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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 MARCH 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 No X
--- ---
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 - 14,548,500 shares outstanding as of May 5,
2004.
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 March 31, 2004 and June 30, 2003 1
Consolidated Statements of Income for the
Three and Nine Months Ended March 31,
2004 and 2003 2
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2004 and 2003 3
Selected Notes to Consolidated Financial
Statements 4
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4: Controls and Procedures 13
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings 14
Item 2: Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 14
Item 3: Defaults upon Senior Securities 15
Item 4: Submission of Matters to a Vote of
Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
SIGNATURES 16
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DOLLARS IN THOUSANDS
- ----------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30,
2004 2003
---------------- ----------------
ASSETS
ASSETS
Cash and due from banks $ 3,282 $ 4,545
Federal funds sold 178,590 11,645
---------------- ----------------
Total cash and cash equivalents 181,872 16,190
Interest bearing deposits in other financial 2,970 6,437
Institutions
Held-to-maturity investments, fair value of
$50,072 and $14,373 at March 31, 2004 and
June 30, 2003, respectively 49,282 14,247
Loans 428,259 391,921
Less allowance for loan losses (2,080) (2,281)
---------------- ----------------
Loans, net 426,179 389,640
Accrued interest receivable 1,860 1,669
Premises and equipment, net 1,519 1,289
Other assets 7,287 4,281
---------------- ----------------
Total assets 670,969 433,753
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Interest Bearing $ 411,436 $ 316,120
Noninterest bearing 118,832 30,119
---------------- ----------------
Total deposits 530,268 346,239
Federal Home Loan Bank advances 50,000 50,000
Accrued expenses and other liabilities 2,413 2,119
---------------- ----------------
Total liabilities 582,681 398,358
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 2,000,000
shares authorized; issued and outstanding -
none - -
Common stock, $.01 par value; 18,000,000
authorized; 14,548,500 shares issued and
outstanding at March 31, 2004 145 -
Additional paid-in capital 55,047 -
Retained earnings 37,645 35,395
Unearned Employee Stock Ownership Plan Shares (4,549) -
---------------- ----------------
Total stockholders' equity 88,288 35,395
---------------- ----------------
Total liabilities and stockholders' equity $ 670,969 $ 433,753
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------ ----------- -----------
Interest Income
Interest and fees on loans $ 4,971 $ 4,982 $ 14,303 $ 14,037
Interest on investment securities, 492 137 1,204 431
taxable
Federal Home Loan Bank dividends 55 29 83 55
Other interest 375 123 572 564
----------- ------------ ----------- -----------
Total interest income 5,893 5,271 16,162 15,087
----------- ------------ ----------- -----------
INTEREST EXPENSE
Interest on Federal Home Loan Bank
advances 373 370 1,130 664
Interest on deposits 2,181 1,845 6,152 5,344
----------- ------------ ----------- -----------
Total interest expense 2,554 2,215 7,282 6,008
----------- ------------ ----------- -----------
NET INTEREST INCOME 3,339 3,056 8,880 9,079
Provision for loan losses 162 282 253 853
----------- ------------ ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,177 2,774 8,627 8,226
----------- ------------ ----------- -----------
NONINTEREST INCOME
Service charges and fees 460 421 1,448 1,244
ATM fees and charges 304 303 875 845
Commissions 53 46 163 177
Other noninterest income (6) 22 (62) 58
----------- ------------ ----------- -----------
Total noninterest income 811 792 2,424 2,324
----------- ------------ ----------- -----------
NONINTEREST EXPENSES
Salaries and benefits 1,354 1,315 3,983 3,938
Occupancy and equipment 320 291 967 868
ATM expense 235 261 718 739
Advertising and promotional 114 116 267 351
Professional services 98 157 265 324
Other operating expense 369 369 1,121 1,156
----------- ------------ ----------- -----------
Total noninterest expenses 2,490 2,509 7,321 7,376
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 1,498 1,057 3,730 3,174
Income tax expense 589 436 1,430 1,309
----------- ------------ ----------- -----------
NET INCOME $ 909 $ 621 $ 2,300 $ 1,865
=========== ============ =========== ===========
EARNINGS PER COMMON SHARE:
Basic n/m* n/m* n/m* n/m*
Diluted n/m* n/m* n/m* n/m*
* NOT MEANINGFUL. SEE NOTE 4
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLARS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
