UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended June 30, 2008
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from
to
Commission
file number 0-51176
KENTUCKY
FIRST FEDERAL BANCORP
(Exact
name of registrant as specified in its charter)
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United
States
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61-1484858
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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479
Main Street, Hazard, Kentucky
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41702
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (502)
223-1638
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock (par value $0.01 per share)
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Nasdaq
Stock Market, LLC
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
Reporting Company x
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Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the common stock held by nonaffiliates was $25.5
million as of June 30, 2008.
Number
of
shares of common stock outstanding as of December 31, 2007:
7,734,164
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, 2008.
(Part II)
2. Portions
of Proxy Statement for the 2008 Annual Meeting of Stockholders. (Part
III)
INDEX
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PAGE
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PART
I
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Item
1.
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Business
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1
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Item
1A
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Risk
Factors
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16
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Item
1B
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Unresolved
Staff Comments
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18
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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19
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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19
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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20
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Item
6.
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Selected
Financial Data
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20
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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20
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Item
8.
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Financial
Statements and Supplementary Data
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21
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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21
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Item
9A(T).
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Controls
and Procedures
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21
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Item
9B.
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Other
Information
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22
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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23
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Item
11.
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Executive
Compensation
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23
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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23
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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24
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Item
14.
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Principal
Accountant Fees and Services
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24
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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24
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SIGNATURES
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PART
I
Item
1. Business
Forward-looking
Statements
This
report contains certain “forward-looking statements” within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on Kentucky First Federal Bancorp’s current expectations
regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as “expects,” “believes,”
“anticipates,” “intends” and similar expressions.
Management’s
ability to predict results or the effect of future plans or strategies is
inherently uncertain. Factors which could affect actual results include the
following: interest rate trends; the general economic climate in the market
areas in which Kentucky First Federal Bancorp operates, as well as nationwide;
Kentucky First Federal Bancorp’s ability to control costs and expenses;
competitive products and pricing; loan delinquency rates; and changes in federal
and state legislation and regulation. These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be
placed on such statements. Kentucky First Federal Bancorp assumes no obligation
to update any forward-looking statements.
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 Frankfort.
Kentucky
First Federal Bancorp. Kentucky
First Federal Bancorp (“Kentucky First” 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 completed its minority stock offering and issued a total of 8,596,064
shares of common stock, of which 4,727,938 shares, or 55%, were issued to First
Federal MHC, a federally chartered mutual holding company formed in connection
with the Reorganization, in exchange for the transfer of all of First Federal
of
Hazard’s capital stock, and 2,127,572 shares were sold at a cash price of $10.00
per share. Also on March 2, 2005, Kentucky First completed its acquisition
of
Frankfort First Bancorp, Inc. (“Frankfort First Bancorp”) and its wholly owned
subsidiary First Federal Savings Bank of Frankfort, Frankfort, Kentucky (“First
Federal of Frankfort”) (the “Merger”). Under the terms of the agreement of
merger, shareholders of Frankfort First Bancorp received approximately 1,740,554
shares of Kentucky First’s common stock and approximately $13.7 million in cash
(including payments to holders of Frankfort First stock options). Following
the
Reorganization and Merger, the Company retained Frankfort First Bancorp as
a
wholly owned subsidiary and holds all of the capital stock of First Federal
of
Hazard and First Federal of Frankfort. The Company is operating First Federal
of
Hazard and First Federal of Frankfort as two independent, community-oriented
savings institutions.
Kentucky
First’s and First Federal of Hazard’s executive offices are located at
479 Main
Street, Hazard, Kentucky, 41702 and their main telephone number is (606)
436-3860.
At
June
30, 2008, Kentucky First had total assets of $247.7 million, deposits of $137.6
million and stockholders’ equity of $59.8 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 Frankfort (collectively, the “Banks”), 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 Frankfort are subject to examination
and
comprehensive regulation by the Office of Thrift Supervision and their savings
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 12 regional banks in the FHLB System. See “Regulation and
Supervision.”
First
Federal Savings and Loan Association of Hazard. First
Federal of Hazard was formed as a federally chartered mutual savings and loan
association in 1960. First Federal of Hazard operates from a single office
in
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 Frankfort. At
June
30, 2008, First Federal of Hazard had total assets of $112.0 million, net loans
receivable of $65.0 million, total mortgage-backed and investment securities
of
$22.0 million, deposits of $79.9 million and total capital of $21.5
million.
First
Federal Savings Bank of Frankfort. First
Federal of Frankfort 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, Anderson, Scott,
Shelby, Woodford and other counties in Kentucky. First Federal of Frankfort
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, 2008, First Federal of Frankfort had total assets of
$140.0 million, net loans receivable of $113.7 million, deposits of
$65.5 million and total capital of $32.3 million.
First
Federal of Frankfort’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 Frankfort operate in two 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 due to the decline in the coal
industry on which the local economy has been historically dependent. However,
recent price increases in the petroleum market have improved the prospects
of
the coal industry at least temporarily. Management cannot determine whether
or
not this will have a long-range positive impact on the local economy. The local
economy has also improved recently from the influx of 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 State
of
Kentucky Economic Development Information System (www.thinkkentucky.com), per
capita personal income in Perry County averaged $25,648 in 2006, compared to
personal income of $29,729 in Kentucky and $36,714 in the United States. Total
population in Perry County has remained stable over the last five years at
approximately 29,500. 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 primarily of the trade,
transportation and utilities industry (18.7%), the services sector, including
health care (16.6%) and the mining industry (9.3%). During the last five years,
the unemployment rate has exceeded 6% and in 2007, was 7.1%, compared to 6.1%
in
Kentucky and 4.6% in the United States.
