-----------------------------------------------------------
PRO FORMA VALUATION UPDATE REPORT
K-FED BANCORP
HOLDING COMPANY FOR
KAISER FEDERAL BANK
COVINA, CALIFORNIA
DATED AS OF:
NOVEMBER 7, 2003
-----------------------------------------------------------
PREPARED BY:
RP(R) FINANCIAL, LC.
1700 NORTH MOORE STREET
SUITE 2210
ARLINGTON, VIRGINIA 22209
RP(R) FINANCIAL, L.C.
- ----------------------------------------------
Financial Services Industry Consultants
November 7, 2003
Board of Directors
K-Fed Mutual Holding Company
K-Fed Bancorp
Kaiser Federal Bank
1359 North Grand Avenue, Suite 200
Covina, California 91724
Members of the Boards:
At your request, we have completed and hereby provide an independent
appraisal ("Appraisal") of the estimated pro forma market value of the Common
Stock which is to be offered in connection with the Plan of Stock Issuance (the
"Plan"), described below.
This Appraisal is furnished pursuant to the requirements of 563b.7 and has
been prepared in accordance with the "Guidelines for Appraisal Reports for the
Valuation of Savings and Loan Associations Converting from Mutual to Stock Form
of Organization" of the Office of Thrift Supervision ("OTS"), including the most
recent revisions as of October 21, 1994, and applicable interpretations thereof.
DESCRIPTION OF PLAN OF STOCK ISSUANCE
K-Fed Mutual Holding Company (the "MHC") is a federally chartered mutual
holding company regulated by the OTS. The MHC was formed in 2003 in conjunction
with the mutual holding company reorganization of Kaiser Federal Bank, Covina,
California, ("Kaiser Federal" or the "Bank"); no stock was issued publicly in
the mutual holding company reorganization. Simultaneous with the mutual holding
company reorganization, a wholly-owned mid-tier stock holding company was formed
known as K-Fed Bancorp ("K-Fed Bancorp" or the "Company") and Kaiser Federal
became a wholly-owned subsidiary of the Company. Pursuant to the Plan, K-Fed
Bancorp will offer for sale up to 49.0% of its common stock (the "Minority Stock
Issuance") to the Bank's Eligible Account Holders, Supplemental Eligible Account
Holders and tax-qualified plans of the Bank (including the employee stock
ownership plan, or "ESOP"). Any shares that are not sold in the Subscription
Offering may be offered for sale in the Direct Community Offering and
subsequently, if appropriate, to the public in a Syndicated Community Offering.
The number of shares of common stock to be sold in the Offering will approximate
46% of the total shares. The number of shares issued to the MHC will approximate
54% of the total shares.
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WASHINGTON HEADQUARTERS
Rosslyn Center Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210 Fax No.: (703) 528-1788
Arlington, VA 22209 Toll-Free No.: (866) 723-0594
www.rpfinancial.com E-Mail: mail@rpfinancial.com
BOARD OF DIRECTORS
NOVEMBER 7, 2003
PAGE 2
Immediately following the Minority Stock Issuance, the primary assets of
the Company will be the capital stock of the Bank and the net offering proceeds
remaining after contributing proceeds to the Bank. The Company will retain up to
50% of the net offering proceeds. The Company intends to use a portion of the
proceeds to make a loan directly to the ESOP to enable the ESOP to purchase up
to 8.0% of the shares of common stock sold in the offering.
RP(R) FINANCIAL, LC.
RP(R) Financial, LC. ("RP Financial") is a financial consulting and
valuation firm serving the financial services industry nationwide that, among
other things, specializes in financial valuations and analyses of business
enterprises and securities, including the pro forma valuation for savings
institutions converting from mutual-to-stock form. The background and experience
of RP Financial is detailed in Exhibit V-1. We believe that, except for the fee
we will receive for our appraisal and assisting the Bank and the Company in the
preparation of the post-conversion business plan, we are independent of the
Company, the Bank, the MHC and the other parties engaged by the Bank or the
Company to assist in the Minority Stock Issuance.
VALUATION METHODOLOGY
In preparing our appraisal, we have reviewed the Bank's and the Company's
regulatory applications, including the prospectus as filed with the OTS and the
Securities and Exchange Commission ("SEC"). We have conducted a financial
analysis of the Bank that has included a review of its audited financial
information for fiscal years ended June 30, 1999 through 2003, and as of
September 30, 2003, and due diligence related discussions with the Company's
management; McGladrey & Pullen, LLP, the Company's independent auditor; Jenkens
& Gilchrist P.C., the Company's legal counsel for the stock conversion, and
Keefe, Bruyette & Woods, Inc., the Company's financial and marketing advisors in
connection with the Company's stock offering. All conclusions set forth in the
Appraisal were reached independently from such discussions. In addition, where
appropriate, we have considered information based on other available published
sources that we believe are reliable. While we believe the information and data
gathered from all these sources are reliable, we cannot guarantee the accuracy
and completeness of such information.
We have investigated the competitive environment within which the Company
operates and have assessed the Company's relative strengths and weaknesses. We
have kept abreast of the changing regulatory and legislative environment for
financial institutions and analyzed the potential impact on the Company and the
industry as a whole. We have analyzed the potential effects of the stock
issuance on the Company's operating characteristics and financial performance as
they relate to the pro forma market value. We have reviewed the economy in the
Company's primary market area and have compared the Company's financial
performance and condition with publicly-traded thrifts in mutual holding company
form, as well as all publicly-traded thrifts. We have reviewed conditions in the
securities markets in general and in the market
BOARD OF DIRECTORS
NOVEMBER 7, 2003
PAGE 3
for thrift stocks in particular, including the market for existing thrift issues
and the market for initial public offerings by thrifts. We have specifically
considered the market for the stock of publicly-traded mutual holding companies,
including the market for initial public offerings in conjunction with other MHC
reorganizations. We have excluded from such analyses thrifts subject to
announced or rumored acquisition, mutual holding company institutions that have
announced their intent to pursue second step conversions, and/or those
institutions that exhibit other unusual characteristics. We have also considered
the expected market for the Company's public shares.
Our Appraisal is based on the Company's representation that the information
contained in the regulatory applications and additional information furnished to
us by the Company, its independent auditors, legal counsel and other authorized
agents are truthful, accurate and complete. We did not independently verify the
financial statements and other information provided by the Company, its
independent auditors, legal counsel and other authorized agents nor did we
independently value the individual assets or liabilities, on or off balance
sheet, of the Company. The valuation considers the Company only as a going
concern and should not be considered as an indication of the Company's
liquidation value.
Our appraised value is predicated on a continuation of the current
operating environment for the Bank, the MHC and the Company and for all thrifts
and their holding companies, including mutual holding companies. Changes in the
local, state and national economy, the legislative and regulatory environment
for financial institutions and mutual holding companies, the stock market,
interest rates, and other external forces (such as natural disasters or
significant world events) may occur from time to time, often with great
unpredictability, and may materially impact the value of thrift stocks as a
whole or the Bank's, the MHC's and the Company's values alone. It is our
understanding that there are no current or long-term plans for pursuing a second
step conversion or for selling control of the Company or the Bank at this time.
To the extent that such factors can be foreseen, they have been factored into
our analysis.
Pro forma market value is defined as the price at which K-Fed Bancorp's
stock, immediately upon completion of the offering, would change hands between a
willing buyer and a willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of relevant facts.
BOARD OF DIRECTORS
NOVEMBER 7, 2003
PAGE 4
VALUATION CONCLUSION
It is our opinion that, as of November 7, 2003, the aggregate market value
of the Company's common stock, assuming a full conversion offering, is $75.0
million. The resulting range of value pursuant to regulatory guidelines and the
corresponding number of shares based on the $10.00 per share offering price is
set forth below:
Total Aggregate
Shares Issued(1) Market Value(1)
---------------- ---------------
Minimum 6,375,000 $63,750,000
Midpoint 7,500,000 $75,000,000
Maximum 8,625,000 $86,250,000
Supermaximum 9,918,750 $99,187,500
(1) Based on a $10.00 per share price, pursuant to a full conversion.
Based on the foregoing valuation, the Board has determined to offer 46% of
the full value for sale in the minority stock offering, the following range:
Offering
Total Shares Mhc Shares Shares
------------ ---------- ------
SHARES(1)
Minimum 6,375,000 3,442,500 2,932,500
Midpoint 7,500,000 4,050,000 3,450,000
Maximum 8,625,000 4,657,500 3,967,500
Supermaximum 9,918,750 5,356,125 4,562,625
DISTRIBUTION OF SHARES(2)
Minimum 100.00% 54.00% 46.00%
Midpoint 100.00% 54.00% 46.00%
Maximum 100.00% 54.00% 46.00%
Supermaximum 100.00% 54.00% 46.00%
AGGREGATE MARKET VALUE
Minimum $63,750,000 $34,425,000 $29,325,000
Midpoint $75,000,000 $40,500,000 $34,500,000
Maximum $86,250,000 $46,575,000 $39,675,000
Supermaximum $99,187,500 $53,561,250 $45,626,250
(1) Based on offering price of $10.00 per share.
(2) Based on 46.00% of the conversion valuation range.
BOARD OF DIRECTORS
NOVEMBER 7, 2003
PAGE 5
LIMITING FACTORS AND CONSIDERATIONS
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
Common Stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of Common Stock in the Offering will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof.
RP Financial's valuation was determined based on the financial condition
and operations of the Bank as of September 30, 2003, the date of the financial
data included in the regulatory applications and prospectus.
RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits the company, its
principals or employees from purchasing stock of its client institutions.
The valuation will be updated as provided for in the conversion regulations
and guidelines. These updates will consider, among other things, any
developments or changes in the Company's financial performance and condition,
management policies, and current conditions in the equity markets for thrift
shares. These updates may also consider changes in other external factors which
impact value including, but not limited to: various changes in the legislative
and regulatory environment, the stock market and the market for thrift stocks,
and interest rates. Should any such new developments or changes be material, in
our opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in the update at the date of the release of the
update.
Respectfully submitted,
RP(R)FINANCIAL, LC.
Ronald S. Riggins
President
James P. Hennessey
Senior Vice President
RP FINANCIAL, LC.
TABLE OF CONTENTS
K-FED BANCORP
COVINA, CALIFORNIA
PAGE
DESCRIPTION NUMBER
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CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS
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Introduction 1.1
Description of Plan of Stock Issuance 1.2
Strategic Overview 1.3
Balance Sheet Trends 1.6
Income and Expense Trends 1.10
Interest Rate Risk Management 1.15
Lending Activities and Strategy 1.16
Asset Quality 1.19
Funding Composition and Strategy 1.20
Legal Proceedings 1.20
CHAPTER TWO MARKET AREA
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Introduction 2.1
Local and Regional Market Conditions 2.2
Market Area Demographics 2.5
Local Economy/Largest Employers 2.8
Unemployment Rates 2.9
Competition 2.10
CHAPTER THREE PEER GROUP ANALYSIS
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Peer Group Selection 3.1
Basis of Comparison 3.2
Selected Peer Group 3.3
Financial Condition 3.5
Income and Expense Components 3.8
Loan Composition 3.11
Credit Risk 3.13
Interest Rate Risk 3.13
Summary 3.16
TABLE OF CONTENTS
K-FED BANCORP
COVINA, CALIFORNIA
(CONTINUED)
PAGE
DESCRIPTION NUMBER
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CHAPTER FOUR VALUATION ANALYSIS
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Introduction 4.1
Appraisal Guidelines 4.1
RP Financial Approach to the Valuation 4.2
Valuation Analysis 4.3
1. Financial Condition 4.3
2. Profitability, Growth and Viability of Earnings 4.4
3. Asset Growth 4.5
4. Primary Market Area 4.6
5. Dividends 4.6
6. Liquidity of the Shares 4.8
7. Marketing of the Issue 4.9
A. The Public Market 4.9
B. The New Issue Market 4.14
C. The Acquisition Market 4.16
8. Management 4.16
9. Effect of Government Regulation and Regulatory Reform 4.17
Summary of Adjustments 4.17
Basis of Valuation - Fully-Converted Pricing Ratios 4.18
Valuation Approaches: Fully-Converted Basis 4.19
Comparison to Recent Conversions and MHC Offerings 4.25
Valuation Conclusion 4.25
RP FINANCIAL, LC.
LIST OF TABLES
K-FED BANCORP
COVINA, CALIFORNIA
TABLE
NUMBER DESCRIPTION PAGE
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1.1 Historical Balance Sheets 1.7
1.2 Historical Income Statements 1.12
2.1 Demographic Data 2.6
2.2 Major Private Employers in Los Angeles, San Bernardino
and Santa Clara Counties 2.8
2.3 Unemployment Trends 2.10
2.4 Deposit Summary 2.12
2.5 Market Share by County 2.13
3.1 Peer Group of Publicly-Traded Thrifts 3.4
3.2 Balance Sheet Composition and Growth Rates 3.6
3.3 Income as a Percent of Average Assets and Yields,
Costs, Spreads 3.9
3.4 Loan Portfolio Composition and Related Information 3.12
3.5 Credit Risk Measures and Related Information 3.14
3.6 Interest Rate Risk Measures and Net Interest Income
Volatility 3.15
4.1 Peer Group Market Area Comparative Analysis 4.7
4.2 Pricing Characteristics and After-Market Trends 4.15
4.3 Calculation of Implied Per Share Data - Incorporating MHC
Second Step Conversion 4.20
4.4 MHC Institutions - Implied Pricing Ratios, Full Conversion
Basis 4.27
4.5 Public Market Pricing 4.28
RP FINANCIAL, LC.
PAGE 1.1
I. OVERVIEW AND FINANCIAL ANALYSIS
INTRODUCTION
Kaiser Federal Bank ("Kaiser Federal" or the "Bank") is a
federally-chartered stock savings bank which conducts operations through its
executive offices in Covina, California, and four branch offices, three of which
are in southern California (Los Angeles and San Bernardino Counties), and one
which is located in Santa Clara in the San Francisco Bay area (Santa Clara
County). Certain of the locations reflect, in part, the credit union roots and
the location of the Kaiser Permanente Medical Care Program employees or
physicians. The Bank also employs a variety of alternative delivery mechanisms,
including 30 ATMs (many of which are remotely located in Kaiser Permanente
health care facilities), online banking and a telephone call center.
Kaiser Federal was originally chartered in 1953 as "Kaiser Foundation
Hospital Employees Federal Credit Union", serving the Los Angeles, San Pedro and
Santa Monica employees of the hospital, clinic and KABAT-Kaiser Institute. Over
the years, the Board of Directors made strategic decisions to increase the
membership potential by adding other Kaiser health facilities and merging with a
smaller Kaiser credit union in Northern California. Over the years, Kaiser
Federal evolved into a full-service multi-branch financial institution operating
through retail branches and remote ATMs located in both southern and northern
California, and subsequently changed its name to Kaiser Permanente Federal
Credit Union. The Bank completed a conversion to a federal mutual savings bank
in November 1999 (the "Charter Conversion"), when it adopted the current name
and at which time it became subject to income taxes.
The objective of the Charter Conversion was to enhance the long-term
viability of the organization by expanding the field of membership to the local
community. In this regard, management was concerned with the credit
concentration within one employer group, particularly as its traditional credit
union customers had comparatively weaker credit characteristics than the market
as a whole. The Bank's post Charter Conversion operations have been
characterized by relatively strong growth in loans and deposits, with much of
the loan growth attributable to affiliate relationships. The loan growth has
featured expanded lending
RP FINANCIAL, LC.
PAGE 1.2
authority, as evidenced in the growth of permanent residential mortgages and
commercial and multi-family loans ("income producing property loans").
Since the Charter Conversion, the Bank has been regulated by the Office of
Thrift Supervision ("OTS"). The Bank is currently a member of the Federal Home
Loan Bank ("FHLB") system. The Bank's deposits are insured up to the regulatory
maximums by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC").
Kaiser Federal reorganized into a mutual holding company ("MHC") structure
in July 2003, and no stock was issued publicly at the time. Simultaneous with
the MHC reorganization, a wholly-owned mid-tier stock holding company was formed
known as K-Fed Bancorp (the "Company"), and Kaiser Federal became a wholly-owned
subsidiary of the Company. The MHC and the Company were both capitalized with
$50,000 in cash concurrent with their formation. The public stock offering being
pursued by the Company will not result in any organizational change.
As of September 30, 2003, the Company maintained $448.6 million in assets,
$360.6 million in deposits and $35.9 million in equity, equal to 8.0% of assets.
For the 12 months ended September 30, 2003, the Company reported net income of
$2.4 million, equal to 0.62% of average assets. At this date, loans and deposits
to Kaiser Permanente Medical Program employees approximated 24% and 40% of the
respective portfolios.
DESCRIPTION OF PLAN OF STOCK ISSUANCE
Pursuant to the Plan of Stock Issuance, the Company will publicly offer a
46% minority position of its common stock ("Minority Stock Issuance" or
"Offering"), and the MHC will retain a 54% majority interest in the Company.
K-Fed Bancorp will continue to be the sole subsidiary of the MHC and will own
100% of the Bank's outstanding stock. The Company will retain approximately 50%
of the net offering proceeds, a portion of which will be loaned to the
newly-formed employee stock ownership plan ("ESOP") to purchase 8% of the
offering shares.
The offering proceeds are expected to facilitate the Bank's continued
expansion and diversification. The Offering also provides the opportunity for
local stock ownership, which
RP FINANCIAL, LC.
PAGE 1.3
may enhance the financial success of the Bank if local shareholders
become/remain customers and promote the Bank's products and services. The
following summary indicates the initial allocation and reinvestment of the
offering proceeds.
o MHC. The MHC currently is the sole shareholder of the Company, and
will retain a 54% majority ownership upon completion of the Offering.
