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EX-31.2 - CERTIFICATION OF CFO SECTION 302 - Simplicity Bancorp, Inc.dex31-2.htm
EX-31.1 - CERTIFICATION OF CEO SECTION 302 - Simplicity Bancorp, Inc.dex31-1.htm
EX-32.2 - CERTIFICATION OF CFO SECTION 906 - Simplicity Bancorp, Inc.dex32-2.htm
EX-32.1 - CERTIFICATION OF CEO SECTION 906 - Simplicity Bancorp, Inc.dex32-1.htm

 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  March 31, 2011
 
OR
 
o 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: 001-34979
 
KAISER FEDERAL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

Maryland
 
26-1500698
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
     
1359 N. Grand Avenue, Covina, CA
 
91724
(Address of principal executive offices)
 
(Zip Code)
     
 
(800) 524-2274
 
(Registrant’s telephone number, including area code)

Indicate by check mark 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 such 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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o                                           Accelerated filer o Non-accelerated filer x Smaller Reporting Company o
 
 
 

 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
 
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 – 9,558,960 shares outstanding as of May 13, 2011.

 
 

 
 
 
KAISER FEDERAL FINANCIAL GROUP, INC.
Table of Contents

   
Page
Part I.
FINANCIAL INFORMATION
 
     
Item 1:
Financial Statements (Unaudited)
 
 
1
 
2
 
3
 
4
 
5
     
Item 2:
18
     
Item 3:
34
     
Item 4:
35
     
Part II.
OTHER INFORMATION
 
     
Item 1:
35
Item 1A:
36
Item 2:
36
Item 3:
36
Item 4:
36
Item 5:
36
Item 6:
37
     
 
38
     
     

 

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except per share data)
   
March 31,
2011
   
June 30,
2010
 
ASSETS
           
Cash and due from banks
  $ 8,287     $ 7,785  
Federal funds sold
    131,880       31,775  
Total cash and cash equivalents
    140,167       39,560  
Interest earning time deposits in other financial institutions
    14,146       19,267  
Securities available-for-sale, at fair value
    1,230       2,290  
Securities held-to-maturity, fair value of $2,505 and $3,866 at March 31, 2011 and June 30, 2010, respectively
    2,432       3,751  
Federal Home Loan Bank (FHLB) stock, at cost
    10,797       12,179  
Loans receivable, net of allowance for loan losses of $11,824 and $13,309 at March 31, 2011 and June 30, 2010, respectively
    701,940       757,985  
Accrued interest receivable
    2,843       3,234  
Premises and equipment, net
    2,392       2,035  
Goodwill
    3,950       3,950  
Bank-owned life insurance
    12,738       12,372  
Real estate owned (REO)
    1,623       1,373  
Other assets
    7,704       8,806  
Total assets
  $ 901,962     $ 866,802  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Noninterest bearing
  $ 67,769     $ 53,022  
Interest bearing
    589,085       577,672  
Total deposits
    656,854       630,694  
Federal Home Loan Bank advances, short-term
    45,000       77,000  
Federal Home Loan Bank advances, long-term
    40,000       60,000  
Accrued expenses and other liabilities
    4,751       4,403  
Total liabilities
    746,605       772,097  
Commitments and contingent liabilities
               
Stockholders’ equity
               
Nonredeemable serial preferred stock, $.01 par value;
25,000,000 shares authorized; issued and outstanding — none
           
Common stock, $0.01 par value; 100,000,000 authorized;
March 31, 2011 — 9,558,960 shares issued
June 30, 2010 — 10,595,640 shares issued
    96       147  
Additional paid-in capital
    100,527       59,513  
Retained earnings
    59,918       54,996  
Accumulated other comprehensive income, net of tax
    26       32  
Unearned employee stock ownership plan (ESOP) shares
    (5,210 )     (1,706 )
Treasury stock, at cost (March 31, 2011 — none;
June 30, 2010 — 1,034,670 shares)
          (18,277 )
Total stockholders’ equity
    155,357       94,705  
Total liabilities and stockholders’ equity
  $ 901,962     $ 866,802  
The accompanying notes are an integral part of these unaudited consolidated financial statements
 


Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(Dollars in thousands, except per share data)

   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income
                       
Interest and fees on loans
  $ 10,568     $ 11,049     $ 32,675     $ 33,101  
Interest on securities, taxable
    43       83       163       278  
Federal Home Loan Bank dividends
    8       8       34       35  
Other interest
    76       111       213       374  
Total interest income
    10,695       11,251       33,085       33,788  
Interest expense
                               
