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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
_______ THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
OR
_______ 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)
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 whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes___ No _X_
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: Common Stock, $.01 par value - 14,714,800 shares outstanding as of
February 7, 2005.
FORM 10-Q
K-FED BANCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of December 31, 2004 and 2003 1
Consolidated Statements of Income and
Comprehensive Income for the Three and Six
Months Ended December 31, 2004 and 2003 2
Consolidated Statement of Stockholders' Equity
and Other Comprehensive Income for the Six
Months Ended December 31, 2004 3
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2004
and 2003 4
Selected Notes to Consolidated Financial
Statements 5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4: Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 22
Item 2: Unregistered Sales of Equity Securities
and Use of Proceeds 22
Item 3: Defaults upon Senior Securities 22
Item 4: Submission of Matters to a Vote of
Security Holders 22
Item 5: Other Information 22
Item 6: Exhibits 23
SIGNATURES 24
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DOLLARS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31 JUNE 30
2004 2004
----------------- ---------------
ASSETS
Cash and due from banks $ 8,461 $ 6,923
Federal funds sold 16,375 5,235
----------------- ---------------
Total cash and cash equivalents 24,836 12,158
Interest bearing deposits in other financial
Institutions 8,910 2,970
Securities available-for-sale 20,018 21,003
Securities held-to-maturity, fair value of $34,990 and
$40,940 at December 31, 2004 and June 30, 2004,
respectively 35,088 41,361
Federal Home Loan Bank stock, at cost 3,599 3,290
Loans receivable 505,593 496,645
Deferred loan origination fees (230) (332)
Net premium on purchased loans 1,243 2,221
Allowance for loan losses (2,272) (2,328)
----------------- ---------------
Loans receivable, net 504,334 496,206
Accrued interest receivable 2,067 2,043
Premises and equipment, net 1,564 1,524
Core deposit intangible 640 -
Goodwill 3,950 -
Other assets 4,160 3,867
----------------- ---------------
Total assets 609,166 584,422
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing $ 44,847 $ 38,020
Interest bearing 420,390 384,933
----------------- ---------------
Total deposits 465,237 422,953
Federal Home Loan Bank advances, short-term 10,000 20,000
Federal Home Loan Bank advances, long-term 39,623 50,000
Accrued expenses and other liabilities 2,583 2,353
----------------- ---------------
Total liabilities 517,443 495,306
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Nonredeemable serial preferred stock, $.01 par value;
2,000,000 shares authorized; issued and outstanding - none - -
Common stock, $.01 par value; 18,000,000 authorized;
14,714,800 shares issued and outstanding at December 31,
2004 and 14,548,500 shares issued and outstanding at June 30,
2004 147 146
Additional paid-in capital 57,518 55,083
Unearned employee stock ownership plan shares (4,208) (4,436)
Unearned employee stock award shares (2,286) -
Retained earnings 40,670 38,513
Accumulated other comprehensive loss, net of tax (118) (190)
----------------- ---------------
Total stockholders' equity 91,723 89,116
----------------- ---------------
Total liabilities and stockholders' equity $ 609,166 $ 584,422
================= ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED FINANCIAL STATEMENTS
1
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
---------------------------------- ------------------------------------
2004 2003 2004 2003
---------------- ------------- ----------------- ---------------
INTEREST INCOME
Interest and fees on loans $ 6,204 $ 4,732 $ 12,430 $ 9,332
Interest on securities,
taxable 486 509 1,006 712
Federal Home Loan Bank dividends 39 - 75 28
Other interest 188 132 229 197
---------------- ------------- ----------------- ---------------
Total interest income 6,917 5,373 13,740 10,269
---------------- ------------- ----------------- ---------------
INTEREST EXPENSE
Interest on Federal Home Loan Bank
advances 462 377 975 757
Interest on deposits 2,129 2,014 4,054 3,971
---------------- ------------- ----------------- ---------------
Total interest expense 2,591 2,391 5,029 4,728
---------------- ------------- ----------------- ---------------
NET INTEREST INCOME 4,326 2,982 8,711 5,541
Provision for loan losses 32 62 152 92
---------------- ------------- ----------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,294 2,920 8,559 5,449
---------------- ------------- ----------------- ---------------
NONINTEREST INCOME
Service charges and fees 478 491 942 988
ATM fees and charges 328 283 650 571
Referral commissions 53 58 107 110
Loss on equity investment (279) (41) (362) (82)
Other noninterest income 15 18 27 26
---------------- ------------- ----------------- ---------------
Total noninterest income 595 809 1,364 1,613
---------------- ------------- ----------------- ---------------
NONINTEREST EXPENSE
Salaries and benefits 1,717 1,319 3,288 2,629
Occupancy and equipment 366 323 682 647
ATM expense 257 241 514 483
Advertising and promotional 104 66 212 153
Professional services 204 71 464 168
Postage 65 71 126 137
Telephone 79 71 153 150
Other operating expense 306 232 585 463
---------------- ------------- ----------------- ---------------
Total noninterest expense 3,098 2,394 6,024 4,830
---------------- ------------- ----------------- ---------------
INCOME BEFORE INCOME TAX EXPENSE 1,791 1,335 3,899 2,232
Income tax expense 678 520 1,480 841
---------------- ------------- ----------------- ---------------
NET INCOME $ 1,113 $ 815 $ 2,419 $ 1,391
================ ============= ================= ===============
COMPREHENSIVE INCOME $ 1,063 $ 815 $ 2,491 $ 1,391
================ ============= ================= ===============
EARNINGS PER COMMON SHARE:
Basic $ 0.08 n/m* $ 0.17 n/m*
Diluted $ 0.08 n/m* $ 0.17 n/m*
* NOT MEANINGFUL. SEE NOTE 5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED FINANCIAL STATEMENTS
2
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS
- ---------------------------------------------------------------------------------------------------
COMMON STOCK
-----------------------
ADDITIONAL UNEARNED
COMPREHENSIVE NUMBER AMOUNT PAID-IN ESOP
INCOME OF SHARES CAPITAL SHARES
---------------------------------------------------------------
Balance, June 30, 2004 14,548,500 $ 146 $ 55,083 $ (4,436)
Comprehensive income
Net Income for the six months
ended December 31, 2004 $ 2,419 - - - -
Other comprehensive income -
Unrealized gain on
securities, net of tax 72 - - - -
-------------
Total comprehensive income 2,491 -
=============
Dividends paid ($0.05 per share)* - - - -
Issuance of stock awards 166,300 1 2,344 -
Allocation of stock awards - - - -
Allocation of ESOP common stock - - 91 228
---------------------------------------------------------------
Balance, December 31, 2004 14,714,800 $ 147 $ 57,518 $ (4,208)
ACCUMULATED
UNEARNED OTHER
STOCK RETAINED COMPREHENSIVE
AWARDS EARNINGS INCOME (LOSS) TOTAL
-------------------------------------------------
Balance, June 30, 2004 $ - $ 38,513 $ (190) $ 89,116
Comprehensive income
Net Income for the six months
ended December 31, 2004 - 2,419 - 2,419
Other comprehensive income -
Unrealized gain on
securities, net of tax - - 72 72
Total comprehensive income
Dividends paid ($0.05 per share)* - (262) - (262)
Issuance of stock awards (2,345) - - -
Allocation of stock awards 59 - - 59
Allocation of ESOP common stock - - 319
-------------------------------------------------
Balance, December 31, 2004 $(2,286) $ 40,670 $ (118) $ 91,723
* K-Fed Mutual Holding Company waived its receipt of dividends on the 8,861,750 shares it owns.