The MHC is not currently expected to engage in business activity other
than stock ownership of the Company. The MHC was capitalized with
$50,000 upon formation July 1, 2003.
o K-FED BANCORP. The Company is expected to retain up to 50% of the net
offering proceeds, which will be utilized to fund the loan for stock
purchased by the newly-formed ESOP and the balance will be deposited
in the Bank for initial reinvestment in high quality investment
securities with short to intermediate term maturities. Over time, such
funds are earmarked for various corporate purposes, including the
possible payment of regular and/or special cash dividends, infusing
additional equity into the Bank and/or repurchases of publicly-held
common stock. Dividends are expected to be periodically paid to the
Company from the Bank.
o KAISER FEDERAL BANK. At least 50% of the net proceeds will be infused
into the Bank as equity. The net investable cash is expected to be
lower than the paid-in capital, based on expectations of deposit
withdrawals to fund stock purchases. Cash proceeds infused into the
Bank will initially become part of general funds, which are expected
to be initially invested into cash and short-term investments pending
longer-term reinvestment into loans and investments.
The Bank expects to continue to pursue a controlled growth strategy,
leveraging its strong pro forma capital, primarily through growth through the
current delivery channels. If appropriate, K-Fed Bancorp may also consider
various capital management strategies to assist in the long-run objective of
increasing return on equity.
STRATEGIC OVERVIEW
As noted previously, the Company has implemented a strategy to continue to
cater to its historical credit union field of membership, but also to reduce its
risk profile (particularly credit risk profile) by broadening the customer base.
This customer diversification strategy was facilitated through the Charter
Conversion in conjunction with broadening the traditional and
RP FINANCIAL, LC.
PAGE 1.4
alternative delivery channels, emphasizing marketing and competitive pricing
strategies and pursuing strategic affiliations to increase loan volume. During
the mid-1990s, the deposit and loan balances attributable to Kaiser Permanente
employees accounted for 50% and 63%, respectively. Today, having more than
doubled in size, the proportion of deposits and loans has diminished to 45% and
17%, respectively, which illustrates the success of its customer diversification
strategy. The loan customer diversification is directly attributable to the
active purchases of 1-4 family and multi-family mortgage loans from other
regional lenders.
As the credit union lending restrictions were removed, the Company
commenced an active program of originating loans to non-customers. This loan
customer diversification has lessened the Company's credit risk profile directly
linked to the employee concentration with Kaiser Permanente.
The balance sheet growth strategy has contributed to the Company's earnings
growth, despite the taxable status as a mutual savings bank. Since the Charter
Conversion was completed, the Company's assets have expanded at a relatively
rapid pace of 23% annually. The Company will continue to seek to grow at a
moderate to strong pace, facilitated by the employment of technology and
alternative delivery systems, the premium pricing of deposits, and supplementing
internally generated loan originations with loans originated through broker
relationships and purchases.
The Company's current operating strategy is designed to take advantage of
the broad geographic footprint encompassed by K-Fed Bancorp's offices and the
remote ATMs from southern California extending up through the San Francisco Bay
area. Moreover, the operating strategy has been focused on leveraging the
Company's alternative delivery channels to limit further significant increases
in operating costs.
The Company's strong loan volume in recent years has been largely
attributable to the purchase of loans secured by 1-4 family mortgage loans,
whereby the servicing rights have been retained by the seller. Such purchases
have generally consisted of loans acquired from major financial institutions or
mortgage banking companies and have been comprised of adjustable rate or hybrid
loans (i.e., loans which are adjustable for the first 1, 3 or 5 years of the
loan and adjustable thereafter). The Company's internally originated 1-4 family
mortgages have been
RP FINANCIAL, LC.
PAGE 1.5
relatively limited, and have generally consisted of longer-term fixed rate
mortgages, typically with maturities ranging from 15 to 30 years.
The Company also employs a staff of 3 loan originators who provided
approximately 97% of the Company's commercial and multi-family mortgage loan
volume in fiscal 2003. The Company has limited the cost of loan originations by
relying heavily on purchased and/or broker sourced loans, particularly with
respect to residential loans. All loans are underwritten internally pursuant to
the Company's board approved underwriting guidelines.
As will be discussed herein, while the credit quality of the Company's loan
portfolio is currently favorable, the credit risk profile has substantially
increased over the last couple of years with the recent emphasis in income
producing property lending and the limited seasoning of the mortgage portfolio.
The Company's strong deposit growth reflects the success of its premium
pricing strategy. The deposit premium pricing has facilitated growth and enabled
the Company to limit "bricks and mortar" expense (including the investment in
systems), a significant accomplishment in view of the fact that only two if its
offices are full service. Expectedly, the Company's cost of deposits exceeds the
competitive market average. The Company's growth in 2003 was also funded by $50
million in advances for the purpose of funding a large loan purchase. In the
future, the Company expects growth to be funded primarily by deposits and the
advances are expected to be repaid at maturity in 2005.
The Company maintains four branch offices, two of which are financial
service centers or "cashless" branches. In addition, the Company employs a
variety of delivery systems, particularly technology-oriented systems, which are
designed to minimize overhead costs, provide convenient around-the-clock access
for customers and increase profitability through continued balance sheet growth.
The Company has significantly expanded its retail footprint through its network
of 30 ATMs. The Company maintains its own web site, and utilizes such technology
to communicate key information to its customers. The Company provides the
ability for online banking, which includes cash management and online bill
payment. The Company's 24-hour telephone banking system provides access to
account information and numerous banking functions.
RP FINANCIAL, LC.
PAGE 1.6
While Kaiser Federal recognized certain benefits as a credit union
including its non-taxable status and strong corporate ties, that charter limited
the types of products and services it could offer and to whom. Prior to the
Charter Conversion, the Company had developed a niche in mortgage lending but
was limited in its ability to expand such lending operations beyond the field of
membership. Today, the Company has the ability to serve the local community and
offer a more diverse array of products and services. Kaiser Federal offers a
wide array of banking services including savings, certificate and checking
accounts, ATM and debit cards, wire transfers, Internet banking, fixed or
adjustable-rate mortgage loans on residential, multifamily and commercial
properties as well as consumer loans. The business strategy employed by the
Company seeks to provide quality service, charge limited fee, pay highly
competitive rates on savings, and charge equitable loan rates.
BALANCE SHEET TRENDS
GROWTH TRENDS
Growth trends over the last five years underscore the impact of the
foregoing strategies, particularly following the Charter Conversion. For
example, during fiscal 2000, the Company's assets increased by only 7.0%, which
was relatively comparable to the growth rate experienced throughout the latter
half of the 1990s. By comparison, since the Charter Conversion, annual asset
growth has approximated 28.4% (see Table 1.1 for details; the detailed audited
and unaudited financial statements are incorporated herein by reference as noted
in Exhibit I-1, and key operating ratios are set forth in Exhibit I-2). The
majority of the asset and loan growth since the Charter Conversion has been
funded with competitively priced deposits, although the Company also borrowed
$50 million of advances from the FHLB during 2003 to fund a large loan purchase.
The Company's growth has recently moderated and is expected to be much lower
than the previous two years.
Annual equity growth equaled 6.5% since the end of fiscal 1999, in part
reflecting the Company's fully taxable status beginning in fiscal 2001. The
post-offering equity growth rate is expected to initially fall below historical
levels given the increased equity, the initial anticipated low return on the net
offering proceeds in the current interest rate environment and the cost of
RP FINANCIAL, LC.
PAGE 1.7
Table 1.1
K-Fed Bancorp
Historical Balance Sheets
(Amount and Percent of Assets)
As of the Fiscal Year Ended June 30,
---------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------------- ------------------- ------------------- ------------------- -------------------
AMOUNT PCT AMOUNT PCT AMOUNT PCT AMOUNT PCT AMOUNT PCT
------ --- ------ --- ------ --- ------ --- ------ ---
($000) (%) ($000) (%) ($000) (%) ($000) (%) ($000) (%)
Total Amount of:
Assets $184,796 100.00# $197,786 100.00% $230,026 100.00% $289,194 100.00% $433,753 100.00%
Cash and Cash Equivalents 5,515 2.98% 10,037 5.07% 31,182 13.56% 4,330 1.50% 16,190 3.73%
Loans Receivable (net) 104,431 56.51% 115,568 58.43% 140,839 61.23% 236,914 81.92% 389,640 89.83%
Investment Securities - AFS 1,610 0.87% 4,448 2.25% 0 0.00% 0 0.00% 0 0.00%
Investment Securities - HTM 22,500 12.18% 24,500 12.39% 18,552 8.07% 19,787 6.84% 14,247 3.28%
Other Investments 46,448 25.13% 40,018 20.23% 35,431 15.40% 23,378 8.08% 6,437 1.48%
FHLB Stock 572 0.31% 607 0.31% 649 0.28% 1,008 0.35% 2,602 0.60%
Deposits 156,663 84.78% 167,401 84.64% 197,588 85.90% 252,038 87.15% 346,239 79.82%
Borrowed Funds 0 0.00% 0 0.00% 0 0.00% 2,000 0.69% 50,000 11.53%
Total Equity 27,460 14.86% 29,445 14.89% 31,048 13.50% 32,956 11.40% 35,395 8.16%
Loans/Deposits 67.02% 69.40% 71.61% 94.40% 113.29%
Compounded
As of Sept. 30, Annual
2003 Growth Rate As of March 31, 2003
------------------- ------------------- --------------------
AMOUNT PCT PCT AMOUNT PCT
------ --- --- ------ ---
($000) (%) (%) ($000) (%)
Total Amount of:
Assets $448,556 100.00% 23.20% 486,409 100.00%
Cash and Cash Equivalents 21,352 4.76% 37.51% 38,785 7.97%
Loans Receivable (net) 377,141 84.08% 35.27% 398,958 82.02%
Investment Securities - AFS 0 0.00% -100.00% 24,952 5.13%
Investment Securities - HTM 38,979 8.69% 13.80% 0 0.00%
Other Investments 891 0.20% -60.56% 0 0.00%
FHLB Stock 2,800 0.62% 45.31% 2,305 0.47%
Deposits 360,567 80.38% 21.67% 401,733 82.59%
Borrowed Funds 50,000 11.15% N.M 42,286 8.69%
Total Equity 35,921 8.01% 6.52% 39,725 8.17%
Loans/Deposits 105.37% 99.88%
Source: K-Fed Bancorp's prospectus.
RP FINANCIAL, LC.
PAGE 1.8
the stock benefit plans and public company reporting. Over the longer term, as
the new equity is leveraged through growth, the return on equity is expected to
improve.
Since a substantial portion of the Company's recent growth has been
facilitated through originated loans sourced from third parties who retain the
servicing rights, the Company has limited contact with many of its new
borrowers; thus, cross-selling opportunities are limited. From a funding
perspective, the Company has been pricing its deposits at a premium and
utilizing intermediaries such as Bankrate.com to post its premium offering
rates. Thus, many of the Company's depositors are rate-based customers, which
again provides limited opportunity for cross-selling, particularly for those
depositors who are located outside the Company's market area. These
characteristics will be considered in the pricing section.
LOANS RECEIVABLE
The Company is primarily emphasizing real estate lending, primarily 1-4
family residential mortgage loans and, to a lesser extent, income producing
property loans. K-Fed Bancorp's loan portfolio composition as of September 30,
2003 underscores such emphasis - permanent first mortgage loans secured by 1-4
family residential properties totaled $227.0 million, equal to 60.2% of total
loans, and multi-family and commercial real estate loans totaled $87.0 million,
equal to approximately 23.1%. The balance of consumer loans has declined over
time to 16.7%.
The majority of the Company's 1-4 family residential mortgage loans conform
to standards set by either Freddie Mac or Fannie Mae. Most non-conforming
residential loans are non-conforming as to the loan amount (i.e., jumbo loans),
while otherwise meeting the agency credit criteria. The majority of the
Company's 1-4 family mortgage loans are purchased from mortgage bankers and
brokers. Purchased residential mortgage loans are typically variable rate or
hybrid ARMs (i.e., fixed for a period of up to 5 years and adjustable
thereafter), and in recent years also included 15 and 30 year fixed rate loans.
Internal originations have been relatively modest in comparison to the purchase
volume in recent years.
The Company's multi-family and commercial mortgage lending has been
conducted in California, particularly southern California. Such loans are
typically offered with adjustable rates, which adjust based on a U.S. Treasury
index (typically the one year CMT) but which may
RP FINANCIAL, LC.
PAGE 1.9
be fixed for the first 3 or 5 years of the loan. Such loans typically possess
maturities ranging up to 15 years, with amortization periods of up to 30 years.
Income producing property loans are generated from an in-house staff of three
originators and through broker relationships.
CASH, INVESTMENTS AND MORTGAGE-BACKED SECURITIES
K-Fed Bancorp's preference is to deploy the majority of assets into loans
while maintaining required liquidity. The Company anticipates initially
reinvesting the net offering proceeds into investments with shorter maturities,
pending longer-term deployment primarily into loans.
As of September 30, 2003, the Company's portfolio of cash and liquidity
investments totaled $21.4 million, or 4.8% of total assets. At this date, this
portfolio was comprised of non-interest bearing cash and cash equivalents ($4.1
million), interest-bearing deposits at other financial institutions ($0.9
million), federal funds sold ($17.2 million) and other short-term high quality
investments ($2.0 million). All of the foregoing assets are considered to be
cash or cash equivalents, and thus are not classified as available for sale
("AFS") or held to maturity ("HTM"). Additionally, the Company maintains a
modest investment in FHLB stock with a book value of $2.8 million.
The Company also maintains a portfolio of mortgage-backed securities
("MBS") classified as HTM which totaled $39.0 million, equal to 8.7% of assets
as of September 30, 2003. MBS primarily consist of agency securities with
relatively short duration. While MBS increased by approximately $24.7 million
over the quarter ended September 30, 2003, reflecting the reinvestment of heavy
cash flows resulting from loan portfolio prepayments, it is management's intent
to maintain comparatively modest MBS balances in favor of loans.
FUNDING STRUCTURE
Retail deposits have generally met the substantial portion of the Company's
funding needs. The Company has been a FHLB member since December 1998, which has
provided funding flexibility, and recently provided intermediate financing of a
large loan purchase. Prior to the Charter Conversion, K-Fed Bancorp also had the
capacity to borrow from a corporate credit union.
RP FINANCIAL, LC.
PAGE 1.10
The Company maintains a strong level of savings and transaction accounts,
which totaled $203.1 million, or 56.3% of total deposits, as of September 30,
2003. While savings and transaction accounts comprise the largest portion of
deposits in aggregate, certificates of deposits ("CDs") comprise the single
largest segment of deposits and equaled $157.4 million, or 43.7% of total
deposits. In comparison, non-interest-bearing checking, money market and
passbook savings accounts equaled $25.9 million (7.2% of deposits), $93.8
million (26.0% of deposits), and $83.4 million (23.1% of deposits).
Borrowings have been utilized primarily as a supplemental funding source to
fund lending activity. As of September 30, 2003, borrowed funds consisted of
$50.0 million of FHLB advances, which were utilized in early 2003 to fund a
major loan purchase, and matures in the third quarter of 2005. It is the
Company's present intention to repay such advances at maturity through available
liquidity and anticipated deposit growth. The Company may continue to utilize
borrowings as a supplemental funding source in the future, generally on a
short-to-intermediate term basis.
CAPITAL
Annual capital growth for the Company has been moderate since the end of
1999, equal to 6.5%, in part reflecting the change to a taxable entity. As of
September 30, 2003, K-Fed Bancorp's equity totaled $35.9 million, or 8.01% of
total assets. The Bank maintained capital surpluses relative to its regulatory
capital requirements at September 30, 2003, and thus qualified as a "well
capitalized" institution. The offering proceeds will serve to further strengthen
Kaiser Federal's regulatory capital position and support further growth. The
equity growth rate is expected to slow for the Company on a post-offering basis
given the pro forma increase in equity, low reinvestment yields currently
available and the potential dividend policy.
INCOME AND EXPENSE TRENDS
The Company's historical earnings and profitability reflect the impact of
the Charter Conversion. Specifically, earnings and profitability reflect the
resulting taxable status since the beginning of 2000 and the large one-time
benefit from the establishment of a deferred tax asset
RP FINANCIAL, LC.
PAGE 1.11
attributable primarily to the valuation allowances. In order to analyze earnings
on a comparable basis prior to the Charter Conversion, we have applied a 40% tax
rate to pre-tax earnings.
Earnings for the 12 months ended September 30, 2003, totaled $2.4 million,
or 0.62% of average assets (see Table 1.2), while core earnings were estimated
at $2.5 million, or 0.66% of average assets, after adjusting for non-recurring
expenses on a tax-effected basis. Adjusted for income taxes, the Company's core
earnings steadily increased through fiscal 2003 to $2.6 million, while
profitability as a percent of average assets peaked at 0.73% in fiscal 2002.
More recently, earnings and profitability subsided to $2.5 million and 0.66% of
average assets, respectively, as spread compression and a decline in
loans-to-assets offset the interim balance sheet growth. Core earnings trended
upward in fiscal 2002 and 2003 as the Company realized the benefit of balance
sheet growth and as the operating expense ratio decreased at a faster pace than
the net interest income ratio. These trends are described more fully below.
NET INTEREST INCOME
Net interest income steadily increased over the last five fiscal years,
primarily reflecting the benefit of balance sheet growth, however, there was a
decline during the most recent 12 month period. Specifically, net interest
income increased from $7.1 million in fiscal 1999 to a peak level of $12.0
million in fiscal 2003, before declining to $11.5 million for the 12 months
ended September 30, 2003. After peaking at 4.01% for fiscal 2001, the Company's
net interest income ratio declined to 3.02% for the 12 months ended September
30, 2003.
The decline in the net interest income ratio primarily reflects expanded
mortgage lending, which has lower yields than consumer lending, and the recent
decline in the loans-to-assets ratio, which is due to high prepayments and the
resulting increase in lower-yielding securities. Moreover, loan yields have been
adversely impacted by the high prepayment of purchased loans that were acquired
at a premium (thus requiring the premium to be amortized). Additionally, some of
the residential ARMs had low initial "teaser" rates which provided a limited
spread compared to the cost of funds. Also, the Company's cost of funds is
relatively high as the growth objectives were realized through highly
competitive pricing on selected deposit accounts.
