Kentucky First Federal Bancorp — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended December 31, 2020. Although the request identifies 2020 Q2, the filing itself is for the fiscal quarter ended December 31, 2020. Financial statements are unaudited. Amounts below are in thousands of dollars unless noted.
Business context and financial performance
The Company is a holding company for two Kentucky community savings institutions. Its business is primarily lending, with approximately 95% of loans secured by residential real estate.
| Metric | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 | Prior-year comparison |
|---|---|---|---|
| Interest income | $3,002 | $6,031 | Down 8.0% and 8.5%, respectively |
| Net interest income | $2,473 | $4,863 | Up 5.6% and 3.0%, respectively |
| Provision for loan losses | $108 | $192 | Prior year: $5 and $64 |
| Non-interest income | $123 | $251 | Up 57.7% and 65.1%, respectively |
| Non-interest expense | $2,029 | $4,112 | Down 3.7% and 2.3%, respectively |
| Net income | $370 | $655 | Prior year: $248 and $482 |
| Basic and diluted EPS | $0.04 | $0.08 | Prior year: $0.03 and $0.06 |
| Net interest margin | 3.11% | 3.09% | Prior year: 3.06% and 3.09% |
| Net interest spread | 2.98% | 2.94% | Prior year: 2.83% and 2.85% |
Financial position, cash flow and liquidity
- At December 31, 2020, total assets were $330.7 million, up 3.0% from June 30, 2020. Net loans were $296.3 million, up $10.4 million (3.6%).
- Cash and cash equivalents were $14.7 million, compared with $13.7 million at June 30. Deposits were $216.3 million, up 1.9%; Federal Home Loan Bank (FHLB) advances were $61.0 million, up 11.6%.
- Total liabilities were $278.8 million and shareholders’ equity was $51.8 million, down $79,000 from June 30. The filing states the Company and Banks were well-capitalized, but does not provide capital ratios in the supplied text.
- For the six months, operating cash flow was $111,000, compared with $780,000 in the prior-year period. Investing activities used $8.1 million, chiefly reflecting $10.9 million of net loan originations for investment. Financing activities provided $9.0 million, including deposit growth and net FHLB borrowing. Cash increased $1.0 million.
- The filing does not provide a clear liquidity ratio or a formal liquidity forecast.
Material changes and management commentary
- Six-month net income rose 35.9%; quarterly net income rose 49.2%. Lower funding costs more than offset reduced interest income: six-month interest expense fell 37.5%, while interest income declined 8.5%. Management attributed lower costs to repricing deposits and borrowings in a low-rate environment.
- Loan-sale gains increased to $155,000 for six months, from $40,000, as more long-term fixed-rate loans were sold to the FHLB. Management cited cost-saving measures for lower operating expenses, while FDIC insurance and data-processing costs increased.
- The allowance for loan losses increased to $1.62 million from $1.49 million. It equaled 0.5% of total loans and 24.8% of nonperforming loans. Nonperforming loans were approximately $6.5 million, or 2.2% of loans, versus $7.4 million, or 2.6%, at June 30. Classified assets declined to $8.7 million from $9.6 million.
- COVID-19 accommodations had been granted on 101 loans totaling $18.4 million. Most borrowers had resumed regular payments; the filing reports $1.2 million remained subject to accommodation at period-end. Management had not added an allowance specifically for COVID-19, but warned prolonged economic weakness could worsen credit quality and require additional provisions.
- First Federal of Kentucky had closed 45 Paycheck Protection Program loans totaling $1.5 million; 13 loans totaling $931,000 had been repaid. The Company planned to participate in a second round.
- Dividends were $0.10 per share for the quarter and $0.20 for six months, totaling $691,000, or 105.5% of six-month net income. Management said capital supported the current policy but did not provide future dividend guidance. A dividend waiver to the mutual holding company was permitted for quarterly dividends up to $0.10 per share through the third calendar quarter of 2021.
- The Company repurchased 7,500 shares in December at an average $7.00 per share. In February 2021 it announced a new authorization to repurchase up to 150,000 shares after substantially completing its prior program.
Outlook, risks and unusual items
- No specific earnings, revenue, margin, or credit-loss guidance was provided. Management said the effects of COVID-19 depend on the duration and severity of the economic downturn and could not be estimated reliably.
- Key risks include deterioration in borrowers’ ability to repay, real-estate collateral values, increased delinquencies or foreclosures, interest-rate and competitive conditions, and disruptions to customers, employees, or service providers. Management reported no material operational or internal-control challenges from its pandemic response.
- Loan deferrals may cause accrued interest or fees to be reversed if losses emerge or loans become nonaccrual. Court and foreclosure delays could impede collections. PPP-related losses or reputational harm are possible if loans are not forgiven or SBA guarantees are not honored.
- The Company expects CECL adoption in fiscal 2024, beginning July 1, 2023, and had not determined the size of any initial allowance adjustment. Adoption of a fair-value disclosure standard in July 2020 had no material financial-statement impact.
- No legal proceedings were reported. Management concluded disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the remaining COVID-19 accommodations resume scheduled payments and how credit quality evolves, particularly for multifamily and commercial real-estate lending.
- Future allowance needs, nonperforming-loan trends, foreclosure outcomes, and the adequacy of the 0.5%-of-loans allowance.
- Whether loan growth and loan-sale gains persist, and how lower asset yields affect net interest margin as funding costs reprice.
- Liquidity and funding needs as FHLB advances rise, and the Company’s regulatory capital ratios, which are not stated in the supplied filing text.
- Dividend sustainability given distributions exceeded six-month earnings, and the effect of the new share-repurchase authorization.