a critical audit matter. The primary reason for our determination that the qualitative adjustments in the ALLL are a critical audit matter is that auditing the qualitative adjustments involved significant judgment and complex review. Further, auditing the qualitative adjustments in the ALLL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other environmental factors.
Our audit procedures related to the qualitative adjustments of the ALLL included the following procedures, among others.
| ● | Obtaining an understanding of the Company’s process for establishing the ALLL, including the qualitative factor adjustments of the ALLL and any limitations of the model |
| ● | Testing of completeness and accuracy of the information utilized in the calculation of the ALLL |
| ● | Evaluating the qualitative factor adjustments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions |
| ● | Evaluating overall reasonableness of estimated reserve by considering past performance of the Company’s loan portfolio, trends in credit quality of the loan portfolio and trends in the credit quality of peer institutions and comparing the trends to the Company’s ALLL trends for directional consistency compared to previous years |
| ● | Preparation of an independent estimate of an acceptable range of the ALLL to compare to management’s estimate |
/s/ FORVIS, LLP
We have served as the Company’s auditor since 2018.
Louisville, Kentucky
September 28, 2023
22
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED BALANCE SHEETS
June 30, 2023 and 2022
(Dollar amounts in thousands, except per share data)
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Cash and due from financial institutions | $ | $ | ||||||
| Fed funds sold | ||||||||
| Interest-bearing demand deposits | ||||||||
| Cash and cash equivalents | ||||||||
| Securities available-for-sale- at fair value | ||||||||
| Securities held-to-maturity, at amortized cost-approximate fair value of $ | ||||||||
| Loans held for sale | ||||||||
| Loans, net of allowance of $ | ||||||||
| Real estate acquired through foreclosure | ||||||||
| Office premises and equipment - at depreciated cost | ||||||||
| Federal Home Loan Bank stock - at cost | ||||||||
| Accrued interest receivable | ||||||||
| Bank-owned life insurance | ||||||||
| Goodwill | ||||||||
| Prepaid income taxes | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Savings | $ | $ | ||||||
| Certificates of deposit | ||||||||
| Demand deposit accounts | ||||||||
| Deposits | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Advances by borrowers for taxes and insurance | ||||||||
| Accrued interest payable | ||||||||
| Deferred income taxes | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity | ||||||||
| Preferred stock, | ||||||||
| Common stock, | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings - restricted | ||||||||
| Unearned employee stock ownership plan (ESOP), | ( | ) | ||||||
| Treasury shares, | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these statements.
23
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 2023 and 2022
(Dollar amounts in thousands, except per share data)
| 2023 | 2022 | |||||||
| Interest income | ||||||||
| Loans, including fees | $ | $ | ||||||
| Mortgage-backed securities | ||||||||
| Other securities | ||||||||
| Interest-bearing deposits and other | ||||||||
| Total interest income | ||||||||
| Interest expense | ||||||||
| Deposits | ||||||||
| Borrowings | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision (credit) for loan losses | ( | ) | ||||||
| Net interest income after provision for loan losses | ||||||||
| Non-interest income | ||||||||
| Earnings on bank-owned life insurance | ||||||||
| Net gains on sales of loans | ||||||||
| Net loss on sales of REO | ( | ) | ||||||
| Net gain on sale of property and equipment | ||||||||
| Other | ||||||||
| Total non-interest income | ||||||||
| Non-interest expense | ||||||||
| Employee compensation and benefits | ||||||||
| Data processing | ||||||||
| Occupancy and equipment | ||||||||
| FDIC insurance premiums | ||||||||
| Voice and data communications | ||||||||
| Advertising | ||||||||
| Outside service fees | ||||||||
| Audit and accounting | ||||||||
| Franchise and other taxes | ||||||||
| Foreclosure and REO expense, net | ||||||||
| Regulatory Assessments | ||||||||
| Other | ||||||||
| Total non-interest expense | ||||||||
| Income before income taxes | ||||||||
| Income tax expense | ||||||||
| Current | ||||||||
| Deferred | ( | ) | ||||||
| Total income tax expense | ||||||||
| NET INCOME | $ | $ | ||||||
| EARNINGS PER SHARE | ||||||||
| $ | $ | |||||||
The accompanying notes are an integral part of these statements.
24
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended June 30, 2023 and 2022
(Dollar amounts in thousands)
| 2023 | 2022 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive loss, net of tax-related effects: | ||||||||
| Unrealized holding losses on securities designated as available for sale during the year, net of tax benefits of $( | ( | ) | ||||||
| Comprehensive income | $ | $ | ||||||
The accompanying notes are an integral part of these statements.
25
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended June 30, 2023 and 2022
(Dollar amounts in thousands, except per share data)
| Common stock | Additional paid-in capital | Retained earnings | Unearned employee stock ownership plan (ESOP) | Treasury shares | Accumulated other comprehensive income (loss) | Total | ||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Allocation of ESOP shares | ( | ) | ||||||||||||||||||||||||||
| Acquisition of shares for treasury | ( | ) | ( | ) | ||||||||||||||||||||||||
| Cash dividends of $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Allocation of ESOP shares | ( | ) | ||||||||||||||||||||||||||
| Acquisition of shares for treasury | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Cash dividends of $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these statements.