RP FINANCIAL, LC.
PAGE 1.12
Table 1.2
K-Fed Bancorp
Historical Income Statements
As of the Fiscal Year Ended June, 30
------------------------------------------------------------------
1999 2000 2001
------------------------------------------- ---------------------
AMOUNT PCT(1) AMOUNT PCT(1) AMOUNT PCT(1)
------ ------ ------ ------ ------ ------
($000) (%) ($000) (%) ($000) (%)
Interest Income $12,778 7.10% $13,104 6.83% $15,064 7.02%
Interest Expense (5,635) -3.13% (5,624) -2.93% (6,452) -3.01%
------- ------ ------- ------ ------- ------
Net Interest Income $7,143 3.97% $7,480 3.90% $8,612 4.01%
Provision for Loan Losses (581) -0.32% (197) -0.10% (768) -0.36%
------- ------ ------- ------ ------- ------
Net Interest Income after Provisions $6,562 3.65% $7,283 3.80% $7,844 3.66%
Other Operating Income 1,679 0.93% 1,770 0.92% 1,946 0.91%
Operating Expense (6,334) -3.52% (6,770) -3.53% (7,139) -3.33%
------- ------ ------- ------ ------- ------
Net Operating Income $ 1,907 1.06% $ 2,283 1.19% $ 2,651 1.24%
Net Gain(Loss) on Sale of Credit Card Loans $ - 0.00% $ - 0.00% $ 123 0.06%
Net Gain(Loss) on Sale of AFS Securities - 0.00% - 0.00% - 0.00%
Mutual Holding Company Reorg. Expenses - 0.00% - 0.00% - 0.00%
------- ------ ------- ------ ------- ------
Total Non-Operating Income/(Expense) $ - 0.00% $ - 0.00% $ 123 0.06%
Net Income Before Tax $ 1,907 1.06% $ 2,283 1.19% $ 2,774 1.29%
Income Taxes 0 0.00% (268) -0.14% (1,208) -0.56%
------- ------ ------- ------ ------- ------
Net Income (Loss) Before Extraord. Items $ 1,907 1.06% $ 2,015 1.05% $ 1,566 0.73%
ESTIMATED CORE NET INCOME
Net Income $ 1,907 1.06% $ 2,015 1.05% $ 1,566 0.73%
Addback(Deduct): Non-Recurring (Inc)/Exp - 0.00% - 0.00% (123) -0.06%
Tax Effect (1) - 0.00% - 0.00% 50 0.02%
------- ------ ------- ------ ------- ------
Estimated Core Net Income $ 1,907 1.06% $ 2,015 1.05% $ 1,493 0.70%
Estimated Core Income
if Taxable at a 40% Effective Tax Rate $ 1,144 0.64% $ 1,370 0.71%
Memo:
Expense Coverage Ratio (2) 112.77% 110.49% 120.63%
Efficiency Ratio (3) 71.80% 73.19% 67.62%
Effective Tax Rate 0.00% 11.73% 43.55%
As of the Fiscal Year Ended June, 30
----------------------------------------------- Twelve Months End.
2002 2003 Sept. 30, 2003
---------------------- ----------------------- ------------------------
AMOUNT PCT(1) AMOUNT PCT(1) AMOUNT PCT(1)
------ ------ ------ ------ ------ ------
($000) (%) ($000) (%) ($000) (%)
Interest Income $16,559 6.34% $20,360 5.59% $20,488 5.38%
Interest Expense (6,623) -2.54% (8,365) -2.30% (8,968) -2.35%
------- ------ ------- ------ ------- ------
Net Interest Income $9,936 3.80% $11,995 3.30% $11,520 3.02%
Provision for Loan Losses (1,147) -0.44% (1,124) -0.31% (951) -0.25%
------- ------ ------- ------ ------- ------
Net Interest Income after Provisions $8,789 3.36% $10,871 2.99% $10,569 2.77%
Other Operating Income 2,881 1.10% 3,270 0.90% 3,352 0.88%
Operating Expense (8,618) -3.30% (9,772) -2.68% (9,759) -2.56%
------- ------ ------- ------ ------- ------
Net Operating Income $ 3,052 1.17% $ 4,369 1.20% $ 4,162 1.09%
Net Gain(Loss) on Sale of Credit Card Loans $ - 0.00% $ - 0.00% $0 0.00%
Net Gain(Loss) on Sale of AFS Securities - 0.00% - 0.00% - 0.00%
Mutual Holding Company Reorg. Expenses - 0.00% (220) -0.06% (220) -0.06%
------- ------ ------- ------ ------- ------
Total Non-Operating Income/(Expense) $ - 0.00% $ (220) -0.06% $ (220) -0.06%
Net Income Before Tax $ 3,052 1.17% $ 4,149 1.14% $ 3,942 1.03%
Income Taxes (1,145) -0.44% (1,710) -0.47% (1,576) -0.41%
------- ------ ------- ------ ------- ------
Net Income (Loss) Before Extraord. Items $ 1,907 0.73% $ 2,439 0.67% $ 2,366 0.62%
ESTIMATED CORE NET INCOME
Net Income $ 1,907 0.73% $ 2,439 0.67% $ 2,366 0.62%
Addback(Deduct): Non-Recurring (Inc)/Exp - 0.00% 220 0.06% 220 0.06%
Tax Effect (1) - 0.00% (90) -0.02% (90) -0.02%
------- ------ ------- ------ ------- ------
Estimated Core Net Income $ 1,907 0.73% $ 2,569 0.71% $ 2,496 0.66%
Estimated Core Income
if Taxable at a 40% Effective Tax Rate
Memo:
Expense Coverage Ratio (2) 115.30% 122.75% 118.04%
Efficiency Ratio (3) 67.24% 64.02% 65.62%
Effective Tax Rate 37.51% 41.22% 39.98%
(1) Reflects a 41% effective tax rate.
(2) Net interest income divided by operating expenses.
(3) Operating expenses as a percent of the sum of net interest income and other operating income (excluding gains on sale).
RP FINANCIAL, LC.
PAGE 1.13
The foregoing trends are reflected in the Company's declining interest rate
spreads. Specifically, the Company's interest rate spread decreased from 3.42%
in fiscal 2001, to 2.98% in fiscal 2003 and 2.05% during the three months ended
September 30, 2003 (see Exhibit I-4). Near-term improvement in spreads may be
affected by continuing loan portfolio refinancing and the continuing
amortization of approximately $2.6 million of unamortized loan premiums (i.e.,
the amortization of such premiums reduces interest income). The initial
reinvestment of the offering proceeds should increase net interest income,
however, the initial reinvestment yields are expected to depress overall asset
yields, interest spreads and the interest income ratio.
LOAN LOSS PROVISIONS
Provisions for loan losses have historically reflected the large balance of
consumer loans, particularly automobile loans which resulted in a high level of
chargeoffs. Loan loss provisions have remained relatively high subsequent to the
Charter Conversion and shift in lending strategy (although there has been some
diminishment during the most recent 12 months), reflecting: (1) the high growth
in total loans, including income producing property loans; and (2) the Company's
limited experience historically with respect to income producing property
lending and the higher risk profile of such lending. Going forward, the Company
will continue to evaluate the adequacy of the level of general valuation
allowances ("GVAs") on a regular basis, and establish additional loan loss
provisions in accordance with the Company's asset classification and loss
reserve policies. For the 12 months ended September 30, 2003, loan loss
provisions totaled $951,000, or 0.25% of average assets.
NON-INTEREST INCOME
Non-interest income for the most recent 12 months totaled $3.4 million, or
0.88% of average assets, primarily reflecting fee income generated through: the
Company's deposit accounts, including various service and non-sufficient fund
("NSF") charges and interchange fees; and ATM related fees, reflecting foreign
transactions at its 30 ATMs and interchange income resulting from the Company's
customers utilizing foreign ATMs.
RP FINANCIAL, LC.
PAGE 1.14
OPERATING EXPENSES
Prior to the Charter Conversion, the Company had a relatively high level of
operating expenses, reflecting a comparatively greater number of labor intensive
transaction accounts and smaller consumer loans. Since the Charter Conversion,
operating expenses have increased at a relatively rapid pace, in part reflecting
the additional compensation, marketing, and other costs related to the growth
and expansion plans. As a result, operating expenses increased from $6.8 million
in fiscal 2000, to $9.8 million for the most recent 12 months. However, the
Company's faster balance sheet growth has dramatically diminished the operating
expense ratio, as the balance sheet growth reflected the benefit of affiliate
relationships which limited the staffing and other infrastructure investments.
Operating expenses are expected to increase on a post-offering basis as a
result of the expense of the stock-related benefit plans and the costs related
to operating as a public company. At the same time, continued balance sheet
growth and reinvestment of the offering proceeds should largely offset the
anticipated expense increase.
NON-OPERATING INCOME/EXPENSE
Net non-operating income (expense) has had a limited impact on overall
profitability until recently. For the 12 months ended September 30, 2003, the
Company incurred $220,000 of expense (0.06% of average assets) attributable to
the July 1, 2003 MHC reorganization.
TAXES
Prior to fiscal 2000, K-Fed Bancorp incurred no tax liabilities due to its
exempt status as a credit union. Following the Charter Conversion, the Company
became subject to standard taxation, which approximated a combined federal and
state tax rate of 41% for the most recent fiscal year.
EFFICIENCY RATIO
The Company's efficiency ratio steadily improved since fiscal 2000 to
64.02% in fiscal 2003, as balance sheet growth offset operating expense growth
and spread compression. The efficiency ratio deteriorated to 65.62% for the most
recent 12 months primarily due to
RP FINANCIAL, LC.
PAGE 1.15
spread compression and resulting impact on net interest income. On a
post-offering basis, the efficiency ratio may show some slight improvement,
although low reinvestment yields may limit the benefit.
INTEREST RATE RISK MANAGEMENT
The primary aspects of the Company's interest rate risk management include:
>> Emphasizing the origination and purchase of adjustable rate
residential mortgage loans or hybrid ARMS with repricing frequencies
of up to five years when market conditions permit;
>> Maintaining a diversified loan portfolio which includes loans secured
by commercial real estate and multi-family properties as well as
non-mortgage loans which carry short terms to maturity and/or variable
interest rates;
>> Maintaining a balance of cash or short-term investments;
>> Maintaining an acceptable level of capital which provides a favorable
level of interest-earning assets relative to interest-bearing
liabilities; and
>> Potentially selling a portion of the fixed rate mortgage loans
originated based on risk and profitability considerations.
The rate shock analysis as of June 30, 2003 (see Exhibit I-5) reflects a
modest liability sensitive position with the net portfolio value ("NPV")
declining by a 144 basis points pursuant to a positive 200 basis point
instantaneous and permanent rate shock, resulting in a post-shock NPV ratio
equal to 8.70%. By way of comparison, OTS estimates NPV data on a regional and
national basis. Based on OTS estimates incorporating June 30, 2003 financial
data and market rate information, assuming a positive 200 basis point
instantaneous and permanent rate shock, the post-shock NPV ratio for all thrifts
operating in the OTS Western Region equaled 8.66%, which reflects a 130 basis
point decline relative to the base scenario. Thus, the Company's risk exposure
compares relatively closely to the regional average.
The NPV analysis is an indicator of the risk to earnings in a volatile
interest rate environment as it incorporates changing assumptions with respect
to maturity and repricing of assets and liabilities. The OTS NPV analysis
indicates that K-Fed Bancorp has a higher NPV ratio and lower interest
sensitivity measure (i.e., the change in the post-shock NPV ratio is more
RP FINANCIAL, LC.
PAGE 1.16
limited) pursuant to a rising interest rate scenario, which is typically the
more adverse scenario for a thrift institution. In this regard, the Company's
interest rate risk exposure is moderated by the relatively high level of ARMs
whose short to intermediate term repricing structure closely matches the short
term repricing structure of the deposit base. Moreover, the Company's interest
rate risk exposure is projected to be further reduced following the completion
of the conversion and reinvestment of the net conversion proceeds into
interest-earning assets.
Overall, the data suggests K-Fed Bancorp's earnings would be negatively
impacted by rising interest rates, although the Company has been somewhat
successful in reducing its exposure to interest rate risk. At the same time,
there are numerous limitations inherent in such analyses, such as the credit
risk of Company's adjustable rate loans in a rising interest rate environment.
Other areas of risk exposure for the Company which may not be captured by the
NPV analysis above include the substantial balance of loan premiums and the
deposit pricing strategy. Specifically, the Company has $2.7 million of purchase
premiums on loans which will be amortized against interest income as the
underlying loans pay down. Similarly, the Company's practice of establishing a
highly competitive deposit rate structure may result in a more rapid escalation
of its deposit costs in the event that market interest rates rise from their
current historically low levels.
LENDING ACTIVITIES AND STRATEGY
Since the Charter Conversion, the Company has been primarily emphasizing
real estate lending, primarily 1-4 family residential mortgage loans and, to a
lesser extent, income producing property loans. The majority of the Company's
1-4 family residential mortgage loans consist of loans which are conforming to
agency standards, and the non-conforming residential loans are conforming but
for the loan amount (i.e., jumbo loans). To a lesser extent, the Company extends
consumer loans, primarily auto loans. Details regarding the Company's loan
portfolio composition are included in Exhibits I-6, I-7 and I-8.
RESIDENTIAL LENDING
As of September 30, 2003, residential mortgage loans approximated $227.0
million, or 60.2% of total loans. The Company originates both fixed rate and
adjustable rate 1-4 family
RP FINANCIAL, LC.
PAGE 1.17
mortgage loans, and its general philosophy is to emphasize adjustable rate loans
and/or shorter-term fixed rate mortgage loans for portfolio (hybrid loans with a
fixed rate of up to 5 years initially). However, in the current interest rate
environment, K-Fed Bancorp has been originating a modest amount of 15 and 30
year fixed rate loans for portfolio. The repricing of ARM loans is tied to a
variety of indexes primarily including the U.S. Treasury rate and LIBOR.
Depending on the type of loan, there are a variety of periodic and lifetime rate
caps which are generally structured based on the conditions prevailing in the
competitive market.
The Company originates 1-4 family loans up to a loan-to-value ("LTV") ratio
of 90%, with private mortgage insurance ("PMI") being required for loans with
LTV ratios in excess of 80.0%. All 1-4 family mortgage loans originated or
purchased by the Company are secured by residences in California.
As a complement to 1-4 family permanent mortgage lending, the Company also
offers home equity loans, including fixed rate amortizing term loans and
variable rate lines of credit tied to the 11th District Cost of Funds.
MULTI-FAMILY AND COMMERCIAL MORTGAGE LENDING
Multi-family and commercial mortgage lending are typically secured by
properties in southern California, but also include other California markets. As
of September 30, 2003, multi-family and commercial mortgage loans equaled $61.9
million (16.4% of loans) and $25.1 million (6.7% of loans), respectively. The
Company's commercial real estate and multi-family loan portfolio has exhibited
relatively strong growth since the Charter Conversion, reflecting the Company's
expanded lending powers.
Multi-family and commercial mortgage loan rates typically adjust based on a
U.S. Treasury index (typically the one year CMT), but may be fixed for the first
3 or 5 years. Such loans possess terms ranging up to 15 years, with amortization
periods of up to 30 years, loan-to-value ratios of up to 75%, and a targeted
debt-coverage ratio of at least 1.2 times. Such loans are typically originated
with prepayment penalties if the loan is repaid within three years of
origination.
RP FINANCIAL, LC.
PAGE 1.18
The Company's typical commercial or multi-family loan is in the range of
$750,000 to $1.5 million, but may be larger if the loan is well-collateralized
or extended to a very credit-worthy borrower. Such loans are typically
collateralized by small office buildings, family-type business establishments
and apartment buildings.
CONSUMER LOANS
The Company's consumer loans totaled $63.0 million at September 30, 2003,
the majority of which consist of auto loans and, to a lesser extent, various
types of consumer installment credit including deposit loans. Most auto loans
are extended pursuant to the Company's pre-approved auto loan program ("PAAL")
whereby the borrower is pre-qualified for a loan up to a pre-established limit
predicated on receipt of final approval from the Company. Customers for the PAAL
product have historically been Kaiser Permanente employees but the Company has
marketed this product to the broader community since the Charter Conversion.
LOAN ORIGINATIONS, PURCHASES AND SALES
The Company's 1-4 family lending is conducted through direct solicitation
techniques, real estate industry relationships, targeted marketing and through
the Internet, as well as through purchases. In recent periods, the majority of
such loans have been generated through purchases, primarily acquired from major
financial institutions or mortgage banking companies. Recent purchases have been
comprised of adjustable rate or hybrid loans. All purchased loans are
underwritten by the Company pursuant to its underwriting guidelines. The
majority of the Company's internally originated 1-4 family mortgages, which have
been relatively limited, have consisted of longer-term fixed rate mortgages,
typically with maturities ranging between 15 to 30 years.
Exhibit I-9, which shows the Company's recent data regarding loan
originations, repayments and sales, highlights K-Fed Bancorp's emphasis on
mortgage lending. The Company's loan diversification efforts are evidenced by
the multi-family and commercial mortgage loan origination level, which totaled
$40.8 million, or 32.4% of all loan originations in fiscal 2003. Moreover, the
Company has been an active loan purchaser acquiring $211.5 million
RP FINANCIAL, LC.
PAGE 1.19
of loans (primarily 1-4 family mortgages), which exceeded total originations
($126.1 million) by more than 67%.
The majority of the Company's loan purchases have been on a servicing
retained basis by the seller. Thus, the Company has limited opportunity for
cross-selling other financial products and services to such customers. In this
regard, the substantial majority of the Company's residential mortgage loan
portfolio has been purchased and thus are serviced by third parties.