Waived dividends of $443 represent restriction on the retained earnings of the Company.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED FINANCIAL STATEMENTS
3
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLARS IN THOUSANDS
- ----------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31
------------------------------------------------
2004 2003
----------------------- ---------------------
OPERATING ACTIVITIES
Net income $ 2,419 $ 1,391
Adjustments to reconcile net income to cash provided
by operating activities:
Amortization of net premium on investments 83 83
Amortization of net premiums on loan purchases 746 1,699
Accretion of net loan origination fees (29) (59)
Accretion of net premiums on purchased
certificates of deposit (45) -
Provision for loan losses 152 92
Depreciation and amortization 215 196
Allocation of ESOP common stock 319 -
Allocation of stock awards 59 -
Federal Home Loan Bank stock dividend (75) (28)
Loss on equity investment 362 82
Amortization of debt exchange costs 96 -
Amortization of core deposit intangible 36 -
Net change in accrued interest receivable (24) 71
Net change in other assets (520) (539)
Net changes in accrued expenses and other
liabilities 228 31
----------------------- ---------------------
Net cash provided by operating
activities 4,022 3,019
----------------------- ---------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale
investments 1,074 -
Purchases of held-to-maturity investments (5,000) (47,813)
Proceeds from maturities of held-to-maturity
investments 11,223 7,019
Net change in time deposits with other financial
institutions (5,940) 3,467
Purchases of loans (63,528) (93,394)
Net change in loans, excluding loan purchases 54,555 102,664
Purchase of Federal Home Loan Bank stock (1,195) (171)
Proceeds from FHLB stock repurchase 961 -
Purchase of equity investment (165) (2,089)
Net cash received from branch acquisition 56,491 -
Purchase of premises and equipment (237) (515)
----------------------- ---------------------
Net cash provided by (used in) investing
activities 48,239 (30,832)
----------------------- ---------------------
FINANCING ACTIVITIES
Proceeds from FHLB advances 165,916 -
Repayment of FHLB advances (185,916) -
Debt exchange costs (473) -
Net change in deposits (18,848) 439,065
Dividends paid on common stock (262) -
Distribution to capitalize K-Fed Mutual Holding
Company - (50)
----------------------- ---------------------
Net cash (used in) provided by financing activities (39,583) 439,015
----------------------- ---------------------
Net change in cash and cash equivalents 12,678 411,202
Cash and cash equivalents, at beginning of year 12,158 16,190
----------------------- ---------------------
Cash and cash equivalents, at end of period $ 24,836 $ 427,392
======================= =====================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED FINANCIAL STATEMENTS
4
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: K-Fed Bancorp (or the "Company") is a majority-owned
subsidiary of K-Fed Mutual Holding Company (or the "Parent"). The Company and
its Parent are holding companies. The Company's sole subsidiary, Kaiser Federal
Bank (or the "Bank"), is a federally chartered savings association, which
provides retail and commercial banking services to individuals and business
customers from its five branch locations 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 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.
BASIS OF PRESENTATION: The financial statements of K-Fed Bancorp have been
prepared in conformity with U.S. generally accepted accounting principals (GAAP)
for interim financial information and predominant practices followed by the
financial services industry, and are unaudited. In the opinion of the Company's
management, all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the financial condition and results of operations for
the interim periods included herein have been made.
The results of operations for the three and six month periods ended December 31,
2004 are not necessarily indicative of the results of operations that may be
expected for any other interim period or for the year ending June 30, 2005.
Certain information and note disclosures normally included in the Company's
annual financial statements have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes included in the
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements presented in
this quarterly report include the accounts of K-Fed Bancorp and its wholly-owned
subsidiary, Kaiser Federal Bank. All material intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES: 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 and discounts.
At December 31, 2004, there were no material changes in the Company's
significant accounting policies or critical accounting estimates from those
disclosed in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
5
NOTE 2 - CHANGE IN REPORTING ENTITY AND EXECUTION OF PLAN OF STOCK ISSUANCE
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.
On November 22, 2003, and amended on February 9, 2004, the Company's 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 approximately $4.5 million to the Bank's
employee stock ownership plan to purchase stock and incurred approximately $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 owned 39.09% of K-Fed Bancorp's common stock, and K-Fed Mutual
Holding Company owned 60.91%.
NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the stock offering, the Bank established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. The Company issued
454,940 shares of common stock to the ESOP in exchange for a ten-year note in
the amount of approximately $4.5 million. The $4.5 million loan for the ESOP
purchase was borrowed from the Company.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest payments made by the ESOP on the loan from the Company. 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. The $4.5 million loan for the ESOP purchase was borrowed from the
Company and requires quarterly payments to be made by the Bank of approximately
$139,000, which represents principal plus interest at 4.00%.
As shares are released from collateral, the Company will report compensation
expense equal to the current market price of the shares and the shares will
become outstanding for earnings-per-share (EPS) computations. Dividends on
allocated ESOP shares reduce retained earnings; dividends on unearned ESOP
shares reduce accrued interest.
NOTE 4 - EMPLOYEE STOCK COMPENSATION
The Company has implemented long-term stock-based benefit plans which enable the
Company to grant stock options and restricted stock awards to employees and
directors. Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," establishes accounting and disclosure
requirements using a fair value-based method of accounting for
6
stock-based employee compensation plans. Compensation expense related to
restricted stock awards is based upon the market value of the Company's stock on
the grant date and is recognized ratably over the required service period.
However, in accounting for stock options, as allowed under SFAS No. 123, the
Company has elected to apply the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and therefore has only adopted the disclosure requirements
of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." As such, no compensation expense was recorded on the date the options were
granted and would only have been recorded if the then current market price of
the underlying stock exceeded the exercise price.
STOCK OPTION PLAN ("SOP"). On November 16, 2004, the Company granted 275,600
incentive stock options to certain employees and 98,000 non-qualified stock
options to directors, for a total of 373,600 stock options granted. The fair
market value of the Company's common stock for purposes of determining the
exercise price of the option on the grant date was $14.50, based on the closing
price of the Company's stock as of the previous business day per the term of the
plan. The Company implemented the SOP to promote the long-term interests of the
Company and its shareholders by providing an incentive to those key employees
who contribute to the operational success of the Company. The maximum number of
options that may be issued under the SOP is 568,675. Options were granted at the
then fair market value and vest over five years. Options expire 10 years from
the date of grant and are subject to certain restrictions and limitations.
A summary of the status of the Company's stock option plan and changes during
the current fiscal year is presented below:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------------------ -------------------
Outstanding at beginning of year - $ -
Granted 373,600 14.50
Exercised - -
Forfeited - -
------------------ -------------------
Outstanding at end of year 373,600 $ 14.50
================== ===================
FY 2005
-------------------
Options exercisable at end of year -
Weighted-average fair value of options granted during year $ 5.10
Average remaining option term 9.9 Years
The fair value of options granted under the SOP is estimated on the date of
grant using the Black-Scholes option pricing valuation model with the following
assumptions:
Date of grant 11/16/04
Options granted 373,600
Estimated fair value of stock option granted $ 5.10
Assumptions used:
Risk-free interest rate 3.54%
Expected option life 5 Years
Expected stock price volatility 39.18%
Expected dividend yield 1.33%
7
If compensation costs for the SOP had been determined based on the fair value at
the option grant date, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (dollars in
thousands, except per share data):
DECEMBER 31, 2004
-----------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
------------------ -------------------
Net income as reported $ 1,113 $ 2,419
Pro forma net income 1,072 2,378
Earnings per share as reported
Basic 0.08 0.17
Diluted 0.08 0.17
Pro forma earnings per share
Basic 0.08 0.17
Diluted 0.08 0.17
At December 31, 2004, the Company had an aggregate of 195,075 options available
for future issuance under the SOP.
RECOGNITION AND RETENTION PLAN ("RRP"). The purpose of the RRP is to promote the
long-term interests of the Company and its shareholders by providing restricted
stock as a means for attracting and retaining directors and certain employees.
The Company granted restricted stock awards of 166,300 shares to its directors
and certain employees on November 16, 2004. The fair market price of the
restricted stock awards was at the $14.10 per share price on November 16, 2004
and totaled $2.3 million. These restricted stock awards vest over a five year
period, and therefore, the unamortized cost of shares not yet earned (vested) is
reported as a reduction of shareholders' equity and will be amortized ratably
over a five year period as compensation expense. Compensation expense related to
the RRP awards was $58,621 for the three and six month periods ended December
31, 2004. There were 166,300 restricted shares outstanding at quarter end.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period, adjusted for the
unallocated portion of shares held by the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position 93-6. Diluted
net income per share is calculated by adjusting the weighted average number of
shares of common stock outstanding, adjusted for the unallocated portion of
shares held by the ESOP, and to include the effects of outstanding stock awards
and stock options, if dilutive.
Prior to the conversion to a stock savings association holding company, earnings
per share are not applicable since the Bank was a mutual savings association and
no stock was outstanding. Earnings per share is not presented for the period
from July 1, 2003 (the date of conversion to a stock company) through December
31, 2003 as the earnings per share calculation for that period is not meaningful
due to the fact that all the outstanding stock of the Company was held by the
Parent and the initial stock offering closed on March 30, 2004. Computations for
basic and diluted earnings per share are provided below (dollars in thousands,
except per share data).
8
DECEMBER 31, 2004
-----------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
------------------ -------------------
Net income as reported $ 1,113 $ 2,419
Weighted average common shares outstanding 14,116,476 14,110,767
Basic earnings per share $ 0.08 $ 0.17
EARNINGS PER SHARE ASSUMING DILUTION
Net income available to common shareholders $ 1,113 $ 2,419
Weighted average common shares outstanding
Dilutive effect of stock options 1,669 -
Dilutive effect of stock awards 1,796 -
Average common shares and dilutive potential
common shares 14,119,941 14,110,767
Diluted earnings per share $ 0.08 $ 0.17
The effect of stock options and stock awards was not included in the calculation
of diluted earnings per share for the six months ended December 31, 2004 because
to do so would have been anti-dilutive.