26
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2023 and 2021
(Dollar amounts in thousands)
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Accretion of purchased loan discount | ( | ) | ( | ) | ||||
| Amortization of discounts and premiums on investment securities, net | ( | ) | ||||||
| Amortization of deferred loan origination costs (fees) | ( | ) | ( | ) | ||||
| Net gain on sale of loans | ( | ) | ( | ) | ||||
| Net loss on real estate owned | ||||||||
| ESOP compensation expense | ||||||||
| Net gain on sale of property & equipment | ( | ) | ||||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| Provision (credit) for loan losses | ( | ) | ||||||
| Origination of loans held for sale | ( | ) | ( | ) | ||||
| Proceeds from loans held for sale | ||||||||
| Deferred income tax | ( | ) | ||||||
| Changes in: | ||||||||
| Accrued interest receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accrued interest payable | ( | ) | ||||||
| Accounts payable and other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of investments available for sale | ( | ) | ( | ) | ||||
| Purchase of FHLB stock | ( | ) | ||||||
| Maturities of time deposits in other financial institutions | ||||||||
| Investment securities maturities, prepayments and calls: | ||||||||
| Held to maturity | ||||||||
| Available for sale | ||||||||
| Proceeds from redemption of FHLB stock | ||||||||
| Proceeds from sale of property & equipment | ||||||||
| Loans originated for investment, net of principal collected | ( | ) | ||||||
| Proceeds from sale of real estate owned | ||||||||
| Additions to premises and equipment, net | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Net increase (decrease) in deposits | ( | ) | ||||||
| Payments by borrowers for taxes and insurance, net | ( | ) | ||||||
| Proceeds from Federal Home Loan Bank advances | ||||||||
| Repayments on Federal Home Loan Bank advances | ( | ) | ( | ) | ||||
| Treasury stock purchases | ( | ) | ( | ) | ||||
| Dividends paid on common stock | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Beginning cash and cash equivalents | ||||||||
| Ending cash and cash equivalents | $ | $ | ||||||
The accompanying notes are an integral part of these statements.
27
KENTUCKY FIRST FEDERAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended June 30, 2023 and 2021
(Dollar amounts in thousands)
| 2023 | 2022 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the year for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest on deposits and borrowings | $ | $ | ||||||
| Supplemental disclosure of noncash investing activities: | ||||||||
| Transfers from loans to real estate acquired through foreclosure | $ | $ | ||||||
| Loans disbursed upon sales of real estate acquired through foreclosure | $ | $ | ||||||
The accompanying notes are an integral part of these statements.
28
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentucky First Federal Bancorp (the “Company”) is a savings and loan holding company whose activities are primarily limited to holding the stock and managing the operations of First Federal Savings and Loan Association of Hazard, Kentucky (“First Federal of Hazard”) and Frankfort First Bancorp, Inc., (“Frankfort First”) the holding company for First Federal Savings Bank of Kentucky (“First Federal of Kentucky”). First Federal of Hazard and First Federal of Kentucky are collectively referred to herein as “the Banks.” First Federal of Hazard is a community-oriented savings and loan association dedicated to serving consumers in Perry and surrounding counties in eastern Kentucky, while First Federal of Kentucky operates through six banking offices located in Frankfort, Danville and Lancaster, Kentucky. Both institutions engage primarily in the business of attracting deposits from the general public and applying those funds to the origination of loans for residential and consumer purposes. First Federal of Kentucky also originates, to a lesser extent, church loans, home equity and other loans. Other than a predominance of one- to four-family residential property, which is common in most thrifts, there are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the Banks’ specific operating areas. The Banks’ profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Banks can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management’s control.
The following is a summary of the Company’s significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements.
1. Principles of Consolidation: The consolidated financial statements include the accounts of the Company, First Federal of Hazard, Frankfort First and First Federal of Kentucky. All significant intercompany accounts and transactions have been eliminated in consolidation.
2. Use of Estimates: The consolidated financial information presented herein has been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP.”) To prepare financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Such estimates include, but are not limited to, the allowance for loan losses, goodwill, and deferred taxes.
3. Debt Securities: Debt securities are classified as held to maturity or available for sale. Securities classified as held to maturity are to be carried at cost only if the Company has the positive intent and ability to hold these securities to maturity. Securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to shareholders’ equity, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
29
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, adjusted for deferred loan origination costs, net, discounts on purchased loans, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance unless the collectability of the loan is in doubt. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on one- to four-family residential loans is generally discontinued at the time a loan is 180 days delinquent and on other loans at the time a loan is 90 days delinquent. All other loans are moved to non-accrual status in accordance with the Company’s policy, typically 90 days after the loan becomes delinquent. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
5. Loans held for sale, Mortgage
Servicing Rights, and Lender Risk Account: Loans held for sale are carried at the lower of cost (less principal payments received)
or fair value, calculated on an aggregate basis. At June 30, 2023 and 2022 the Company had $
In selling loans, the Company utilizes
a program with the Federal Home Loan Bank, retaining servicing on loans sold. Mortgage servicing rights on originated loans that have
been sold are initially recorded at fair value. Capitalized servicing rights are amortized in proportion to and over the period of estimated
servicing revenues. The Company recorded amortization related to mortgage servicing rights totaling $
The Company was servicing mortgage
loans of approximately $
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with other non-interest income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income which is reported
on the income statement as other non-interest income is recorded for fees earned for servicing loans. The fees are based on a contractual
percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted
against loan servicing fee income. Servicing fees totaled $
Certain loan sale transactions with the Federal Home Loan Bank of Cincinnati (“FHLB”) provide for the establishment of a Lender Reserve Account (“LRA”). The LRA consists of amounts withheld by FHLB from loan sale proceeds for absorbing inherent losses that are probable on those sold loans. These withheld funds are an asset to the Company, as they are scheduled to be paid to the Company in future years, net of any credit losses on those loans sold. The receivables are initially measured at fair value. The fair value is estimated by discounting the cash flows over the life of each master commitment contract. The accretable yield is amortized over the life of the master commitment contract. Expected cash flows are reevaluated at each measurement date. If there is an adverse change in expected cash flows, the accretable yield would be adjusted on a prospective basis and the asset evaluated for impairment.
30
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loss experience, the nature and volume of the portfolio, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers all loans and is based on historical loss experience adjusted for current factors. In consultation with regulators, the Company considers a time frame of two years when estimating the appropriate level of allowance for loan losses. This period may be shortened or extended based on anticipated trends in the Banks or in the Banks’ markets.
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent eight quarters. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.
These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Our portfolio segments include residential real estate, nonresidential real estate and land, loans on deposits and consumer and other loans. Risk factors associated with our portfolio segments are as follows:
Residential Real Estate
Our primary lending activity is the origination of mortgage loans, which enable a borrower to purchase or refinance existing homes in the Banks’ respective market areas. We further classify our residential real estate loans as one- to four-family (owner-occupied vs nonowner-occupied), multi-family or construction. We believe that our first mortgage position on loans secured by residential real estate presents lower risk than our other loans, with the exception of loans secured by deposits.
