Kentucky First Federal Bancorp — Form 10-Q Summary
Reporting period: Unaudited quarter ended September 30, 2016, the first quarter of fiscal 2017. Comparisons of operating results are with the three months ended September 30, 2015; balance-sheet changes are generally versus June 30, 2016. The company operates two Kentucky community savings institutions.
Financial performance and condition
| Metric | Quarter ended / balance at September 30, 2016 | Comparison |
|---|---|---|
| Interest income | $2.789 million | Down 6.5% from $2.984 million year over year |
| Net interest income | $2.461 million | Down 6.6% from $2.634 million |
| Net interest margin | 3.71% | 3.93% in prior-year quarter |
| Net income / EPS | $297,000 / $0.04 | $538,000 / $0.06 in prior-year quarter |
| Operating cash flow | $553,000 provided | $642,000 provided in prior-year quarter |
| Total assets | $295.1 million | Up $3.2 million, or 1.1%, from June 30 |
| Net loans | $241.2 million | Up $2.8 million from June 30 |
| Deposits / FHLB advances | $185.5 million / $39.1 million | Deposits down $3.1 million; advances up $5.9 million from June 30 |
| Shareholders’ equity | $67.5 million | Down $28,000 from June 30 |
In the quarter, investing activities used $2.864 million and financing activities provided $2.849 million; cash and cash equivalents increased $538,000 to $13.646 million. The company also held $4.699 million in time deposits at other financial institutions. Total liabilities were $227.6 million. The allowance for loan losses was $1.476 million, or 0.6% of total loans.
Material changes and drivers
- Net income fell 44.8% year over year, primarily due to lower net interest income, higher non-interest expense and higher income tax expense.
- Interest income declined mainly because average loans were $4.8 million lower and the average loan yield fell 24 basis points to 4.46%. Deposit interest expense fell, but higher average borrowings increased borrowing expense.
- Non-interest income rose to $168,000 from $114,000, principally reflecting $73,000 in gains on sales of other real estate owned (OREO), versus $16,000 in the prior-year quarter. Non-interest expense increased 5.0% to $2.168 million, including higher compensation and occupancy costs.
- The effective tax rate was 35.0%, compared with 19.9% a year earlier. The prior-year rate benefited from reversal of an ASC 740 reserve related to a previously received federal tax refund.
- Deposits declined as rate-sensitive customers sought higher yields; management used short-term FHLB advances to replace funding. Management attributed increased assets partly to loan growth, cash and time deposits.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it would pursue high-quality loan growth where profitable, prudent and consistent with interest-rate-risk strategies.
- Nonperforming loans were approximately $8.7 million, or 3.6% of total loans, up from $7.1 million, or 2.9%, at June 30. Allowance coverage of nonperforming loans fell to 16.9% from 21.2%. Classified assets totaled $12.833 million, all substandard; no assets were classified doubtful or loss.
- OREO was $345,000 across seven properties, down from $527,000 at June 30. The quarter included a $73,000 net gain on OREO sales; there was no OREO write-down in the quarter.
- The company paid $0.10 per share in dividends, totaling $372,000, or 125.3% of quarterly net income. Management said it believed capital was sufficient to maintain the current dividend policy, but future dividends depend on financial and regulatory factors. First Federal MHC was permitted to waive dividends through the third quarter of 2017, subject to stated limits.
- Management identified risks including economic conditions, real-estate prices, interest rates, competition, regulation and technology. The filing reported no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls; it also stated there were no significant changes to internal control over financial reporting.
Important facts for investors to verify
- Whether nonperforming loans and past-due balances continue to rise, and whether the allowance remains adequate given lower coverage of nonperforming loans.
- Whether deposit outflows persist and require further FHLB borrowing, including the resulting effect on funding costs and net interest margin.
- Whether quarterly earnings can recover without reliance on OREO sale gains, and how expenses and tax rates compare in subsequent periods.
- Whether dividends remain sustainable relative to earnings, liquidity, capital and regulatory requirements.
- The filing’s reported period results are not necessarily indicative of full-year results; assess them alongside subsequent filings and the company’s fiscal 2016 Form 10-K.