NOTE 6 - BRANCH ACQUISITION
On September 24, 2004, the Bank acquired the Panorama City branch of Pan
American Bank. The acquisition was accounted for as a purchase and accordingly
was included in the results of operations from the date of acquisition. The
following table summarizes the estimated fair value of the assets acquired and
liabilities assumed at the date of acquisition. The Company expects that the
estimated fair values assigned to the assets acquired and liabilities assumed
may be subject to refinement as information becomes available, although such
adjustments are not expected to be significant.
Dollars in thousands
-----------------------------
Assets Acquired:
Cash $ 128
Loans 23
Other assets / prepayment credits 38
Core deposit intangible 676
-----------------------------
Total assets acquired 865
Liabilities Assumed:
Deposit accounts 60,971
Discount on certificates of deposit 206
Accrued interest payable 1
-----------------------------
Total liabilities assumed (net of assets 60,313
acquired)
Cash received from Pan American Bank 56,363
Goodwill $ 3,950
The core deposit intangible will be amortized over approximately 8 years on an
accelerated basis. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," goodwill is not
amortizable but will be subject to annual impairment testing.
9
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
In August 2004, the Company paid-off and replaced a $50 million advance from the
Federal Home Loan Bank of San Francisco with 5- $10 million advances in order to
better match the Company's debt maturity schedule with the maturities and
repricing terms of our interest-earning assets and other interest-bearing
liabilities. The prepayment penalty assessed by the Federal Home Loan Bank of
San Francisco is being amortized over the life of the new advances using the
interest method in accordance with EITF 96-19, issued by the Financial
Accounting Standards Board in 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains certain forward-looking statements
and information relating to the Company and the Bank that are based on the
beliefs of management as well as assumptions made by and information currently
available to management. In addition, in portions of this document the words
"anticipate," "believe," "estimate," "expect," "intend," "should" and similar
expressions or the negative thereof, as they relate to the Company or the Bank
or their management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company and/or the Bank with respect
to forward-looking events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND JUNE 30, 2004.
Our total assets increased by $24.7 million, or 4.2%, to $609.2 million at
December 31, 2004 from $584.4 million at June 30, 2004. The increase primarily
reflects the increase in cash and cash equivalents as a result of the
acquisition of the Panorama City branch from Pan American Bank in September
2004, partially offset by the repayment of short-term Federal Home Loan Bank of
San Francisco advances and the net outflow of deposits for the quarter,
excluding the effects of the Panorama City branch acquisition.
Cash and cash equivalents increased $12.6 million to $24.8 million at December
31, 2004 from $12.2 million at June 30, 2004. The majority of the increase is
related to federal funds sold, which increased $11.1 million to $16.4 million at
December 31, 2004 from $5.2 million at June 30, 2004. The increase will be
utilized to assist in funding loan commitments scheduled for settlement in
January 2005.
Our net loan portfolio increased $8.1 million, or 1.6%, to $504.3 million at
December 31, 2004 from $496.2 million at June 30, 2004. This increase was
primarily attributable to increases in one- to four-family and commercial real
estate loans. One-to four-family real estate loans increased $6.7 million, or
1.9% to $348.4 million at December 31, 2004 from $341.8 million at June 30, 2004
and commercial real estate loans increased $3.0 million to $29.9 million at
December 31, 2004 from $26.9 million at June 30, 2004. Slight decreases were
experienced in the consumer loan portfolio during the period; however; the
overall loan mix remained relatively constant, with real estate loans comprising
89.4% of the total loan portfolio at December 31, 2004, compared with 88.8% at
June 30, 2004.
Our investment portfolio decreased $7.3 million, or 11.7%, to $55.1 million at
December 31, 2004 from $62.4 million at June 30, 2004. The decrease is
attributable to normal repayments of principal on our mortgage-backed securities
and collateralized mortgage obligations. Liquid funds available
10
for investment purchases during the period were directed to loan originations
and purchases in our efforts to increase the overall yield on interest-earning
assets.
Total deposits increased $42.2 million, or 10.0%, to $465.2 million at December
31, 2004 from $423.0 million at June 30, 2004. This increase is primarily due to
the acquisition of $61.2 million in deposits in connection with our Panorama
City branch purchase. Excluding the Panorama City deposits, overall deposits
decreased $19.0 million, due primarily to the maturation and withdrawal of
high-rate certificates of deposit and the withdrawal of money market account
funds by customers seeking higher yielding opportunities elsewhere.
Equity increased $2.6 million to $91.7 million at December 31, 2004 from $89.1
million at June 30, 2004 primarily as a result of $2.4 million in income earned
for the six-month period ended December 31, 2004, the allocation of ESOP shares
and stock awards earned during the quarter totaling $378,000, and the decrease
in the net unrealized holding losses on securities available for sale of
$72,000. These items were partially offset by the payment of dividends of
$262,000.
