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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 000-50592
K-FED BANCORP
(Exact name of registrant as specified in its charter)
Federal 20-0411486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1359 N. Grand Avenue Covina, CA 91724
(Address of principal executive office) (Zip Code)
(800)524-2274
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value per share.
Indicate by check whether the registrant: (1)has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 2003 was zero. There were 14,548,500 shares of the
registrant's common stock, $.01 par value per share, outstanding at August 31,
2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2004 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
K-FED BANCORP
Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2004
Table of Contents
Page
----
Part I.
Item 1. Business. 2
Item 2. Properties. 37
Item 3. Legal Proceedings. 37
Item 4. Submission of Matters to a Vote of Security Holders. 37
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities. 38
Item 6. Selected Financial Data. 39
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 53
Item 8. Financial Statements and Supplementary Data. 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 55
Item 9A. Controls and Procedures. 56
Item 9B. Other Information 56
Part III.
Item 10. Directors and Executive Officers of the Registrant. 56
Item 11. Executive Compensation. 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. 57
Item 13. Certain Relationships and Related Transactions. 57
Item 14. Principal Accountant Fees and Services. 57
Part IV.
Item 15. Exhibits and Financial Statement Schedules. 57
1
Part I.
Item 1. Business.
General
K-Fed Bancorp (or the "Company") is a federally-chartered stock
corporation that was formed in July 2003 as a wholly-owned subsidiary of K-Fed
Mutual Holding Company, a federally-chartered mutual holding company, in
connection with the mutual holding company reorganization of Kaiser Federal Bank
(or the "Bank"), a federally chartered stock savings association. Upon
completion of the mutual holding company reorganization in July 2003, the
Company acquired all of the capital stock of the Bank. On March 30, 2004, the
Company completed a minority stock offering in which it sold 5,686,750 shares,
or 39.09%, of its outstanding common stock to eligible depositors of the Bank in
a subscription offering. The remaining 8,861,750 outstanding shares of the
Company are owned by K-Fed MHC.
K-Fed Mutual Holding Company is a federally-chartered mutual holding
company and is subject to regulation by the Office of Thrift Supervision. K-Fed
Mutual Holding Company's principal assets are its investment in K-Fed Bancorp
and approximately $50,000 in cash. So long as K-Fed Mutual Holding Company is in
existence, it will at all times own at least a majority of the outstanding
common stock of K-Fed Bancorp.
At June 30, 2004, K-Fed Bancorp had total assets of $584.4 million,
total deposits of $423.0 million and total shareholders' equity of $89.1
million. The Company's business activities generally are limited to passive
investment activities and oversight of our investment in the Bank. Unless the
context otherwise requires, all references to the Company include the Bank and
the Company on a consolidated basis.
The Bank is a community oriented financial institution offering a
variety of financial services to meet the needs of the communities we serve. We
are headquartered in Covina, California, with a branch in Pasadena to serve Los
Angeles County, a branch in Fontana to serve San Bernardino and Riverside
Counties, and a branch in Santa Clara to serve Santa Clara County.
The Bank began operations as a credit union in 1953 when we were formed
as Kaiser Foundation Hospital Employees Federal Credit Union. The credit union
initially served the employees of the Kaiser Foundation Hospital in Los Angeles,
California. As the Kaiser Permanente Medical Care Program evolved so did the
credit union and in 1972 it changed its name to Kaiser Permanente Federal Credit
Union. The credit union grew to primarily serve Kaiser employees and physicians
who worked or lived in California between the Mexican border in the south and
San Francisco County to the north. The credit union serviced members with two
branches, Pasadena and Santa Clara and a network of 30 ATMs primarily located in
Kaiser medical centers. However, as a credit union, the credit union was legally
restricted to serve only individuals who shared a "common bond" such as a common
employer.
After receiving the necessary regulatory and membership approvals, on
November 1, 1999, Kaiser Permanente Federal Credit Union converted to a federal
mutual savings association known as Kaiser Federal Bank which serves the general
public as well as Kaiser employees.
2
On July 1, 2003, we completed our conversion from a federal mutual
savings association to a federal stock savings association in conjunction with
the mutual holding company reorganization.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and to a
lesser extent, multi-family residential loans and commercial real estate loans.
We also originate automobile and other consumer loans. Historically, we have not
made commercial business loans or construction loans. We obtain loans through
our staff, as well as through advertising in various publications.
Our revenues are derived principally from interest on loans and
mortgage-backed and related securities. We also generate revenue from service
charges and other income.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, demand deposit accounts and time deposit accounts with varied terms
ranging from 90 days to five years. We solicit deposits in our primary market
area of San Diego, Los Angeles, San Bernardino and Santa Clara Counties,
California.
Available Information
Our Internet address is www.k-fed.com. We make available free of charge,
through our web site, annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. All SEC
filings of the Company are also available at the SEC's website, www.sec.gov.
Market Area
Our expansive market area provides a large, increasing base of potential
customers with per capita income levels favorable to the national average. Los
Angeles County's economy has improved dramatically since the mid 1990's as a
result of extensive overhauling and restructuring of the region's basic economic
sectors. This base consists of a diversified mix of high-technology commercial
endeavors, by-products of the defense related industries, which capitalized on
the highly educated and skilled labor force. Emerging growth areas include
telecommunications, electronics, computers, software and biomedical technologies
as well as international trade. The western portion of the San Bernardino and
Riverside Counties are adjacent to higher housing cost areas of Los Angeles,
Orange and San Diego Counties and are a magnet for new residents seeking
affordable housing as well as many local business operations. Manufacturing,
transportation and distribution companies provide thousands of jobs in this
area. Santa Clara County is in the "Silicon Valley" where high technology
industries have down sized. However, the per capita income well exceeds the
state and national average.
Competition
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings
3
institutions, commercial banks, credit unions and mortgage bankers. Other
savings institutions, commercial banks, credit unions and finance companies
provide vigorous competition in consumer lending. We also face competition from
other lenders and investors with respect to loans that we purchase.
We attract all of our deposits through our branch and ATM network.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions, as well as mutual funds and other
alternative investments. We compete for these deposits by offering superior
service and a variety of deposit accounts at competitive rates. As of June 30,
2004, we believe that we hold less than 0.14% of the deposits in our primary
market area.
Lending Activities
General. We originate and purchase one- to four-family and multi-family
residential loans and to a lesser extent we originate and purchase commercial
real estate loans. We also originate consumer loans, primarily automobile loans.
Our loans carry either a fixed or an adjustable rate of interest. Consumer loans
are generally short term and amortize monthly or have interest payable monthly.
Mortgage loans generally have a longer term amortization, with maturities up to
30 years, depending upon the type of property with principal and interest due
each month. We also have loans in our portfolio that require only interest
payments on a monthly basis. At June 30, 2004, our net loan portfolio totaled
$496.2 million, which constituted 84.9% of our total assets. Approximately 61%
of our loan portfolio consists of purchased loans. We underwrite each purchased
loan, however, in accordance with our underwriting standards.
At June 30, 2004, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities under applicable regulations
was $9.6 million. At June 30, 2004, we had no loans or group of loans to related
borrowers with outstanding balances in excess of this amount. Our five largest
lending relationships at June 30, 2004 were as follows: (1) a $1.8 million loan
to purchase a 22-unit apartment building, (2) a $1.7 million loan to refinance
an office building, (3) a $1.6 million loan to purchase a 24 unit apartment
building, (4) a $1.4 million loan to purchase a shopping center, and (5) a $1.4
million loan to refinance a manufacturing facility.
4
The following table presents information concerning the composition of
Kaiser Federal Bank's loan portfolio in dollar amounts and in percentages as of
the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
REAL ESTATE
One- to four-family................... $ 341,776 68.82% $ 259,563 66.64% $ 145,383 61.03%
Commercial............................ 26,879 5.41 21,266 5.46 7,585 3.18
Multi-family.......................... 72,519 14.60 42,275 10.85 20,345 8.55
----------- --------- ----------- --------- ----------- ---------
Total real estate loans............ 441,174 88.83 323,104 82.95 173,313 72.76
OTHER LOANS
Consumer:
Automobile............................. 47,359 9.54 56,872 14.60 51,947 21.81
Home equity............................ 437 0.08 664 0.17 1,735 0.73
Other.................................. 7,675 1.55 8,878 2.28 11,202 4.70
----------- --------- ----------- --------- ----------- ---------
Total other loans................... 55,471 11.17 66,414 17.05 64,884 27.24
----------- --------- ----------- --------- ----------- ---------
Total loans......................... 496,645 100.00% 389,518 100.00% 238,197 100.00%
========= ========= =========
Less:
Net deferred loan originations
fees (costs)...................... (332) (354) (219)
Premiums on purchased loans......... 2,221 2,757 680
Allowance for loan losses........... (2,328) (2,281) (1,744)
----------- ----------- -----------
Total loans receivable, net...... $ 496,206 $ 389,640 $ 236,914
=========== =========== ===========
(continued)
AT JUNE 30,
-----------------------------------------------
2001 2000
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- ---------
REAL ESTATE
One- to four-family................... $ 71,824 50.62% $ 55,665 47.80%
Commercial............................ - - - -
Multi-family.......................... - - - -
----------- --------- ----------- ---------
Total real estate loans............ 71,824 50.62 55,665 47.80
OTHER LOANS
Consumer:
Automobile............................. 54,548 38.44 45,147 38.77
Home equity............................ 1,880 1.32 1,167 1.00
Other.................................. 13,648 9.62 14,466 12.43
----------- --------- ----------- ---------
Total other loans................... 70,076 49.38 60,780 52.20
----------- --------- ----------- ---------
Total loans......................... 141,900 100.00% 116,445 100.00%
========= ==========
Less:
Net deferred loan originations
fees (costs)...................... (49) (14)
Premiums on purchased loans......... 163 -
Allowance for loan losses........... (1,175) (863)
----------- -----------
Total loans receivable, net...... $ 140,839 $ 115,568
=========== ===========
5
The following table shows the composition of Kaiser Federal Bank loan
portfolio by fixed- and adjustable-rate at the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
FIXED RATE
REAL ESTATE
One- to four-family................... $ 82,104 16.53% $ 72,798 18.69% $ 71,734 30.12%
----------- --------- ----------- --------- ----------- ---------
Total real estate loans............. 82,104 16.53 72,798 18.69 71,734 30.12
OTHER LOANS
Consumer:
Automobile............................ 47,359 9.54 56,872 14.60 51,941 21.80
Other................................. 6,459 1.30 7,530 1.93 9,607 4.03
----------- --------- ----------- --------- ----------- ---------
Total other loans................... 53,818 10.84 64,402 16.53 61,548 25.83
----------- --------- ----------- --------- ----------- ---------
Total fixed-rate loans............ 135,922 27.37 137,200 35.22 133,282 55.95
----------- --------- ----------- --------- ----------- ---------
ADJUSTABLE RATE
REAL ESTATE
One- to four-family................... 259,672 52.29 186,765 47.95 73,649 30.93
Commercial............................ 26,879 5.41 21,266 5.46 7,585 3.18
Multi-family.......................... 72,519 14.60 42,275 10.85 20,345 8.54
----------- --------- ----------- --------- ----------- ---------
Total real estate loans............. 359,070 72.30 250,306 64.26 101,579 42.65
OTHER LOANS
Consumer:
Automobile............................ - 0.00 - 0.00 6 0.00
Home equity........................... 437 0.09 664 0.17 1,735 0.73
Other................................. 1,216 0.24 1,348 0.35 1,595 0.67
----------- --------- ----------- --------- ----------- ---------
Total other loans................... 1,653 0.33 2,012 0.52 3,336 1.40
----------- --------- ----------- --------- ----------- ---------
Total adjustable-rate loans....... 360,723 72.63 252,318 64.78 104,915 44.05
----------- --------- ----------- --------- ----------- ---------
Total loans....................... 496,645 100.00% 389,518 100.00% 238,197 100.00%
========= ========= =========
Less:
Net deferred loan originations
fees (costs).................... (332) (354) (219)
Premiums on purchased loans....... 2,221 2,757 680
Allowance for loan losses......... (2,328) (2,281) (1,744)
----------- ----------- -----------
Total loans receivable, net.... $ 496,206 $ 389,640 $ 236,914
=========== =========== ===========
(continued)
AT JUNE 30,
-----------------------------------------------
2001 2000
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- ---------
FIXED RATE
REAL ESTATE
One- to four-family................... $ 64,659 45.57% $ 54,684 46.96%
----------- --------- ----------- ---------
Total real estate loans............. 64,659 45.57 54,684 46.96
OTHER LOANS
Consumer:
Automobile............................ 54,536 38.43 45,120 38.75
Other................................. 11,497 8.10 9,051 7.77
----------- --------- ----------- ---------
Total other loans................... 66,033 46.53 54,171 46.52
----------- --------- ----------- ---------
Total fixed-rate loans............ 130,692 92.10 108,855 93.48
----------- --------- ----------- ---------
ADJUSTABLE RATE
REAL ESTATE
One- to four-family................... 7,165 5.05 981 0.84
Commercial............................ - 0.00 - 0.00
Multi-family.......................... - 0.00 - 0.00
Total real estate loans............. 7,165 5.05 981 0.84
OTHER LOANS
Consumer:
Automobile............................ 12 0.01 27 0.03
Home equity........................... 1,880 1.32 1,167 1.00
Other................................. 2,151 1.52 5,415 4.65
----------- --------- ----------- ---------
Total other loans................... 4,043 2.85 6,609 5.68
Total adjustable-rate loans....... 11,208 7.90 7,590 6.52
----------- --------- ----------- ---------
Total loans....................... 141,900 100.00% 116,445 100.00%
========= =========
Less:
Net deferred loan originations
fees (costs).................... (49) (14)
Premiums on purchased loans....... 163 -
Allowance for loan losses......... (1,175) (863)
----------- -----------
Total loans receivable, net.... $ 140,839 $ 115,568
=========== ===========
6
LOAN MATURITY AND REPRICING. The following schedule illustrates certain
information at June 30, 2004 regarding the dollar amount of loans maturing in
Kaiser Federal Bank's portfolio based on their contractual terms to maturity,
but does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Loan balances do not include undisbursed
loan proceeds, unearned discounts, unearned income and allowance for loan
losses.
REAL ESTATE
--------------------------------------
ONE-TO CONSUMER - CONSUMER -
FOUR-FAMILY COMMERICAL MULTI-FAMILY AUTOS OTHER (2) TOTAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
At
June 30,
- ---------------------------
Within 1 year (1)........... $ - $ - $ 8 $ 1,068 $ 4,286 $ 5,362
After 1 year:
After 1 Year through 3
Years.................... 77 - 122 13,166 972 14,337
After 3 Years through
5 Years.................. 220 - 19 32,626 449 33,314
After 5 Years through
10 Years................. 6,838 26,369 3,200 499 2,305 39,211
After 10 Years through
15 Years................. 37,494 510 46,809 - 100 84,913
Over 15 years............. 297,147 - 22,361 - - 319,508
------------ ------------ ------------ ------------ ------------ ------------
Total due after 1 year...... 341,776 26,879 72,511 46,291 3,826 491,283
------------ ------------ ------------ ------------ ------------ ------------
Total....................... $ 341,776 $ 26,879 $ 72,519 $ 47,359 $ 8,112 $ 496,645
============ ============ ============ ============ ============ ============
- ------------------------
(1) Includes demand loans and loans having no stated maturity.
(2) Includes home equity loans.
7
The following table illustrates certain information at June 30, 2004
regarding the dollar amount of loans maturing in Kaiser Federal Bank's portfolio
based on their contractual terms to maturity, but does not include scheduled
payments or potential prepayments. Loans that have adjustable or renegotiable
interest rates are shown as maturing in the period during which the loan
reprices. Demand loans, loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loan losses.
REAL ESTATE
--------------------------------------
ONE-TO CONSUMER - CONSUMER -
FOUR-FAMILY COMMERICAL MULTI-FAMILY AUTOS OTHER (2) TOTAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
At
June 30,
- ---------------------------
Within 1 year (1)........... $ 9,933 $ 4,601 $ 23,824 $ 1,068 $ 4,286 $ 43,712
After 1 year:
After 1 Year through
3 Years................. 126,830 7,198 32,512 13,166 972 180,678
After 3 Years through
5 Years................. 123,141 15,080 16,183 32,626 449 187,479
After 5 Years through
10 Years................ 6,838 - - 499 2,305 9,642
After 10 Years through
15 Years................ 37,126 - - - 100 37,226
Over 15 years............. 37,908 - - - - 37,908
------------ ------------ ------------ ------------ ------------ ------------
Total due after 1 year...... 331,843 22,278 48,695 46,291 3,826 452,933
------------ ------------ ------------ ------------ ------------ ------------
Total....................... $ 341,776 $ 26,879 $ 72,519 $ 47,359 $ 8,112 $ 496,645
============ ============ ============ ============ ============ ============
- ---------------------------
(1) Includes demand loans and loans having no stated maturity.
(2) Includes home equity loans.
8
The following tables set forth the dollar amount of all loans due after
June 30, 2005, which have fixed interest rates and adjustable interest rates.
DUE AFTER JUNE 30, 2005
----------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ------------- -------------
(Dollars in Thousands)
REAL ESTATE LOANS
One-to four-family.............. $ 82,104 $ 259,672 $ 341,776
Commercial...................... - 26,879 26,879
Multi-family.................... - 72,511 72,511
------------ ------------- -------------
Total real estate loans....... 82,104 359,062 441,166
------------ ------------- -------------
OTHER LOANS
Consumer:
Automobile...................... 46,291 - 46,291
Home Equity..................... - 34 34
Other Loans..................... 3,792 - 3,792
------------ ------------- -------------
Total other loans............. 50,083 34 50,117
------------ ------------- -------------
Total loans....................... $ 132,187 $ 359,096 $ 491,283
============ ============= =============
Of the $496.6 million in total loans at June 30, 2004, approximately
$135.9 million have fixed rates of interest and approximately $360.7 million
have adjustable rates of interest.
One- to Four-Family Residential Lending. At June 30, 2004, one- to
four-family residential mortgage loans totaled $341.8 million, or 68.8%, of our
gross loan portfolio. We generally underwrite our one- to four-family loans
based on the applicant's employment and credit history and the appraised value
of the subject property. Presently, we lend up to 80% of the lesser of the
appraised value or purchase price for one- to four-family residential loans.
Should we grant a loan with a loan-to-value ratio in excess of 80%, we require
private mortgage insurance in order to reduce our exposure below 80%. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements. We currently retain
in our portfolios all single-family loans we originate. Approximately 64.6% of
our one- to-four family residential portfolio was purchased within the past
fiscal year.
We currently originate one- to four-family mortgage loans on a
fixed-rate and adjustable-rate basis. Our pricing strategy for mortgage loans
includes setting interest rates that are competitive with other local financial
institutions and consistent with our internal needs. Adjustable-rate loans are
tied to a variety of indices including a rate based on U. S. Treasury securities
adjusted to a constant maturity of one year and the average of U.S. Treasury
securities adjusted to a constant maturity of one year over the previous 12
month period. A majority of our adjustable rate loans carry an initial fixed
rate of interest for either three or five years which then converts to an
interest rate that is adjusted annually based upon the applicable index. Our
home mortgages are structured with a five to thirty year maturity, with
amortizations up to a 30 year period. All of our one- to-four family loans
originated or purchased are secured by properties located in California.
All our real estate loans contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property. The loans originated or
9
purchased by us are underwritten and documented pursuant to Freddie Mac or
Fannie Mae guidelines. See "- Loan Originations, Purchases, Sales and
Repayments." See "- Asset Quality - Non-Performing Assets" and "Asset Quality -
Classified Assets."
Adjustable rate loan mortgages generally pose different credit risks
than fixed-rate loans, primarily because as interest rates rise, the borrower's
payment rises, increasing the potential for default. The Company has not
experienced significant delinquencies for these loans. However, the majority of
these loans have been purchased or originated within the past three years. See "
- - Asset Quality - Non-Performing Assets" and " - Classified Assets." At June 30,
2004, our one-to four-family ARM loan portfolio totaled $259.7 million, or 52.3%
of our gross loan portfolio. At that date, the fixed-rate one-to-four-family
mortgage loan portfolio totaled $82.1 million, or 16.5% of the Company's gross
loan portfolio.
In addition, the Company has purchased adjustable-rate interest-only
mortgage loans. As of June 30, 2004, the Company's one- to four-family
interest-only ARM loans totaled $84.3 million, or 17.0% of our gross loan
portfolio. We have no plans to increase the number of interest-only loans held
in our loan portfolio at this time.