First
Federal of Frankfort’s primary lending area includes the Kentucky counties of
Franklin, Anderson, Scott, Shelby and Woodford, with the majority of lending
originated on properties located in Franklin County. Franklin County has a
population of approximately 48,000, of which approximately 27,000 live within
the city of Frankfort, which serves as the capital of Kentucky. The primary
employer in the area is the state government, which employs about 40% of the
work force. In addition, there are several large industrial, financial and
government employers in the community. Due to this large, relatively stable
source of employment, there has been little fluctuation in the unemployment
rate
which has ranged from 3 to 5% in recent years and was 4.5% in June 2007.
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, although there is little demand for such
loans in our market areas. We also offer loans secured by deposit accounts
and,
through First Federal of Frankfort, 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, 2008, residential mortgage loans totaled
$164.2 million, or 89.5% of our total loan portfolio. We offer a mix of
adjustable-rate and fixed-rate mortgage loans with terms up to 40 years.
Adjustable-rate loans have an initial fixed term of one, three, five or seven
years. After the initial term, the rate adjustments on First Federal of
Frankfort’s adjustable-rate loans are indexed to the National Average Contract
Interest Rate for Major Lenders on the Purchase of Previously Occupied Homes.
The interest rates on these mortgages are adjusted once a year, with limitations
on adjustments 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, 2008, the Company’s loan portfolio included $103.6 million in
adjustable-rate one- to four-family residential mortgage loans, or 65.6%, of
the
Company’s one- to four-family 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. However, despite
their popularity in some parts of the country, neither bank offers
adjustable-rate loans that contractually allow for negative amortization. Such
loans, under some circumstances, can cause the balance of a closed-end loan
to
exceed the original balance and perhaps surpass the value of the collateral.
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, (with terms up to 40 years available for some products)
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 100% 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. On a rare case-by-case basis, 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 to individuals to finance the construction of residential
dwellings for personal use. On limited occasions we have made construction
loans
to builders for the construction of a single-family residence for subsequent
sale. At June 30, 2008, construction loans totaled $3.5 million, or 1.9%, 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.
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.
The
Company has made two construction loans beyond the scope discussed above. During
fiscal 2008, we financed the construction of a small 4-unit condominium
development ($800,000). The project is completed and financing will stay in
place until the units are sold. We have also financed the construction of an
addition to a church ($3.6 million). This project is completed and will convert
to permanent financing. The Company does not intend to make a large number
of
loans outside the owner-occupied single-family construction model, but it may
undertake such projects from time to time.
Multi-Family
and Nonresidential Loans.
As
opportunities arise, we offer mortgage loans secured by multi-family
(residential property comprised of five or more units) or nonresidential real
estate, which is generally secured by commercial office buildings, churches,
condominiums and properties used for other purposes. At June 30, 2008,
multi-family and nonresidential loans totaled $2.7 million and $11.3 million,
respectively, or 1.5% and 6.2%, respectively, of our total loan portfolio.
We
originate multi-family and nonresidential 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.
Loans
secured by multi-family and commercial 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 commercial
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 commercial 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.
Consumer
Lending.
Our
consumer loans include home equity lines of credit and loans secured by savings
deposits. At June 30, 2008, our consumer loan balance totaled $7.9 million,
or
4.3%, of our total loan portfolio. Of the consumer loan balance at June 30,
2008, $4.5 million were home equity loans and $3.4 million were loans secured
by
savings deposits.
Our
home
equity loans are made at First Federal of Frankfort and are made on the security
of residential real estate and have terms of up to 10 years. Most of First
Federal of Frankfort’s home equity loans do not exceed 80% of the estimated
value of the property, less the outstanding principal of the first mortgage.
First Federal of Frankfort does 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. First Federal of
Frankfort’s home equity loans require the monthly payment of 2% of the unpaid
principal until maturity, when the remaining unpaid principal, if any, is due.
First Federal of Frankfort’s 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, 2008, the
total outstanding home equity loans amounted to 2.5% of the Company’s total loan
portfolio.
Loans
secured by savings are originated for up to 90% of the depositor’s savings
account balance. The interest rate is normally two 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, 2008, loans on savings accounts totaled 1.8%
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. However, these risks are considerably reduced in
our
case, since all of our consumer loans are secured loans.
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. We currently
do
not purchase loans. First Federal of Frankfort began selling fixed-rate loans
in
April 2004 to the Federal Home Loan Bank of Cincinnati (“FHLB-Cincinnati”). Loan
servicing rights are retained on such loans. At June 30, 2008, $7.9 million
in
loans were being serviced by First Federal of Frankfort 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. First Federal of Hazard’s loan committee, consisting of its two
senior officers, has authority to approve loans of up to $275,000. Loans above
this amount and loans with non-standard terms such as longer repayment terms
or
high loan-to-value ratios, must be approved by our Board of Directors.
First
Federal of Frankfort’s loan approval process allows for various combinations of
experienced bank officers to approve or deny loans which are one- to four-family
properties totaling $275,000 or less, church loans of under $150,000, home
equity lines of credit of $100,000 or less and loans to individuals whose
aggregate borrowings with the Bank is less than $500,000. Loans that do not
conform to these criteria must be submitted to the Board of Directors or
Executive Committee composed of at least four 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. First Federal of Frankfort also
requires an earthquake provision in all policies for new loans.