We offer a mix of adjustable-rate and
fixed-rate mortgage loans with terms up to
We offer loans on one- to four-family
rental properties at a maximum of
We also originate loans to individuals
to finance the construction of residential dwellings for personal use or for use as rental property. We occasionally lend to builders
for construction of speculative or custom residential properties for resale, but on a limited basis. Construction loans are generally
less than one year in length, do not exceed
Multi-family and Nonresidential Loans
We offer mortgage loans secured by
residential multi-family (five or more units), and nonresidential real estate. Nonresidential real estate loans are comprised generally
of commercial office buildings, churches and properties used for other purposes. Generally, these loans are originated for
31
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Allowance for loan losses: (continued)
Consumer lending
Our consumer loans include home equity
lines of credit, loans secured by savings deposits, automobile loans, and unsecured loans. Home equity loans are generally second mortgage
loans subordinate only to first mortgages also held by the bank and do not exceed 80% of the estimated value of the property. We do offer
home equity loans up to
The Banks choose the most appropriate method for accounting for impaired loans. For secured loans, which make up the vast majority of the loans in the Banks’ portfolio, this method involves determining the fair value of the collateral, reduced by estimated selling costs. Where appropriate, the Banks would account for impaired loans by determining the present value of expected future cash flows discounted at the loan’s effective interest rate.
A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Although most of our loans are secured by collateral, we rely heavily on the capacity of our borrowers to generate sufficient cash flow to service their debt. As a result, our loans do not become collateral-dependent until there is deterioration in the borrower’s cash flow and financial condition, which makes it necessary for us to look to the collateral for our sole source of repayment. Collateral-dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under the policy at that time.
We utilize updated independent appraisals to determine fair value for collateral-dependent loans, adjusted for estimated selling costs, in determining our specific reserve. In some situations, management does not secure an updated independent appraisal. These situations may involve small loan amounts or loans that, in management’s opinion, have an abnormally low loan-to-value ratio.
With respect to the Banks’ investment in troubled debt restructurings, multi-family and nonresidential loans, and the evaluation of impairment thereof, such loans are nonhomogenous and, as such, may be deemed to be collateral-dependent when they become more than 90 days delinquent. We obtain updated independent appraisals in these situations or when we suspect that the previous appraisal may no longer be reflective of the property’s current fair value. This process varies from loan to loan, borrower to borrower, and also varies based on the nature of the collateral.
7. Federal Home Loan Bank Stock: The Banks are members of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as interest income.
8. Real Estate Owned: Real estate acquired through or instead of foreclosure is initially recorded at fair value less estimated selling expenses at the date of acquisition, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequently, the carrying value is adjusted through a valuation allowance and the amount is recorded through expense. Costs relating to holding real estate owned, net of rental income, are charged against earnings as incurred.
32
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Premises and Equipment: Land
is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. The cost of premises and equipment includes
expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial
reporting, depreciation is provided on the straight-line method over the useful lives of the assets, estimated to be forty years for buildings,
ten to forty years for building improvements, and five to ten years for furniture and equipment. When management initiates a plan to dispose
of assets, those assets are transferred to fixed assets held for sale and evaluated for potential impairment. At June 30, 2022 the Company
had fixed assets held for sale of $
10. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years’ earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management’s estimate of future taxable income. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future.
A tax provision is recognized as a
benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
Kentucky First Federal Bancorp and Frankfort First Bancorp, Inc., each are subject to state income taxes in the Commonwealth of Kentucky. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before 2019.
11. Retirement and Employee Benefit
Plans: The Banks participate in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”),
which is a tax-qualified, multi-employer defined benefit pension fund covering all employees who qualify as to length of service. The
Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer
plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal
Revenue Code. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand
behind all of the liabilities. Accordingly, under the Pentegra DB Plan contributions made by a participating employer may be used to provide
benefits to participants of other participating employers. Total contributions made to the Pentegra DB Plan, as reported on Form 5500,
equal $
The Company also maintained a nonqualified
deferred compensation plan for the benefit of certain directors, which was closed to any future deferrals. The expense incurred for the
deferred compensation was $
33
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Retirement and Employee Benefit Plans: (continued)
The Company maintains an Employee Stock
Ownership Plan (“ESOP”) which provides retirement benefits for substantially all full-time employees who have completed one
year of service and have attained the age of 21. Annual contributions are made to the ESOP equal to the ESOP’s debt service less
dividends received by the ESOP on unallocated shares. Shares in the ESOP were acquired using funds provided by a loan from the Company
and, accordingly, the cost of those shares is shown as a reduction of stockholders’ equity. Shares are released to participants
proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends
on unallocated shares are used to repay loan principal and accrued interest. Compensation expense is recorded equal to the fair value
of shares committed to be released during a given fiscal year. Allocation of shares to the ESOP participants was contingent upon the repayment
of a loan to Kentucky First Federal Bancorp totaling $
| For the fiscal year ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Allocated shares | ||||||||
| Shares committed to be released | ||||||||
| Unearned shares | ||||||||
| Total ESOP shares | ||||||||
| Fair value of unearned shares at end of period | $ | $ | ||||||
The Company maintains a 401(k) plan for the benefit of all full-time employees. No employer contributions have been made to the 401(k) plan.
12. Earnings Per Share: Diluted
earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued or
released under the Company’s share-based compensation plans.
| For the fiscal year ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| $ | $ | |||||||
| EARNINGS PER SHARE | $ | $ | ||||||
Basic earnings per share is computed based upon the weighted-average shares outstanding during the year (which excludes treasury shares) less average shares in the ESOP that are unallocated and not committed to be released. There were no options outstanding for fiscal years 2023 and 2022.
34
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Assets and Liabilities: Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access as of the measurement date.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
| Fair Value Measurements Using | ||||||||||||||||
| Quotes Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
| (in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| 2023 | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | | $ | |||||||||||
| 2022 | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
There were no transfers between levels 1 and 2.