Multi-Family Residential Lending. We also offer multi-family residential
loans. These loans are secured by real estate located in our primary market
area. At June 30, 2004, multi-family residential loans totaled $72.5 million, or
14.6%, of our gross loan portfolio and $24.0 million of this amount was
purchased from other lenders without recourse.
Our multi-family residential loans are originated with adjustable
interest rates only. We use a number of indices to set the interest rate,
including a rate based on the constant maturity of one year U.S. Treasury
securities. A majority of our adjustable rate loans carry an initial fixed rate
of interest for either three or five years which then converts to an interest
rate that is adjusted annually based upon the applicable index. Loan-to-value
ratios on our multi-family residential loans do not exceed 75% of the appraised
value of the property securing the loan. These loans require monthly payments,
amortize over a period of up to 30 years and have maximum maturity of 30 years.
These loans are secured by properties located in California. We use mortgage
bankers and brokers to originate these loans as well as through our staff. We
retain some of the multi-family loans we originate, while selling participations
in others to manage our exposure to any one borrower.
Loans secured by multi-family residential real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family residential loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "- Loan Originations,
Purchases, Sales and Repayments."
Loans secured by multi-family residential properties are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
residential properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired. See "- Asset Quality - Non-Performing
Assets."
10
Commercial Real Estate Lending. We offer commercial real estate loans.
These loans are secured primarily by small retail establishments, rental
properties and small office buildings located in our primary market area. At
June 30, 2004, commercial real estate loans totaled $26.9 million, or 5.4%, of
our gross loan portfolio. Our largest commercial real estate loan at June 30,
2004, was a $1.7 million loan secured by the real estate.
We originate only adjustable-rate commercial real estate loans. The
interest rate on these loans is tied to a variety of indices, including a rate
based on the constant maturity of one year U.S. Treasury securities. A majority
of our adjustable-rate loans carry an initial fixed rate of interest for either
three or five years which then converts an interest rate that is adjusted
annually based upon the index. Loan-to-value ratios on our commercial real
estate loans do not exceed 75% of the appraised value of the property securing
the loan. These loans require monthly payments, amortize up to 30 years, have
maturities of up to 10 years and carry pre-payment penalties.
Loans secured by commercial real estate are underwritten based on the
income producing potential of the property, the financial strength of the
borrower and any guarantors. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
commercial real estate loans are performed by independent state licensed fee
appraisers approved by the board of directors. All the properties securing our
commercial real estate loans are located in California. See "- Loan
Originations, Purchases, Sales and Repayments."
Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality - Non-Performing Loans."
Consumer Loans. Historically, we offered a variety of consumer loans.
Currently we only offer loans secured by automobiles or deposits. Consumer loans
generally have shorter terms to maturity, which reduces our exposure to changes
in interest rates, and carry higher rates of interest than do one- to
four-family residential mortgage loans. At June 30, 2004, our consumer loan
portfolio, exclusive of automobile loans, totaled $8.1 million, or 1.6%, of our
gross loan portfolio. In recent years, our consumer loans, as a percentage of
our loan portfolio, has continued to decrease as we have emphasized our real
estate loan products.
The most significant component of our consumer lending is automobile
loans. We originate automobile loans only on a direct basis with the borrower.
Loans secured by automobiles totaled $47.4 million at June 30, 2004, or 9.5%, of
our gross loan portfolio at June 30, 2004. Automobile loans may be written for
up to seven years for new automobiles and a maximum of five years for used
automobiles and have fixed rates of interest. Loan to value ratios for
automobile loans are up to 100% of the sales price for new automobiles and up to
100% of value on used cars, based on valuation from official used car guides.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles. In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance. As a result, consumer loan
collections
11
are dependent on the borrower's continuing financial stability and, thus, are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
We originate loans through employees located at our offices. Walk-in
customers and referrals from our current customer base, advertisements, real
estate brokers, mortgage loan brokers and builders are also important sources of
loan originations. While we originate both adjustable-rate and fixed-rate loans,
our ability to originate loans is dependent upon customer demand for loans in
our market area. Demand is affected by local competition and the interest rate
environment. We also purchase real estate whole loans as well as participation
interests in real estate loans. In addition, we sell participation interests in
some of our larger real estate loans. We began purchasing one- to four-family
real estate loans in January 2001 and multi-family real estate loans in October
2001. We have used 10 different loan brokers in these purchase transactions. As
of June 30, 2004, we had participation interests in two commercial real estate
loans. All of our other commercial real estate loans have been originated
in-house. At June 30, 2004, our real estate loan portfolio totaled $441.2
million or 88.8% of the gross loan portfolio. Purchased real estate loans at
June 30, 2004 totaled $300.6 million, or 68.1% of the real estate loan
portfolio.
12
The following table shows the loan origination, purchase, sale and
repayment activities of Kaiser Federal Bank for the periods indicated, and
includes loans originated for both our own portfolio and for sale of
participating interests.
YEAR ENDED JUNE 30,
-------------------------------------------
2004 2003 2002
-------------- -------------- -------------
(Dollars in Thousands)
ORIGINATIONS BY TYPE:
Adjustable rate:
Real estate- one- to four- family............. $ 1,288 $ 4,039 $ 2,986
- commercial....................... 12,820 15,164 8,661
- multi-family..................... 24,100 25,662 4,115
Non-real estate - consumer automobile......... - - -
- other consumer.............. 4,516 4,983 4,920
-------------- -------------- -------------
Total adjustable-rate....................... 42,724 49,848 20,682
-------------- -------------- -------------
Fixed rate:
Real estate- one- to four- family............. 16,595 31,808 18,567
Non-real estate - consumer automobile......... 21,070 35,457 25,175
- other consumer.............. 9,447 9,010 10,585
-------------- -------------- -------------
Total fixed-rate............................ 47,112 76,275 54,327
-------------- -------------- -------------
Total loans orginated..................... 89,836 126,123 75,009
-------------- -------------- -------------
PURCHASES:
Adjustable rate:
Real estate- one- to four- family............. 247,160 204,738 78,053
- commercial....................... - 1,500 -
- multi-family..................... 18,394 - 16,298
-------------- -------------- -------------
Total adjustable-rate....................... 265,554 206,238 94,351
-------------- -------------- -------------
Fixed rate:
Real estate- one- to four- family............. 18,281 5,217 3,982
- commercial....................... - - -
- multi-family..................... - - -
-------------- -------------- -------------
Total fixed-rate............................ 18,281 5,217 3,982
-------------- -------------- -------------
Total loans purchased..................... 283,835 211,455 98,333
-------------- -------------- -------------
SALES AND REPAYMENTS:
Sales and loan participations sold.............. 1,585 3,111 1,063
Principal repayments............................ 264,959 183,146 75,982
-------------- -------------- -------------
Total reductions.......................... 266,544 186,257 77,045
-------------- -------------- -------------
Increase (decrease) in other items, net......... (561) 1,405 (222)
-------------- -------------- -------------
Net increase.............................. $ 106,566 $ 152,726 $ 96,075
============== ============== =============
ASSET QUALITY
The Kaiser Permanente Medical Care Program employs a large percentage of
Kaiser Federal Bank's account holders. Further, a significant concentration of
our borrowers resides in California. Although Kaiser Federal Bank has a
diversified loan portfolio, borrowers' ability to repay loans may be affected by
the economic climate of either the health care industry or the overall
geographic region in which the borrowers reside. Because we have a significant
amount of real estate loans, decreases in California's real estate values could
adversely affect the value of property used as collateral. In this regard, at
June 30, 2004, the rate of unemployment (not seasonally adjusted) in the State
of California was 6.3% with the unemployment rate for the United States at 5.8%
In addition, the State
13
of California's newly approved budget includes a spending plan that eliminates a
state deficit estimated at the beginning of the calendar year 2004 to be $17.0
billion. These initiatives may require aggressive measures such as reducing
state expenditures and other cost-cutting initiatives to meet the budget's
objectives. These measures may negatively affect the California economy and
Kaiser Federal Bank.
When a borrower fails to make a timely payment on a consumer loan, a
delinquency notice is sent when the loan is 10 days past due. When the loan is
20 days past due, we mail a subsequent delinquency notice to the borrower. Once
a loan is 30 days past due, our staff contacts the borrower by telephone to
determine the reason for delinquency and to request payment of the delinquent
amount in full or the establishment of an acceptable repayment plan to bring the
loan current. If the borrower is unable to make or keep payment arrangements,
additional collection action is taken in the form of repossession of collateral
for secured loans and small claims or legal action for unsecured loans.
For one- to four-family residential, multi-family and commercial real
estate loans serviced by us, a delinquency notice is sent to the borrower when
the loan is 8 days past due. When the loan is 20 days past due, we mail a
subsequent delinquency notice to the borrower. Typically, before the loan
becomes 45 days past due, contact with the borrower is made requesting payment
of the delinquent amount in full, or the establishment of an acceptable
repayment plan to bring the loan current. If an acceptable repayment plan has
not been agreed upon, loan personnel will generally prepare a notice of intent
to foreclose. The notice of intent to foreclose allows the borrower up to 10
days to bring the account current. Once the loan becomes 60 days delinquent, and
an acceptable repayment plan has not been agreed upon, the servicing officer
will turn over the account to the deed of trust trustee with instructions to
initiate foreclosure.
Real estate loans serviced by a third party are subject to the servicing
institution's collection policies. However, we track each purchased loan
individually to ensure full payments are received as scheduled. Each month,
third party servicers are required to provide delinquent loan status reports to
our servicing officer, which are included in the month-end delinquent real
estate report to management. Contractually, third party servicers are required
to adhere to collection policies no less stringent than our policies.
DELINQUENT LOANS. The following table sets forth our loans delinquent 60
to 89 days and over 89 days past due by type, number, amount and percentage of
type at June 30, 2004.
LOANS DELINQUENT FOR:
----------------------------------------------- TOTAL
60-89 DAYS 90 DAYS OR MORE DELINQUENT LOANS
----------------------- ----------------------- -----------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- ------------ ---------- ------------ ---------- ------------
(Dollars in Thousands)
One- to four-family............... - $ - - $ - - $ -
Commercial........................ - - - - - -
Multi-family...................... - - - - - -
Home Equity....................... - - - - - -
Consumer - automobile............. 40 502 9 79 49 581
Other consumer.................... 97 93 2 3 99 96
---------- ------------ ---------- ------------ ---------- ------------
137 595 11 82 148 677
========== ============ ========== ============ ========== ============
Delinquent loans to
total gross loans................. 0.12% 0.02% 0.14%
14
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. Generally, all loans past due 90 days and over are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.
Foreclosed assets consist of real estate and other assets which have
been acquired through foreclosure on loans. At the time of foreclosure, assets
are recorded at the lower of their estimated fair value less selling costs or
the loan balance, with any write-down charged against the allowance for loan
losses. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates.
JUNE 30,
----------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- ---------- ---------
(Dollars in Thousands)
NONACCRUAL LOANS:
One- to four-family........................ $ - $ - $ - $ - $ -
Commercial................................. - - - - -
Multi-family............................... - - - - -
Consumer - Automobile...................... 79 13 138 77 26
Consumer - Other........................... 3 13 - 14 1
--------- --------- --------- ---------- ---------
Total.................................... 82 26 138 91 27
--------- --------- --------- ---------- ---------
ACCRUING DELINQUENT MORE THAN 90 DAYS:
One- to four-family........................ - - - - -
Commercial................................. - - - - -
Multi-family............................... - - - - -
Consumer - Automobile...................... - - - - -
Consumer - Other........................... - - - - -
--------- --------- --------- ---------- ---------
Total.................................... - - - - -
--------- --------- --------- ---------- ---------
Non-performing loans......................... 82 26 138 91 27
Repossessed assets........................... 62 26 78 378 31
--------- --------- --------- ---------- ---------
Total non-performing assets.................. $ 144 $ 52 $ 216 $ 469 $ 58
========= ========= ========= ========== =========
Non-performing loans to total loans (1)...... 0.02% 0.01% 0.06% 0.06% 0.02%
Non-performing assets to total assets........ 0.02% 0.01% 0.07% 0.20% 0.03%
Non-accrued interest (2).................... $ 4 $ 1 $ 4 $ 3 $ 1
========= ========= ========= ========== =========
- -----------------------------
(1) Total loans are net of deferred fees and costs
(2) If interest on the loans classified as non-accrual had been accrued, interest income in these
amounts would have been accrued on non-accrual loans.
CLASSIFIED ASSETS. Regulations provide for the classification of loans
and other assets, such as debt and equity securities considered by regulators to
be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
15
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision and the FDIC, which may order the establishment of additional
general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. The
total amount of classified assets represented 2.6% of our equity capital and
0.4% of our total assets at June 30, 2004.
The aggregate amount of our classified assets at the dates indicated
were as follows:
AT JUNE 30,
------------------------
2004 2003
----------- -----------
(Dollars in Thousands)
Classified Assets:
Loss...................... $ 85 $ 83
Doubtful.................. 968 1,304
Substandard............... 858 407
Special Mention........... 422 353
----------- -----------
Total.................... $ 2,333 $ 2,147
=========== ===========
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the probable losses inherent in the loan portfolio. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include loss ratio analysis by type of loan and
specific allowances for identified problem loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loans or pools of
loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
16
The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting our key lending areas and other conditions, such as credit
quality trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss
experience in particular segments of the portfolio that existed as of the
balance sheet date and the impact that such conditions were believed to have had
on the collectibility of the loan. Senior management reviews these conditions
quarterly in discussions with our senior credit officers. To the extent that any
of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management's estimate of the
effect of such condition may be reflected as a specific allowance applicable to
such credit or portfolio segment. Where any of these conditions is not evidenced
by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the loss related to this condition
is reflected in the unallocated allowance. The evaluation of the inherent loss
with respect to these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments.
Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions in our market area.
This evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. For all
specifically reviewed loans for which it is probable that Kaiser Federal Bank
will be unable to collect all amounts due according to the terms of the loan
agreement, Kaiser Federal Bank determines impairment by computing a fair value
either based on discounted cash flows using the loan's initial interest rate or
the fair value of the collateral if the loan is collateral dependent. Large
groups of smaller balance homogenous loans that are collectively evaluated for
impairment and are excluded from specific impairment evaluation, and their
allowance for loan losses is calculated in accordance with the allowance for
loan losses policy described above.
Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Our methodology as described permits adjustments to any loss
factor used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. In addition, management's
determination as to the amount of our allowance for loan losses is subject to
review by the Office of Thrift Supervision and the FDIC, which may require the
establishment of additional general or specific allowances based upon their
judgment of the information available to them at the time of their examination
of Kaiser Federal Bank.
At June 30, 2004, our allowance for loan losses was $2.3 million or 0.5%
of the total loan portfolio and 2,839.0% of total non-performing loans.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, that may be
susceptible to significant change. In the opinion of management, the allowance,
when taken as a whole, is at an amount that will absorb probable loan losses
inherent in our loan portfolios.
17
The following sets forth an analysis of our allowance for loan losses.
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Balance at beginning of period............... $ 2,281 $ 1,744 $ 1,175 $ 863 $ 1,094
CHARGE-OFFS:
One- to four-family......................... - - - - -
Commercial.................................. - - - - -
Multi-family................................ - - - - -
Consumer - automobile....................... 675 842 990 534 145
Other consumer.............................. 62 58 110 85 371
------------ ------------ ------------ ------------ ------------
737 900 1,100 619 516
RECOVERIES:
One- to four-family......................... - - - - -
Commercial.................................. - - - - -
Multi-family................................ - - - - -
Consumer - automobile....................... 279 296 503 137 18
Other consumer.............................. 22 17 19 26 70
------------ ------------ ------------ ------------ ------------
301 313 522 163 88
------------ ------------ ------------ ------------ ------------
Net charge-offs............................... 436 587 578 456 428
Provision (benefit) for loan losses........... 483 1,124 1,147 768 197
------------ ------------ ------------ ------------ ------------
Balance at end of period...................... $ 2,328 $ 2,281 $ 1,744 $ 1,175 $ 863
============ ============ ============ ============ ============
Net charge-offs to average loans during
this period (1)............................ 0.11% 0.19% 0.33% 0.36% 0.40%
Net charge-offs to average non-
performing loans during this period ........ 807.41% 715.85% 504.80% 772.88% 228.88%
Allowance for loan losses to non-
performing loans............................ 2,839.02% 8,773.08% 1,263.77% 1,291.21% 3,196.30%
Allowance as a % of total loans (end of
period) (1)................................. 0.47% 0.58% 0.73% 0.83% 0.74%
- ----------------------------
(1) Total loans are net of deferred fees and costs
18
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.
AT JUNE 30,
-------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
GROSS GROSS GROSS GROSS
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
PERCENT OF TO PERCENT OF TO
ALLOWANCE TOTAL ALLOWANCE TOTAL
TO TOTAL GROSS TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ------------ ------------- -------- ------------ -------------
(Dollars in Thousands)
Secured by residential real estate.... $ 932 40.03 % 68.82 % $ 703 30.82 % 66.64 %
Secured by commercial real estate..... 99 4.25 5.41 82 3.59 5.46
Secured by multi-family real estate... 232 9.97 14.60 132 5.79 10.85
Consumer - automobile................. 1,008 43.30 9.54 1,289 56.51 14.60
Consumer - other...................... 57 2.45 1.63 75 3.29 2.45
Unallocated........................... - - - - - -
------- -------- ---------- --------- -------- ---------
Total Allowance for Loan Losses....... $ 2,328 100.00 % 100.00% $ 2,281 100.00 % 100.00 %
======= ======== ========== ========= ======== =========
(continued)
AT JUNE 30,
-------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
GROSS GROSS GROSS GROSS
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
PERCENT OF TO PERCENT OF TO
ALLOWANCE TOTAL ALLOWANCE TOTAL
TO TOTAL GROSS TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ------------ ------------- -------- ------------ -------------
Secured by residential real estate.... $ 582 33.33 % 61.04 % $ 287 24.44 % 50.62 %
Secured by commercial real estate..... 30 1.73 3.18 - - -
Secured by multi-family real estate... 81 4.66 8.54 - - -
Consumer - automobile................. 970 55.63 21.81 751 63.88 38.44
Consumer - other...................... 81 4.65 5.43 137 11.68 10.94
Unallocated........................... - - - - - -
------- -------- ---------- --------- -------- ---------
Total Allowance for Loan Losses....... $ 1,744 100.00 % 100.00 % $ 1,175 100.00% 100.00 %
======= ======== ========== ========= ======== =========
(continued)
AT JUNE 30,
----------------------------------
2002
-----------------------------------
PERCENT OF PERCENT OF
GROSS GROSS
LOANS LOANS
IN EACH IN EACH
CATEGORY CATEGORY
PERCENT OF TO
ALLOWANCE TOTAL
TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS
-------- ------------ -------------
Secured by residential real estate.... $ 256 29.66 % 47.80 %
Secured by commercial real estate..... - - -
Secured by multi-family real estate... - - -
Consumer - automobile................. 383 44.38 38.77
Consumer - other...................... 224 25.96 13.43
Unallocated........................... - - -
------- -------- ----------
Total Allowance for Loan Losses....... $ 863 100.00 % 100.00 %
======= ======== ==========
19
INVESTMENT ACTIVITIES
GENERAL. We are required by federal regulations to maintain an amount of
liquid assets in order to meet our liquidity needs. These assets consist of
certain specified securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Commitments." Cash
flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of June 30, 2004, our liquidity ratio (liquid assets
as a percentage of net withdrawable savings and current borrowings) was 33.4%.
We are authorized to invest in various types of liquid assets, including
U.S. Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federal savings associations may also invest their assets
in investment grade commercial paper and corporate debt securities and mutual
funds whose assets conform to the investments that a federally chartered savings
association is otherwise authorized to make directly. See "How We Are Regulated
- - Kaiser Federal Bank" for a discussion of additional restrictions on our
investment activities.
Under the direction and guidance of the Investment/Asset and Liability
Management Committee and board policy, our president has the basic
responsibility for the management of our investment portfolio. Various factors
are considered when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated short and long term interest rates, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The current structure of our investment portfolio provides liquidity
when loan demand is high, assists in maintaining earnings when loan demand is
low and maximizes earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk. See
"Quantitative and Qualitative Disclosures about Market Risk - Asset and
Liability Management and Market Risk."
