Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 000-50592
K-FED BANCORP
(Exact name of registrant as specified in its charter)
Federal 20-0411486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1359 N. Grand Avenue Covina, CA 91724
(Address of principal executive office) (Zip Code)
(800)524-2274
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value per share.
Indicate by check whether the registrant: (1)has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 2003 was zero. There were 14,548,500 shares of the
registrant's common stock, $.01 par value per share, outstanding at August 31,
2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2004 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
K-FED BANCORP
Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2004
Table of Contents
Page
----
Part I.
Item 1. Business. 2
Item 2. Properties. 37
Item 3. Legal Proceedings. 37
Item 4. Submission of Matters to a Vote of Security Holders. 37
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities. 38
Item 6. Selected Financial Data. 39
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 53
Item 8. Financial Statements and Supplementary Data. 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 55
Item 9A. Controls and Procedures. 56
Item 9B. Other Information 56
Part III.
Item 10. Directors and Executive Officers of the Registrant. 56
Item 11. Executive Compensation. 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. 57
Item 13. Certain Relationships and Related Transactions. 57
Item 14. Principal Accountant Fees and Services. 57
Part IV.
Item 15. Exhibits and Financial Statement Schedules. 57
1
Part I.
Item 1. Business.
General
K-Fed Bancorp (or the "Company") is a federally-chartered stock
corporation that was formed in July 2003 as a wholly-owned subsidiary of K-Fed
Mutual Holding Company, a federally-chartered mutual holding company, in
connection with the mutual holding company reorganization of Kaiser Federal Bank
(or the "Bank"), a federally chartered stock savings association. Upon
completion of the mutual holding company reorganization in July 2003, the
Company acquired all of the capital stock of the Bank. On March 30, 2004, the
Company completed a minority stock offering in which it sold 5,686,750 shares,
or 39.09%, of its outstanding common stock to eligible depositors of the Bank in
a subscription offering. The remaining 8,861,750 outstanding shares of the
Company are owned by K-Fed MHC.
K-Fed Mutual Holding Company is a federally-chartered mutual holding
company and is subject to regulation by the Office of Thrift Supervision. K-Fed
Mutual Holding Company's principal assets are its investment in K-Fed Bancorp
and approximately $50,000 in cash. So long as K-Fed Mutual Holding Company is in
existence, it will at all times own at least a majority of the outstanding
common stock of K-Fed Bancorp.
At June 30, 2004, K-Fed Bancorp had total assets of $584.4 million,
total deposits of $423.0 million and total shareholders' equity of $89.1
million. The Company's business activities generally are limited to passive
investment activities and oversight of our investment in the Bank. Unless the
context otherwise requires, all references to the Company include the Bank and
the Company on a consolidated basis.
The Bank is a community oriented financial institution offering a
variety of financial services to meet the needs of the communities we serve. We
are headquartered in Covina, California, with a branch in Pasadena to serve Los
Angeles County, a branch in Fontana to serve San Bernardino and Riverside
Counties, and a branch in Santa Clara to serve Santa Clara County.
The Bank began operations as a credit union in 1953 when we were formed
as Kaiser Foundation Hospital Employees Federal Credit Union. The credit union
initially served the employees of the Kaiser Foundation Hospital in Los Angeles,
California. As the Kaiser Permanente Medical Care Program evolved so did the
credit union and in 1972 it changed its name to Kaiser Permanente Federal Credit
Union. The credit union grew to primarily serve Kaiser employees and physicians
who worked or lived in California between the Mexican border in the south and
San Francisco County to the north. The credit union serviced members with two
branches, Pasadena and Santa Clara and a network of 30 ATMs primarily located in
Kaiser medical centers. However, as a credit union, the credit union was legally
restricted to serve only individuals who shared a "common bond" such as a common
employer.
After receiving the necessary regulatory and membership approvals, on
November 1, 1999, Kaiser Permanente Federal Credit Union converted to a federal
mutual savings association known as Kaiser Federal Bank which serves the general
public as well as Kaiser employees.
2
On July 1, 2003, we completed our conversion from a federal mutual
savings association to a federal stock savings association in conjunction with
the mutual holding company reorganization.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and to a
lesser extent, multi-family residential loans and commercial real estate loans.
We also originate automobile and other consumer loans. Historically, we have not
made commercial business loans or construction loans. We obtain loans through
our staff, as well as through advertising in various publications.
Our revenues are derived principally from interest on loans and
mortgage-backed and related securities. We also generate revenue from service
charges and other income.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, demand deposit accounts and time deposit accounts with varied terms
ranging from 90 days to five years. We solicit deposits in our primary market
area of San Diego, Los Angeles, San Bernardino and Santa Clara Counties,
California.
Available Information
Our Internet address is www.k-fed.com. We make available free of charge,
through our web site, annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. All SEC
filings of the Company are also available at the SEC's website, www.sec.gov.
Market Area
Our expansive market area provides a large, increasing base of potential
customers with per capita income levels favorable to the national average. Los
Angeles County's economy has improved dramatically since the mid 1990's as a
result of extensive overhauling and restructuring of the region's basic economic
sectors. This base consists of a diversified mix of high-technology commercial
endeavors, by-products of the defense related industries, which capitalized on
the highly educated and skilled labor force. Emerging growth areas include
telecommunications, electronics, computers, software and biomedical technologies
as well as international trade. The western portion of the San Bernardino and
Riverside Counties are adjacent to higher housing cost areas of Los Angeles,
Orange and San Diego Counties and are a magnet for new residents seeking
affordable housing as well as many local business operations. Manufacturing,
transportation and distribution companies provide thousands of jobs in this
area. Santa Clara County is in the "Silicon Valley" where high technology
industries have down sized. However, the per capita income well exceeds the
state and national average.
Competition
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings
3
institutions, commercial banks, credit unions and mortgage bankers. Other
savings institutions, commercial banks, credit unions and finance companies
provide vigorous competition in consumer lending. We also face competition from
other lenders and investors with respect to loans that we purchase.
We attract all of our deposits through our branch and ATM network.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions, as well as mutual funds and other
alternative investments. We compete for these deposits by offering superior
service and a variety of deposit accounts at competitive rates. As of June 30,
2004, we believe that we hold less than 0.14% of the deposits in our primary
market area.
Lending Activities
General. We originate and purchase one- to four-family and multi-family
residential loans and to a lesser extent we originate and purchase commercial
real estate loans. We also originate consumer loans, primarily automobile loans.
Our loans carry either a fixed or an adjustable rate of interest. Consumer loans
are generally short term and amortize monthly or have interest payable monthly.
Mortgage loans generally have a longer term amortization, with maturities up to
30 years, depending upon the type of property with principal and interest due
each month. We also have loans in our portfolio that require only interest
payments on a monthly basis. At June 30, 2004, our net loan portfolio totaled
$496.2 million, which constituted 84.9% of our total assets. Approximately 61%
of our loan portfolio consists of purchased loans. We underwrite each purchased
loan, however, in accordance with our underwriting standards.
At June 30, 2004, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities under applicable regulations
was $9.6 million. At June 30, 2004, we had no loans or group of loans to related
borrowers with outstanding balances in excess of this amount. Our five largest
lending relationships at June 30, 2004 were as follows: (1) a $1.8 million loan
to purchase a 22-unit apartment building, (2) a $1.7 million loan to refinance
an office building, (3) a $1.6 million loan to purchase a 24 unit apartment
building, (4) a $1.4 million loan to purchase a shopping center, and (5) a $1.4
million loan to refinance a manufacturing facility.
