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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 SEPTEMBER 30, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
------ THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER: 000-50592
K-FED BANCORP
(Exact name of registrant as specified in its charter)
FEDERAL 20-0411486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1359 N. GRAND AVENUE COVINA, CA 91724
(Address of principal executive office) (Zip Code)
(800)524-2274
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1)has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes_X_ No ___
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes___ No _X_
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: Common Stock, $.01 par value - 14,548,500 shares outstanding as of
November 9, 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
September 30, 2004 and 2003 1
Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended September 30, 2004
and 2003 2
Consolidated Statement of Stockholders' Equity And Other
Comprehensive Income for the Three Months Ended
September 30, 2004 3
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2004 and 2003 4
Selected Notes to Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
Item 4: Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 15
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 15
SIGNATURES 16
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DOLLARS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30 JUNE 30
2004 2004
------------------ ---------------
ASSETS
Cash and due from banks $ 5,981 $ 6,923
Federal funds sold 26,970 5,235
------------------ ---------------
Total cash and cash equivalents 32,951 12,158
Interest bearing deposits in other financial
Institutions 2,970 2,970
Securities available-for-sale 20,706 21,003
Securities held-to-maturity, fair value of $37,639 and
$40,940 at September 30, 2004 and June 30, 2004,
respectively 37,688 41,361
Federal Home Loan Bank stock, at cost 4,521 3,290
Loans receivable 496,566 496,645
Deferred loan origination fees (351) (332)
Net premium on purchased loans 1,411 2,221
Allowance for loan losses (2,338) (2,328)
------------------ ---------------
Loans receivable, net 495,288 496,206
Accrued interest receivable 2,261 2,043
Premises and equipment, net 1,541 1,524
Core deposit intangible 676 -
Goodwill 3,950 -
Other assets 4,031 3,867
------------------ ---------------
Total assets 606,583 584,422
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing $ 37,728 $ 38,020
Interest bearing 425,859 384,933
------------------ ---------------
Total deposits 463,587 422,953
Federal Home Loan Bank advances, short-term - 20,000
Federal Home Loan Bank advances, long-term 49,553 50,000
Accrued expenses and other liabilities 2,748 2,353
------------------ ---------------
Total liabilities 515,888 495,306
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Nonredeemable serial preferred stock, $.01 par value;
2,000,000 shares authorized; issued and outstanding - none - -
Common stock, $.01 par value; 18,000,000 authorized;
14,548,500 shares issued and outstanding at September 30,
2004 and June 30, 2004 146 146
Additional paid-in capital 55,121 55,083
Unearned Employee Stock Ownership Plan shares (4,322) (4,436)
Retained earnings 39,818 38,513
Accumulated other comprehensive loss, net of tax (68) (190)
------------------ ---------------
Total stockholders' equity 90,695 89,116
------------------ ---------------
Total liabilities and stockholders' equity $ 606,583 $ 584,422
================== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------------------
2004 2003
------------------- ------------------
INTEREST INCOME
Interest and fees on loans $ 6,225 $ 4,600
Interest on securities,
taxable 520 203
Federal Home Loan Bank dividends 36 27
Other interest 42 66
------------------- ------------------
Total interest income 6,823 4,896
------------------- ------------------
INTEREST EXPENSE
Interest on Federal Home Loan Bank
advances 513 379
Interest on deposits 1,926 1,958
------------------- ------------------
Total interest expense 2,439 2,337
------------------- ------------------
NET INTEREST INCOME 4,384 2,559
Provision for loan losses 120 30
------------------- ------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,264 2,529
------------------- ------------------
NONINTEREST INCOME
Service charges and fees 464 497
ATM fees and charges 322 288
Referral commissions 55 52
Loss on equity investment (83) (41)
Other noninterest income 12 8
------------------- ------------------
Total noninterest income 770 804
------------------- ------------------
NONINTEREST EXPENSE
Salaries and benefits 1,571 1,310
Occupancy and equipment 316 324
ATM expense 257 241
Advertising and promotional 108 86
Professional services 260 96
Postage 61 66
Telephone 74 78
Other operating expense 279 235
------------------- ------------------
Total noninterest expense 2,926 2,436
------------------- ------------------
