Item 1A. Risk Factors
Item
1A. Risk Factors .
Interest
Rate Risk
Rising
interest rates may hurt our profits and asset values .
In
response to the COVID-19 virus pandemic, the Federal Reserve Board’s Open Market Committee (“FOMC”) decreased interest
rates to near zero in March 2020. The low interest rate environment remained in effect at June 30, 2021, and the FOMC announced at its
September 2021 meeting that it could commence increasing interest rates in 2022.
If
interest rates rise, our net interest income may decline in the short term since, due to the generally shorter terms of interest-bearing
liabilities, interest expense paid on interest-bearing liabilities, increases more quickly than interest income earned on interest-earning
assets, such as loans and investments. In addition, rising interest rates may hurt our income because of reduced demand for new loans
and refinancing loans may in turn result in reduced interest and fee income earned on new loans and loan refinancings. While we believe
that modest interest rate increases will not significantly hurt our interest rate spread over the long term due to our high level of
liquidity and the presence of a significant amount of adjustable-rate mortgage loans in our loan portfolio, interest rate increases may
initially reduce our interest rate spread until such time as our loans and investments reprice to higher levels.
Changes
in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio. Generally, the value
of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for
sale are reported as separate components of equity. Decreases in the fair value of securities available for sale resulting from increases
in interest rates therefore could have an adverse effect on stockholders’ equity.
Risks
Related to the COVID-19 Pandemic and Associated Economic Slowdown
The
ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of
operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult
to predict.
Global
health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing
on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The
outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions,
quarantines, shelter in place or stay-at-home orders and business limitations and shutdowns. Such measures have significantly contributed
to rising unemployment and negatively impacted consumer and business spending. Local jurisdictions have subsequently lifted stay-at-home
orders and moved to phased reopening of businesses, capacity restrictions and health and safety recommendations that encourage continued
physical distancing and teleworking have limited the ability of businesses to return to pre-pandemic levels of activity. The United States
government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage
of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The
outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers,
customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us
or our borrowers, customers or business partners, including but not limited to:
●
Demand
for our products and services may decline, making it difficult to grow assets and income;
●
Credit
losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions,
particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;
●
If
the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies,
problem assets, and foreclosures may increase, resulting in increased charge-offs and reduced income;
●
Collateral
for loans, especially real estate, may decline in value, which could cause loan losses to increase;
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●
Our
allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which
will adversely affect our net income;
●
The
net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
●
As
the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to
a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing
net income;
●
A
material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash
dividend;
●
Operational
failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
●
Increased
cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;
●
A
prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation
allowance against our current outstanding deferred tax assets;
●
We
rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could
have an adverse effect on us; and
●
Federal
Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
The
pandemic has introduced increasing uncertainty around the local and national economy. Regulatory treatment of loan deferrals has been
changed to encourage loan deferrals. Although the deferrals may lessen credit losses in the long run, they make our credit metrics less
transparent, timely and useful. The increased volume of loan related work including processing deferrals, processing PPP loan requests
and changing regulations increases inherent credit risks, and loans with deferred payments are more likely to default in the future.
The Company believes there could be potential stresses on liquidity management as a direct result of the COVID-19 pandemic. As customers
manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.
The
spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home
and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we
determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will
be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The
extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments,
which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its
severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions
can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as
a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any
recession that has occurred or may occur in the future.
There
are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as
a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts
on our business, our operations or the global economy as a whole.
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Risks
Related to Our Lending Activities
If
our allowance for loan losses is not sufficient to cover actual loan losses, our results of operations would be negatively affected.
In
determining the amount of the allowance for loan losses, we analyze our loss and delinquency experience by loan categories and we consider
the effect of existing economic conditions. In addition, we make various assumptions and judgments about the collectability of our loan
portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for
the repayment of many of our loans. If the actual results are different from our estimates, or our analyses are incorrect, our allowance
for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance
and would decrease our net income. Our emphasis on loan growth and on increasing our portfolio, as well as any future credit deterioration,
will require us to increase our allowance further in the future. In addition, our banking regulators periodically review our allowance
for loan losses and could require us to increase our provision for loan losses. Any increase in our allowance for loan losses or loan
charge-offs as required by regulatory authorities may have a material adverse effect on our results of operations and financial condition.
A
large percentage of our loans are collateralized by real estate and disruptions in the real estate market may result in losses and hurt
our earnings.