4
The following table presents information concerning the composition of
Kaiser Federal Bank's loan portfolio in dollar amounts and in percentages as of
the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
REAL ESTATE
One- to four-family................... $ 341,776 68.82% $ 259,563 66.64% $ 145,383 61.03%
Commercial............................ 26,879 5.41 21,266 5.46 7,585 3.18
Multi-family.......................... 72,519 14.60 42,275 10.85 20,345 8.55
----------- --------- ----------- --------- ----------- ---------
Total real estate loans............ 441,174 88.83 323,104 82.95 173,313 72.76
OTHER LOANS
Consumer:
Automobile............................. 47,359 9.54 56,872 14.60 51,947 21.81
Home equity............................ 437 0.08 664 0.17 1,735 0.73
Other.................................. 7,675 1.55 8,878 2.28 11,202 4.70
----------- --------- ----------- --------- ----------- ---------
Total other loans................... 55,471 11.17 66,414 17.05 64,884 27.24
----------- --------- ----------- --------- ----------- ---------
Total loans......................... 496,645 100.00% 389,518 100.00% 238,197 100.00%
========= ========= =========
Less:
Net deferred loan originations
fees (costs)...................... (332) (354) (219)
Premiums on purchased loans......... 2,221 2,757 680
Allowance for loan losses........... (2,328) (2,281) (1,744)
----------- ----------- -----------
Total loans receivable, net...... $ 496,206 $ 389,640 $ 236,914
=========== =========== ===========
(continued)
AT JUNE 30,
-----------------------------------------------
2001 2000
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- ---------
REAL ESTATE
One- to four-family................... $ 71,824 50.62% $ 55,665 47.80%
Commercial............................ - - - -
Multi-family.......................... - - - -
----------- --------- ----------- ---------
Total real estate loans............ 71,824 50.62 55,665 47.80
OTHER LOANS
Consumer:
Automobile............................. 54,548 38.44 45,147 38.77
Home equity............................ 1,880 1.32 1,167 1.00
Other.................................. 13,648 9.62 14,466 12.43
----------- --------- ----------- ---------
Total other loans................... 70,076 49.38 60,780 52.20
----------- --------- ----------- ---------
Total loans......................... 141,900 100.00% 116,445 100.00%
========= ==========
Less:
Net deferred loan originations
fees (costs)...................... (49) (14)
Premiums on purchased loans......... 163 -
Allowance for loan losses........... (1,175) (863)
----------- -----------
Total loans receivable, net...... $ 140,839 $ 115,568
=========== ===========
5
The following table shows the composition of Kaiser Federal Bank loan
portfolio by fixed- and adjustable-rate at the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
FIXED RATE
REAL ESTATE
One- to four-family................... $ 82,104 16.53% $ 72,798 18.69% $ 71,734 30.12%
----------- --------- ----------- --------- ----------- ---------
Total real estate loans............. 82,104 16.53 72,798 18.69 71,734 30.12
OTHER LOANS
Consumer:
Automobile............................ 47,359 9.54 56,872 14.60 51,941 21.80
Other................................. 6,459 1.30 7,530 1.93 9,607 4.03
----------- --------- ----------- --------- ----------- ---------
Total other loans................... 53,818 10.84 64,402 16.53 61,548 25.83
----------- --------- ----------- --------- ----------- ---------
Total fixed-rate loans............ 135,922 27.37 137,200 35.22 133,282 55.95
----------- --------- ----------- --------- ----------- ---------
ADJUSTABLE RATE
REAL ESTATE
One- to four-family................... 259,672 52.29 186,765 47.95 73,649 30.93
Commercial............................ 26,879 5.41 21,266 5.46 7,585 3.18
Multi-family.......................... 72,519 14.60 42,275 10.85 20,345 8.54
----------- --------- ----------- --------- ----------- ---------
Total real estate loans............. 359,070 72.30 250,306 64.26 101,579 42.65
OTHER LOANS
Consumer:
Automobile............................ - 0.00 - 0.00 6 0.00
Home equity........................... 437 0.09 664 0.17 1,735 0.73
Other................................. 1,216 0.24 1,348 0.35 1,595 0.67
----------- --------- ----------- --------- ----------- ---------
Total other loans................... 1,653 0.33 2,012 0.52 3,336 1.40
----------- --------- ----------- --------- ----------- ---------
Total adjustable-rate loans....... 360,723 72.63 252,318 64.78 104,915 44.05
----------- --------- ----------- --------- ----------- ---------
Total loans....................... 496,645 100.00% 389,518 100.00% 238,197 100.00%
========= ========= =========
Less:
Net deferred loan originations
fees (costs).................... (332) (354) (219)
Premiums on purchased loans....... 2,221 2,757 680
Allowance for loan losses......... (2,328) (2,281) (1,744)
----------- ----------- -----------
Total loans receivable, net.... $ 496,206 $ 389,640 $ 236,914
=========== =========== ===========
(continued)
AT JUNE 30,
-----------------------------------------------
2001 2000
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- --------- ----------- ---------
FIXED RATE
REAL ESTATE
One- to four-family................... $ 64,659 45.57% $ 54,684 46.96%
----------- --------- ----------- ---------
Total real estate loans............. 64,659 45.57 54,684 46.96
OTHER LOANS
Consumer:
Automobile............................ 54,536 38.43 45,120 38.75
Other................................. 11,497 8.10 9,051 7.77
----------- --------- ----------- ---------
Total other loans................... 66,033 46.53 54,171 46.52
----------- --------- ----------- ---------
Total fixed-rate loans............ 130,692 92.10 108,855 93.48
----------- --------- ----------- ---------
ADJUSTABLE RATE
REAL ESTATE
One- to four-family................... 7,165 5.05 981 0.84
Commercial............................ - 0.00 - 0.00
Multi-family.......................... - 0.00 - 0.00
Total real estate loans............. 7,165 5.05 981 0.84
OTHER LOANS
Consumer:
Automobile............................ 12 0.01 27 0.03
Home equity........................... 1,880 1.32 1,167 1.00
Other................................. 2,151 1.52 5,415 4.65
----------- --------- ----------- ---------
Total other loans................... 4,043 2.85 6,609 5.68
Total adjustable-rate loans....... 11,208 7.90 7,590 6.52
----------- --------- ----------- ---------
Total loans....................... 141,900 100.00% 116,445 100.00%
========= =========
Less:
Net deferred loan originations
fees (costs).................... (49) (14)
Premiums on purchased loans....... 163 -
Allowance for loan losses......... (1,175) (863)
----------- -----------
Total loans receivable, net.... $ 140,839 $ 115,568
=========== ===========
6
LOAN MATURITY AND REPRICING. The following schedule illustrates certain
information at June 30, 2004 regarding the dollar amount of loans maturing in
Kaiser Federal Bank's portfolio based on their contractual terms to maturity,
but does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Loan balances do not include undisbursed
loan proceeds, unearned discounts, unearned income and allowance for loan
losses.
REAL ESTATE
--------------------------------------
ONE-TO CONSUMER - CONSUMER -
FOUR-FAMILY COMMERICAL MULTI-FAMILY AUTOS OTHER (2) TOTAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
At
June 30,
- ---------------------------
Within 1 year (1)........... $ - $ - $ 8 $ 1,068 $ 4,286 $ 5,362
After 1 year:
After 1 Year through 3
Years.................... 77 - 122 13,166 972 14,337
After 3 Years through
5 Years.................. 220 - 19 32,626 449 33,314
After 5 Years through
10 Years................. 6,838 26,369 3,200 499 2,305 39,211
After 10 Years through
15 Years................. 37,494 510 46,809 - 100 84,913
Over 15 years............. 297,147 - 22,361 - - 319,508
------------ ------------ ------------ ------------ ------------ ------------
Total due after 1 year...... 341,776 26,879 72,511 46,291 3,826 491,283
------------ ------------ ------------ ------------ ------------ ------------
Total....................... $ 341,776 $ 26,879 $ 72,519 $ 47,359 $ 8,112 $ 496,645
============ ============ ============ ============ ============ ============
- ------------------------
(1) Includes demand loans and loans having no stated maturity.