At June 30, 2004, our investment portfolio totaled $62.4 million and
consisted principally of collateralized mortgage obligations, mortgage-backed
securities, and U.S. agency obligations. From time to time, investment levels
may increase or decrease depending upon yields available on investment
alternatives and management's projected demand for funds for loan originations,
deposits, and other activities.
MORTGAGE-BACKED SECURITIES. Our mortgage-backed securities had a fair
value of $11.6 million and a $11.8 million amortized cost at June 30, 2004. The
mortgage-backed securities were comprised of Freddie Mac, Fannie Mae, and Ginnie
Mae mortgage-backed securities. At June 30, 2004, the portfolio had a
weighted-average coupon rate of 4.1% and an estimated weighted-average-yield of
3.3%. These securities had an estimated average maturity of 8.3 years and an
estimated average life of 3.0 years at June 30, 2004.
U.S. AGENCY OBLIGATIONS. Our portfolio of U.S. agency obligations had a
fair value of $20.9 million and a $21.0 million amortized cost at June 30, 2004.
At June 30, 2004, the portfolio had a weighted-average-coupon and a
weighted-average-yield of 2.8%. All U.S. agency obligations have call
provisions. The longest term call provision was on a bond with an amortized cost
of $5.0 million, a one-time call of 0.4 years, and a final maturity of 2.4
years.
20
COLLATERALIZED MORTGAGE OBLIGATIONS. Our portfolio of collateralized
mortgage obligations had a fair value of $29.4 million and a $29.9 million
amortized cost at June 30, 2004. At June 30, 2004 the portfolio had a
weighted-average-coupon of 4.5% and a weighted-average-yield of 4.1%. These
securities had an estimated average maturity of 21.1 years and an estimated
average life of 3.6 years at June 30, 2004.
We invest in collateralized mortgage obligations as an alternative to
mortgage loans and conventional mortgage-backed securities as part of our asset
liability management strategy. Management believes that collateralized mortgage
obligations represent attractive investment alternatives relative to other
investments due to the wide variety of maturity and repayment options available
through such investments. In particular, we have, from time to time, concluded
that short and intermediate and long duration collateralized mortgage
obligations (with an expected average life of five to ten years or less)
represent a better combination of rate and duration than adjustable rate
mortgage-backed securities. Because our collateralized mortgage obligations are
purchased as an alternative to mortgage loans and because we have the ability
and intent to hold such securities to maturity, all such securities are
classified as held-to-maturity. All of our collateralized mortgage obligations
and mortgage-backed securities are guaranteed by either Fannie Mae, Freddie Mac
or Ginnie Mae.
In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying collateralized mortgage obligations are segmented and paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche of a
collateralized mortgage obligations may therefore carry prepayment risk that
differs from that of both the underlying collateral and other tranches. It is
our strategy to purchase tranches of collateralized mortgage obligations with
expected shorter term duration and are intended to produce stable cash flows in
different interest rate environments. However, interest rate changes may affect
the duration of these securities.
To assess price volatility, the Federal Financial Institutions
Examination Council adopted a policy which requires an annual "stress" test of
mortgage derivative securities. This policy, which has been adopted by the
Office of Thrift Supervision, requires us to annually test our collateralized
mortgage obligations and other mortgage-related securities to determine whether
they are high-risk or non high-risk securities. Mortgage derivative products
with an average life or price volatility in excess of a benchmark 30-year
mortgage-backed pass-through security are considered high-risk mortgage
securities. Under the policy, savings institutions, such as Kaiser Federal Bank,
may invest in high-risk mortgage securities only to reduce interest rate risk.
In accordance with our policy, we do not invest in securities classified as
high-risk at the time of purchase. However, as of June 30, 2004, we had $17.9
million in high risk securities as a result of changes in market interest rates.
21
The following table sets forth the composition of our investment
portfolio at the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------ ------------------------
CARRYING CARRYING CARRYING
VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
----------- ------------ ----------- ------------ ----------- ------------
(Dollars in Thousands)
SECURITIES AVAILABLE FOR SALE:
Investment securities:
U.S. Government Agency obligations............ $ 10,890 17.46 % $ - - % $ - - %
Mortgage-backed securities:
Freddie Mac................................... 10,113 16.22 - - % $ - - %
----------- ----------- ----------- ---------- ----------- ----------
Total securities available for sale............. $ 21,003 33.68 % $ - - % $ - - %
=========== =========== =========== ========== =========== ==========
SECURITIES HELD TO MATURITY:
Investment securities:
U.S. Government Agency obligations............ $ 10,000 16.03 % $ - - % $ 8,000 40.43 %
Mortgage-backed securities:
Fannie Mae.................................... 732 1.17 1,188 8.34 1,825 9.22
Freddie Mac................................... 454 0.73 695 4.88 959 4.85
Ginnie Mae.................................... 310 0.50 406 2.85 667 3.37
Collateralized mortgage obligations:
Fannie Mae.................................... 7,342 11.77 7,399 51.93 6,735 34.04
Freddie Mac................................... 18,049 28.94 4,559 32.00 1,601 8.09
Ginnie Mae.................................... 4,474 7.17 - 0.00 - 0.00
----------- ----------- ----------- ---------- ----------- ----------
Total held to maturity.......................... $ 41,361 66.32 % $ 14,247 100.00 % $ 19,787 100.00 %
=========== =========== =========== ========== =========== ==========
Total investment securities..................... $ 62,364 100.00 % $ 14,247 100.00 % $ 19,787 100.00 %
=========== =========== =========== ========== =========== ==========
OTHER EARNINGS ASSETS:
Interest-bearing deposits in other financial
institutions................................ $ 2,970 24.40 $ 6,437 30.52 $ 23,378 91.75
Fed Funds..................................... 5,235 43.00 11,645 0.55 975 3.83
FHLB stock.................................... 3,290 27.02 2,602 12.34 1,008 3.96
Other investments............................. 679 0.05 406 1.93 118 0.46
----------- ----------- ----------- ---------- ----------- ----------
Total other earning assets...................... $ 12,174 100.00 % $ 21,090 100.00 % $ 25,479 100.00 %
=========== =========== =========== ========== =========== ==========
Total investment securities and other earning
assets........................................ $ 74,538 $ 35,337 $ 45,266
=========== =========== ===========
While our collateralized mortgage backed securities and mortgage backed
securities carry a reduced credit risk as compared to whole loans due to their
issuance under government agency sponsored programs, they remain subject to the
risk that a fluctuating interest rate environment, along with other factors like
the geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of the mortgage loans and so affect both the prepayment speed,
and value, of the investment securities. As a result of these factors, the
estimated average lives of these securities will be shorter than the contractual
maturities as shown on the following table.
22
The composition and maturities of the investment securities portfolio as
of June 30, 2004, are as follows:
AT JUNE 30, 2004
------------------------------------------------------------------------------------------
WEIGHTED AFTER ONE WEIGHTED AFTER FIVE WEIGHTED
ONE YEAR AVERAGE YEAR THROUGH AVERAGE YEARS THROUGH AVERAGE AFTER TEN
OR LESS YIELD FIVE YEARS YIELD TEN YEARS YIELD YEARS
------------- ----------- -------------- ----------- ------------- ----------- -----------
(Dollars in Thousands)
U.S. Government Agency obligations....... $ - -% $ 20,890 2.76% $ - -% $ -
Mortgage-backed securities............... - - 8,163 3.20 1,950 3.86 1,496
Collateralized mortgage obligations...... - - - - - - 29,865
------------- ----------- -------------- ----------- ------------- ----------- -----------
Total investment securities.............. $ - -% 29,053 2.88% 1,950 3.86% 31,361
============= =========== ============== =========== ============= =========== ===========
(CONTINUED)
AT JUNE 30, 2004
---------------------------------------
WEIGHTED WEIGHTED
AVERAGE BALANCE AS OF AVERAGE
YIELD JUNE 30, 2004 YIELD
----------- --------------- -----------
(Dollars in Thousands)
U.S. Government Agency obligations....... -% $ 20,890 2.76%
Mortgage-backed securities............... 2.81 11,609 3.26
Collateralized mortgage obligations...... 4.07 29,865 4.07
----------- --------------- -----------
Total investment securities.............. 4.01% $ 62,364 3.47%
=========== =============== ===========
FEDERAL HOME LOAN BANK STOCK. As a member of the Federal Home Loan Bank
of San Francisco, we are required to own capital stock in the Federal Home Loan
Bank of San Francisco. The amount of stock we hold is based on percentages
specified by the Federal Home Loan Bank of San Francisco on our outstanding
advances and the requirements of their Mortgage Purchase Program. The redemption
of any excess stock we hold is at the discretion of the Federal Home Loan Bank
of San Francisco. The carrying value of Federal Home Loan Bank of San Francisco
stock totaled $3.3 million and had a weighted-average-yield of 3.9% for the year
ended June 30, 2004. The yield on the Federal Home Loan Bank of San Francisco
stock is produced by stock dividends, that are subject to the discretion of the
board of directors of the Federal Home Loan Bank of San Francisco.
EQUITY INVESTMENT. We also had an approximate 20% investment in a
limited liability partnership, which builds and operates affordable housing
projects located in Northern California. We purchased the investment for
approximately $2.7 million during the year ended June 30, 2004. The investment
is being accounted for using the equity method of accounting. The investment is
evaluated periodically for impairment based on the remaining allocable tax
credits.
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities, borrowings, and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts to consumers with a
wide range of interest rates and terms. Our deposits consist of time deposit
accounts, savings, money market and demand deposit accounts. We have
historically paid competitive rates on our deposit accounts. We primarily rely
on competitive pricing policies, marketing and customer service to attract and
retain these deposits. Approximately 37.3% of our deposits are from customers
who are employed by the Kaiser Permanente Medical Care Program.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and bi-weekly
direct deposits from Kaiser Permanente Medical Care Program payrolls. The
variety of deposit accounts we offer has allowed us to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
We have become more susceptible to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. We try to manage the pricing
of our deposits in keeping with our asset/liability management, liquidity and
profitability objectives, subject to competitive factors. Based on our
experience, we believe that our deposits are relatively stable sources of funds.
Despite this stability, our ability to attract and maintain these deposits and
the rates paid on them has been and will continue to be significantly affected
by market conditions.
23
The following table sets forth our deposit flows during the periods
indicated.
YEAR ENDED JUNE 30,
--------------------------------------------
2004 2003 2002
-------------- -------------- --------------
(Dollars in Thousands)
Opening balance................... $ 346,239 $ 252,038 $ 197,588
Deposits, net of withdrawals...... 68,590 86,871 47,849
Interest credited................. 8,124 7,330 6,601
-------------- -------------- --------------
Ending balance.................... $ 422,953 $ 346,239 $ 252,038
============ ============ ============
Net increase...................... 76,714 94,201 54,450
Percent increase.................. 22.16% 37.38% 27.56%
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered at the dates indicated.
AT JUNE 30,
--------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------ ------------- ------------ ------------- ------------ -------------
(Dollars in Thousands)
Noninterest-bearing demand........ $ 38,020 8.99% $ 30,119 8.70% $ 26,904 10.67%
Savings........................... 95,115 22.49 82,691 23.88 69,782 27.69
Money market...................... 105,532 24.95 87,555 25.30 59,970 23.79
Certificates of deposit
1.00% - 1.99%................... 26,092 6.17 12,543 3.62 - -
2.00% - 2.99%................... 69,569 16.45 52,072 15.04 18,627 7.39
3.00% - 3.99%................... 37,652 8.90 26,919 7.77 19,462 7.72
4.00% - 4.99%................... 26,808 6.34 23,145 6.68 14,713 5.84
5.00% - 5.99%................... 9,770 2.31 13,127 3.79 16,889 6.70
6.00% - 6.99%................... 8,400 1.99 12,124 3.50 19,425 7.71
7.00% - 7.99%................... 5,995 1.43 5,944 1.72 6,266 2.49
------------ ------------- ------------ ------------- ------------ -------------
Total Certificates of Deposit..... 184,286 43.57 145,874 42.12 95,382 37.85
------------ ------------- ------------ ------------- ------------ -------------
Total............................. $ 422,953 100.00% $ 346,239 100.00% $ 252,038 100.00%
============ ============= ============ ============= ============ =============
24
The following table indicates the amount of Kaiser Federal Bank's
certificates of deposit by time remaining until maturity as of June 30, 2004.
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2006 2007 2008 2009 TOTAL
--------------- --------------- --------------- --------------- --------------- --------------
(Dollars in Thousands)
1.00% - 1.99%........... $ 26,000 $ 77 $ 9 $ 7 $ - $ 26,093
1.99% - 2.99%........... 54,704 14,376 446 10 32 69,568
3.00% - 3.99%........... 6,673 7,465 6,783 4,749 11,982 37,652
4.00% - 4.99%........... 2,990 663 1,708 14,510 6,937 26,808
5.00% - 5.99%........... 1,285 1,406 7,080 - - 9,771
6.00% - 6.99%........... 3,462 4,937 - - - 8,399
7.00% - 7.99%........... 20 5,975 - - - 5,995
--------------- --------------- --------------- --------------- --------------- --------------
$ 95,134 $ 34,899 $ 16,026 $ 19,276 $ 18,951 $ 184,286
=============== =============== =============== =============== =============== ==============
The following table provides the remaining maturities of large denomination
($100,000 or more) time deposits at June 30, 2004.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------------------------------- --------------
(in Thousands)
Three months or less................. $ 5,415
Over three through six months........ 5,188
Over six through twelve months....... 13,122
Over twelve months................... 31,643
--------------
Total............................ $ 55,368
==============
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to purchase loans or to fund loan demand or when they meet our asset/liability
management goals. Our borrowings historically have consisted of advances from
the Federal Home Loan Bank of San Francisco. See Note 10 of the Notes to
Consolidated Financial Statements.
We may obtain advances from the Federal Home Loan Bank of San Francisco
upon the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At June
30, 2004, we had $70.0 million in Federal Home Loan Bank advances outstanding.
25
The following table sets forth information as to our Federal Home Loan
Bank advances for the periods indicated
AT OR FOR THE YEAR ENDED JUNE 30
-----------------------------------------
2004 2003 2002
-----------------------------------------
(Dollars in Thousands)
Average balance outstanding.......................... $ 51,538 $ 34,972 $ 2,615
Maximum month-end balance............................ 70,000 50,000 13,000
Balance at end of period............................. 70,000 50,000 2,000
Weighted average interest rate during the period..... 2.92% 2.97% 1.23%
Weighted average interest rate at end of period...... 2.50% 3.00% 1.17%
EMPLOYEES
At June 30, 2004, we had a total of 90 employees, including 15 part-time
employees. Our employees are not represented by any collective bargaining group.
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to K-Fed Bancorp and Kaiser Federal Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States
Congress that may affect the operations of K-Fed Bancorp and Kaiser Federal
Bank. In addition, the regulations governing K-Fed Bancorp and Kaiser Federal
Bank may be amended from time to time by the Office of Thrift Supervision. Any
such legislation or regulatory changes in the future could adversely affect
K-Fed Bancorp or Kaiser Federal Bank. No assurance can be given as to whether or
in what form any such changes may occur.
GENERAL
Kaiser Federal Bank, as a federally-chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Kaiser Federal Bank also is subject
to regulation by the FDIC, which insures the deposits of Kaiser Federal Bank to
the maximum extent permitted by law, and requirements established by the Federal
Reserve Board. Federally chartered savings institutions are required to file
periodic reports with the Office of Thrift Supervision and are subject to
periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting stockholders.
The Office of Thrift Supervision regularly examines Kaiser Federal Bank
and prepares reports for the consideration of Kaiser Federal Bank's board of
directors on any deficiencies that it may find in Kaiser
26
Federal Bank's operations. Kaiser Federal Bank's relationship with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws, especially in such matters as the ownership of savings accounts and
the form and content of Kaiser Federal Bank's mortgage requirements. Any change
in such regulations, whether by the FDIC, the Office of Thrift Supervision or
Congress, could have a material adverse impact on K-Fed Bancorp and Kaiser
Federal Bank and their operations.
K-FED BANCORP
GENERAL. K-Fed Bancorp is a federal mutual holding company subsidiary
within the meaning of Section 10(o) of the Home Owners' Loan Act. It is required
to file reports with the Office of Thrift Supervision and is subject to
regulation and examination by the Office of Thrift Supervision. In addition, the
Office of Thrift Supervision has enforcement authority over K-Fed Bancorp and
any non-savings institution subsidiaries. This permits the Office of Thrift
Supervision to restrict or prohibit activities that it determines to be a
serious risk to Kaiser Federal Bank. This regulation is intended primarily for
the protection of the depositors and not for the benefit of stockholders of
K-Fed Bancorp.
ACTIVITIES RESTRICTIONS. K-Fed Bancorp and its non-savings institution
subsidiaries are subject to statutory and regulatory restrictions on their
business activities specified by federal regulations, which include performing
services and holding properties used by a savings institution subsidiary,
activities authorized for savings and loan holding companies as of March 5,
1987, and non-banking activities permissible for bank holding companies pursuant
to the Bank Holding Company Act of 1956 or authorized for financial holding
companies pursuant to the Gramm-Leach-Bliley Act.
If Kaiser Federal Bank fails the qualified thrift lender test, K-Fed
Bancorp must, within one year of that failure, register as, and will become
subject to, the restrictions applicable to bank holding companies. See "-
Qualified Thrift Lender Test."
WAIVERS OF DIVIDENDS BY K-FED BANCORP. Office of Thrift Supervision
regulations require K-Fed Mutual Holding Company to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of dividends from K-Fed
Bancorp. The Office of Thrift Supervision reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association and its stock holding company;
(iii) the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding company, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations.
We anticipate that K-Fed Mutual Holding Company will waive dividends
paid by K-Fed Bancorp, if any. Under Office of Thrift Supervision regulations,
our public stockholders would not be diluted because of any dividends waived by
K-Fed Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event K-Fed Mutual Holding
Company converts to stock form.
27
CONVERSION OF K-FED MUTUAL HOLDING COMPANY TO STOCK FORM. The Office of
Thrift Supervision regulations permit K-Fed Mutual Holding Company to convert
from the mutual form of organization to the capital stock form of organization
(a "Conversion Transaction"). There can be no assurance when, if ever, a
Conversion Transaction will occur, and the board of directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to K-Fed
Bancorp (the "New Holding Company"), K-Fed Mutual Holding Company's corporate
existence would end, and certain depositors of Kaiser Federal Bank would receive
the right to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of common stock held by stockholders other
than K-Fed Mutual Holding Company ("Minority Stockholders") would be
automatically converted into a number of shares of common stock in the New
Holding Company determined pursuant to an exchange ratio that ensures that the
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in K-Fed Bancorp immediately prior to the Conversation
Transaction. Under Officer of Thrift Supervision regulations, Minority
Stockholders would not be diluted because of any dividends waived by K-Fed
Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio), if K-Fed Mutual Holding Company
converts to stock form. The total number of shares held by Minority Stockholders
after a Conversion Transaction also would be increased by any purchases by
Minority Stockholders in the stock offering conducted as part of the Conversion
Transaction.
A Conversion Transaction requires the approval of the Office of Thrift
Supervision as well as a majority of the votes eligible to be cast by the
members of K-Fed Mutual Holding Company and a majority of the votes eligible to
be cast by the stockholders of K-Fed Bancorp other than K-Fed Mutual Holding
Company.
KAISER FEDERAL BANK
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Kaiser Federal
Bank is required to file periodic reports with the Office of Thrift Supervision
and is subject to periodic examinations by the Office of Thrift Supervision and
the FDIC. When these examinations are conducted by the Office of Thrift
Supervision and the FDIC, the examiners may require Kaiser Federal Bank to
provide for higher general or specific loan loss reserves. All savings
institutions are subject to a semi-annual assessment, based upon the savings
institution's total assets, to fund the operations of the Office of Thrift
Supervision.
The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Kaiser Federal Bank and K-Fed Bancorp. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the Office of Thrift Supervision. Except under certain
circumstances, public disclosure of final enforcement actions by the Office of
Thrift Supervision is required.
28
In addition, the investment, lending and branching authority of Kaiser
Federal Bank is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the Office of Thrift Supervision. Federal savings institutions are
also generally authorized to branch nationwide. Kaiser Federal Bank is in
compliance with the noted restrictions.