Interest on deposits
    2,192       2,676       7,057       8,229  
Interest on borrowings
    967       1,665       3,807       5,697  
Total interest expense
    3,159       4,341       10,864       13,926  
Net interest income
    7,536       6,910       22,221       19,862  
Provision for loan losses
          2,272       950       8,787  
Net interest income after provision for loan losses
    7,536       4,638       21,271       11,075  
Noninterest income
                               
Service charges and fees
    391       528       1,304       1,722  
ATM fees and charges
    517       457       1,530       1,377  
Referral commissions
    70       74       221       232  
Gain (loss) on equity method investment
    51       (75 )     (69 )     (225 )
Bank-owned life insurance
    119       123       366       366  
Other noninterest income
    10       8       19       36  
Total noninterest income
    1,158       1,115       3,371       3,508  
Noninterest expense
                               
Salaries and benefits
    2,426       1,993       6,945       6,254  
Occupancy and equipment
    627       588       1,808       1,770  
ATM expense
    454       456       1,356       1,294  
Advertising and promotional
    84       68       287       279  
Professional services
    508       283       1,125       682  
Federal deposit insurance premiums
    232       279       767       771  
Postage
    67       71       206       207  
Telephone
    174       173       524       523  
REO and foreclosure expense (gain)
    32       (119 )     287       (129 )
Other operating expense
    399       458       1,224       1,192  
Total noninterest expense
    5,003       4,250       14,529       12,843  
Income before income tax expense
    3,691       1,503       10,113       1,740  
Income tax expense
    1,430       394       3,818       427  
Net income
  $ 2,261     $ 1,109     $ 6,295     $ 1,313  
Comprehensive income
  $ 2,250     $ 1,103     $ 6,289     $ 1,290  
Earnings per common share:
                               
Basic
  $ 0.25     $ 0.12     $ 0.68     $ 0.14  
Diluted
  $ 0.25     $ 0.12     $ 0.68     $ 0.14  
The accompanying notes are an integral part of these unaudited consolidated financial statements
 




Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Dollars in thousands, except per share data)

       
Common Stock
                 
Treasury Stock
     
   
Comprehensive
Income
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income, net
 
Unearned ESOP Shares
 
Shares
 
Amount
 
Total
 
Balance June 30, 2010
       
10,595,640
 
$
147
 
$
59,513
 
$
54,996
 
$
32
 
$
(1,706
)
(1,034,670
)
$
(18,277
)$
 94,705  
Comprehensive income
                                                       
Net income for the nine months ended March 31, 2011
 
$
6,295
 
   
   
   
6,295
   
   
 
   
    6,295  
Other comprehensive loss – unrealized loss on securities, net of tax
   
(6
)
   
   
   
   
(6
)
 
 
   
    (6
)
Total comprehensive income
 
$
6,289
                                                 
Dividends declared ($0.25 per share) *
       
   
   
   
(1,373
)
 
   
 
   
    (1,373
)
Items relating to Conversion and stock offering:
                                                       
Treasury stock retired pursuant to reorganization
       
(1,034,670
)
 
(14
)
 
(18,263
)
 
   
   
 
1,034,670
   
18,277
     
Cancellation of K-Fed Mutual Holding Company shares and fractional shares
       
(6,377,010
)
 
(101
)
 
101
   
   
   
 
   
     
Proceeds from stock offering, net of expense of $4,665
       
6,375,000
   
64
   
59,021
   
   
   
 
   
    59,085  
Purchase of shares by ESOP pursuant to reorganization
       
   
   
   
   
   
(3,825
)
   
   (3,825
)
Stock options earned
       
   
   
61
   
   
   
 
   
    61  
Allocation of stock awards
       
   
   
82
   
   
   
 
   
    82  
Allocation of ESOP common stock
       
   
   
12
   
   
   
321
 
   
    333  
Balance March 31, 2011
       
9,558,960
 
$
96
 
$
100,527
 
$
59,918
 
$
26
 
$
(5,210
)
 
$
  $  155,357  
 
* K-Fed Mutual Holding Company waived its receipt of dividends for the quarter ended September 30, 2010 on the shares it owned.
 