(2) Includes home equity loans.
7
The following table illustrates certain information at June 30, 2004
regarding the dollar amount of loans maturing in Kaiser Federal Bank's portfolio
based on their contractual terms to maturity, but does not include scheduled
payments or potential prepayments. Loans that have adjustable or renegotiable
interest rates are shown as maturing in the period during which the loan
reprices. Demand loans, loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loan losses.
REAL ESTATE
--------------------------------------
ONE-TO CONSUMER - CONSUMER -
FOUR-FAMILY COMMERICAL MULTI-FAMILY AUTOS OTHER (2) TOTAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
At
June 30,
- ---------------------------
Within 1 year (1)........... $ 9,933 $ 4,601 $ 23,824 $ 1,068 $ 4,286 $ 43,712
After 1 year:
After 1 Year through
3 Years................. 126,830 7,198 32,512 13,166 972 180,678
After 3 Years through
5 Years................. 123,141 15,080 16,183 32,626 449 187,479
After 5 Years through
10 Years................ 6,838 - - 499 2,305 9,642
After 10 Years through
15 Years................ 37,126 - - - 100 37,226
Over 15 years............. 37,908 - - - - 37,908
------------ ------------ ------------ ------------ ------------ ------------
Total due after 1 year...... 331,843 22,278 48,695 46,291 3,826 452,933
------------ ------------ ------------ ------------ ------------ ------------
Total....................... $ 341,776 $ 26,879 $ 72,519 $ 47,359 $ 8,112 $ 496,645
============ ============ ============ ============ ============ ============
- ---------------------------
(1) Includes demand loans and loans having no stated maturity.
(2) Includes home equity loans.
8
The following tables set forth the dollar amount of all loans due after
June 30, 2005, which have fixed interest rates and adjustable interest rates.
DUE AFTER JUNE 30, 2005
----------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ------------- -------------
(Dollars in Thousands)
REAL ESTATE LOANS
One-to four-family.............. $ 82,104 $ 259,672 $ 341,776
Commercial...................... - 26,879 26,879
Multi-family.................... - 72,511 72,511
------------ ------------- -------------
Total real estate loans....... 82,104 359,062 441,166
------------ ------------- -------------
OTHER LOANS
Consumer:
Automobile...................... 46,291 - 46,291
Home Equity..................... - 34 34
Other Loans..................... 3,792 - 3,792
------------ ------------- -------------
Total other loans............. 50,083 34 50,117
------------ ------------- -------------
Total loans....................... $ 132,187 $ 359,096 $ 491,283
============ ============= =============
Of the $496.6 million in total loans at June 30, 2004, approximately
$135.9 million have fixed rates of interest and approximately $360.7 million
have adjustable rates of interest.
One- to Four-Family Residential Lending. At June 30, 2004, one- to
four-family residential mortgage loans totaled $341.8 million, or 68.8%, of our
gross loan portfolio. We generally underwrite our one- to four-family loans
based on the applicant's employment and credit history and the appraised value
of the subject property. Presently, we lend up to 80% of the lesser of the
appraised value or purchase price for one- to four-family residential loans.
Should we grant a loan with a loan-to-value ratio in excess of 80%, we require
private mortgage insurance in order to reduce our exposure below 80%. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements. We currently retain
in our portfolios all single-family loans we originate. Approximately 64.6% of
our one- to-four family residential portfolio was purchased within the past
fiscal year.
We currently originate one- to four-family mortgage loans on a
fixed-rate and adjustable-rate basis. Our pricing strategy for mortgage loans
includes setting interest rates that are competitive with other local financial
institutions and consistent with our internal needs. Adjustable-rate loans are
tied to a variety of indices including a rate based on U. S. Treasury securities
adjusted to a constant maturity of one year and the average of U.S. Treasury
securities adjusted to a constant maturity of one year over the previous 12
month period. A majority of our adjustable rate loans carry an initial fixed
rate of interest for either three or five years which then converts to an
interest rate that is adjusted annually based upon the applicable index. Our
home mortgages are structured with a five to thirty year maturity, with
amortizations up to a 30 year period. All of our one- to-four family loans
originated or purchased are secured by properties located in California.
All our real estate loans contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property. The loans originated or
9
purchased by us are underwritten and documented pursuant to Freddie Mac or
Fannie Mae guidelines. See "- Loan Originations, Purchases, Sales and
Repayments." See "- Asset Quality - Non-Performing Assets" and "Asset Quality -
Classified Assets."
Adjustable rate loan mortgages generally pose different credit risks
than fixed-rate loans, primarily because as interest rates rise, the borrower's
payment rises, increasing the potential for default. The Company has not
experienced significant delinquencies for these loans. However, the majority of
these loans have been purchased or originated within the past three years. See "
- - Asset Quality - Non-Performing Assets" and " - Classified Assets." At June 30,
2004, our one-to four-family ARM loan portfolio totaled $259.7 million, or 52.3%
of our gross loan portfolio. At that date, the fixed-rate one-to-four-family
mortgage loan portfolio totaled $82.1 million, or 16.5% of the Company's gross
loan portfolio.
In addition, the Company has purchased adjustable-rate interest-only
mortgage loans. As of June 30, 2004, the Company's one- to four-family
interest-only ARM loans totaled $84.3 million, or 17.0% of our gross loan
portfolio. We have no plans to increase the number of interest-only loans held
in our loan portfolio at this time.
Multi-Family Residential Lending. We also offer multi-family residential
loans. These loans are secured by real estate located in our primary market
area. At June 30, 2004, multi-family residential loans totaled $72.5 million, or
14.6%, of our gross loan portfolio and $24.0 million of this amount was
purchased from other lenders without recourse.
Our multi-family residential loans are originated with adjustable
interest rates only. We use a number of indices to set the interest rate,
including a rate based on the constant maturity of one year U.S. Treasury
securities. A majority of our adjustable rate loans carry an initial fixed rate
of interest for either three or five years which then converts to an interest
rate that is adjusted annually based upon the applicable index. Loan-to-value
ratios on our multi-family residential loans do not exceed 75% of the appraised
value of the property securing the loan. These loans require monthly payments,
amortize over a period of up to 30 years and have maximum maturity of 30 years.
These loans are secured by properties located in California. We use mortgage
bankers and brokers to originate these loans as well as through our staff. We
retain some of the multi-family loans we originate, while selling participations
in others to manage our exposure to any one borrower.
Loans secured by multi-family residential real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family residential loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "- Loan Originations,
Purchases, Sales and Repayments."
Loans secured by multi-family residential properties are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
residential properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired. See "- Asset Quality - Non-Performing
Assets."
10
Commercial Real Estate Lending. We offer commercial real estate loans.
These loans are secured primarily by small retail establishments, rental
properties and small office buildings located in our primary market area. At
June 30, 2004, commercial real estate loans totaled $26.9 million, or 5.4%, of
our gross loan portfolio. Our largest commercial real estate loan at June 30,
2004, was a $1.7 million loan secured by the real estate.
We originate only adjustable-rate commercial real estate loans. The
interest rate on these loans is tied to a variety of indices, including a rate
based on the constant maturity of one year U.S. Treasury securities. A majority
of our adjustable-rate loans carry an initial fixed rate of interest for either
three or five years which then converts an interest rate that is adjusted
annually based upon the index. Loan-to-value ratios on our commercial real
estate loans do not exceed 75% of the appraised value of the property securing
the loan. These loans require monthly payments, amortize up to 30 years, have
maturities of up to 10 years and carry pre-payment penalties.