11
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
For the three months ended December 31
------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------- --------------------------------------
INTEREST-EARNING ASSETS
Loans receivable(1)................. $ 495,572 $ 6,204 5.01% $ 367,304 $ 4,732 5.15%
Securities(2)....................... 56,779 486 3.42% 50,858 509 4.00%
Fed Funds .......................... 29,489 141 1.91% 115,711 112 0.39%
Federal Home Loan Bank Stock ....... 3,820 39 4.10% 2,800 - 0.00%
Interest-bearing deposits in other
financial institutions............ 5,940 47 3.16% 2,401 14 2.27%
Other interest-earning assets....... - - - 2,142 6 1.03%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets....... 591,600 6,917 4.68% 541,216 5,373 3.97%
Non-interest earning assets......... 19,398 30,296
----------- -----------
Total assets........................ $ 610,998 $ 571,512
=========== ===========
INTEREST-BEARING
LIABILITIES
Money market........................ $ 111,114 $ 346 1.25% $ 149,206 $ 432 1.16%
Savings deposits.................... 96,737 101 0.42% 132,796 121 0.36%
Certificates of deposit............. 215,061 1,682 3.13% 167,942 1,461 3.48%
FHLB advances....................... 49,588 462 3.72% 50,000 377 3.02%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities.. 472,500 2,591 2.19% 499,944 2,391 1.91%
----------- -----------
Non-interest-bearing liabilities.... 47,393 35,253
----------- -----------
Total liabilities................... 519,893 535,197
Equity.............................. 91,105 36,315
----------- -----------
Total liabilities and equity........ $ 610,998 $ 571,512
=========== ===========
Net interest/spread................. $ 4,326 2.49% $ 2,982 2.06%
=========== =========== =========== ===========
Margin(3)........................... 2.92% 2.20%
=========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities..... 125.21% 108.26%
=========== ===========
(CONTINUED)
For the six months ended December 31
------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------- --------------------------------------
INTEREST-EARNING ASSETS
Loans receivable(1)................. $ 499,282 $ 12,430 4.98% $ 374,785 $ 9,332 4.98%
Securities(2)....................... 58,524 1,006 3.44% 37,292 712 3.82%
Fed Funds .......................... 18,694 166 1.77% 73,636 163 0.44%
Federal Home Loan Bank Stock ....... 3,906 75 3.83% 2,719 28 2.04%
Interest-bearing deposits in other
financial institutions............ 4,667 63 2.69% 3,253 26 1.62%
Other interest-earning assets....... - - - 1,405 8 1.10%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets....... 585,073 13,740 4.70% 493,090 10,269 4.17%
Non-interest earning assets......... 16,891 21,651
----------- -----------
Total assets........................ $ 601,964 $ 514,741
=========== ===========
INTEREST-BEARING
LIABILITIES
Money market........................ $ 107,799 $ 648 1.20% $ 123,905 $ 851 1.37%
Savings deposits.................... 95,947 203 0.42% 111,452 282 0.51%
Certificates of deposit............. 200,921 3,203 3.19% 159,979 2,838 3.55%
FHLB advances....................... 62,903 975 3.10% 50,000 757 3.03%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities.. 467,570 5,029 2.15% 445,336 4,728 2.12%
----------- -----------
Non-interest-bearing liabilities.... 43,908 33,410
----------- -----------
Total liabilities................... 511,478 478,746
Equity.............................. 90,486 35,995
----------- -----------
Total liabilities and equity........ $ 601,964 $ 514,741
=========== ===========
Net interest/spread................. $ 8,711 2.55% $ 5,541 2.05%
=========== =========== =========== ===========
Margin(3)........................... 2.98% 2.25%
=========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities..... 125.13% 110.72%
=========== ===========
(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
12
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
AND DECEMBER 31, 2003.
GENERAL. Net income for the three months ended December 31, 2004 was $1.1
million, an increase of $298,000, or 36.6%, from the net income of $815,000 for
the three months ended December 31, 2003. The increase in net income was
primarily due to an increase in interest income of $1.5 million and a decrease
in provision for loan losses of $30,000, partially offset by increases in
interest expense of $200,000, noninterest expenses of $704,000, income taxes of
$158,000 and a decrease in noninterest income of $214,000. Earnings per basic
and diluted share were $0.08 for the three months ended December 31, 2004. No
earnings per share information is available for the three months ended December
31, 2003 as the Company's initial public offering occurred in March 2004.
INTEREST INCOME. Interest income increased by $1.5 million, or 28.7%, to $6.9
million for the three months ended December 31, 2004 from $5.4 million for the
three months ended December 31, 2003. The primary factor for the increase in
interest income was an increase in the average loans receivable balance of
$128.3 million, or 34.9%, from $367.3 million for the three months ended
December 31, 2003 to $495.6 million for the three months ended December 31,
2004. The increase was primarily due to the investment of proceeds received from
the Company's stock offering, which occurred in March 2004, in purchases of one-
to four-family and multi-family real estate loans. Interest income was
negatively impacted by the 14 basis point decrease in the average yield on loans
receivable, from 5.15% for the three months ended December 31, 2003 to 5.01% for
the three months ended December 31, 2004. This resulted from the continued
increase in real estate loans in the average loans receivable mix, which earn a
lower rate of interest than our consumer loan portfolio.
Interest income on securities decreased by $23,000 or 4.5%, to $486,000 for the
three months ended December 31, 2004, from $509,000 for the three months ended
December 31, 2003. Although the average balance of securities increased $5.9
million, the average yield on the securities investment portfolio decreased from
4.00% to 3.42%, attributable primarily to the fact that the securities recently
acquired earn a lower rate of interest than the maturing investments they
replaced.
INTEREST EXPENSE. Interest expense increased $200,000, or 8.4%, for the three
months ended December 31, 2004 to $2.6 million as compared to $2.4 million for
the three months ended December 31, 2003. Although the average balance of
interest-bearing liabilities decreased $27.4 million to $472.5 million for the
three months ended December 31, 2004 from $499.9 million for the three months
ended December 31, 2003, the average cost of our interest-bearing liabilities
increased 28 basis points from 1.91% to 2.19%. The decline in average balance
and increase in average cost is primarily due to the effects that the
announcement of the stock offering had on our deposit balances in December 2003.
The significant amount of deposits received in December 2003 from depositors
opening new accounts or adding funds to existing accounts in anticipation of the
stock offering, temporarily shifted the mix of our interest-bearing liabilities
toward non- to short maturity deposit products, which bear a lower rate of
interest. Interest expense on interest-bearing deposits increased $115,000, or
5.7% to $2.1 million for the three months ended December 31, 2004 from $2.0
million for the three months ended December 31, 2003.