 
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
 



Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

   
Nine months ended
March 31,
 
   
2011
   
2010
 
OPERATING ACTIVITIES
           
Net income
  $ 6,295     $ 1,313  
Adjustments to reconcile net income to net cash provided by operating activities:
               
(Accretion) Amortization of net premiums on securities
    (1 )     2  
Accretion of net discounts on loan purchases
    (20 )     (17 )
Amortization of net loan origination costs
    62       52  
Provision for loan losses
    950       8,787  
Gain on sale of REO
    (21 )     (128 )
REO direct write-down
    164        
Depreciation and amortization
    556       588  
Amortization of core deposit intangible
    35       48  
Loss on equity investment
    69       225  
Increase in cash surrender value of bank-owned life insurance
    (366 )     (366 )
Accretion of debt exchange costs
          (4 )
Allocation of ESOP common stock
    333       301  
Allocation of stock awards
    82       176  
Stock options earned
    61       203  
Net change in accrued interest receivable
    391       248  
Net change in other assets
    772       (4,212 )
Net change in accrued expenses and other liabilities
    348       33  
Net cash provided by operating activities
    9,710       7,249  
                 
INVESTING ACTIVITIES
               
Proceeds from maturities and principal repayments of available-for-sale securities
    1,051       1,453  
Proceeds from maturities and principal repayments of held-to-maturity securities
    1,318       1,426  
Net change in interest earning time deposits with other financial institutions
    5,121       1,362  
Net change in loans
    52,950       (15,929 )
Proceeds from sale of real estate owned
    1,941       1,026  
Redemption of FHLB stock
    1,382        
Purchases of premises and equipment
    (913 )     (193 )
Net cash provided by (used in) investing activities
    62,850       (10,855 )
                 
FINANCING ACTIVITIES
               
Repayment of FHLB advances
    (52,000 )     (60,000 )
Dividends paid on common stock
    (1,373 )     (1,392 )
Purchase of treasury stock
          (115 )
Net change in deposits
    26,160       82,545  
Net proceeds from stock offering
    59,085        
Purchase of shares by ESOP pursuant to reorganization
    (3,825 )      
Change in State of California time deposit
          (25,000 )
Net cash provided by (used in) financing activities
    28,047       (3,962 )
                 
Net increase (decrease) in cash and cash equivalents
    100,607       (7,568 )
Beginning cash and cash equivalents
    39,560       73,705  
Ending cash and cash equivalents
  $ 140,167     $ 66,137  
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements
 


Notes to Consolidated Financial Statements
(Unaudited)

Note 1 – Nature of Business and Significant Accounting Policies

Nature of Business: Kaiser Federal Financial Group, Inc. (the “Company”) is a Maryland corporation that owns all of the outstanding common stock of Kaiser Federal Bank (the “Bank”).   It is the successor to K-Fed Bancorp following the completion of the second-step conversion and offering in November 2010.  The Company’s primary activity is holding all of the outstanding shares of common stock of Kaiser Federal Bank.  The Bank is a federally chartered savings bank headquartered in Covina, California.  The Bank’s principal business activity consists of attracting retail deposits from the general public and originating primarily loans secured by first mortgages on owner-occupied, one-to-four family residences and multi-family residences located in its market area.  While the Bank originates many types of residential and commercial real estate loans, the majority of its one-to-four family 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 its investment in the Bank. Unless the context otherwise requires, all references to the Company include the Bank and the Company on a consolidated basis, and prior to November 19, 2010, the Company refers to K-Fed Bancorp and the Bank on a consolidated basis.

Basis of Presentation: The financial statements of Kaiser Federal Financial Group, Inc. have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and predominant practices followed by the financial services industry, and are unaudited. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made.

The results of operations for the three and nine months ended March 31, 2011 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the fiscal year ending June 30, 2011. 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 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

On November 19, 2010, the Company completed the conversion from a mutual holding company structure to a fully public stock holding company form of organization and related public offering. The Company sold a total of 6,375,000 shares of common stock in the offering at a purchase price of $10.00 per share.  The offering raised capital of $59.1 million, which is net of costs of $4.7 million.  Concurrent with the completion of the offering shares of K-Fed Bancorp common stock owned by public stockholders were exchanged for 0.7194 shares of the Company’s common stock.  All share and per share information in this report for periods prior to the conversion has been revised to reflect the 0.7194:1 conversion ratio on shares outstanding, including shares of the former Mutual Holding Company that were not publically traded.

Principles of Consolidation: The consolidated financial statements presented in this quarterly report include the accounts of Kaiser Federal Financial Group, Inc. and its wholly-owned subsidiary, Kaiser Federal Bank. All material intercompany balances and transactions have been eliminated in consolidation. Financial information presented in this report is derived in part from the consolidated financial statements of K-Fed Bancorp and subsidiary prior to November 19, 2010.

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, real estate owned and the valuation of financial instruments.
 

Reclassifications:  Some items in prior period financial statements were reclassified to conform to the current presentation.

New Accounting Standards:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance under ASC Topic 860, “Transfers and Servicing,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASC Topic 860 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASC Topic 860 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative guidance under ASC Topic 860 is effective at the start of the fiscal year beginning after November 15, 2009. The adoption of this guidance did not have a material impact upon the Company.