ASSET QUALITY
The Company's asset quality has historically been strong and the level of
non-performing assets ("NPAs") is low currently. As reflected in Exhibit I-11,
the NPA balance was $216,000, equal to 0.05% of assets, consisting of
non-performing loans ($63,000) and repossessed assets (equal to $153,000). The
ratio of allowances to total loans has declined from 1.04% as of the end of
fiscal 1999 to 0.59% as of September 30, 2003 (see Exhibits I-10 and I-11), due
to rapid loan portfolio growth.
While asset quality has been strong, we believe there are two risk factors
which are not reflected in the data. First, a significant element of growth
within the loan portfolio has consisted of loans secured by commercial and
multi-family properties. The performance of such loans tends to be highly
correlated to the strength of the local economy including the real estate
markets, all of which have been very strong in the Company's markets through the
last several years. Accordingly, in the event of a market downturn, loan
portfolio quality may likely diminish more rapidly in comparison to other local
lenders. The second risk factor pertains to the limited seasoning of a large
portion of the loan portfolio. As reflected in Table 1.1, the balance of loans
receivable has increased by $236.3 million, or by 168% since the end of fiscal
2001. The limited seasoning of the portfolio is important since asset quality
problems in mortgage loans often do not initially arise.
RP FINANCIAL, LC.
PAGE 1.20
FUNDING COMPOSITION AND STRATEGY
As of September 30, 2003, the Company's assets were funded primarily with
deposits, and, to a lesser extent, borrowings and equity (see Exhibits I-12,
I-13 and I-14). The Company's deposit services cater to individuals rather than
commercial businesses.
DEPOSITS
Local retail deposits have consistently addressed the substantial portion
of K-Fed Bancorp's funding needs, with core deposits in the form of non-interest
bearing checking, passbook accounts, and money market deposit accounts
comprising the majority of deposits. In the aggregate, these accounts totaled
$203.1 million, or 56.3% of total deposits as of March 31, 2003. As of September
30, 2003, CDs accounted for approximately 43.7% of deposits. Approximately 50%
of CDs had remaining maturities of one year or less. Large balance CDs (i.e.
balances greater than $100,000), which tend to be more rate sensitive than lower
balance CDs, accounted for $42.4 million, or 11.8% of deposits, at March 31,
2003.
BORROWINGS
Borrowings have been utilized primarily as a supplemental funding source to
fund lending activity. As of September 30, 2003, borrowed funds consisted of
$50.0 million of FHLB advances, representing funding for a large loan purchase
in early 2003. The Company's FHLB advance matures in the third calendar quarter
of 2005, and is currently expected to be repaid upon maturity. The Company may
continue to utilize borrowings as a supplemental funding source in the future,
generally for these same purposes but its preference is to utilize deposits to
fund operations with the objective of building customer relationships.
LEGAL PROCEEDINGS
Other than the routine legal proceedings that occur in the Company's
ordinary course of business, the Company is not involved in litigation which is
expected to have a material impact on the K-Fed Bancorp's financial condition or
operations.
RP FINANCIAL, LC.
PAGE 2.1
II. MARKET AREA
INTRODUCTION
K-Fed Bancorp currently conducts operations through its executive offices
in Covina, California, and a total of 4 branch offices, 3 of which are in
southern California (Los Angeles and San Bernardino Counties) while the
remaining branch is located in Santa Clara in the San Francisco Bay area (Santa
Clara County) (see the map of locations below). Certain of the locations
reflect, in part, the credit union roots and the location of the Kaiser
Permanente Medical Care Program employees or physicians. The Bank intends to
continue expanding its regional branch office network and financial service
centers although the timing and locations have yet to be determined. Moreover,
K-Fed Bancorp will continue to extend the reach of its branch network through
continued operation of the network of remote access service systems, including a
network of 30 ATMs, Internet and telephone banking.
- --------------------------------------------------------------------------------
[MAP]
- --------------------------------------------------------------------------------
RP FINANCIAL, LC.
PAGE 2.2
Future growth opportunities for K-Fed Bancorp depend on the growth and
stability of the regional economy, demographic growth trends, and the nature and
intensity of the competitive environment. These factors have been briefly
examined in the following pages to help determine the growth potential that
exists for the Bank and the relative economic health of K-Fed Bancorp's market
area. The growth potential and the stability provided by the market area have a
direct bearing on the market value of the Bank, and will be factored into our
valuation analysis accordingly.
LOCAL AND REGIONAL MARKET CONDITIONS
ECONOMIC OVERVIEW - LOS ANGELES COUNTY
Los Angeles County's economy has historically been tied to the aerospace,
entertainment and tourism industries and has realized strong growth since the
beginning of World War II. The presence of nearby military installations and
test facilities coupled with the mild climate and good weather made the area an
excellent location for aerospace firms to grow and prosper. These same
conditions facilitated the growth of the entertainment and tourism businesses
which have historically been the mainstay of the local economy. Strong
population growth and the growing income levels coupled with the availability of
land and the development of an extensive network of freeways provided for growth
in the real estate industry (both development and finance).
The reliance upon the defense and tourism industries historically brought
immense growth and prosperity to Los Angeles County, but also introduced
significant volatility. The region's growth came to a sudden halt in the early
1990s with the combined impact of the national recession, the commencement of
the Gulf War, the breakup of the Soviet Union and subsequent end of the Cold War
and downsizing of the U.S. military, all of which led to severe recessionary
conditions through the mid-1990s.
Los Angeles County's economy has improved dramatically since the mid-1990s
when the longest and deepest recession in 60 years ended. In this regard, many
economists and local business leaders believe the most recent economic recovery
and expansion were not mere
RP FINANCIAL, LC.
PAGE 2.3
business or cyclical adjustments, but an extensive overhauling and restructuring
of the region's basic economic drivers.
From an economy largely dominated by aerospace, tourism and the
entertainment industries, Los Angeles County's economic base has transformed
into a more diversified mix of high-technology commercial endeavors. Some of
these sectors were by-products of the defense-related industries and knowledge,
which capitalized on the highly educated and skilled labor force. Emerging
growth areas include telecommunications, electronics, computers, software, and
biomedical technologies.
International trade has also contributed to Los Angeles County's economic
growth in recent years fueled both by cross-border trade with nearby Mexico and
by trade with other Pacific Rim countries. Currently, the Port of Los
Angeles/Long Beach ranks first in the U.S. in total trade. Coupled with its
status as a major entertainment and cultural center, Los Angeles has been a
major entry way and settlement area for immigrants to the U.S.
SAN BERNARDINO COUNTY - INLAND EMPIRE
Riverside and San Bernardino Counties are commonly referred to as the
"Inland Empire" and together, these two counties comprise the Riverside-San
Bernardino Metropolitan Statistical Area ("MSA"). While the Inland Empire
encompasses a huge geographic area extending to the Nevada border, K-Fed
Bancorp's operations are concentrated in the western portions of San Bernardino
County.
The Inland Empire has realized strong business and population growth in the
last several decades owing, in part, to defense spending and the large military
infrastructure in the region and to its location adjacent to the high cost
coastal areas of Los Angeles, Orange and San Diego Counties. In this regard,
many manufacturing, transportation and distribution companies have located in
the Inland Empire. The area has also been a magnet for new residents seeking
affordable housing outside of the expensive coastal markets.
Like Los Angeles County, the Inland Empire markets were dramatically
impacted by the cutbacks in defense spending and base closures in the early
1990s. Concurrently, other significant employment losses occurred in the
financial services and construction sectors, primarily as a result of Southern
California's troubled real estate markets. Since that time, the
RP FINANCIAL, LC.
PAGE 2.4
Inland Empire economy has recovered and is one of the fastest growing
metropolitan areas in the country.
Much of the Inland Empire's business growth can be attributed to companies
that expand locally, and to those that relocate from the nearby coastal
counties. Over 750 of the Inland Empire's new business operations have migrated
from the congested and high-priced regions of Los Angeles, Orange and San Diego
Counties over the last six years -- a trend that is expected to continue in the
coming decades. The region's prominent role as a transportation corridor also
translates to healthy employment rates in affiliated industries. Fifty-six
percent of the region's new businesses were manufacturers, adding over 31,000
jobs into the economic base, while 33% were distributors, which brought over
20,000 jobs to the region. The Inland Empire's modern and rapidly-expanding
logistics infrastructure accommodates the transport of goods to every corner of
the country and the world, and provides thousands of jobs in warehousing and
transportation of goods, air cargo, rail transportation, and trucking.
Record levels of foreign trade and motion picture production, and a
pronounced recovery in tourism have also had a positive economic impact. The
Inland Empire's diverse terrain and unique settings make it a popular region for
film and entertainment production, while its mountain, lake and desert resorts
and proximity to major population centers contributed to tourism.
Notwithstanding increasing real estate prices, the Inland Empire still
represents a relatively affordable housing market which continues to fuel the
residential and commercial construction industries.
SANTA CLARA COUNTY
Prior to World War II, the economy of Santa Clara County was tied to
agriculture as a result of the moderate climate and long growing season.
However, the southern portions of the San Francisco Bay area have grown
exponentially over the last fifty years with the growth of the San Francisco Bay
overall, coupled with the development of technology-related industries. In this
regard, much of the growth in the technology sector which led to the development
of the "Silicon Valley" as the region is known today was facilitated by the
location of Stanford University in Palo Alto which provided for the engineering
and creative resources required to stimulate growth of high technology
industries.
RP FINANCIAL, LC.
PAGE 2.5
The growth of computer and biotechnology industries in Santa Clara County
fueled strong employment and income growth through the 1990s. With the dot.com
bust beginning in 2000, unemployment rates have increased and real estate prices
have eased. However, the long-term economic prospects for the region appear to
be strong, particularly if the national economic recovery continues to proceed
as anticipated.
MARKET AREA DEMOGRAPHICS
For reasons described above, the Bank's markets have generally demonstrated
strong population growth. The large size of the markets overall - Los Angeles
County has 11.8 million residents, San Bernardino County has 1.8 million
residents while Santa Clara County has 1.7 million residents - gives the Bank
exposure to a large base of potential customers (see Table 2.1), although it is
a very competitive market.
Total population in Los Angeles County increased at a comparatively
moderate pace equal to 10.3% from 1990 to 2000, which fell short of both the
state and national average. Importantly, growth projections for population
through 2007 reflect that growth will more closely track to the state and
national averages. By comparison, growth in San Bernardino County has been very
strong, equal to 24.2% between 1990 and 2000, while population growth of 16.2%
in Santa Clara County more closely approximated the state and national averages
(equal to 17.2% and 15.3%, respectively).
Paralleling trends for population growth, the total number of households
increased at comparatively modest levels in Los Angeles County since 1990 while
approximating or exceeding the state and national averages in San Bernardino and
Santa Clara Counties.
Median household and per capita income levels in Los Angeles and San
Bernardino Counties are relatively favorable to the national average and fall
modestly below the comparable state aggregate. Income levels in Santa Clara
County reflect its status as one of the wealthiest counties in the U.S. as
household and per capita income well exceeded the levels for the Bank's other
markets as well as the state and national average.
RP FINANCIAL, LC.
PAGE 2.6
Table 2.1
K-Fed Bancorp
Demographic Data
Base Current Projected % Change % Change
1990 2002 2007 1990-2002 2002-2007
---- ---- ---- --------- ---------
STATE OF CALIFORNIA
Total Population 29,760,022 34,876,616 37,286,836 17.19% 6.91%
0-14 Age Group (%) 22% 23% 22% 20.65% 3.77%
15-34 Age Group (%) 34% 29% 30% 0.29% 7.03%
35-54 Age Group (%) 25% 29% 28% 33.70% 3.98%
55+ Age Group (%) 18% 19% 20% 22.03% 15.05%
Total Households 10,381,206 11,803,522 12,511,538 13.70% 6.00%
$0-24K Households (%) 34% 21% 17% -30.38% -11.87%
$25-50K Households (%) 33% 25% 23% -13.38% -1.24%
$50K+ Households (%) 33% 54% 59% -85.54% 16.28%
Average Household Income $ 46,330 $ 75,364 $ 89,264 62.67% 18.44%
Median Household Income $ 35,799 $ 54,280 $ 62,035 51.62% 14.29%
Per Capita Income $ 16,357 $ 25,649 $ 30,026 56.81% 17.06%
LOS ANGELES COUNTY
Total Population 8,863,128 9,774,284 10,346,884 10.28% 5.86%
0-14 Age Group (%) 22% 24% 23% 17.21% 2.82%
15-34 Age Group (%) 36% 31% 31% -5.57% 6.19%
35-54 Age Group (%) 25% 28% 27% 25.14% 2.77%
55+ Age Group (%) 17% 18% 19% 13.41% 14.30%
Total Households 2,989,542 3,207,177 3,367,298 7.28% 4.99%
$0-24K Households (%) 36% 23% 20% -30.17% -10.41%
$25-50K Households (%) 32% 27% 25% -10.35% -0.07%
$50K+ Households (%) 33% 50% 55% 64.68% 14.71%
Average Household Income $ 47,328 $ 71,353 $ 81,669 50.76% 14.46%
Median Household Income $ 34,965 $ 50,203 $ 54,980 43.58% 9.52%
Per Capita Income $ 16,091 $ 23,422 $ 26,517 45.56% 13.21%
RP FINANCIAL, LC.
PAGE 2.7
Table 2.1
K-Fed Bancorp
Demographic Data
Base Current Projected % Change % Change
1990 2002 2007 1990-2002 2002-2007
---- ---- ---- --------- ---------
SAN BERNARDINO COUNTY
Total Population 1,418,380 1,760,862 1,892,159 24.15% 7.46%
0-14 Age Group (%) 27% 27% 26% 25.69% 4.39%
15-34 Age Group (%) 34% 29% 30% 6.43% 8.16%
35-54 Age Group (%) 24% 28% 27% 45.91% 4.71%
55+ Age Group (%) 15% 16% 17% 27.50% 16.26%
Total Households 464,737 540,349 569,737 16.27% 5.44%
$0-24K Households (%) 37% 25% 22% -20.64% -7.40%
$25-50K Households (%) 35% 29% 28% -6.12% 2.15%
$50K+ Households (%) 28% 46% 50% 91.13% 14.37%
Average Household Income $ 40,152 $ 59,253 $ 67,174 47.57% 13.37%
Median Household Income $ 33,439 $ 46,337 $ 50,356 38.57% 8.67%
Per Capita Income $ 13,334 $ 18,237 $ 20,178 36.77% 10.64%
SANTA CLARA COUNTY
Total Population 1,497,583 1,740,132 1,873,783 16.20% 7.68%
0-14 Age Group (%) 20% 21% 20% 18.52% 4.21%
15-34 Age Group (%) 36% 31% 31% -1.65% 7.74%
35-54 Age Group (%) 27% 31% 30% 30.28% 4.47%
55+ Age Group (%) 16% 18% 20% 29.48% 16.98%
Total Households 520,182 582,317 619,493 11.94% 6.38%
$0-24K Households (%) 21% 9% 6% -52.89% -27.34%
$25-50K Households (%) 31% 13% 10% -51.53% -16.90%
$50K+ Households (%) 48% 78% 83% 80.40% 14.29%
Average Household Income $ 58,123 $ 117,191 $ 149,360 101.63% 27.45%
Median Household Income $ 48,117 $ 93,503 $ 118,642 94.32% 26.89%
Per Capita Income $ 20,354 $ 39,175 $ 49,187 92.47% 25.56%
RP FINANCIAL, LC.
PAGE 2.8
LOCAL ECONOMY/LARGEST EMPLOYERS
The largest employers in Los Angeles County reflect its relatively diverse
economy and the fact that some of the largest sectors (entertainment and
tourism) are comprised of a multitude of relatively small employers which
together comprise a large portion of the economy.
Table 2.2
K-Fed Bancorp
Major Private Employers in Los Angeles, San Bernardino and Santa Clara Counties
Employer Business
-------- --------
LOS ANGELES COUNTY
------------------
Boeing Aerospace
Kaiser Permanente Health Maint. Org.
Ralph's Grocery Supermarket Operator
Kelly Services Personnel Mgmt. Firm
Bank of America Financial Services
Target Retailer
Pacific Bell Telecommunications
ABM Industries Building Services
University of Southern California Education
San Bernardino County
---------------------
Stater Brothers Holdings Supermarket Operator
Loma Linda University Medical Center Education
Wal-Mart Retailer
Kaiser Permanente Medical Center Healthcare
United Parcel Service Transportation/Shipping
Loma Linda University Education
Sears Roebuck and Company Retailer
Verizon Telecommunications
San Antonio Community Hospital Healthcare
St. Bernardine Medical Center Healthcare
RP FINANCIAL, LC.
PAGE 2.9
Table 2.2 (Continued)
K-Fed Bancorp
Major Private Employers in Los Angeles, San Bernardino and Santa Clara Counties
Santa Clara County
------------------
Agilent Technologies Electronic Components
Apple Computer Computer Equipment
Applied Materials, Inc. Electronic Components
Cisco Systems, Inc. Computer and DP Services
Flextronics International, LTD. Electronic Components
Hewlett-Packard Co. Electronic Components
IBM Corp. Computer and Office Equip.
Intel Corp. Electronic Components
KLA-Tenor Corp. Electronic Components
Lockheed Martin Space Systems Aerospace
Santa Clara Valley Medical Center Healthcare
Solectron Corp. Electronic Components
Stanford Hospital and Clinics Healthcare
Stanford University Education
Sun Microsystems, Inc. Computer and Office Equip.
Source: Local Chambers of Commerce.
San Bernardino and Santa Clara Counties reflect the characteristics and
trends previously described. In this regard, the major employers in San
Bernardino County reflect its suburban character with its mix of retailers and
health care providers. Santa Clara County's largest employers are relatively
concentrated in the technology and health care sectors and reflects many of the
industry leaders involved in the production of computer hardware and software.
UNEMPLOYMENT RATES
Unemployment rates on a national level have been trending upward over the
most recent 12 months, reflecting the weakening economy which has led to the
current recessionary economic conditions (see Table 2.3). Unemployment rates in
California and the Company's markets have remained relatively stable, albeit at
levels above the national average with the exception of San Bernardino County.