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, 2008, the regulatory
limit on loans to one borrower was $3.3 million for First Federal of Hazard
and
$2.6 million for First Federal of Frankfort. 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, 2008, no commitment losses
were reflected in a separate liability.
First
Federal of Frankfort offers construction loans in which the borrower obtains
the
loan for a short term, less than one year, and simultaneously extends a
commitment for permanent financing. First Federal of Hazard offers a
construction loan that is convertible to permanent financing, thus no additional
commitment is made.
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.
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,
a
commitment from another lender to refinance the loan or 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, 2008, our investment portfolio consisted primarily of U.S. Government agency
securities with maturities of five years or less and 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 Frankfort owns several Bank Owned Life Insurance policies totaling
$2.3 million at June 30, 2008. The purpose of these policies is to offset future
escalation of the costs of non-salary employee benefit plans such as First
Federal of Frankfort’s defined benefit retirement plan and First Federal of
Frankfort’s health insurance plan. The lives of certain key Bank employees are
insured, and First Federal of Frankfort 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
Frankfort. 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.
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 Frankfort. 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 Frankfort’s regulators. This asset is considered illiquid because,
although First Federal of Frankfort 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 Frankfort,
checking accounts and individual retirement accounts (“IRAs”). We do not utilize
brokered funds. 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 Frankfort 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 Frankfort.
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, 2008,
First Federal of Hazard and First Federal of Frankfort were authorized to invest
up to $3.4 million and $4.2 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.
According
to the Federal Deposit Insurance Corporation (“FDIC”), at June 30, 2007, First
Federal of Hazard had a deposit market share of 16.1% in Perry County. Its
largest competitors, Peoples Bank & Trust Company of Hazard (approximately
$285.8 million in assets), Community Trust Bank, Inc. (approximately $2.9
billion in assets) and 1st
Trust
Bank (approximately $81.0 million in assets), have Perry County deposit market
shares of 46.3%, 17.2% and 11.0%, 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 Frankfort’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 Frankfort 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, 2007, First Federal of Frankfort had a
deposit market share of 6.4%. Its largest competitors for depositors are the
Farmers Bank and Capital Trust ($602.3 million in assets) at a 45.6% market
share, American Founders Bank ($508.9
million in assets) at 20.4%, Whitaker Bank ($1.3 billion in assets) at 11.4%,
Fifth Third Bank ($112 billion in assets) at 6.2%, and Republic Bank ($2.9
billion in assets) at 4.4%. The Bank also faces considerable competition from
credit unions including the Commonwealth Credit Union ($717.4 million in assets)
and the Kentucky Employees Credit Union ($43.0 million in assets). First Federal
of Frankfort competes for loans with other depository institutions, as well
as
specialty mortgage lenders and brokers and consumer finance companies. First
Federal of Frankfort 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
Frankfort believes it has developed strong relationships with the businesses,
real estate agents, builders and general public in its market area. Despite
First Federal of Frankfort’s small size relative to the many and various other
depository and lending institutions in its market area, First Federal of
Frankfort usually ranks first with respect to the origination of single-family
purchase mortgages made on properties located in Franklin County. Nevertheless,
the level of competition in First Federal of Frankfort’s market area has
limited, to a certain extent, the lending opportunities in its market
area.
Personnel
At
June
30, 2008, we had 37 full-time employees and two part-time employees, none of
whom is 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 Frankfort are subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision,
as
their primary federal regulator, and the Federal Deposit Insurance Corporation,
as insurer of deposits. First Federal of Hazard and First Federal of Frankfort
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 managed by
the
Federal Deposit Insurance Corporation. First Federal of Hazard and First Federal
of Frankfort must each file reports with the Office of Thrift Supervision and
the Federal Deposit Insurance Corporation 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 Office
of
Thrift Supervision and, under certain circumstances, the Federal Deposit
Insurance Corporation to evaluate First Federal of Hazard’s and First Federal of
Frankfort’s safety and soundness and compliance with various regulatory
requirements. This regulatory structure is intended primarily for the protection
of the insurance fund and depositors.
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 Office of Thrift
Supervision. Certain of the regulatory requirements that are applicable to
First
Federal of Hazard, First Federal of Frankfort, 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.
Regulation
of Federal Savings Institutions
Business
Activities.
Federal
law and regulations, primarily the Home Owners’ Loan Act and the regulations of
the Office of Thrift Supervision, govern the activities of federal savings
institutions, such as First Federal of Hazard and First Federal of Frankfort.
These laws and regulations delineate the nature and extent of the activities
in
which federal savings banks may engage. In particular, certain lending authority
for federal savings institutions, e.g.,
commercial, nonresidential real property loans and consumer loans, is limited
to
a specified percentage of the institution’s capital or assets.
Branching.
Federal
savings institutions are authorized to establish branch offices in any state
or
states of the United States and its territories, subject to the approval of
the
Office of Thrift Supervision.
Capital
Requirements.
The
Office of Thrift Supervision’s capital regulations require federal savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
to
total assets ratio, a 4% leverage ratio (3% for institutions receiving the
highest examination rating under the Office of Thrift Supervision’s examination
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest examination rating) and, together with the risk-based capital
standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage
and
risk-based capital standards, institutions must generally deduct investments
in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The
risk-based capital standard requires federal savings institutions to maintain
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In 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
assigned by the Office of Thrift Supervision capital regulation based on the
risks believed inherent in the type of asset. Core (Tier 1) capital is defined
as common stockholders’ equity (including retained earnings), certain
noncumulative 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
components of supplementary 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 supplementary capital
included as part of total capital cannot exceed 100% of core
capital.
