Kentucky First Federal Bancorp quarterly report, Q2 FY2023

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Kentucky First Federal Bancorp — Form 10-Q Summary

Business context and period. The company is a bank holding company operating two Kentucky community savings institutions. This fiscal second-quarter report covers the three and six months ended December 31, 2022; balance-sheet comparisons are to June 30, 2022. Amounts below are in millions unless noted.

Financial performance and condition

  • Quarter: Net interest income was $2.448 million, up 4.9% year over year. Net income was $374,000, down 22.4%; diluted EPS was $0.04 versus $0.06. Interest income rose 12.6% to $3.131 million, while interest expense increased 52.5% to $683,000. Noninterest income fell 31.0% to $69,000, and noninterest expense rose 7.2% to $2.030 million.
  • Six months: Net interest income was $4.880 million, up 0.9%; net income was $747,000, down 28.9%, and diluted EPS was $0.09 versus $0.13. Total interest income rose 4.5% to $6.016 million, while interest expense rose 23.9% to $1.136 million. Noninterest income declined 49.1% to $167,000; noninterest expense increased 2.1% to $3.958 million.
  • Margins: Six-month net interest margin was 3.06% versus 2.94% a year earlier; net interest spread was 2.90% versus 2.82%. For the quarter, the average-balance table reports margin of 3.03% versus 2.84% and spread of 2.86% versus 2.73%. The MD&A prose gives a conflicting quarterly spread comparison; verify against the underlying filing.
  • Assets and lending: Total assets increased 2.2% from June to $335.4 million. Net loans rose 8.9% to $299.0 million, led by one- to four-family, multifamily and construction lending. Cash and cash equivalents declined 70.4% to $7.7 million. Available-for-sale securities were $13.5 million; total securities were reported by management as $13.8 million.
  • Funding and liquidity: Deposits declined $30.5 million to $209.4 million, while FHLB advances increased $39.2 million to $73.2 million. The six-month cash-flow statement shows operating cash flow of $0.8 million, investing outflow of $26.4 million and financing inflow of $7.4 million; cash declined $18.2 million. These movements indicate greater reliance on FHLB funding as deposits contracted.
  • Credit: The six-month loan-loss provision was $113,000; none was recorded in the December quarter. Allowance for loan losses was $1.655 million, or 0.6% of loans and 27.2% of nonperforming loans. Nonperforming loans were approximately $6.1 million, or 2.0% of total loans, versus $5.8 million, or 2.1%, at June 30. Substandard assets were $7.5 million. TDRs were $1.2 million, down from $1.4 million; no TDRs defaulted in the six-month periods reported.
  • Capital and shareholder returns: Management said the company and banks were well-capitalized above regulatory requirements. Shareholders’ equity was $51.6 million. Dividends were $0.20 per share for the six months, unchanged year over year. The company repurchased 15,000 shares during the quarter.

Changes, outlook, risks and unusual items

  • Management attributed lower six-month earnings primarily to reduced loan-sale gains, a loan-loss provision and higher operating expenses. Rising market rates reduced demand for long-term fixed-rate loans typically sold after origination.
  • Borrowing costs rose sharply: quarterly borrowing interest expense increased to $379,000, with the average rate on borrowings at 2.45% versus 0.78% a year earlier. Management said advances were used to replace deposits.
  • The $113,000 provision reflected loan growth and a larger multifamily portfolio, which management describes as carrying greater risk than one- to four-family residential loans. One- to four-family loans past due 90 days or more and still accruing totaled $392,000; loans in foreclosure were $805,000.
  • Available-for-sale securities had $457,000 of gross unrealized losses at December 31; accumulated other comprehensive loss was $343,000 after tax. Management reported no impairment through earnings and said it did not intend, or expect to be compelled, to sell the securities before maturity.
  • The company expects to adopt CECL in fiscal 2024, beginning July 1, 2023. It has engaged a modeling software provider but said the size of the initial retained-earnings adjustment and total financial-statement impact cannot yet be determined; added process complexity and costs are expected.
  • No specific earnings or financial guidance was provided. Risks cited include economic conditions, local real-estate prices, interest rates, competition, regulation and potential effects of COVID-19. Management warned that a prolonged recession could weaken capital through higher credit losses. No material risk-factor changes, legal proceedings or significant control changes were reported; disclosure controls were deemed effective.

Investor verification priorities

  1. Assess liquidity and funding sensitivity: deposits fell while FHLB advances rose, and cash declined substantially.
  2. Review loan performance, especially past-due and nonperforming balances, multifamily growth, foreclosure exposure and allowance coverage.
  3. Confirm quarterly net interest spread: the MD&A narrative conflicts with its average-balance table.
  4. Evaluate the effect of rising funding costs, reduced loan-sale gains and the unchanged dividend on future earnings and capital.
  5. Monitor the CECL implementation plan and eventual opening allowance adjustment, as well as unrealized securities losses and any need to sell securities.