Loans secured by commercial real estate are underwritten based on the
income producing potential of the property, the financial strength of the
borrower and any guarantors. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
commercial real estate loans are performed by independent state licensed fee
appraisers approved by the board of directors. All the properties securing our
commercial real estate loans are located in California. See "- Loan
Originations, Purchases, Sales and Repayments."
Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality - Non-Performing Loans."
Consumer Loans. Historically, we offered a variety of consumer loans.
Currently we only offer loans secured by automobiles or deposits. Consumer loans
generally have shorter terms to maturity, which reduces our exposure to changes
in interest rates, and carry higher rates of interest than do one- to
four-family residential mortgage loans. At June 30, 2004, our consumer loan
portfolio, exclusive of automobile loans, totaled $8.1 million, or 1.6%, of our
gross loan portfolio. In recent years, our consumer loans, as a percentage of
our loan portfolio, has continued to decrease as we have emphasized our real
estate loan products.
The most significant component of our consumer lending is automobile
loans. We originate automobile loans only on a direct basis with the borrower.
Loans secured by automobiles totaled $47.4 million at June 30, 2004, or 9.5%, of
our gross loan portfolio at June 30, 2004. Automobile loans may be written for
up to seven years for new automobiles and a maximum of five years for used
automobiles and have fixed rates of interest. Loan to value ratios for
automobile loans are up to 100% of the sales price for new automobiles and up to
100% of value on used cars, based on valuation from official used car guides.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles. In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance. As a result, consumer loan
collections
11
are dependent on the borrower's continuing financial stability and, thus, are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
We originate loans through employees located at our offices. Walk-in
customers and referrals from our current customer base, advertisements, real
estate brokers, mortgage loan brokers and builders are also important sources of
loan originations. While we originate both adjustable-rate and fixed-rate loans,
our ability to originate loans is dependent upon customer demand for loans in
our market area. Demand is affected by local competition and the interest rate
environment. We also purchase real estate whole loans as well as participation
interests in real estate loans. In addition, we sell participation interests in
some of our larger real estate loans. We began purchasing one- to four-family
real estate loans in January 2001 and multi-family real estate loans in October
2001. We have used 10 different loan brokers in these purchase transactions. As
of June 30, 2004, we had participation interests in two commercial real estate
loans. All of our other commercial real estate loans have been originated
in-house. At June 30, 2004, our real estate loan portfolio totaled $441.2
million or 88.8% of the gross loan portfolio. Purchased real estate loans at
June 30, 2004 totaled $300.6 million, or 68.1% of the real estate loan
portfolio.
12
The following table shows the loan origination, purchase, sale and
repayment activities of Kaiser Federal Bank for the periods indicated, and
includes loans originated for both our own portfolio and for sale of
participating interests.
YEAR ENDED JUNE 30,
-------------------------------------------
2004 2003 2002
-------------- -------------- -------------
(Dollars in Thousands)
ORIGINATIONS BY TYPE:
Adjustable rate:
Real estate- one- to four- family............. $ 1,288 $ 4,039 $ 2,986
- commercial....................... 12,820 15,164 8,661
- multi-family..................... 24,100 25,662 4,115
Non-real estate - consumer automobile......... - - -
- other consumer.............. 4,516 4,983 4,920
-------------- -------------- -------------
Total adjustable-rate....................... 42,724 49,848 20,682
-------------- -------------- -------------
Fixed rate:
Real estate- one- to four- family............. 16,595 31,808 18,567
Non-real estate - consumer automobile......... 21,070 35,457 25,175
- other consumer.............. 9,447 9,010 10,585
-------------- -------------- -------------
Total fixed-rate............................ 47,112 76,275 54,327
-------------- -------------- -------------
Total loans orginated..................... 89,836 126,123 75,009
-------------- -------------- -------------
PURCHASES:
Adjustable rate:
Real estate- one- to four- family............. 247,160 204,738 78,053
- commercial....................... - 1,500 -
- multi-family..................... 18,394 - 16,298
-------------- -------------- -------------
Total adjustable-rate....................... 265,554 206,238 94,351
-------------- -------------- -------------
Fixed rate:
Real estate- one- to four- family............. 18,281 5,217 3,982
- commercial....................... - - -
- multi-family..................... - - -
-------------- -------------- -------------
Total fixed-rate............................ 18,281 5,217 3,982
-------------- -------------- -------------
Total loans purchased..................... 283,835 211,455 98,333
-------------- -------------- -------------
SALES AND REPAYMENTS:
Sales and loan participations sold.............. 1,585 3,111 1,063
Principal repayments............................ 264,959 183,146 75,982
-------------- -------------- -------------
Total reductions.......................... 266,544 186,257 77,045
-------------- -------------- -------------
Increase (decrease) in other items, net......... (561) 1,405 (222)
-------------- -------------- -------------
Net increase.............................. $ 106,566 $ 152,726 $ 96,075
============== ============== =============
ASSET QUALITY
The Kaiser Permanente Medical Care Program employs a large percentage of
Kaiser Federal Bank's account holders. Further, a significant concentration of
our borrowers resides in California. Although Kaiser Federal Bank has a
diversified loan portfolio, borrowers' ability to repay loans may be affected by
the economic climate of either the health care industry or the overall
geographic region in which the borrowers reside. Because we have a significant
amount of real estate loans, decreases in California's real estate values could
adversely affect the value of property used as collateral. In this regard, at
June 30, 2004, the rate of unemployment (not seasonally adjusted) in the State
of California was 6.3% with the unemployment rate for the United States at 5.8%
In addition, the State
13
of California's newly approved budget includes a spending plan that eliminates a
state deficit estimated at the beginning of the calendar year 2004 to be $17.0
billion. These initiatives may require aggressive measures such as reducing
state expenditures and other cost-cutting initiatives to meet the budget's
objectives. These measures may negatively affect the California economy and
Kaiser Federal Bank.
When a borrower fails to make a timely payment on a consumer loan, a
delinquency notice is sent when the loan is 10 days past due. When the loan is
20 days past due, we mail a subsequent delinquency notice to the borrower. Once
a loan is 30 days past due, our staff contacts the borrower by telephone to
determine the reason for delinquency and to request payment of the delinquent
amount in full or the establishment of an acceptable repayment plan to bring the
loan current. If the borrower is unable to make or keep payment arrangements,
additional collection action is taken in the form of repossession of collateral
for secured loans and small claims or legal action for unsecured loans.
For one- to four-family residential, multi-family and commercial real
estate loans serviced by us, a delinquency notice is sent to the borrower when
the loan is 8 days past due. When the loan is 20 days past due, we mail a
subsequent delinquency notice to the borrower. Typically, before the loan
becomes 45 days past due, contact with the borrower is made requesting payment
of the delinquent amount in full, or the establishment of an acceptable
repayment plan to bring the loan current. If an acceptable repayment plan has
not been agreed upon, loan personnel will generally prepare a notice of intent
to foreclose. The notice of intent to foreclose allows the borrower up to 10
days to bring the account current. Once the loan becomes 60 days delinquent, and
an acceptable repayment plan has not been agreed upon, the servicing officer
will turn over the account to the deed of trust trustee with instructions to
initiate foreclosure.
Real estate loans serviced by a third party are subject to the servicing
institution's collection policies. However, we track each purchased loan
individually to ensure full payments are received as scheduled. Each month,
third party servicers are required to provide delinquent loan status reports to
our servicing officer, which are included in the month-end delinquent real
estate report to management. Contractually, third party servicers are required
to adhere to collection policies no less stringent than our policies.
DELINQUENT LOANS. The following table sets forth our loans delinquent 60
to 89 days and over 89 days past due by type, number, amount and percentage of
type at June 30, 2004.