The
Office of Thrift Supervision also has authority to establish individual minimum
capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the
particular circumstances. At June 30, 2008, First Federal of Hazard and First
Federal of Frankfort each met each of these capital requirements.
Prompt
Corrective Regulatory Action.
The
Office of Thrift Supervision is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution’s degree of undercapitalization. Generally, a savings institution
that has a ratio of total capital to risk weighted assets of less than 8%,
a
ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a
ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
“under-capitalized.” A savings institution that has a total risk-based capital
ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be “significantly undercapitalized”
and a savings institution that has a tangible capital to assets ratio equal
to
or less than 2% is deemed to be “critically undercapitalized.” Subject to a
narrow exception, the Office of Thrift Supervision is required to appoint a
receiver or conservator within specified time frames for an institution that
is
“critically undercapitalized.” An institution must file a capital restoration
plan with the Office of Thrift Supervision within 45 days of the date it
receives notice that it is “undercapitalized,” “significantly undercapitalized,”
or “critically undercapitalized.” Compliance with the plan must be guaranteed by
any parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. “Significantly undercapitalized” and
“critically undercapitalized” institutions are subject to more extensive
mandatory regulatory actions. The Office of Thrift Supervision 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.
Loans
to One Borrower.
Federal
law provides that savings institutions are generally subject to the limits
on
loans to one borrower applicable to national banks. A savings institution 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.
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 Office of Thrift Supervision determines that
a
savings institution fails to meet any standard prescribed by the guidelines,
the
Office of Thrift Supervision may require the institution to submit an acceptable
plan to achieve compliance with the standard.
Limitation
on Capital Distributions.
Office
of Thrift Supervision regulations impose limitations upon all capital
distributions by a savings institution, 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 Office of Thrift Supervision is required before any capital distribution
if the institution does not meet the criteria for “expedited treatment” of
applications under Office of Thrift Supervision regulations (i.e.,
generally, 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 institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the Office of Thrift Supervision. If an application is not
required, the institution must still provide prior notice to the Office of
Thrift Supervision of the capital distribution if, like First Federal of Hazard
and First Federal of Frankfort, it is a subsidiary of a holding company. If
First Federal of Hazard’s or First Federal of Frankfort’s capital were ever to
fall below its regulatory requirements or the Office of Thrift Supervision
notified it that it was in need of increased supervision, its ability to make
capital distributions could be restricted. In addition, the Office of Thrift
Supervision 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.
Qualified
Thrift Lender Test.
Federal
law requires savings institutions to meet a qualified thrift lender test. Under
the test, a 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) in at least 9 months out of each
12-month period.
A
savings
institution that fails the qualified thrift lender test is subject to certain
operating restrictions and may be required to convert to a bank charter. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered “qualified thrift investments.” At
June 30, 2008, First Federal of Hazard and First Federal of Frankfort each
met
the qualified thrift lender test.
Transactions
with Related Parties.
Federal
law limits the authority of First Federal of Hazard and First Federal of
Frankfort to lend to, and engage in certain other transactions with
(collectively, “covered transactions”), “affiliates” (e.g.,
any
company that controls or is under common control with an 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
institution. The aggregate amount of covered transactions with all affiliates
is
limited to 20% of the savings institution’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
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited
from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution 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 act 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 Frankfort’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
Frankfort may make to insiders based, in part, on First Federal of Hazard’s and
First Federal of Frankfort’s respective capital positions and requires certain
board approval procedures to be followed. Such loans must be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for loans
made pursuant to a benefit or compensation program that is widely available
to
all employees of the institution and does not give preference to insiders over
other employees. There are additional restrictions applicable to loans to
executive officers.
Enforcement.
The
Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions 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 action 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 Federal
Deposit Insurance Corporation has authority to recommend to the Director of
the
Office of Thrift Supervision that enforcement action to be taken with respect
to
a particular savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Assessments.
Federal
savings banks are required to pay assessments to the Office of Thrift
Supervision to fund its operations. The general assessments, paid on a
semi-annual basis, are based upon the savings institution’s total assets,
including consolidated subsidiaries, as reported in the institution’s latest
quarterly thrift financial report, its financial condition and the complexity
of
its portfolio.
Insurance
of Deposit Accounts. The
Banks’ deposits are insured up to applicable limits by the Deposit Insurance
Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank
Insurance Fund and the Savings Association Insurance Fund, which were merged
in
2006. The FDIC recently amended its risk-based assessment system for 2007 to
implement authority granted by the Federal Deposit Insurance Reform Act of
2005
(“Reform Act”). Under the revised system, insured institutions are assigned to
one of four risk categories 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. Risk category I, which contains the least
risky depository institutions, is expected to include more than 90% of all
institutions. Unlike the other categories, Risk Category I contains further
risk
differentiation based on the FDIC’s analysis of financial ratios, examination
component ratings and other information. Assessment rates are determined by
the
FDIC and currently range from five to seven basis points for the healthiest
institutions (Risk Category I) to 43 basis points of assessable deposits for
the
riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one
quarter to the next, except that no single adjustment can exceed three basis
points. No institution may pay a dividend if in default of the FDIC
assessment.
The
Reform Act also provided for a one-time credit for eligible institutions based
on their assessment base as of December 31, 1996. Subject to certain limitations
with respect to institutions that are exhibiting weaknesses, credits can be
used
to offset assessments until exhausted. First Federal of Hazard’s and First
Federal of Frankfort’s one-time credits were approximately $126,000 and
$126,000, respectively, of that, $73,000 and $90,000, respectively, remain
unused at June 30, 2008. The Reform Act also provided for the possibility that
the FDIC may pay dividends to insured institutions once the Deposit Insurance
Fund reserve ratio equals or exceeds 1.35% of estimated insured
deposits.