INCOME BEFORE INCOME TAX EXPENSE 2,108 897
Income tax expense 803 321
------------------- ------------------
NET INCOME $ 1,305 $ 576
=================== ==================
COMPREHENSIVE INCOME $ 1,427 $ 576
=================== ==================
EARNINGS PER COMMON SHARE:
Basic and diluted $ 0.09 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 STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS
- ------------------------------------------------------------------------------------------
COMMON STOCK
----------------------
ADDITIONAL
COMPREHENSIVE NUMBER PAID-IN
INCOME OF SHARES AMOUNT CAPITAL
----------------------------------------------------
Balance, June 30, 2004 14,548,500 $ 146 $ 55,083
Comprehensive income
Net Income for the three months
ended September 30, 2004 $ 1,305 - - -
Other comprehensive loss -
unrealized loss on securities,
net of tax 122 - - -
------------
Total comprehensive income $ 1,427
============
Allocation of ESOP common stock - - 38
----------------------------------------------------
Balance, September 30, 2004 14,548,500 $ 146 $ 55,121
(CONT'D)
ACCUMULATED
UNEARNED OTHER TOTAL
ESOP RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES EARNINGS LOSS EQUITY
-------------------------------------------------------
Balance, June 30, 2004 $ (4,436) $ 38,513 $ (190) $ 89,116
Comprehensive income
Net Income for the three months
ended September 30, 2004 - 1,305 - 1,305
Other comprehensive loss -
unrealized loss on securities,
net of tax - - 122 122
Total comprehensive income
Allocation of ESOP common stock 114 - - 152
-------------------------------------------------------
Balance, September 30, 2004 $ (4,322) $ 39,818 $ (68) $ 90,695
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLARS IN THOUSANDS
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30
------------------------------------------------
2004 2003
----------------------- ---------------------
OPERATING ACTIVITIES
Net income $ 1,305 $ 576
Adjustments to reconcile net income to cash provided
by operating activities:
Amortization of net premium on investments 40 57
Amortization of net premiums on loan purchases 427 1,035
Accretion of net loan origination fees (10) (28)
Provision for loan losses 120 30
Depreciation and amortization 93 93
Allocation of ESOP common stock 152 -
Federal Home Loan Bank stock dividend (36) (27)
Loss on equity investment 83 41
Amortization of debt exchange costs 26 -
Net change in accrued interest receivable (218) (36)
Net change in other assets (312) (496)
Net changes in accrued expenses and other
liabilities 393 (51)
----------------------- ---------------------
Net cash provided by operating
activities 2,063 1,194
----------------------- ---------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale
investments 487 -
Purchases of held-to-maturity investments - (25,015)
Proceeds from maturities of held-to-maturity
investments 3,650 226
Net change in time deposits with other financial
institutions - 5,546
Purchases of loans (29,272) (58,164)
Net change in loans, excluding loan purchases 29,677 69,626
Purchase of Federal Home Loan Bank stock (1,195) -
Purchase of equity investment - (2,025)
Net cash received from branch acquisition 56,491 -
Purchase of premises and equipment (92) (504)
----------------------- ---------------------
Net cash provided by (used in) investing
activities 59,746 (10,310)
----------------------- ---------------------
FINANCING ACTIVITIES
Proceeds from FHLB advances 165,916 12,000
Repayment of FHLB advances (185,916) (12,000)
Debt exchange costs (473) -
Net change in deposits (20,543) 14,328
Distribution to capitalize K-Fed Mutual Holding
Company - (50)
----------------------- ---------------------
Net cash (used in) provided by financing
activities (41,016) 14,278
----------------------- ---------------------
Net change in cash and cash equivalents 20,793 5,162
Cash and cash equivalents, at beginning of year 12,158 16,190
----------------------- ---------------------
Cash and cash equivalents, at end of period $ 32,951 $ 21,352
======================= =====================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: K-Fed Bancorp (or the "Company") is a majority-owned
subsidiary of K-Fed Mutual Holding Company (or the "Parent"). The Company and
its Parent are holding companies. The Company's sole subsidiary, Kaiser Federal
Bank (or the "Bank"), is a federally chartered savings association, which
provides retail and commercial banking services to individuals and business
customers from its five branch locations throughout California. While the Bank
originates all types of retail and commercial real estate loans, the majority of
its residential real estate loans have been purchased from other financial
institutions.
The Company's business activities generally are limited to passive investment
activities and oversight of our investment in the Bank. Unless the context
otherwise requires, all references to the Company include the Bank and the
Company on a consolidated basis.
