Kentucky First Federal Bancorp — Form 10-Q Summary
Business context and reporting period
The company is a bank holding company operating two community-oriented savings institutions in Kentucky. This report covers the fiscal quarter and six months ended December 31, 2017; comparisons are with the same periods in 2016 unless noted. Financial figures are in U.S. dollars; amounts are in thousands unless stated otherwise.
Key financial metrics
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Interest income | $2,984 | $5,885 |
| Net interest income | $2,482 | $4,915 |
| Net interest margin | 3.54% | 3.51% |
| Net income | $869 | $1,149 |
| Diluted earnings per share | $0.11 | $0.14 |
| Dividends per share | $0.10 | $0.20 |
- At December 31, total assets were $309.4 million, net loans were $260.8 million, deposits were $191.3 million, FHLB advances were $48.6 million, and shareholders’ equity was $67.7 million.
- Cash and cash equivalents were $9.4 million; time deposits at other financial institutions were $6.7 million. Cash and cash equivalents declined $3.4 million from June 30.
- Six-month operating cash flow was $1.0 million; investing cash flow was negative $4.5 million and financing cash flow was approximately break-even. Cash declined from $12.8 million to $9.4 million.
- The six-month provision for loan losses was $3,000. The allowance was $1.5 million, or 0.6% of loans and 23.5% of nonperforming loans.
Material changes versus the prior comparable period
- Six-month net income rose 108.5% to $1.149 million; quarterly net income rose 242.1% to $869,000. Results included a $268,000 income tax benefit from remeasuring deferred tax liabilities following enactment of the Tax Cuts and Jobs Act, and higher bank-owned life insurance (BOLI) income associated with death-benefit proceeds.
- Six-month net interest income declined $16,000 despite 5.1% growth in interest income, as interest expense increased 45.0%. The net interest margin fell to 3.51% from 3.69%; the net interest spread fell to 3.37% from 3.59%.
- Loans grew 1.0% from June 30 to $260.8 million. Deposits increased 4.6% to $191.3 million, while FHLB advances declined 12.8% to $48.6 million as deposits were used in place of borrowings.
- Nonperforming loans decreased to approximately $6.5 million, or 2.5% of loans, from $6.8 million, or 2.6%, at June 30. Total classified assets were $12.2 million versus $12.1 million. Special-mention loans fell to $1.4 million from $6.2 million, which management attributed to improved borrower financial condition.
- Noninterest income rose to $576,000 for the six months, primarily because BOLI earnings increased to $412,000. Noninterest expense rose 2.2% to $4.4 million.
Outlook, risks and unusual items
- Management said it will seek high-quality loan growth where profitable and prudent, and is using deposits to fund loan growth and reduce FHLB advances. The filing provides no quantitative earnings or financial guidance.
- Management stated that the company had sufficient capital to continue its current dividend policy without affecting either subsidiary bank’s well-capitalized status; numerical capital ratios are not provided. Dividends paid were $724,000, or 63.0% of six-month net income. The Federal Reserve did not object to the mutual holding company waiving receipt of dividends of up to $0.10 per share through the third calendar quarter of 2018.
- Four TDRs with a carrying value of $136,000 defaulted during the six-month period; the properties were taken into real estate owned and sold. TDR balances were $1.5 million at both December 31 and June 30. Real estate owned increased to $806,000 from $358,000.
- Management cited general economic conditions, real estate prices in its markets, interest rates, competition, legal and regulatory changes, and technology as risks. It reported no material change to the risks in its 2017 Form 10-K. Legal proceedings: none reported.
- The company expects CECL adoption in fiscal 2021 to add complexity and cost; the size of any initial allowance adjustment is not yet determinable. Management expected no material impact from the cited revenue and financial-instrument accounting standards. The company adopted guidance on callable debt-security premium amortization in the quarter with no material impact.
- Disclosure controls were reported effective, with no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported earnings increase is attributable to BOLI death-benefit-related income and the one-time deferred-tax remeasurement, versus recurring operations.
- Whether deposit pricing and higher borrowing costs continue to pressure net interest margin and spread.
- Trends in nonperforming and classified loans, TDR defaults, foreclosures, and allowance coverage, particularly given real estate concentration.
- The sustainability of the dividend relative to recurring earnings, liquidity, and regulatory capital; the filing does not provide numerical capital ratios.
- Management’s evolving estimate of CECL’s allowance impact and implementation costs.