------------------------------------------
2004 2003
-------------------- ------------------
OPERATING ACTIVITIES
Net income $ 2,300 $ 1,865
Adjustments to reconcile net income to cash provided
by operating activities:
Amortization of net premium on investments 131 11
Amortization of premiums on loan purchases 2,238 657
Accretion of loan origination fees (77) (54)
Provision for loan losses 253 853
Depreciation and amortization 293 202
Federal Home Loan Bank stock dividend (83) (55)
Loss on equity investment 106 -
Net change in accrued interest receivable (191) (320)
Net change in other assets (253) (218)
Net changes in accrued expenses and other 294 52
liabilities
-------------------- ------------------
Net cash provided by operating activities 5,011 2,993
-------------------- ------------------
INVESTING ACTIVITIES
Purchases of held-to-maturity investments (47,813) (9,623)
Proceeds from maturities of held-to-maturity 12,647 11,693
investments
Net change in time deposits with other financial 3,467 16,842
institutions
Purchases of loans (165,913) (142,510)
Net change in loans, excluding loan purchases 126,960 19,481
Purchase of Federal Home Loan Bank stock (171) (1,479)
Purchase of equity investment (2,605) -
Purchase of premises and equipment (523) (206)
-------------------- ------------------
Net cash used in investing activities (73,951) (105,802)
-------------------- ------------------
FINANCING ACTIVITIES
Net change in Federal Home Loan Bank advances - 48,000
Net change in deposits 184,029 67,496
Net proceeds from stock issuance 50,643 -
Distribution to capitalize K-Fed Mutual Holding (50) -
Company (Parent)
-------------------- ------------------
Net Cash provided by financing activities 234,622 115,496
-------------------- ------------------
Net change in cash and cash equivalents 165,682 12,687
Cash and cash equivalents, at beginning of year 16,190 4,330
-------------------- ------------------
Cash and cash equivalents, at end of period $ 181,872 $ 17,017
==================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and Federal Home Loan Bank $ 7,290 $ 6,017
advances
Income taxes paid $ 1,291 $ 1,770
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
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 (the "Company") is a wholly 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 individuals and business customers from its four
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.
BASIS OF PRESENTATION: The financial statements of K-Fed Bancorp have been
prepared in conformity with accounting principals generally accepted in the
United States of America (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 nine month periods ended March 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, 2004.
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 a reading of the consolidated financial statements and notes
included in the Registration Statement on Form S-1 filed by the Company with the
Securities and Exchange Commission (File Number 333-111029), as amended,
initially filed on December 9, 2003, and declared effective on February 12, 2004
("Registration Statement"). Certain amounts in the interim 2003 financial
statements have been reclassified to conform to the 2004 presentation with no
effect on net income.
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 the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect amounts reported in the consolidated financial statements. 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. The Company
considers the allowance for loan losses and the amortization of loan purchase
premiums to be critical accounting estimates.
At March 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 Registration Statement.
NOTE 2 - 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
4
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%.
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.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments 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 principally from the
Bank's contributions to the ESOP over a period of ten-years. The $4.5 million
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.
NOTE 4 - 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, to include the effect of unearned restricted stock
shares and stock options, if dilutive, using the treasury stock method. At March
31, 2004, the Company had no restricted stock plan or stock option plan.
Prior to the conversion to a stock bank 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 March 31, 2004 as the
earnings per share calculation for that period is not meaningful due to the
initial stock offering closing on March 30, 2004.
5
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 MARCH 31, 2004 AND JUNE 30, 2003.
