Business Overview
Kentucky First Federal Bancorp (NASDAQ:KFFB) is a mid-tier holding company that operates two independent, community-oriented savings institutions - First Federal Savings and Loan Association of Hazard and First Federal Savings Bank of Kentucky. With a rich history spanning over two decades, KFFB has weathered various economic cycles and emerged as a steadfast player in the banking sector.
KFFB was incorporated as a mid-tier holding company in March 2005, upon the completion of the reorganization of First Federal of Hazard into a federal mutual holding company form of organization. On the same date, KFFB also completed its minority stock offering and its concurrent acquisition of Frankfort First Bancorp, Inc. and its wholly-owned subsidiary, First Federal Savings Bank of Kentucky. In December 2012, the Company further expanded its footprint by acquiring CKF Bancorp, Inc., a savings and loan holding company with three banking locations in Boyle and Garrard Counties, Kentucky.
The Company's results of operations have historically been dependent primarily on net interest income, which is the difference between the income earned on its loans and securities and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations have also been affected by the provision for losses on loans and service charges and fees collected on the Company's deposit accounts. The Company's general, administrative, and other expenses have primarily consisted of employee compensation and benefits expense, occupancy and equipment expense, data processing expense, and other operating expenses.
Over the years, the Company has faced various challenges, including general economic and competitive conditions, particularly changes in interest rates, government policies, and actions of regulatory authorities. The Company has navigated these challenges to the best of its ability, focusing on its core community-oriented banking business and maintaining its commitment to serving the financial needs of its local markets.
Today, KFFB operates First Federal of Hazard and First Federal of Kentucky as two independent, community-oriented savings institutions, providing a range of financial services to its customers. The Company's primary operations consist of attracting deposits and originating loans, with a focus on residential real estate, nonresidential real estate, farm, land, commercial and industrial, and consumer and other loans.
Financial Performance
As of September 30, 2024, KFFB reported total assets of $375.70 million, a slight increase of 0.20% from the $374.97 million reported as of June 30, 2024. The growth in assets was primarily driven by an increase in loans held for sale, as well as a rise in cash and due from financial institutions.
KFFB's loan portfolio, net of allowance for credit losses, stood at $333.18 million as of September 30, 2024, a modest increase of 0.10% from the $333.02 million reported at the end of the previous fiscal year. The Company's non-performing loans, defined as loans 90 days or more past due or on nonaccrual status, totaled $4.30 million, or 1.30% of total loans, as of September 30, 2024, compared to $3.90 million, or 1.20%, as of June 30, 2024.
The Company's allowance for credit losses (ACL) was $2.10 million as of September 30, 2024, unchanged from the previous quarter. The ACL represented 50.20% of non-performing loans and 0.60% of total loans at the end of the third quarter of fiscal 2024, compared to 54.60% and 0.60%, respectively, as of June 30, 2024.
KFFB's investment securities portfolio, consisting primarily of mortgage-backed securities, decreased by 2.50% to $9.60 million as of September 30, 2024, compared to $9.86 million at the end of the prior fiscal year.
On the liabilities side, total deposits decreased by 0.50% to $254.91 million as of September 30, 2024, down from $256.14 million at the end of fiscal 2024. This decline was primarily attributable to a 2.30% decrease in demand deposit accounts and a 0.30% decrease in savings accounts, partially offset by a 0.20% decrease in certificates of deposit.
KFFB's shareholders' equity totaled $48.20 million as of September 30, 2024, an increase of 0.50% from the $48.00 million reported at the end of the previous fiscal year. This increase was primarily due to a 71.70% decrease in accumulated other comprehensive loss, from $336,000 to $95,000.
For the fiscal year 2024, KFFB reported revenue of $7.25 million and a net loss of $1.721 million. Operating cash flow (OCF) for the year was negative $1.454 million, while free cash flow (FCF) was negative $1.52 million.
In the most recent quarter (Q1 2025), KFFB reported revenue of $4.62 million and a net loss of $15,000. OCF and FCF for the quarter were both negative $1.41 million. Compared to the same quarter in the previous year, revenue increased by 23.7%, while net income improved from a loss of $175,000 in Q1 2023 to a loss of $15,000 in Q1 2024, representing a 91.4% improvement.
Net interest income, the company's primary source of revenue, increased 12.00% to $1.87 million for the three months ended September 30, 2024, compared to the same period in the prior year. This increase was driven by a 23.70% rise in interest income, primarily from loans, which was partially offset by a 33.20% increase in interest expense, primarily on deposits and borrowings. The net interest margin expanded 10 basis points to 2.05% for the three-month period ended September 30, 2024.
Liquidity
The Company's liquidity position remains stable, with sufficient cash and cash equivalents to meet its short-term obligations and fund its operations. KFFB maintains a diverse funding base, primarily consisting of customer deposits and borrowings from the Federal Home Loan Bank. The Company's liquidity management strategies focus on maintaining adequate levels of liquid assets and access to various funding sources to ensure it can meet its financial obligations and support its business activities.
