Kentucky First Federal Bancorp — Form 10-Q Summary
Business context and reporting period
Community banking holding company reporting unaudited results for the three months ended September 30, 2012, its fiscal first quarter. Unless otherwise noted, financial amounts are in thousands of dollars. The company operates First Federal of Hazard and First Federal of Frankfort.
Key financial results
| Metric | Quarter ended Sep. 30, 2012 | Prior-year quarter / comparison |
|---|---|---|
| Interest income | $2,425 | $2,594 |
| Net interest income | $1,986 | $1,950 |
| Net interest income after loan-loss provision | $1,960 | $1,950 |
| Net interest margin | 4.01% | 3.84% |
| Non-interest income | $109 | $26 |
| Non-interest expense | $1,290 | $1,349 |
| Net income | $522 | $421 |
| Basic and diluted EPS | $0.07 | $0.06 |
| Dividend per share | $0.10 | $0.10 |
| Operating cash flow | $716 | $1,335 |
At September 30, 2012, total assets were $219.8 million, loans net of allowance were $177.9 million, deposits were $133.3 million, FHLB advances were $24.5 million, and shareholders’ equity was $59.1 million. Cash and cash equivalents were $7.3 million. The allowance for loan losses was $873,000, or 0.49% of total loans. The filing states consolidated and bank capital exceeded “well capitalized” thresholds; it does not provide capital ratios in the supplied text.
Cash increased $1.6 million during the quarter. Investing activities provided $4.9 million, mainly reflecting net loan collections; financing activities used $4.0 million, including $2.6 million of FHLB advance repayments, $1.2 million of deposit outflows, and $277,000 of dividends.
Material changes versus comparable periods
- Net income rose $101,000, or 24%, year over year. Management attributed the increase chiefly to $58,000 of gains on loan sales and improved real-estate-owned (REO) results.
- Net interest income increased modestly despite a $169,000 decline in interest income, as interest expense fell $205,000. Deposit costs declined; the average deposit rate fell to 0.93% from 1.38%.
- Non-interest expense fell 4.4%, principally from lower professional fees and no longer having amortization expense on the fully amortized core deposit intangible. Employee compensation and benefits rose $107,000, mainly due to higher retirement expense.
- Compared with June 30, 2012, assets declined $3.2 million, primarily because net loans fell $4.5 million. Deposits declined $1.2 million; FHLB advances declined $2.6 million.
- Nonperforming loans increased to approximately $2.7 million, or 1.5% of loans, from $1.8 million, or 0.98%. Classified assets increased to $10.0 million from $8.3 million. The allowance covered 32.5% of nonperforming loans, down from 48.8%.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or financial guidance is provided. Management said loan demand remained weak amid the economic downturn and expected home-loan demand to remain weak until housing conditions improved. It continued to seek high-quality lending opportunities and favored selling long-term fixed-rate mortgage production in the low-rate environment.
- A merger with CFK Bancorp and Central Kentucky Federal Savings Bank remained pending regulatory approval. CFK shareholders approved the transaction on July 3, 2012; the company expected completion in the fourth quarter of 2012. Estimated consideration was $11.6 million. CFK reported $124.3 million in assets, $98.7 million in net loans, $101.8 million in deposits, and $13.0 million in tangible equity as of September 30.
- During the quarter, 12 residential loans totaling $1.086 million after modification were identified as troubled debt restructurings (TDRs); 112,000 were not performing to modified terms. Ten were identified following bankruptcy discharge without borrower reaffirmation. No TDRs defaulted during the quarter or preceding 12 months.
- Management cautioned that the allowance may not cover unidentified loan losses. Forward-looking risks cited include economic conditions, real-estate prices, interest rates, competition, laws and regulation, and technology changes.
- The company paid $277,000 in dividends, equal to 53.1% of quarterly net income, and repurchased 7,800 shares at an average $7.86. Management said future dividends depend on financial and regulatory factors and did not commit to a future level.
- Management reported disclosure controls were effective and no significant quarterly change in internal control over financial reporting. The filing lists no applicable legal proceedings or additional risk factors for this report.
Important facts for investors to verify
- Whether the proposed CFK merger received regulatory approval and closed on the expected schedule, and the final consideration and integration effects.
- Whether the increase in nonperforming loans and classified assets continues, and whether allowance coverage remains adequate.
- Whether net income can be sustained as loan yields and loan demand remain under pressure, particularly given the contribution from loan-sale gains and improved REO results.
- Whether deposit outflows, planned debt repayments, liquidity held for the merger, and the dividend remain compatible with capital and funding needs.