In June 2009, the FASB issued new authoritative guidance under Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46R.” In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17 which provides updates to ASC Topic 810, “Consolidations”  This guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new guidance under ASC Topic 810 is effective at the start of the fiscal year beginning after November 15, 2009. The adoption of this guidance did not have a material impact upon the Company.

In July 2010, the FASB amended existing guidance related to financing receivables and the allowance for credit losses, which requires further disaggregated disclosures that improve financial statement users’ understanding of 1) the nature of an entity’s credit risk associated with its financing receivables and 2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position, but required expansion of the Company’s disclosures.

In April 2011, the FASB amended existing guidance to assist creditors in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring (“TDR”).  The guidance does not change previous standards that a restructuring of debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider,” but provides clarification on determining whether a debtor is in financial difficulty and if a concession was granted.  The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.  Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations or financial position.


Note 2 – Earnings Per Share

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for this calculation unless unearned. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation and had an immaterial impact on the calculation for the three and nine months ended March 31, 2011 and 2010.  Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.

   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Basic
 
(Dollars in thousands, except per share data)
 
Net income
  $ 2,261     $ 1,109     $ 6,295       1,313  
Weighted average common shares outstanding
    9,072,381       9,422,864       9,260,539       9,419,816  
Basic earnings per share
  $ 0.25     $ 0.12     $ 0.68       0.14  
                                 
Diluted
                               
Net income
  $ 2,261     $ 1,109     $ 6,295       1,313  
                                 
Weighted average common shares outstanding
    9,072,381       9,422,864       9,260,539       9,419,816  
Dilutive effect of stock options
                161        
Average shares and dilutive potential common shares
    9,072,381       9,422,864       9,260,700       9,419,816  
Diluted earnings per share
  $ 0.25     $ 0.12     $ 0.68       0.14  

For the three and nine months ended March 31, 2011 outstanding stock options to purchase 304,515 shares, respectively were anti-dilutive and not considered in computing diluted earnings per common share. For the three and nine months ended March 31, 2010 outstanding stock options to purchase 348,500 shares were anti-dilutive and not considered in computing diluted earnings per common share.


Note 3 – Fair Value Measurements

FASB ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

There were no financial or nonfinancial instruments transferred in or out of Level 1, 2, or 3 input categories during the three or nine months ended March 31, 2011 and 2010.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Nonrecurring adjustments to certain real estate properties classified as real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

As of March 31, 2011 and June 30, 2010, there were no liabilities measured at fair value.

Assets measured at fair value on a recurring basis are summarized in the following table:
 
         
Fair Value Measurements Using
 
Assets at March 31, 2011:
 
Total
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
   
(Dollars in thousands)
 
Available-for-sale securities
                       
Mortgage-backed securities (residential)
  $ 219     $     $ 219     $  
Collateralized mortgage obligations (residential)
  $ 1,011     $     $ 1,011     $  
                                 
Assets at June 30, 2010:
                               
                                 
Available-for-sale securities
                               
Mortgage-backed securities (residential)
  $ 341     $     $ 341     $  
Collateralized mortgage obligations (residential)
  $ 1,949     $     $ 1,949     $  
                                 

 
The following financial assets were measured at fair value on a non-recurring basis:
 
       
Fair Value Measurements Using
 
Assets at March 31, 2011:
 
Total
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
   
(Dollars in thousands)
 
Impaired loans
  $ 21,062     $     $     $ 21,062  
                                 
Assets at June 30, 2010:
                               
                                 
Impaired loans
  $ 20,829     $     $     $ 20,829  

The following nonfinancial assets were measured at fair value on a non-recurring basis:

       
Fair Value Measurements Using
 
Assets at March 31, 2011:
 
Total
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
   
(Dollars in thousands)
 
Real estate owned
  $ 762     $     $     $ 762  
                                 
Assets at June 30, 2010:
                               
                                 
Real estate owned
  $ 429     $     $     $ 429  

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $26.1 million at March 31, 2011 and June 30, 2010. The valuation allowance for these loans was $5.1 million at March 31, 2011 as compared to $5.3 million at June 30, 2010. An additional provision for loan losses of $2.3 million was made for the nine months ended March 31, 2011 relating to impaired loans.

Real estate owned is measured at fair value less estimated costs to sell at transfer. If the fair value of the asset declines, a write-down is recorded through expense. During the three and nine months ended March 31, 2011 the Company incurred a charge of $10,000 and $164,000, respectively to reduce real estate owned to fair value. During the three and nine months ended March 31, 2010, the Company did not incur any charges to reduce real estate owned to fair value.

