Kentucky First Federal Bancorp — Form 10-Q
Business context and period: The company is a holding company for two Kentucky community savings banks. This unaudited report covers the three months ended September 30, 2017, the first quarter of fiscal 2018, and compares results with the three months ended September 30, 2016. Balance-sheet changes are compared with June 30, 2017. Dollar amounts below are in millions unless otherwise noted.
Financial results and position
| Metric | Current period / date | Comparison |
|---|---|---|
| Net income | $0.280; $0.03 per share | $0.297; $0.04 per share in prior-year quarter |
| Interest income / expense | $2.901 / $0.468 | $2.789 / $0.328 |
| Net interest income | $2.433 | $2.461 prior year; down 1.1% |
| Net interest margin / spread | 3.49% / 3.35% | 3.71% / 3.60% prior year |
| Non-interest income / expense | $0.140 / $2.158 | $0.168 / $2.168 prior year |
| Operating cash flow | $0.507 | $0.553 prior year |
| Total assets | $304.5 | Down $4.0, or 1.3%, from June 30 |
| Net loans / allowance for loan losses | $255.9 / $1.554 | Net loans down $2.4 from June 30; allowance was $1.533 |
| Deposits / FHLB advances | $188.2 / $46.2 | Deposits up $5.3; advances down $9.6 from June 30 |
| Cash and cash equivalents | $8.3 | Down $4.5 from June 30 |
| Shareholders’ equity | $67.1 | Down $0.036 from June 30 |
Quarterly cash flows were $0.507 million from operations, $0.630 million used in investing, and $4.335 million used in financing, reducing cash and cash equivalents by $4.458 million to $8.346 million. Financing included $11.050 million of FHLB repayments, partly offset by $5.342 million of deposit growth and $1.500 million of new advances. Separately, time deposits at other financial institutions rose $2.7 million to $6.9 million.
Material changes and asset quality
- Net income declined 5.7% year over year. Higher loan interest income and interest on deposits and other assets were more than offset by higher funding costs. Interest expense rose 42.7%, including a 114.8% increase in borrowing expense; the average borrowing rate rose to 1.38% from 0.92%.
- Average loans increased 6.8% to $257.8 million, while the average loan yield decreased to 4.30% from 4.46%. Management said it would continue seeking high-quality loans, subject to profitability, prudence, and interest-rate-risk considerations.
- Nonperforming loans were approximately $7.1 million, or 2.8% of total loans, versus $6.8 million, or 2.6%, at June 30. The allowance equaled 22.9% of nonperforming loans and 0.6% of total loans. No loan-loss provision was recorded in the quarter; net charge-offs were $18,000 and recoveries were $39,000.
- Past-due loans totaled $9.1 million at September 30, including $4.5 million at least 90 days past due. Troubled debt restructurings totaled $1.7 million, up from $1.5 million at June 30; four TDRs with a carrying value of $136,000 defaulted during the quarter and were transferred to REO and sold.
- REO increased to $777,000 from $358,000. The company reported $11.8 million in substandard assets, down from $12.1 million, and $4.6 million in special-mention loans, down from $6.2 million. Management attributed the special-mention reduction to improved borrower financial condition.
- The quarterly dividend was $0.10 per share; $363,000 was paid, equal to 129.6% of quarterly net income. Management said it believed capital was sufficient to maintain the current dividend policy, while noting future dividends depend on financial and regulatory factors.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance was provided. The filing cautions that quarterly results are not necessarily indicative of full-year results.
- Management identified general economic conditions, real-estate prices, interest rates, competition, regulation, and technology changes as factors that could cause actual results to differ from forward-looking statements. The company reported no material change in the risk factors in its 2017 Form 10-K and no legal proceedings.
- After quarter-end, former President/CEO and current director of a subsidiary bank died. Bank-owned life insurance proceeds of approximately $1.2 million were expected; because the related policies had a $792,000 cash value at September 30, the company expected to recognize approximately $370,000 of income.
- The company adopted stock-compensation guidance effective July 1, 2017, with no material impact. It was assessing the future impact of the expected-credit-loss (CECL) standard, effective for the company beginning fiscal 2021; management expected added process complexity and costs but could not yet estimate the financial impact or one-time allowance adjustment.
- Management concluded disclosure controls were effective and reported no significant quarterly change in internal control over financial reporting. No shares were repurchased during the quarter.
Important facts for investors to verify
- Whether net interest margin and spread continue to contract as borrowing and deposit costs rise.
- Trends in nonperforming and past-due loans, TDR performance, REO, and allowance adequacy, particularly given the absence of a current-quarter provision.
- Whether deposit growth and loan repayments can sustain funding needs and reduce reliance on FHLB advances.
- The timing and actual recognized amount of the expected $370,000 bank-owned life-insurance gain, and its effect on subsequent earnings.
- Dividend sustainability: the quarter’s dividend payments exceeded net income, and future distributions remain subject to capital, liquidity, earnings, and regulatory considerations.
- The eventual effect and implementation costs of CECL and other accounting standards noted in the filing.