There were no assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2023 and 2022.
The following disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated balance sheet, is based on the assumptions presented for each particular item and for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods.
35
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Assets and Liabilities: (continued)
The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments.
| Fair Value Measurements at | ||||||||||||||||||||
| Carrying | June 30, 2023 Using | |||||||||||||||||||
| (in thousands) | Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Available-for-sale securities | $ | |||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||
| Loans receivable - net | $ | |||||||||||||||||||
| Federal Home Loan Bank stock | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | ||||||||||||||||
| Federal Home Loan Bank advances | ||||||||||||||||||||
| Advances by borrowers for taxes and insurance | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Fair Value Measurements at | ||||||||||||||||||||
| Carrying | June 30, 2022 Using | |||||||||||||||||||
| (in thousands) | Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Financial assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Available-for-sale securities | $ | |||||||||||||||||||
| Held-to-maturity securities | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans receivable - net | $ | |||||||||||||||||||
| Federal Home Loan Bank stock | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | ||||||||||||||||
| Federal Home Loan Bank advances | ||||||||||||||||||||
| Advances by borrowers for taxes and insurance | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
14. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing deposits in other financial institutions with original maturities of less than ninety days.
15. Goodwill: Goodwill
of $
36
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Cash Surrender Value of Life Insurance: First Federal of Kentucky has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
17. Treasury Stock: Treasury stock is stated at cost. Cost is determined by the first-in, first-out method.
18.
| (in thousands) | 2023 | 2022 | ||||||
| Outstanding principal, beginning of year | $ | $ | ||||||
| Changes in composition of related parties | ||||||||
| Principal disbursed during the year | ||||||||
| Principal repaid and refinanced during the year | ( | ) | ( | ) | ||||
| Outstanding principal, end of year | $ | $ | ||||||
Deposits from related parties held
by the Company at June 30, 2023 and 2022 totaled $
In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.
19. Comprehensive Income and Accumulated Comprehensive Income (Loss): Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, net of tax, for the period which are also recognized as separate components of equity. Accumulated comprehensive income (loss) consists solely of unrealized gain or loss on available-for-sale securities at the end of the period.
20. Revenue Recognition: The Company’s revenue-generating activities accounted for under Topic 606 includes primarily service charges and fees on deposits and other service charges and fees and comprise the majority of other non-interest income on the statement of income. Service charges and fees on deposits are primarily debit card interchange fees and automatic teller machine (“ATM”) surcharge fees. To a lesser extend service charges and fees also include overdraft fees, dormant account fees, and service charges on checking and savings accounts. Overdraft fees are recognized at the time an account is overdrawn. Dormant account fees are recognized when an account is inactive for at least 365 days. Service charges on checking and savings accounts are primarily account maintenance services performed and recognized in the same calendar month. Other deposit-based service charges and fees include transaction-based services completed at the request of the customer and recognized at the time the transaction is completed. These transaction-based services include ATM usage and stop payment services. All service charges and fees on deposits are withdrawn from the customer’s account at the time the service is provided.
21. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
22. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
23. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to the holding company or by the holding company to shareholders.
37
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
24. Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
25. Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
26. New Accounting Standards:
FASB ASC 326 –
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized
cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing
the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The Company
will now use forward-looking information to enhance its credit loss estimates. The amendment requires enhanced disclosures to aid investors
and other users of financial statements to better understand significant estimates and judgments used in estimating credit losses, as
well as the credit quality and underwriting standards of our portfolio. The largest impact to the Company will be on its allowance for
loan and lease losses, although the ASU also amends the accounting for credit losses on available-for-sale debt securities, held-to-maturity
securities, and purchased financial assets with credit deterioration. The standard is effective for public companies for annual periods
and interim periods within those annual periods beginning after December 15, 2019. However, the FASB has delayed the implementation of
the ASU for smaller reporting companies until years beginning after December 15, 2022, or in the Company’s case the fiscal year
beginning July 1, 2023. ASU 2016-13 will be applied through a cumulative effect adjustment to retained earnings (modified-retrospective
approach), except for debt securities for which an other-than-temporary impairment had been recognized before the effective date. A prospective
transition approach is required for these debt securities. We have selected and engaged a third-party software provider for modeling our
data. We have run parallel calculations using both our traditional allowance calculation methodology and the new CECL software for the
three most recent quarterly periods. We are pleased with the progress made on the fine tuning of the data inputs for the model. We expect
to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period
in which the new standard is effective, and estimate the amount of such one-time adjustment to be in the range of $
In March 2022 the Financial Accounting Standards Board (“FASB”) issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, as an update to its post-implementation review activities associated with ASU No. 2016-13. The amendments in this Update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance provided to determine whether a modification results in a new loan or a continuation of an existing loan. This Update also requires disclosure by public business entities of current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. Because the Company has not yet adopted amendments in Update 2016-13, the amendments in this Update are effective for the fiscal year beginning July 1, 2023.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
38
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE B - SECURITIES
The following table summarizes the
amortized cost and fair value of the available for sale securities and held to maturity investment securities portfolio at June 30, 2023
and 2022 and the corresponding amounts of gross unrealized or unrecognized gains and losses. Unrealized gains or losses apply to available-for-sale
securities and are recognized in accumulated other comprehensive income, while unrealized gains or losses on held-to-maturity securities
are not recognized in the financial statements.
| 2023 | ||||||||||||||||
| (in thousands) | Amortized | Gross unrealized gains | Gross unrealized losses | Estimated fair value | ||||||||||||
| Available-for-sale Securities | ||||||||||||||||
| Agency mortgage-backed residential | $ | $ | $ | | $ | |||||||||||
| Held-to-maturity Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
| 2022 | ||||||||||||||||
| (in thousands) | Amortized | Gross unrealized gains | Gross unrealized losses | Estimated fair value | ||||||||||||
| Available-for-sale Securities | ||||||||||||||||
| Agency mortgage-backed residential | $ | $ | $ | $ | ||||||||||||
| Held-to-maturity Securities | ||||||||||||||||
| Agency mortgage-backed: residential | $ | $ | $ | $ | ||||||||||||
At June 30, 2023, the Company’s debt securities consisted of mortgage-backed securities, which do not have a single maturity date. Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities during the fiscal year
ended June 30, 2023 or 2022. At June 30, 2023 the Company had no available-for-sale
mortgage-backed securities with gross unrealized losses that had been in an unrealized loss position for more than 12 months and $
At June 30, 2023 the Company had $
Securities in an unrealized loss position as a percent of
total securities were
Unrealized losses on agency mortgage-backed securities have not been recognized into income because they are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the investments reach maturity.