GENERAL. Our total assets increased by $237.2, or 54.7%, to $671.0 million at
March 31, 2004 from $433.8 million at June 30, 2003. The increase reflected
growth in our cash and cash equivalents, loans receivable, and securities
held-to-maturity, funded by proceeds raised from the initial public offering as
well as an increase in deposits.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased $165.7 million,
or 1,022.8%, to $181.9 million at March 31, 2004 from $16.2 million at June 30,
2003. The increase was primarily the result of the completion of the Company's
stock offering, which resulted in the receipt of $50.7 million in net proceeds
that had not been fully deployed into loans and other higher yielding assets by
the end of the quarter. Additionally, in connection with the stock offering, the
Company received additional subscriptions of $87.3 million which could not be
filled due to the stock offering being over-subscribed. As of March 31, 2004,
$86.9 million of the refund checks related to the over-subscription had not been
presented for payment. The remaining $28.1 million increase was a result of
normal transaction activity.
LOANS. Our net loan portfolio increased $36.6 million, or 9.4%, to $426.2
million at March 31, 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 a $9.6 million increase in the one-to-four family real estate
loans to $269.2 million at March 31, 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 $32.0 million, or 50.4%, to $95.5 million
at March 31, 2004 from $63.5 million at June 30, 2003, slightly offset by a $5.4
million decrease in the consumer loan portfolio from $66.4 million at June 30,
2003 to $61.0 million at March 31, 2004.
INVESTMENTS. Our investment portfolio increased $35.1 million, or 247.2%, to
$49.3 million at March 31, 2004 from $14.2 million at June 30, 2003. The
increase is attributable to the purchase of additional collateralized mortgage
obligations with cash received through significant prepayments in the one- to
four-family real estate loan portfolio and continued growth in deposits.
Interest bearing deposits in other financial institutions decreased $3.4 million
to $3.0 million from $6.4 million as a result of the maturity of time deposits.
DEPOSITS. Total deposits increased $184.1 million, or 53.2%, to $530.3 million
at March 31, 2004 from $346.2 million at June 30, 2003. $86.9 million
6
of the deposits at March 31, 2004 represent refund checks related to the
over-subscription of K-Fed Bancorp's Initial Public Offering that concluded on
March 30, 2004, which were classified as non-interest deposits at March 31,
2004. Most of the $86.9 million was withdrawn from the Bank subsequent to March
31, 2004. In addition, approximately $30.8 million remains in accounts that were
opened during the last two weeks in December 2003, when potential investors were
attempting to establish subscription rights for the stock offering, which is
also expected to be withdrawn from the Bank. Excluding the growth caused by the
two above-mentioned factors, the increase in deposits is reduced to $66.4
million, representing a 19.1% increase over total deposits as of June 30, 2003.
Increases were experienced among all deposit accounts, with the most significant
increases occurring in certificates of deposits, which increased $40.4 million,
or 27.7%, to $186.3 million at March 31, 2004 from $145.9 million at June 30,
2003 and money market accounts, which increased $35.8 million, or 40.9%, to
$123.4 million at March 31, 2004, from $87.6 million at June 30, 2003. Influx of
deposits deemed to be only attributable to the stock offering, which contributed
to the large increase in non-interest deposits, were invested in short-term
Federal Funds, while deposits attributable to normal growth were utilized to
support loan growth and fund loan pool purchases.
EQUITY. Equity increased $52.9 million to $88.3 million at March 31, 2004 from
$35.4 million at June 30, 2003 as a result of net proceeds of $50.7 million
raised through the initial public offering completed on March 30, 2004. This was
supplemented by $2.3 million of net income earned for the nine months ended
March 31, 2004, and partially offset by a $50,000 distribution made in order to
capitalize K-Fed Mutual Holding Company, the parent company of K-Fed Bancorp.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND MARCH 31, 2003.
GENERAL. We had net income of $909,000 and $621,000 for the three months ended
March 31, 2004 and 2003, respectively. The increase of $288,000 was primarily
due to an increase in net interest income of $283,000, a decrease in the
provision for loan losses of $120,000, and partially offset by an increase in
income taxes of $153,000.
INTEREST INCOME. Interest income increased by $622,000, or 11.8% to $5.9 million
for the three months ended March 31, 2004 from $5.3 million for the three months
ended March 31, 2003.