Kaiser Federal Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At June 30, 2004 Kaiser Federal Bank's lending
limit under this restriction was $9.6 million. Kaiser Federal Bank is in
compliance with the loans-to-one-borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Kaiser Federal Bank is a member of the Savings Association Insurance
Fund, which is administered by the FDIC. Deposits are insured up to the
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the Savings Association Insurance Fund. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the Office of Thrift Supervision an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as Kaiser Federal Bank, are
required to maintain a minimum level of regulatory capital. The Office of Thrift
Supervision has established capital standards, including a tangible capital
requirement, a leverage ratio or core capital requirement and a risk-based
capital requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.50% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for
29
calculating compliance with the requirement. At June 30, 2004, Kaiser Federal
Bank had no intangible assets.
At June 30, 2004, Kaiser Federal Bank had tangible capital of $61.6
million, or 11.05% of adjusted total assets, which is approximately $53.2
million above the minimum requirement of 1.50% of adjusted total assets in
effect on that date.
The capital standards also require core capital equal to at least 4.00%
of adjusted total assets unless its supervisory condition is such to allow it to
maintain a 3.00% ratio. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At June 30, 2004, Kaiser Federal Bank had no intangibles which
were subject to these tests.
At June 30, 2004, Kaiser Federal Bank had core capital equal to $61.6
million, or 11.05% of adjusted total assets, which is $39.3 million above the
minimum requirement of 4.00% in effect on that date.
The Office of Thrift Supervision also requires savings institutions to
have core capital equal to 4.00% of risk-weighted assets ("Tier 1 Risk-Based").
At June 30, 2004, Kaiser Federal Bank had Tier 1 risk-based capital of $61.6 or
17.95% of risk-weighted assets, which is approximately $47.9 million above the
minimum on such date. The Office of Thrift Supervision also requires savings
institutions to have total capital of at least 8.00% of risk-weighted assets.
Total capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The Office of Thrift Supervision is also authorized
to require a savings institution to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of
non-traditional activities.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On June 30, 2004, Kaiser Federal Bank had total risk-based capital of
$63.9 million and risk-weighted assets of $343.1 million; or total capital of
18.63% of risk-weighted assets. This amount was $36.5 million above the 8.00%
requirement in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4.00% core capital ratio, a 4.00% Tier 1 risked-based capital ratio or an
8.00% risk-based capital ratio. Any such institution must submit a capital
restoration plan and until the plan is approved by the Office of Thrift
Supervision, may not increase its assets, acquire another institution, establish
a branch or engage in any new activities, and generally may not make capital
distributions. The Office of Thrift Supervision is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
institutions.
30
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or
has Tier 1 risk-based or core capital ratios of less than 3.00% or a risk-based
capital ratio of less than 6.00% and is considered "significantly
undercapitalized" will be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.00% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions, such as Kaiser Federal Bank, that
before and after the proposed distribution are well-capitalized, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Kaiser Federal Bank may pay
dividends to K-Fed Bancorp in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings institutions that do
not, or would not meet their current minimum capital requirements following a
proposed capital distribution or propose to exceed these net income limitations,
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."
LIQUIDITY
All savings institutions, including Kaiser Federal Bank, are required to
maintain sufficient liquidity to ensure a safe and sound operation.
31
QUALIFIED THRIFT LENDER TEST
All savings institutions, including Kaiser Federal Bank, are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At June 30, 2004 Kaiser Federal Bank met the test with a 99.6%,
ratio and has always met the test since its effectiveness.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender within one year of failure and thereafter remains a
qualified thrift lender. If such an institution has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
such an institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any institution that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, every FDIC-insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with the examination of
Kaiser Federal Bank, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Kaiser Federal Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the Office of Thrift Supervision. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, Kaiser Federal Bank may be required to devote additional funds for
investment and lending in its local community. Kaiser Federal Bank was examined
for Community Reinvestment Act compliance and received a rating of satisfactory
in its latest examination.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of Kaiser Federal Bank include K-Fed
Bancorp and any company which is under common control with Kaiser Federal Bank.
In addition, a savings institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Office of Thrift Supervision has the discretion to treat
subsidiaries of savings institutions as affiliates on a case by case basis.
32
On April 1, 2003, the Federal Reserve's Regulation W, which
comprehensively interprets sections 23A and 23B of the Federal Reserve Act,
became effective. The Federal Reserve Act and Regulation W are applicable to
savings associations such as Kaiser Federal Bank. The regulation unifies and
updates staff interpretations issued over the years, incorporates several new
interpretative proposals (such as to clarify when transactions with an unrelated
third party will be attributed to an affiliate), and addresses new issues
arising as a result of the expanded scope of nonbanking activities engaged in by
banks and bank holding companies in recent years and authorized for financial
holding companies under the Gramm-Leach-Bliley Act. In addition, the Office of
Thrift Supervision regulations prohibit a savings institution from lending to
any of its affiliates that is engaged in activities that are not permissible for
bank holding companies and from purchasing the securities of any affiliate,
other than a subsidiary.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
FEDERAL SECURITIES LAW
The stock of K-Fed Bancorp is registered with the SEC under the
Securities Exchange Act of 1934, as amended. K-Fed Bancorp is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
K-Fed Bancorp stock held by persons who are affiliates of K-Fed Bancorp
may not be resold without registration unless sold in accordance with certain
resale restrictions. Affiliates are generally considered to be officers,
directors and principal stockholders. If K-Fed Bancorp meets specified current
public information requirements, each affiliate of K-Fed Bancorp will be able to
sell in the public market, without registration, a limited number of shares in
any three-month period.
USA PATRIOT Act
In response to the terrorist events of September 11, 2001, the President
of the United States signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act, which
augmented existing anti-money laundering laws, gives the federal government new
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements:
o Financial institutions must establish anti-money laundering
programs that include: (i) internal policies, procedures, and
controls; (ii) specific designation of an anti-money laundering
compliance officer; (iii) ongoing employee training programs;
and (iv) an independent audit function to test the anti-money
laundering program.
33
o Financial institutions that establish, maintain, administer, or
manage private banking accounts or correspondent accounts in the
United States for non-United States persons or their
representatives must establish appropriate, specific, and, where
necessary, enhance due diligence policies, procedures, and
controls designed to detect and report money laundering.
o Financial institutions are prohibited from establishing,
maintaining, administering or managing correspondent accounts
for foreign banks that do not have a physical presence in any
country and will be subject to certain recordkeeping obligations
with respect to correspondent accounts of foreign banks.
o Bank regulators must consider a holding company's effectiveness
in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Our policies and procedures have been updated to reflect the
requirements of the USA PATRIOT Act. No significant changes in our business or
customer practices were required as a result of the implementation of these
requirements.
PRIVACY
Federal banking rules limit the ability of banks and other financial
institutions to disclose non-public information about consumers to nonaffiliated
third parties. Pursuant to these rules, financial institutions must provide:
o initial notices to customers about their privacy policies,
describing the conditions under which they may disclose
nonpublic personal information to nonaffiliated third parties
and affiliates;
o annual notices of their privacy policies to current customers;
and
o a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
These privacy provisions affect how consumer information is transmitted
through diversified financial companies and conveyed to outside vendors. The
Company has implemented our privacy policies in accordance with the law.
In recent years, a number of states have implemented their own versions
of privacy laws. For example, in 2003, California adopted standards that are
more stringent than federal law, allowing bank customers the opportunity to bar
financial companies from sharing information with their affiliates.
On December 22, 2003, the SEC issued the advance notice of proposed
rulemaking along with the federal banking agencies and other government agencies
seeking comment on whether they should consider amending current regulations "to
allow or require financial institutions to provide alternative types of privacy
notices, such as a short privacy notice, that would be easier for consumers to
understand." The concept release lists more than 40 questions on which the
agencies sought comment from the public, organized in the following categories:
goals of a privacy notice, elements of a privacy notice, language of a privacy
notice, format of a privacy notice, mandatory and permissible aspects of a
privacy notice, costs and benefits of a short notice, and other categories.
34
SARBANES-OXLEY ACT OF 2002.
The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on
July 30, 2002 in response to public concerns regarding corporate accountability
in connection with recent accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act
generally applies to all companies that file or are required to file periodic
reports with the SEC, under the Securities Exchange Act of 1934, including K-Fed
Bancorp.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules and mandates further studies of certain issues by the SEC
and the Comptroller General. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts, primarily checking, NOW and Super NOW checking accounts.
At June 30, 2004, Kaiser Federal Bank was in compliance with these reserve
requirements. Savings institutions are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve
Bank.
FEDERAL HOME LOAN BANK SYSTEM
Kaiser Federal Bank is a member of the Federal Home Loan Bank of San
Francisco, which is one of 12 regional Federal Home Loan Banks that administers
the home financing credit function of savings institutions. Each Federal Home
Loan Bank serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required to be fully secured by sufficient collateral as
determined by the Federal Home Loan Bank. In addition, all long-term advances
are required to provide funds for residential home financing.
As a member, Kaiser Federal Bank is required to purchase and maintain
stock in the Federal Home Loan Bank of San Francisco. At June 30, 2004, Kaiser
Federal Bank had $3.3 million in Federal Home Loan Bank stock, which was in
compliance with this requirement. In past years, Kaiser Federal Bank has
received substantial dividends on its Federal Home Loan Bank stock. Over the
past two fiscal years such dividends have averaged 4.0% and were 3.9% for the
fiscal year ended June 30, 2004.
Under federal law, the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately-priced housing programs through
35
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have affected
adversely the level of Federal Home Loan Bank dividends paid and could continue
to do so in the future. These contributions could also have an adverse effect on
the value of Federal Home Loan Bank stock in the future. A reduction in value of
Kaiser Federal Bank's Federal Home Loan Bank stock may result in a corresponding
reduction in Kaiser Federal Bank's capital.
TAXATION
FEDERAL
GENERAL. K-Fed Bancorp and Kaiser Federal Bank are subject to federal
income taxation in the same general manner as other corporations, with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to K-Fed Bancorp or Kaiser
Federal Bank. K-Fed Bancorp has not yet filed a federal income tax return due to
its recent organization. Kaiser Federal Bank's federal income tax returns have
never been audited by the IRS.
METHOD OF ACCOUNTING. For federal income tax purposes, K-Fed Bancorp and
Kaiser Federal Bank currently reports its income and expenses on the accrual
method of accounting and uses a fiscal year ending on June 30th, for filing its
federal income tax return.
MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum
tax at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net Operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Kaiser Federal Bank has not been subject to the alternative minimum tax, no do
we have any such amounts available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carryback net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. At June 30, 2004, Kaiser Federal
Bank had no net operating loss carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. K-Fed Bancorp may eliminate from
its income dividends received from Kaiser Federal Bank as a wholly owned
subsidiary of K-Fed Bancorp if it elects to file a consolidated return with
Kaiser Federal Bank. The corporate dividends-received deduction is 100% or 80%,
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, depending on the level of
stock ownership of the payor of the dividend. Corporations which own less than
20% of the stock of a corporation distributing a dividend may deduct 70% of
dividends received or accrued on their behalf.
STATE
K-Fed Bancorp and Kaiser Federal Bank are subject to the California
corporate (franchise) tax which is assessed at the rate of 10.84%. For this
purpose, California taxable income generally means federal taxable income
subject to certain modifications provided for in the California law.
36
ITEM 2. PROPERTIES.
At June 30, 2004, we had two full service offices and two financial
service centers. Our financial services centers provide all the same services as
a full service office except dispense cash, but cash is available from an ATM
located on site. We lease the space in which our home office, executive offices
and branch offices are located. The net book value of our investment in
premises, equipment and fixtures, excluding computer equipment, was
approximately $1.2 million at June 30, 2004.
The following table provides a list of our main and branch offices, all
of which are leased.
Owned or Lease Expiration Deposits at
Location Leased Date June 30, 2004
- ------------- ------------ ------------------ ------------------
(In Thousands)
HOME AND EXECUTIVE OFFICE Leased April 2010 $ 133,653
1359 N. Grand Avenue
Covina, CA 91724
BRANCH OFFICES:
131 North El Molino Ave., Suite 100 Leased June 2005 186,522
Pasadena, CA 91101
3375 Scott Blvd., Suite 312 Leased May 2009 49,486
Santa Clara, CA 95054
9844 Sierra Ave., Suite A Leased September 2006 53,292
Fontana, CA 92335
We believe that our current facilities are adequate to meet the present
and immediately foreseeable needs of Kaiser Federal Bank and K-Fed Bancorp.
We use an in-house system with support provided by a third-party vendor
to maintain our data base of depositor and borrower customer information. The
net book value of our data processing and computer equipment at June 30, 2004
was approximately $337,000.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of this litigation or any material
impact on our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 2004.
37
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the Nasdaq National Market under the
symbol "KFED". K-Fed Mutual Holding Company owns 8,861,750 shares, or 60.91% of
our outstanding common stock. The approximate number of holders of record of the
Company's common stock as of August 11, 2004 was 1,572. Certain shares of the
Company are held in "nominee" or "street" name and accordingly, the number of
beneficial owners of such shares is not known or included in the foregoing
number. The following table presents quarterly market information for the
Company's common stock for the period ended June 30, 2004. The Company began
trading on the Nasdaq Stock Market on March 31, 2004. Accordingly, no
information prior to this date is available. The high and low prices on March
31, 2004 were $14.00 and $12.95, respectively. The following information was
provided by the Nasdaq Stock Market.
Fiscal 2004 High Low Dividends
- ------------------------------------ ---------- ---------- -----------
Quarter ended June 30, 2004 $ 13.50 $ 11.07 $ 0.00
Dividend payments by K-Fed Bancorp are dependent primarily on dividends
it receives from Kaiser Federal Bank, because K-Fed Bancorp will have no source
of income other than dividends from Kaiser Federal Bank, earnings from the
investment of proceeds from the sale of shares of common stock retained by K-Fed
Bancorp, and interest payments with respect to K-Fed Bancorp's loan to the
Employee Stock Ownership Plan. A regulation of the Office of Thrift Supervision
imposes limitations on "capital distributions" by savings institutions. See "How
We Are Regulated - Limitations on Dividends and Other Capital Distributions."
At June 30, 2004, there were no compensation plans under which equity
securities of the Company were authorized for issuance.
38
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial and other
data of the Company at the dates and for the periods indicated. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein at
Item 7 and the consolidated financial statements and related notes contained in
Item 8 and beginning on page F-1
AT JUNE 30,
---------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total assets....................................... $ 584,422 $ 433,753 $ 289,194 $ 230,026 $ 197,786
Cash and cash equivalents.......................... 12,158 16,190 4,330 31,182 10,037
Loans receivable, net.............................. 496,206 389,640 236,914 140,839 115,568
Securities available-for-sale ..................... 21,003 - - - 4,448
Securities held-to-maturity........................ 41,361 14,247 19,787 18,552 24,500
Other investments (interest-bearing term deposit).. 2,970 6,437 23,378 35,431 40,018
FHLB Stock......................................... 3,290 2,602 1,008 649 607
Deposits........................................... 422,953 346,239 252,038 197,588 167,401
Total borrowings................................... 70,000 50,000 2,000 - -
Total stockholder's equity......................... 89,116 35,395 32,956 31,049 29,446
YEAR ENDED JUNE 30,
---------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Selected Operations Data:
- -------------------------
Total interest income.............................. $ 22,037 $ 20,444 $ 16,597 $ 15,107 $ 13,140
Total interest expense............................. 9,622 8,365 6,622 6,452 5,624
--------- --------- --------- --------- ---------
Net interest income.............................. 12,415 12,079 9,975 8,655 7,516
Provision for loan losses.......................... 483 1,124 1,147 768 197
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses............................................ 11,932 10,955 8,828 7,887 7,319
Customer service charges........................... 3,121 2,879 2,260 1,577 1,433
Gain on sale of credit card portfolio.............. - - - 123 -
Loss on equity investment.......................... (173) - - - -
Other noninterest income........................... 281 307 582 326 348
--------- --------- --------- --------- ---------
Total noninterest income........................ 3,229 3,186 2,842 2,026 1,781
Total noninterest expense.......................... 10,000 9,992 8,618 7,139 6,817
--------- --------- --------- --------- ---------
Income before taxes................................ 5,161 4,149 3,052 2,774 2,283
Income tax provision(1)............................ 1,993 1,710 1,145 1,208 268
--------- --------- --------- --------- ---------
Net income(1)...................................... $ 3,168 $ 2,439 $ 1,907 $ 1,566 $ 2,015
========= ========= ========= ========= =========
- ------------------
(1)Had Kaiser Federal Bank been subject to federal and state income taxes for the fiscal year ended June 30, 2000,
income tax expense and net income for the fiscal year ended Juen 30, 2000 would have been $936,000 and $1.3 million,
respectively.
39
AT OR FOR THE YEAR ENDED
Selected Financial Ratios and Other Data: JUNE 30,
- ----------------------------------------- ---------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
PERFORMANCE RATIOS:
Return on assets (ratio of net income to average total assets)... 0.58% 0.68% 0.76% 0.76% 1.05%
Return on equity (ratio of net income to average equity)......... 6.05% 7.13% 6.01% 5.22% 7.11%
Return on assets, net of tax(1).................................. 0.58% 0.68% 0.76% 0.76% 0.70%
Return on equity, net of tax(1).................................. 6.05% 7.13% 6.01% 5.22% 4.75%
Dividend payout ratio............................................ n/a n/a n/a n/a n/a
INTEREST RATE SPREAD INFORMATION:
Average during period............................................ 2.03% 2.98% 3.37% 3.42% 3.18%
End of Period.................................................... 2.31% 2.84% 3.30% 4.46% 3.74%
Net interest margin(2)........................................... 2.34% 3.42% 4.06% 4.31% 4.00%
Ratio of non-interest expense to average total assets............ 1.83% 2.77% 3.42% 3.46% 3.54%
Efficienty ratio(3).............................................. 63.92% 65.46% 67.24% 66.84% 73.32%
Ratio of average interest-earning assets to average
interest-bearing liabilities.................................... 117.32% 118.57% 125.42% 127.80% 127.73%
QUALITY RATIOS:
Non-performing assets to total assets............................ 0.02% 0.01% 0.07% 0.20% 0.03%
Allowance for loan losses to non-performing loans(4)............. 2839.02% 8773.08% 1263.77% 1291.21% 3196.30%
Allowance for loan losses to total loan(4)(5).................... 0.47% 0.58% 0.73% 0.83% 0.74%
Net charge-offs to average outstanding........................... 0.11% 0.19% 0.33% 0.36% 0.40%
Non-performing loans to total loans.............................. 0.02% 0.01%. 0.06% 0.06% 0.02%
CAPITAL RATIOS:
Equity to total assets at end of period.......................... 15.25% 8.16% 11.40% 13.50% 14.89%
Average equity to average assets................................. 9.56% 9.47% 12.58% 14.55% 14.72%
Tier 1 leverage.................................................. 11.05% 8.16% 11.40% 13.50% 14.89%
Tier 1 risk-based................................................ 17.95% 14.20% 19.87% 24.86% 28.00%
Total risk-based................................................. 18.63% 15.11% 20.92% 25.80% 28.82%
OTHER DATA
Number of full-service offices................................... 2 2 2 2 2
Number of loans.................................................. 9,936 11,020 11,394 11,852 13,006
Number of deposit accounts....................................... 65,264 64,495 63,663 61,600 58,625
- -----------------------
(1) Had Kaiser Federal Bank been subject to federal and state income taxes for the fiscal years ended June 30, 2000, income
tax expense and net income for the fiscal year ended June 30, 2000 would have been $936,000 and $1.3 million, respectively.
(2) Net interest income divided by average interest-earning assets.
(3) Efficiency ratio represents noninterest expense as a percentage of net interest income plus noninterest income, exclusive
of securities gains and losses.
(4) The allowance for loan losses at June 30, 2004, 2003, 2002, 2001, and 2000 was $2.3 million, $2.3 million; $1.7 million;
$1.2 million; and $863,000, respectively.
(5) Total loans are net of deferred fees and costs.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements, which are based on
assumptions and describe future plans, strategies and expectations of K-Fed
Bancorp and Kaiser Federal Bank. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar words. Our ability to predict results or the
actual effect of future plans or strategies is uncertain. Factors which could
have a material adverse effect on our operations include, but are not limited
to, changes in interest rates, general economic conditions, economic conditions
in the state of California, legislative and regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, fiscal policies of the California State
Government, the quality or composition of our loan or investment portfolios,
demand for loan products, competition for and the availability of, loans that we
purchase for our portfolio, deposit flows, competition, demand for financial
services in our market areas and accounting principles and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and you should not rely too much on these statements.
OVERVIEW AND MANAGEMENT STRATEGY
Our results of operations depend primarily on our net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans and investment securities, and interest
expense on interest-bearing liabilities, which principally consist of deposits
and borrowings. Our results of operations also are affected by the level of our
provisions for loan losses, noninterest income and noninterest expenses.