LOANS DELINQUENT FOR:
----------------------------------------------- TOTAL
60-89 DAYS 90 DAYS OR MORE DELINQUENT LOANS
----------------------- ----------------------- -----------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- ------------ ---------- ------------ ---------- ------------
(Dollars in Thousands)
One- to four-family............... - $ - - $ - - $ -
Commercial........................ - - - - - -
Multi-family...................... - - - - - -
Home Equity....................... - - - - - -
Consumer - automobile............. 40 502 9 79 49 581
Other consumer.................... 97 93 2 3 99 96
---------- ------------ ---------- ------------ ---------- ------------
137 595 11 82 148 677
========== ============ ========== ============ ========== ============
Delinquent loans to
total gross loans................. 0.12% 0.02% 0.14%
14
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. Generally, all loans past due 90 days and over are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.
Foreclosed assets consist of real estate and other assets which have
been acquired through foreclosure on loans. At the time of foreclosure, assets
are recorded at the lower of their estimated fair value less selling costs or
the loan balance, with any write-down charged against the allowance for loan
losses. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates.
JUNE 30,
----------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- ---------- ---------
(Dollars in Thousands)
NONACCRUAL LOANS:
One- to four-family........................ $ - $ - $ - $ - $ -
Commercial................................. - - - - -
Multi-family............................... - - - - -
Consumer - Automobile...................... 79 13 138 77 26
Consumer - Other........................... 3 13 - 14 1
--------- --------- --------- ---------- ---------
Total.................................... 82 26 138 91 27
--------- --------- --------- ---------- ---------
ACCRUING DELINQUENT MORE THAN 90 DAYS:
One- to four-family........................ - - - - -
Commercial................................. - - - - -
Multi-family............................... - - - - -
Consumer - Automobile...................... - - - - -
Consumer - Other........................... - - - - -
--------- --------- --------- ---------- ---------
Total.................................... - - - - -
--------- --------- --------- ---------- ---------
Non-performing loans......................... 82 26 138 91 27
Repossessed assets........................... 62 26 78 378 31
--------- --------- --------- ---------- ---------
Total non-performing assets.................. $ 144 $ 52 $ 216 $ 469 $ 58
========= ========= ========= ========== =========
Non-performing loans to total loans (1)...... 0.02% 0.01% 0.06% 0.06% 0.02%
Non-performing assets to total assets........ 0.02% 0.01% 0.07% 0.20% 0.03%
Non-accrued interest (2).................... $ 4 $ 1 $ 4 $ 3 $ 1
========= ========= ========= ========== =========
- -----------------------------
(1) Total loans are net of deferred fees and costs
(2) If interest on the loans classified as non-accrual had been accrued, interest income in these
amounts would have been accrued on non-accrual loans.
CLASSIFIED ASSETS. Regulations provide for the classification of loans
and other assets, such as debt and equity securities considered by regulators to
be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
15
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision and the FDIC, which may order the establishment of additional
general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. The
total amount of classified assets represented 2.6% of our equity capital and
0.4% of our total assets at June 30, 2004.
The aggregate amount of our classified assets at the dates indicated
were as follows:
AT JUNE 30,
------------------------
2004 2003
----------- -----------
(Dollars in Thousands)
Classified Assets:
Loss...................... $ 85 $ 83
Doubtful.................. 968 1,304
Substandard............... 858 407
Special Mention........... 422 353
----------- -----------
Total.................... $ 2,333 $ 2,147
=========== ===========
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the probable losses inherent in the loan portfolio. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include loss ratio analysis by type of loan and
specific allowances for identified problem loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loans or pools of
loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
16
The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting our key lending areas and other conditions, such as credit
quality trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss
experience in particular segments of the portfolio that existed as of the
balance sheet date and the impact that such conditions were believed to have had
on the collectibility of the loan. Senior management reviews these conditions
quarterly in discussions with our senior credit officers. To the extent that any
of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management's estimate of the
effect of such condition may be reflected as a specific allowance applicable to
such credit or portfolio segment. Where any of these conditions is not evidenced
by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the loss related to this condition
is reflected in the unallocated allowance. The evaluation of the inherent loss
with respect to these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments.
Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions in our market area.
This evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. For all
specifically reviewed loans for which it is probable that Kaiser Federal Bank
will be unable to collect all amounts due according to the terms of the loan
agreement, Kaiser Federal Bank determines impairment by computing a fair value
either based on discounted cash flows using the loan's initial interest rate or
the fair value of the collateral if the loan is collateral dependent. Large
groups of smaller balance homogenous loans that are collectively evaluated for
impairment and are excluded from specific impairment evaluation, and their
allowance for loan losses is calculated in accordance with the allowance for
loan losses policy described above.
Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Our methodology as described permits adjustments to any loss
factor used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. In addition, management's
determination as to the amount of our allowance for loan losses is subject to
review by the Office of Thrift Supervision and the FDIC, which may require the
establishment of additional general or specific allowances based upon their
judgment of the information available to them at the time of their examination
of Kaiser Federal Bank.
At June 30, 2004, our allowance for loan losses was $2.3 million or 0.5%
of the total loan portfolio and 2,839.0% of total non-performing loans.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, that may be
susceptible to significant change. In the opinion of management, the allowance,
when taken as a whole, is at an amount that will absorb probable loan losses
inherent in our loan portfolios.
17
The following sets forth an analysis of our allowance for loan losses.
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Balance at beginning of period............... $ 2,281 $ 1,744 $ 1,175 $ 863 $ 1,094
CHARGE-OFFS:
One- to four-family......................... - - - - -
Commercial.................................. - - - - -
Multi-family................................ - - - - -
Consumer - automobile....................... 675 842 990 534 145
Other consumer.............................. 62 58 110 85 371
------------ ------------ ------------ ------------ ------------
737 900 1,100 619 516
RECOVERIES:
One- to four-family......................... - - - - -
Commercial.................................. - - - - -
Multi-family................................ - - - - -
Consumer - automobile....................... 279 296 503 137 18
Other consumer.............................. 22 17 19 26 70
------------ ------------ ------------ ------------ ------------
301 313 522 163 88
------------ ------------ ------------ ------------ ------------
Net charge-offs............................... 436 587 578 456 428
Provision (benefit) for loan losses........... 483 1,124 1,147 768 197
------------ ------------ ------------ ------------ ------------
Balance at end of period...................... $ 2,328 $ 2,281 $ 1,744 $ 1,175 $ 863
============ ============ ============ ============ ============
Net charge-offs to average loans during
this period (1)............................ 0.11% 0.19% 0.33% 0.36% 0.40%
Net charge-offs to average non-
performing loans during this period ........ 807.41% 715.85% 504.80% 772.88% 228.88%
Allowance for loan losses to non-
performing loans............................ 2,839.02% 8,773.08% 1,263.77% 1,291.21% 3,196.30%
Allowance as a % of total loans (end of
period) (1)................................. 0.47% 0.58% 0.73% 0.83% 0.74%
- ----------------------------
(1) Total loans are net of deferred fees and costs
18
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.