Interest income on securities increased by $355,000, or 259.1%, to $492,000 for
the three months ended March 31, 2004, from $137,000 for the three months ended
March 31, 2003. The increase resulted from a $40.6 million, or 351.1% increase
in the average balance of securities attributable to the purchase of additional
collateralized mortgage obligations with cash received through significant
prepayments in the one- to four-family real estate loan portfolio and continued
growth in deposits. The increase was offset by the decline in the average yield
on the securities investment portfolio from 4.73% for the three months ended
March 31, 2003 to 3.77% for the three months ended March 31, 2004, a decline of
96 basis points.
The largest component of other interest income, interest income from federal
funds sold, increased $259,000, or 294.3%, to $347,000 for the three months
ended March 31, 2004 from $88,000 for the three months ended March 31, 2003. The
increase resulted from an increase in the average balance of federal funds sold
of $150.4 million, which was due to the short-term investment of stock
subscription proceeds, slightly offset by the decrease in the overall federal
funds rate.
Although the average balance of loans receivable increased $67.4 million, or
20.4%, to $397.4 million for the three months ended March 31, 2004 from $330.0
million for the three months ended March 31, 2003, a low interest rate
environment during the three months ended March 31, 2004, as compared to March
7
31, 2003 offset increases in average loans resulting in interest earned on total
loans remaining steady at $5.0 million for each quarter. The average yield on
loans was 5.00% for the three months ended March 31, 2004 as compared to 6.04%
for the three months ended March 31, 2003.
INTEREST EXPENSE. Interest expense increased $339,000, or 15.3%, for the three
months ended March 31, 2004 to $2.6 million as compared to $2.2 million for the
three months ended March 31, 2003. The change is primarily attributable to the
significant increase in deposits, partially offset by lower interest rates. The
average interest rates on interest-bearing liabilities decreased to 1.84% for
the three months ended March 31, 2004 from 2.76% for the three months ended
March 31, 2003. Average interest-bearing liabilities increased 73.3% to $555.8
million at March 31, 2004 from $320.7 million at March 31, 2003.
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,
multifamily, 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 $120,000 to $162,000 for the three
months ended March 31, 2004 compared to $282,000 for the three months ended
March 31, 2003. The allowance for loan losses as a percent of total loans was
0.49% at March 31, 2004 as compared to 0.60% at March 31, 2003. The decrease in
the provision is primarily attributable to the significant shift in the loan
portfolio mix from consumer loans to real estate secured 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.
NONINTEREST INCOME. Our noninterest income increased $19,000, or 2.4%, to
$811,000 for the three months ended March 31, 2004 from $792,000 for the three
months ended March 31, 2003. The increase is primarily the result of an
8
increase in customer service fees on deposit accounts of $39,000. Customer
service fees increased as a result of increased returned item fees. This
increase was partially offset by a $24,000 loss on an equity investment in a tax
credit fund.
NONINTEREST EXPENSE. Our noninterest expenses decreased $19,000 for the three
months ended March 31, 2004 as compared to March 31, 2003. The decrease was
primarily due to $59,000 of additional professional and outside fees incurred in
the quarter-ended March 31, 2003 in connection with the Bank's mutual holding
company reorganization. This decrease was partially offset by a $39,000 increase
in salaries and benefits, primarily due to salary increases, bonuses, and
vacation accruals.
INCOME TAX EXPENSE. Income tax expense for the three months ended March 31, 2004
was $589,000 compared to $436,000 for the three months ended March 31, 2003.
This increase is primarily a result of an increase in pre-tax income of
$441,000, offset by tax credits received through the Bank's equity investment in
a tax credit fund. The effective tax rate was 39.3% and 41.2% for the three
months ended March 31, 2004 and 2003, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND
2003.
GENERAL. We had net income of $2.3 million for the nine months ended March 31,
2004 and $1.9 million for the nine months ended March 31, 2003. The increase of
$435,000 resulted from factors discussed below.
INTEREST INCOME. Interest income increased by $1.1 million, or 7.1%, to $16.2
million for the nine months ended March 31, 2004 from $15.1 million for the nine
months ended March 31, 2003.
