Kentucky First Federal Bancorp — FY2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020. The filing is an annual report, not a report for calendar Q4 2019. The provided text incorporates the annual report’s financial statements and MD&A by reference but does not include their detailed results.
Business context and financial position
Kentucky First operates two community-oriented savings institutions, First Federal of Hazard and First Federal of Kentucky, serving eastern and central Kentucky. The banks primarily attract local deposits and make residential real estate loans. At June 30, 2020, the company reported total assets of $321.1 million, deposits of $212.3 million and stockholders’ equity of $51.9 million.
- Net loans were $74.1 million at First Federal of Hazard and $211.7 million at First Federal of Kentucky.
- Residential mortgages were $238.9 million, or 83.1% of the loan portfolio; 72.6% of residential mortgage balances were adjustable-rate loans.
- Real estate-secured loans represented approximately 95.9% of the portfolio. Nonresidential real estate loans were $36.6 million; multifamily loans were $12.4 million.
- The banks elected the Community Bank Leverage Ratio framework for the quarter ended March 31, 2020. The filing says both banks’ capital exceeded applicable minimums, but the supplied text does not provide their capital ratios.
Results, liquidity and changes versus the prior period
The supplied filing text does not provide clear values for consolidated revenue, net income or loss, cash flows, net interest margin, allowance for loan losses, borrowings or other debt, or year-over-year changes in these measures. Although the filing incorporates FY2020 and FY2019 financial statements, those statements and the MD&A figures are not included in the provided text.
A material unusual item was a $13.6 million goodwill impairment charge recorded in FY2020. The company disclosed a return on average equity of -19.0% for the year. The text does not provide a clear net income or loss figure, so the charge’s effect on reported earnings cannot be quantified here.
The filing describes an ongoing dividend-waiver practice by First Federal MHC. Its waiver of dividends on company shares supports distributions to public shareholders; the filing states that quarterly dividends of $0.10 per common share were covered by an approval through May 2021. Future waivers remain subject to member and regulatory approval.
Outlook, commentary and principal risks
- COVID-19: Management warns of potential higher delinquencies, credit losses, foreclosures, weaker collateral values, liquidity pressures and operational or cyber risks. Loan deferrals and Paycheck Protection Program processing may make credit quality harder to assess. The ultimate impact was uncertain.
- Interest rates: The Federal Reserve had cut rates to near zero in March 2020. Management cautions that asset yields could decline faster than funding costs, reducing net interest income and margin. Rising rates could also initially raise funding costs faster than asset yields and reduce securities values.
- Credit and geographic concentration: The loan book is heavily secured by real estate. Hazard’s eastern Kentucky market has faced a distressed economy and insufficient loan demand, partly associated with the decline of coal.
- Capital and shareholder returns: Management disclosed a low FY2020 return on equity and cautioned that capital rules may constrain dividends or repurchases. Public dividends also depend on bank capital distributions and continued MHC dividend waivers.
- Other risks: Competition, regulatory changes, employee benefit costs, cybersecurity and third-party service disruptions, and the expected adoption of CECL in the fiscal year beginning July 1, 2023. Management said CECL could require a higher loan-loss allowance.
Management reported effective disclosure controls and internal control over financial reporting as of June 30, 2020. The external auditor did not provide an internal-control attestation, as the company qualified for an exemption. The filing reports no pending legal proceeding believed likely to have a material adverse effect.
Investor verification points
- Review the incorporated FY2020 annual report and audited statements for revenue, earnings, cash flow, net interest margin, credit-loss provisions, delinquency trends, debt and liquidity metrics, and comparable FY2019 figures.
- Examine the basis and segment allocation of the $13.6 million goodwill impairment and whether further impairment indicators exist.
- Verify loan deferrals, subsequent delinquencies, charge-offs, allowance adequacy and commercial real estate exposure following COVID-19.
- Confirm bank capital ratios under the elected CBLR framework and the holding company’s capacity to fund dividends or repurchases.
- Check the filing’s share-repurchase table against the original filing: the supplied text contains dates that appear inconsistent with its stated fourth-quarter FY2020 heading.