In
addition to the assessment for deposit insurance, institutions are required
to
make payments on bonds issued in the late 1980s by the Financing Corporation
to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and during the four quarters ended June 30, 2008 averaged 1.35 basis
points of assessable deposits.
The
Reform Act provided the FDIC with authority to adjust the Deposit Insurance
Fund
ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to
the
prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC
as the level that the fund should achieve, was established by the agency at
1.25% for 2008, which remained unchanged from 2007.
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. However, the recent failure of
FDIC-insured institutions may increase the likelihood that insurance assessments
will increase in the future.
Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. Management does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
Federal
Home Loan Bank System.
First
Federal of Hazard and First Federal of Frankfort 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 Frankfort 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 Frankfort were in compliance with this
requirement with investments in Federal Home Loan Bank of Cincinnati stock
at
June 30, 2008, of $2.1 million and $3.4 million, respectively.
Community
Reinvestment Act. Under
the
Community Reinvestment Act, as implemented by Office of Thrift Supervision
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs
of
its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements
or
programs for financial institutions 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 Office of Thrift
Supervision, in connection with its examination of a savings association, to
assess the institution’s record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications
by
such institution.
The
Community Reinvestment Act requires public disclosure of an institution’s rating
and requires the Office of Thrift Supervision 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
Frankfort each received a “Satisfactory” rating as a result of their most recent
Community Reinvestment Act assessments.
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 Office of Thrift
Supervision and are subject to Office of Thrift Supervision regulations,
examinations, supervision, reporting requirements and regulations concerning
corporate governance and activities. In addition, the Office of Thrift
Supervision has enforcement authority over Kentucky First and First Federal
MHC
and their non-savings institution subsidiaries. Among other things, this
authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to First Federal of Hazard
and/or First Federal of Frankfort.
Restrictions
Applicable to Mutual Holding Companies. According
to federal law and Office of Thrift Supervision regulations, a mutual holding
company, such as First Federal MHC, may generally engage in the following
activities: (1) investing in the stock of insured depository institutions 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 or trust; (8) any activity permitted
for multiple savings and loan holding companies by Office of Thrift Supervision
regulations; (9) any activity permitted by the Board of Governors of the Federal
Reserve System for bank holding companies and financial holding companies;
and
(10) any activity permissible for service corporations. Recent legislation,
which authorized mutual holding companies to engage in activities permitted
for
financial holding companies, expanded the authorized activities. Financial
holding companies may engage in a broad array of financial services activities,
including insurance and securities.
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
institution, or its holding company, without prior written approval of the
Office of Thrift Supervision. 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 Federal Deposit Insurance Corporation. In evaluating
applications by holding companies to acquire savings institutions, the Office
of
Thrift Supervision 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
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions 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 institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
If
a
savings institution subsidiary of a savings and loan holding company fails
to
meet the qualified thrift lender test set, the holding company must register
with the Federal Reserve Board as a bank holding company within one year of
the
savings institution’s failure to so qualify.
Stock
Holding Company Subsidiary Regulation. The
Office of Thrift Supervision has adopted regulations governing 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.
Waivers
of Dividends by First Federal MHC.
Office
of
Thrift Supervision regulations require First Federal MHC to notify the Office
of
Thrift Supervision if it proposes to waive receipt of our dividends from
Kentucky First. The Office of Thrift Supervision reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver
if:
(i) the waiver would not be detrimental to the safe and sound operation of
the
savings association; and (ii) the mutual holding company’s board of directors
determines that such waiver is consistent with such directors’ fiduciary duties
to the mutual holding company’s members. The Office of Thrift Supervision will
not consider the amount of dividends waived by the mutual holding company in
determining an appropriate exchange ratio in the event of a full conversion
to
stock form. Kentucky First has been granted such a waiver. Dividends paid to
shareholders on November 19, 2007, February 25, May 23 and August 18, 2008
were
waived by First Federal MHC.
Conversion
of First Federal MHC to Stock Form. Office
of
Thrift Supervision 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
of
First Federal of Hazard 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 Office of Thrift Supervision 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), in the event First
Federal MHC converts to stock form. 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 Office
of
Thrift Supervision 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 institution or as otherwise defined by the Office of Thrift Supervision.
Under the Change in Bank Control Act, the Office of Thrift Supervision 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.
Federal
and State Taxation
General.
We
report our income on a fiscal year basis using the accrual method of
accounting.
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. Each of our federal income tax returns have been either audited or closed
under the statute of limitations through tax year 2002. For the 2008 fiscal
year, First Federal of Hazard’s and Frankfort First’s maximum federal income tax
rate was 34%.
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 $5.4 million of First Federal of Frankfort 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 Frankfort 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 Frankfort’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 Frankfort’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 Frankfort’s taxable income. Non-dividend distributions include
distributions in excess of First Federal of Frankfort’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 Frankfort’s current or
accumulated earnings and profits will not be so included in First Federal of
Frankfort’s taxable income.