Interest income on investment securities increased $773,000, or 179.4%, to $1.2
million for the nine months ended March 31, 2004 from $431,000 for the nine
months ended March 31, 2003. The change was a result of an increase in the
average balance of the portfolio of $28,2 million to $41.5 million for the nine
months ended March 31, 2004 from $13.1 million for the nine months ended March
31, 2003, which was attributable to the purchase of additional collateralized
mortgage obligations with cash received through significant prepayments in the
one- to four-family real estate loan portfolio and continued growth in deposits.
The effects on interest income of the average balance increase was partially
offset with a decrease in the overall average yield of 44 basis points from
4.31% to 3.87% for the comparable periods.
Interest income on loans increased $266,000, or 1.9%, to $14.3 million for the
nine months ended March 31, 2004 from $14.0 million for the nine months ended
March 31, 2003. Although the average balance of loans increased $97.6 million,
or 34.1%, to $383.4 million for the nine months ended March 31, 2004 from $285.9
million for the nine months ended March 31, 2003, the average yield on total
loans decreased 158 basis points from 6.55% to 4.97% for the comparable periods,
primarily due to high level of prepayments experienced in our one-to-four family
residential real estate loan portfolio that resulted in faster than anticipated
premium amortizations and the acquisition of replacement loans at a time when
the market was experiencing a general decrease in the market rates of interest.
INTEREST EXPENSE. The increase in interest expense of $1.3 million for the nine
months ended March 31, 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 $19.5 million to $50.0 million for
the nine months ended March 31, 2004 from $30.5 million for the nine months
ended March 31, 2003. This created an increase in Federal Home Loan Bank
interest costs of $466,000. Average time deposits increased by $58.0 million to
$167.1 million for the nine months ended March 31, 2004 from $109.0 million for
the nine months ended March 31, 2003. This contributed to a $861,000 increase in
deposit interest costs.
9
In aggregate, interest-bearing liabilities increased $174.0 million, or 62.1%,
from $280.0 million for the nine months ended March 31, 2003 to $454.0 million
for the nine months ended March 31, 2004. However, over this same time period,
the average rate on interest-bearing liabilities decreased 72 basis points from
2.86% to 2.14, due primarily to the liability mix changing with lower market
rates of interest on 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. Deposit growth that management identified as being primarily due to
over-subscriptions during the stock were maintained in short-term cash
equivalent accounts in anticipation of their withdrawal.
PROVISION FOR LOAN LOSSES. The provision for loan losses made during the nine
months ended March 31, 2004 totaled $253,000, a decrease of $600,000 from the
provision for loan losses made during the nine months ended March 31, 2003. The
allowance for loan losses as a percent of total loans was 0.49% at March 31,
2004 as compared to 0.60% at March 31, 2003. This decrease is due to the growth
in loans being primarily in real estate secured loans, which in our experience
have historically maintained a lower rate of loss than consumer loans.
NONINTEREST INCOME. Noninterest income increased to $2.4 million from $2.3
million for the nine months ended March 31, 2004 and 2003, respectively. The
increase is primarily the result of a $204,000 increase in customer service
charges and fees. Customer service charges increased as a result of changing our
fee structure with regards to excessive withdrawals on savings accounts as well
as increased return item fees. This increase was partially offset by a $106,000
loss on an equity investment in a tax credit fund.
NONINTEREST EXPENSES. Noninterest expenses decreased $55,000, or 0.1%, to $7.3
million for the nine months ended March 31, 2004 compared to $7.4 million for
the nine months ended March 31, 2003. This decrease is primarily due to $59,000
of additional professional and outside fees incurred in the nine months ended
March 31, 2003 in connection with the Bank's mutual holding company
reorganization.
INCOME TAX EXPENSE. Income tax expense for the nine months ended March 31, 2004
was $1.4 million compared to $1.3 million for the nine months ended March 31,
2003. This represented tax expense to pre-tax income of 38.3% for the nine
months ended March 31, 2004 and 41.2% for the nine months ended March 31, 2003.
The decrease in the tax expense percentage is a result of $93,000 in estimated
tax credits from an equity investment in a tax credit fund for the nine months
ended March 31, 2004.