AT JUNE 30,
-------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
GROSS GROSS GROSS GROSS
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
PERCENT OF TO PERCENT OF TO
ALLOWANCE TOTAL ALLOWANCE TOTAL
TO TOTAL GROSS TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ------------ ------------- -------- ------------ -------------
(Dollars in Thousands)
Secured by residential real estate.... $ 932 40.03 % 68.82 % $ 703 30.82 % 66.64 %
Secured by commercial real estate..... 99 4.25 5.41 82 3.59 5.46
Secured by multi-family real estate... 232 9.97 14.60 132 5.79 10.85
Consumer - automobile................. 1,008 43.30 9.54 1,289 56.51 14.60
Consumer - other...................... 57 2.45 1.63 75 3.29 2.45
Unallocated........................... - - - - - -
------- -------- ---------- --------- -------- ---------
Total Allowance for Loan Losses....... $ 2,328 100.00 % 100.00% $ 2,281 100.00 % 100.00 %
======= ======== ========== ========= ======== =========
(continued)
AT JUNE 30,
-------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
GROSS GROSS GROSS GROSS
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
PERCENT OF TO PERCENT OF TO
ALLOWANCE TOTAL ALLOWANCE TOTAL
TO TOTAL GROSS TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ------------ ------------- -------- ------------ -------------
Secured by residential real estate.... $ 582 33.33 % 61.04 % $ 287 24.44 % 50.62 %
Secured by commercial real estate..... 30 1.73 3.18 - - -
Secured by multi-family real estate... 81 4.66 8.54 - - -
Consumer - automobile................. 970 55.63 21.81 751 63.88 38.44
Consumer - other...................... 81 4.65 5.43 137 11.68 10.94
Unallocated........................... - - - - - -
------- -------- ---------- --------- -------- ---------
Total Allowance for Loan Losses....... $ 1,744 100.00 % 100.00 % $ 1,175 100.00% 100.00 %
======= ======== ========== ========= ======== =========
(continued)
AT JUNE 30,
----------------------------------
2002
-----------------------------------
PERCENT OF PERCENT OF
GROSS GROSS
LOANS LOANS
IN EACH IN EACH
CATEGORY CATEGORY
PERCENT OF TO
ALLOWANCE TOTAL
TO TOTAL GROSS
AMOUNT ALLOWANCE LOANS
-------- ------------ -------------
Secured by residential real estate.... $ 256 29.66 % 47.80 %
Secured by commercial real estate..... - - -
Secured by multi-family real estate... - - -
Consumer - automobile................. 383 44.38 38.77
Consumer - other...................... 224 25.96 13.43
Unallocated........................... - - -
------- -------- ----------
Total Allowance for Loan Losses....... $ 863 100.00 % 100.00 %
======= ======== ==========
19
INVESTMENT ACTIVITIES
GENERAL. We are required by federal regulations to maintain an amount of
liquid assets in order to meet our liquidity needs. These assets consist of
certain specified securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Commitments." Cash
flow projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of June 30, 2004, our liquidity ratio (liquid assets
as a percentage of net withdrawable savings and current borrowings) was 33.4%.
We are authorized to invest in various types of liquid assets, including
U.S. Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federal savings associations may also invest their assets
in investment grade commercial paper and corporate debt securities and mutual
funds whose assets conform to the investments that a federally chartered savings
association is otherwise authorized to make directly. See "How We Are Regulated
- - Kaiser Federal Bank" for a discussion of additional restrictions on our
investment activities.
Under the direction and guidance of the Investment/Asset and Liability
Management Committee and board policy, our president has the basic
responsibility for the management of our investment portfolio. Various factors
are considered when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated short and long term interest rates, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The current structure of our investment portfolio provides liquidity
when loan demand is high, assists in maintaining earnings when loan demand is
low and maximizes earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk. See
"Quantitative and Qualitative Disclosures about Market Risk - Asset and
Liability Management and Market Risk."
At June 30, 2004, our investment portfolio totaled $62.4 million and
consisted principally of collateralized mortgage obligations, mortgage-backed
securities, and U.S. agency obligations. From time to time, investment levels
may increase or decrease depending upon yields available on investment
alternatives and management's projected demand for funds for loan originations,
deposits, and other activities.
MORTGAGE-BACKED SECURITIES. Our mortgage-backed securities had a fair
value of $11.6 million and a $11.8 million amortized cost at June 30, 2004. The
mortgage-backed securities were comprised of Freddie Mac, Fannie Mae, and Ginnie
Mae mortgage-backed securities. At June 30, 2004, the portfolio had a
weighted-average coupon rate of 4.1% and an estimated weighted-average-yield of
3.3%. These securities had an estimated average maturity of 8.3 years and an
estimated average life of 3.0 years at June 30, 2004.
U.S. AGENCY OBLIGATIONS. Our portfolio of U.S. agency obligations had a
fair value of $20.9 million and a $21.0 million amortized cost at June 30, 2004.
At June 30, 2004, the portfolio had a weighted-average-coupon and a
weighted-average-yield of 2.8%. All U.S. agency obligations have call
provisions. The longest term call provision was on a bond with an amortized cost
of $5.0 million, a one-time call of 0.4 years, and a final maturity of 2.4
years.
20
COLLATERALIZED MORTGAGE OBLIGATIONS. Our portfolio of collateralized
mortgage obligations had a fair value of $29.4 million and a $29.9 million
amortized cost at June 30, 2004. At June 30, 2004 the portfolio had a
weighted-average-coupon of 4.5% and a weighted-average-yield of 4.1%. These
securities had an estimated average maturity of 21.1 years and an estimated
average life of 3.6 years at June 30, 2004.
We invest in collateralized mortgage obligations as an alternative to
mortgage loans and conventional mortgage-backed securities as part of our asset
liability management strategy. Management believes that collateralized mortgage
obligations represent attractive investment alternatives relative to other
investments due to the wide variety of maturity and repayment options available
through such investments. In particular, we have, from time to time, concluded
that short and intermediate and long duration collateralized mortgage
obligations (with an expected average life of five to ten years or less)
represent a better combination of rate and duration than adjustable rate
mortgage-backed securities. Because our collateralized mortgage obligations are
purchased as an alternative to mortgage loans and because we have the ability
and intent to hold such securities to maturity, all such securities are
classified as held-to-maturity. All of our collateralized mortgage obligations
and mortgage-backed securities are guaranteed by either Fannie Mae, Freddie Mac
or Ginnie Mae.
In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying collateralized mortgage obligations are segmented and paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche of a
collateralized mortgage obligations may therefore carry prepayment risk that
differs from that of both the underlying collateral and other tranches. It is
our strategy to purchase tranches of collateralized mortgage obligations with
expected shorter term duration and are intended to produce stable cash flows in
different interest rate environments. However, interest rate changes may affect
the duration of these securities.
To assess price volatility, the Federal Financial Institutions
Examination Council adopted a policy which requires an annual "stress" test of
mortgage derivative securities. This policy, which has been adopted by the
Office of Thrift Supervision, requires us to annually test our collateralized
mortgage obligations and other mortgage-related securities to determine whether
they are high-risk or non high-risk securities. Mortgage derivative products
with an average life or price volatility in excess of a benchmark 30-year
mortgage-backed pass-through security are considered high-risk mortgage
securities. Under the policy, savings institutions, such as Kaiser Federal Bank,
may invest in high-risk mortgage securities only to reduce interest rate risk.
In accordance with our policy, we do not invest in securities classified as
high-risk at the time of purchase. However, as of June 30, 2004, we had $17.9
million in high risk securities as a result of changes in market interest rates.
21
The following table sets forth the composition of our investment
portfolio at the dates indicated.