As of September 30, 2024, KFFB reported cash and cash equivalents of $17.27 million. The company's debt-to-equity ratio stood at 1.45 as of June 30, 2024. The current ratio and quick ratio were both 56.07 as of September 30, 2024, indicating a strong short-term liquidity position.
Regulatory Developments
On August 13, 2024, KFFB's subsidiary, First Federal Savings Bank of Kentucky, entered into a formal written agreement with the Office of the Comptroller of the Currency (OCC), which became effective as of the same date. As a result, First Federal Savings Bank of Kentucky is considered to be in "troubled condition" and is subject to individual minimum capital requirements (IMCRs) imposed by the OCC.
Under the terms of the agreement, First Federal Savings Bank of Kentucky is required to take several actions, including creating a compliance committee, submitting a revised strategic plan, adopting a revised succession plan, and implementing revised liquidity risk management and interest rate risk programs. The Company's Board of Directors is responsible for ensuring that First Federal Savings Bank of Kentucky adheres to the corrective actions and that they are effective in addressing the deficiencies that resulted in the agreement.
As of September 30, 2024, First Federal Savings Bank of Kentucky's common equity tier 1 capital ratio was 16.11%, its tier 1 capital ratio was 16.11%, its total capital ratio was 16.11%, and its leverage ratio was 10.07%, all of which exceeded the IMCRs imposed by the OCC.
Business Segments
Kentucky First Federal Bancorp operates through two primary business segments: Retail Banking and Lending.
Retail Banking Segment The Retail Banking segment includes the company's deposit-gathering activities, which consist of accepting deposits from individual, business, and public unit customers. Kentucky First Federal Bancorp offers a variety of deposit products, including savings accounts, demand deposits, money market deposit accounts, and certificates of deposit. As of September 30, 2024, total deposits were $254.91 million, a decrease of 0.50% from June 30, 2024. Demand deposit accounts decreased 2.30% to $31.42 million, while savings accounts decreased 0.30% to $47.27 million. Certificates of deposit, the largest component of deposits, decreased 0.20% to $176.22 million, of which $46.00 million were brokered deposits. The cost of deposits has been increasing due to higher market interest rates, with the average rate paid on total deposits increasing 105 basis points to 3.22% for the three months ended September 30, 2024, compared to the same period in the prior year.
Lending Segment
The Lending segment includes the company's loan origination and servicing activities. Kentucky First Federal Bancorp originates a variety of loan products, including residential real estate, commercial real estate, construction, land, farm, and consumer loans. As of September 30, 2024, the company's total loan portfolio, net of the allowance for credit losses, was $333.18 million, an increase of 0.10% from June 30, 2024. The largest components of the loan portfolio were one- to four-family residential real estate loans at $255.52 million and nonresidential real estate loans at $34.41 million.
The loan portfolio has seen some credit quality challenges, with nonperforming loans (loans 90 days or more past due or on nonaccrual status) increasing to $4.30 million, or 1.30% of total loans, as of September 30, 2024, compared to $3.90 million, or 1.20%, as of June 30, 2024. The allowance for credit losses totaled $2.14 million as of September 30, 2024, representing 50.20% of nonperforming loans and 0.60% of total loans. Substandard assets, which include substandard loans and real estate owned, were $6.59 million, or 2.00% of total loans, as of September 30, 2024, compared to $7.17 million, or 2.10%, as of June 30, 2024.
Outlook and Risks
KFFB's management is committed to fully addressing the provisions of the agreement with the OCC and satisfying the IMCRs imposed on First Federal Savings Bank of Kentucky as expeditiously as possible. The Company believes it has made progress toward addressing the deficiencies that resulted in the agreement, but there can be no assurance that it will be able to do so in a timely manner.
The Company's ability to pay future dividends and the amount that may be paid is subject to a number of factors, including its ability to fully and timely address the deficiencies that resulted in the agreement, the satisfaction of the IMCRs imposed on First Federal Savings Bank of Kentucky, and the ability of First Federal MHC to receive regulatory and member approval of the waiver of the receipt of dividends.
Additionally, the prolonged economic recession could adversely impact KFFB's and its subsidiaries' capital positions, financial condition, and results of operations. The Company also faces risks associated with changes in interest rates, competition, and the regulatory environment, among other factors.
Conclusion
KFFB has navigated a challenging environment in recent years, marked by regulatory scrutiny and the impact of the economic recession. The Company's commitment to addressing the provisions of the agreement with the OCC and satisfying the IMCRs imposed on its subsidiary is commendable, and its efforts to strengthen its financial position and operational efficiency are crucial for its long-term success.
As KFFB continues to chart a resilient path forward, it will need to carefully manage its risks, adapt to changing market conditions, and explore strategic opportunities that can enhance shareholder value. Investors will need to closely monitor the Company's progress in resolving the regulatory issues and its ability to generate sustainable earnings and maintain a strong capital base. The Company's focus on its core Retail Banking and Lending segments, along with its efforts to manage deposit costs and improve credit quality, will be key factors in determining its future financial performance and ability to navigate the challenges ahead.