Kentucky First Federal Bancorp — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2015 (the second quarter of fiscal 2016). Comparisons are with the corresponding 2014 periods unless otherwise noted. Dollar amounts are in millions unless stated otherwise. The unaudited statements include only normal recurring adjustments; interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Period / date | Result |
|---|---|---|
| Net income | Three months | $0.404 million, down 30.2%; diluted EPS $0.05 versus $0.07 |
| Net income | Six months | $0.942 million, down 5.3%; diluted EPS $0.11 versus $0.12 |
| Net interest income | Three months / six months | $2.643 million / $5.277 million; down 5.7% / 4.9% |
| Net interest margin | Three months / six months | 3.93% / 3.93%, versus 4.14% / 4.11% |
| Net interest income after provision | Three months / six months | $2.643 million / $5.266 million; up 2.0% / down 0.3% |
| Operating cash flow | Six months | $1.391 million, compared with $1.432 million |
| Cash and cash equivalents | December 31, 2015 | $14.480 million, up $0.845 million from June 30, 2015 |
| Total assets | December 31, 2015 | $306.838 million, up 3.6% from June 30, 2015 |
| Loans, net | December 31, 2015 | $243.968 million, essentially unchanged from June 30 |
| Deposits | December 31, 2015 | $192.485 million, down $7.216 million (3.6%) from June 30 |
| FHLB advances | December 31, 2015 | $44.532 million, up $17.897 million from June 30 |
| Shareholders’ equity | December 31, 2015 | $67.591 million, up $0.278 million from June 30 |
For the six months, investing activities used $10.069 million, principally reflecting an $11.0 million Treasury-note purchase and $0.893 million of premises and equipment additions. Financing activities provided $9.523 million, including net FHLB advances of $17.897 million, partly offset by lower deposits and $0.736 million of dividends. The Treasury note was short-term and matured shortly after December 31, 2015; it was funded with a short-term FHLB advance.
Material changes and management commentary
- Six-month interest income fell 4.6% to $5.969 million, chiefly because the average loan yield declined 21 basis points to 4.70%. Loan interest income declined 4.4% to $5.786 million. The average loan balance was nearly unchanged.
- Six-month interest expense decreased 1.8% to $0.692 million: lower average deposits reduced deposit costs, while increased borrowing balances raised borrowing expense. Management attributed deposit outflows to customers seeking higher yields in the low-rate environment, including non-insured investments.
- Six-month provision for loan losses declined to $0.011 million from $0.266 million; there was no provision in the December quarter versus $0.210 million a year earlier. Management cited improving asset quality, minimal charge-offs and stable loan balances, while cautioning that the allowance may not cover unidentified losses.
- Six-month non-interest income fell 26.8% to $0.240 million, mainly because gains on REO sales declined and REO valuation adjustments increased. Non-interest expense rose 2.6% to $4.234 million. Compensation costs increased, in part due to defined-benefit pension expense of $0.354 million for six months; management expected that expense level to remain steady in the following six months. Occupancy costs also rose with additional branch and office capacity.
- Six-month federal income tax expense was $0.330 million versus $0.490 million; the effective tax rate was 25.9% versus 33.0%. Management attributed the reduction primarily to reversal of a FIN 48 reserve related to a previously received federal tax refund. The quarter’s effective tax rate was 32.7% versus 33.1%.
- Nonperforming loans were approximately $6.0 million, or 2.4% of loans, versus $6.5 million, or 2.7%, at June 30. The $1.568 million allowance covered 26.3% of nonperforming loans and equaled 0.64% of total loans. TDRs were $1.6 million; special-mention loans were $9.0 million. REO declined to $1.138 million from $1.593 million.
- The company paid $0.10 per share in dividends for the quarter and $0.20 per share for the six months. The six-month dividend payout was 78.1% of net income. Management said capital was sufficient to continue the current policy but gave no assurance about future dividend levels. A dividend waiver by First Federal MHC was permitted through the third quarter of 2016.
Outlook, risks and other disclosures
Management provided no quantified earnings or financial guidance. It said loan demand remained weak and expected home-loan demand to remain constrained until the housing market strengthened, while continuing to seek high-quality loans where prudent and profitable. Identified risks include economic conditions, real-estate prices, interest rates, competition, regulation and technology. The filing reported no material change to the risks in the fiscal 2015 Form 10-K, no legal proceedings, and effective disclosure controls with no significant quarterly change in internal control over financial reporting.
Unusual or notable items include the short-term Treasury investment and related FHLB funding, the FIN 48 tax-reserve reversal, elevated pension costs, and $0.039 million of REO valuation adjustments in the six-month period. No investment securities were sold during the six months.
Important facts for investors to verify
- Whether the short-term Treasury note matured as expected and the related FHLB advance was repaid; confirm the resulting funding mix and borrowing costs.
- Whether deposit outflows and reliance on FHLB advances continued after quarter-end.
- Subsequent trends in loan yields, net interest margin, credit quality, nonperforming loans, REO and adequacy of the allowance.
- Whether pension and occupancy costs, and the tax benefit from the FIN 48 reserve reversal, affect comparability of future earnings.
- Future dividend decisions, including applicable regulatory and capital conditions.