The
amount of additional taxable income triggered by a non-dividend 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 Frankfort 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 34% federal
corporate income tax rate. First Federal of Frankfort does not intend to pay
dividends 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 good 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 Frankfort are exempt from both the
Kentucky corporation income tax and corporation license tax. However, both
institutions are instead subject to the bank franchise tax, an annual tax
imposed on federally or state chartered savings and loan associations, savings
banks and other similar institutions operating in Kentucky. The tax is 0.1%
of
taxable capital stock held as of January 1 each year. Taxable capital stock
includes an institution’s undivided profits, surplus and general reserves plus
savings accounts and paid-up stock less deductible items. Deductible items
include certain exempt federal obligations and Kentucky municipal bonds.
Financial institutions which are subject to tax both within and without Kentucky
must apportion their net capital.
Item
1A. Risk Factors
We
may not be able to achieve sufficient growth in our retail franchise to allow
us
to achieve the anticipated benefits of our merger with Frankfort First
Bancorp.
We
intend
to efficiently utilize excess liquidity at either Bank or Kentucky First by
buying and selling whole loans or participations in loans between First Federal
of Hazard and First Federal of Frankfort, with the originating bank retaining
servicing of any loans sold, or by making deposits into accounts at either
bank,
subject to regulatory limitations, in order to maximize the potential earnings
of each bank. This strategy will not succeed if we do not maintain sufficient
loan demand at First Federal of Frankfort or sufficient deposit growth and
retention at First Federal of Hazard. At June 30, 2008, Frankfort First had
total real estate loans of $106.2 million, compared to $117.6 million at June
30, 2007, a decrease of approximately $11.4 million, or 9.7%. Loans sold by
First Federal of Frankfort to First Federal of Hazard were $41.9 million and
$21.4 million at June 30, 2008 and 2007, respectively. At June 30, 2008, First
Federal of Hazard had total deposits of $79.9 million, compared to total
deposits of $84.4 million at June 30, 2007, a decrease of $4.5 million, or
5.3%.
There can be no assurance as to if or when this strategy can be accomplished.
In
an attempt to increase the overall interest rate spread of the combined company,
management may adopt strategies that result in decreases in the assets and/or
liabilities of either or both Banks.
Rising
interest rates may hurt our profits and asset values.
If
interest rates continue to rise, our net interest income would likely 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, a continuation of rising interest rates may hurt our income because
of
reduced demand for new loans, the demand for refinancing loans and the interest
and fee income earned on new loans and refinancings. At June 30, 2008, in the
event of an instantaneous and permanent 200 basis point increase in interest
rates, our net portfolio value, which represents the discounted present value
of
the difference between incoming cash flows on interest-earning and other assets
and outgoing cash flows on interest-bearing liabilities, would be expected
to
decrease by approximately 15.5%. 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.
Strong
competition within our market area 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.
The
distressed economy in First Federal of Hazard’s market area could hurt our
profits and slow our growth.
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 there has been improvement in the economy from the influx
of
other industries, such as health care and manufacturing, and there may be signs
that the coal industry is improving with the rising costs of petroleum, the
economy in First Federal of Hazard’s market area continues to lag behind the
economies of Kentucky and the United States. As a result, First Federal of
Hazard has experienced insufficient loan demand in its market area. While First
Federal of Hazard will seek to use excess funds to purchase loans from First
Federal of Frankfort, we expect the redeployment of funds from securities into
loans to take several years. Moreover, the slow economy in First Federal of
Hazard’s market area will limit our ability to grow our asset base in that
market.
We
operate in a highly regulated environment and we may be adversely affected
by
changes in laws and regulations.
We
are
subject to extensive government regulation, supervision and examination. Such
regulation, supervision and examination govern the activities in which we may
engage, and is intended primarily for the protection of the deposit insurance
fund and our depositors. 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 level of our allowance for loan losses. 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.
We
expect that our return on equity will be low compared to other companies as
a
result of our high level of capital.
Return
on
average equity, which equals net income divided by average equity, is a ratio
used by many investors to compare the performance of a particular company with
other companies. For the year ended June 30, 2008, our return on average equity
was 1.54%. Over time, we intend to leverage our capital by continued investment
in higher-yielding assets, such as loans. We also intend to continue managing
excess capital through our stock repurchase program, which has been successful,
given relatively low market prices of the Company’s common stock. However, this
program could be curtailed or rendered less effective if the market price of
our
stock increases, or if the Company’s liquid funds are deployed elsewhere. Our
goal of generating a return on average equity that is competitive with other
publicly-held subsidiaries of mutual holding companies, by increasing earnings
per share and book value per share, without assuming undue risk, could take
a
number of years to achieve, and we cannot assure that our goal will be attained.
Consequently, you should not expect a competitive return on average equity
in
the near future. Failure to achieve a competitive return on average equity
might
make an investment in our common stock unattractive to some investors and might
cause our common stock to trade at lower prices than comparable companies with
higher returns on average equity.
Additional
annual employee compensation and benefit expenses may reduce our profitability
and stockholders’ equity.
We
will
continue to recognize employee compensation and benefit expenses for employees
and executives under our benefit plans. With regard to the employee stock
ownership plan, applicable accounting practices require that the expense be
based on the fair market value of the shares of common stock at specific points
in the future, therefore we will recognize expenses for our employee stock
ownership plan when shares are committed to be released to participants’
accounts. We will also recognize expenses for restricted stock awards and
options over the vesting periods of those awards. In addition, employees of
both
subsidiary Banks participate in a defined-benefit plan through Pentegra. Costs
associated with the defined-benefit plans could increase or legislation could
be
enacted that would increase the Banks’ obligations under the plan or change the
methods the Banks use in accounting for the plans. Those changes could adversely
affect personnel expense and the Company’s balance sheet.
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.
