Kentucky First Federal Bancorp annual report, FY2019

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Kentucky First Federal Bancorp — FY2019 Form 10-K

Reporting period: Fiscal year ended June 30, 2019. The filing is an annual report, not a standalone fourth-quarter report; it incorporates the financial statements and MD&A from the stockholder annual report, which are not included in the supplied text.

Business context and key metrics

Kentucky First is a holding company operating two community-oriented savings institutions in Kentucky. Lending is concentrated in one- to four-family residential real estate. At June 30, 2019, the company reported total assets of $330.8 million, deposits of $195.8 million and stockholders’ equity of $66.3 million.

  • Net loans were $77.2 million at First Federal of Hazard and $203.7 million at First Federal of Kentucky.
  • Residential mortgages totaled $235.8 million, or 83.5% of the loan portfolio. Real-estate-secured loans represented approximately 95.7% of the portfolio.
  • Return on average equity was 1.2% for FY2019. Management cautions that returns may remain low relative to other companies.
  • The company recognized an approximately $63,000 income tax benefit from Kentucky tax-law changes.
  • First Federal of Kentucky held $2.5 million in bank-owned life insurance. The two banks held $6.5 million in FHLB-Cincinnati stock combined.
  • Net income, revenue, net interest margin, operating cash flow, total borrowings/debt and detailed liquidity figures are not stated clearly in the supplied filing text.

Changes and capital actions

  • The filing identifies FY2018 as the comparison period for the incorporated financial statements, but the supplied text does not provide comparative income, balance-sheet or cash-flow figures sufficient to quantify year-over-year changes.
  • During the fourth quarter, the company repurchased 29,800 shares under its December 2018 program at an average $7.74 per share; 96,200 shares remained authorized for repurchase at June 30, 2019.
  • The defined-benefit plan was frozen in April 2019; active employees no longer accrue benefits and new employees will not enter the plan.
  • The banks’ capital exceeded the levels required to be considered “well capitalized,” and management said they met fully phased-in Basel III minimums and conservation buffers. Specific capital ratios are not provided in the supplied text.

Outlook, risks and unusual items

The filing gives no quantified earnings or growth guidance. Management describes competition, interest-rate trends, costs, loan delinquencies and regulation as factors affecting future results. It reports insufficient loan demand in First Federal of Hazard’s economically distressed, coal-dependent market area.

  • Rising rates could increase funding costs faster than asset yields initially, reduce loan/refinancing demand and lower the value of fixed-rate securities. Adjustable-rate mortgages help limit exposure but have repricing lags and caps.
  • Credit exposure is concentrated in real estate. Construction, commercial and multifamily loans carry higher risks than residential mortgages; local economic weakness or declining property values could increase losses.
  • Other identified risks include tax-law effects on housing and borrowers, intense deposit and loan competition, regulatory burden, cybersecurity and third-party system disruptions, and the transition away from LIBOR after 2021.
  • CECL was expected to take effect for the company’s fiscal year beginning July 1, 2020; management warned it could increase the allowance for credit losses and related costs.
  • First Federal MHC’s dividend waivers support dividends to public shareholders but require continuing member and regulatory approval. The MHC owns voting control, which can limit minority shareholders’ influence over transactions.
  • No material pending legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls under the applicable filer exemption.

Investor facts to verify

  1. Review the incorporated annual report for FY2019 and FY2018 revenue, net income, margins, cash flows, debt/borrowings, liquidity and capital ratios; these details are absent from the supplied text.
  2. Check year-over-year changes in credit quality, nonperforming assets, allowance for loan losses and charge-offs, especially given the real-estate concentration and Hazard-area weakness.
  3. Confirm repurchase execution and remaining authorization, and assess the company’s low 1.2% return on average equity.
  4. Monitor future MHC dividend-waiver approvals, bank capital-distribution capacity, and the implementation impact of CECL and LIBOR replacement.