Interest expense on Federal Home Loan Bank advances increased $85,000, or 22.5%
to $462,000 for the three months ended December 31, 2004 from $377,000 for the
three months ended December 31, 2003. The increase is primarily due to the
amortization of deferred costs incurred in connection with our debt
restructuring in order to better match the Company's debt maturity schedule with
the maturities and repricing terms of our interest-earning assets and other
interest-bearing liabilities.
13
PROVISION FOR LOAN LOSSES. Management assesses the allowance for loan losses on
a quarterly basis. In evaluating the level of allowance for loan losses,
management considers the types and amounts 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 latter 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,
multi-family, or commercial real estate loan, has been impaired and a loss is
probable.
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.
Our provision for loan losses decreased $30,000 to $32,000 for the three months
ended December 31, 2004 compared to $62,000 for the three months ended December
31, 2003. The allowance for loan losses as a percent of total loans was 0.45% at
December 31, 2004 as compared to 0.56% at December 31, 2003. The decrease in the
provision is primarily attributable to the continued low loan losses being
experienced by the Bank. 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. However, we have further refined our monitoring
of the real estate loan portfolio to identify loans that may be more susceptible
to loss in the event of an economic downturn in the U.S. or California economy
(e.g., interest-only loans).
NONINTEREST INCOME. Our noninterest income decreased $214,000, or 26.5%, to
$595,000 for the three months ended December 31, 2004 from $809,000 for the
three months ended December 31, 2003. The decrease is primarily the result of a
$238,000 increase in the loss on an equity investment in a tax credit fund,
partially offset by increases in ATM fees and charges.
NONINTEREST EXPENSE. Our noninterest expenses increased $704,000, or 29.4% for
the three months ended December 31, 2004 as compared to December 31, 2003. The
increase was primarily due to a $398,000 increase in salaries and benefits, a
$133,000 increase in professional services, a $38,000 increase in advertising
and promotional expenses, and a $74,000 increase in other operating expenses.
Salaries and benefits represented 55.4% and 55.1% of total noninterest expense
for the three months ended December 31, 2004 and December 31, 2003,
respectively. Total salaries and benefits increased $398,000, or 30.2%, to
14
$1.7 million for the three months ended December 31, 2004 from $1.3 million for
the three months ended December 31, 2003. The increase was primarily due to
$167,000 in ESOP compensation expense related to the establishment of the plan
in March 2004, $59,000 in compensation expense related to the allocation of
stock awards as part of the implementation of the Recognition and Retention
Plan, $65,000 related to the Panorama City branch that was acquired in September
2004, and $20,000 in increases in overall employee health benefits. The
remaining increase is primarily due to normal salary increases and the hiring of
additional employees.
Professional services increased $133,000 to $204,000 for the three months ended
December 31, 2004 from $71,000 for the three months ended December 31, 2003. The
increase was primarily due to increased audit and filing fees as a result of
increased SEC and OTS compliance and reporting requirements.
Advertising and promotional expenses increased $38,000 and other operating
expenses increased $74,000. The growth in other operating expenses was primarily
the result of increases in miscellaneous accounts related to the continued
growth of the Bank and the amortization of the core deposit intangible related
to the acquisition of the Panorama City branch in September 2004, which amounted
to $36,000 for the three months ended December 31, 2004.
INCOME TAX EXPENSE. Income tax expense for the three months ended December 31,
2004 was $678,000 compared to $520,000 for the three months ended December 31,
2003. This increase is primarily a result of an increase in pre-tax income of
$456,000. The effective tax rate was 37.9% and 39.0% for the three months ended
December 31, 2004 and 2003, respectively. The variance in the effective tax rate
for the periods is primarily attributable to the increase in tax credits
received from our investment in the tax credit fund.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
AND DECEMBER 31, 2003.
GENERAL. Net income for the six months ended December 31, 2004 was $2.4 million,
an increase of $1 million, or 73.9%, from the net income of $1.4 million for the
six months ended December 31, 2003. The increase in net income was primarily due
to an increase in interest income of $3.4 million, offset by increases in
interest expense of $301,000, noninterest expenses of $1.2 million, and income
taxes of $639,000 and a decrease in noninterest income of $249,000. Earnings per
basic and diluted share were at $0.17 for the six months ended December 31,
2004. No earnings per share information is available for the six months ended
December 31, 2003 as the Company's initial public offering occurred in March
2004.
INTEREST INCOME. Interest income increased by $3.4 million, or 33.8%, to $13.7
million for the six months ended December 31, 2004 from $10.3 million for the
six months ended December 31, 2003. The primary factor for the increase in
interest income was an increase in the average loans receivable balance of
$124.5 million, or 33.2%, from $374.8 million for the six months ended December
31, 2003 to $499.3 million for the six months ended December 31, 2004. The
increase was primarily due to the investment of proceeds received from the
Company's stock offering, which occurred in March 2004, in purchases of one- to
four-family and multi-family real estate loans. The average yield on loans
receivable remained consistent at 4.98% for both the six months ended December
31, 2004 and 2003.
Interest income on securities increased by $294,000 or 41.3%, to $1 million for
the six months ended December 31, 2004, from $712,000 for the six months ended
December 31, 2003. The increase resulted from a $21.2 million, or 56.9% increase
in the average balance of securities resulting from the purchase of additional
mortgage-backed and U.S. Government agency securities with cash received from
the Company's stock offering, which occurred in March 2004. The effects of this
increase in interest income on securities was partially offset by the decrease
in the average yield on the securities investment portfolio from 3.82% for the
six months ended December 31, 2003 to 3.44% for the six
15
months ended December 31, 2004, a decrease of 38 basis points, due mainly to the
overall decline in market interest rates at the time the new securities were
acquired.