At June 30, 2023 and 2022, pledged
securities totaled $
39
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS
| (in thousands) | 2023 | 2022 | ||||||
| Residential real estate | ||||||||
| One- to four-family | $ | $ | ||||||
| Multi-family | ||||||||
| Construction | ||||||||
| Land | ||||||||
| Farm | ||||||||
| Nonresidential real estate | ||||||||
| Commercial and industrial | ||||||||
| Consumer and other | ||||||||
| Loans on deposits | ||||||||
| Home equity | ||||||||
| Automobile | ||||||||
| Unsecured | ||||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The amounts above include net deferred
loan fees of $
June 30, 2023:
| (in thousands) | Loans individually evaluated | Loans acquired with deteriorated credit quality* | Ending loans balance | Ending allowance attributed to loans | ||||||||||||
| Loans individually evaluated for impairment: | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | $ | $ | ||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Home Equity | ||||||||||||||||
| Loans collectivelly evaluated for impairment: | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | ||||||||||||||
| Multi-family | ||||||||||||||||
| Construction | ||||||||||||||||
| Land | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Loans on deposits | ||||||||||||||||
| Home equity | ||||||||||||||||
| Automobile | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | |||||||||||||||
| * |
40
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
June 30, 2022:
| (in thousands) | Loans individually evaluated | Loans acquired with deteriorated credit quality* | Ending loans balance | Ending allowance attributed to loans | ||||||||||||
| Loans individually evaluated for impairment: | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Home equity | ||||||||||||||||
| Unsecured | ||||||||||||||||
| Loans collectivelly evaluated for impairment: | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | ||||||||||||||
| Multi-family | ||||||||||||||||
| Construction | ||||||||||||||||
| Land | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Loans on deposits | ||||||||||||||||
| Home equity | ||||||||||||||||
| Automobile | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | |||||||||||||||
| * | These loans were evaluated at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition. |
41
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
| (in thousands) | Unpaid Principal Balance and Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||
| June 30, 2023: | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| June 30, 2022: | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||
| Consumer and other | - | - | - | |||||||||||||||||
| Home equity | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
42
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
| June 30, 2023 | June 30, 2022 | |||||||||||||||
| (in thousands) | Nonaccrual | Loans Past Due Over 90 Days Still Accruing | Nonaccrual | Loans Past Due Over 90 Days Still Accruing | ||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | $ | $ | | |||||||||||
| Multi-family | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Home equity | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
One- to four-family loans in process
of foreclosure totaled $
Troubled Debt Restructurings:
A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Banks would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.”
At June 30, 2023 and 2022, the Company
had $
During
The Company had no allocated specific
reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2023 or 2022. At June 30, 2023
and 2022, TDR loans on nonaccrual status totaled $
43
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
June 30, 2023:
| (in thousands) | 30-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Loans Not Past Due | Total | |||||||||||||||
| Residential real estate | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Land | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Loans on deposits | ||||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
June 30, 2022:
| (in thousands) | 30-89 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Loans Not Past Due | Total | |||||||||||||||
| Residential real estate | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | $ | $ | |||||||||||||||
| Multi-family | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Land | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Loans on deposits | ||||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
44
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above.
45
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
June 30, 2023:
| (in thousands) | Pass | Special Mention | Substandard | Doubtful | ||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Construction | ||||||||||||||||
| Land | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Loans on deposits | ||||||||||||||||
| Home equity | ||||||||||||||||
| Automobile | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
June 30, 2022:
| (in thousands) | Pass | Special Mention | Substandard | Doubtful | ||||||||||||
| Residential real estate | ||||||||||||||||
| One- to four-family | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Construction | ||||||||||||||||
| Land | ||||||||||||||||
| Farm | ||||||||||||||||
| Nonresidential real estate | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Loans on deposits | ||||||||||||||||
| Home equity | ||||||||||||||||
| Automobile | ||||||||||||||||
| Unsecured | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
46
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
June 30, 2023:
| (in thousands) | Beginning balance | Provision (credit) for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Multi-family | ||||||||||||||||||||
| Construction | ||||||||||||||||||||
| Land | ( | ) | ||||||||||||||||||
| Farm | ( | ) | ||||||||||||||||||
| Nonresidential real estate | ( | ) | ||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Loans on deposits | ||||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| $ | $ | $ | ( | ) | $ | $ | ||||||||||||||
June 30, 2022:
| (in thousands) | Beginning balance | Provision (credit) for loan losses | Loans charged off | Recoveries | Ending balance | |||||||||||||||
| Residential real estate | ||||||||||||||||||||
| One- to four-family | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Multi-family | ( | ) | ||||||||||||||||||
| Construction | ( | ) | ||||||||||||||||||
| Land | ||||||||||||||||||||
| Farm | ||||||||||||||||||||
| Nonresidential real estate | ( | ) | ||||||||||||||||||
| Commercial and industrial | ( | ) | ||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Loans on deposits | ( | ) | ||||||||||||||||||
| Home equity | ||||||||||||||||||||
| Automobile | ||||||||||||||||||||
| Unsecured | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||
47
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE C - LOANS (continued)
Purchased Loans:
The Company purchased loans during
the fiscal year ended June 30, 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination
and it was probable, at acquisition, that all contractually required payments would not be collected.
| (in thousands) | 2023 | 2022 | ||||||
| Residential real estate | ||||||||
| One- to four-family | $ | $ | ||||||
| (in thousands) | 2023 | 2022 | ||||||
| Balance at beginning of year | $ | $ | ||||||
| Accretion of income | ( | ) | ( | ) | ||||
| Balance at end of year | $ | $ | ||||||
For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the years ended June 30, 2023 or 2022, nor were any allowance for loan losses reversed during those years.