AT JUNE 30,
------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------ ------------------------
CARRYING CARRYING CARRYING
VALUE % OF TOTAL VALUE % OF TOTAL VALUE % OF TOTAL
----------- ------------ ----------- ------------ ----------- ------------
(Dollars in Thousands)
SECURITIES AVAILABLE FOR SALE:
Investment securities:
U.S. Government Agency obligations............ $ 10,890 17.46 % $ - - % $ - - %
Mortgage-backed securities:
Freddie Mac................................... 10,113 16.22 - - % $ - - %
----------- ----------- ----------- ---------- ----------- ----------
Total securities available for sale............. $ 21,003 33.68 % $ - - % $ - - %
=========== =========== =========== ========== =========== ==========
SECURITIES HELD TO MATURITY:
Investment securities:
U.S. Government Agency obligations............ $ 10,000 16.03 % $ - - % $ 8,000 40.43 %
Mortgage-backed securities:
Fannie Mae.................................... 732 1.17 1,188 8.34 1,825 9.22
Freddie Mac................................... 454 0.73 695 4.88 959 4.85
Ginnie Mae.................................... 310 0.50 406 2.85 667 3.37
Collateralized mortgage obligations:
Fannie Mae.................................... 7,342 11.77 7,399 51.93 6,735 34.04
Freddie Mac................................... 18,049 28.94 4,559 32.00 1,601 8.09
Ginnie Mae.................................... 4,474 7.17 - 0.00 - 0.00
----------- ----------- ----------- ---------- ----------- ----------
Total held to maturity.......................... $ 41,361 66.32 % $ 14,247 100.00 % $ 19,787 100.00 %
=========== =========== =========== ========== =========== ==========
Total investment securities..................... $ 62,364 100.00 % $ 14,247 100.00 % $ 19,787 100.00 %
=========== =========== =========== ========== =========== ==========
OTHER EARNINGS ASSETS:
Interest-bearing deposits in other financial
institutions................................ $ 2,970 24.40 $ 6,437 30.52 $ 23,378 91.75
Fed Funds..................................... 5,235 43.00 11,645 0.55 975 3.83
FHLB stock.................................... 3,290 27.02 2,602 12.34 1,008 3.96
Other investments............................. 679 0.05 406 1.93 118 0.46
----------- ----------- ----------- ---------- ----------- ----------
Total other earning assets...................... $ 12,174 100.00 % $ 21,090 100.00 % $ 25,479 100.00 %
=========== =========== =========== ========== =========== ==========
Total investment securities and other earning
assets........................................ $ 74,538 $ 35,337 $ 45,266
=========== =========== ===========
While our collateralized mortgage backed securities and mortgage backed
securities carry a reduced credit risk as compared to whole loans due to their
issuance under government agency sponsored programs, they remain subject to the
risk that a fluctuating interest rate environment, along with other factors like
the geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of the mortgage loans and so affect both the prepayment speed,
and value, of the investment securities. As a result of these factors, the
estimated average lives of these securities will be shorter than the contractual
maturities as shown on the following table.
22
The composition and maturities of the investment securities portfolio as
of June 30, 2004, are as follows:
AT JUNE 30, 2004
------------------------------------------------------------------------------------------
WEIGHTED AFTER ONE WEIGHTED AFTER FIVE WEIGHTED
ONE YEAR AVERAGE YEAR THROUGH AVERAGE YEARS THROUGH AVERAGE AFTER TEN
OR LESS YIELD FIVE YEARS YIELD TEN YEARS YIELD YEARS
------------- ----------- -------------- ----------- ------------- ----------- -----------
(Dollars in Thousands)
U.S. Government Agency obligations....... $ - -% $ 20,890 2.76% $ - -% $ -
Mortgage-backed securities............... - - 8,163 3.20 1,950 3.86 1,496
Collateralized mortgage obligations...... - - - - - - 29,865
------------- ----------- -------------- ----------- ------------- ----------- -----------
Total investment securities.............. $ - -% 29,053 2.88% 1,950 3.86% 31,361
============= =========== ============== =========== ============= =========== ===========
(CONTINUED)
AT JUNE 30, 2004
---------------------------------------
WEIGHTED WEIGHTED
AVERAGE BALANCE AS OF AVERAGE
YIELD JUNE 30, 2004 YIELD
----------- --------------- -----------
(Dollars in Thousands)
U.S. Government Agency obligations....... -% $ 20,890 2.76%
Mortgage-backed securities............... 2.81 11,609 3.26
Collateralized mortgage obligations...... 4.07 29,865 4.07
----------- --------------- -----------
Total investment securities.............. 4.01% $ 62,364 3.47%
=========== =============== ===========
FEDERAL HOME LOAN BANK STOCK. As a member of the Federal Home Loan Bank
of San Francisco, we are required to own capital stock in the Federal Home Loan
Bank of San Francisco. The amount of stock we hold is based on percentages
specified by the Federal Home Loan Bank of San Francisco on our outstanding
advances and the requirements of their Mortgage Purchase Program. The redemption
of any excess stock we hold is at the discretion of the Federal Home Loan Bank
of San Francisco. The carrying value of Federal Home Loan Bank of San Francisco
stock totaled $3.3 million and had a weighted-average-yield of 3.9% for the year
ended June 30, 2004. The yield on the Federal Home Loan Bank of San Francisco
stock is produced by stock dividends, that are subject to the discretion of the
board of directors of the Federal Home Loan Bank of San Francisco.
EQUITY INVESTMENT. We also had an approximate 20% investment in a
limited liability partnership, which builds and operates affordable housing
projects located in Northern California. We purchased the investment for
approximately $2.7 million during the year ended June 30, 2004. The investment
is being accounted for using the equity method of accounting. The investment is
evaluated periodically for impairment based on the remaining allocable tax
credits.
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities, borrowings, and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts to consumers with a
wide range of interest rates and terms. Our deposits consist of time deposit
accounts, savings, money market and demand deposit accounts. We have
historically paid competitive rates on our deposit accounts. We primarily rely
on competitive pricing policies, marketing and customer service to attract and
retain these deposits. Approximately 37.3% of our deposits are from customers
who are employed by the Kaiser Permanente Medical Care Program.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and bi-weekly
direct deposits from Kaiser Permanente Medical Care Program payrolls. The
variety of deposit accounts we offer has allowed us to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
We have become more susceptible to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. We try to manage the pricing
of our deposits in keeping with our asset/liability management, liquidity and
profitability objectives, subject to competitive factors. Based on our
experience, we believe that our deposits are relatively stable sources of funds.
Despite this stability, our ability to attract and maintain these deposits and
the rates paid on them has been and will continue to be significantly affected
by market conditions.
23
The following table sets forth our deposit flows during the periods
indicated.
YEAR ENDED JUNE 30,
--------------------------------------------
2004 2003 2002
-------------- -------------- --------------
(Dollars in Thousands)
Opening balance................... $ 346,239 $ 252,038 $ 197,588
Deposits, net of withdrawals...... 68,590 86,871 47,849
Interest credited................. 8,124 7,330 6,601
-------------- -------------- --------------
Ending balance.................... $ 422,953 $ 346,239 $ 252,038
============ ============ ============
Net increase...................... 76,714 94,201 54,450
Percent increase.................. 22.16% 37.38% 27.56%
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered at the dates indicated.
AT JUNE 30,
--------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------ ------------- ------------ ------------- ------------ -------------
(Dollars in Thousands)
Noninterest-bearing demand........ $ 38,020 8.99% $ 30,119 8.70% $ 26,904 10.67%
Savings........................... 95,115 22.49 82,691 23.88 69,782 27.69
Money market...................... 105,532 24.95 87,555 25.30 59,970 23.79
Certificates of deposit
1.00% - 1.99%................... 26,092 6.17 12,543 3.62 - -
2.00% - 2.99%................... 69,569 16.45 52,072 15.04 18,627 7.39
3.00% - 3.99%................... 37,652 8.90 26,919 7.77 19,462 7.72
4.00% - 4.99%................... 26,808 6.34 23,145 6.68 14,713 5.84
5.00% - 5.99%................... 9,770 2.31 13,127 3.79 16,889 6.70
6.00% - 6.99%................... 8,400 1.99 12,124 3.50 19,425 7.71
7.00% - 7.99%................... 5,995 1.43 5,944 1.72 6,266 2.49
------------ ------------- ------------ ------------- ------------ -------------
Total Certificates of Deposit..... 184,286 43.57 145,874 42.12 95,382 37.85
------------ ------------- ------------ ------------- ------------ -------------
Total............................. $ 422,953 100.00% $ 346,239 100.00% $ 252,038 100.00%
============ ============= ============ ============= ============ =============
24
The following table indicates the amount of Kaiser Federal Bank's
certificates of deposit by time remaining until maturity as of June 30, 2004.
