Business context and reporting period
Kentucky First Federal Bancorp is a bank holding company operating two Kentucky community savings institutions. This Form 10-Q covers the three months ended September 30, 2019, the company’s fiscal first quarter (the filing’s “2019 Q1,” not calendar Q1). Financial statement amounts below are in U.S. dollars; amounts described as millions or thousands are identified accordingly.
Key financial metrics
- Earnings: Net income was $234,000, or $0.03 per share, versus $138,000, or $0.02 per share, a year earlier. Income before taxes was $294,000; federal income tax expense was $60,000.
- Revenue and margins: Net interest income was $2.381 million, up 1.5% year over year. Net interest margin declined to 3.13% from 3.22%, and net interest spread fell to 2.89% from 3.02%. Interest income rose 9.3% to $3.328 million, while interest expense increased 35.3% to $947,000. Non-interest income was $74,000; non-interest expense was $2.102 million.
- Cash flow: Operating activities provided $18,000, versus $418,000 in the prior-year quarter. Investing activities provided $4.561 million and financing activities used $2.285 million. Cash and cash equivalents increased $2.294 million to $12.155 million.
- Balance sheet and liquidity: At September 30, total assets were $328.759 million, down $2.012 million from June 30. Deposits were $196.079 million, up $243,000; FHLB advances were $64.373 million, down $2.330 million. Loans, net of allowance, were $279.633 million, down $1.336 million. Cash and cash equivalents plus time deposits at other institutions totaled $15.620 million. Shareholders’ equity was $66.040 million, down $238,000.
- Credit quality: Nonperforming loans were approximately $7.5 million, or 2.7% of total loans, versus $8.0 million, or 2.8%, at June 30. The allowance for loan losses was $1.450 million, equal to 0.5% of total loans and 19.4% of nonperforming loans. The quarter included a $59,000 provision and $65,000 in charge-offs. Substandard assets totaled $11.208 million; troubled debt restructurings were $1.5 million.
- Shareholder returns: The company paid $334,000 in dividends, or $0.10 per common share, equal to 142.7% of quarterly net income. It repurchased 20,000 shares for $151,000 during the quarter.
Material changes versus the prior comparable period
- Net income increased 69.6%, aided by lower operating expenses and higher interest income, despite a higher loan-loss provision and sharply higher funding costs.
- Loan interest income increased $284,000, reflecting higher average loan balances and yields. Average interest-bearing deposit cost rose to 1.22% from 0.92%; borrowing cost rose to 2.29% from 2.10%, and average borrowings increased to $62.8 million from $49.1 million.
- Non-interest expense declined 5.5% to $2.102 million. Compensation and benefits fell $94,000, partly reflecting lower pension costs and a decline in staffing from 68 to 64 full-time equivalents. The defined-benefit pension plan freeze effective April 1, 2019 is expected by management to reduce fiscal 2020 costs by an estimated $279,000.
- From June 30 to September 30, cash increased $2.294 million and time deposits at other institutions declined $3.497 million; management said matured time deposits were used to reduce FHLB advances and increase cash.
- Past-due loans of all categories declined to $7.649 million from $8.960 million at June 30. Real estate owned increased to $965,000 from $710,000, with properties held increasing from eight to 18.
Outlook, commentary, risks and unusual items
- Management said it continues to seek high-quality loans and will originate loans when profitable, prudent and consistent with its interest-rate-risk strategy. The filing provides no earnings or revenue guidance; quarterly results are not necessarily indicative of full-year results.
- Management said it believes current dividends can be maintained without affecting either subsidiary bank’s well-capitalized status, but future dividends depend on capital, earnings, liquidity, regulatory requirements and overall financial condition. The Federal Reserve did not object to the mutual holding company waiving quarterly dividends of up to $0.10 per share through the third calendar quarter of 2020.
- Risks identified include economic conditions, real estate prices in the company’s markets, interest rates, competition, legal and regulatory changes, and technology. The company reported no material changes to the risk factors in its 2019 Form 10-K and no legal proceedings.
- The company is assessing the impact of CECL, expected to become effective for it in fiscal 2024. It expects a one-time cumulative adjustment but cannot yet estimate its magnitude; management also expects added complexity and cost. Adoption of the lease standard on July 1, 2019 had no material recorded lease assets or liabilities.
- FDIC assessment credits reduced the quarter’s reported FDIC insurance premium expense to zero; remaining credits were $52,000 at quarter-end, and their future use depends on the Deposit Insurance Fund reserve ratio. The filing also reports that no impairment was recognized on securities in unrealized loss positions.
- Management concluded disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher deposit and borrowing costs continue to compress net interest margin and spread.
- Trends in nonperforming and substandard loans, foreclosures, real estate owned, charge-offs and allowance coverage; assess whether the allowance remains adequate.
- How the high dividend payout relative to quarterly earnings affects capital and liquidity, and whether the stated dividend policy is sustainable.
- Management’s eventual CECL transition estimate and the effect of FDIC assessment credits expiring or becoming unavailable.
- The filing is unaudited and presents the quarter ended September 30, 2019; confirm the fiscal-period labeling when comparing it with other reports.