Approximately
96.3% of our loan portfolio at June 30, 2021 was comprised of loans collateralized by real estate. Disruptions in the real estate market
could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral
in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the
time the credit is extended. If real estate values decline, it will become more likely that we would be required to increase our allowance
for loan losses. If during a period of reduced real estate values, we are required to liquidate the collateral securing a loan to satisfy
the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely affect our financial
condition.
Our
concentration of residential mortgage loans exposes us to increased lending risks.
At
June 30, 2021, $224.1 million, or 74.8%, of our loan portfolio was secured by one-to-four family real estate, all of which is located
in the Commonwealth of Kentucky, and we intend to continue this type of lending in the foreseeable future. One-to-four family residential
mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers
to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values as a result
of a downturn in the local housing markets or in the markets in neighboring states in which we originate residential mortgage loans could
reduce the value of the real estate collateral securing these types of loans. Declines in real estate values could cause some of our
residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted
loans by selling the real estate collateral.
The
distressed economy in First Federal of Hazard’s market area could hurt our profits and slow our growth.
Our
banks operate in three distinct market areas. First Federal of Hazard’s market area consists of Perry and surrounding counties
in eastern Kentucky. The economy in this market area has been distressed in recent years due to the decline in the coal industry on which
the economy has been dependent. While the region has seen improvement in the economy from the influx of other industries, such as health
care and manufacturing, the competition provided by new methods of extracting natural gas has recently hurt the coal industry. As a consequence,
the economy in First Federal of Hazard’s market area continues to lag behind the economies of Kentucky and the United States and
First Federal of Hazard has experienced insufficient loan demand in its market area. Moreover, the slow economy in First Federal of Hazard’s
market area will limit our ability to grow our asset base in that market.
Strong
competition within our market areas could hurt our profits and slow growth.
Although
we consider ourselves competitive in our market areas, we face intense competition both in making loans and attracting deposits. Price
competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest
income. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that
we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability to
compete successfully in our market areas.
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Risks
Related to Our Business and Industry Generally
We
expect that the implementation of a new accounting standard could require us to increase our allowance for loan losses and may have a
material adverse effect on our financial condition and results of operations.
The
Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Kentucky
First, First Federal of Hazard and First Federal of Kentucky for our fiscal year beginning July 1, 2023. This standard, referred to as
Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit
losses on loans, and provide for the expected credit losses as allowances for loan losses. This will change the current method of providing
allowances for loan losses that are probable, which we expect could require us to increase our allowance for loan losses, and will likely
greatly increase the data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any
increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses,
may have a material adverse effect on our financial condition and results of operations.
Ineffective
liquidity management could adversely affect our financial results and condition.
Effective
liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests,
customer deposit maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal
operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding
sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us
specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity
sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets.
Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are
checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial
majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace
maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of
our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and
adversely affect our business, results of operations or financial condition.
We
may be adversely affected by recent changes in U.S. tax laws and regulations.
Changes
in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will
have an impact on the banking industry, borrowers and the market for residential real estate. Included in this legislation were: (i) a
lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions
for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility
of property taxes and state and local income taxes.
The
recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand
for such loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive,
demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted
as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would
reduce our profitability and could materially adversely affect our business, financial condition and results of operations.
Regulation
of the financial services industry is undergoing major changes, 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 governs the
activities in which we may engage, and is intended primarily for the protection of the deposit insurance fund and our depositors.
20
In
2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes
resulted in broad reform and increased regulation affecting financial institutions. The Dodd-Frank Act has created a significant
shift in the way financial institutions operate and has restructured the regulation of depository institutions by merging the Office
of Thrift Supervision, which previously regulated the Banks, into the OCC, and assigning the regulation of savings and loan holding
companies, including the Company and the MHC, to the Federal Reserve Board. The Dodd-Frank Act also created the Consumer Financial
Protection Bureau to administer consumer protection and fair lending laws, a function that was formerly performed by the depository
institution regulators. As required by the Dodd-Frank Act, the federal banking regulators have proposed new consolidated capital
requirements that will limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as
capital in the Banks that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions
designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as that which
occurred in 2008 and 2009. The full impact of the Dodd-Frank Act on our business and operations may not be known for years until
final regulations implementing the legislation are adopted. The Dodd-Frank Act may have a material impact on our operations,
particularly through increased regulatory burden and compliance costs. Any future legislative changes could have a material impact
on our profitability, the value of assets held for investment or the value of collateral for loans. Future legislative changes could
also require changes to business practices and potentially expose us to additional costs, liabilities, enforcement action and
reputational risk. In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies recently have begun to take
stronger supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses as a
result of the recent economic crisis. These actions include the entering into of written agreements and cease and desist orders that
place certain limitations on their operations. Federal banking regulators recently have also been using with more frequency their
ability to impose individual minimal capital requirements on banks, which requirements may be higher than those imposed under the
Dodd-Frank Act or which would otherwise qualify the bank as being “well capitalized” under the OCC’s prompt
corrective action regulations. If we were to become subject to a supervisory agreement or higher individual capital requirements,
such action may have a negative impact on our ability to execute our business plans, as well as our ability to grow, pay dividends,
repurchase stock or engage in mergers and acquisitions and may result in restrictions in our operations. See “Regulation
and Supervision—Regulation of Federal Savings Associations—Capital Requirements” for a discussion of
regulatory capital requirements.
