Kentucky First Federal Bancorp — Q2 FY2012 Form 10-Q
Business context and reporting period. The company is a bank holding company operating two savings banks. This unaudited filing covers the quarter and six months ended December 31, 2011; balance-sheet comparisons are with June 30, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Interest income | $2.594 | $2.726 | $5.188 | $5.472 |
| Net interest income | $2.040 | $1.884 | $3.990 | $3.648 |
| Provision for loan losses | $0.082 | $0.043 | $0.082 | $0.068 |
| Non-interest income | $0.031 | $0.074 | $0.057 | $0.154 |
| Non-interest expense | $1.411 | $1.282 | $2.760 | $2.608 |
| Net income | $0.388 | $0.424 | $0.809 | $0.757 |
| Basic and diluted EPS | $0.05 | $0.06 | $0.11 | $0.10 |
- Margins: Net interest margin was 4.03% for the quarter and 3.94% for the six-month period, compared with 3.51% and 3.40%, respectively, a year earlier.
- Balance sheet at Dec. 31: Assets were $236.4 million, up 4.6% from June 30. Net loans were $184.0 million; deposits were $136.6 million; FHLB advances were $38.7 million; and shareholders’ equity was $59.0 million.
- Liquidity and cash flow: Cash and cash equivalents were $4.2 million, down from $5.0 million at June 30. For the six months, operating cash flow was $0.543 million, investing cash flow was negative $10.610 million, financing cash flow was positive $9.176 million, and cash decreased $0.891 million. The company held $12.5 million of U.S. Treasury notes due February 2012; it says the note matured shortly after quarter-end and the short-term FHLB advance used to fund it was repaid.
- Dividends: $0.20 per share for the six months ($0.10 in the quarter); cash dividends paid were $0.567 million, or 70% of six-month net income. Management said future dividends depend on capital, earnings, liquidity, regulatory requirements, and overall financial condition.
Material changes versus comparable periods
- Six-month net income rose 6.9% to $0.809 million, while quarterly net income fell 8.5% to $0.388 million.
- Net interest income increased as funding costs fell faster than interest income. Six-month interest expense declined 34.3% to $1.198 million; deposit expense fell 37.5%. Lower loan balances and yields reduced interest income.
- Six-month non-interest income fell to $0.057 million, including a $0.048 million OREO impairment charge and a $0.013 million loss on OREO sales. Non-interest expense rose 5.8%; merger-related legal and outside-service costs were the main drivers.
- Total loans rose modestly from June, but reported nonperforming loans increased to about $1.8 million, or 1.0% of loans, from $0.876 million, or 0.5%. Allowance for loan losses increased to $0.842 million from $0.764 million; coverage of nonperforming loans fell to 45.7% from 87.2%.
- OREO declined to $2.630 million from $4.304 million. The filing attributes the reduction largely to sales and notes that a $2.2 million loan was made on property formerly held as OREO, with $0.650 million of deferred revenue at quarter-end.
- FHLB advances increased $13.5 million from June, while deposits declined $3.3 million. The increase in assets was primarily associated with securities purchases, including the $12.5 million Treasury note.
Outlook, risks, contingencies, and unusual items
- Management said loan demand remained weak amid the economic downturn and expected home-loan demand to remain subdued until housing improved. It continued to seek prudent, high-quality lending opportunities.
- Management expected deposit repricing at lower rates to continue if market rates remained steady, but said the pace would decline and net interest margin expansion could plateau. About 68% of real estate loans were adjustable-rate loans with rate floors.
- A definitive merger agreement with CKF Bancorp was announced November 3, 2011. CKF reported September 30 assets of $131.1 million, loans of $109.0 million (net of allowance), and deposits of $103.5 million. Consideration includes cash and Kentucky First Federal common stock; closing was expected in Q3 2012, subject to CKF shareholder and regulatory approvals.
- Two putative class-action lawsuits filed by CKF shareholders allege, among other things, inadequate merger consideration and fiduciary-duty breaches. The companies considered the claims without merit and intended to defend them. The filing does not quantify potential exposure.
- Disclosure controls and procedures were deemed ineffective due to a previously identified material weakness. Remediation work was underway, but management said the weakness would not be considered remediated until controls were implemented, tested, and found effective.
- Management identified general economic conditions, local real-estate values, interest rates, competition, laws, and regulation as risks. It also cautioned that loan-loss reserves may not cover unidentified losses. The company reported that it and each bank exceeded regulatory “well capitalized” levels.
Important facts for investors to verify
- Whether the CKF merger receives shareholder and regulatory approval, closes as expected, and how its cash-and-stock consideration affects capital and ownership.
- Progress and independent evaluation of the material-weakness remediation in disclosure controls.
- Trends in delinquency, nonaccrual loans, classified assets, OREO valuations and sales, and whether the allowance remains adequate; reported nonperforming-loan coverage declined materially.
- Whether net interest margin can be sustained as deposit repricing benefits diminish and loan demand remains weak.
- The outcome and potential costs of the CKF shareholder litigation, and any impact on the merger timetable.
- Future dividend-waiver approvals for the mutual holding company and the resulting capacity to maintain shareholder dividends.