Business context and reporting period
Kentucky First Federal Bancorp is the holding company for two Kentucky community savings institutions. This unaudited Form 10-Q covers the three months ended September 30, 2023, the first quarter of its fiscal year. Dollar amounts below are in millions unless otherwise noted.
Financial performance and condition
- Earnings: Net loss was $175,000, or $0.02 per share, versus net income of $373,000, or $0.05 per share, in the prior-year quarter.
- Interest income and margins: Interest income rose 29.4% to $3.734 million, but interest expense increased 355.6% to $2.064 million. Net interest income fell 31.3% to $1.670 million. Net interest margin declined to 1.95% from 3.09%, and net interest spread to 1.49% from 2.96%.
- Other results: Provision for credit losses was $6,000 versus $113,000. Non-interest income decreased 24.5% to $74,000; non-interest expense increased 2.8% to $1.982 million. The company recorded an income tax benefit of $69,000, compared with tax expense of $116,000.
- Cash flow: Operating activities used $570,000 and investing activities used $3.545 million; financing activities provided $8.534 million. Cash and cash equivalents increased $4.419 million to $12.586 million.
- Balance sheet and funding: Total assets were $356.8 million, up 2.2% from June 30, 2023. Net loans were $318.2 million; deposits were $252.4 million; Federal Home Loan Bank advances were $52.6 million. Shareholders’ equity was $49.6 million, down 2.1%. No liquidity ratio is clearly provided in the filing text.
- Credit quality: Nonperforming loans were approximately $5.3 million, or 1.6% of loans, versus $4.7 million, or 1.5%, at June 30. The allowance for credit losses was $2.1 million, equal to 0.7% of loans and 40.3% of nonperforming loans. Loans past due totaled $6.4 million.
- Securities and capital: Available-for-sale and held-to-maturity securities totaled about $11.5 million at quarter-end. Available-for-sale securities had $754,000 of gross unrealized losses; the quarter’s after-tax securities loss in other comprehensive income was $138,000. Management said the company and banks were well-capitalized relative to regulatory requirements.
Material changes versus the prior comparable period
The principal deterioration was funding-cost pressure: average interest-bearing liability cost rose to 2.87% from 0.71%, while the average yield on interest-earning assets increased to 4.36% from 3.66%. The resulting margin compression drove the move from quarterly profit to loss. Loans grew, while average interest-earning assets and liabilities also increased.
Deposits increased $26.1 million from June 30, 2023, while FHLB advances declined $17.5 million. Certificates of deposit rose to $166.5 million, including $48.1 million in brokered deposits. Management noted rising costs for both retail and wholesale funding.
The company adopted CECL on July 1, 2023. Adoption increased the loan allowance by $497,000 and established a $54,000 allowance for unfunded commitments; the net-of-tax cumulative adjustment reduced retained earnings by $414,000. The allowance for unfunded commitments was reported at $56,000 at September 30.
Outlook, commentary, risks and unusual items
- Management said it believed the rate cycle was near its peak, which could slow increases in funding costs, but this was an expectation rather than formal earnings guidance. It described interest-rate risk as moderate and noted that modeled economic value of equity was sensitive to rate changes; the filing cautions that such estimates depend on assumptions and are not predictions of actual results.
- Management intends to pursue high-quality loan growth where prudent and profitable, while seeking to increase core deposits, reduce reliance on higher-cost funding, and shift toward higher-earning loans.
- On October 13, 2023, the company announced future dividends would be reduced, primarily because of lower bank earnings. The board expected that, if quarterly dividends continue in 2024, they would be no more than $0.05 per share. The quarter’s dividend was $0.10 per share. Future payments depend on earnings, bank capital distributions, and regulatory and mutual-holding-company approvals or non-objections.
- Key disclosed risks include interest rates and funding costs, economic and real-estate conditions, higher-than-expected credit losses, competition, deposit and loan demand, technology and cybersecurity, staffing, and regulatory or litigation matters. Management reported no legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Whether net interest margin and funding costs stabilize, particularly given the growth in certificates and brokered deposits.
- Subsequent loan delinquencies, nonperforming loans, foreclosures, classified assets, and whether the CECL allowance remains adequate.
- The board’s actual 2024 dividend decisions and the required regulatory and mutual-member approvals or non-objections.
- Realized losses or liquidity effects from the securities portfolio, most of which was in an unrealized loss position for at least 12 months.
- Whether reported capital strength and liquidity remain resilient if economic conditions worsen or deposit funding becomes more expensive.