NOTE D - REAL ESTATE OWNED
| (in thousands) | 2023 | 2022 | ||||||
| Balance at beginning of year | $ | $ | ||||||
| Loans transferred to real estate owned | ||||||||
| Capitalized expenditures | ||||||||
| Valuation adjustments | ||||||||
| Disposals | ( | ) | ||||||
| Balance at end of year | $ | $ | ||||||
NOTE E - PREMISES AND EQUIPMENT
| (in thousands) | 2023 | 2022 | ||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Furniture & equipment | ||||||||
| Less: accumulated depreciation | ||||||||
| Balance at end of year | $ | $ | ||||||
48
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE F - GOODWILL
Goodwill of $
NOTE G - DEPOSITS
| (in thousands) | 2023 | 2022 | ||||||
| Non-interest bearing checking accounts | $ | $ | ||||||
| Checking accounts | ||||||||
| Savings Accounts | ||||||||
| Money market demand deposits | ||||||||
| Total demand, transaction and passbook deposits | ||||||||
| Certificates of deposit | ||||||||
| Total deposits | $ | $ | ||||||
| (in thousands) | 2023 | ||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 and thereafter | |||||
| $ | |||||
At June 30, 2023 and 2022, the
Company had certificate of deposit accounts with balances equal to or in excess of $
49
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE H - ADVANCES FROM THE FEDERAL HOME LOAN BANK
| (in thousands) | 2023 | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030-2033 | ||||
| $ | ||||
At June 30, 2023 interest rates for
advances were fixed ranging from
Each advance is payable at its maturity
date, with a prepayment penalty for fixed rate advances. Based on collateral composed of first mortgage loans and the Company’s
holdings of FHLB stock, the Company was eligible to borrow up to $
NOTE I - INCOME TAXES
| (in thousands) | 2023 | 2022 | ||||||
| Income taxes at the statutory rate | $ | $ | ||||||
| Increase (decrease) resulting from: | ||||||||
| Cash surrender value of life insurance | ( | ) | ( | ) | ||||
| State income taxes | ||||||||
| Other | ( | ) | ( | ) | ||||
| $ | $ | |||||||
50
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE I - INCOME TAXES (continued)
| (in thousands) | 2023 | 2022 | ||||||
| Taxes (payable) refundable on temporary differences at estimated corporate tax rate: | ||||||||
| Deferred tax assets: | ||||||||
| General loan loss allowance | $ | $ | ||||||
| Accrued expenses | ||||||||
| Fair value accounting adjustments at acquisition | ||||||||
| Nonaccrued interest on loans | ||||||||
| Unrealized loss on available-for-sale securities | ||||||||
| Depreciation | ||||||||
| State net operating loss carryforward | ||||||||
| Total deferred tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Federal Home Loan Bank stock dividends | ( | ) | ( | ) | ||||
| Deferred loan origination costs | ( | ) | ( | ) | ||||
| Loan servicing rights | ( | ) | ( | ) | ||||
| Accrual to cash adjustment | ( | ) | ( | ) | ||||
| Fair value accounting adjustments on acquisition | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax liability | $ | ( | ) | $ | ( | ) | ||
The Company has state net operating
loss carryforward of $
Prior to 1997, the Banks were allowed
a special bad debt deduction, generally limited to
NOTE J - LOAN COMMITMENTS
The Banks are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of the commitments reflect the extent of the Banks’ involvement in such financial instruments.
The Banks’ exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments.
51
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE J - LOAN COMMITMENTS (continued)
| 2023 | 2022 | |||||||||||||||
| (in thousands) | Fixed | Variable | Fixed | Variable | ||||||||||||
| Unused commitment: | ||||||||||||||||
| Revolving, open-end lines secured by real estate | $ | $ | $ | $ | ||||||||||||
| Commitments to fund real estate construction loans | ||||||||||||||||
| Other unused commitments: | ||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||
| Other | ||||||||||||||||
| Letters of credit | ||||||||||||||||
Commitments to make loans are generally made for periods of 60 days or less. There were fixed rate loan commitments to fund real estate construction loans at June 30, 2022. Other unused commitments include real estate loan commitments, which represent the primary loans made by the Banks. Long-term, fixed rate mortgage loans are usually sold to the FHLB, as part of the Company’s interest rate risk strategy.
NOTE K - STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL
Qualified Thrift Lender –
Federal regulations require the Banks comply with the Qualified Thrift Lender (“QTL”) test, which requires that
Dividend Restrictions – Dividends from the Banks are the primary source of funds for the Company. Banking regulations limit the amount of dividends that may be paid to the Company by the Banks without prior approval of the Office of the Controller of the Currency (the “OCC.”) Under these regulations the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years. At June 30, 2023, the Banks could, without prior approval, declare no dividends.
Regulatory Capital Requirements – The Banks are subject to minimum regulatory capital standards promulgated by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
Capital Standards – Effective January 1, 2020, the Company and the Banks became subject to the Community Bank Leverage Ratio (“CBLR”) framework. Previously the Company and the Banks were subject to regulatory capital reforms in accordance with Basel III.
52
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE K - STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL (continued)
Community Bank Leverage Ratio
Certain community banks and holding
companies (which include the Company, Frankfort First, First Federal of Kentucky and First Federal of Hazard) that satisfy certain qualifying
criteria, including having less than $
In April 2020, federal banking regulators
issued temporary changes to the CBLR framework according to certain directives of the Coronavirus Aid, Relief, and Economic Security (“CARES”)
Act. These changes were adopted as a final rule and applied to those banking organizations otherwise meeting the other existing qualifying
criteria.
Under this framework the Company and the Banks would be considered well-capitalized under the applicable guidelines.