We
may be subject to more stringent capital requirements which could result in lower returns on equity, require the raising of additional
capital, and limit our ability to pay dividends or repurchase shares of our common stock.
In
July 2013, the OCC and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital
rules applicable to First Federal of Hazard, First Federal of Kentucky and Kentucky First. The final rule implements the “Basel
III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital
and leverage ratios, which became effective for First Federal of Hazard, First Federal of Kentucky and Kentucky First on January 1, 2015,
and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital
requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased
from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also
establishes a “capital conservation” buffer of 2.5%, and will result in the following minimum ratios: (i) a common equity
Tier 1 capital ratio of 7%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new
capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and increased each
year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases,
and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage
of eligible retained income that can be utilized for such actions. As of June 30, 2021, the capital levels of First Federal of Hazard
and First Federal of Kentucky exceed the required capital amounts according to the Community Bank Leverage Ratio regulations and we believe
they also meet the fully-phased in minimum capital requirements. See Note K-Stockholders’ Equity and Regulatory Capital of Notes
to Consolidated Financial Statements.
The
application of more stringent capital requirements for us could among other things, result in lower returns on equity, require the raising
of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were unable
to comply with such requirements. See “Regulation and Supervision—Regulation of Federal Savings Associations—Capital
Requirements.”
21
We
are subject to certain risks in connection with our use of technology.
Our
security measures may not be sufficient to mitigate the risk of a cyber attack. Communications and information systems are essential
to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other
aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information
in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the
security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses,
or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, this could jeopardize
our or our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems
and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties.
We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities
or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered
through any insurance maintained by us. We could also suffer significant reputational damage.
Security
breaches in our Internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of
our security also could deter customers from using our Internet banking services that involve the transmission of confidential information.
We rely on standard Internet security systems to provide the security and authentication necessary to effect secure transmission of data.
These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant
legal liability and significant damage to our reputation and our business.
Our
security measures may not protect us from systems failures or interruptions.
While
we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance
that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our
data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties,
or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected,
and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information
through various other vendors and their personnel.
The
occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you
that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing
systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could
damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose
us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
We
must keep pace with technological change to remain competitive.
Financial
products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in
a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes
available, as well as related essential personnel. In addition, technology has lowered barriers to entry into the financial services
market and made it possible for financial technology companies and other non-bank entities to offer financial products and services traditionally
provided by banks. The ability to keep pace with technological change is important, and the failure to do so, due to cost, proficiency
or otherwise, could have a material adverse impact on our business and therefore on our financial condition and results of operations.
22
If
we are required to impair our goodwill, intangibles, or other long lived assets, our financial condition and results of operations would
be adversely affected.
Pursuant
to Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other and ASC 360, Property, Plant and Equipment,
we are required to perform an annual impairment review of goodwill, intangibles and other long lived assets which could result in an
impairment charge if it is determined that the carrying value of the assets are in excess of the fair value. We perform the impairment
test annually during our fourth fiscal quarter. Goodwill, intangibles and other long lived assets are also tested more frequently if
changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such
as changes in the variables associated with the judgments, assumptions and estimates made in assessing the appropriate fair value indicate
the carrying amount of certain assets may not be recoverable, the assets are evaluated for impairment. If actual operating results differ
from these assumptions, it may result in an asset impairment. As of June 30, 2020, management early adopted ASU 2017-04, Intangibles-Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the required method for estimating the fair
value of the Company. Future write-downs of intangibles and other long lived assets could affect certain of the financial covenants under
our debt agreements, could restrict our financial flexibility, and would impact our results of operations.