The most recent unemployment rate for Los Angeles stands at 6.8% which is 1.0%
above the national average and 0.7% above the average for California as a whole.
The current unemployment rate in San Bernardino County is 5.5% which is
relatively favorable while the rate in Santa Clara County of 7.5% reflects the
impact of the significant scaleback in technology employment following the
dot.com bust. Given that there
RP FINANCIAL, LC.
PAGE 2.10
are signs that the Federal Reserve rate reductions are having their intended
effect to stimulate the economy, the current level of unemployment may be at or
near peak levels.
Table 2.3
K-Fed Bancorp
Unemployment Trends (1)
September 2002 September 2003
Region Unemployment Unemployment
------ ------------ ------------
United States 5.7% 5.8%
California 6.5 6.1
Los Angeles County 6.7 6.8
San Bernardino County 5.9 5.5
Santa Clara County 8.8 7.5
(1) Unemployment rates are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics.
COMPETITION
As a savings bank with its primary business functions of real estate
lending and the gathering of deposits in southern California and the San
Francisco Bay area, K-Fed Bancorp's primary competitors are: (1) other financial
institutions with offices proximate to the Company's locations; (2) other
mortgage loan originators; (3) those depository and lending organizations not
physically located within the Company's markets, but capable of doing business
remotely through the Internet or by other means; and (4) other competitors such
as investment firms, mutual funds, insurance companies, etc.
Competition among financial institutions in the Company's market is
significant. As larger institutions compete for market share to achieve
economies of scale, the environment for the Company's products and services is
expected to remain highly competitive. Community-sized institutions such as
K-Fed Bancorp typically compete with larger institutions on pricing or operate
in a niche that will allow for operating margins to be maintained at profitable
levels. The Company's business plan reflects elements of both strategies.
RP FINANCIAL, LC.
PAGE 2.11
Table 2.4 displays deposit market trends over recent years for the markets
where the Company maintains branches. The large size of the markets overall are
indicated by the deposit totals, which equaled $188.0 billion for Los Angeles
County alone while Santa Clara and San Bernardino Counties were $46 billion and
$13 billion, respectively. Furthermore, growth trends are relatively favorable
as the Los Angeles County deposit market realized 9.9% annual growth for the two
years ended June 30, 2002, which fell between the corresponding growth figures
for San Bernardino County (17.9%) and Santa Clara County (6.7%).
The largest competitors in the markets served by K-Fed Bancorp are
comprised of some of the largest financial institutions in California and the
nation as a whole. In this regard, Bank of America holds the largest market
share in all three counties where the Company maintains branch offices, with a
market share in the range of 20% based on deposit data as of June 30, 2002 (see
Table 2.5 for details). Other large competitors include Washington Mutual, Wells
Fargo, Union Bank and Citibank. At the same time, there are many smaller
competitors, each holding less than 1.0% of the deposit market. Based on the
most recent branch deposit data, K-Fed Bancorp held less than 1% of all the
markets where it operated.
RP FINANCIAL, LC.
PAGE 2.12
Table 2.4
Deposit Table
K-Fed Bancorp
Deposits as of June 30,
------------------------------------------------------ Two Year
2000 2001 2002 Growth Rate
---- ---- ---- -----------
($000) ($000) ($000) (%)
STATE OF CALIFONIA
Bank Deposits $ 327,889,227 $ 356,950,997 $ 381,397,313 7.9%
Thrift Deposits 124,957,182 134,165,703 150,741,141 9.8%
Savings Bank Deposits 925,183 927,408 1,649,143 33.5%
Credit Union Deposits 55,232,271 64,300,402 72,855,386 14.9%
------------- ------------- -------------
Total Deposits $ 509,003,863 $ 556,344,510 $ 606,642,983 9.2%
LOS ANGELES COUNTY
Bank Deposits $ 94,997,588 $ 108,639,542 $ 116,166,552 10.6%
Thrift Deposits 42,763,600 44,440,355 49,089,064 7.1%
Savings Bank Deposits 554,509 549,833 677,162 10.5%
Credit Union Deposits 17,381,667 19,681,250 22,038,078 12.6%
------------- ------------- -------------
Total Deposits $ 155,697,364 $ 173,310,980 $ 187,970,856 9.9%
KAISER FEDERAL BANK $ 148,619 $ 174,812 $ 195,320 14.6%
SANTA CLARA COUNTY
Bank Deposits $ 27,592,561 $ 29,352,972 $ 30,036,155 4.3%
Thrift Deposits 6,726,306 7,240,488 8,176,693 10.3%
Savings Bank Deposits - - 18,011 NA
Credit Union Deposits 6,039,502 6,872,085 7,708,649 13.0%
------------- ------------- -------------
Total Deposits $ 40,358,369 $ 43,465,545 $ 45,939,508 6.7%
KAISER FEDERAL BANK $ 18,782 $ 22,779 $ 28,342 22.8%
SAN BERNARDINO
Bank Deposits $ 5,617,402 $ 6,151,101 $ 6,881,583 10.7%
Thrift Deposits 4,328,510 4,513,579 4,880,934 6.2%
Savings Bank Deposits - - 8,153 NA
Credit Union Deposits 904,910 1,079,963 1,257,465 17.9%
------------- ------------- -------------
Total Deposits $ 10,850,822 $ 11,744,643 $ 13,028,135 9.6%
KAISER FEDERAL BANK $ - $ - $ 28,349 NA
Source: SNL Financial, LC
RP FINANCIAL, LC.
PAGE 2.13
Table 2.5
K-Fed Bancorp
Market Share by County
Deposits as of June 30,
Number of ----------------------------------------- Market
Company Name City State Charter Branches 2000 2001 2002 Share
- ------------ ---- ----- ------- -------- ---- ---- ---- -----
($000) ($000) ($000) (%)
SANTA CLARA COUNTY
Bank of America NA Charlotte NC B 60 $ 6,761,803 $ 6,975,048 $ 7,279,731 19.27%
Wells Fargo Bank NA San Francisco CA B 62 $ 4,374,942 $ 5,509,777 $ 5,758,639 15.24%
Washington Mutual Bank, FA Stockton CA T 41 $ 3,343,588 $ 3,478,869 $ 4,232,776 11.20%
Comerica Bank-California San Jose CA B 11 $ 2,228,430 $ 2,478,436 $ 3,198,575 8.46%
Silicon Valley Bank Santa Clara CA B 2 $ 4,014,133 $ 3,259,547 $ 2,412,805 6.39%
Bank of the West San Francisco CA B 29 $ 1,583,682 $ 1,716,329 $ 1,681,379 4.45%
Citibank FSB Reston VA T 15 $ 1,652,191 $ 1,788,790 $ 1,554,648 4.11%
World SB FSB Oakland CA T 16 $ 1,114,237 $ 1,239,872 $ 1,453,445 3.85%
Cupertino National Bk Cupertino CA B 5 $ 1,089,129 $ 1,365,544 $ 1,402,608 3.71%
Union Bank of California NA San Francisco CA B 14 $ 1,253,272 $ 1,277,351 $ 1,390,439 3.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Kaiser Federal Bank Covina CA T 1 $ 18,782 $ 22,779 $28,342 779 0.08%
- ------------------------------------------------------------------------------------------------------------------------------------
All Others 1 $56,579,146 $ 7,056,135 $ 7,393,037 19.59%
SAN BERNARDINO
Bank of America NA Charlotte NC B 36 $ 2,029,271 $ 2,142,586 $ 2,347,258 20.52%
Washington Mutual Bank, FA Stockton CA T 25 $ 1,461,441 $ 1,412,774 $ 1,530,889 13.39%
PFF Bank & Trust Pomona CA T 13 $ 859,213 $ 924,701 $ 977,987 8.55%
Citizens Business Bank Ontario CA B 9 $ 672,026 $ 784,546 $ 971,734 8.50%
Wells Fargo Bank NA San Francisco CA B 27 $ 824,737 $ 897,284 $ 915,883 8.01%
Citibank (West) FSB San Francisco CA T 14 $ 579,881 $ 597,342 $ 616,717 5.39%
World SB FSB Oakland CA T 8 $ 437,341 $ 475,030 $ 513,844 4.49%
Downey S&LA Newport Beach CA T 7 $ 384,953 $ 450,106 $ 427,814 3.74%
Jackson Federal Bank Fullerton CA T 6 $ 186,568 $ 223,752 $ 370,145 3.24%
Desert Community Bank Victorville CA B 8 $ 247,122 $ 286,116 $ 312,521 2.73%
- ------------------------------------------------------------------------------------------------------------------------------------
Kaiser Federal Bank Covina CA T 1 $ - $ - $ 28,349 0.25%
- ------------------------------------------------------------------------------------------------------------------------------------
All Others 73 $ 2,021,660 $ 2,161,415 $ 2,423,066 21.19%
LOS ANGELES COUNTY
Bank of America NA Charlotte NC B 299 $29,897,952 $34,251,116 $35,560,951 21.78%
Washington Mutual Bank, FA Stockton CA T 254 $19,431,305 $19,408,370 $22,103,652 13.54%
Wells Fargo Bank NA San Francisco CA B 220 $10,196,304 $12,666,724 $13,507,159 8.27%
Union Bank of California NA San Francisco CA B 65 $ 9,025,278 $ 9,495,137 $ 9,294,943 5.69%
Citibank (West) FSB San Francisco CA T 137 $ 7,241,883 $ 7,423,971 $ 7,659,978 4.69%
Comerica Bank-California San Jose CA B 15 $ 4,357,677 $ 5,694,696 $ 7,407,069 4.54%
City National Bank Beverly Hills CA B 42 $ 5,155,385 $ 5,751,727 $ 6,913,471 4.23%
Bank of the West San Francisco CA B 54 $ 4,466,515 $ 4,465,149 $ 4,859,008 2.98%
World SB FSB Oakland CA T 30 $ 2,706,308 $ 3,104,356 $ 3,577,691 2.19%
California National Bank Los Angeles CA B 48 $ 3,370,036 $ 3,205,222 $ 3,187,987 1.95%
- ------------------------------------------------------------------------------------------------------------------------------------
Kaiser Federal Bank Covina CA T 2 $ 148,619 $ 174,812 $ 195,320 0.12%
- ------------------------------------------------------------------------------------------------------------------------------------
All Others 676 $40,631,249 $45,653,017 $49,034,053 30.04%
RP FINANCIAL, LC.
PAGE 3.1
III. PEER GROUP ANALYSIS
This chapter presents an analysis of K-Fed Bancorp's operations versus a
group of comparable companies (the "Peer Group") selected from the universe of
all publicly-traded savings institutions. The primary basis of the pro forma
market valuation of K-Fed Bancorp is provided by these public companies. Factors
affecting the Company's pro forma market value such as financial condition,
credit risk, interest rate risk, and recent operating results can be readily
assessed in relation to the Peer Group. Current market pricing of the Peer
Group, subject to appropriate adjustments to account for differences between
K-Fed Bancorp and the Peer Group, will then be used as a basis for the valuation
of K-Fed Bancorp's to-be-issued common stock.
PEER GROUP SELECTION
The mutual holding company form of ownership has been in existence in its
present form since 1991. As of the date of this appraisal, there were 16
publicly-traded institutions operating as subsidiaries of MHCs. We believe there
are a number of characteristics of MHCs that make their shares distinctly
different than the shares of fully-converted companies. These factors include:
(1) lower aftermarket liquidity in the MHC shares since less than 50% of the
shares are available for trading; (2) guaranteed minority ownership interest,
with no opportunity of exercising voting control of the institution in the MHC
form of organization, thus limiting acquisition speculation in the stock price;
(3) market expectations of the potential impact of "second-step" conversions on
the pricing of public MHC institutions; (4) the regulatory policies regarding
the dividend waiver by MHC institutions; and (5) mid-tier holding companies
(formed by most MHCs) facilitate the ability for stock repurchases, thereby
potentially improving the market for the public shares and the MHC's financial
characteristics. We believe that each of these factors has a distinct impact on
the pricing of the shares of MHC institutions, relative to the market pricing of
shares of fully-converted public companies.
Thus, given the unique characteristics of the MHC form of ownership, RP
Financial concluded that the appropriate Peer Group for K-Fed Bancorp's
valuation should be comprised
RP FINANCIAL, LC.
PAGE 3.2
of thrifts in MHC form, and no full stock companies. In this regard, a Peer
Group comprised of public MHC thrifts is consistent with the regulatory
guidelines, and other recently completed MHC transactions. Further, the Peer
Group should be comprised of only those MHC institutions whose common stock is
either listed on a national exchange or is NASDAQ listed, since the market for
companies trading in this fashion is regular and reported. We believe non-listed
MHC institutions are inappropriate for the Peer Group, since the trading
activity for thinly-traded stocks is typically highly irregular in terms of
frequency and price and thus may not be a reliable indicator of market value. We
have excluded from the Peer Group those public MHC institutions that are
currently pursuing a "second-step" conversion, companies subject to speculative
factors or unusual operating conditions, and companies who have announced a
"remutualization" transaction or a merger with another MHC - as the pricing
characteristics of these MHC institutions are typically distorted. MHCs that
recently completed their minority stock offerings are typically excluded as
well, due to the lack of a seasoned trading history and/or insufficient time to
effectively redeploy the offering proceeds. Selected characteristics of the
universe of all publicly-traded institutions are included as Exhibit III-1.
BASIS OF COMPARISON
This appraisal includes two sets of financial data and ratios for each
public MHC institution. The first set of financial data reflects the actual book
value, earnings, assets and operating results reported by the public MHC
institutions in its public filings inclusive of the minority ownership interest
outstanding to the public. The second set of financial data, discussed at length
in the following chapter, places the Peer Group institutions on equal footing by
restating their financial data and pricing ratios on a "fully-converted" basis
assuming the sale of the majority shares held by the MHCs in public offerings
based on their respective current prices and standard assumptions for second
step conversions. This adjustment is appropriate for several reasons, including:
(1) the investment community also prices the stock of MHCs assuming the
completion of a second step conversion; and, MHC institutions have different
proportions of their stock publicly held, so this technique neutralizes such
differences. Throughout the appraisal, the adjusted figures will be specifically
identified as being on a "fully-converted"
RP FINANCIAL, LC.
PAGE 3.3
basis. Unless so noted, the figures referred to in the appraisal will be actual
financial data reported by the public MHC institutions.
Both sets of financial data have their specific use and applicability to
the appraisal. The actual financial data, as reported by the Peer Group
companies and reflective of the minority interest outstanding, will be used
primarily in this Chapter III to make financial comparisons between the Peer
Group and the Company. In this analysis, we consider the pro forma impact of the
offering on the Company. The fully-converted analysis will be more fully
described and quantified in the pricing analysis discussed in Chapter IV. The
fully-converted pricing ratios are considered critical to the valuation analysis
in Chapter IV, because they place each public MHC institution on a
fully-converted basis (making their pricing ratios comparable to the pro forma
valuation conclusion reached herein), eliminate distortion in pricing ratios
between public MHC institutions that have sold different percentage ownership
interests to the public, and reflect the actual pricing ratios (fully-converted
basis) being placed on public MHC institutions in the market today to reflect
the unique trading characteristics of publicly-traded MHC institutions.
SELECTED PEER GROUP
Among the universe of nearly 230 publicly-traded thrifts, the number of
public MHC institutions is relatively small, thereby limiting the selection
process. Under ideal circumstances, the Peer Group would be comprised of at
least ten publicly-traded regionally-based MHC institutions with financial and
operating characteristics comparable to the Company. However, given the limited
number of publicly-traded institutions in the MHC form of ownership, the
selection criteria was necessarily more broadly based, i.e., not confined to a
particular geographic market area, financial and operating characteristics. In
the selection process, publicly-traded MHCs with assets of less than $1 billion
were considered for the Peer Group, in that they were more comparable than
larger thrifts in terms of resources, financial strength, competitive strength
and size and liquidity characteristics of the stock offering. Ten
publicly-traded MHC companies currently maintain assets of less than $1 billion
and all ten were selected for the Peer Group. While the Peer Group is not
exactly comparable to the Company, we believe
RP FINANCIAL, LC.
PAGE 3.4
Table 3.1
Peer Group of Publicly-Traded Thrifts
November 17, 2003(1)
Operating Total Fiscal Conv. Stock Market
Ticker Financial Institution Exchg. Primary Market Strategy(2) Assets Offices Year Date Price Value
- ------ --------------------- ------ -------------- ----------- ------ ------- ---- ---- ----- -----
($)
WFD Westfield Financial MHC of MA (47.0) (3) AMEX Southwestern MA Thrift $810 10 12-31 12/01 $24.20 $242
BCSB BCSB Bankcorp MHC of MD (36.0) OTC Northeast MD Thrift 640 11 09-30 07/98 18.00 106
ONFC Oneida Financial MHC of NY (45.7) OTC Central NY Thrift 429 6 12-31 12/98 24.00 119
ALLB Alliance Bank MHC of PA (20.0) OTC Southeastern PA Thrift 385 8 12-31 03/95 29.09 100
PBHC Pathfinder BC MHC of NY (39.1) (3) OTC Upstate NY Thrift 283 5 12-31 11/95 17.25 42
JXSB Jacksonville Bancorp MHC of IL (45.6) OTC Central IL Thrift 261 7 12-31 04/95 16.41 32
ROME Rome Bancorp Inc. MHC of NY (41.6) (3) OTC Central NY Thrift 258 4 12-31 10/99 27.56 118
GCBC Green County Bancorp MHC of NY (43.0) OTC Southeast NY, NJ Thrift 257 6 06-30 12/98 32.24 66
WCFB Webster City Federal MHC of IA (38.5) OTC Central IA Thrift 106 1 12-31 08/94 13.00 49
GOV Gouverneur Bancorp MHC of NY (42.4) AMEX Northern NY Thrift 89 1 09-30 03/99 12.00 27
NOTES: (1) Or most recent date available (M=March, S=September, D=December, J=June, E=Estimated, and P=Pro Forma)
(2) Operating strategies are: Thrift=Traditional Thrift, M.B.=Mortgage Banker, R.E.=Real Estate Developer,
Div.=Diversified and Ret.=Retail Banking.
