Kentucky First Federal Bancorp — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014. The company is the parent of two savings banks, with a predominantly real-estate loan portfolio. Financial statement amounts below are in thousands of dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Interest income | $3,156 | $6,255 | $3,390 quarter; $6,626 six months |
| Net interest income | $2,802 | $5,550 | $2,962 quarter; $5,745 six months |
| Provision for loan losses | $210 | $266 | $171 quarter; $453 six months |
| Non-interest income | $232 | $328 | $97 quarter; $212 six months |
| Non-interest expense | $1,958 | $4,127 | $2,044 quarter; $4,031 six months |
| Net income | $579 | $995 | $598 quarter; $1,021 six months |
| Basic and diluted EPS | $0.07 | $0.12 | $0.07 quarter; $0.12 six months |
| Net interest margin | 4.14% | 4.11% | 4.13% quarter; 3.94% six months |
At December 31, 2014, total assets were $303.1 million, loans net of allowance were $244.3 million, cash and cash equivalents were $9.8 million, and held-to-maturity securities were $16.4 million. Deposits were $205.0 million; Federal Home Loan Bank (FHLB) advances were $29.0 million. Shareholders’ equity was $67.2 million.
For the six months, operating cash flow was $1.4 million; investing activities used $5.5 million and financing activities provided $2.4 million. Cash and cash equivalents declined $1.7 million to $9.8 million. The company paid $704,000 in dividends, or 70.8% of six-month net income, and repurchased $345,000 of shares.
Changes versus comparable periods
- Six-month net income declined 2.5% to $995,000; second-quarter net income declined 3.2% to $579,000.
- Six-month net interest income fell 3.4%, but net interest margin improved to 4.11% from 3.94%. Lower interest expense partly offset reduced interest income and a smaller average loan portfolio.
- The six-month loan-loss provision decreased to $266,000 from $453,000; the quarterly provision increased to $210,000 from $171,000.
- Six-month non-interest income rose to $328,000, primarily reflecting improved gains on sales of foreclosed real estate (OREO). Non-interest expense rose 2.4% to $4.1 million.
- From June 30, deposits decreased $8.1 million (3.8%), while FHLB advances increased $11.8 million (68.9%), primarily to fund an $8.5 million short-term Treasury note purchase. The note had matured before filing.
- Net loans declined $2.4 million (1.0%), attributed to weak demand and loan payoffs. OREO increased to $2.2 million from $1.8 million.
Outlook, commentary, and risks
- Management described loan demand as weak and expected home-loan demand to remain subdued until the housing market strengthened. It said it would pursue high-quality lending when profitable, prudent, and consistent with interest-rate-risk strategies. No quantified earnings or revenue guidance was provided.
- Nonperforming loans were approximately $7.0 million, or 2.8% of total loans, versus $9.7 million, or 3.95%, at June 30. The allowance was $1.6 million, equal to 22.7% of nonperforming loans and 0.64% of total loans.
- Special-mention loans increased to $8.0 million from $3.9 million, mainly due to cash-flow weakness at two larger, current borrowers; management said the loans were well secured by real estate. Substandard assets declined to $14.4 million from $16.3 million.
- Troubled debt restructurings totaled $1.8 million at December 31, down from $2.0 million at June 30; no TDR modifications or defaults occurred in the current six-month period. About 41.6% of TDRs related to borrowers completing Chapter 7 proceedings without reaffirming their debt.
- Management cautioned that the allowance may not cover unidentified loan losses. Forward-looking risks include economic conditions, real-estate prices, interest rates, competition, regulation, and technology. The filing reported no material change in previously disclosed risk factors and no legal proceedings.
- The board’s dividend policy remains subject to capital, earnings, liquidity, regulatory, and other considerations. The Federal Reserve did not object to the mutual holding company waiving receipt of dividends up to $0.10 per share per quarter through the third quarter of 2015. Management said it believed current dividends could continue without impairing subsidiary-bank well-capitalized status, but gave no assurance of future dividend levels.
- Management reported effective disclosure controls and no significant quarterly change in internal control over financial reporting. It noted pension funding costs could be higher in the future, despite no further defined-benefit pension costs anticipated for the balance of the fiscal year.
Important facts for investors to verify
- Whether reduced loan demand and lower average loan balances continue to pressure interest income and loan growth.
- The composition, aging, collateral values, and subsequent performance of nonperforming loans, special-mention loans, TDRs, and OREO; the allowance remains a management estimate.
- How deposit outflows and increased reliance on FHLB advances affect funding costs, liquidity, and net interest margin.
- The sustainability of earnings and dividends, including the contribution from OREO sale gains and the reported dividend payout of 70.8% of six-month earnings.
- The terms and effect of the Treasury-note transaction funded with additional FHLB advances; the note had matured before filing, but the filing text does not provide a clear value for its maturity proceeds or subsequent use.