The Basel III, which became effective
January 1, 2015, established higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio
and a new capital conservation buffer (“CCB.”) The regulations also included revisions to the definition of capital and changes
in the risk-weighting of certain assets, in addition to redefining “well capitalized” as a
| Actual | For Capital Adequacy Purposes | |||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | ||||||||||||
| Community Bank Leverage Ratio: | ||||||||||||||||
| June 30, 2023 | ||||||||||||||||
| Kentucky First Federal Bancorp | $ | % | $ | % | ||||||||||||
| First Federal Savings and Loan Association of Hazard | $ | % | $ | % | ||||||||||||
| First Federal Savings Bank of Kentucky | $ | % | $ | % | ||||||||||||
| June 30, 2022 | ||||||||||||||||
| Kentucky First Federal Bancorp | $ | % | $ | % | ||||||||||||
| First Federal Savings and Loan Association of Hazard | $ | % | $ | % | ||||||||||||
| First Federal Savings Bank of Kentucky | $ | % | $ | % | ||||||||||||
53
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE K - STOCKHOLDERS’ EQUITY AND REGULATORY CAPITAL (continued)
As of June 30, 2023 and 2022, management believes that First Federal of Hazard and First Federal of Kentucky met all capital adequacy requirements to which the Banks were subject. There are no conditions or subsequent events that have occurred that managements believes have changed the Banks’ categories.
Regulations of the Board of Governors
of the Federal Reserve System governing mutual holding companies require First Federal MHC to meet certain criteria before the company
may waive the receipt by it of any common stock dividend declared by Kentucky First Federal Bancorp. During each of the fiscal years ended
June 30, 2023 and 2022, and pursuant to the provisions allowed by the Board of Governors of the Federal Reserve System, First Federal
MHC waived $
NOTE L - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP
KENTUCKY FIRST FEDERAL BANCORP
BALANCE SHEETS
June 30, 2023 and 2022
| (in thousands) | 2023 | 2022 | ||||||
| ASSETS | ||||||||
| Interest-bearing deposits in First Federal of Hazard | $ | $ | ||||||
| Interest-bearing deposits in First Federal of Kentucky | ||||||||
| Other interest-bearing deposits | ||||||||
| Investment in First Federal of Hazard | ||||||||
| Investment in Frankfort First | ||||||||
| Prepaid expenses and other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Accounts payable and other liabilities | $ | $ | ||||||
| Shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
54
KENTUCKY FIRST FEDERAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2023 and 2022
NOTE L - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP (continued)
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Years ended June 30, 2023 and 2022
| (in thousands) | 2023 | 2022 | ||||||
| Income | ||||||||
| Interest income | $ | $ | ||||||
| Non-interest income | ||||||||
| Dividends from First Federal of Hazard | ||||||||
| Equity in undistributed (excess distributed) earnings of First Federal of Hazard | ( | ) | ||||||
| Dividends from Frankfort First | ||||||||
| Equity in undistributed (excess distributed) earnings of Frankfort First | ( | ) | ( | ) | ||||
| Total income | ||||||||
| Non-interest expenses | ||||||||
| Earnings before income taxes | ||||||||
| Income tax expense (benefit) | ( | ) | ( | ) | ||||
| Net income (loss) | ||||||||
| Other comprehensive (loss) income, net of tax-related effects: | ||||||||
| Unrealized holding losses on securities designated as available-for-sale during the year, net of tax benefits of $ | ( | ) | ||||||
| $ | $ | |||||||
55
KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF CASH FLOWS
For Years ended June 30, 2023 and 2022
| (in thousands) | 2023 | 2022 | ||||||
| Cash flows from operating activities: | ||||||||
| Net earnings for the year | $ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Excess (deficit) distributions over earnings (undistributed earnings from consolidated subsidiaries | ||||||||
| Noncash compensation expense | ||||||||
| Increase (decrease) in cash due to changes in: | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Treasury stock purchases | ( | ) | ( | ) | ||||
| Dividends paid on common stock | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of year | ||||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||
56
Kentucky First Federal Bancorp would like to recognize our employees who work hard every day to maximize the value of your investment:
First Federal Savings Bank of Kentucky
Frankfort-Danville-Lancaster
| Lesa Asbery | Customer Service Leader |
| Lyndi Baker | Customer Service Leader |
| Brenda Baldwin | Financial analyst |
| Melissa Banta | Vice President Human Resources |
| Chase Barnett | Vice President Loan Officer |
| Phyllis Bryant | Customer Service Rep |
| Nancy Carpenter | Customer Service Rep |
| Kelsey Carter | Customer Service Leader |
| Katresha Clay | Customer Service Rep |
| Andrea Cline | Accounting Assistant |
| Lisa Craig | Vice President Deposit Operations |
| Tracie Crawley | Digital Banking Coordinator |
| Becky Crowe | Customer Service Leader |
| Deryl Curtis | Loan Servicing Specialist |
| Cortney Dillingham | Vice President Chief Credit Officer |
| Betty Doolin | Audit Coordinator for Kentucky First Federal Bancorp |
| Tyler Eades | Vice President/Chief Financial Officer of Kentucky First Federal |
| Bancorp and Chief Financial Officer of First Federal of Hazard | |
| Diana Eads | Customer Service Leader |
| Tiffaney Elliott | Chief Operating Officer Danville-Lancaster and Chief Financial |
| Officer of First Federal of Kentucky | |
| Jamey Ensley | Information Technology |
| Debra Freeman | Customer Service Leader/Training Coordinator |
| Cameron Frisby | Customer Service Rep |
| Stacey Greenawalt | Vice President Head of Residential Lending |
| Bernice Harrod | Assistant Vice President Loan Processing Coordinator |
| Melissa Harrod | Customer Service Rep |
| Karen Hatfield | Assistant Vice President/Customer Service Leader |