(3) FDIC savings bank institution.
Source: Corporate offering circulars, data derived from information published in SNL Securities Quarterly Thrift Report, and
financial reports of publicly-traded thrifts.
RP FINANCIAL, LC.
PAGE 3.5
such companies form a good basis for the valuation of the Company. To the extent
significant differences exist, valuation adjustments will be made accordingly.
On average, the Peer Group companies maintain a slightly higher level of
capitalization relative to the universe of all public thrifts, and have lower
profitability and return on equity. On a fully-converted basis, the Peer Group
would have nearly twice the capital level and higher profitability, which would
result in an even lower return on equity. The summary table below underscores
the key differences, particularly in the average pricing ratios between full
stock and MHC institutions (both as reported and on a fully converted basis).
MHC Peer Group
--------------
Fully-
All Reported Converted
Publicly-Traded Basis Basis(1)
--------------- ----- --------
Financial Characteristics (Averages)
------------------------------------
Assets ($Mil) $2,244 $352 $401
Equity/Assets (%) 10.59% 12.55% 23.95%
Core Return on Assets (%) 0.68 0.59 0.64
Core Return on Equity (%) 6.69 4.38 2.51
Pricing Ratios (Averages)(2)
----------------------------
Price/Core Earnings (x) 20.29x 30.13x 30.28x
Price/Book (%) 160.47% 221.50% 98.38%
Price/Assets (%) 16.82 27.52 23.41
(1) Pro forma basis.
(2) Based on market prices as of November 7, 2003.
The following sections present a comparison of K-Fed Bancorp's financial
condition, income and expense trends, loan composition, interest rate risk and
credit risk versus the figures reported by the Peer Group. The conclusions drawn
from the comparative analysis are then factored into the valuation analysis
discussed in the final chapter.
FINANCIAL CONDITION
Table 3.2 shows comparative balance sheet measures for the Company and the
Peer Group. The Company's pre-offering equity ratio of 8.0% of assets falls
below the Peer Group
RP FINANCIAL, LC.
Page 3.6
Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of June 30, 2003
Balance Sheet as a Percent of Assets
------------------------------------------------------------------------------------------
Cash & MBS & Borrowed Subd. Net Goodwill Tng Net MEMO:
Equivalents Invest Loans Deposits Funds Debt Worth & Intang Worth Pref.stock
----------- ------ ----- -------- ----- ---- ----- -------- ----- ----------
K-Fed Bancorp
- -------------
September 30, 2003 4.8% 8.9% 84.1% 80.4% 11.2% 0.0% 8.0% 0.0% 8.0% 0.0%
All Public Companies 6.2% 23.2% 66.2% 67.8% 19.6% 0.1% 10.4% 0.5% 9.9% 0.0%
State of CA 1.9% 21.4% 73.9% 56.0% 33.3% 0.2% 8.1% 0.2% 7.9% 0.1%
Comparable Group Average 7.0% 30.8% 57.8% 76.9% 8.8% 0.0% 12.5% 0.6% 11.9% 0.0%
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 14.3% 31.4% 49.6% 74.1% 16.0% 0.0% 9.1% 0.0% 9.1% 0.0%
BCSB BCSB Bankcorp MHC of MD (36.0) 3.9% 35.1% 58.4% 85.6% 3.7% 0.0% 7.2% 0.4% 6.8% 0.0%
GOV Gouverneur Bncrp MHC of NY (42.4) 2.5% 27.8% 67.1% 64.1% 13.7% 0.0% 19.8% 0.0% 19.8% 0.0%
GCBC Green Co. Bancorp MHC of NY (43.0) 6.6% 39.4% 51.5% 84.9% 3.1% 0.0% 11.3% 0.0% 11.3% 0.0%
JXSB Jacksonville Bancorp MHC of IL (45.6) 4.5% 37.3% 52.6% 89.7% 0.7% 0.0% 7.9% 1.2% 6.7% 0.0%
ONFC Oneida Financial MHC of NY (45.7) 6.4% 38.1% 46.1% 70.5% 16.7% 0.0% 11.7% 2.9% 8.9% 0.0%
PBHC Pathfinder BC MHC of NY (39.1) 2.5% 23.6% 66.6% 72.2% 17.0% 0.0% 7.6% 1.7% 5.9% 0.0%
ROME Rome Bancorp Inc. MHC of NY (41.6) 4.8% 15.5% 75.7% 78.9% 5.3% 0.0% 14.2% 0.0% 14.2% 0.0%
WCFB Webster City Fed. MHC of IA (38.5) 18.0% 15.4% 64.7% 68.4% 9.1% 0.0% 21.2% 0.1% 21.1% 0.0%
WFD Westfield Fin. MHC of MA (47.0) 6.2% 44.0% 45.3% 81.0% 3.0% 0.0% 15.4% 0.0% 15.4% 0.0%
Balance Sheet Annual Growth Rates
---------------------------------------------------------------------------
MBS, Cash & Borrows. Net Tng Net
Assets Investments Loans Deposits & Subdebt Worth Worth
------ ----------- ----- -------- --------- ----- -----
K-Fed Bancorp
- -------------
September 30, 2003 50.97% 89.84% 45.32% 39.27% N.M. 6.90% 6.90%
All Public Companies 8.83% 17.30% 5.26% 8.59% 4.17% 4.35% 3.68%
State of CA 21.76% 12.75% 30.43% 17.30% 22.64% 12.91% 11.18%
Comparable Group Average 10.22% 21.69% 3.84% 12.43% 6.07% 2.16% 0.10%
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 3.67% 10.02% -1.57% 5.02% -0.94% -1.51% -1.51%
BCSB BCSB Bankcorp MHC of MD (36.0) 43.32% 59.72% 33.67% 46.99% 93.64% 3.94% -2.23%
GOV Gouverneur Bncrp MHC of NY (42.4) 7.02% -0.51% 10.27% 14.47% -18.12% 2.15% 2.15%
GCBC Green Co. Bancorp MHC of NY (43.0) 16.72% 38.88% 2.99% 18.69% -11.11% 10.32% 10.32%
JXSB Jacksonville Bancorp MHC of IL (45.6) 6.78% 42.85% -10.82% 6.86% N.M. 4.43% 5.76%
ONFC Oneida Financial MHC of NY (45.7) 2.82% 2.80% 1.80% 2.01% 0.56% 7.99% 5.99%
PBHC Pathfinder BC MHC of NY (39.1) 9.75% 9.21% 8.46% 15.32% -2.59% -6.49% -19.76%
ROME Rome Bancorp Inc. MHC of NY (41.6) 3.56% -19.45% 11.55% 5.43% -12.91% 0.77% 0.77%
WCFB Webster City Fed. MHC of IA (38.5) 6.19% 63.82% -9.72% 8.24% 0.00% 2.83% 2.29%
WFD Westfield Fin. MHC of MA (47.0) 2.34% 9.58% -8.26% 1.23% N.M. -2.78% -2.78%
Regulatory Capital
-----------------------------
Tangible Core Reg.Cap
-------- ---- - ------
K-Fed Bancorp
- -------------
September 30, 2003 8.00% 8.00% 13.50%
All Public Companies 9.16% 9.15% 16.71%
State of CA 8.01% 8.01% 14.86%
Comparable Group Average 12.78% 12.29% 24.18%
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) N.M. N.M. N.M.
BCSB BCSB Bankcorp MHC of MD (36.0) 7.44% 7.44% 13.75%
GOV Gouverneur Bncrp MHC of NY (42.4) 19.00% 19.00% 37.50%
GCBC Green Co. Bancorp MHC of NY (43.0) 9.04% 9.04% 19.63%
JXSB Jacksonville Bancorp MHC of IL (45.6) N.M. 6.69% 13.09%
ONFC Oneida Financial MHC of NY (45.7) N.M. N.M. N.M.
PBHC Pathfinder BC MHC of NY (39.1) 7.79% 7.79% 13.20%
ROME Rome Bancorp Inc. MHC of NY (41.6) N.M. N.M. N.M.
WCFB Webster City Fed. MHC of IA (38.5) 20.64% 20.64% 43.86%
WFD Westfield Fin. MHC of MA (47.0) N.M. 15.43% 28.23%
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP(R)Financial, LC. calculations. The
information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or
completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 3.7
average of 12.5%; however, with the addition of offering proceeds, the pro forma
capital position will exceed the Peer Group's ratio. Neither had a significant
amount of intangible assets. The increased equity is anticipated to enhance
K-Fed Bancorp's earnings potential through reinvestment of proceeds, lower
funding costs and potentially through profitable growth. However, at the same
time, the increased pro forma capital position is expected to result in a
decline in the Company's return on equity ("ROE"), based on both reported and
core earnings. Both the Company's and the Peer Group's current equity ratios
reflect strong surpluses over regulatory capital requirements; and on a
post-offering basis the Company's cushion over capital requirements will be
enhanced.
The Company's asset composition reflects a comparatively higher
concentration of loans to assets, at 84.1% versus a 57.8% average for the Peer
Group. Comparatively, the ratio of cash, investments, and MBS for the Company
was lower than for the Peer Group (13.7% of assets versus 37.8% for the Peer
Group). Overall, the Company's interest-earning assets ("IEA") approximated
97.8% of assets, which was higher than the comparative Peer Group ratio of
95.6%. The Company's higher IEA ratio reflects, in part, the limited investment
in fixed assets and no intangible assets in comparison to the Peer Group. On a
pro forma basis, the Company's IEA advantage is expected to increase as the net
proceeds are reinvested into IEA.
The Company's deposits equaled 80.4% of assets, which was above the Peer
Group average of 76.9%. Borrowings were utilized to a lesser degree by the Peer
Group, at 8.8% versus the K-Fed Bancorp's ratio of 11.2%. Total interest-bearing
liabilities ("IBL") maintained by K-Fed Bancorp and the Peer Group, equaled
91.6% and 85.7% of assets, respectively. The ratio of IBL will be reduced on a
post-offering basis as the Company funds a greater portion of its operations out
of capital.
K-Fed Bancorp posted much higher annual asset growth than the Peer Group,
at 50.97% and 10.45%, respectively. The Company's comparatively faster growth is
attributable to relatively strong loan growth, reflecting the Company's efforts
to leverage capital and take advantage of the expanded lending powers (both from
a product and geographic standpoint) following the Charter Conversion. Over this
same period, the Company's loans increased
RP FINANCIAL, LC.
PAGE 3.8
45.32% versus 3.84% for the Peer Group on average, with the Company's faster
loan growth being primarily attributable to purchases.
The growth rate of both deposits and borrowings for the Company well
exceeded the Peer Group average as K-Fed Bancorp sought to fund asset growth.
Specifically, the annual growth rate for deposits was 39.27% versus an average
of 12.43% for the Peer Group. The growth rate for borrowings was not meaningful
as K-Fed Bancorp's outstanding borrowings increased from a very small level ($2
million) to $50 million as of September 30, 2003. The borrowing growth rate for
the Peer Group equaled 6.07% for the most recent 12 month period.
Importantly, the Company's business plan indicates that future balance
sheet growth may more closely approximate the Peer Group average as compared to
the level of growth realized over the last 12 months, and the Company expects to
repay the $50 million in advances upon maturity with available liquidity and
interim deposit growth.
The Company's equity increased 6.90%, versus 2.16% for the Peer Group. The
Peer Group's more limited equity growth, notwithstanding comparable
profitability, reflects dividend and capital management strategies. On a
post-offering basis, the Company's capital growth rate is expected to decline
due to the increased equity level and marginal short-term net proceeds
reinvestment benefit.
INCOME AND EXPENSE COMPONENTS
Table 3.3 displays comparative statements of operations for the Company and
the Peer Group. K-Fed Bancorp and the Peer Group reported net income to average
assets ratios of 0.62% and 0.65%, respectively. The Company's operations reflect
a relatively favorable level of operating expense and fee income, the benefits
of which are offset by a comparatively weaker net interest income ratio.
The Peer Group's interest income and interest expense ratios relative to
average assets were relatively favorable in comparison to the Company, resulting
in a stronger net interest income ratio. The Peer Group's higher interest income
ratio was realized through earning a higher yield on interest-earning assets
(5.94% versus 5.25% for the Company). Despite the Company's higher ratio of
loans-to-assets, the Company's lower asset yields reflect its higher
RP FINANCIAL, LC.
Page 3.9
Table 3.3
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2003
Net Interest Income Other Income
----------------------------- --------------------
Loss NII Total
Net Provis. After Loan R.E. Other Other
Income Income Expense NII on IEA Provis fees Oper. Income Income
------ ------ ------- --- ------- ------ ---- ----- ------ ------
K-Fed Bancorp
- -------------
September 30, 2003 0.62% 5.38% 2.35% 3.02% 0.25% 2.77% 0.00% 0.00% 0.88% 0.88%
All Public Companies 0.91% 5.70% 2.57% 3.13% 0.19% 2.95% 0.04% 0.00% 0.53% 0.58%
State of CA 1.18% 6.02% 2.48% 3.54% 0.28% 3.26% 0.04% 0.01% 0.37% 0.43%
Comparable Group Average 0.65% 5.68% 2.28% 3.40% 0.29% 3.12% 0.03% -0.01% 0.58% 0.60%
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 0.28% 5.55% 2.54% 3.01% 0.52% 2.49% 0.00% -0.02% 0.30% 0.28%
BCSB BCSB Bankcorp MHC of MD (36.0) 0.34% 5.84% 2.80% 3.04% 0.26% 2.78% 0.04% 0.00% 0.12% 0.16%
GOV Gouverneur Bncrp MHC of NY (42.4) 0.69% 6.22% 2.31% 3.91% 0.10% 3.81% 0.00% -0.07% 0.27% 0.20%
GCBC Green Co. Bancorp MHC of NY (43.0) 0.93% 5.50% 1.83% 3.67% 0.08% 3.60% 0.00% 0.03% 1.03% 1.06%
JXSB Jacksonville Bancorp MHC of IL (45.6) 0.28% 5.55% 2.57% 2.98% 1.25% 1.74% 0.15% -0.07% 0.51% 0.59%
ONFC Oneida Financial MHC of NY (45.7) 0.86% 5.22% 2.21% 3.01% 0.05% 2.96% 0.00% 0.00% 2.08% 2.08%
PBHC Pathfinder BC MHC of NY (39.1) 0.50% 5.80% 2.44% 3.36% 0.25% 3.12% 0.10% 0.03% 0.44% 0.58%
ROME Rome Bancorp Inc. MHC of NY (41.6) 0.97% 6.03% 1.63% 4.40% 0.19% 4.21% 0.00% 0.00% 0.45% 0.45%
WCFB Webster City Fed. MHC of IA (38.5) 1.28% 6.18% 2.42% 3.76% 0.08% 3.68% 0.00% -0.01% 0.38% 0.37%
WFD Westfield Fin. MHC of MA (47.0) 0.38% 4.91% 2.04% 2.87% 0.10% 2.77% 0.00% 0.00% 0.23% 0.23%
G&A/Other Exp. Non-Op. Items Yields, Costs, and Spreads
---------------- -------------- -----------------------------
MEMO: MEMO:
G&A Goodwill Net Extrao. Yield Cost Yld-Cost Assets/ Effective
Expense Amort. Gains Items On Assets of Funds Spread Fte Emp. Tax Rate
------- ------ ----- ----- --------- -------- ------ -------- --------
K-Fed Bancorp
- -------------
September 30, 2003 2.56% 0.00% -0.06% 0.00% 5.25% 2.68% 2.57% $5,340 39.98%
All Public Companies 2.49% 0.02% 0.35% 0.00% 5.77% 2.86% 2.91% $4,515 34.65%
State of CA 2.22% 0.01% 0.50% 0.00% 6.21% 2.77% 3.44% $6,570 40.83%
Comparable Group Average 2.87% 0.01% 0.10% 0.00% 5.94% 2.66% 3.28% $3,565 35.08%
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 2.60% 0.00% 0.00% 0.00% 5.83% 2.82% 3.01% $5,197 N.M.
BCSB BCSB Bankcorp MHC of MD (36.0) 2.54% 0.00% 0.13% 0.00% 5.99% 3.14% 2.85% $3,949 35.74%
GOV Gouverneur Bncrp MHC of NY (42.4) 2.98% 0.00% 0.11% 0.00% 6.40% 2.97% 3.43% $2,961 39.74%
GCBC Green Co. Bancorp MHC of NY (43.0) 3.32% 0.00% 0.01% 0.00% 5.66% 2.09% 3.57% $3,023 31.02%
JXSB Jacksonville Bancorp MHC of IL (45.6) 2.67% 0.03% 0.38% 0.00% 5.89% 2.85% 3.04% $2,418 N.M.
ONFC Oneida Financial MHC of NY (45.7) 4.11% 0.02% 0.28% 0.00% 5.74% 2.52% 3.22% $3,002 27.95%
PBHC Pathfinder BC MHC of NY (39.1) 3.12% 0.04% 0.14% 0.00% 6.23% 2.74% 3.50% $2,749 26.09%
ROME Rome Bancorp Inc. MHC of NY (41.6) 3.21% 0.00% 0.02% 0.00% 6.27% 1.93% 4.34% $2,717 34.24%
WCFB Webster City Fed. MHC of IA (38.5) 2.06% 0.00% 0.01% 0.00% 6.31% 3.14% 3.17% $4,086 35.73%
WFD Westfield Fin. MHC of MA (47.0) 2.14% 0.00% -0.11% 0.00% 5.08% 2.44% 2.64% $5,547 50.11%
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP(R)Financial, LC. calculations.
The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 3.10
concentration of 1-4 family residential mortgage loans, the majority of which
are adjustable rate or hybrid ARMs that were purchased at a premium. In
contrast, many of the Peer Group companies have a more substantial internal
origination capability and greater loan diversification. The Company's
marginally higher interest expense ratio, 2.35% versus 2.28% of average assets
for the Peer Group, reflects the Company's higher IBL ratio, and higher use of
borrowings which is partially offset by its more favorable core deposit mix.