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 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.
See "Consolidated Statements of Cash Flows" contained in the Consolidated
Financial Statements included in this document.
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
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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 March 31, 2004, the total approved loan commitments
unfunded amounted to $50.8 million, which includes the unadvanced portion of
loans of $6.1 million, a $4.7 million commitment to purchase a pool of whole
residential real estate loans in April 2004, and a $40.0 million commitment to
purchase a pool of whole residential real estate loans in May 2004. The Company
also has a $21.9 million commitment to purchase investment securities (U.S.
Government Agency Bonds and Mortgage-Backed Pass-Through Securities), with $16.4
million to be funded in April 2004 and $5.5 million to be funded in May 2004.
Time deposits and advances from the Federal Home Loan Bank of San Francisco
scheduled to mature in one year or less at March 31, 2004, totaled $94.8 million
and $0, respectively. Based on historical experience, management believes that a
significant portion of maturing deposits will remain with Kaiser Federal Bank,
except for the large influx of deposits associated with the stock subscription,
discussed above. Kaiser Federal Bank anticipates that we will continue to have
sufficient funds, through deposits and borrowings, to meet our current
commitments.
At March 31, 2004, we had available additional advances from the Federal Home
Loan Bank of San Francisco in the amount of $139.9 million.
CAPITAL
The table below sets forth Kaiser Federal Bank's capital position relative to
its Office of Thrift Supervision capital requirements at March 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
Minimum Capital Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-
weighted assets) $62,729 19.44% $25,819 8.00% $32,274 10.00%
Tier 1 capital (to risk-
weighted assets) 60,649 18.79 12,909 4.00 19,364 6.00
Tier 1 (core) capital (to
adjusted tangible asets) 60,649 10.81 22,445 4.00 28,057 5.00
11
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.
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
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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 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: (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 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 derivative instruments in a
material amount to control interest rate risk.
There has not been any material change in the market risk disclosures contained
in the Company's Registration Statement on Form S-1, dated February 12, 2004.
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) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
13
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Use of Proceeds. On March 30, 2004, the Company completed an offering
of securities registered pursuant to the Securities Act of 1933, as
amended. In connection therewith:
1. The effective date of the registration statement on Form S-1, as
amended (File No. 333-111029) was February 12, 2004.
2. The offering of securities was not underwritten. Keefe, Bruyette, &
Wood, Inc. acted as marketing agent.
3. The class of securities registered was common stock, $0.01 par
value per share. The amount of such securities registered was
5,686,750 shares at an offering price of $10.00 per share. The
offering terminated on March 30, 2004 with the sale of 5,686,750
shares at a price of $10.00 per share. 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 Bancorp owns 60.91%.
4. The total offering expenses incurred by the Company were
approximately $1.7 million, none of which were paid directly or
indirectly to directors or officers of the Company or their
associates. A breakdown of the fees by type is as follows
(dollars in thousands):
Marketing agent commission and expenses $725
Other fees 950
------
Total fees $1,675
5. Gross proceeds of the offering were $56.9 million. The Company
loaned $4.5 million to the Bank's employee stock ownership plan to
purchase stock in the offering and incurred $1.7 million of
expenses associated with the offering resulting in net proceeds of
$50.7 million. One-half of the net proceeds were invested in the
Bank and the remaining amount is invested in overnight federal
funds earning interest while awaiting deployment into other
interest-earning assets. These uses of proceeds do not represent a
material change in the use of proceeds, described in the Company's
prospectus dated February 12, 2004.
14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Charter of K-Fed Bancorp (1)
3.2 Bylaws of K-Fed Bancorp (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
(b) Reports on Form 8-K
During the quarter ended March 31, 2004, the Company filed a report on
Form 8-K, dated March 31, 2004, to report the completion of its minority stock
offering.
---------------
(1) Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-111029), and incorporated
herein by reference
15
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: May 5, 2004 /s/ Kay M. Hoveland
----------------- ------------------------------------
Kay M. Hoveland
President and Chief Executive Officer
/s/ Daniel A. Cano
------------------------------------
Daniel A. Cano
Chief Financial Officer
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