BASIS OF PRESENTATION: The financial statements of K-Fed Bancorp have been
prepared in conformity with U.S. generally accepted accounting principals (GAAP)
for interim financial information and predominant practices followed by the
financial services industry, and are unaudited. In the opinion of the Company's
management, all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the financial condition and results of operations for
the interim periods included herein have been made.
The results of operations for the three month period ended September 30, 2004
are not necessarily indicative of the results of operations that may be expected
for any other interim period or for the year ending June 30, 2005. Certain
information and note disclosures normally included in the Company's annual
financial statements have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes included in the
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements presented in
this quarterly report include the accounts of K-Fed Bancorp and its wholly-owned
subsidiary, Kaiser Federal Bank. All material intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of income and expenses during the reporting
period. Changes in these estimates and assumptions are considered reasonably
possible and may have a material impact on the consolidated financial statements
and thus actual results could differ from the amounts reported and disclosed
herein. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, the valuation of financial instruments, and mortgage-loan prepayment
assumptions used to determine the effective interest amortization of loan
purchase premiums.
At September 30, 2004, there were no material changes in the Company's
significant accounting policies or critical accounting estimates from those
disclosed in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
5
NOTE 2 - CHANGE IN REPORTING ENTITY AND EXECUTION OF PLAN OF STOCK ISSUANCE
On July 1, 2003, the Bank consummated its reorganization into a federally
chartered mutual holding company form of organization, whereby the Bank became
the wholly-owned subsidiary of the newly formed Company with the Company
becoming a wholly-owned subsidiary of the newly formed Parent. In accordance
with Statement of Financial Accounting Standards No. 141, "Business
Combinations," when accounting for a transfer of assets or exchange of shares
between entities under common control, the entity that receives the net assets
or the equity interests shall initially recognize the assets and liabilities
transferred at their carrying amounts in the accounts of the transferring entity
at the date of transfer. Therefore, K-Fed Bancorp recorded the acquisition of
the Bank at historical cost.
On November 22, 2003, and amended on February 9, 2004, the Company's Board of
Directors adopted a plan of stock issuance to sell a minority interest of its
common stock to eligible depositors of the Bank in a subscription offering, with
the majority of the common stock owned by K-Fed Mutual Holding Company. The plan
was accomplished through the sale to eligible depositors on March 30, 2004 of
5,686,750 shares, representing 39.09% of the Company's stock.
The issued shares resulted in gross proceeds of $56.9 million. In connection
with the offering, the Company loaned approximately $4.5 million to the Bank's
employee stock ownership plan to purchase stock and incurred approximately $1.7
million of expenses associated with the offering resulting in net proceeds of
$50.7 million to the Company. The aggregate purchase price was determined by an
independent appraisal. Consistent with the Company's stated intent for use of
the stock offering proceeds, one-half of the total proceeds less offering
expenses ($27.6 million) was invested in the Bank and placed in the Bank's
general funds for general corporate purposes. In addition to the 5,686,750
shares issued to eligible depositors, the Company issued 8,860,750 additional
shares to K-Fed Mutual Holding Company. As a result of the offering, purchasers
in the offering 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. The $4.5 million loan for the ESOP
purchase was borrowed from the Company.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest payments made by the ESOP on the loan from the Company. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Company's contributions to the ESOP and earnings on
ESOP assets. The $4.5 million loan for the ESOP purchase was borrowed from the
Company and requires quarterly payments to be made by the Bank of approximately
$139,000, which represents principal plus interest at 4.00%.
As shares are released from collateral, the Company will report compensation
expense equal to the current market price of the shares and the shares will
become outstanding for earnings-per-share (EPS) computations. Dividends on
allocated ESOP shares reduce retained earnings; dividends on unearned ESOP
shares reduce accrued interest.
NOTE 4 - 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
6
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. At September
30, 2004, the Company had no restricted stock plan or stock option plan, and as
a result, basic and diluted earnings per share are the same.
Prior to the conversion to a stock savings association holding company, earnings
per share are not applicable since the Bank was a mutual savings association and
no stock was outstanding. Earnings per share is not presented for the period
from July 1, 2003 (the date of conversion to a stock company) through September
30, 2003 as the earnings per share calculation for that period is not meaningful
due to the fact that all the outstanding stock of the Company was held by the
Parent and the initial stock offering closed on March 30, 2004. Computations for
basic and diluted earnings per share are provided below.