Noninterest income consists primarily of service charges on deposit accounts and
ATM fees and charges. Noninterest expense consists primarily of salaries and
employee benefits, occupancy, equipment, data processing, and ATM costs. Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.
Our strategy is to operate as an independent financial institution
dedicated to serving the needs of customers in our market area, which extends
from Southern California to the San Francisco Bay area as a result of our
history as a credit union serving the employees of the Kaiser Permanente Medical
Care Program. We intend to continue to attract retail deposits, with the goal of
expanding the deposit base, largely relying on organic growth within our current
branch infrastructure and our ATM network.
We have been able to achieve deposit growth in excess of the market
average over the last several years by pricing our deposits at a premium to the
market. We may not necessarily continue that strategy in the future. We expect
our customers to use remote access methods such as our call center and audio
response unit as well as internet banking and bill payer to access their
accounts, which allows us to minimize the need for "bricks" and "mortar"
branches.
We project that the majority of the deposits will be used to originate
or purchase residential real estate, multi-family or commercial real estate
loans. A majority of our loan portfolio consists of loans that we have
purchased, using our own underwriting standards. We will continue to rely on
purchased and broker sourced loans as a method of reducing costs relating to
other institutions relying primarily on internally generated loans.
Our commitment is to provide a reasonable range of products and services
to meet the needs of our customers. As part of this commitment, we will continue
the course established over the past few years of increasing our involvement in
real estate lending as well as meeting our customers' automobile loan
41
demand. Our goal is to grow Kaiser Federal Bank while providing cost effective
services to our market area.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In reviewing and understanding financial information for the Company,
you are encouraged to read and understand the significant accounting policies
used in preparing our consolidated financial statements.
These policies are described in Note 1 to the consolidated financial
statements included in Item 8 of this report and are essential in understanding
Management's Discussion and Analysis of Financial Condition and Results of
Operation. The accounting and financial reporting policies of the Company
conform to accounting principles generally accepted in the United States of
America and to general practices within the banking industry. Accordingly, the
consolidated financial statements require certain estimates, judgments, and
assumptions, which are believed to be reasonable, based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the periods presented. The following accounting
policies comprise those that management believes are the most critical to aid in
fully understanding and evaluating our reported financial results.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will cover
known and inherent losses in the loan portfolio, based on evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the types and amount of loans in the loan portfolio, historical loss
experience, peer group information, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
estimated losses relating to specifically identified loans, and current economic
conditions.
Our methodology for analyzing the allowance for loan losses consists of
specific and general components. The specific component relates to loans that
are classified as doubtful, substandard or special mention. For such loans that
are also classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience for consumer
loans and peer group loss experience for real estate loans, adjusted for
qualitative factors.
While management uses the best information available to make loan loss
allowance evaluations, adjustments to the allowance may be necessary based on
changes in economic and other conditions or changes in accounting guidance. In
addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The
Office of Thrift Supervision may require the recognition of adjustments to the
allowance for loan losses based on its judgment of information available to it
at the time of its examination.
LOANS: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred net loan origination fees, and increased
by premiums on purchased loans. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized as an adjustment to
interest income using the effective interest method over the remaining lives of
the associated loans. Loan premiums on purchased loans are accreted into
interest income as a yield adjustment over the estimated lives of the loan pools
using the effective interest method.
42
The estimated lives of these loans can fluctuate based on the amount of
prepayments received during each month. The amount of monthly prepayment can
vary substantially based on the interest rate environment (i.e., lower interest
rates increase the likelihood of refinances) and the rate of turnover of the
mortgages (i.e., how often the underlying properties are sold and the loans are
paid off). We estimate the prepayments based on past experience. We adjust the
rate of amortization regularly to reflect changes in the estimated lives of the
loans.
INVESTMENTS: Securities that may be sold prior to maturity are
classified as available-for-sale. These securities are stated at fair value, and
any unrealized net gains and losses are reported as a separate component of
equity until realized, net of any tax effect. Changes in the fair value of
investments classified as available-for-sale are reflected as direct charges or
credits to equity, net of any tax effect. Fair value is determined using
independent quotations. Premiums or discounts are recognized in interest income
using the effective interest method. Other than temporary declines, if any, in
the fair value of individual securities available-for-sale that are below cost
are included in earnings as realized losses.
Securities for which the Company has the positive intent and ability to
hold until maturity are classified as securities held-to-maturity and are
recorded at cost, adjusted for unamortized premiums or discounts. Premium or
discounts are recognized in interest income using the effective interest method.
The sale of a security within three months of its maturity date or after the
collection of at least 85% of the principal outstanding at the time the security
was acquired is considered a maturity for purposes of classification and
disclosure. Other than temporary declines, if any, in the fair value of
individual securities held-to-maturity that are below cost are included in
earnings as realized losses.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND JUNE 30, 2003.
GENERAL. Our total assets increased by $150.6 million, or 34.7%, to
$584.4 million at June 30, 2004 compared to $433.8 million at June 30, 2003. The
increase reflected growth in our loans receivable and investment securities,
funded by proceeds raised from the initial public offering as well as increases
in deposits and Federal Home Loan Bank advances.
LOANS. Our net loan portfolio increased $106.6 million, or 27.4%, to
$496.2 million at June 30, 2004 from $389.6 million at June 30, 2003. Although
the Company has continued to experience higher than average levels in the volume
of one-to-four family real estate loan prepayments, additional loan pool
purchases as well as in-house originations were sufficient to replace these
loans as well as facilitate an $82.2 million increase in the one-to-four family
real estate loans to $341.8 million at June 30, 2004 from $259.6 million at June
30, 2003. Additional increases were experienced in the multi-family and
commercial real estate loan portfolio, which increased $35.8 million, or 56.3%,
to $99.4 million at June 30, 2004 from $63.6 million at June 30, 2003, slightly
offset by a $10.9 million decrease in the consumer loan portfolio from $66.4
million at June 30, 2003 to $55.5 million at June 30, 2004.
INVESTMENTS. Our investment portfolio (including mortgage-backed
securities) increased $48.2 million to $62.4 million at June 30, 2004 from $14.2
million at June 30, 2003. The growth in the investment portfolio resulted from
an increase in investable funds from the initial stock offering. U.S. government
agency obligations increased $20.9 million, collateralized mortgage obligations
increased $17.9 million, and mortgage-backed securities increased $9.3 million.
DEPOSITS. Our total deposits increased $76.8 million, or 22.2%, to
$423.0 million at June 30, 2004 from $346.2 million at June 30, 2003. This
growth resulted from increases in interest-bearing deposits of $68.8 million, to
$384.9 million from $316.1 million, and non-interest bearing deposits of $7.9
million, to $38.0 million from $30.1 million for the same time period. The
additional funding was used to support loan growth.
43
BORROWINGS. Federal Home Loan Bank advances increased $20.0 million to
$70.0 million at June 30, 2004 from $50.0 million at June 30, 2003. We used the
borrowings for the funding and purchase of loans and as part of our capital and
interest rate risk management strategies. We borrowed funds from the Federal
Home Loan Bank to fund attractive loan opportunities in order to increase
interest-earning assets and enhance earnings for Kaiser Federal Bank.
EQUITY. Total shareholders' equity increased $53.7 million, or 151.7%,
to $89.1 million at June 30, 2004 from $35.4 million at June 30, 2003. Our
equity to assets ratio under generally accepted accounting principles ("GAAP")
was 15.25% at June 30, 2004 compared to 8.16% at June 30, 2003. The large
increase in our equity to assets ratio was a result of $50.7 million of net
capital generated in connection with the completion of our initial stock
offering in March 2004 and net income of $3.2 million for the year ended June
30, 2004, partially offset by a tax effected unrealized loss on securities of
$190,000.
44
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth certain information at June 30, 2004 and
for the years ended June 30, 2004, 2003 and 2002, respectively. The average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived primarily from month-end balances. Management does
not believe that the use of month-end balances rather than daily average
balances has caused any material differences in the information presented.
AT FOR THE YEAR ENDED JUNE 30,
JUNE 30 --------------------------------------------------------------------
2004 2004 2003
---------- --------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ----------- ---------- ---------- ----------- ---------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS
- -----------------------
Loans receivable(1) (4).............. 4.71% $ 397,799 $ 19,423 4.88% $ 308,163 $ 19,149 6.21%
Securities(2)........................ 3.47 46,554 1,716 3.68 13,614 561 4.12
Fed funds............................ 1.50 78,838 700 0.89 18,498 303 1.64
Federal Home Loan Bank stock......... - 2,837 111 3.90 2,067 85 4.11
Interest-bearing deposits in
other financial institutions....... 2.13 3,122 58 1.85 11,053 340 3.08
Other interest-earning assets........ 3.41 1,930 29 1.52 291 6 2.13
---------- ----------- ---------- ---------- ----------- ---------- ----------
Total interest-earning assets........ 4.35 531,080 22,037 4.15 353,686 20,444 5.78
---------- ----------
Non-interest earning assets.......... 16,940 7,415
----------- -----------
Total assets......................... $ 548,020 361,101
=========== ===========
INTEREST-BEARING
- ----------------
LIABILITIES
- -----------
Money market......................... 1.12% $ 123,734 $ 1,722 1.39% 73,223 $ 1,604 2.19%
Savings deposits..................... 0.40 105,983 518 0.49 73,524 899 1.22
Certificates of deposit.............. 3.29 171,410 5,879 3.43 116,573 4,824 4.14
FHLB advances........................ 2.50 51,538 1,503 2.92 34,972 1,038 2.97
---------- ----------- ---------- ---------- ----------- ---------- ----------
Total interest-bearing liabilities... 2.04 452,665 9,622 2.12 298,292 8,365 2.80
---------- ----------
Non-interest-bearing liabilities..... 42,963 28,624
----------- -----------
Total liabilities.................... 495,628 326,916
Equity............................... 52,392 34,185
----------- -----------
Total liabilities and equity......... $ 548,020 $ 361,101
=========== ===========
Net interest/spread.................. 2.31% $ 12,415 2.03% $ 12,079 2.98%
========== ========== ========== ========== ==========
Margin(3)............................ 2.72% 2.34% 3.42%
========== ========== ==========
Ratio of interest-earning assets to
interest-bearing liabilities....... 117.32% 118.57%
=========== ===========
(CONTINUED)
FOR THE YEAR ENDED JUNE 30,
---------------------------------
2002
---------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
----------- ---------- ----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS
- -----------------------
Loans receivable(1) (4).............. $ 175,662 $ 13,588 7.74%
Securities(2)........................ 20,234 967 4.78
Fed funds............................ 15,841 390 2.46
Federal Home Loan Bank stock......... 743 38 5.09
Interest-bearing deposits in
other financial institutions....... 33,321 1,613 4.84
Other interest-earning assets........ 45 1 3.03
----------- ---------- ----------
Total interest-earning assets........ 245,846 16,597 6.75
----------
Non-interest earning assets.......... 6,349
-----------
Total assets......................... 252,195
===========
INTEREST-BEARING
- ----------------
LIABILITIES
- -----------
Money market......................... 46,552 $ 1,243 2.67%
Savings deposits..................... 62,660 933 1.49
Certificates of deposit.............. 84,188 4,414 5.24
FHLB advances........................ 2,615 32 1.23
----------- ---------- ----------
Total interest-bearing liabilities... 196,015 6,622 3.38
----------
Non-interest-bearing liabilities..... 24,466
-----------
Total liabilities.................... 220,481
Equity............................... 31,714
-----------
Total liabilities and equity......... $ 252,195
===========
Net interest/spread.................. $ 9,975 3.37%
========== ==========
Margin(3)............................ 4.06%
==========
Ratio of interest-earning assets to
interest-bearing liabilities....... 125.42%
===========
- ---------------------------------
(1) Calculated net of deferred fees and loss reserves and includes non-accrual
loans.
(2) Calculated based on amortized cost.
(3) Net interest income divided by interest-earning assets.
(4) Interest income includes loan fees of $494,000, $443,000, and $259,000 for
the years ended June 30, 2004, 2003, and 2002, respectively.
45
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate;
(2) changes in rate, which are changes in rate multiplied by the old volume; and
(3) changes in rate/volume, which are the changes in rate times the changes in
volume.
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30 JUNE 30
------------------------------------ ------------------------------------
2004 VS. 2003 2003 VS. 2002
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------------ ------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME NET VOLUME RATE VOLUME NET
-------- -------- -------- --------- -------- -------- -------- ---------
(Dollars in Thousands)
INTEREST-EARNING ASSETS
- -----------------------
Loans receivable (1).................. $ 5,566 $ (4,099) $ (1,193)$ 274 $10,248 $(2,672) $(2,015) $ 5,561
Securities............................ 1,357 (60) (142) 1,155 (316) (134) 44 (406)
Fed Funds............................. 990 (139) (454) 397 65 (130) (22) (87)
Federal Home Loan Bank stock.......... 32 (4) (2) 26 67 (7) (13) 47
Interest-bearing deposits in other
financial institutions (244) (136) 98 (282) (1,080) (586) 393 (1,273)
Other interest-earning assets......... 35 (2) (10) 23 7 (0) (2) 5
-------- -------- -------- --------- -------- -------- -------- ---------
Total interest-earning assets......... $ 7,736 $(4,440) $(1,703) $ 1,593 $ 8,991 $(3,529) $(1,615) $ 3,847
======== ======== ======== ========= ======== ======== ======== =========
INTEREST-BEARING LIABILITES
- ---------------------------
Money market.......................... $ 1,106 $ (586) $ (402) $ 118 $ 712 $ (223) $ (128) $ 361
Savings deposits...................... 396 (537) (240) (381) 164 (169) (29) (34)
Certificates of deposit............... 2,270 (828) (387) 1,055 1,692 (926) (356) 410
FHLB advances......................... 492 (17) (10) 465 391 46 569 1,006
-------- -------- -------- --------- -------- -------- -------- ---------
Total interest-bearing liabilities.... 4,264 (1,968) (1,039) 1,257 2,959 (1,272) 56 1,743
======== ======== ======== ========= ======== ======== ======== =========
Change in net interest income/spread.. $ 3,472 $(2,472) $ (664) $ 336 $ 6,032 $(2,257) $(1,671) $ 2,104
======== ======== ======== ========= ======== ======== ======== =========
- ------------------------------
(1) Total loans are net of deferred fees and costs.
46
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2004 AND 2003.
GENERAL. We had net income of $3.2 million for the year ended June 30,
2004 and $2.4 million for the year ended June 30, 2003. The increase of $729,000
was primarily due to an increase in net interest income of $336,000 and a
decrease in the provision for loan losses of $641,000, partially offset by an
increase in income taxes of $283,000.
NET INTEREST INCOME. Net interest income increased $336,000, or 2.8%, to
$12.4 million for the year ended June 30, 2004 compared to $12.1 million for the
year ended June 30, 2003, reflecting a $1.6 million, or 7.8%, increase in
interest income, partially offset by a $1.2 million, or 15.0%, increase in
interest expense. Our interest rate spread decreased to 2.03% for the year ended
June 30, 2004 compared to 2.98% for the year ended June 30, 2003, caused by a
temporary change in asset mix due to the significant amount of short-term
deposit growth experienced during the second and third quarters of the fiscal
year in connection with the initial stock offering, which were invested in low
yielding Federal funds, partially offset by lower levels of rates paid on
deposits. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased to 117.3% for the year ended June 30,
2004 compared to 118.6% for the year ended June 30, 2003.
INTEREST INCOME. Total interest income increased by $1.6 million, or
7.8%, to $22.0 million for the year ended June 30, 2004 from $20.4 million for
the year ended June 30, 2003. The increase was primarily the result of the
growth of our average balance of loans receivable, investment securities, and
Federal funds sold.
Interest income on loans increased $224,000, or 1.4%, to $19.4 million
for the year ended June 30, 2004 from $19.1 million for the year ended June 30,
2003. The change was a result of an increase in the average balance of the
portfolio of $89.6 million to $397.8 million for the year ended June 30, 2004
from $308.2 million for the year ended June 30, 2003, combined with a decrease
on the overall average yield on loans of 4.88% for the year ended June 30, 2004
as compared to 6.21% for the year ended June 30, 2003, primarily due to a
general decrease in the market rates of interest combined significant levels of
loan prepayments that resulted in a high level of loan purchase premium
amortization.
Interest earned on our investment securities, Federal Home Loan Bank
stock, Federal funds sold, and interest-bearing deposits with other financial
institutions increased $1.3 million, or 100.5% from $1.3 million for the year
ended June 30, 2003 to $2.6 million for the year ended June 30, 2004. However,
the average yield on these interest-earning assets decreased to 1.97% for the
year ended June 30, 2004 as compared to 2.85% for the year ended June 30, 2003,
primarily due to the significant increase in the average balance of our Federal
funds sold, which was associated with the significant increases in deposits
experienced as a result of our initial stock offering, which occurred in March
2004.
INTEREST EXPENSE. The increase in interest expense of $1.2 million for
the year ended June 30, 2004 was primarily due to the increase in average
interest-bearing liabilities, partially offset by lower interest rates. Average
Federal Home Loan Bank advances increased by $16.5 million to $51.5 million for
the year ended June 30, 2004 from $35.0 million for the year ended June 30,
2003. This created an increase in Federal Home Loan Bank interest costs of
$465,000. Average time deposits increased by $54.8 million to $171.4 million for
the year ended June 30, 2004 from $116.6 million for the year ended June 30,
2003. This contributed to the $792,000 increase in deposit
47
interest costs. The average rate on interest bearing liabilities decreased from
2.80% for the year ended June 30, 2003 to 2.12% for the year ended June 30,
2004, due primarily to the temporary liability mix change, resulting from the
significant increase in short-term, low-cost deposits experienced as a result of
our initial stock offering, which occurred in March 2004, combined with
generally lower market rates of interest on new fundings. The additional funding
was used to support loan growth.
PROVISION FOR LOAN LOSSES. Management assesses the allowance for loan
losses on a quarterly basis. In evaluating the level of the allowance for loan
losses, management considers the types and amount of loans in the loan
portfolio, historical loss experience, peer group information, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, estimated losses relating to specifically identified
loans and current economic conditions. The allowance is increased by provisions
for loan losses, which are charged against income. Our policies require the
review of assets on a regular basis, and we appropriately classify loans as well
as other assets if warranted. We believe we use the best information available
to make a determination with respect to the allowance for loan losses,
recognizing that adjustments may be necessary depending upon a change in
economic conditions.
Our methodology for analyzing the allowance for loan losses consists of
two components: general and specific allowances. The general allowance is
determined by applying an estimated loss percentage to various homogenous pools
of loans. The loss percentages are based on historical loan loss experiences for
consumer loans and peer and industry averages for real-estate lending in order
to balance the recent and substantial increase in this type of lending with the
limited historical loan losses experienced by Kaiser Federal Bank for these
types of loans. The specific allowance component is created when management
believes that the collectibility of a specific large loan, such as a real
estate, multifamily, or commercial real estate loan, has been impaired and a
loss is probable. See "Business -Asset Quality-Allowance for Loan Losses."
While management uses the best information available to make loan loss
allowance evaluations, adjustments to the allowance may be necessary based on
changes in economic and other conditions. We anticipate that our allowance for
loan losses will be adjusted as we continue to implement Kaiser Federal Bank's
strategy of originating and purchasing primarily residential real estate loans.
Additionally, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The
Office of Thrift Supervision may require the recognition of adjustments to the
allowance for loan losses based on its judgment of information available to it
at the time of its examination. See "Business - Asset Quality - Allowance for
Loan Losses."
Our provision for loan losses decreased $641,000 to $483,000 for the
year ended June 30, 2004 compared to $1.1 million for the year ended June 30,
2003. The allowance for loan losses as a percent of total loans was 0.47% at
June 30, 2004 as compared to 0.58% at June 30, 2003. The decrease in the
provision is primarily attributable to the significant shift in the loan
portfolio mix from consumer loans, which have experienced a higher rate of loss
for both Kaiser Federal Bank and its peers, to real estate loans, which have
experienced a lower rate of loss. We used the same methodology and generally
similar assumptions in assessing the adequacy of the allowance for consumer and
real estate loans for both periods.
48
NONINTEREST INCOME. Noninterest income remained unchanged at $3.2
million for the year ended June 30, 2004 as compared with noninterest income for
the year ended June 30, 2003, although there were changes in certain
subcomponents of noninterest income. Service charges and fees increased
$187,000, primarily due to our checking account overdraft protection program and
the implementation of excessive withdrawal fees on non-transaction accounts.