However, implementation of a stock-based incentive plan will require approval
of
Kentucky First’s stockholders other than First Federal MHC. Office of Thrift
Supervision regulations would likely prevent an acquisition of Kentucky First
other than by another mutual holding company or a mutual
institution.
There
may be a limited market for our common stock which may lower our stock
price.
Although
our shares of common stock are listed on the Nasdaq Global Market, there is
no
guarantee that the shares will be regularly traded. If an active trading market
for our common stock does not develop, you may not be able to sell all of your
shares of common stock on short notice and the sale of a large number of shares
at one time could temporarily depress the market price.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
We
conduct our business through four offices. The following table sets forth
certain information relating to our offices at June 30, 2008.
| |
|
Year
Opened/Acquired
|
|
Owned or
Leased
|
|
Net
Book Value at
June 30,
2008
|
|
Approximate
Square Footage
|
|
| |
|
(Dollars
in thousands)
|
|
|
First
Federal of Hazard
Main
Office:
479
Main Street
Hazard,
Kentucky 41701
|
|
|
1960
|
|
|
Owned
|
|
$
|
76
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Federal of Frankfort
Main
Office:
216
West Main Street
Frankfort,
Kentucky 40601
|
|
|
2005
|
|
|
Owned
|
|
|
1,320
|
|
|
14,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East
Branch
1980
Versailles Road
Frankfort,
Kentucky 40601
|
|
|
2005
|
|
|
Owned
|
|
|
519
|
|
|
1,800
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
Branch
1220
US 127 South
Frankfort,
Kentucky 40601
|
|
|
2005
|
|
|
Owned
|
|
|
501
|
|
|
2,480
|
|
The
net
book value of our investment in premises and equipment was $2.7 million at
June
30, 2008. 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. Submission
of Matters to a Vote of Security Holders
Not
applicable.
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, 2008
(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, 2008.
|
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
2008
Beginning
date: April 1
Ending
date: April 30
|
|
|
12,500
|
|
$
|
10.16
|
|
|
12,500
|
|
|
110,500
|
|
|
May
2008
Beginning
date: May 1
Ending
date: May 31
|
|
|
12,800
|
|
$
|
10.12
|
|
|
12,800
|
|
|
97,700
|
|
|
June
2008
Beginning
date: June 1
Ending
date: June 30
|
|
|
27,200
|
|
$
|
9.99
|
|
|
27,200
|
|
|
70,500
|
|
|
Total
|
|
|
52,500
|
|
$
|
10.06
|
|
|
52,500
|
|
|
|
|
| |
(1)
|
On
August 17, 2007, the Company announced a program to repurchase up
to
150,000 shares of its Common Stock. This program was completed on
February
13, 2008 when the Company completed the repurchase of substantially
all
shares authorized under this program and on that same date announced
another program to repurchase up to 150,000 shares of its Common
Stock.
|
Item
6. Selected
Financial Data
The
information contained in the table captioned “Selected Consolidated Financial
and Other Data” in the Annual Report is incorporated herein by
reference.
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
The
information contained under the sections captioned “Market Risk” in the Annual
Report is incorporated herein by reference.
Item
8. Financial
Statements and Supplementary Data
The
Consolidated Financial Statements, Notes to Consolidated Financial Statements,
Independent Auditor’s Report 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(T). Controls
and Procedures
| |
(a)
|
Disclosure
Controls and Procedures
|
The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have conducted an evaluation of the effectiveness
of the Company’s “disclosure controls and procedures,” as such term is defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as
amended, (the “Exchange Act”). Based upon their evaluation, management has
concluded that, as a result of a material weakness in internal control over
financial reporting discussed below, as of June 30, 2008, the Company’s
disclosure controls and procedures were not effective to ensure that information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and regulations.
| |
(b)
|
Management’s
Annual Report on Internal Control Over Financial Reporting
|
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined under Exchange Act Rule 13a-15(f).
The Company’s internal control over financial reporting is designed to provide
reasonable assurance to its management and board of directors regarding the
preparation and fair presentation of published financial statements. Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, management has concluded that the Company’s disclosure
controls and procedures are not effective because of the identification of
a
material weakness in our internal control over financial reporting, which we
view as an integral part of our disclosure controls and procedures. A
material weakness is a deficiency, or a combination of control deficiencies,
in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis.
During
the course of our external audit for the fiscal year ended June 30, 2008, we
noted an adjustment identified by our external auditors related to accrual
of
mortgage loan interest receivable. While management has concluded that the
Company did not maintain effective internal control over financial reporting
as
of June 30, 2008, due to this material weakness, this did not result in a
material misstatement of any of the Company’s financial statements, including
the annual and interim financial statements for fiscal 2008.
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 temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this Annual Report on Form 10-K.
| |
(c)
|
Changes
to Internal Control Over Financial
Reporting
|
In
connection with the above evaluation of our disclosure controls and procedures,
no change was identified that occurred in the Company’s internal control over
financial reporting during the three months ended June 30, 2008 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. However, management has
taken remedial steps to address the material weakness described above in
“Management’s Annual Report on Internal Control Over Financial
Reporting.”
Item
9B. Other Information
Not
Applicable.
PART
III
Item
10. Directors,
Executive Officers, and Corporate Governance
Directors
The
information contained under the section captioned “Proposal I — Election of
Directors” in the Company’s definitive proxy statement for the Company’s 2008
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 “Proposal
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 “Proposal
I ─ Election of Directors ─ Committees of the Board of
Directors”
in the
Proxy Statement.