Fair Value of Financial Instruments

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate fair value:

Investments

Estimated fair values for investments are obtained from quoted market prices where available. Where quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments.

 
Securities available-for-sale that are previously reported are excluded from the fair value disclosure below.

Loans

The estimated fair value for all loans is determined by discounting the estimated cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and maturities.

Impaired loans that are previously reported are excluded from the fair value disclosure below.

Deposits

The estimated fair value of deposit accounts (savings, non interest bearing demand and money market accounts) is the carrying amount. The fair value of fixed-maturity time certificates of deposit is estimated by discounting the estimated cash flows using the current rate at which similar certificates would be issued.

FHLB Advances

The fair values of the FHLB advances are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Other On-Balance Sheet Financial Instruments

Other on-balance sheet financial instruments include cash and cash equivalents, interest earning time-deposits in other financial institutions, accrued interest receivable, FHLB stock and accrued expenses and other liabilities. The carrying value of each of these financial instruments is a reasonable estimation of fair value. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Off-Balance Sheet Financial Instruments

The fair values for the Company’s off-balance sheet loan commitments are estimated based on fees charged to others to enter into similar agreements taking into account the remaining terms of the agreements and credit standing of the Company’s customers. The estimated fair value of these commitments is not significant.

The estimated fair values of the Company’s financial instruments are summarized as follows:

   
March 31, 2011
   
June 30, 2010
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
   
(In thousands)
 
Financial assets:
                       
Cash and cash equivalents
  $ 140,167     $ 140,167     $ 39,560     $ 39,560  
Interest earning time deposits in other financial institutions
    14,146       14,146       19,267       19,267  
Securities held-to-maturity
    2,432       2,505       3,751       3,866  
Federal Home Loan Bank Stock
    10,797    
NA
      12,179    
NA
 
Loans receivable, net
    680,878       685,691       737,156       756,778  
Accrued interest receivable
    2,843       2,843       3,234       3,234  
Financial liabilities:
                               
Deposits
    656,854       662,169       630,694       637,684  
Borrowings
    85,000       86,831       137,000       141,773  



Note 4 – Investments

The amortized cost and fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
 
   
Fair
Value
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Amortized
Cost
 
   
(Dollars in thousands)
 
March 31, 2011
                       
Mortgage-backed securities (residential):
                       
Freddie Mac
  $ 219     $ 6     $     $ 213  
Collateralized mortgage obligations (residential):
                               
Freddie Mac
    1,011       38             973  
Total
  $ 1,230     $ 44     $     $ 1,186  
                                 
June 30, 2010
                               
Mortgage-backed securities (residential):
                               
Freddie Mac
  $ 341     $ 9     $     $ 332  
Collateralized mortgage obligations (residential):
                               
Freddie Mac
    1,949       48       (3 )     1,904  
Total
  $ 2,290     $ 57     $ (3 )   $ 2,236  
                                 

The amortized cost, unrecognized gains and losses, and fair value of securities held-to-maturity were as follows:
 
   
Amortized Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
   
(Dollars in thousands)
 
March 31, 2011
                       
Mortgage-backed securities (residential):
                       
Fannie Mae
  $ 148     $ 2     $     $ 150  
Freddie Mac
    114       4             118  
Ginnie Mae
    54       2             56  
Collateralized mortgage obligations (residential):
                               
Fannie Mae
    1,019       27             1,046  
Freddie Mac
    1,097       39       (1 )     1,135  
Total
  $ 2,432     $ 74     $ (1 )   $ 2,505  
                                 
June 30, 2010
                               
Mortgage-backed securities (residential):
                               
Fannie Mae
  $ 162     $ 2     $     $ 164  
Freddie Mac
    131       5             136  
Ginnie Mae
    60       2             62  
Collateralized mortgage obligations (residential):
                               
Fannie Mae
    1,352       34             1,386  
Freddie Mac
    2,046       79       (7 )     2,118  
Total
  $ 3,751     $ 122     $ (7 )   $ 3,866  
 
There were no sales of securities during the three or nine months ended March 31, 2011 or March 31, 2010.
 