Three months
ended
September 30, 2004
----------------------
Net income as reported, in thousands $ 1,305
Weighted average common shares outstanding 14,105,058
----------------------
Basic and diluted earnings per share $ 0.09
======================
NOTE 5 - BRANCH ACQUISITION
On September 24, 2004, the Bank acquired the Panorama City branch of Pan
American Bank. The acquisition was accounted for as a purchase and accordingly
was included in the results of operations from the date of acquisition. The
following table summarizes the estimated fair value of the assets acquired and
liabilities assumed at the date of acquisition. The Company expects that the
estimated fair values assigned to the assets acquired and liabilities assumed
may be subject to refinement as information becomes available, although such
adjustments are not expected to be significant.
Dollars in
thousands
-------------------
Assets Acquired:
Cash $ 128
Loans 23
Other assets / prepayment credits 38
Core deposit intangible 676
-------------------
Total assets acquired 865
Liabilities Assumed:
Deposit accounts 60,971
Discount on certificates of deposit 206
Accrued interest payable 1
-------------------
Total liabilities assumed (net of assets 60,313
acquired)
Cash received from Pan American Bank 56,363
Goodwill $ 3,950
The core deposit intangible will be amortized over approximately 8 years on an
accelerated basis. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," goodwill is not
amortizable but will be subject to annual impairment testing.
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
In August 2004, the Company paid-off and replaced a $50 million advance from the
Federal Home Loan Bank of San Francisco with a number of 5- $10 million advances
in order to better match the Company's debt maturity schedule with the
maturities and repricing terms of our interest-earning assets and other
interest-bearing liabilities. The prepayment penalty assessed by the Federal
Home Loan Bank of San Francisco is being amortized over the life of the new
7
advances using the interest method in accordance with EITF 96-19, issued by the
Financial Accounting Standards Board in 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains certain forward-looking statements
and information relating to the Company and the Bank that are based on the
beliefs of management as well as assumptions made by and information currently
available to management. In addition, in portions of this document the words
"anticipate," "believe," "estimate," "expect," "intend," "should" and similar
expressions or the negative thereof, as they relate to the Company or the Bank
or their management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company and/or the Bank with respect
to forward-looking events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND JUNE 30, 2004.
Our total assets increased by $22.2 million, or 3.8%, to $606.6 million at
September 30, 2004 from $584.4 million at June 30, 2004. The increase primarily
reflects the increase in cash and cash equivalents as a result of the
acquisition of the Panorama City branch from Pan American Bank, partially offset
by the repayment of short-term Federal Home Loan Bank of San Francisco advances
and the net outflow of deposits for the quarter, excluding the effects of the
Panorama City branch acquisition.
Cash and cash equivalents increased $20.8 million to $33.0 million at September
30, 2004 from $12.2 million at June 30, 2004. The culmination of the Panorama
City branch acquisition netted the Company $56.5 million in cash, of which $20.0
million of the proceeds were immediately used to repay short-term advances from
the Federal Home Loan Bank of San Francisco. Due to the timing of the
acquisition, the Company was unable to fully deploy the remaining proceeds prior
to the close of the quarter-end.
Our net loan portfolio decreased $918,000, or 0.2%, to $495.3 million at
September 30, 2004 from $496.2 million at June 30, 2004. Although the portfolio
remained relatively unchanged from June 30, 2004 balances, one- to four-family
real estate loans experienced a $4.7 million increase to $346.5 million at
September 30, 2004 from $341.8 million at June 30, 2004. All other categories of
loans saw decreases in their balances, which given the overall change in the
portfolio, basically resulted in a shifting of the loan portfolio mix to further
increase the concentration of one- to four- family real estate loans, which
stands at 69.8% of the total loan portfolio.
Our investment portfolio decreased $4.0 million, or 6.4%, to $58.4 million at
September 30, 2004 from $62.4 million at June 30, 2004. The decrease is
attributable to normal repayments of principal on our mortgage-backed securities
and collateralized mortgage obligations.
Total deposits increased $40.6 million, or 9.6%, to $463.6 million at September
30, 2004 from $423.0 million at June 30, 2004. This increase is primarily due to
the acquisition of $61.2 million in deposits in connection with our Panorama
City branch purchase. Excluding the Panorama City deposits, overall deposits
decreased $20.4 million, due primarily to the maturation and withdrawal of
high-rate certificates of deposit and the withdrawal of money market account
funds by customers seeking higher yielding opportunities elsewhere.
