Kentucky First Federal Bancorp — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, the company’s fiscal first quarter. Unaudited results compare with the three months ended September 30, 2019; balance-sheet comparisons are against June 30, 2020. The company operates two Kentucky community savings institutions.
Financial results and position
| Metric | September 2020 quarter / period end | Comparison |
|---|---|---|
| Net income | $285,000; diluted EPS $0.04 | Up 21.8% from $234,000; EPS was $0.03 |
| Net interest income | $2.390 million | Up 0.4% from $2.381 million |
| Net interest margin / spread | 3.06% / 2.90% | 3.13% / 2.89% a year earlier |
| Provision for loan losses | $84,000 | Compared with $59,000 |
| Assets | $327.7 million | Up $6.5 million, or 2.0%, from June 30 |
| Loans, net of allowance | $290.5 million | Up $4.6 million, or 1.6%, from June 30 |
| Deposits | $215.1 million | Up $2.8 million, or 1.3%, from June 30 |
| FHLB advances | $58.4 million | Up $3.7 million, or 6.7%, from June 30 |
| Cash and cash equivalents | $17.1 million | Up $3.4 million from June 30 |
| Shareholders’ equity | $51.8 million | Down $82,000 from June 30 |
| Cash flows | Operating +$255,000; investing −$3.238 million; financing +$6.397 million | Cash increased $3.414 million during the quarter |
Interest income declined 9.0% year over year to $3.029 million, but interest expense fell 32.5% to $639,000, supporting slightly higher net interest income. Lower borrowing costs were a major contributor. Non-interest income increased to $128,000, primarily from loan-sale gains; non-interest expense edged down to $2.083 million. The filing does not report a conventional profit margin.
Material changes and credit quality
- Nonperforming loans were approximately $6.9 million, or 2.4% of total loans, versus $7.4 million, or 2.6%, at June 30. The allowance was $1.536 million, equal to 0.5% of loans and 22.4% of nonperforming loans.
- Total loans past due were $6.465 million at September 30, versus $6.542 million at June 30. Classified assets were $9.197 million, down from $9.587 million.
- Loan growth included increases in multifamily and nonresidential real estate lending. The portfolio remains concentrated in residential real estate: one- to four-family loans totaled $221.7 million.
- The company paid a $0.10-per-share dividend, totaling $344,000, or 120.7% of quarterly net income. It repurchased 8,000 shares at an average $6.12 per share.
Outlook, risks, and other notable items
- COVID-19: Management said the pandemic’s ultimate effects were uncertain and could materially affect operations, customers, credit quality, and capital. The banks remained open with modified service arrangements; management reported no material operational or control challenges at the time.
- Loan deferrals: The banks had granted deferrals on 96 loans totaling $18.1 million. Of 81 loans totaling $16.2 million that completed deferral periods, $16.0 million had returned to normal repayment status; 15 loans totaling $1.9 million remained in their deferral periods. Management warned that a prolonged downturn could lead to additional credit provisions or reversal of accrued interest and fees.
- PPP: First Federal of Kentucky closed 44 Paycheck Protection Program loans totaling $1.4 million. Management understood these loans to be fully guaranteed by the U.S. government.
- Capital and dividends: The company and banks were reported well-capitalized. Management said it believed capital supported the current dividend policy, but future dividends depend on financial and regulatory conditions. The dividend payout exceeded earnings for the quarter.
- Accounting: The company is preparing for CECL, which it expects to adopt in fiscal 2024; the impact cannot yet be determined and may increase process complexity and costs. Adoption of the fair-value disclosure standard in July 2020 had no material effect.
- No specific earnings guidance was provided. Forward-looking outcomes are subject to economic, real-estate, interest-rate, competitive, regulatory, and pandemic-related risks. Legal proceedings were reported as none.
Most important facts for investors to verify
- Whether borrowers who completed COVID-related deferrals continue making payments, and whether remaining deferred loans or the three customers noted as not yet returned to amortizing status develop into losses.
- Whether the allowance remains adequate as economic conditions evolve, particularly given real-estate exposure and nonperforming loans equal to 2.4% of total loans.
- Whether deposit and loan growth can be sustained without further reliance on FHLB advances, and how funding costs and net interest margin respond to interest-rate changes.
- Whether dividends remain supportable given the quarter’s 120.7% payout ratio and the company’s capital, liquidity, earnings, and regulatory requirements.
- The eventual CECL adoption adjustment and its effect on the allowance, retained earnings, and reported credit costs.