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2006 2007 2008 2009 TOTAL
--------------- --------------- --------------- --------------- --------------- --------------
(Dollars in Thousands)
1.00% - 1.99%........... $ 26,000 $ 77 $ 9 $ 7 $ - $ 26,093
1.99% - 2.99%........... 54,704 14,376 446 10 32 69,568
3.00% - 3.99%........... 6,673 7,465 6,783 4,749 11,982 37,652
4.00% - 4.99%........... 2,990 663 1,708 14,510 6,937 26,808
5.00% - 5.99%........... 1,285 1,406 7,080 - - 9,771
6.00% - 6.99%........... 3,462 4,937 - - - 8,399
7.00% - 7.99%........... 20 5,975 - - - 5,995
--------------- --------------- --------------- --------------- --------------- --------------
$ 95,134 $ 34,899 $ 16,026 $ 19,276 $ 18,951 $ 184,286
=============== =============== =============== =============== =============== ==============
The following table provides the remaining maturities of large denomination
($100,000 or more) time deposits at June 30, 2004.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------------------------------- --------------
(in Thousands)
Three months or less................. $ 5,415
Over three through six months........ 5,188
Over six through twelve months....... 13,122
Over twelve months................... 31,643
--------------
Total............................ $ 55,368
==============
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to purchase loans or to fund loan demand or when they meet our asset/liability
management goals. Our borrowings historically have consisted of advances from
the Federal Home Loan Bank of San Francisco. See Note 10 of the Notes to
Consolidated Financial Statements.
We may obtain advances from the Federal Home Loan Bank of San Francisco
upon the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At June
30, 2004, we had $70.0 million in Federal Home Loan Bank advances outstanding.
25
The following table sets forth information as to our Federal Home Loan
Bank advances for the periods indicated
AT OR FOR THE YEAR ENDED JUNE 30
-----------------------------------------
2004 2003 2002
-----------------------------------------
(Dollars in Thousands)
Average balance outstanding.......................... $ 51,538 $ 34,972 $ 2,615
Maximum month-end balance............................ 70,000 50,000 13,000
Balance at end of period............................. 70,000 50,000 2,000
Weighted average interest rate during the period..... 2.92% 2.97% 1.23%
Weighted average interest rate at end of period...... 2.50% 3.00% 1.17%
EMPLOYEES
At June 30, 2004, we had a total of 90 employees, including 15 part-time
employees. Our employees are not represented by any collective bargaining group.
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to K-Fed Bancorp and Kaiser Federal Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States
Congress that may affect the operations of K-Fed Bancorp and Kaiser Federal
Bank. In addition, the regulations governing K-Fed Bancorp and Kaiser Federal
Bank may be amended from time to time by the Office of Thrift Supervision. Any
such legislation or regulatory changes in the future could adversely affect
K-Fed Bancorp or Kaiser Federal Bank. No assurance can be given as to whether or
in what form any such changes may occur.
GENERAL
Kaiser Federal Bank, as a federally-chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Kaiser Federal Bank also is subject
to regulation by the FDIC, which insures the deposits of Kaiser Federal Bank to
the maximum extent permitted by law, and requirements established by the Federal
Reserve Board. Federally chartered savings institutions are required to file
periodic reports with the Office of Thrift Supervision and are subject to
periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting stockholders.
The Office of Thrift Supervision regularly examines Kaiser Federal Bank
and prepares reports for the consideration of Kaiser Federal Bank's board of
directors on any deficiencies that it may find in Kaiser
26
Federal Bank's operations. Kaiser Federal Bank's relationship with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws, especially in such matters as the ownership of savings accounts and
the form and content of Kaiser Federal Bank's mortgage requirements. Any change
in such regulations, whether by the FDIC, the Office of Thrift Supervision or
Congress, could have a material adverse impact on K-Fed Bancorp and Kaiser
Federal Bank and their operations.
K-FED BANCORP
GENERAL. K-Fed Bancorp is a federal mutual holding company subsidiary
within the meaning of Section 10(o) of the Home Owners' Loan Act. It is required
to file reports with the Office of Thrift Supervision and is subject to
regulation and examination by the Office of Thrift Supervision. In addition, the
Office of Thrift Supervision has enforcement authority over K-Fed Bancorp and
any non-savings institution subsidiaries. This permits the Office of Thrift
Supervision to restrict or prohibit activities that it determines to be a
serious risk to Kaiser Federal Bank. This regulation is intended primarily for
the protection of the depositors and not for the benefit of stockholders of
K-Fed Bancorp.
ACTIVITIES RESTRICTIONS. K-Fed Bancorp and its non-savings institution
subsidiaries are subject to statutory and regulatory restrictions on their
business activities specified by federal regulations, which include performing
services and holding properties used by a savings institution subsidiary,
activities authorized for savings and loan holding companies as of March 5,
1987, and non-banking activities permissible for bank holding companies pursuant
to the Bank Holding Company Act of 1956 or authorized for financial holding
companies pursuant to the Gramm-Leach-Bliley Act.
If Kaiser Federal Bank fails the qualified thrift lender test, K-Fed
Bancorp must, within one year of that failure, register as, and will become
subject to, the restrictions applicable to bank holding companies. See "-
Qualified Thrift Lender Test."
WAIVERS OF DIVIDENDS BY K-FED BANCORP. Office of Thrift Supervision
regulations require K-Fed Mutual Holding Company to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of dividends from K-Fed
Bancorp. The Office of Thrift Supervision reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association and its stock holding company;
(iii) the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding company, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations.
We anticipate that K-Fed Mutual Holding Company will waive dividends
paid by K-Fed Bancorp, if any. Under Office of Thrift Supervision regulations,
our public stockholders would not be diluted because of any dividends waived by
K-Fed Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event K-Fed Mutual Holding
Company converts to stock form.
27
CONVERSION OF K-FED MUTUAL HOLDING COMPANY TO STOCK FORM. The Office of
Thrift Supervision regulations permit K-Fed Mutual Holding Company to convert
from the mutual form of organization to the capital stock form of organization
(a "Conversion Transaction"). There can be no assurance when, if ever, a
Conversion Transaction will occur, and the board of directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to K-Fed
Bancorp (the "New Holding Company"), K-Fed Mutual Holding Company's corporate
existence would end, and certain depositors of Kaiser Federal Bank would receive
the right to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of common stock held by stockholders other
than K-Fed Mutual Holding Company ("Minority Stockholders") would be
automatically converted into a number of shares of common stock in the New
Holding Company determined pursuant to an exchange ratio that ensures that the
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in K-Fed Bancorp immediately prior to the Conversation
Transaction. Under Officer of Thrift Supervision regulations, Minority
Stockholders would not be diluted because of any dividends waived by K-Fed
Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio), if K-Fed Mutual Holding Company
converts to stock form. The total number of shares held by Minority Stockholders
after a Conversion Transaction also would be increased by any purchases by
Minority Stockholders in the stock offering conducted as part of the Conversion
Transaction.
A Conversion Transaction requires the approval of the Office of Thrift
Supervision as well as a majority of the votes eligible to be cast by the
members of K-Fed Mutual Holding Company and a majority of the votes eligible to
be cast by the stockholders of K-Fed Bancorp other than K-Fed Mutual Holding
Company.
KAISER FEDERAL BANK
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Kaiser Federal
Bank is required to file periodic reports with the Office of Thrift Supervision
and is subject to periodic examinations by the Office of Thrift Supervision and
the FDIC. When these examinations are conducted by the Office of Thrift
Supervision and t