 
Note 5 – Loans

The composition of loans consists of the following (in thousands):
 
   
March 31,
2011
   
June 30,
2010
 
Real Estate:
           
One-to-four family residential, fixed rate
  $ 235,418     $ 276,995  
One-to-four family residential, variable rate
    53,132       58,636  
Multi-family residential, variable rate
    282,194       278,397  
Commercial real estate, variable rate
    109,978       113,458  
      680,722       727,486  
Consumer:
               
Automobile
    19,763       29,492  
Other consumer loans, primarily unsecured
    12,686       13,768  
      32,449       43,260  
Total loans
    713,171       770,746  
Deferred net loan origination costs
    632       607  
Net discounts on purchased loans
    (39 )     (59 )
Allowance for loan losses
    (11,824 )     (13,309 )
    $ 701,940     $ 757,985  


The following is the activity in the allowance for loan losses (in thousands):

 
Allowance for loan losses for the
 
 
Three months ended March 31, 2011
 
 
One-to-four family
 
Multi-family residential
 
Commercial real estate
 
Automobile
 
Other
 
Total
 
Balance, beginning of period
  $ 5,945     $ 4,056     $ 2,151     $ 118     $ 32     $ 12,302  
Provision for loan losses
    1,338       (1,204 )     (83 )     (46 )     (5 )      
Recoveries
                      27       6       33  
Loans charged off
    (481 )                 (24 )     (6 )     (511 )
Balance, end of period
  $ 6,802     $ 2,852     $ 2,068     $ 75     $ 27     $ 11,824  

 
Allowance for loan losses for the
 
 
Three months ended March 31, 2010
 
 
One-to-four family
 
Multi-family residential
 
Commercial real estate
 
Automobile
 
Other
 
Total
 
Balance, beginning of period
  $ 6,850     $ 2,791     $ 877     $ 118     $ 104     $ 10,740  
Provision for loan losses
    975       924       314       75       (16 )     2,272  
Recoveries
                      10       6       16  
Loans charged off
    (162 )                 (35 )     (11 )     (208 )
Balance, end of period
  $ 7,663     $ 3,715     $ 1,191     $ 168     $ 83     $ 12,820  

 
Allowance for loan losses for the
 
 
Nine months ended March 31, 2011
 
 
One-to-four family
 
Multi-family residential
 
Commercial real estate
 
Automobile
 
Other
 
Total
 
Balance, beginning of period
  $ 7,821     $ 3,643     $ 1,599     $ 185     $ 61     $ 13,309  
Provision for loan losses
    600       (19 )     469       (134 )     34       950  
Recoveries
    90                   90       23       203  
Loans charged off
    (1,709 )     (772 )           (66 )     (91 )     (2,638 )
Balance, end of period
  $ 6,802     $ 2,852     $ 2,068     $ 75     $ 27     $ 11,824  



 
Allowance for loan losses for the
 
 
Nine months ended March 31, 2010
 
 
One-to-four family
 
Multi-family residential
 
Commercial real estate
 
Automobile
 
Other
 
Total
 
Balance, beginning of period
  $ 3,326     $ 515     $ 286     $ 342     $ 117     $ 4,586  
Provision for loan losses
    4,712       3,200       905       (48 )     18       8,787  
Recoveries
                      47       15       62  
Loans charged off
    (375 )                 (173 )     (67 )     (615 )
Balance, end of period
  $ 7,663     $ 3,715     $ 1,191     $ 168     $ 83     $ 12,820  

At March 31, 2011, non-accrual loans totaled $28.9 million, compared to $31.5 million at June 30, 2010. At March 31, 2011 and June 30, 2010, there were no loans past due more than 90 days and still accruing interest. Included in non-accrual loans are troubled debt restructurings of $12.2 million and $13.0 million at March 31, 2011 and June 30, 2010, respectively. There were no further commitments to customers whose loans were troubled debt restructurings at March 31, 2011 and June 30, 2010.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011 (in thousands):

   
One-to-four family
   
Multi-family residential
   
Commercial real estate
   
Automobile
   
Other
   
Total
 
Allowance for loan losses:
                                   
Ending allowance balance attributed to loans:
                                   
Individually evaluated for impairment
  $ 3,682     $ 983     $ 418     $     $     $ 5,083  
Collectively evaluated for impairment
    3,120       1,869       1,650       75       27       6,741  
Total ending allowance balance
  $ 6,802     $ 2,852     $ 2,068     $ 75       27     $ 11,824  

   
One-to-four family
   
Multi-family residential
   
Commercial real estate
   
Automobile
   
Other
   
Total
 
Loans:
                                   
Individually evaluated for impairment
  $ 20,923     $ 3,090     $ 4,925     $     $     $ 28,938  
Collectively evaluated for impairment
    267,627       279,104       105,053       19,763       12,686       684,233  
Total ending loan balance
  $ 288,550     $ 282,194     $ 109,978     $ 19,763     $ 12,686     $ 713,171  



A loan is impaired when it is probable, based on current information and events, the Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. When it is determined that a loss is probable, a specific valuation allowance is established and included in the allowance for loan losses. The amount of impairment is determined by the difference between the recorded investment in the loan and estimated net realizable value of the underlying collateral on collateral dependent loans.

