Kentucky First Federal Bancorp — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2019, the third quarter of fiscal 2019—not 2018 Q3 as stated in the request metadata. Dollar amounts below are in millions unless noted.
Business context and reporting period
Kentucky First Federal Bancorp is a holding company for two Kentucky community-oriented savings institutions. This unaudited report covers the three and nine months ended March 31, 2019, with comparisons to the corresponding 2018 periods. The company cautions that nine-month results are not necessarily indicative of full-year results.
Financial performance and position
- Quarter: Net income was $0.207 million, or $0.02 per diluted share, versus $0.162 million, or $0.02 per share, a 27.8% increase. Net interest income was $2.347 million, down 2.5%; total interest income rose 7.5% to $3.192 million, but interest expense rose 50.6% to $0.845 million.
- Nine months: Net income was $0.512 million, or $0.06 per diluted share, compared with $1.311 million, or $0.16 per share, down 60.9%. Net interest income declined 3.4% to $7.074 million. The provision for loan losses was $0.011 million versus $0.107 million.
- Margins: Net interest margin was 3.18% for the quarter versus 3.38% a year earlier, and 3.21% for nine months versus 3.47%. The nine-month net interest spread was 3.00%, down from 3.32%.
- Cash flow: Nine-month operating cash flow was $0.795 million versus $1.233 million. Investing activities used $1.066 million versus $7.632 million; financing activities provided $0.521 million versus $3.221 million. Cash and cash equivalents ended at $10.193 million, up from $9.943 million at June 30, 2018.
- Balance sheet and liquidity: Total assets were $319.421 million, up 0.3% from June 30, 2018. Loans, net, were $271.670 million; deposits were $195.236 million; and cash and cash equivalents were $10.193 million. The filing does not provide a clear standalone liquidity ratio.
- Debt and equity: Federal Home Loan Bank advances were $56.038 million, up $2.986 million from June 30, 2018. Shareholders’ equity was $66.508 million, down $0.695 million. The company paid $1.087 million in dividends, or $0.30 per common share for the nine-month period.
- Credit quality: Nonperforming loans were approximately $7.9 million, or 2.9% of total loans, versus $7.7 million, or 3.1%, at June 30, 2018. The allowance for loan losses was $1.529 million, equal to 0.6% of loans and 19.4% of nonperforming loans. Classified assets totaled $11.320 million, down from $12.625 million.
Material changes versus prior periods
- Nine-month interest income grew 6.4%, but interest expense increased 53.0%, reflecting higher deposit and borrowing costs. Management cited the relatively short-term nature of funding compared with longer-term loans, including limits and fixed-rate periods that can slow asset repricing.
- Nine-month non-interest income fell 69.5% to $0.193 million. The main factor was a $0.374 million year-over-year decline in bank-owned life insurance earnings; the prior-year period included nonrecurring insurance death-benefit proceeds. Lower REO sale gains and larger REO valuation adjustments also contributed.
- Nine-month non-interest expense rose 1.3% to $6.627 million, principally from higher employee compensation and benefits. Defined-benefit pension contributions rose 61.0% to $0.771 million.
- Loan balances grew modestly, while deposits edged down 0.2%; FHLB advances increased 5.6%. Treasury-share purchases totaled $0.674 million during the nine-month period.
Outlook, commentary, risks and unusual items
- Management said it continues to seek high-quality loans, subject to profitability, prudence and interest-rate-risk considerations. No quantified earnings or revenue guidance is provided.
- The company froze its defined-benefit plan effective April 1, 2019. It estimated annual savings of approximately $0.5 million beginning in fiscal 2020, while noting that ongoing plan-maintenance costs and Pension Benefit Guaranty Corporation premiums will remain.
- Management said it believes current capital is sufficient to maintain the dividend without impairing either subsidiary bank’s well-capitalized status, but future dividends depend on capital, earnings, liquidity, regulatory requirements and overall financial condition. The dividend waiver for First Federal MHC was permitted through the third calendar quarter of 2019.
- The company reported no material change in the risk factors in its 2018 Form 10-K. Cited forward-looking risks include general economic conditions, real-estate prices, interest rates, competition, legal and regulatory changes, and technology. Controls and procedures were reported effective, with no significant quarterly change in internal control over financial reporting.
- The company adopted revenue-recognition guidance on July 1, 2018, recording a $0.441 million cumulative adjustment to retained earnings; it said the principal practice change concerned gains on REO sales. It expects to adopt CECL in fiscal 2021; the impact is not yet determinable, and management expects added complexity and costs.
- The company repurchased 24,000 shares in February and March 2019 under a newly authorized 150,000-share plan; 126,000 shares remained authorized for purchase at March 31.
Important facts for investors to verify
- Reconcile the request’s “2018 Q3” label with the filing’s actual March 31, 2019 reporting date.
- Track deposit and borrowing costs, net interest margin, and the pace of loan repricing as interest rates change.
- Review trends in nonperforming loans, past-due balances, REO valuations and the allowance for loan losses.
- Assess the durability of earnings excluding the prior-year insurance benefit and the expected savings from the pension-plan freeze.
- Monitor dividend sustainability, FHLB funding, share repurchases and the eventual CECL transition impact.