This increase was primarily offset by a $173,000 loss on an equity investment in
a tax credit fund during fiscal 2004.
NONINTEREST EXPENSES. Noninterest expenses remained unchanged at $10.0
million for the year ended June 30, 2004 as compared with noninterest expense
for the year ended June 30, 2003. An increase in salaries and benefits of
$176,000, or 3.3% was offset by one-time professional and outside fees incurred
for the year ended June 30, 2003 in connection with the Bank's mutual holding
company reorganization.
Salaries and employee benefits represented 54.3% and 52.6% of total
noninterest expense for the years ended June 30, 2004 and 2003, respectively.
The increase in salaries and benefits is primarily due to normal salary
increases and bonuses.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2003 AND 2002.
GENERAL. We had net income of $2.4 million for the year ended June 30,
2003 and $1.9 million for the year ended June 30, 2002. The change in net income
in the fiscal year ended June 30, 2003 resulted from higher net interest income
and non-interest income that was partially offset by increases in non-interest
expense.
NET INTEREST INCOME. Net interest income increased $2.1 million, or
21.0%, to $12.1 million for the year ended June 30, 2003 compared to $10.0
million for the year ended June 30, 2002, reflecting a $3.8 million, or 22.9%,
increase in interest income, partially offset by a $1.8 million, or 27.3%,
increase in interest expense. Our interest rate spread decreased to 2.98% for
the year ended June 30, 2003 compared to 3.37% for the year ended June 30, 2002,
reflecting a significant change in asset mix due to increased funding and
purchasing of adjustable-rate residential real estate loans, partially offset by
lower levels of rates paid on deposits. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
118.57% for year ended June 30, 2003 compared to 125.42% for year ended June 30,
2002.
INTEREST INCOME. Total interest income increased by $3.8 million, or
22.9%, to $20.4 million for the year ended June 30, 2003 from $16.6 million for
the year ended June 30, 2002. The increase was primarily the result of the
growth of our average loan portfolio balance, which grew by $132.5 million to
$308.2 million for the year ended June 30, 2003 from $175.7 million for the year
ended June 30, 2002. Interest earned on total loans for the year ended June 30,
2003 was $19.1 million compared to $13.6 million for the year ended June 30,
2002. The average yield on total loans decreased to 6.21% for the year ended
June 30, 2003 as compared to 7.74% for the year ended June 30, 2002, primarily
due to a general decrease in the market rates of interest.
Interest income on investment securities, Federal Home Loan Bank stock
and interest-bearing deposits with other financial institutions decreased $1.7
million, or 56.7%, for the year ended June 30, 2003 to $1.3 million from $3.0
million for the year ended June 30, 2002. The change was a result of a decrease
in the average balance of the portfolio of $24.9 million to $45.2 million for
the year ended June 30, 2003 from $70.1 million for the year ended June 30,
2002, combined with a
49
decrease on the overall average yield on total investments of 2.85% for the year
ended June 30, 2003 as compared to 4.29% for the year ended June 30, 2002.
INTEREST EXPENSE. The increase in interest expense of $1.8 million for
the year ended June 30, 2003 was primarily due to the increase in average
interest-bearing liabilities, partially offset by lower interest rates. Average
Federal Home Loan Bank advances increased by $32.4 million to $35.0 million for
the year ended June 30, 2003 from $2.6 million for the year ended June 30, 2002.
This created an increase in Federal Home Loan Bank interest costs of $1.0
million. Average time deposits increased by $32.4 million to $116.6 million for
the year ended June 30, 2003 from $84.2 million for the year ended June 30,
2002. This contributed to the $737,000 increase in deposit interest costs. The
average rate on interest bearing liabilities decreased from 3.38% during the
year ended June 30, 2002 to 2.80% during the year ended June 30, 2003, due
primarily to the liability mix changing with generally lower market rates of
interest on the new fundings. Additional borrowings and increases in interest
bearing liabilities were used to fund the growth in loans in order to implement
our leverage strategy to increase interest-earning assets and enhance earnings.
PROVISION FOR LOAN LOSSES. The provision for loan losses during the year
ended June 30, 2003 totaled $1.1 million, which is similar to the provision made
during the year ended June 30, 2002. The allowance for loan losses as a percent
of total loans was 0.58% at June 30, 2003 compared to 0.73% at June 30, 2002.
Although the provision expense increase is due primarily to the substantial
growth in the overall loan portfolio, the decrease in the allowance for loan
losses as a percent of loans was due to the growth in loans being primarily in
real estate secured loans, which have historically experienced a lower rate of
loss than consumer loans.
NONINTEREST INCOME. Noninterest income amounted to $3.2 million and $2.8
million for the years ended June 30, 2003 and 2002, respectively. The increase
is primarily attributed to the implementation of a checking account overdraft
protection program as well as an increase in ATM surcharge fees.
NONINTEREST EXPENSES. Noninterest expenses increased $1.4 million, or
16.3%, to $10.0 million for the year ended June 30, 2003 compared to $8.6
million for the year ended June 30, 2002. This is primarily due to a $751,000
increase in salaries and benefits and a $220,000 increase in professional
services.
Salaries and employee benefits represented 52.6% and 52.3% of total
non-interest expense for the years ended June 30, 2003 and 2002, respectively.
Total salaries and employee benefits increased $751,000, or 16.7%, to $5.3
million for the year ended June 30, 2003 from $4.5 million for the same period
in 2002. The increase is primarily due to normal salary increases and bonuses.
Professional services expense increased $220,000 as a result of fees
incurred for the mutual holding company reorganization of Kaiser Federal Bank.
LIQUIDITY AND COMMITMENTS
Prior to the passage of the Financial Regulatory Relief and Economic
Efficiency Act of 2000 in December 2000, we were required to maintain minimum
levels of investments that qualify as liquid assets under Office of Thrift
Supervision regulations. Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in relation to the
50
return on loans. Historically, we have maintained liquid assets at levels above
the minimum requirements imposed by Office of Thrift Supervision regulations and
above levels believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
Our liquidity, represented by cash and cash equivalents and
mortgage-backed and related securities, is a product of its operating, investing
and financing activities. Our primary sources of funds are deposits,
amortization, prepayments and maturities of outstanding loans and
mortgage-backed and related securities, and other short-term investments and
funds provided from operations. While scheduled payments from the amortization
of loans and mortgage-backed related securities and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, we invest
excess funds in short-term interest-earning assets, which provide liquidity to
meet lending requirements. We also generate cash through borrowings. We utilize
Federal Home Loan Bank advances to leverage our capital base and provide funds
for our lending and investment activities, and enhance our interest rate risk
management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, we maintain a strategy of
investing in various lending products as described in greater detail under
"Business - Lending Activities." We use our sources of funds primarily to meet
ongoing commitments, to pay maturing time deposits and savings withdrawals, to
fund loan commitments and to maintain our portfolio of mortgage-backed and
related securities. At June 30, 2004, the total approved loan commitments
unfunded amounted to $39.0 million, which includes the unadvanced portion of
loans of $6.0 million. Time deposits and advances from the Federal Home Loan
Bank of San Francisco scheduled to mature in one year or less at June 30, 2004,
totaled $95.1 million and $20.0 million, respectively. Based on historical
experience, management believes that a significant portion of maturing deposits
will remain with Kaiser Federal Bank and we anticipate that we will continue to
have sufficient funds, through deposits and borrowings, to meet our current
commitments.
At June 30, 2004 we had available additional advances from the Federal
Home Loan Bank of San Francisco in the amount of $157.0 million.
On July 2, 2004, the Bank signed a definitive agreement with Pan
American Bank, FSB, Burlingame, California, to acquire the Panorama City Branch
of Pan American Bank. The transaction will include the assumption of
approximately $64 million in deposits. The transaction received regulatory
approval on August 6, 2004 and is expected to be completed in the third quarter
of calendar year 2004.
51
CONTRACTUAL OBLIGATIONS
In the normal course of business, the Company enters into contractual
obligations that meet various business needs. These contractual obligations
include time deposits to customers, borrowings from the Federal Home Loan Bank,
lease obligations for facilities, and commitments to purchase and/or originate
loans. The following table summarizes the Company's long-term contractual
obligations at June 30, 2004.
LESS THAN 1 - 3 3 - 5 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
- ----------------------------------- ------------- -------------- ------------ ------------ --------------
(Dollars in Thousands)
FHLB advances $ 70,000 $ 20,000 $ 50,000 $ - $ -
Operating lease obligations 2,520 499 828 856 337
Loan commitments to
purchase residential
mortgage loans 31,478 31,478 - - -
Loan commitments to
originate residential
mortgage loans 1,478 1,478 - - -
Available home equity and
unadvanced lines of credit 6,037 6,037 - - -
Deposits 184,286 95,134 50,925 38,227 -
Commitments to fund equity
investment in tax credit fund 680 680 - - -
------------- -------------- ------------ ------------ --------------
Total commitments and
contractual obligations $ 296,479 $ 155,306 $ 101,753 $ 39,083 $ 337
============= ============== ============ ============ ==============
CAPITAL
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total stockholders' equity was $89.1
million at June 30, 2004 or 15.25%, of total assets on that date. As of June 30,
2004, we exceeded all regulatory capital requirements. Our regulatory capital
ratios at June 30, 2004 were as follows: core capital 11.05%; Tier I risk-based
capital 17.95%; and total risk-based capital 18.63%. The regulatory capital
requirements to be considered well capitalized are 5%, 6% and 10%, respectively.
See "How We Are Regulated - Regulatory Capital Requirements."
IMPACT OF INFLATION
The consolidated financial statements presented herein have been
prepared in accordance with GAAP. These principles require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising
52
interest rates, the liquidity and maturity structure of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of non-interest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1 of the financial statements contained in Item 8
and set forth at F-1.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on
assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Our loans generally have
longer maturities than our deposits. Accordingly, our results of operations,
like those of other financial institutions, are impacted by changes in interest
rates and the interest rate sensitivity of our assets and liabilities. The risk
associated with changes in interest rates and our ability to adapt to these
changes is known as interest rate risk and is our most significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt
to manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate risk
we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on our results of operations, we have
adopted investment/asset and liability management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability policies of Kaiser Federal Bank, which are implemented by
the asset/liability management committee.
The purpose of the asset/liability management committee is to
communicate, coordinate and control asset/liability management consistent with
our business plan and board approved policies. The committee establishes and
monitors the volume and mix of assets and funding sources taking into account
relative costs and spreads, interest rate sensitivity and liquidity needs. The
objectives are to manage assets and funding sources to produce results that are
consistent with liquidity, capital adequacy, growth, risk and profitability
goals.
The asset/liability management committee generally meets on a weekly
basis to review, among other things, economic conditions and interest rate
outlook, current and projected liquidity
53
needs and capital position, anticipated changes in the volume and mix of assets
and liabilities and interest rate risk exposure limits versus current
projections pursuant to net present value of portfolio equity analysis and
income simulations. The asset/liability management committee recommends
appropriate strategy changes based on this review. The chairman or his designee
is responsible for reviewing and reporting on the effects of the policy
implementations and strategies to the board of directors at least monthly.
In order to manage our assets and liabilities and achieve the desired
liquidity, credit quality, interest rate risk, profitability and capital
targets, we have focused our strategies on:
o Originating and purchasing adjustable rate loans,
o Originating a reasonable volume of short- and intermediate-term
consumer loans,
o Managing our deposits to establish stable deposit relationships,
o Using Federal Home Loan Bank advances and pricing on fixed-term
non-core deposits to align maturities and repricing terms, and
o Attempting to limit the percentage of fixed-rate loans in our
portfolio.
At times, depending on the level of general interest rates, the
relationship between long- and short-term interest rates, market conditions and
competitive factors, the asset/liability management committee may determine to
increase our interest rate risk position somewhat in order to maintain our net
interest margin.
The asset/liability management committee regularly reviews interest rate
risk by forecasting the impact of alternative interest rate environments on net
interest income and market value of portfolio equity, which is defined as the
net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity
that are authorized by the board of directors of Kaiser Federal Bank.
54
The Office of Thrift Supervision provides Kaiser Federal Bank with the
information presented in the following table, which is based on information
provided to the Office of Thrift Supervision by Kaiser Federal Bank. It presents
the change in Kaiser Federal Bank's net portfolio value at June 30, 2004 that
would occur upon an immediate change in interest rates based on Office of Thrift
Supervision assumptions but without giving effect to any steps that management
might take to counteract that change. A reduction in interest rates of more than
100 basis points is not presented because it would computer to a rate less than
zero for certain products.
June 30, 2004
--------------------------------------------------------------------------
Change in
Interest Rates in
Basis Points ("bp") Net Portfolio Value NPV as % of PV of Assets
(Rate Shock ------------------------------------------- ----------------------------
in Rates) $ Amount $ Change % Change NPV Ratio Change (bp)
--------------------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
+300 bp 39,800 (34,698) (47) 7.50 (553)
+200 bp 51,850 (22,648) (30) 9.52 (351)
+100 bp 63,771 (10,727) (14) 11.42 (162)
0 bp 74,498 -- -- 13.04 --
-100 bp 80,522 6,024 8 13.88 85
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, shortcomings are
inherent in the method of analysis presented in the foregoing tables. For
example, although assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in the market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features, that restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see pages F-1 through F-30 following the signature page of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
55
ITEM 9A. CONTROLS AND PROCEDURES.
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Act")) as of the end of the period covered
by this report. The Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures as of
the end of the period covered by this report are effective in ensuring that the
information required to be disclosed by the Company in the reports it files or
submits under the Act is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
in a timely manner, and (ii) recorded, processed, summarized, and reported
within the time periods specified in the SEC's rules and forms.
There have been no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the
fiscal year ended June 30, 2004 that have materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. CONTROLS AND PROCEDURES.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS. The information required by this item
is incorporated herein by reference from the Company's definitive proxy
statement for its 2004 Annual Meeting of Stockholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. The information
concerning compliance with the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934 by directors, officers, and ten percent
stockholders of the Company required by this item is incorporated herein by
reference from the Company's definitive proxy statement for its 2004 Annual
Meeting of Stockholders.
CODE OF ETHICS. The Company has adopted a written Code of Ethics. The
Code of Ethics applies to the Company's and the Bank's Principal Executive
Officer and Principal Financial and Accounting Officer. A copy of the Company's
Code of Ethics is available on our website at WWW.K-FED.COM.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning executive compensation required by this item
is incorporated herein by reference from the Company's definitive proxy
statement for its 2004 Annual Meeting of Stockholders.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information concerning security ownership of certain beneficial
owners and management required by this item is incorporated herein by reference
from the Company's definitive proxy statement for its 2004 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related
transactions required by this item is incorporated herein by reference from the
Company's definitive proxy statement for its 2004 Annual Meeting of
Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information concerning principal accountant fees and services is
incorporated herein by reference from the Company's definitive proxy statement
for its 2004 Annual Meeting of Stockholders.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements:
See Part II - Item 8. Financial Statements and Supplementary Data.
(b) Exhibits:
3.1 Charter of K-Fed Bancorp (1)
3.2 Bylaws of K-Fed Bancorp (1)
4.0 Form of Stock Certificate of K-Fed Bancorp (1)
10.1 Registrant's Employee Stock Ownership Plan (1)
10.2 Registrant's Executive Non-Qualified Retirement Plan (1)
21.0 Subsidiaries of the Registrant (1)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
- --------------------------------------------------------------------------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(Registration No. 333-111029), and incorporated herein by reference.
57
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
K-Fed Bancorp
Date: September 15, 2004 /s/ Kay M. Hoveland
--------------------------------------
Kay M. Hoveland
President and Chief Executive Officer
Duly authorized representative
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 15, 2004 /s/ James L. Breeden
--------------------------------------
James L. Breeden
Director and Chairman of the Board
Date: September 15, 2004 /s/ Kay M. Hoveland
--------------------------------------
Kay M. Hoveland
Director, President and Chief
Executive Officer
Principal Executive Officer
Date: September 15, 2004 /s/ Rita H. Zwern
--------------------------------------
Rita H. Zwern
Director and Secretary
Date: September 15, 2004 /s/ Gerald A. Murbach
--------------------------------------
Gerald A. Murbach
Director
Date: September 15, 2004 /s/ Marilyn T. Owsley
--------------------------------------
Marilyn T. Owsley
Director
Date: September 15, 2004 /s/ Robert C. Steinbach
--------------------------------------
Robert C. Steinbach
Director
Date: September 15, 2004 /s/ Frank G. Nicewicz
--------------------------------------
Frank G. Nicewicz
Director
Date: September 15, 2004 /s/ Daniel A. Cano
--------------------------------------
Daniel A. Cano
Chief Financial Officer
Principal Financial and Accounting
Officer
58
K-FED BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Financial Condition at
June 30, 2004 and 2003 F-3
Consolidated Statements of Income for the Years Ended
June 30, 2004, 2003, and 2002 F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended
June 30, 2004, 2003, and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2004, 2003, and 2002 F-6
Notes to Consolidated Financial Statements F-7
THE CONSOLIDATED FINANCIAL STATEMENTS OF K-FED MUTUAL HOLDING COMPANY HAVE BEEN
OMITTED BECAUSE K-FED MUTUAL HOLDING COMPANY HAS NOT CONDUCED ANY BUSINESS OTHER
THAN THAT OF AN ORGANIZATIONAL NATURE.