8
Equity increased $1.6 million to $90.7 million at September 30, 2004 from $89.1
million at June 30, 2004 primarily as a result of $1.3 million in income earned
for the first fiscal quarter ended September 30, 2004. The allocation of ESOP
shares earned during the quarter along with the decrease in the net unrealized
holding losses on securities available for sale contributed to the remaining
increase.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 AND SEPTEMBER 30, 2003.
GENERAL. Net income for the three months ended September 30, 2004 was $1.3
million, an increase of $729,000, or 126.6%, from the net income of $576,000 for
the three months ended September 30, 2003. The increase in net income was
primarily due to an increase in interest income of $1.9 million, offset by
increases in interest expense of $102,000, noninterest expenses of $490,000, and
income taxes of $482,000. Earnings per basic and diluted share were at $.09 for
the quarter-ended September 30, 2004. No earnings per share information is
available for the three months ended September 30, 2003 as the Company's initial
public offering occurred in March 2004.
INTEREST INCOME. Interest income increased by $1.9 million, or 38.8%, to $6.8
million for the three months ended September 30, 2004 from $4.9 million for the
three months ended September 30, 2003. The primary factor for the increase in
interest income was an increase in the average loans receivable balance of
$119.1 million, or 31.1%, from $382.9 million for the three months ended
September 30, 2003 to $502.0 million for the three months ended September 30,
2004. The increase was primarily due to the investment of proceeds received from
the Company's minority stock offering, which occurred in March 2004, in
whole-loan purchases of real estate loans. Interest income was also positively
impacted by the 15 basis point increase in the average yield on loans
receivable, from 4.81% for the three months ended September 30, 2003 to 4.96%
for the three months ended September 30, 2004. A significant contributor to this
increase was the decline in significant loan prepayments on purchased loans for
the three months ended September 30, 2004, which eased the level of purchase
loan premium write-offs previously experienced with the high loan refinancing
levels fueled by declining market interest rates in previous quarters.
Interest income on securities increased by $317,000 or 156.2%, to $520,000 for
the three months ended September 30, 2004, from $203,000 for the three months
ended September 30, 2003. The increase resulted from a $36.1 million, or 149.8%
increase in the average balance of securities attributable to the purchase of
additional mortgage backed and U.S. Government agency securities with cash
received from the Company's minority stock offering, which occurred in March
2004. The increase was supplemented by the increase in the average yield on the
securities investment portfolio from 3.36% for the three months ended September
30, 2003 to 3.45% for the three months ended September 30, 2004, an increase of
9 basis points.
INTEREST EXPENSE. Interest expense increased $102,000, or 4.4%, for the three
months ended September 30, 2004 to $2.4 million as compared to $2.3 million for
the three months ended September 30, 2003. The change is primarily attributable
to the significant increase in average deposits, offset by lower interest rates.
The average interest rates on interest-bearing liabilities decreased to 2.10%
for the three months ended September 30, 2004 from 2.49% for the three months
ended September 30, 2003. Average interest-bearing liabilities increased 23.7%
to $464.6 million at September 30, 2004 from $375.6 million at September 30,
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
9
collateral, estimated losses relating to specifically identified loans, and
current economic conditions. The allowance is increased by provisions for loan
losses, which are charged against income. Our policies require the review of
assets on a regular basis, and we appropriately classify loans as well as other
assets if warranted. We believe we use the best information available to make a
determination with respect to the allowance for loan losses, recognizing that
adjustments may be necessary depending upon a change in economic conditions.
Our methodology for analyzing the allowance for loan losses consists of two
components: general and specific allowances. The general allowance is determined
by applying an estimated loss percentage to various homogenous pools of loans.
The loss percentages are based on historical loan loss experiences for consumer
loans and peer and industry averages for real estate lending in order to balance
the recent and substantial increase in this type of lending with the limited
historical loan losses experienced by Kaiser Federal Bank for these latter types
of loans. The specific allowance component is created when management believes
that the collectibility of a specific large loan, such as a real estate,
multi-family, or commercial real estate loan, has been impaired and a loss is
probable.
While management uses the best information available to make loan loss allowance
evaluations, adjustments to the allowance may be necessary based on changes in
economic and other conditions. We anticipate that our allowance for loan losses
will be adjusted as we continue to implement Kaiser Federal Bank's strategy of
originating and purchasing primarily residential real estate loans.