K-Fed Bancorp's interest expense ratio is expected to diminish on a pro forma
basis, as the conversion proceeds will represent interest-free funds for the
Company. Overall, the Company's net interest income ratio of 3.02% compared
unfavorably to the Peer Group average of 3.40%.
Non-interest income equaled 0.88% of average assets for K-Fed Bancorp
versus an average of 0.60% for the Peer Group. The Company's non-interest income
ratio is comparatively higher, primarily reflecting the high level of fee income
generated through the Company's deposit accounts and large ATM network.
K-Fed Bancorp operates with a modestly lower operating expense ratio than
the Peer Group, reflecting its efforts to leverage its brick and mortar and
staffing costs through premium pricing of deposits and the employment of
alternative delivery systems. The operating expense ratios for K-Fed Bancorp and
the Peer Group were 2.56% and 2.87%, respectively. On a post-offering basis, the
Company's operating expenses can be expected to increase with the addition of
stock benefit plans and public company expenses. Intangible assets amortization
was nominal for the Peer Group, and the Company had no amortizing intangible
assets.
K-Fed Bancorp's efficiency ratio (operating expenses as a percent of the
sum of non-interest operating income and net interest income) of 65.6% is more
favorable than the Peer Group's ratio of 71.8%. On a post-offering basis, the
Company's efficiency ratio may improve marginally. Thus, the Company's
efficiency ratio is expected to remain at an advantage.
Loan loss provisions for the Company and the Peer Group were similar,
amounting to 0.25% and 0.29% of average assets for K-Fed Bancorp and the Peer
Group, respectively. The loan loss provisions for the Company, notwithstanding
the more favorable level of NPAs, reflects the relatively large balance of
consumer loans for K-Fed Bancorp (which are typically
RP FINANCIAL, LC.
PAGE 3.11
charged off after they are 90 days delinquent) and the growth and
diversification in the loan portfolio.
Non-operating expense of 0.06% of average assets for K-Fed Bancorp
consisted primarily of professional expenses related to the mutual holding
company reorganization in fiscal 2003. The Peer Group reported net non-operating
income equal to 0.10% of average assets, which was largely comprised of gains on
the sale of loans and investments. Such gains are subject to volatility due to
fluctuations in market and other interest rates, and, thus are not viewed as
being a recurring source of income, and thus will be excluded from the
calculation of the valuation earnings base.
The Company's effective tax rate for the last 12 months of 40.0% is
modestly above the Peer Group average of 35.1%. The Company expects that its
effective tax rate will continue to approximate the recent historical level in
fiscal 2004, and thus remain at a comparative disadvantage relative to the Peer
Group.
LOAN COMPOSITION
K-Fed Bancorp's loan portfolio reflects a comparatively greater
concentration of 1-4 family residential mortgage loans and MBS, which aggregated
to 59.3% of assets and 46.3% of assets for the Company and the Peer Group,
respectively (see Table 3.4). Loans secured by permanent 1-4 family residential
mortgage loans equaled 50.6% of assets for the Company versus 35.2% on average
for the Peer Group, while MBS comprised 8.7 and 11.1%, respectively.
K-Fed Bancorp's lending activities show greater diversification in the
areas of multi-family and commercial mortgage lending and non-mortgage consumer
lending. Specifically, multi-family and commercial mortgage loans represented
19.4% of assets as compared to only 10.8% for the Peer Group, while consumer
loans equaled 14.1% of assets for the Company as compared to 4.5% for the Peer
Group on average. Conversely, the Peer Group maintained construction loan (1.3%
of assets) and business loan (6.3% of assets) portfolios, while the Company was
not engaged in these lending areas. The Company's more significant
diversification into higher risk types of lending coupled with its greater
investment in loans
RP FINANCIAL, LC.
PAGE 3.12
Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of June 30, 2003
Portfolio Composition as a Percent of Assets
-----------------------------------------------------
4-Jan Constr. 5+Unit Commerc. RWA/ Serviced Servicing
Institution MBS Family & Land Comm RE Business Consumer Assets For Others Assets
----------- --- ------ ------ ------- -------- -------- ------ ---------- ------
(%) (%) (%) (%) (%) (%) (%) ($000) ($000)
K-Fed Bancorp 8.69% 50.61% 0.00% 19.41% 0.00% 14.05% 62.97% $0 $0
All Public Companies 12.65% 38.11% 4.84% 15.64% 4.24% 4.08% 60.33% $750,841 $6,655
State of CA 14.87% 37.77% 4.18% 27.26% 6.21% 1.14% 59.52% $3,295,937 $35,750
Comparable Group Average 11.06% 35.23% 1.25% 10.76% 6.30% 4.48% 56.01% $34,337 $173
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 4.89% 18.39% 3.42% 26.75% 0.95% 1.37% 56.87% $0 $0
BCSB BCSB Bankcorp MHC of MD (36.0) 15.84% 33.50% 2.08% 8.10% 14.52% 0.56% 55.65% $10,623 $0
GOV Gouverneur Bncrp MHC of NY (42.4) 12.56% 49.36% 1.15% 4.12% 11.08% 2.12% 52.24% $0 $0
GCBC Green Co. Bancorp MHC of NY (43.0) 22.41% 41.56% 0.98% 4.82% 1.99% 2.00% 48.37% $0 $0
JXSB Jacksonville Bancorp MHC of IL (45.6) 0.00% 27.97% 0.90% 8.08% 5.38% 8.29% 54.53% $158,216 $1,152
ONFC Oneida Financial MHC of NY (45.7) 8.92% 22.54% 0.17% 6.97% 9.42% 7.75% 61.85% $82,598 $272
PBHC Pathfinder BC MHC of NY (39.1) 12.44% 48.82% 1.71% 10.20% 1.40% 4.98% 60.65% $39,987 $192
ROME Rome Bancorp Inc. MHC of NY (41.6) 1.88% 35.69% 0.67% 21.46% 11.58% 7.03% 66.41% $3,001 $0
WCFB Webster City Fed. MHC of IA (38.5) 1.98% 57.55% 0.91% 2.83% 2.80% 0.74% 47.35% $0 $0
WFD Westfield Fin. MHC of MA (47.0) 29.73% 16.93% 0.54% 14.25% 3.85% 9.94% 56.23% $48,949 $115
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP(R)Financial, LC. calculations.
The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 3.13
overall translated into higher risk-weighted-assets ratio compared to the Peer
Group (62.97% versus 56.01% for the Peer Group).
CREDIT RISK
Despite the higher credit risk profile, the Company reported a lower
NPAs/assets ratio than the Peer Group, at 0.05% of assets and 0.82% of assets,
respectively (see Table 3.5). Likewise, non-performing loans as a percent of
total loans were below the Peer Group average (0.02% and 0.89%, respectively).
Reserve coverage in relation to non-performing loans and assets was favorable
for the Company. However, the Company's reserve ratio in relation to total loans
was lower than for the Peer Group. In contrast, the Company has experienced
higher chargeoffs, largely reflecting its automobile loan portfolio.
At the same time, the nature of the Company's loan portfolio, including the
high proportion of income producing property loans and the limited seasoning of
a significant portion of the portfolio, tends to increase the overall credit
risk profile in comparison to the Peer Group. While it is difficult to quantify
such risk, the rapid growth, diversification and high proportion of loans
serviced by others is an area of sensitivity in the valuation.
INTEREST RATE RISK
Table 3.6 reflects various key ratios highlighting the relative interest
rate risk exposure. From a balance sheet perspective, K-Fed Bancorp's lower
pre-conversion capital position and lower IEA/IBL ratio suggest higher exposure.
On a post-conversion basis, these ratios should improve relative to the Peer
Group. In the absence of comparability in timely interest rate risk reporting
and methodology, we reviewed quarterly changes in the net interest income ratio.
In general, the quarterly fluctuations in the Company's net interest income
ratio exceed the Peer Group average. At the same time, the Company's net
interest income ratio should stabilize to some degree following the conversion,
given the initial expected proceeds reinvestment strategy (primarily
short-to-intermediate term investment securities).
There are several characteristics of the Company's operations which may
serve to increase the Company's interest risk exposure in relation to the Peer
Group. In this regard, the
RP FINANCIAL, LC.
PAGE 3.14
Table 3.5
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of June 30, 2003 or Most Recent Date Available
NPAs & Rsrves/
REO/ 90+Del/ NPLs/ Rsrves/ Rsrves/ NPAs & Net Loan NLCs/
Institution Assets Assets Loans Loans Npls 90+Del Chargoffs Loans
----------- ------ ------ ----- ----- ---- ------ --------- -----
(%) (%) (%) (%) (%) (%) ($000) (%)
K-Fed Bancorp 0.03% 0.05% 0.02% 0.60% 3566.67% 1040.28% $562 0.15%
All Public Companies 0.11% 0.76% 0.99% 1.06% 198.05% 152.92% $358 0.21%
State of CA 0.03% 0.30% 0.44% 1.36% 231.12% 279.85% $1,138 0.48%
Comparable Group Average 0.19% 0.82% 0.89% 1.03% 279.52% 162.86% $201 0.40%
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 0.85% 2.60% N.A. 1.33% N.A. 27.55% $0 0.00%
BCSB BCSB Bankcorp MHC of MD (36.0) 0.05% 0.11% 0.09% 0.58% 621.84% 318.24% $775 0.83%
GOV Gouverneur Bncrp MHC of NY (42.4) 0.19% 0.78% 0.87% 1.12% 128.24% 96.97% $12 0.08%
GCBC Green Co. Bancorp MHC of NY (43.0) 0.02% 0.11% 0.16% 0.87% 529.09% 423.27% $28 0.08%
JXSB Jacksonville Bancorp MHC of IL (45.6) 0.18% 1.80% 2.94% 1.97% 67.04% 55.38% $701 2.11%
ONFC Oneida Financial MHC of NY (45.7) 0.00% N.A. N.A. 1.04% N.A. N.A. $135 0.27%
PBHC Pathfinder BC MHC of NY (39.1) 0.56% 1.02% 0.70% 0.86% 121.69% 54.87% $193 0.42%
ROME Rome Bancorp Inc. MHC of NY (41.6) 0.00% 0.33% N.A. 0.81% N.A. 189.90% $91 0.18%
WCFB Webster City Fed. MHC of IA (38.5) 0.05% 0.39% N.A. 0.54% N.A. 90.29% $34 -0.01%
WFD Westfield Fin. MHC of MA (47.0) 0.00% 0.26% 0.56% 1.17% 209.24% 209.24% $40 0.05%
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP(R)Financial, LC. calculations.
The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 3.15
Table 3.6
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of June 30, 2003 or Most Recent Date Available
Balance Sheet Measures
-------------------------
Non-Earn. Quarterly Change in Net Interest Income
Equity/ IEA/ Assets/ ------------------------------------------------------------
Institution Assets IBL Assets 6/30/2003 3/31/2003 12/31/2002 9/30/2002 6/30/2002 3/31/2002
----------- ------ --- ------ --------- --------- ---------- --------- --------- ---------
(%) (%) (%) (change in net interest income is annualized in basis points)
K-Fed Bancorp 8.0% 106.8% 2.2% -30 -47 -52 3 19 -3
All Public Companies 9.8% 108.6% 4.3% -8 -7 -5 -3 5 6
State of CA 7.9% 108.7% 2.8% -6 0 1 -3 -7 10
Comparable Group Average 11.9% 111.7% 4.5% -17 -4 -6 4 13 2
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 9.1% 105.9% 4.6% -22 -9 21 -4 21 -10
BCSB BCSB Bankcorp MHC of MD (36.0) 6.8% 109.1% 2.5% -35 -3 -31 34 7 17
GOV Gouverneur Bncrp MHC of NY (42.4) 19.8% 125.1% 2.7% -16 22 -51 9 12 34
GCBC Green Co. Bancorp MHC of NY (43.0) 11.3% 110.7% 2.6% -11 4 -13 -4 2 7
JXSB Jacksonville Bancorp MHC of IL (45.6) 6.7% 104.4% 5.6% -29 -1 -16 -11 22 -11
ONFC Oneida Financial MHC of NY (45.7) 8.9% 103.9% 9.5% 0 -5 6 13 19 -16
PBHC Pathfinder BC MHC of NY (39.1) 5.9% 104.0% 7.2% -10 6 3 -11 -12 7
ROME Rome Bancorp Inc. MHC of NY (41.6) 14.2% 114.0% 4.0% -14 -16 51 -5 29 -41
WCFB Webster City Fed. MHC of IA (38.5) 21.1% 126.5% 1.9% -20 -30 -17 23 25 25
WFD Westfield Fin. MHC of MA (47.0) 15.4% 113.7% 4.5% -14 -12 -15 -4 1 5
NA=Change is greater than 100 basis points during the quarter.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP(R) Financial, LC.
calculations. The information provided in this table has been obtained from sources we believe are reliable, but we
cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 3.16
Company prices its deposits in the upper end of the competitive range and
employs bankrate.com to post its deposit rate on the Internet. Thus, its
deposits may potentially be more rate sensitive than deposits which are
generated through traditional branches. Additionally, the Company's practice of
purchasing loans has led to a substantial balance of purchase premiums ($2.6
million as of September 30, 2003) introduces an element of volatility into the
Company's interest income as such premiums must be amortized (i.e., reduce
interest income) over the life of the loan. In recent periods, the level of
interest income has been negatively impacted by accelerated loan repayments
which have caused the loan purchase premium to be amortized more quickly.
SUMMARY
Based on the above analysis, RP Financial concluded that the Peer Group
forms a reasonable basis for determining the pro forma market value of K-Fed
Bancorp. Such general characteristics as asset size, capital position,
interest-earning asset composition, funding composition, core earnings measures,
loan composition, credit quality and exposure to interest rate risk all tend to
support the reasonability of the Peer Group from a financial standpoint. Those
areas where differences exist will be addressed in the form of valuation
adjustments to the extent necessary.
RP FINANCIAL, LC.
PAGE 4.1
IV. VALUATION ANALYSIS
INTRODUCTION
This chapter presents the valuation analysis and methodology used to
determine K-Fed Bancorp's estimated pro forma market value for purposes of
pricing the minority stock. The valuation incorporates the appraisal methodology
promulgated by the OTS and adopted in practice by the FDIC for standard
conversions and mutual holding company offerings, particularly regarding
selection of the Peer Group, fundamental analysis on both the Company and the
Peer Group, and determination of the Company's pro forma market value utilizing
the market value approach.
APPRAISAL GUIDELINES
The OTS written appraisal guidelines, originally released in October 1983
and updated in late-1994, specify the market value methodology for estimating
the pro forma market value of an institution. The FDIC, state Companying
agencies and other Federal agencies have endorsed the OTS appraisal guidelines
as the appropriate guidelines involving mutual-to-stock conversions. As
previously noted, the appraisal guidelines for MHC offerings are somewhat
different, particularly in the Peer Group selection process. Specifically, the
regulatory agencies have indicated that the Peer Group should be based on the
pro forma fully-converted pricing characteristics of publicly-traded MHCs,
rather than on already fully-converted publicly-traded stock thrifts, given the
unique differences in stock pricing of MHCs and fully-converted stock thrifts.
Pursuant to this methodology: (1) a peer group of comparable publicly-traded MHC
institutions is selected; (2) a financial and operational comparison of the
subject company to the peer group is conducted to discern key differences; and
(3) the pro forma market value of the subject company is determined based on the
market pricing of the peer group, subject to certain valuation adjustments based
on key differences. In addition, the pricing characteristics of recent
conversions and MHC offerings must be considered.
RP FINANCIAL, LC.
PAGE 4.2
RP FINANCIAL APPROACH TO THE VALUATION
The valuation analysis herein complies with such regulatory approval
guidelines. Accordingly, the valuation incorporates a detailed analysis based on
the Peer Group, discussed in Chapter III, which constitutes "fundamental
analysis" techniques. Additionally, the valuation incorporates a "technical
analysis" of recently completed conversions and stock offerings of comparable
MHCs, including closing pricing and aftermarket trading of such offerings. It
should be noted that these valuation analyses, based on either the Peer Group or
the recent conversions and MHC transactions, cannot possibly fully account for
all the market forces which impact trading activity and pricing characteristics
of a stock on a given day.
The pro forma market value determined herein is a preliminary value for the
Corporation's to-be-issued stock. Throughout the offering process, RP Financial
will: (1) review changes in the Company's operations and financial condition;
(2) monitor the Company's operations and financial condition relative to the
Peer Group to identify any fundamental changes; (3) monitor the external factors
affecting value including, but not limited to, local and national economic
conditions, interest rates, and the stock market environment, including the
market for thrift stocks; and (4) monitor pending MHC offerings, and to a lesser
extent, standard conversion offerings, both regionally and nationally. If
material changes should occur prior to close of the offering, RP Financial will
evaluate if updated valuation reports should be prepared reflecting such changes
and their related impact on value, if any. RP Financial will also prepare a
final valuation update at the closing of the offering to determine if the
prepared valuation analysis and resulting range of value continues to be
appropriate.
The appraised value determined herein is based on the current market and
operating environment for the Company and for all thrifts. Subsequent changes in
the local and national economy, the legislative and regulatory environment, the
stock market, interest rates, and other external forces (such as natural
disasters or major world events), which may occur from time to time (often with
great unpredictability) may materially impact the market value of all thrift
stocks, including K-Fed Bancorp's value, the market value of the stocks of
public MHC institutions, or K-Fed Bancorp's value alone. To the extent a change
in factors impacting the
RP FINANCIAL, LC.
PAGE 4.3
Company's value can be reasonably anticipated and/or quantified, RP Financial
has incorporated the estimated impact into its analysis.
