Kentucky First Federal Bancorp — Form 10-Q
Reporting period: Three months ended September 30, 2015. Financial statement amounts are in millions of dollars unless otherwise noted. The filing presents unaudited consolidated results for the Company and its banking subsidiaries.
Financial performance and position
- Earnings: Net income was $0.538 million, up 29.3% from $0.416 million a year earlier. Basic and diluted EPS were $0.06 versus $0.05.
- Interest income and margins: Interest income was $2.984 million, down 3.7%; interest expense was $0.350 million, approximately flat. Net interest income declined 4.1% to $2.634 million. Net interest margin fell to 3.93% from 4.07%.
- Credit provision and non-interest items: Provision for loan losses was $0.011 million, compared with $0.056 million. Non-interest income rose to $0.114 million from $0.096 million; non-interest expense fell to $2.065 million from $2.169 million. Lower expenses and income tax expense were the main drivers of higher net income.
- Cash flow: Operating cash flow was $0.642 million. Investing activities used $0.676 million, including $0.605 million of premises and equipment additions; financing activities used $0.936 million. Cash and cash equivalents decreased $0.970 million to $12.665 million.
- Balance sheet and liquidity: Total assets were $295.918 million, down $0.380 million from June 30, 2015. Net loans were $245.012 million; deposits were $196.253 million, down $3.448 million; FHLB advances were $29.231 million, up $2.596 million. Shareholders’ equity was $67.513 million.
- Credit quality: Nonperforming loans were approximately $6.3 million, or 2.6% of loans, versus $6.5 million, or 2.7%, at June 30. The $1.568 million allowance equaled 24.9% of nonperforming loans and 0.6% of total loans. Classified assets rose to $13.599 million from $12.639 million; management attributed the increase mainly to downgrades of two well-secured, non-delinquent residential borrowers.
- Dividends: The Company paid $0.10 per share, totaling $0.378 million, or 70.3% of quarterly net income. Management said it believed capital was sufficient to maintain the current policy, while noting future dividends depend on financial and regulatory factors.
Changes, outlook, and risks
- Compared with the prior-year quarter, lower loan yields reduced interest income and the net interest margin. Average deposits declined 7.0% as rate-sensitive customers sought higher yields; FHLB borrowing increased to offset deposit outflows.
- Management reported continued efforts to originate high-quality loans where profitable and prudent. No specific earnings or financial guidance was provided.
- Non-interest expense benefited from lower pension-related compensation costs and reduced foreclosure/OREO expenses. Legal fees increased by $0.022 million in connection with an attempted merger of the Company’s two banks; management said this cost was not expected to recur. Occupancy and equipment costs rose, and management expected them to increase as recently purchased buildings are placed in service.
- Federal income tax expense fell to $0.134 million from $0.203 million, primarily due to reversal of a FIN 48 reserve related to a previously received federal tax refund; effective tax rates were 19.9% and 32.8%, respectively. OREO valuation adjustments included an $0.018 million write-down.
- Management identified general economic conditions, real estate prices, interest rates, competition, laws and regulation, and changing financial-services technology as risks. It cautioned that quarterly results are not necessarily indicative of full-year results. The filing reported no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit outflows and reliance on FHLB advances continue, and the resulting effect on funding costs and net interest margin.
- Trends in classified assets, nonperforming loans, TDRs, and the adequacy of the allowance; TDR balances were $1.6 million at quarter-end.
- Whether the tax-reserve reversal and lower pension expense materially affect comparability of future earnings.
- Progress and outcome of the bank-merger effort, as well as costs and service impacts from new facilities.
- Future dividend decisions and capital, liquidity, and regulatory conditions; management provided no forward earnings guidance.