Individually impaired loans were as follows (in thousands):

   
March 31,
2011
   
June 30,
2010
 
Loans with no allocated allowance
  $ 2,793     $ 8,289  
Loans with allocated allowance
    26,145       26,120  
    $ 28,938     $ 34,409  
                 
Total allowance for loan losses allocated
  $ 5,083     $ 5,291  

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011 (in thousands):

   
Unpaid Principal Balance
   
Allowance
for Loan Losses Allocated
 
With no related allowance recorded:
           
One-to-four family
  $ 2,793     $  
Multi-family residential
           
Commercial real estate
           
                 
With an allowance recorded:
               
One-to-four family
    18,130       3,682  
Multi-family residential
    3,090       983  
Commercial real estate
    4,925       418  
Total
  $ 28,938     $ 5,083  

The difference between the recorded investment and unpaid principal balance of loans relates to accrued interest, net deferred origination costs and net discounts on purchased loans each of which is immaterial to each loan class.

   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Monthly average of individually impaired loans during the period (in thousands)
  $ 28,070     $ 26,536     $ 29,434     $ 18,808  

Payments received on impaired loans are recorded as a reduction of principal or as interest income depending on management’s assessment of the ultimate collectability of the loan principal. Generally, interest income on an impaired loan is recorded on a cash basis when the outstanding principal is brought current. For the three and nine months ended March 31, 2011, income recorded on impaired loans totaled $249,000 and $736,000, respectively. For the three and nine months ended March 31, 2010, income recorded on impaired loans totaled $114,000 and $256,000, respectively.  Interest income recorded on impaired loans for all periods presented was recorded on a cash basis.


The following table presents the recorded investment in nonaccrual loans by class of loans as of March 31, 2011 (in thousands):

Non-accrual loans:
 
Non-accrual
 
Real estate loans:
     
One-to-four family
 
$
20,922
 
Multi-family residential
   
3,090
 
Commercial
   
4,926
 
Other loans:
       
Automobile
   
7
 
Other
   
2
 
Total non-accrual loans
 
$
28,947
 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 by class of loans:

   
30-59 Days
Delinquent
   
60-89 Days
Delinquent
   
90 Days or More
Delinquent
   
Total Delinquent Loans
   
Total Current Loans
   
Total Loans
 
   
(Dollars in thousands)
 
                                     
Real estate loans:
                                   
One-to-four family
  $ 3,373     $ 616     $ 7,349     $ 11,338     $ 277,212     $ 288,550  
Multi-family
                1,757       1,757       280,437       282,194  
Commercial
          637             637       109,341       109,978  
Other loans:
                                               
Automobile
    60             7       67       19,696       19,763  
Other
    4             2       6       12,680       12,686  
Total loans
  $ 3,437     $ 1,253     $ 9,115     $ 13,805     $ 699,366     $ 713,171  


Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation and current economic trends among other factors.  This analysis is performed monthly.  The Company uses the following definitions for risk ratings:

Special Mention.  Loans are classified as special mention when it is determined a loan relationship should be monitored more closely.  Loans that are 60 days to 89 days past due are generally classified as special mention.  In addition, loans are classified as special mention for a variety of reasons including changes in recent borrower financial conditions, changes in borrower operations, changes in value of available collateral, concerns regarding changes in economic conditions in a borrower’s industry, and other matters.  A loan classified as special mention in many instances may be performing in accordance with the loan terms.

Substandard.  Loans that are 90 days or more past due are generally classified as substandard.  A loan is also 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.


Doubtful.  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 highly questionable and improbable.

Loans not meeting the criteria as part of the above described process are considered to be Pass rated loans.  Pass rated loans are generally well protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.  Pass rated assets are not more than 59 days past due but are generally performing in accordance with the loan terms.   As of March 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

   
Pass
   
Special Mention
   
Substandard
   
Doubtful
 
                         
Real estate loans:
                       
One-to-four family
  $ 251,518     $ 8,100     $ 28,932     $  
Multi-family
    275,100       5,649       1,445        
Commercial
    99,482       6,155       4,341        
Other loans:
                               
Automobile
    19,238       174       327       24  
Other
    12,677             9        
Total loans
  $ 658,015     $ 20,078     $ 35,054     $ 24  

The Company evaluates one-to-four family residential loans by historical loss experience stratified by the county where the property is located.  The following table presents the one-to-four family real estate loans by county as of March 31, 2011 (dollars in thousands).