INTEREST EXPENSE. Interest expense increased $301,000, or 6.4%, for the six
months ended December 31, 2004 to $5.0 million as compared to $4.7 million for
the six months ended December 31, 2003. The change is primarily attributable to
the increase in average deposits and a slight increase in the average interest
rate on Federal Home Loan Bank advances, offset by decreases in average interest
rates on deposits. The average interest rates on interest-bearing liabilities
increased to 2.15% for the six months ended December 31, 2004 from 2.12% for the
six months ended December 31, 2003. Average interest-bearing liabilities
increased $22.3 million, or 5.0% to $467.6 million at December 31, 2004 from
$445.3 million at December 31, 2003. The primary factor for the increase in the
overall average interest rates on interest-bearing liabilities was due to the
amortization of deferred costs incurred in connection with our debt
restructuring in order to better match the Company's debt maturity schedule with
the maturities and repricing terms of our interest-earning assets and other
interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. Our provision for loan losses increased $60,000 to
$152,000 for the six months ended December 31, 2004 compared to $92,000 for the
six months ended December 31, 2003. The allowance for loan losses as a percent
of total loans was 0.45% at December 31, 2004 as compared to 0.56% at December
31, 2003. 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. However, we have further refined our monitoring of the real estate
loan portfolio to identify loans that may be more susceptible to loss in the
event of an economic downturn in the U.S. or California economy (e.g.,
interest-only loans).
NONINTEREST INCOME. Our noninterest income decreased $249,000, or 15.4%, to $1.4
million for the six months ended December 31, 2004 from $1.6 million for the six
months ended December 31, 2003. The decrease is primarily the result of a
$280,000 increase in the loss on an equity investment in a tax credit fund,
partially offset by increases in ATM fees and charges.
NONINTEREST EXPENSE. Our noninterest expenses increased $1.2 million, or 24.7%
for the six months ended December 31, 2004 as compared to December 31, 2003. The
increase was primarily due to a $659,000 increase in salaries and benefits, a
$296,000 increase in professional services, a $59,000 increase in advertising
and promotional expenses, and a $122,000 increase in other operating expenses.
Salaries and benefits represented 54.6% and 54.4% of total noninterest expense
for the six months ended December 31, 2004 and December 31, 2003, respectively.
Total salaries and benefits increased $659,000, or 25.1%, to $3.3 million for
the six months ended December 31, 2004 from $2.6 million for the six months
ended December 31, 2003. The increase was primarily due to the $324,000 in ESOP
compensation expense related to the establishment of the plan in March 2004,
$59,000 in compensation expense related to the allocation of stock awards as
part of the implementation of the Recognition and Retention Plan, $69,000
related to the Panorama City branch that was acquired in September 2004, $59,000
in increased bonus compensation expense, and $24,000 in increases in overall
employee health benefits. The remaining increase is primarily due to normal
salary increases and the hiring of additional employees.
Professional services increased $296,000 to $464,000 for the six months ended
December 31, 2004 from $168,000 for the six months ended December 31, 2003. The
increase was primarily due to increased audit and filing fees as a result of
increased SEC and OTS compliance and reporting requirements.
Advertising and promotional expenses increased $59,000 and other operating
expenses increased $122,000. The increase in other operating expense was
16
primarily a result of increases in miscellaneous accounts related to the
continued growth of the Bank and the amortization of the core deposit intangible
related to the acquisition of the Panorama City branch in September 2004, which
amounted to $36,000 for the six-months ended December 31, 2004.
INCOME TAX EXPENSE. Income tax expense for the six months ended December 31,
2004 was $1.5 million compared to $841,000 for the six months ended December 31,
2003. This increase is primarily a result of an increase in pre-tax income of
$1.7 million. The effective tax rate was 38.0% and 37.7% for the six months
ended December 31, 2004 and 2003, respectively. The increase in the effective
tax rate for the periods is primarily attributable to the increase in pre-tax
income, partially offset by the tax credits received from our investment in the
tax credit fund.
LIQUIDITY AND COMMITMENTS
Historically, we have maintained liquid assets at levels above the levels
believed to be adequate to meet the requirements of normal operations, including
potential deposit outflows. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained. See "Consolidated Statements of
Cash Flows" contained in the Consolidated Financial Statements included in this
quarterly report.
Our liquidity, represented by cash and cash equivalents and mortgage-backed and
related securities, is a product of 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. 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 December 31, 2004, the total approved loan commitments
unfunded amounted to $23.3 million, which includes the unadvanced portion of
loans of $5.8 million, $1.2 million of in-house loan origination commitments,
and $16.3 million in commitments to purchase two pools of whole residential real
estate loans in January 2005.
Time deposits and advances from the Federal Home Loan Bank of San Francisco
scheduled to mature in one year or less at December 31, 2004, totaled $122.9
million and $10.0 million, respectively. Based on historical experience,
management believes that a significant portion of maturing deposits will remain
with Kaiser Federal Bank. We anticipate that we will continue to have sufficient
funds, through deposits and borrowings, to meet our current commitments.
At December 31, 2004, we had available additional advances from the Federal Home
Loan Bank of San Francisco in the amount of $153.3 million.
17
CAPITAL
The table below sets forth Kaiser Federal Bank's capital position relative to
its Office of Thrift Supervision capital requirements at December 31, 2004. The
definitions of the terms used in the table are those provided in the capital
regulations issued by the Office of Thrift Supervision.
Minimum Required
to Be Well
Capitalized
Under Prompt
Corrective
Actual Minimum Capital Requirements Action Provisions
--------------------------- ------------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
Total capital (to risk-
weighted assets) $ 61,925 17.10% $ 28,975 8.00% $ 36,219 10.00%
Tier 1 capital (to risk-
weighted assets) 59,653 16.47 14,487 4.00 21,731 6.00
Tier 1 (core) capital (to
adjusted tangible
assets) 59,653 10.26 23,255 4.00 29,068 5.00
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. The substantial increase in capital ratios
from the quarter ended December 31, 2003 was primarily a result of the capital
raised in the initial public offering.
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 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 noninterest 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.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 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
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. 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 quarterly.