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
K-Fed Bancorp
Covina, California
We have audited the accompanying consolidated statements of financial condition
of K-Fed Bancorp (the Company) and Subsidiary as of June 30, 2004 and 2003 and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of K-Fed Bancorp and
Subsidiary as of June 30, 2004 and 2003 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2004,
in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
- --------------------------
McGladrey & Pullen LLP
Irvine, California
August 10, 2004
F-2
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, except share data)
- --------------------------------------------------------------------------------
JUNE 30
----------------------
2004 2003
--------- ---------
ASSETS
Cash and due from banks $ 6,923 $ 4,545
Federal funds sold 5,235 11,645
--------- ---------
Total cash and cash equivalents 12,158 16,190
Interest bearing deposits in other financial institutions 2,970 6,437
Securities available-for-sale 21,003 --
Securities held-to-maturity (fair value of $40,940 and $14,373 at
June 30, 2004 and 2003, respectively) 41,361 14,247
Federal Home Loan Bank stock, at cost 3,290 2,602
Loans receivable 496,645 389,518
Deferred loan origination fees (332) (354)
Net premium on purchased loans 2,221 2,757
Allowance for loan losses (2,328) (2,281)
--------- ---------
Loans, net 496,206 389,640
Accrued interest receivable 2,043 1,669
Premises and equipment, net 1,524 1,289
Other assets 3,867 1,679
--------- ---------
Total assets $ 584,422 $ 433,753
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing demand $ 38,020 $ 30,119
Interest bearing 384,933 316,120
--------- ---------
Total deposits 422,953 346,239
FHLB advances, short-term 20,000 --
FHLB advances, long-term 50,000 50,000
Accrued expenses and other liabilities 2,353 2,119
--------- ---------
Total liabilities 495,306 398,358
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Non-redeemable serial preferred stock; $.01 par value,
2,000,000 shares authorized; issued and outstanding - none -- --
Common stock; $.01 par value, 18,000,000 shares authorized;
14,548,500 shares issued and outstanding as of June 30, 2004 146 --
Additional paid-in capital 55,083 --
Unearned ESOP shares (4,436) --
Retained earnings 38,513 35,395
Accumulated other comprehensive loss (190) --
--------- ---------
Total stockholders' equity 89,116 35,395
--------- ---------
Total liabilities and stockholders' equity $ 584,422 $ 433,753
========= =========
The accompanying notes are an integral part of these financial statements
F-3
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except share data)
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30
-------------------------------
2004 2003 2002
-------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 19,423 $ 19,149 $ 13,588
Interest on investment securities, taxable 1,716 561 967
FHLB dividends 111 85 38
Other interest 787 649 2,004
-------- -------- --------
Total interest income 22,037 20,444 16,597
-------- -------- --------
INTEREST EXPENSE
Interest on FHLB advances 1,503 1,038 32
Interest on deposits 8,119 7,327 6,590
-------- -------- --------
Total interest expense 9,622 8,365 6,622
-------- -------- --------
NET INTEREST INCOME 12,415 12,079 9,975
Provision for loan losses 483 1,124 1,147
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,932 10,955 8,828
-------- -------- --------
NONINTEREST INCOME
Service charges and fees 1,911 1,724 1,335
ATM fees and charges 1,210 1,155 925
Referral commissions 221 230 436
Loss on equity investment (173) -- --
Other noninterest income 60 77 146
-------- -------- --------
Total noninterest income 3,229 3,186 2,842
-------- -------- --------
NONINTEREST EXPENSE
Salaries and benefits 5,433 5,257 4,506
Occupancy and equipment 1,280 1,193 1,079
ATM expense 976 999 869
Advertising and promotional 411 470 460
Professional services 398 555 335
Postage 266 295 279
Telephone 294 331 328
Other operating expense 942 892 762
-------- -------- --------
Total noninterest expense 10,000 9,992 8,618
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 5,161 4,149 3,052
Income tax expense 1,993 1,710 1,145
-------- -------- --------
NET INCOME $ 3,168 $ 2,439 $ 1,907
======== ======== ========
EARNINGS PER COMMON SHARE:
Basic $ 0.06 n/m* n/m*
Diluted $ 0.06 n/m* n/m*
* NOT MEANINGFUL - SEE NOTE 1 AND NOTE 14
The accompanying notes are an integral part of these financial statements
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Dollars in Thousands, except share data)
- --------------------------------------------------------------------------------
Common Stock
----------------
Accumulated
Additional Unearned Other Total
Comprehensive Number Amount Paid-in ESOP Retained ompre- Stockholders'
Income of Shares Capital Shares Earnings hensive Equity
Loss
-------------------------------------------------------------------------------------
Balance, June 30, 2001 $ - $ - $ - $ 31,049 $ - $ 31,049
Net Income for the year ended June 30,
2002 - - - - 1,907 - 1,907
--------------------------------------------------------------------------------------
Balance, June 30, 2002 - - - - 32,956 - 32,956
Net Income for the year ended June 30,
2003 - - - - 2,439 - 2,439
--------------------------------------------------------------------------------------
Balance, June 30, 2003 - - - - 35,395 - 35,395
Comprehensive income
Net Income for the year ended June 30,
2004 $ 3,168 - - - - 3,168 - 3,168
Other comprehensive loss -
unrealized loss on securities,
net of tax (190) - - - - - (190) (190)
---------
Total comprehensive income $ 2,978
==========
Distribution to capitalize K-Fed 1,000 - - - (50) - (50)
Mutual Holding Company
Common stock issued to K-Fed Mutual
Holding Company 8,860,750 - - - - - -
Common stock issued 5,231,810 146 50,507 - - 50,653
Shares acquired by ESOP 454,940 - 4,549 (4,549) -
Allocation of ESOP common stock - - 27 113 - - 140
--------------------------------------------------------------------------------------
Balance, June 30, 2004 14,548,500 $ 146 $55,083 $ (4,436) $ 38,513 $ (190) $ 89,116
======================================================================================
The accompanying notes are an integral part of these financial statements
F-5
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, except share data)
- --------------------------------------------------------------------------------
YEARS ENDED JUNE 30
-----------------------------------
2004 2003 2002
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 3,168 $ 2,439 $ 1,907
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of net premium on investments 189 148 25
Amortization of net premiums on loan purchases 2,863 1,221 146
Accretion of loan origination fees (94) (85) (17)
Provision for loan losses 483 1,124 1,147
Depreciation and amortization 383 292 231
Allocation of ESOP common stock 140 -- --
Federal Home Loan Bank stock dividend (111) (85) (38)
Loss on equity investment 173 -- --
Increase in deferred income taxes (20) (224) (113)
Increase in accrued income receivable (374) (339) (384)
(Increase) decrease in other assets 462 (128) 394
Increase (decrease) in accrued expenses and other liabilities 234 (81) 810
--------- --------- ---------
Net cash provided by operating activities 7,496 4,282 4,108
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of available-for-sale investments (21,837) -- --
Proceeds from maturities of available-for-sale investments 499 -- --
Purchases of held-to-maturity investments (47,813) (9,628) (10,925)
Proceeds from maturities of held-to-maturity investments 20,522 15,020 9,665
Net decrease in time deposits with other financial institutions 3,467 16,941 12,053
Purchases of loans (286,162) (234,303) (99,935)
Net change in loans, excluding loan purchases 176,344 79,317 2,584
Purchase of FHLB stock (577) (1,594) (359)
Purchase of equity investment (2,670) -- --
Purchases of premises and equipment (618) (376) (493)
--------- --------- ---------
Net cash used in investing activities (158,845) (134,623) (87,410)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from FHLB advances 32,000 52,030 2,000
Repayment of FHLB advances (12,000) (4,030) --
Net increase in deposits 76,714 94,201 54,450
Net proceeds from stock issuance 50,653 -- --
Distribution to capitalize K-Fed Mutual Holding Company (50) -- --
--------- --------- ---------
Net cash provided by financing activities 147,317 142,201 56,450
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,032) 11,860 (26,852)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 16,190 4,330 31,182
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,158 $ 16,190 $ 4,330
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits and FHLB advances $ 9,627 $ 8,368 $ 6,634
Income taxes paid $ 2,106 $ 2,150 $ 1,015
Net change in unrealized loss on securities available for sale,
net of tax $ 190 -- --
The accompanying notes are an integral part of these financial statements
F-6
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: K-Fed Bancorp (the Company) is a majority-owned
subsidiary of K-Fed Mutual Holding Company (the Parent). The Company and
its Parent are holding companies. The Company's sole subsidiary, Kaiser
Federal Bank (the Bank), is a federally chartered savings association,
which provides retail and commercial banking services to individual and
business customers from its 4 branches throughout California. While the
Bank originates all types of retail, and commercial real estate loans,
the majority of its residential real estate loans have been purchased
from other financial institutions. The accounting and reporting policies
of the Company and the Bank conform to accounting principles generally
accepted in the United States of America (GAAP) and general industry
practices.
The Company's business activities generally are limited to passive
investment activities and oversight of our investment in the Bank.
Unless the context otherwise requires, all references to the Company
include the Bank and the Company on a consolidated basis.
CHANGE IN REPORTING ENTITY: On July 1, 2003, the Bank consummated its
reorganization into a federally chartered mutual holding company form of
organization, whereby the Bank became the wholly owned subsidiary of the
newly formed Company with the Company becoming a wholly owned subsidiary
of the newly formed Parent. In accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations," when accounting
for a transfer of assets or exchange of shares between entities under
common control, the entity that receives the net assets or the equity
interests shall initially recognize the assets and liabilities
transferred at their carrying amounts in the accounts of the
transferring entity at the date of transfer. Therefore, K-Fed Bancorp,
recorded the acquisition of the Bank at historical cost.
EXECUTION OF PLAN OF STOCK ISSUANCE: On November 22, 2003, and amended
on February 9, 2004, the Board of Directors adopted a plan of stock
issuance to sell a minority interest of its common stock to eligible
depositors of the Bank in a subscription offering, with the majority of
the common stock owned by K-Fed Mutual Holding Company. The plan was
accomplished through the sale to eligible depositors on March 30, 2004
of 5,686,750 shares, representing 39.09% of the Company's stock.
The issued shares resulted in gross proceeds of $56.9 million. In
connection with the offering, the Company loaned $4.5 million to the
Bank's employee stock ownership plan to purchase stock and incurred $1.7
million of expenses associated with the offering resulting in net
proceeds of $50.7 million to the Company. The aggregate purchase price
was determined by an independent appraisal. Consistent with the
Company's stated intent for use of the stock offering proceeds, one-half
of the total proceeds less offering expenses ($27.6 million) was
invested in the Bank and placed in the Bank's general funds for general
corporate purposes. In addition to the 5,686,750 shares issued to
eligible depositors, the Company issued 8,860,750 additional shares to
K-Fed Mutual Holding Company. As a result of the offering, purchasers in
the offering own 39.09% of K-Fed Bancorp's common stock, and K-Fed
Mutual Holding Company owns 60.91%.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated
financial statements include the accounts of the Company and the Bank.
All material intercompany balances and transactions have been eliminated
in consolidation. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America and predominant practices followed by the
financial services industry.
F-7
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL
STATEMENTS: The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of income and
expenses during the reporting period. Changes in these estimates and
assumptions are considered reasonably possible and may have a material
impact on the consolidated financial statements and thus actual results
could differ from the amounts reported and disclosed herein. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses,
the valuation of financial instruments, and mortgage-loan prepayment
assumptions used to determine the effective interest amortization of
loan purchase premiums.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of vault
and ATM cash, daily federal funds sold, demand deposits due from other
banks, and other time deposits that have an original maturity of less
than 90 days. For purposes of the Statement of Cash Flows, the Company
reports net cash flows for customer loan transactions (excluding loan
purchases) and deposit transactions.
INTEREST BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS: Interest
bearing deposits in other financial institutions consist of
interest-bearing time deposits in depository institutions with an
original maturity equal to or greater than 90 days.
SECURITIES AVAILABLE-FOR-SALE: Securities available-for-sale represent
securities that may be sold prior to maturity. These securities are
stated at fair value, and any unrealized net gains and losses are
reported as a separate component of equity until realized, net of any
tax effect. Changes in the fair value of investments classified as
available-for-sale are reflected as direct charges or credits to equity,
net of any tax effect. Estimated fair values for investments are
obtained from quoted market prices where available. Where quoted market
prices are not available, estimated fair values are based on quoted
market prices of comparable instruments. Premiums or discounts are
recognized in interest income using the effective interest method over
the estimated life of the investment.
Securities available-for-sale may be sold in response to changes in
market interest rates, repayment rates, the need for liquidity, and
changes in the availability and the yield on alternative investments.
Other than temporary declines, if any, in the fair value of individual
securities available-for-sale that are below cost are included in
earnings as realized losses.
SECURITIES HELD-TO-MATURITY: Securities for which the Company has the
positive intent and ability to hold until maturity are classified as
securities held-to-maturity and are recorded at cost, adjusted for
unamortized premiums or discounts. Premium or discounts are recognized
in interest income using the effective interest method over the
estimated life of the investment. The sale of a security within three
months of its maturity date or after the collection of at least 85% of
the principal outstanding at the time the security was acquired is
considered a maturity for purposes of classification and disclosure.
Other than temporary declines, if any, in the fair value of individual
securities held-to-maturity that are below cost are included in earnings
as realized losses.
FEDERAL HOME LOAN BANK STOCK: The Bank, as a member of the Federal Home
Loan Bank of San Francisco (FHLB) system, is required to maintain an
investment in capital stock of the FHLB in an amount equal to the
greater of 1% of its outstanding mortgage loans or 4.7% of advances from
the FHLB. No ready market exists for the FHLB stock, and it has no
quoted market value.
F-8
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
LOANS: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred net loan origination fees, and
increased by premiums on purchased loans. Interest on loans is
recognized over the terms of the loans and is accrued as earned, using
the effective interest rate. Loan premiums on purchased loans are
accreted into interest income as a yield adjustment over the estimated
lives of the loan pools using the effective interest method. The
estimated lives of these loan pools are re-evaluated periodically based
on actual prepayments. The current estimated lives of these loan pools
range from two to eight years. Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as
an adjustment to interest income using the effective interest method
over the estimated lives of the related loans.
A loan is considered to be delinquent when payments have not been made
according to contractual terms, typically evidenced by non-payment of a
monthly installment by the due date.
Accrual of interest on loans is discontinued when management believes,
after considering economics, business conditions, and collection efforts
that the borrower's financial condition is such that collection of
interest is doubtful. Accrual of interest is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due or when the loan becomes past due 90 days as to either
principal or interest. All interest accrued but not collected for loans
that are placed on non-accrual status or subsequently charged off is
reversed against interest income. Income is subsequently recognized on
the cash basis until, in management's judgment, the borrower's ability
to make periodic interest and principal payments is back to normal and
future payments are reasonably assured, in which case the loan is
returned to accrual status.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes
that collectability of the principal is unlikely. Subsequent recoveries,
if any, are credited to the allowance.
The allowance is an amount that management believes will absorb
estimated losses relating to specifically identified loans, as well as
probable credit losses inherent in the balance of the loan portfolio,
based on an evaluation of the collectability of existing loans and prior
loss experience. This evaluation also takes into consideration such
factors as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay. This
evaluation does not include the effects of expected losses on specific
loans or groups of loans that are related to future events or expected
changes in economic conditions. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan
losses, and may require adjustments to the allowance based on their
judgment about information available to them at the time of their
examinations.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as doubtful, substandard,
or special mention. For such loans that are also classified as impaired,
an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is
lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience for
consumer loans and peer group loss experience for real estate loans
adjusted for qualitative factors.
F-9
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
A loan is impaired when it is probable, based on current information and
events, the Bank will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan
agreement. Commercial loans are evaluated for impairment based on their
past due status and are measured on an individual basis based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS: The Bank accounts for
transfers and servicing of financial assets in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 140 requires application of a
financial component's approach that focuses on control. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. The
statement also distinguishes transfers of financial assets that are
sales from transfers of financial assets that are secured borrowings.
PREMISES AND EQUIPMENT: Leasehold improvements and furniture and
equipment are carried at cost, less accumulated depreciation and
amortization. Furniture and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets,
which is usually 3 to 5 years. The cost of leasehold improvements is
amortized using the straight-line method over the lesser of the terms of
the related leases or their useful life, which is usually 5 to 10 years.
INCOME TAXES: Deferred taxes are provided on an asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
COMPREHENSIVE INCOME / LOSS: Comprehensive income consists of net income
and other comprehensive income / loss for the Company. Other
comprehensive loss is comprised entirely of unrealized gains and losses
on securities available-for-sale, which is also recognized as a separate
component of equity.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or
range of loss can be reasonably estimated. Management does not believe
there now are such matters that will have a material effect on the
financial statements.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): The cost of shares issued to the
ESOP but not yet allocated to participants is shown as a reduction of
stockholders' equity. Compensation expense is based on the market price
of shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends
on unearned ESOP shares reduce accrued interest.
F-10
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
LOAN COMMITMENTS: Financial instruments include off-balance-sheet credit
instruments, such as commitments to make or purchase loans. The face
amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
EARNINGS PER COMMON SHARE: The Company displays basic and diluted EPS in
the consolidated statement of operations. Basic EPS is computed by
dividing net income by the weighted average number of shares outstanding
during the year. At June 30, 2004, the Company had no stock options or
related instruments, and as a result, basic and diluted EPS are the
same.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial
instruments are estimated using relevant market information and other
assumptions, as more fully disclosed in a separate note. Fair value
estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes
in assumptions or in market conditions could significantly affect the
estimates.
ADOPTION OF NEW ACCOUNTING STANDARDS: During 2004, the Company adopted
Emerging Issues Task Force (EITF) 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments". Adoption of the new standards did not materially affect
the Company's operating results or financial condition.
EITF 03-1 provides guidance for evaluating whether an investment is
other-than-temporarily impaired and requires certain quantitative and
qualitative disclosures for cost method investments.
2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain reserve balances in cash or on
deposit with the Federal Reserve Bank, based on a percentage of
deposits. The total of those reserve balances is approximately $924,000
and $675,000 at June 30, 2004 and 2003, respectively.
F-11
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
3. INVESTMENTS
The following summarizes the recorded value, gross unrealized gains and
losses, and the estimate fair value of the Company's investment
securities:
UNREALIZED UNREALIZED
LOSSES LOSSES
AMORTIZED UNREALIZED LESS THAN GREATER THAN FAIR
COST GAINS 12 MONTHS 12 MONTHS VALUE
--------- ---------- --------- ----------- --------
(Dollars in Thousands)
SECURITIES AVAILABLE-FOR-SALE
JUNE 30, 2004
U.S. Government Agency Obligations $ 11,000 $ -- $ (110) $ -- $ 10,890
Mortgage-backed securities
Freddie Mac 10,326 -- (213) -- 10,113
-------- ------ -------- ------ --------
$ 21,326 $ -- $ (323) $ -- $ 21,003
======== ====== ======== ====== ========
SECURITIES HELD-TO-MATURITY
JUNE 30, 2004
U.S. Government Agency Obligations $ 10,000 $ -- $ (20) $ -- $ 9,980
Mortgage-backed securities
Fannie Mae 732 13 -- -- 745
Freddie Mac 454 -- (3) -- 451
Ginnie Mae 310 5 -- -- 315
Collateralized mortgage obligations
Fannie Mae 7,342 22 (180) -- 7,184
Freddie Mac 18,049 21 (334) -- 17,736
Ginnie Mae 4,474 55 -- -- 4,529
-------- ------ -------- ------ --------
$ 41,361 $ 116 $ (537) $ -- $ 40,940
======== ====== ======== ====== ========
JUNE 30, 2003
Mortgage-backed securities
Fannie Mae $ 1,188 $ 23 $ -- $ -- $ 1,211
Freddie Mac 695 10 -- -- 705
Ginnie Mae 406 7 -- -- 413
Collateralized mortgage obligations
Fannie Mae 7,399 103 -- -- 7,502
Freddie Mac 4,559 -- (17) -- 4,542
-------- ------ -------- ------ --------
$ 14,247 $ 143 $ (17) $ -- $ 14,373
======== ====== ======== ====== ========
F-12
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
Certain investment securities shown above currently have fair values
less than amortized cost and therefore contain unrealized losses. The
Company has evaluated these securities and has determined that the
decline in value is temporary and is related to the change in market
interest rates since purchase. The decline in value is not related to
any company or industry specific event. At June 30, 2004 there are 14
investment securities with unrealized losses. The Company anticipates
full recovery of amortized cost with respect to these securities at
maturity or sooner in the event of a more favorable market interest rate
environment.
The recorded value and the fair value of investment securities at June
30, 2004, by contractual maturity, are shown below.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
--------------------------- ---------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ---------- -------------- ---------------
(Dollars in Thousands)
Due within one year $ -- $ -- $ -- $ --
Due from one year to five years 10,000 9,980 11,000 10,890
Due from five years to ten years -- -- -- --
Due after ten years -- -- -- --
Mortgage-backed securities and
Collateralized mortgage obligations 31,361 30,960 10,326 10,113
------- ------- ------- -------
$41,361 $40,940 $21,326 $21,003
======= ======= ======= =======
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
There were no sales of securities during the years ending June 30, 2004,
2003, and 2002.
F-13
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
4. LOANS
The composition of loans consists of the following:
JUNE 30
---------------------------
2004 2003
--------------------------
(Dollars in Thousands)
Real Estate:
One-to-Four family residential, fixed rate $ 82,104 $ 72,798
One-to-Four family residential, variable rate 259,672 186,765
Multi-family residential, variable rate 72,519 42,275
Commercial real estate, variable rate 26,879 21,266
--------- ---------
441,174 323,104
--------- ---------
Consumer:
Vehicle 47,359 56,872
Home equity 437 664
Other consumer loans, primarily unsecured 7,675 8,878
--------- ---------
55,471 66,414
--------- ---------
Total loans 496,645 389,518
Deferred net loan origination fees (332) (354)
Net premiums on purchased loans 2,221 2,757
Allowance for loan losses (2,328) (2,281)
--------- ---------
$ 496,206 $ 389,640
========= =========
In addition to the above, the Company participates with other financial
institutions in certain loans they have originated. The Company
continues to service the participants' balance, which at June 30, 2004
totaled approximately $6.3 million and represented 7 loans. The Company
receives a servicing fee of 25 basis points on these participated loans.
The Company has purchased real-estate loan participations originated by
other financial institutions. All of these loan participations were
purchased without recourse and are secured by real property. The
originating financial institution performs all servicing functions on
these loans.
The following is an analysis of the changes in the allowance for loan
losses:
YEARS ENDED JUNE 30
-----------------------------------
2004 2003 2002
------- --------- --------
(Dollars in Thousands)
Balance, beginning of year $ 2,281 $ 1,744 $ 1,175
Provision for loan losses 483 1,124 1,147
Recoveries 301 313 522
Loans charged off (737) (900) (1,100)
------- --------- --------
Balance, end of year $ 2,328 $ 2,281 $ 1,744
======= ========= ========
There were no loans individually classified as impaired as of June 30,
2004 and 2003.
F-14
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
Loans on which accrual of interest has been discontinued or reduced
amounted to $82,000 and $26,000 at June 30, 2004 and 2003, respectively.
If interest on those loans had been accrued, such income would have
approximated $4,000, $1,000, and $4,000 for the years ended June 30,
2004, 2003, and 2002 respectively. The effects of troubled debt
restructurings are not considered material to the Company's financial
position and results of operations.