Compliance
with Section 16(a) of the Exchange Act
Information
regarding compliance with Section 16(a) of the Exchange Act, the cover page
to
this Annual Report on Form 10-K and the section captioned “Section
16(a) Beneficial Ownership Reporting Compliance”
in the
Proxy Statement are incorporated herein by reference.
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.
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 “Voting Securities and Security Ownership” in the Proxy
Statement.
|
| |
(b)
|
Security
Ownership of Management. Information
required by this item is incorporated herein by reference to the
sections
captioned “Voting Securities and Security Ownership” and “Proposal
I — Election of Directors” 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,
2008.
|
| |
|
(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
|
|
|
339,200
|
|
$
|
10.10
|
|
|
82,016
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
339,200
|
|
$
|
10.10
|
|
|
82,016
|
|
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 “Proposal I — Election of Directors — Transactions with
Management” in the Proxy Statement.
Corporate
Governance
For
information regarding director independence, the section captioned “Proposal
I – Election of Directors”
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
and Other Fees Paid to Independent Registered Public Accounting
Firm”
in the
Proxy Statement.
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):
|
Report
of
Independent Registered Public Accounting Firm
Consolidated
Statements of Financial Condition as of June 30, 2008 and 2007
Consolidated
Statements of Earnings for the Years Ended June 30, 2008 and 2007
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended
June 30, 2008 and 2007
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2008 and 2007
Notes
to
Consolidated Financial Statements
| |
(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.
|
| |
(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.
|
|
No.
|
|
Description
|
|
3.1
|
|
Charter
of Kentucky First Federal Bancorp*
|
|
3.2
|
|
Bylaws
of Kentucky First Federal Bancorp*
|
|
4.1
|
|
Specimen
Stock Certificate of Kentucky First Federal Bancorp*
|
|
10.1
|
|
Form
of First Federal Savings and Loan Association of Hazard Employee
Stock
Ownership Plan and Trust Agreement*†
|
|
10.2
|
|
Form
of ESOP Loan Documents*†
|
|
10.3
|
|
Form
of Employment Agreement between Kentucky First Federal Bancorp, First
Federal Savings Bank of Frankfort and Don D. Jennings*†
|
|
10.4
|
|
Form
of Employment Agreement between Kentucky First Federal Bancorp, First
Federal Savings Bank of Frankfort and R. Clay Hulette*†
|
|
10.5
|
|
Form
of Employment Agreement between First Federal Savings Bank of Frankfort
and Danny A. Garland*†
|
|
10.6
|
|
Form
of Employment Agreement between First Federal Savings Bank of Frankfort
and Teresa Kuhl*†
|
|
10.7
|
|
Form
of Employment Agreement between Kentucky First Federal Bancorp, First
Federal Savings and Loan Association of Hazard and Tony D.
Whitaker*†
|
|
10.8
|
|
Form
of First Federal Savings and Loan Association of Hazard Supplemental
Executive Retirement Plan*†
|
|
10.9
|
|
Form
of First Federal Savings and Loan Association of Hazard Change in
Control
Severance Compensation Plan*†
|
|
10.10
|
|
Form
of First Federal Savings Bank of Frankfort Change in Control Severance
Compensation Plan*†
|
|
10.11
|
|
Kentucky
First Federal Bancorp 2005 Equity Incentive Plan **†
|
|
10.12
|
|
Form
of Restricted Stock Award Agreement***†
|
|
10.13
|
|
Form
of Incentive Stock Option Award Agreement***†
|
|
10.14
|
|
Form
of Non-Statutory Option Award Agreement***†
|
|
13
|
|
Annual
Report to Stockholders for the year ended June 30, 2008
|
|
21
|
|
Subsidiaries
|
|
23.1
|
|
Consent
of BKD LLP
|
|
31.1
|
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
31.2
|
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
32
|
|
Section
1350 Certifications
|
__________
|
|
† |
Management
contract or compensation plan or
arrangement.
|
|
|
* |
Incorporated
herein by reference to the Company’s Registration Statement on Form S-1
(File No. 333-119041).
|
|
|
** |
Incorporated
herein by reference to the Company’s definitive additional proxy
solicitation materials filed with the Securities and Exchange Commission
on October 24, 2005.
|
|
|
*** |
Incorporated
herein by reference to the Company’s Registration Statement on Form S-8
(File No. 333-130243).
|
|
|
(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.
|
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
29, 2008
|
By:
|
/s/
Tony D. Whitaker
|
| |
|
Tony
D. Whitaker
|
| |
|
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/
Tony D. Whitaker
|
|
|
Tony
D. Whitaker
|
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
| |
|
|
/s/
R. Clay Hulette
|
|
|
R.
Clay Hulette
|
|
|
Vice
President, Chief Financial Officer and Treasurer
|
|
|
(Principal
Financial and Accounting Officer)
|
|
| |
|
| /s/
Don
D. Jennings |
|
|
Don
D. Jennings
|
|
|
Director
|
|
| |
|
| /s/
Stephen
G. Barker |
|
|
Stephen
G. Barker
|
|
|
Director
|
|
| |
|
| /s/
William
D. Gorman |
|
|
William
D. Gorman
|
|
|
Director
|
|
| |
|
| /s/
Walter
G. Ecton, Jr. |
|
|
Walter
G. Ecton, Jr.
|
|
|
Director
|
|
| |
|
| /s/
David
R. Harrod |
|
|
David
R. Harrod
|
|
|
Director
|
|
| |
|
| /s/
Herman
D. Regan, Jr. |
September
29, 2008
|
|
Herman
D. Regan, Jr.
|
|
|
Director
|
|