Kentucky First Federal Bancorp — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, compared with the three months ended September 30, 2017 for operating results. Balance-sheet comparisons are to June 30, 2018. Although the request labels this 2018 Q1, the filing covers the quarter ended September 30, 2018. The company operates two Kentucky community savings banks.
Financial results and position
- Earnings: Net income was $138,000, down 50.7% from $280,000; basic and diluted EPS was $0.02 versus $0.03. The company declared dividends of $0.10 per share in each quarter.
- Interest income and margin: Total interest income rose 5.0% to $3.046 million, while interest expense increased 49.6% to $700,000. Net interest income fell 3.6% to $2.346 million. Net interest margin declined to 3.22% from 3.49%; the reported net interest yield fell to 3.02% from 3.35%.
- Other income and costs: Noninterest income decreased 50.7% to $69,000, including a $5,000 gain on REO sales and an $18,000 REO valuation write-down. Noninterest expense increased 3.1% to $2.224 million, with higher employee and pension costs a key factor.
- Credit provision: The provision for loan losses was $11,000, versus none in the prior-year quarter. The allowance was $1.571 million, or 0.6% of total loans.
- Cash flow: Operating cash flow was $418,000, compared with $507,000. Investing activities provided $1.628 million, while financing activities used $2.058 million. Cash and cash equivalents decreased $12,000 to $9.931 million.
- Balance sheet and funding: Total assets were $316.7 million, down 0.5% from June 30. Net loans were $268.9 million, deposits $196.8 million, and FHLB advances $50.0 million. Deposits increased $1.2 million during the quarter; FHLB advances declined $3.0 million. Shareholders’ equity was $67.4 million.
Material changes and notable items
- Higher average loan balances and interest-bearing asset yields lifted interest income, but rising deposit and borrowing costs more than offset that growth. The average cost of deposits rose to 0.92% from 0.65%, and the average cost of borrowings to 2.10% from 1.38%.
- Nonperforming loans were approximately $8.8 million, or 3.3% of total loans, compared with $7.7 million, or 3.1%, at June 30. Allowance coverage of nonperforming loans declined to 17.8% from 20.6%.
- Loans classified as troubled debt restructurings totaled $1.9 million, up from $1.7 million at June 30. The company reported no TDR defaults in the quarter. Total classified assets were $12.445 million, mostly substandard loans.
- The company adopted the revenue recognition standard Topic 606 on July 1, 2018. It recorded a $441,000 cumulative-effect adjustment to retained earnings, offset against deferred revenue; management reported no other material changes to revenue-recognition practices. Adoption of ASU 2016-01 and ASU 2016-15 had no material financial impact.
- The $364,000 of dividends paid was 263.8% of quarterly net income. Management said it believed capital was sufficient to maintain the current dividend policy, subject to capital, earnings, liquidity, regulatory and other considerations.
Outlook, risks and contingencies
- No quantified earnings or operating guidance was provided. Management said it would continue to seek high-quality loans where profitable, prudent and consistent with interest-rate risk strategies, and to manage liquidity for yield.
- Management cautioned that the allowance may not cover unidentified loan losses. Forward-looking risks include economic conditions, real estate prices, interest rates, competition, regulation and technology.
- The company is preparing for CECL, expected to take effect for its fiscal year beginning July 1, 2020. It expects a one-time cumulative adjustment but could not estimate its size or the overall impact; it also expects added complexity and costs.
- Management attributed higher pension costs to factors including prolonged low interest rates, administrative fees and Pension Benefit Guaranty Corporation premiums. The filing reports no material change in previously disclosed risk factors and no legal proceedings.
- Disclosure controls were assessed as effective, with no significant quarterly change in internal control over financial reporting reported.
Key facts for investors to verify
- Whether rising deposit and borrowing costs continue to pressure net interest margin and earnings.
- Trends in nonperforming loans, past-due loans, TDRs, classified assets and allowance coverage.
- The sustainability of the dividend given the quarter’s payout above net income and management’s capital and liquidity considerations.
- The accounting and longer-term financial effects of Topic 606 adoption, including the $441,000 retained-earnings adjustment, and the eventual CECL impact.
- Future pension funding requirements and the effect of REO valuation changes and sales on noninterest income.