Kentucky First Federal Bancorp — Form 10-Q
Business context and period. The company operates two Kentucky community savings institutions. This unaudited report covers the quarter and six months ended December 31, 2018, the company’s fiscal second quarter. Comparisons are with the corresponding 2017 periods; balance-sheet comparisons are with June 30, 2018.
Financial performance and condition
- Six-month earnings: Net income was $305,000, or $0.04 per diluted share, down 73.5% from $1.149 million, or $0.14 per share. For the December quarter, net income was $167,000, down 80.8% from $869,000.
- Interest income and margins: Six-month interest income rose 5.8% to $6.224 million, but interest expense rose 54.3% to $1.497 million. Net interest income fell 3.8% to $4.727 million. Net interest margin was 3.22%, versus 3.51%; net interest spread was 3.02%, versus 3.37%. Quarterly net interest margin was 3.23%, versus 3.54%.
- Other income and expenses: Six-month non-interest income fell 80.6% to $112,000, while non-interest expense increased 2.1% to $4.454 million. The loan-loss provision was $11,000 versus $3,000. Federal income tax expense was $69,000, compared with a $25,000 benefit in the prior period.
- Balance sheet: Assets were $320.954 million, up 0.8% from June 30. Net loans were $273.111 million, deposits $197.277 million, and Federal Home Loan Bank advances $55.536 million. Shareholders’ equity was $66.810 million, down 0.6%.
- Liquidity and cash flow: Cash and cash equivalents were $10.142 million, up $199,000 from June 30. Six-month operating cash flow was $469,000; investing used $2.627 million and financing provided $2.357 million. Dividends paid totaled $718,000.
- Credit quality: Nonperforming loans were approximately $8.3 million, or 3.0% of total loans, versus $7.7 million, or 3.1%, at June 30. The allowance was $1.529 million, equal to 18.4% of nonperforming loans and 0.6% of total loans. Past-due loans totaled $9.995 million, including $4.103 million at least 90 days past due. TDR balances were $1.9 million, up from $1.7 million.
Material changes and unusual items
- The largest earnings driver was higher funding costs: average deposit and borrowing costs rose as rates increased, while management said loan repricing was slower and some loans had rate-adjustment limits or fixed-rate periods.
- Prior-year comparisons include a nonrecurring bank-owned life insurance death-benefit receipt. BOLI earnings were $37,000 for the current six months versus $412,000 a year earlier. The prior-year period also included a $268,000 tax benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act.
- The company recorded $54,000 in REO valuation adjustments during the six months, compared with none in the prior-year period. REO was $810,000 at December 31.
- The company adopted ASC 606 on July 1, 2018, recording a $441,000 cumulative-effect adjustment to retained earnings against deferred revenue. Management reported no other material change to revenue recognition practices.
- During the six months, the company repurchased $487,000 of stock. A new authorization permits repurchase of up to 150,000 shares; the prior program was substantially completed.
Outlook, management commentary, and risks
- Management said it will continue pursuing loan growth where profitable, prudent, and consistent with interest-rate risk strategies. It noted that FOMC indications suggested rates may be near neutral; this is commentary, not formal earnings guidance.
- On January 31, 2019, the company announced a freeze of its defined-benefit pension plan effective in the quarter ending June 2019. It estimated annual savings of about $500,000 beginning in fiscal 2020, while noting ongoing plan-administration and insurance costs. Higher required pension contributions had contributed to expense growth.
- Dividends of $0.20 per share for the six months equaled 235.4% of net income. Management said it believed capital supported the current policy, but future dividends depend on capital, earnings, liquidity, regulatory requirements, and overall financial condition. The Federal Reserve did not object to the holding company’s dividend waiver through the third calendar quarter of 2019.
- Disclosed risks include economic conditions, real-estate prices in the company’s markets, interest rates, competition, legal and regulatory changes, and financial-services technology. The company said there were no material changes to the risks in its 2018 Form 10-K. It expects CECL adoption in fiscal 2021 to add complexity and cost; the impact is not yet quantifiable.
- Management reported effective disclosure controls and no significant quarterly change in internal control over financial reporting. No legal proceedings were reported.
Important facts for investors to verify
- Whether net interest margins stabilize as deposit and borrowing costs adjust relative to loan yields.
- The composition, aging, and subsequent performance of nonperforming loans, TDRs, and REO, and the adequacy of the allowance.
- Whether the pension freeze delivers the estimated savings and what transition or continuing costs arise.
- The sustainability of dividends given six-month earnings below dividends paid, and the effect of further share repurchases on capital.
- The deferred-revenue accounting adjustment, CECL implementation assumptions, and any later quantified impact.