Risks
Related to Our Holding Company Structure
First
Federal MHC owns a majority of our common stock and is able to exercise voting control over most matters put to a vote of stockholders,
including preventing sale or merger transactions you may like or a second-step conversion by First Federal MHC.
First
Federal MHC owns a majority of our common stock and, through its Board of Directors, is able to exercise voting control over most matters
put to a vote of stockholders. As a federally chartered mutual holding company, the board of directors of First Federal MHC must ensure
that the interests of depositors of First Federal of Hazard are represented and considered in matters put to a vote of stockholders of
Kentucky First. Therefore, the votes cast by First Federal MHC may not be in your personal best interests as a stockholder. For example,
First Federal MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium
for their shares, prevent a second-step conversion transaction by First Federal MHC or defeat a stockholder nominee for election to the
Board of Directors of Kentucky First. However, implementation of a stock-based incentive plan will require approval of Kentucky First’s
stockholders other than First Federal MHC. Federal Reserve Board regulations would likely prevent an acquisition of Kentucky First other
than by another mutual holding company or a mutual institution.
Our
ability to pay dividends is subject to the ability of First Federal of Hazard and First Federal of Kentucky to make capital distributions
to Kentucky First and the waiver of dividends by First Federal MHC.
Our
long-term ability to pay dividends to our stockholders is based primarily upon the ability of the Banks to make capital distributions
to Kentucky First, and also on the availability of cash at the holding company level in the event earnings are not sufficient to pay
dividends according to the cash dividend payout policy. Under Office of the Comptroller of the Currency safe harbor regulations, the
Banks may each distribute to Kentucky First capital not exceeding net retained income for the current calendar year and the prior two
calendar years. First Federal MHC owns a majority of Kentucky First’s outstanding stock. First Federal MHC has historically waived
its right to dividends on the Kentucky First common shares it owns, in which case the amount of dividends paid to public stockholders
is significantly higher than it would be if First Federal MHC accepted dividends. First Federal MHC is not required to waive dividends,
but Kentucky First expects this practice to continue, subject to member and regulatory approval annually. First Federal MHC is required
to obtain a waiver from the Federal Reserve Board allowing it to waive its right to dividends.
The
Federal Reserve Board in 2011 issued regulations that govern the activities of Kentucky First and First Federal MHC and the regulations
were implemented in the fourth quarter of 2011. Under Section 239.8(d) of the Federal Reserve Board’s Regulation MM governing dividend
waivers, a mutual holding company may waive its right to dividends on shares of its subsidiary if the mutual holding company gives written
notice of the waiver to the Federal Reserve Board and the Federal Reserve Board does not object. For a company such as First Federal
MHC that waived dividends prior to December 1, 2009, the Federal Reserve Board may not object to a dividend waiver if such waiver would
not be detrimental to the safety and soundness of the savings association subsidiary and the board of directors of the mutual holding
company expressly determines that such dividend waiver is consistent with the board’s fiduciary duties to the members of the mutual
holding company.
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To
address concerns with respect to the conflict of interest created by dividend waivers, Regulation MM requires the board of directors
of the mutual holding company to adopt a resolution that describes the conflict of interest that exists because of a director’s
ownership of stock in the subsidiary declaring the dividends and any actions the mutual holding company board have taken to eliminate
the conflict of interest, such as the directors’ waiving their right to receive dividends. Also, the resolution must contain an
affirmation that a majority of the mutual members eligible to vote have, within the 12 months prior to the declaration date of the dividend,
voted to approve the waiver of dividends.
First
Federal MHC has received Federal Reserve Board approval to waive quarterly dividends totaling $0.40 per share annually beginning with
the dividend paid on September 28, 2012 and continuing through the dividend payable in the third quarter of 2022. It is expected that
First Federal MHC will continue to waive future dividends, except to the extent dividends are needed to fund First Federal MHC’s
continuing operations, subject to the ability of First Federal MHC to obtain regulatory approval of its requests to waive dividends and
to its ability to obtain member approval of dividend waivers.
We
cannot predict whether members will continue to approve annual dividend waiver requests or whether the Federal Reserve Board will grant
future dividend waiver requests and, if granted, there can be no assurance as to the conditions, if any, the Federal Reserve Board will
place on future dividend waiver requests by grandfathered mutual holding companies such as First Federal MHC. If First Federal MHC is
unable to waive the receipt of dividends, our ability to pay dividends to our stockholders may be substantially impaired and the amounts
of any such dividends may be significantly reduced.
Item
1B. Unresolved Staff Comments .
None.