Additionally, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The
Office of Thrift Supervision may require the recognition of adjustments to the
allowance for loan losses based on its judgment of information available to it
at the time of its examination.
Our provision for loan losses increased $90,000 to $120,000 for the three months
ended September 30, 2004 compared to $30,000 for the three months ended
September 30, 2003. The allowance for loan losses as a percent of total loans
was 0.47% at September 30, 2004 as compared to 0.59% at September 30, 2003. The
increase in the provision is primarily attributable to the $110,000 of net
charge-offs incurred during the three months ended September 30, 2004. 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 decreased $34,000, or 4.2%, to
$770,000 for the three months ended September 30, 2004 from $804,000 for the
three months ended September 30, 2003. The decrease is primarily the result of a
$42,000 increase in the loss on an equity investment in a tax credit fund,
partially offset by increases in ATM fees and charges.
NONINTEREST EXPENSE. Our noninterest expenses increased $490,000, or 20.1% for
the three months ended September 30, 2004 as compared to September 30, 2003. The
increase was primarily due to a $261,000 increase in salaries and benefits, a
$164,000 increase in professional services, a $22,000 increase in advertising
and promotional expenses, and a $44,000 increase in other operating expenses.
Salaries and benefits represented 53.7% of total noninterest expense for the
three months ended September 30, 2004 and September 30, 2003. Total salaries and
benefits increased $261,000, or 19.9%, to $1.6 million for the three months
ended September 30, 2004 from $1.3 million for the three months ended September
30, 2003. The increase was primarily due to the $157,000 in ESOP compensation
expense related to the establishment of the plan in March 2004 and an increase
of $59,000 in the bonus compensation expense for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003. The
remaining increase is primarily due to normal salary increases.
10
Professional services increased $164,000 to $260,000 for the three months ended
September 30, 2004 from $96,000 for the three months ended September 30, 2003.
The increase was primarily due to increased audit and filing fees as a result of
increased SEC and OTS compliance and reporting requirements.
Advertising and promotional expenses increased $22,000 and other operating
expenses increased $44,000 primarily as a result of increases in various
miscellaneous accounts related to the continued growth of the Bank.
INCOME TAX EXPENSE. Income tax expense for the three months ended September 30,
2004 was $803,000 compared to $321,000 for the three months ended September 30,
2003. This increase is primarily a result of an increase in pre-tax income of
$1.2 million. The effective tax rate was 38.1% and 35.8% for the three months
ended September 30, 2004 and 2003, respectively.
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 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 September 30, 2004, the total approved loan commitments
unfunded amounted to $20.9 million, which includes the unadvanced portion of
loans of $5.8 million and a $13.7 million commitment to purchase a pool of whole
residential real estate loans in November 2004.
Time deposits and advances from the Federal Home Loan Bank of San Francisco
scheduled to mature in one year or less at September 30, 2004, totaled $124.8
million and $10.0 million, respectively. Based on historical experience,
management believes that a significant portion of maturing deposits will remain
with Kaiser Federal Bank. We anticipate that we will continue to have sufficient
funds, through deposits and borrowings, to meet our current commitments.
11
At September 30, 2004, we had available additional advances from the Federal
Home Loan Bank of San Francisco in the amount of $153.0 million.
CAPITAL
The table below sets forth Kaiser Federal Bank's capital position relative to
its Office of Thrift Supervision capital requirements at September 30, 2004. The
definitions of the terms used in the table are those provided in the capital
regulations issued by the Office of Thrift Supervision.
Minimum Required
to Be Well
Capitalized
Under Prompt
Corrective
Actual Minimum Capital Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-
weighted assets) $ 60,637 17.08% $ 28,409 8.00% $ 35,511 10.00%
Tier 1 capital (to risk-
weighted assets) 58,299 16.42 14,204 4.00 21,306 6.00
Tier 1 (core) capital (to
adjusted tangible assets) 58,299 10.07 23,147 4.00 28,933 5.00
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. The substantial increase in capital ratios
from the quarter ended September 30, 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.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on assets and
pay on liabilities generally are established contractually for a period of time.
Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those
of other financial institutions, are impacted by changes in interest rates and
the interest rate sensitivity of our assets and liabilities. The risk associated
with changes in interest rates and our ability to adapt to these changes is
known as interest rate risk and is our most significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt to
manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate risk
we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on our results of operations, we have adopted
investment/asset and liability management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability policies of Kaiser Federal Bank, which are implemented by
the asset/liability management committee.
The purpose of the asset/liability management committee is to communicate,
coordinate and control asset/liability management consistent with our business
plan and board approved policies. The committee establishes and monitors the
volume and mix of assets and funding sources taking into account relative costs
and spreads, interest rate sensitivity and liquidity needs. The objectives are
to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The asset/liability management committee generally meets on a weekly basis to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections pursuant to net present value of portfolio
equity analysis and income simulations. The asset/liability management committee
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity, which is defined as the net present value of an institution's existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and market
value of portfolio equity that are authorized by the board of directors of
Kaiser Federal Bank. The asset/liability management committee recommends
appropriate strategy changes based on this review. The chairman or his designee
is responsible for reviewing and reporting on the effects of the policy
implementations and strategies to the board of directors at least quarterly.
In order to manage our assets and liabilities and achieve the desired liquidity,
credit quality, interest rate risk, profitability and capital targets, we have
focused our strategies on: (1) originating and purchasing adjustable rate loans;
(2) originating a reasonable volume of short- and intermediate-term consumer
loans; (3) managing our deposits to establish stable deposit relationships; (4)
using Federal Home Loan Bank advances, and pricing on fixed-term non-core
deposits to align maturities and repricing terms, and (5) attempting to limit
the percentage of fixed-rate loans in our portfolio.
13
At times, depending on the level of general interest rates, the relationship
between long- and short-term interest rates, market conditions and competitive
factors, the asset/liability management committee may determine to increase our
interest rate risk position somewhat in order to maintain our net interest
margin. In the future, we intend to continue our existing strategy of
originating and purchasing relatively short-term and/or adjustable rate loans.
The Bank does not maintain any securities for trading purposes. The Bank does
not currently engage in trading activities or use instruments such as interest
rate swaps, hedges, or other similar derivatives to control interest rate risk.
The Office of Thrift Supervision provides Kaiser Federal Bank with the
information presented in the following table, which is based on information
provided to the Office of Thrift Supervision by Kaiser Federal Bank. It presents
the change in Kaiser Federal Bank's net portfolio value at September 30, 2004
that would occur upon an immediate change in interest rates based on Office of
Thrift Supervision assumptions but without giving effect to any steps that
management might take to counteract that change. A reduction in interest rates
of more than 100 basis points is not presented because it would compute to a
rate less than zero for certain products.
September 30, 2004
-----------------------------------------------------------------------------------
Change in interest rates in Net portfolio value (NPV) NPV as % of PV of assets
basis points ("bp") (Rate --------------------------------------------- ----------------------------------
shock in rates) $ amount $ change % change NPV ratio Change(bp)
- ------------------------------- ------------ ------------ ------------ -------------- ---------------
(Dollars in thousands)
+300 bp $ 48,555 $ (26,281) (35)% 8.69 % (384) bp
+200 bp 58,439 (16,397) (22) 10.21 (232)
+100 bp 67,681 (7,156) (10) 11.56 (97)
0 bp 74,836 - - 12.53 -
-100 bp 76,813 1,977 3 12.72 19
The Office of Thrift Supervision uses certain assumptions in assessing the
interst rate risk of savings associations. These assumptions relate to interst
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios.
As with any method of measuring interest rate risk, shortcomings are inherent in
the method of analysis presented in the foregoing tables. For example, although
assets and liabilities may have similar maturities or periods to repricing,
they may react in different degrees to changes in the market interest rates.
Also, the interest rates on certain types of assets an liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets, such
as adjustable rate mortgage loans, have features, that restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, if
interest rates change, expected rates of prepayments on loans and early
withdrawals from certificates of deposit could deviate significantly from those
assumed in calculating the table.
ITEM 4. CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 (the "Act")) as of the end of the period covered by this
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as of the end of
the period covered by this report are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms.
There have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15(d)-15(f) under the Act) that occurred during
the most recent fiscal quarter that have materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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
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: November 9, 2004 /S/ Kay M. Hoveland
---------------- -------------------------------------------
Kay M. Hoveland
President and Chief Executive Officer
/s/ Daniel A. Cano
-------------------------------------------
Daniel A. Cano
Chief Financial Officer
16