| Lee Ann Hockensmith | Vice President Chief Customer Officer |
| Nikki Hodge | Customer Service Rep |
| Ronald Howard | Vice President/Chief Lancaster Market Officer |
| Brittany Hulette | Accounting Assistant |
| Clay Hulette | Frankfort Area President |
| Teresa Hulette | Executive Vice President |
| Don Jennings | Chief Executive Officer |
57
First Federal Savings Bank of Kentucky
Frankfort-Danville-Lancaster, continued
| Eve Ann Jones | Customer Service Rep/Marketing Assistant |
| Sara Mack | Accounting Department Coordinator |
| Tracey McCoun | Vice President/BSA Officer/Deposit Compliance Officer |
| Christina Miller | Customer Service Rep |
| Samantha Miller | Vice President/Loan Compliance Officer/Credit Analyst |
| Julie Moore | Vice President/Loan Officer |
| Shelby Morris | Customer Service Rep |
| Carolyn Mulcahy | Assistant Vice President/Administrative Assistant |
| Jeanie Murphy | Loan Servicing Specialist |
| Lavenna Quire | Vice President/Loan Officer |
| David Semones | Security Officer/Loan Assistant |
| John Senter | Vice President/Loan Officer |
| Cynthia Shank | Customer Service Rep |
| Jenny Stump | Loan Processor |
| Angie Tennell | Loan Processor |
| Yvonne Thornberry | Loan Servicing |
| Mike Ware | Vice President/Information Technology Manager |
| Jennifer Whalen | Vice President/Loan Officer |
First Federal Savings and Loan Association of Hazard
| Jaime S. Coffey | Chief Executive Officer |
| Carlen Dixon | Vice President/Loan Officer/Information Technology |
| Kelly Fugate | Customer Service Rep |
| Jamie Haynes | Assistant Vice President/Treasurer |
| Melissa Matthews | Customer Service Rep |
| Margaret S. Petrey | Vice President/Head Teller |
| Lauren Riley | Vice President/Collections/Loan Officer |
| Eliza Stacy | Customer Service Rep |
| Jessica Watts | Vice President/Secretary/Loan Administration |
58
Kentucky First Federal Bancorp Board of Directors:
Stephen G. Barker, Attorney and President and General Counsel to Kentucky River Properties, LLC
Walter G. Ecton, Jr., Attorney and principal of Ecton, Murphy and Shannon, PLLC
Lou Ella Farler, former President and CEO of First Federal Savings and Loan Association of Hazard
William D. Gorman, Jr., former President and CEO of Hazard Insurance Agency
David R. Harrod, CPA, principal of Harrod and Associates, PSC
Don D. Jennings, President, Kentucky First Federal Bancorp
William H. Johnson, former Danville/Lancaster area President, First Federal Savings Bank of Kentucky
Tony D. Whitaker, Chairman, Kentucky First Federal Bancorp
First Federal Savings and Loan Association of Hazard Board of Directors:
| Stephen G. Barker | Jaime Coffey | Walter G. Ecton, Jr. | ||
| Lou Ella Farler | William D. Gorman, Jr. | Tony D. Whitaker, Chairman |
First Federal Savings Bank of Kentucky Board of Directors:
| Russell M. Brooks | J. Mark Goggans | David R. Harrod | ||
| R. Clay Hulette | Don D. Jennings, Chairman | William H. Johnson | ||
| Yvonne Y. Morley | Jerry M. Purcell | Mark Stamper | ||
| Virginia R.S. Stump |
| Special Counsel | Kilpatrick Townsend & Stockton LLP | |
| Suite 900 | ||
| 607 14th Street NW | ||
| Washington, DC 20005-2018 | ||
| Transfer Agent and Registrar | EQ formerly known as American Stock Transfer & Trust Company, LLC | |
| 6201 15th Avenue | ||
| Brooklyn, NY 11219 | ||
| (718) 921-8124 |
The Annual Meeting of Shareholders will be held on November 16, 2023 at 4:30 p.m. at the Challenger Center on the campus of Hazard Community and Technical College located at One Community Drive in Hazard, KY.
Shareholder Inquiries and Availability of 10-K Reports: A COPY OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2023, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE FOR THE NOVEMBER 16, 2023 ANNUAL MEETING, UPON WRITTEN REQUEST TO:
| Investor Relations: | Don Jennings | don.jennings@ffsbky.bank | ||
| Clay Hulette | clay.hulette@ffsbky.bank | |||
| (502) 223-1638 or 1-888-818-3372 216 W Main St PO Box 535 Frankfort, KY 40602 | ||||
59
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
| State or Other | ||||||
| Jurisdiction of | Percentage | |||||
| Incorporation | Ownership | |||||
| Parent | ||||||
| Kentucky First Federal Bancorp | United States | N/A | ||||
| Subsidiaries (1) | ||||||
| First Federal Savings and Loan Association of Hazard | United States | 100 | % | |||
| Frankfort First Bancorp, Inc. | Delaware | 100 | % | |||
| First Federal Savings Bank of Kentucky (2) | United States | 100 | % | |||
| (1) | The assets, liabilities and operations of the subsidiaries are included in the consolidated financial statements contained in the Annual Report to Stockholders attached hereto as Exhibit 13. |
| (2) | Wholly owned subsidiary of Frankfort First Bancorp, Inc., which is a wholly-owned subsidiary of Parent. |
Exhibit 31.1
Certification
I, Don D. Jennings, certify that:
1. I have reviewed this Annual Report on Form 10-K of Kentucky First Federal Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-(15)(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 28, 2023
| /s/ Don D. Jennings | |
| Don D. Jennings | |
| Chief Executive Officer |
Exhibit 31.2
Certification
I, R. Clay Hulette, certify that:
1. I have reviewed this Annual Report on Form 10-K of Kentucky First Federal Bancorp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-(15)(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 28, 2023
| /s/ R. Clay Hulette | |
| R. Clay Hulette | |
| Vice President, Chief Financial Officer and Treasurer |
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned executive officers of Kentucky First Federal Bancorp (the “Registrant”) hereby certify that this Annual Report on Form 10-K for the year ended June 30, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| By: | /s/ Don D. Jennings | ||
| Name: | Don D. Jennings | ||
| Title: | Chief Executive Officer | ||
| By: | /s/ R. Clay Hulette | ||
| Name: | R. Clay Hulette | ||
| Title: | Vice President, Chief Financial Officer and Treasurer | ||
Date: September 28, 2023