Kentucky First Federal Bancorp — 10-Q Summary
Business context and reporting period
The company is a Kentucky bank holding company whose subsidiaries operate savings banks. This filing covers the fiscal first quarter ended September 30, 2011; income and cash-flow comparisons are against the three months ended September 30, 2010. Balance-sheet comparisons are against June 30, 2011. Unless otherwise noted, amounts are in thousands of dollars.
Financial performance and condition
| Metric | September 2011 quarter / period-end | Comparable period or prior quarter-end |
|---|---|---|
| Interest income | $2,594 | $2,746 |
| Interest expense | $644 | $982 |
| Net interest income | $1,950 | $1,764 |
| Net interest margin / spread | 3.84% / 3.55% | 3.27% / 2.85% |
| Net income; diluted EPS | $421; $0.06 | $333; $0.04 |
| Noninterest income / expense | $26 / $1,349 | $80 / $1,326 |
| Operating cash flow | $1,335 | $441 |
| Total assets | $227,545 | $226,135 at June 30, 2011 |
| Loans, net; allowance for loan losses | $182,723; $764 | $182,796; $764 at June 30, 2011 |
| Deposits; FHLB advances | $140,759; $24,634 | $139,940; $25,261 at June 30, 2011 |
| Cash and cash equivalents | $8,534 | $5,049 at June 30, 2011 |
| Shareholders’ equity | $58,864 | $58,697 at June 30, 2011 |
Net income increased 26% year over year, primarily reflecting higher net interest income and no loan-loss provision, versus a $25 provision in the prior-year quarter. Net interest income rose 11% as interest expense fell faster than interest income. Average deposit cost declined to 1.38% from 2.05%, and average borrowing cost to 2.55% from 2.99%. The effective tax rate was 32.9%, compared with 32.5%.
Quarterly cash increased by $3,485. Cash from operating activities was $1,335, while investing activities provided $2,061 and financing activities provided $89. The filing attributes the increase in cash primarily to loan repayments. A $667 deferred-revenue liability arose in connection with OREO sales facilitated by loans; the company expects to recognize this revenue in future periods.
Material changes, outlook, and risks
- Nonperforming loans increased to approximately $1.7 million, or 0.9% of loans, from $876,000, or 0.5%, at June 30. The allowance covered 44.2% of nonperforming loans, versus 87.2% at June 30; management said the increase in problem loans reflected borrowers whose performance had improved in the prior quarter but weakened again.
- Past-due loans totaled $4.228 million, all in one- to four-family residential loans. OREO was $2.681 million, down from $4.304 million at June 30. Substandard assets totaled $7.2 million, including $4.481 million of loans and $2.681 million of OREO. The allowance was 0.4% of total loans.
- Management reported weaker loan demand amid the economic downturn and expected home-loan demand to remain weak until the housing market improves. It expected certificates of deposit to continue repricing lower if interest rates remained steady, but said the resulting margin expansion could plateau as repricing slows. Adjustable-rate real-estate loans had rate floors.
- Noninterest income fell to $26,000, including a $17,000 loss on OREO sales and a $10,000 OREO impairment charge. No loans were sold during the quarter. Merger-related legal, accounting, and outside-service costs contributed to higher expenses.
- On November 3, 2011, the company announced a definitive merger agreement with CKF Bancorp, which had $131.1 million in assets at September 30. Consideration includes cash and company common stock. Completion requires CKF shareholder and regulatory approvals; closing was expected in the second or third quarter of 2012.
- The company declared a $0.10-per-share dividend, totaling $282,000, or 67% of quarterly net income. Management said the banks and consolidated company exceeded well-capitalized levels, but did not provide capital ratios or commit to future dividend levels.
- Disclosure controls were deemed ineffective because of a previously identified material weakness. Management was working on remediation; the weakness would not be considered remediated until controls were implemented, operated, tested, and judged effective. The filing cites economic conditions, local real-estate prices, interest rates, competition, regulation, and technology as risks. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the merger receives required approvals, its final terms and dilution effects, and whether it closes on the anticipated timetable.
- Trends in nonperforming and past-due loans, OREO dispositions, and the adequacy of the $764,000 loan-loss allowance.
- How much of future earnings reflects recognition of the $667,000 deferred revenue and whether recurring margins can be sustained as deposit repricing slows.
- Remediation progress for the material weakness in disclosure controls and any subsequent assessment of control effectiveness.
- The sustainability of the $0.10 quarterly dividend given earnings, capital, liquidity, and merger-related cash needs.