   
Unpaid Principal Balance
 
       
One-to-four family loans
     
Los Angeles County
  $ 107,084  
Orange County
    50,210  
Riverside County
    12,524  
San Bernardino County
    13,623  
San Diego County
    25,625  
Other
    79,484  
    $ 288,550  

The Company’s multi-family and commercial real estate loans are less seasoned, and therefore, the Company has not incurred material charge-offs.  The historical loss migration for these loans types were expanded to include the credit loss migration from published sources, including both the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.



Forward-Looking Statements

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. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often includes words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business of Kaiser Federal Financial Group, Inc. and Kaiser Federal Bank, and changes in the securities markets. 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. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Market Area

Our success depends primarily on the general economic conditions in the California counties of Los Angeles, Orange, San Bernardino, Riverside and Santa Clara, as nearly all of our loans are to customers in this market area.  Economic conditions remain weak both nationally and in our market area of California.  We continue to experience a downward trend on home prices and California remains one of the highest in the nation for foreclosure activity.  California, in particular has experienced significant declines in real estate values and elevated unemployment rates.  Unemployment rates in California were 12.0% in March 2011 as compared to 12.3% in June 2010.

Comparison of Financial Condition at March 31, 2011 and June 30, 2010.

Assets. Total assets increased $35.2 million, or 4.1% to $902.0 million at March 31, 2011 from $866.8 million at June 30, 2010. The increase primarily reflected growth in cash and cash equivalents, partially offset by a decrease in loans receivable.  Total cash and cash equivalents increased $100.6 million, or 254.3% to $140.2 million at March 31, 2011 from $39.6 million at June 30, 2010.  The increase in cash and cash equivalents was a result of an increase in deposits as well as the $59.1 million in net proceeds raised from the second-step stock offering.
 
 
Our investment securities portfolio decreased $2.4 million, or 39.4% to $3.7 million at March 31, 2011 from $6.0 million at June 30, 2010.  The decrease was attributable to maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Our net loan portfolio decreased by $56.0 million, or 7.4% to $701.9 million at March 31, 2011 from $758.0 million at June 30, 2010 due primarily to a decrease in one-to-four family real estate loans.  One-to-four family real estate loans decreased $47.0 million, or 14.0% to $288.6 million at March 31, 2011 from $335.6 million at June 30, 2010 due to loan repayments, charge-offs and transfers of property to real estate owned. The decline was also due to the overall decline in consumer demand for mortgages as volume has dropped industry-wide.  Multi-family loans increased $3.8 million, or 1.4% to $282.2 million at March 31, 2011 from $278.4 million at June 30, 2010. Commercial real estate loans decreased $3.5 million, or 3.1% to $110.0 million at March 31, 2011 from $113.5 million at June 30, 2010. Other loans which were comprised primarily of automobile loans decreased $10.8 million, or 25.0% to $32.4 million at March 31, 2011 from $43.3 million at June 30, 2010. Real estate loans comprised 95.5% of the total loan portfolio at March 31, 2011, compared with 94.4% at June 30, 2010.

Deposits. Total deposits increased $26.2 million, or 4.1% to $656.9 million at March 31, 2011 from $630.7 million at June 30, 2010. The growth was comprised of increases of $16.7 million in checking and savings balances, $7.3 million in money market balances and $2.2 million in certificates of deposit balances.  The increase in deposits was typical this time of year due to tax refunds as well as higher than normal payroll deposits received by a significant number of our customers at the end of the quarter.

 
Borrowings. Advances from the FHLB of San Francisco decreased $52.0 million, or 38.0% to $85.0 million at March 31, 2011 from $137.0 million at June 30, 2010. The decrease was a result of the pay down of scheduled maturities of FHLB Advances during the period.  The repayment was funded with available liquidity and proceeds from the second-step stock offering.

Stockholders’ Equity.  Stockholders’ equity increased $60.7 million to $155.4 million at March 31, 2011 from $94.7 million at June 30, 2010. The increase in stockholders’ equity was primarily due to the conversion and related stock offering, which occurred on November 19, 2010.  Proceeds from the offering, net of $4.7 million in expense, totaled $59.1 million, with $3.8 million of the proceeds being used to fund the ESOP.



Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table sets forth certain information for the quarter ended March 31, 2011 and 2010, respectively.
 
   
For the three months ended March 31,
         
2011 (1)
               
2010 (1)
         
               
Average
               
Average
   
   
Average
         
Yield/
   
Average
         
Yield/
   
   
Balance
   
Interest
   
Cost
   
Balance
   
Interest
   
Cost
   
   
(Dollars in thousands)
INTEREST-EARNING ASSETS
                                     
Loans receivable(2)
  $ 716,481     $ 10,568       5.90 %