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: (1) originating and purchasing adjustable rate loans;
(2) originating a reasonable volume of short- and intermediate-term consumer
loans; (3) managing our deposits to establish stable deposit relationships; (4)
using Federal Home Loan Bank advances, and pricing on fixed-term non-core
deposits to align maturities and repricing
19
terms, and (5) 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. In the future, we intend to continue our existing strategy of
originating and purchasing relatively short-term and/or adjustable rate loans.
The Bank does not maintain any securities for trading purposes. The Bank does
not currently engage in trading activities or use instruments such as interest
rate swaps, hedges, or other similar derivatives to control interest rate risk.
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 December 31, 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 compute to a
rate less than zero for certain products.
December 31, 2004
-----------------------------------------------------------------------------------
Change in interest Net portfolio value (NPV) NPV as % of PV of assets
rates in basis --------------------------------------------- ----------------------------------
points ("bp") (Rate
shock in rates) $ amount $ change % change NPV ratio Change(bp)
- ------------------------------- ------------ ------------ ------------ -------------- ---------------
(dollars in thousands)
+300 bp $ 49,213 $ (26,656) (35)% 8.77 % (391) bp
+200 bp 59,227 (16,642) (22) 10.31 (237)
+100 bp 68,681 (7,188) (9) 11.70 (98)
0 bp 75,869 - - 12.68 -
-100 bp 78,452 2,583 3 12.97 29
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 123, Revised, requires all public companies to record compensation cost for
stock options provided to employees in return for employee service. The cost is
measured at the fair value for the options when granted, and this cost is
expensed over the employee service period, which is normally the vesting period
of the options. This will apply to awards granted or modified after the first
quarter or year beginning after June 15, 2005. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. The
effect on results of operations will depend on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided, and so
20
cannot currently be predicted. Existing options that will vest after adoption
date are expected to result in additional compensation expense of approximately
$370,000 during the fiscal years ending June 30, 2006, 2007, 2008, and 2009 and
$139,000 for the fiscal year ending June 30, 2010. There will be no significant
effect on financial position as total equity will not change.
SFAS 151 amends inventory pricing to require expensing costs such as idle
facility expense, excess spoilage, double freight, and rehandling costs, rather
than capitalizing as part of inventory. This replaces prior guidance to expense
such costs only if they were "so abnormal" as to require expensing, and applies
for fiscal years beginning after June 15, 2005.
SFAS 152 requires real estate time-share transactions to be accounted for as
nonretail land sales, and to use the additional guidance in SOP 04-2. SOP 04-2
illustrates how to apply SFAS 66 to specific forms of real estate time-share
transactions for fiscal years beginning after June 15, 2005.
SFAS 153 modifies an exception from fair value measurement of nonmonetary
exchanges. Exchanges that are not expected to result in significant changes in
cash flows of the reporting entity are not measured at fair value. This
supersedes the prior exemption from fair value measurement for exchanges of
similar productive assets, and applies for fiscal years beginning after June 15,
2005.
SOP 03-3 requires that a valuation allowance for loans acquired in a transfer,
including in a business combination, reflect only losses incurred after
acquisition and should not be recorded at acquisition. It applies to any loan
acquired in a transfer that showed evidence of credit quality deterioration
since it was made.
The effect of these other new standards on the Company's financial position and
results of operations is not expected to be material upon and after adoption.
ITEM 4. 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 Rules 13a-15(e) or 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 Rules 13a-15(f) or 15(d)-15(f) under the Act) that occurred during
the most recent fiscal quarter that have materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders for K-Fed Bancorp was held on
October 26, 2004. At that meeting, the shareholders elected the
following persons to three-year terms to the Board of Directors:
James L. Breeden by a vote of 13,823,460 for and 54,399 withheld,
and Frank G. Nicewicz by a vote of 13,822,660 for and 55,199
withheld. Robert Steinbach, Gerald Murbach, Rita Zwern, Marilyn
Owsley, and Kay M. Hoveland also continue to serve as directors
after the meeting.
Also approved was the adoption of the K-Fed Bancorp 2004 Stock
Option Plan, by a vote of 2,979,469 for, 419,083 against,
8,896,382 abstained and 1,582,925 broker non-votes and the K-Fed
Bancorp 2004 Recognition and Retention Plan by a vote of
2,968,391 for, 425,539 against, 8,895,107 abstained and 1,588,822
broker non-votes. Included in the abstained votes are the
8,861,750 shares held by the MHC that were excluded from voting
on these proposals.
The appointment of Crowe Chizek and Company LLC as independent
auditors for the fiscal year ending June 30, 2005 was ratified by
a vote of 13,804,411 for, 44,158 against, and 29,290 abstained.
ITEM 5. OTHER INFORMATION
On October 26, 2004, K-Fed Bancorp stockholders adopted the K-Fed
Bancorp 2004 Stock Option Plan. Stock options in the amount of up
to 568,675 shares of common stock may be granted to employees and
directors of K-Fed Bancorp and employees and directors of its
wholly owned subsidiary, Kaiser Federal Bank.
Also on October 26, 2004, K-Fed Bancorp stockholders adopted the
K-Fed Bancorp 2004 Recognition and Retention Plan. This plan
provides for the award of up to 227,470 shares of common stock to
key employees and directors of K-Fed Bancorp and employees and
directors of its wholly owned subsidiary, Kaiser Federal Bank.
22
ITEM 6. EXHIBITS
10.1 K-Fed Bancorp 2004 Stock Option Plan*
10.2 K-Fed Bancorp 2004 Recognition and Retention Plan*
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
- ------------------
* Incorporated by reference to the Company's Proxy Statement
relating to the Company's October 26, 2004 annual meeting of
stockholders, originally filed by the Company with the
Commission on September 23, 2004.
23
SIGNATURES
Pursuant to the requirements 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: February 7, 2005 /s/ Kay M. Hoveland
---------------- -------------------------------------
Kay M. Hoveland
President and Chief Executive Officer
/s/ Daniel A. Cano
-------------------------------------
Daniel A. Cano
Chief Financial Officer
24