5. CONCENTRATIONS OF CREDIT RISK
The Kaiser Permanente Medical Care Program employs a large percentage of
the Company's account holders. Further, a significant concentration of
the Company's borrowers resides in California. Although the Company has
a diversified loan portfolio, borrowers' ability to repay loans may be
affected by the economic climate of either the health care industry or
the overall geographic region in which borrowers reside.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
JUNE 30
----------------------
2004 2003
------ ------
(Dollars in Thousands)
Loans $1,789 $1,570
Investment securities 247 57
Other 7 42
------ ------
$2,043 $1,669
====== ======
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
JUNE 30
----------------------
2004 2003
------- -------
(Dollars in Thousands)
Leasehold improvements $ 332 $ 332
Furniture and equipment 3,050 3,089
------- -------
3,382 3,421
Accumulated depreciation and amortization (1,858) (2,132)
------- -------
$ 1,524 $ 1,289
======= =======
Depreciation expense on premises and equipment totaled $383,000,
$292,000, and $231,000 for the years ended June 30, 2004, 2003, and
2002, respectively.
The Company leases office space in four buildings. The operating leases
contain renewal options and provisions requiring the Company to pay
property taxes and operating expenses over base period amounts. All
rental payments are dependent only upon the lapse of time.
F-15
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
Minimum rental payments under operating leases with initial or remaining
terms of one year or more at June 30, 2004 are as follows:
(Dollars in Thousands)
YEARS ENDED JUNE 30
2005 $ 499
2006 419
2007 409
2008 425
2009 431
Subsequent years 337
-------------------
$ 2,520
===================
Rental expense for the years ended June 30, 2004, 2003, and 2002 for all
facilities leased under operating leases totaled $602,000, $597,000, and
$540,000, respectively.
8. INVESTMENT IN LIMITED LIABILITY PARTNERSHIP
The Company has an approximate 20% investment in the California
Affordable Housing Fund, a limited liability partnership, which builds
and operates affordable housing projects located in Northern California.
The Company purchased the investment for approximately $2,670,000 during
the year ended June 30, 2004 and has committed to fund another $680,000
over the next five years contingent upon stipulations set forth in the
partnership agreement. The investment is included in other assets at
June 30, 2004 and is being accounted for using the equity method of
accounting. The investment is evaluated periodically for impairment
based on the remaining allocable tax credits. For the year ended June
30, 2004 the Company recorded an estimated charge to noninterest income
of $173,000 for its share of losses in the fund and recorded an
estimated credit to federal and state income tax expense of $106,000 and
$34,000, respectively for its share of affordable housing tax credits.
9. DEPOSITS
Deposits are summarized as follows:
JUNE 30
-----------------------
2004 2003
-------- --------
(Dollars in Thousands)
Savings $ 95,115 $ 82,691
Checking accounts, non interest bearing 38,020 30,119
Money market accounts 105,532 87,555
Time certificates of deposit 184,286 145,874
-------- --------
$422,953 $346,239
======== ========
F-16
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
Deposits by maturity are summarized as follows:
JUNE 30
--------------------------
2004 2003
-------- --------
(Dollars in Thousands)
No contractual maturity $238,667 $200,365
0 - 1 year maturity 95,134 74,550
1 - 2 years maturity 34,899 22,969
2 - 3 years maturity 16,026 20,190
3 - 4 years maturity 19,276 9,156
4 - 5 years maturity 18,951 19,009
-------- --------
$422,953 $346,239
======== ========
Savings, checking accounts, money market accounts, and individual
retirement accounts have no contractual maturity. Certificate accounts
have maturities of five years or less.
The aggregate amount of time deposits in denominations of $100,000 or
more at June 30, 2004 and 2003 is approximately $55,368,000 and
$32,994,000, respectively. Generally, deposits in excess of $100,000 are
not insured by the FDIC.
Interest expense by major category is summarized as follows:
YEARS ENDED JUNE 30
------------------------
2004 2003 2002
------ ------ ------
(Dollars in Thousands)
Money market accounts $1,722 $1,604 $1,243
Savings 518 899 933
Time certificates of deposit 5,879 4,824 4,414
------ ------ ------
$8,119 $7,327 $6,590
====== ====== ======
10. FEDERAL HOME LOAN BANK ADVANCES
The Company utilizes a demand loan agreement with the Federal Home Loan
Bank of San Francisco (FHLB). The terms of the agreement call for
pledging a portion of the Company's mortgage portfolio based on the
outstanding balance. At June 30, 2004, the interest rates on the
Company's advances from the FHLB ranged from 1.44%% to 3.00% with a
weighted average rate of 2.50%. At June 30, 2003, total borrowings
consist of one fixed rate advance with an interest rate of 3.00%. For
all advances, interest is payable monthly with principal and any unpaid
accrued interest due at maturity. The contractual maturities by year of
the Company's advances are as follows:
2004 2003
------- -------
(Dollars in Thousands)
YEARS ENDED JUNE 30,
--------------------
2005 $20,000 $ --
2006 50,000 50,000
------- -------
Total advances $70,000 $50,000
======= =======
As of June 30, 2004 and June 30, 2003, the Bank has pledged $337,760,000
and $299,922,000, respectively, in mortgage loans under the terms of the
agreement. At June 30, 2004 and June 30, 2003, the amount available to
borrow under this agreement is approximately $157,000,000 and
$146,000,000, respectively.
F-17
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to various legal actions normally associated with
collections of loans and other business activities of financial
institutions, the aggregate effect of which, in management's opinion,
would not have a material adverse effect on the financial condition or
results of operations of the Company.
The Company had no outstanding commitments to sell loans or investments
at June 30, 2004 and 2003.
At June 30, 2004 and 2003, there were approximately $3,155,000 and
$9,272,000, respectively, in cash and cash equivalents with balances in
excess of insured limits.
Outstanding mortgage loan commitments at June 30, 2004 and 2003 total
approximately $1,478,000 and $2,364,000, respectively. Commitments to
purchase mortgage loans at June 30, 2004 and 2003 total approximately
$31,478,000 and $21,599,000, respectively. The purchase commitments
outstanding at June 30, 2004 are comprised of $29,504,000 in fixed rate
loans and $1,974,000 in variable rate loans.
Available credit on home equity and unsecured lines of credit is
summarized as follows:
JUNE 30
-----------------------
2004 2003
------ ------
(Dollars in Thousands)
Home equity $ 590 $1,148
Other consumer 5,447 5,861
------ ------
$6,037 $7,009
====== ======
Commitments for home equity and unsecured lines of credit may expire
without being drawn upon. Therefore, the total commitment amount does
not necessarily represent future cash requirements of the Company. These
commitments are not reflected in the financial statements.
12. EMPLOYEE BENEFITS
The Company has a 401(k) pension plan that allows eligible employees to
defer a portion of their salary into the 401(k) plan. The Company
matches 50% of the first 10% of employees' wage reductions. The Company
contributed $130,000, $94,000, and $73,000 respectively, to the plan for
the years ended June 30, 2004, 2003, and 2002.
The Company has an executive salary deferral program for the benefit of
certain senior executives that have been designated to participate in
the program. The program allows an additional opportunity for key
executives to defer a portion of their compensation into a non-qualified
deferral program to supplement their retirement earnings. At June 30
2004 and 2003 the Company has accrued a liability for executive
deferrals of $679,000 and $406,000, respectively.
Effective July 1, 2001 the Company began maintaining an Annual Incentive
Plan and a Long-Term Incentive Plan for key employees. Participants are
awarded a percentage of their base salary for attaining certain personal
performance goals. The compensation expense related to these plans for
the year ended June 2004, 2003, and 2002 totaled $184,000, $193,000 and
$150,000 respectively.
F-18
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
13. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
During 2004, the Company implemented the Employee Stock Ownership Plan,
which covers substantially all of its employees. In connection with the
stock offering, the Company issued 454,940 shares of common stock for
allocation under the ESOP in exchange for a ten-year note in the amount
of approximately $4.5 million. The $4.5 million for the ESOP purchase
was borrowed from the Company. The ESOP shares initially were pledged as
collateral for the loan.
The loan is secured by shares purchased with the loan proceeds and will
be repaid by the ESOP with funds from the Company's contributions to the
ESOP and earnings on ESOP assets. Shares issued to the ESOP are
allocated to ESOP participants based on the proportion of debt service
paid in the year. Principal and interest payments are scheduled to occur
over a ten-year period.
During 2004, 11,374 shares of stock with an average fair value of $12.37
per share were committed to be released, resulting in ESOP compensation
expense of $140,000. Shares held by the ESOP at June 30, 2004 are as
follows:
2004
--------
Allocated shares 11,374
Unearned shares 443,566
--------
Total ESOP shares 454,940
========
Fair value of unearned shares at June 30, 2004 (in Thousands) $ 5,655
========
14. EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per
common share computation for the period beginning with March 30, 2004,
the date of the initial stock offering, to the period ended June 30,
2004 is as follows:
2004
-----------
Earnings per common share
Net income (in Thousands) $ 3,168
Less net income of Company prior to initial stock offering
(in Thousands) 2,280
-----------
Net income attributable to common stock holders $ 888
(in Thousands)
===========
Total weighted average common shares outstanding 14,093,682
===========
Basic and Diluted earnings per common share $ 0.06
===========
F-19
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
15. OTHER COMPREHENSIVE LOSS
Other comprehensive income components and related taxes were as follows
(Dollars in Thousands):
2004
------
Unrealized holding losses on securities available-for-sale $(323)
Tax effect 133
-----
Other comprehensive loss $(190)
=====
16. RELATED PARTY TRANSACTIONS
Loans to certain executive officers, directors, and their associates
totaled $754,000 and $598,000 at June 30, 2004 and 2003, respectively.
Management believes that such loans were made in the ordinary course of
business on substantially the same terms, including interest rate and
collateral, as those prevailing at the time for comparable transactions
with other persons, and did not involve more than the normal credit risk
nor present other unfavorable features. The following is a summary of
activity during the fiscal year ended June 30, 2004 with respect to such
aggregate loans to these individual and their associates and affiliated
companies:
Balance at June 30, 2003 $ 598,000
New loans 618,000
Repayments (462,000)
---------
Balance at June 30, 2004 $ 754,000
=========
17. INCOME TAXES
The components of income tax expense are as follows:
JUNE 30
---------------------------------
2004 2003 2002
------- ------- -------
(Dollars in Thousands)
Current
Federal $ 1,490 $ 1,426 $ 911
State 523 508 347
------- ------- -------
2,013 1,934 1,258
------- ------- -------
Deferred
Federal (15) (166) (97)
State (5) (58) (16)
------- ------- -------
(20) (224) (113)
------- ------- -------
Income tax expense $ 1,993 $ 1,710 $ 1,145
======= ======= =======
F-20
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
The income tax provision differs from the amount of income tax
determined by applying the United States federal income tax rate to
pretax income due to the following:
JUNE 30
----------------------------------
2004 2003 2002
------- ------- -------
(Dollars in Thousands)
Federal income tax at statutory rate $ 1,755 $ 1,411 $ 1,038
State taxes, net of federal tax benefit 369 297 218
Reversal of income tax accrued upon
expiration of contingency -- -- (119)
General business credit (140) -- --
Other, net 9 2 8
------- ------- -------
$ 1,993 $ 1,710 $ 1,145
======= ======= =======
Tax expense as a percentage of income
before tax 38.6% 41.2% 37.5%
======= ======= =======
The Company's total net deferred tax assets are as follows:
JUNE 30
----------------------
2004 2003
------- -------
(Dollars in Thousands)
Deferred tax assets:
Allowance for loan losses $ 958 $ 629
Accrued expenses 382 281
Accrued state income tax 178 67
Unrealized loss on securities available-for-sale 133 --
Other 17 --
------- -------
Total deferred tax assets 1,668 977
------- -------
Deferred tax liabilities:
Bad debt reserve recapture (326)
Premises and equipment (266) (89)
Federal Home Loan Bank Stock dividends (113) (78)
------- -------
Total deferred tax liabilities (705) (167)
------- -------
Net deferred tax asset, included in other assets $ 963 $ 810
======= =======
18. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
The regulations require the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-21
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and Tier 1 capital
to total assets (as defined). Management's opinion, as of June 30, 2004,
is that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 2004, the most recent notification from the Office of
Thrift Supervision, categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, an institution must maintain minimum total risk-based,
Tier 1 risk based and Tier 1 leverage ratios as set forth in the table
below. There are no conditions or events since the notification that
management believes have changed the Bank's category. The Bank's actual
capital amounts and ratios are presented in the following table.
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
-------------------------- -------------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------- -------------------------- -------------------------
(Dollars in Thousands)
JUNE 30, 2004:
Total Capital (to
risk-weighted
assets) $ 63,910 18.63% $ 27,445 8.00% $34,306 10.00%
Tier 1 Capital (to
risk-weighted
assets) 61,582 17.95 13,723 4.00 20,584 6.00
Tier 1 Capital (to
total assets) 61,582 11.05 22,285 4.00 27,857 5.00
JUNE 30, 2003:
Total Capital (to
risk-weighted
assets) $ 37,675 15.11% $ 19,942 8.00% $ 24,927 10.00
Tier 1 Capital (to
risk-weighted
assets) 35,395 14.20 9,971 4.00 $ 14,956 6.00
Tier 1 Capital (to
total assets) 35,395 8.16 14,454 4.00 $ 21,682 5.00
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions
of capital, which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital account.
F-22
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
Generally, savings institutions, such as Kaiser Federal Bank, that
before and after the proposed distribution are well-capitalized, may
make capital distributions during any calendar year equal to the greater
of 100% of net income for the year-to-date plus retained net income for
the two preceding years. However, an institution deemed to be in need of
more than normal supervision by the Office of Thrift Supervision may
have its dividend authority restricted by the Office of Thrift
Supervision. Kaiser Federal Bank may pay dividends to K-Fed Bancorp in
accordance with this general authority.
The Holding Company is not currently subject to prompt corrective action
regulations.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a market
exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to
estimate fair value:
INVESTMENTS
Estimated fair values for investments are obtained from quoted
market prices where available. Where quoted market prices are
not available, estimated fair values are based on quoted market
prices of comparable instruments.
LOANS
The estimated fair value for all fixed rate loans and variable
rate loans with an initial fixed rate feature is determined by
discounting the estimated cash flows using the current rate at
which similar loans would be made to borrowers with similar
credit ratings and maturities.
The estimated fair value for variable rate loans with no initial
fixed rate feature is the carrying amount.
The impact of delinquent loans on the estimation of the fair
values described above is not considered to have a material
effect and, accordingly, delinquent loans have been disregarded
in the valuation methodologies employed.
DEPOSITS
The estimated fair value of deposit accounts (savings, non
interest bearing demand and money market accounts) is the
carrying amount. The fair value of fixed-maturity time
certificates of deposit is estimated by discounting the
estimated cash flows using the current rate at which similar
certificates would be issued.
F-23
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
FHLB ADVANCES
The fair values of the FHLB advances are estimated using
discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
OTHER ON-BALANCE-SHEET FINANCIAL INSTRUMENTS
Other on-balance-sheet financial instruments include cash and
cash equivalents, accrued interest receivable, and accrued
expenses and other liabilities. The carrying value of each of
these financial instruments is a reasonable estimation of fair
value.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair values for the Company's off-balance sheet loan
commitments are estimated based on fees charged to others to
enter into similar agreements taking into account the remaining
terms of the agreements and credit standing of the Company's
customers. The estimated fair value of these commitments is not
significant.
The estimated fair values of the Company's financial instruments are
summarized as follows
JUNE 30, 2004 JUNE 30, 2003
-------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ------------- -------------- ----------------
(Dollars in Thousands)
Financial assets:
Cash and cash equivalents $ 12,158 $ 12,158 $ 16,190 $ 16,190
Interest bearing deposits in
other financial institutions 2,970 2,970 6,437 6,437
Securities available-for-sale 21,003 21,003 - -
Securities held-to-maturity 41,361 40,940 14,247 14,373
Federal Home Loan Bank Stock 3,290 3,290 2,602 2,602
Loans, net 496,206 493,474 389,640 393,048
Accrued interest receivable 2,043 2,043 1,669 1,669
Financial liabilities:
Deposits 422,953 424,497 346,239 348,089
FHLB advances 70,000 70,152 50,000 51,689
The Company assumes interest rate risk (the risk that general interest
rate levels will change) as a result of its normal operations. As a
result, the fair values of the Company's financial instruments will
change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match
maturities of assets and liabilities to the extent believed necessary to
minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and
more likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to do
so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing
in securities with terms that mitigate the Company's overall interest
rate risk.
F-24
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
20. CONDENSED CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
(Dollars in Thousands, except share data)
--------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
---------------- --------------- ---------------- ---------------
2003/2004
Interest income $4,896 $5,373 $5,893 $5,875
Interest expense 2,337 2,391 2,554 2,340
------ ------ ------ ------
Net interest income 2,559 2,982 3,339 3,535
Provision for loan losses 30 62 162 229
Non-interest income 804 809 811 805
Non-interest expense 2,436 2,394 2,490 2,680
------ ------ ------ ------
Income before income tax 897 1,335 1,498 1,431
Income tax expense 321 520 589 563
------ ------ ------ ------
Net income $ 576 $ 815 $ 909 $ 868
====== ====== ====== ======
Earnings per share n/m (1) n/m (1) n/m (1) $ 0.06
====== ====== ====== ======
2002/2003
Interest income $4,754 $5,062 $5,271 $5,357
Interest expense 1,735 2,058 2,215 2,357
------ ------ ------ ------
Net interest income 3,019 3,004 3,056 3,000
Provision for loan losses 203 368 282 271
Non-interest income 737 795 792 862
Non-interest expense 2,449 2,418 2,509 2,616
------ ------ ------ ------
Income before income tax 1,104 1,013 1,057 975
Income tax expense 455 418 436 401
------ ------ ------ ------
Net income $ 649 $ 595 $ 621 $ 574
====== ====== ====== ======
Earnings per share n/m (1) n/m (1) n/m (1) n/m (1)
====== ====== ====== ======
(1) Shares outstanding and earnings per share information is not
meaningful. The Company did not complete its initial public offering until March
30, 2004
F-25
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
21. CONDENSED FINANCIAL STATEMENTS OF K-FED BANCORP (UNCONSOLIDATED)
CONDENSED BALANCE SHEET
(Dollars in Thousands)
June 30
2004
-------
ASSETS
Cash and cash equivalents $ 1,948
Securities available for sale 21,003
ESOP Loan 4,457
Investment in bank subsidiary 61,582
Accrued income receivable 83
Other assets 148
-------
$89,221
=======
LIABILITIES & STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 105
Stockholders' equity 89,116
-------
$89,221
=======
F-26
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
(Dollars in Thousands)
June 30
2004
------
INCOME
Interest on ESOP Loan $ 46
Interest on investment securities, taxable 114
Other income 63
------
Total income 223
EXPENSES
Other operating expenses 86
------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 137
Income taxes 68
------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 69
Equity in undistributed earnings of bank subsidiary 3,099
------
NET INCOME $3,168
======
F-27
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
June 30
2004
--------
OPERATING ACTIVITIES
Net income $ 3,168
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of bank subsidiary (3,099)
Amortization of net premiums on investments 12
Increase in accrued income receivable (83)
Net increase in other assets (15)
Net increase in accrued expenses and other liabilities 105
--------
Net cash provided by operating activities 88
--------
INVESTING ACTIVITIES
Purchases of available-for-sale investments (21,837)
Proceeds from maturities of available-for-sale investments 499
Net change in ESOP loan receivable (4,457)
Dividends received on equity investment in bank subsidiary 100
--------
Net cash used in investing activities (25,695)
--------
FINANCING ACTIVITIES
Capital contribution to bank subsidiary (23,048)
Net proceeds from stock issuance 50,653
Distribution to capitalize K-Fed Mutual Holding Company (50)
--------
Net cash provided by financing activities 27,555
--------
INCREASE IN CASH AND CASH EQUIVALENTS 1,948
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR --
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,948
========
SUPPLEMENTAL CASH FLOW INFORMATION
Capital contribution from parent in the form of net assets $ 35,395
Net change in unrealized loss on securities available-for-sale, net of tax $ 190
Financing Activities:
Issuance of common stock under ESOP $ 140
F-28
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
22. SUBSEQUENT EVENT
On July 2, 2004, the Bank signed a definitive agreement with Pan American Bank,
FSB, Burlingame, California, to acquire the Panorama City Branch of Pan American
Bank. The transaction will include the assumption of approximately $64 million
in deposits. The transaction received regulatory approval on August 6, 2004 and
is expected to be completed in third quarter of calendar year 2004.
F-29