VALUATION ANALYSIS
A fundamental analysis discussing similarities and differences relative to
the Peer Group was presented in Chapter III. The following sections summarize
the key differences between the Company and the Peer Group and how those
differences affect the pro forma valuation. Emphasis is placed on the specific
strengths and weaknesses of the Company relative to the Peer Group in such key
areas as financial condition, profitability, growth and viability of earnings,
asset growth, primary market area, dividends, liquidity of the shares, marketing
of the issue, management, and the effect of government regulations and/or
regulatory reform. We have also considered the market for thrift stocks, in
particular new issues, to assess the impact on value of K-Fed Bancorp coming to
market at this time.
1. FINANCIAL CONDITION
The financial condition of an institution is an important determinant in
pro forma market value because investors typically look to such factors as
liquidity, capital, asset composition and quality, and funding sources in
assessing investment attractiveness. The similarities and differences in the
Company's and the Peer Group's financial strength are noted as follows:
o OVERALL A/L COMPOSITION. The Company's asset composition includes a higher
proportion of loans overall, with both 1-4 family mortgage loans and high
risk weight loans (including multi-family and commercial mortgage loans and
consumer loans), exceeding the Peer Group average. Notwithstanding the
higher ratio of total loans to assets, the Company's net interest income
ratio is below the Peer Group attributable to the comparatively lower loan
yields generated by the Company. The Peer Group is currently supplementing
retail deposits with modestly lower borrowings utilization, while the
Company currently relies more heavily on borrowed funds. The Company's
ratio of IEA/IBL will improve on a post-offering basis, thereby diminishing
its current disadvantage. One other disadvantage relative to the Peer Group
should be noted - that is, the Company has limited contact with many of its
loan customers given the high proportion of purchased loans, thus providing
limited opportunity to cross-sell. Also, the balance sheet growth has been
funded with deposits at premium rates, and many of the depositors are
out-of-market and thus present limited cross-sell opportunities.
RP FINANCIAL, LC.
PAGE 4.4
o CREDIT QUALITY. While the Company's credit risk profile appears to be
comparatively favorable based on lower NPAs/assets and reserve coverage
ratios, we believe there are some offsetting risk factors, including
limited seasoning of a significant segment of the rapidly growing mortgage
loan portfolio (including the income property lending), lower proportion of
loss reserves to total loans, higher chargeoffs and higher risk-weighted
assets ratio.
o BALANCE SHEET LIQUIDITY. The Company currently maintains a lower level of
cash, investments and MBS. Substantially all of the Company's investments
are designated "held to maturity;" these consist primarily of MBS with
short-to-intermediate durations which provide cashflow until their
maturity. The infusion of the stock proceeds will initially increase the
Company's level of liquid assets pending investment of the proceeds into
loans and other longer-term investments. Both the Company and the Peer
Group appear to have ample borrowing capacity, although it is the Company's
preference to repay its current advances.
o EQUITY CAPITAL. The Company's pro forma equity capital ratio will exceed
the Peer Group average, which should support its current growth objectives.
On balance, we have made a slight downward adjustment for the Company's
financial condition on a pro forma basis relative to the Peer Group for a
perceived higher credit risk profile and less earnings power from its balance
sheet despite a higher proportion of assets in loans.
2. PROFITABILITY, GROWTH AND VIABILITY OF EARNINGS
Earnings are a key factor in determining pro forma market value, as the
level and risk characteristics of an institution's earnings stream and the
prospects and ability to generate future earnings heavily influence the multiple
that the investment community will pay for earnings. The major factors
considered in the valuation are described below.
o REPORTED EARNINGS. The Company is less profitable than the Peer Group, due
to a weaker net interest income ratio and higher income tax structure,
despite more favorable operating expense and non-interest income ratios.
o CORE EARNINGS. On a core basis, adjusting for non-operating items for both,
the Company's core profitability begins to approach the Peer Group average,
but still remains less favorable. On a pro forma basis, the Company's
earnings will be enhanced with the reinvestment of the net offering
proceeds, which will be offset by the expense attributable to the stock
benefit plans. Thus, the Company remains at a comparative profitability
disadvantage.
RP FINANCIAL, LC.
PAGE 4.5
o INTEREST RATE RISK. Quarterly changes in the Company's net interest income
to average assets ratios indicated a relatively high degree of volatility
associated with the Company's net interest margin, as K-Fed Bancorp has
been adversely impacted by high loan prepayments on its portfolio of loans
purchased at a premium. The Company's interest rate sensitivity may be
increased in comparison to the Peer Group by a deposit generation strategy
which is focused on paying highly competitive rates. Other measures of
interest rate risk, such as capital ratios and IEA/IBL ratios reflected
greater risk exposure for the Company while K-Fed Bancorp maintained a
favorable level of non-interest earning assets. On a pro forma basis, the
Company's capital position and IEA/IBL ratio will be enhanced by the
infusion of stock proceeds, thereby lessening its exposure.
o CREDIT RISK. Loss provisions had a similar impact on the Company's
profitability for the past year and the Company's NPA/assets ratio is lower
in comparison to the Peer Group. At the same time, limited seasoning of the
Company's rapidly growing mortgage loan portfolio, which includes a higher
proportion of 100% risk-weight multi-family and commercial mortgage loans,
and lower level of loss reserves to loans, may pose a higher risk profile
than suggested by the current non-performing data. Also, the Company has
experienced a higher level of chargeoffs relative to the Peer Group,
reflecting the automobile loan portfolio.
o EARNINGS GROWTH POTENTIAL. The Company's faster historical balance sheet
growth relative to the Peer Group also suggests faster earnings growth
potential, given the Company's pro forma capital position. At the same
time, the Company expects balance sheet growth to slow and the advances to
be repaid at maturity. Thus, the Company's historical earnings growth rate
is expected to slow.
o RETURN ON EQUITY. Following the infusion of the Offering proceeds, the
Company's pro forma capital position (consolidated with the holding
company) will be relatively comparable to the Peer Group's equity-to-assets
ratio. Coupled with the K-Fed Bancorp's lower pro forma ROA, the Company's
pro forma core ROE is anticipated to remain below the Peer Group average
over the intermediate term.
Overall, we concluded that a slight downward valuation adjustment for
profitability, growth and viability of earnings was appropriate.
3. ASSET GROWTH
The Company's recent asset growth has significantly exceeded the Peer Group
average, due to the Company's high level of loan purchases funded by premium
deposit pricing and use of advances during 2003. Since the Company's growth is
highly dependent upon third party sources (i.e., most loans are generated
through purchases and/or brokers and the Company does
RP FINANCIAL, LC.
PAGE 4.6
not service such loans) and the Peer Group has demonstrated greater internal
loan origination capacity, it can be argued that the quality of the Peer Group's
growth is greater in that internally generated loans generally provide greater
cross-sell opportunities. Moreover, management has indicated that it expects
future loan and deposit growth rates will be below the recent historical trend
based on internal decisions to be less aggressive rate-wise. Also, the Company
plans to repay its advances upon maturity through liquidity and interim deposit
growth, which will slow its growth rate. On balance, we believe no adjustment
was warranted for this factor.
4. PRIMARY MARKET AREA
The general condition of a financial institution's market area has an
impact on value, as future success is in part dependent upon opportunities for
profitable activities in the local market area. Operating in Los Angeles and San
Bernardino Counties in southern California and Santa Clara County in northern
California, the Company faces significant competition for loans and deposits
from larger financial institutions, who provide a broader array of services and
have significantly larger branch networks. Demographic and income trends and
characteristics in the Company's primary market area are relatively favorable to
the primary market areas served by the Peer Group companies (see Table 4.1). The
deposit market share exhibited by the Company was relatively smaller than the
Peer Group average (0.1% for the Company versus 17.0% for the Peer Group) but
the substantial majority of the Peer Group companies were in comparatively
smaller markets. The data in Table 4.1 also reflects that unemployment rates in
K-Fed Bancorp's market above the average and medians for the Peer Group's
markets.
On balance, we concluded that no adjustment was appropriate for the
Company's market area.
5. DIVIDENDS
The Company has indicated its intention to pay an annual cash dividend.
However, the amount and timing of any dividends has not yet been determined. The
future declarations of dividends by the Board of Directors will depend upon a
number of factors, including investment opportunities, growth objectives,
financial condition, profitability, tax considerations, minimum
RP FINANCIAL, LC.
PAGE 4.7
Table 4.1
Peer Group Market Area Comparative Analysis
Per Capita Income
Population Proj. ----------------- Deposit Unempl-
---------------- Pop. 2000-2003 2003-2008 % State Market oyment
Institution County 2000 2003 2008 % Change % Change Amount Average Share(1) Rate
- ----------- ------ ---- ---- ---- -------- -------- ------ ------- --------- ----
(000) (000)
Alliance Bank MHC of PA Delaware 551 551 551 0.1% 0.0% 30,077 121.2% 4.0% 4.7%
BCSB Bankcorp MHC of MD Baltimore 754 770 795 2.0% 3.2% 30,456 103.0% 3.3% 4.8%
Gouverneur Bancorp of NY St. Lawrence 112 111 111 -0.4% -0.8% 17,729 65.2% 4.9% 6.9%
Greene Co. Bancorp MHC of NY Greene 48 49 50 1.0% 1.7% 21,243 78.2% 27.8% 3.9%
Jacksonville SB MHC of IL Morgan 37 37 37 1.8% -0.1% 20,359 78.4% 29.2% 4.8%
Oneida Financial MHC of NY Madison 69 71 72 1.8% 1.7% 22,252 81.9% 37.2% 5.4%
Pathfinder Bancorp MHC of NY Oswego 122 122 123 0.0% 0.1% 18,959 69.8% 22.9% 8.3%
Rome Bancorp MHC of NY Oneida 235 233 229 -1.1% -1.5% 20,966 77.2% 6.3% 4.4%
Westfield Financial Inc of MA Hampden 456 457 458 0.1% 0.4% 22,870 72.9% 10.9% 6.5%
Webster City Fed. Bancorp MHC of IA Hamilton 16 16 16 -0.1% 0.3% 21,593 95.6% 23.7% 4.0%
AVERAGES: 240 242 244 0.5% 0.5% 22,650 84.3% 17.0% 5.4%
MEDIANS: 117 117 117 0.1% 0.2% 21,418 78.3% 16.9% 4.8%
KAISER FEDERAL LOS ANGELES 9,519 9,874 10,434 3.7% 5.7% 24,141 92.7% 0.1% 6.8%
(1) Total institution deposits in headquarters county as percent of total county deposits.
Sources: CACI, SNL Financial
RP FINANCIAL, LC.
PAGE 4.8
capital requirements, regulatory limitations, stock market characteristics and
general economic conditions.
All 10 of the Peer Group companies pay regular cash dividends, with implied
dividend yields ranging from 0.83% to 5.23%. The average dividend yield on the
stocks of the Peer Group institutions equaled 2.20% as of November 7, 2003 (see
Table 4.4). As of November 7, 2003, approximately 90% of all publicly-traded
thrifts (non-MHC institutions) had adopted cash dividend policies (see Exhibit
IV-1) exhibiting an average yield of 2.02% and an average payout ratio of
37.02%. The dividend paying thrifts generally maintain higher than average
profitability ratios, facilitating their ability to pay cash dividends.
Our valuation adjustment for dividends for K-Fed Bancorp as an MHC also
considered the regulatory policy with regard to waiver of dividends by the MHC.
Under current policy, any waiver of dividends by an FDIC regulated MHC requires
that the minority stockholders' ownership interest be reduced in a second-step
conversion to reflect the cumulative waived dividend account. Comparatively, no
adjustment for waived dividends is required for OTS regulated companies in a
second-step conversion. As an MHC operating under OTS regulation, the Company
will be subject to the same regulatory dividend policy as a large majority of
the Peer Group companies (eight of the Peer Group companies operate under OTS
regulation). Accordingly, we believe that to the extent K-Fed Bancorp's pro
forma market value would be influenced by the OTS' dividend policy regarding MHC
institutions, it has been sufficiently captured in the pricing of the Peer Group
companies.
In light of the Company's stated intention to pay a dividend and given the
Company's capacity to pay a dividend comparable to the Peer Group, based on its
relatively comparable pro forma capitalization and profitability, we concluded
that no adjustment was warranted for purposes of dividends relative to the Peer
Group.
6. LIQUIDITY OF THE SHARES
The Peer Group is by definition composed of companies that are traded in
the public markets. Eight of the Peer Group members trade on the NASDAQ system
and two Peer Group companies trade on the AMEX. Typically, the number of shares
outstanding and market
RP FINANCIAL, LC.
PAGE 4.9
capitalization provides an indication of how much liquidity there will be in a
particular stock. The market capitalization of the Peer Group companies, based
on the shares issued and outstanding to public shareholders (i.e., excluding the
majority ownership interest owned by the respective MHCs) ranged from $9.4
million to $117.0 million as of November 7, 2003, with average and median market
values of $34.1 million and $24.3 million, respectively. The shares issued and
outstanding to the public shareholders of the Peer Group members ranged from
688,000 to 4.8 million, with average and median shares outstanding of 1.5
million and 1.0 million, respectively. The Company's minority stock offering is
expected to result in shares outstanding that will be above the Peer Group
average and median, and a market capitalization that will be comparable to the
Peer Group average and above the median. Accordingly, we anticipate that the
liquidity in the Company's stock will be modestly greater relative to the Peer
Group companies' stocks. Additionally, it is anticipated that the Company's
stock will be listed on NASDAQ, which would further enhance the liquidity in the
Company's stock. Overall, we concluded that a slight upward adjustment was
warranted for this factor.
7. MARKETING OF THE ISSUE
Three separate markets exist for thrift stocks: (1) the after-market for
public companies, both fully-converted stock companies and MHCs, in which
trading activity is regular and investment decisions are made based upon
financial condition, earnings, capital, ROE, dividends and future prospects; (2)
the new issue market in which converting thrifts are evaluated on the basis of
the same factors but on a pro forma basis without the benefit of prior
operations as a publicly-held company and stock trading history; and (3) the
thrift acquisition market. All three of these markets were considered in the
valuation of the Company's to-be-issued stock.
A. THE PUBLIC MARKET
The value of publicly-traded thrift stocks is easily measurable, and
is tracked by most investment houses and related organizations. Exhibit IV-1
provides pricing and financial data on all publicly-traded thrifts. In general,
thrift stock values react to market stimuli such as interest rates, inflation,
perceived industry health, projected rates of economic growth, regulatory issues
and stock market
RP FINANCIAL, LC.
PAGE 4.10
conditions in general. Exhibit IV-2 displays historical stock market trends for
various indices and includes historical stock price index values for thrifts and
commercial banks. Exhibit IV-3 displays historical stock price indices for
thrifts only.
In terms of assessing general stock market conditions, the performance of
the overall stock market has been mixed over the past year. The broader stock
market experienced heavy selling pressure in September 2002, which was
attributable to third quarter earning warnings from a broad spectrum of
companies, economic data signaling a slowing economic recovery and a growing
threat of a war in Iraq. The sell-off in the broader stock market continued into
the fourth quarter, with looming fears of a war with Iraq and worsening
corporate profits pushing the Dow Jones Industrial Average ("DJIA") to its
lowest close in five years in early-October 2002. Stocks rebounded on technical
factors in mid-October, as the DJIA posted a weekly gain after six consecutive
weeks of decline. The rally in the broader stock market continued through the
balance of October, reflecting more attractive valuations following the third
quarter sell-off and some upbeat third quarter earnings news by some blue chip
stocks. After six consecutive months of decline, the DJIA was up 10.6% for the
month of October.
The rebound in the broader stock market that began in October 2002
continued into early-November, as the Federal Reserve cut short-term interest
rates by a larger-than-expected half a percentage point. Following eight
consecutive weeks of gains, the DJIA declined during the first two weeks of
December, as mounting concerns over geopolitical tensions overshadowed
better-than-expected economic data. The broader market recovered slightly in
mid-December, despite growing concerns of how strongly business would rebound in
2003 and escalating war talk with Iraq. Downbeat economic data and war concerns
pulled stocks lower at the close of 2002, with the DJIA positing its worst year
since 1977 closing down 16.8% for the year.
Stocks surged higher at the start of the new year, with data showing
December manufacturing activity stronger than expected. Favorable expectations
for the government's economic stimulus package supported further gains in the
market, although early indications of mixed earnings for the fourth quarter and
ongoing geopolitical concerns served to temper the rally in mid-January. The
strong gains posted at the beginning of 2003 were wiped out in late-January, as
disappointing fourth quarter earnings and the looming war with Iraq pulled the
RP FINANCIAL, LC.
PAGE 4.11
broader market lower. War fears and the uncertain outlook for the economy
continued to weigh down stocks through most of February and into early-March, as
blue chip stocks dropped to a five month low during the first week of March.
Comparatively, the commencement of war with Iraq produced a rally in the stock
market, amid initial expectations that a conflict in Iraq would end quickly.
However, the rally was not sustained, as stocks declined at the close of the
first quarter on renewed worries about the economy and fears that the war in
Iraq could be longer and more difficult than investors had anticipated.
Stocks rebounded at the start of the second quarter on news of U.S. war
successes in Iraq. As investors shifted their focus from the war to first
quarter earnings, the broader stock market settled into a narrow trading in
mid-April 2003 and then rallied higher through the end of April and into
early-May. Generally better than expected first quarter earnings and increasing
investor optimism that the end of the war with Iraq would lead to a recovery in
the economy and corporate profits supported the rally. Technology stocks posted
the strongest gains during the rally, as the NASDAQ Composite Index ("NASDAQ")
moved to five month high in early-May. The broader stock market sustained a
positive trend through the second half of May and into early-June 2003, as the
DJIA moved above 9000 on investor optimism that low interest rates, the tax-cut
plan and improving consumer confidence would boost the economy. After
experiencing a mild set back following an earnings warning from Motorola and
news of a shake-up in Freddie Mac's top management due to accounting concerns,
the stock market recovered in mid-June on growing expectations that the Federal
Reserve would cut rates further to stimulate the economy. Following three months
of gains, stocks eased lower at the close of the second quarter largely on
profit taking.
The broader stock market surged higher at the beginning of the third
quarter of 2003 on growing optimism about the economy and the sustainability of
the bull market. The NASDAQ Composite Index posted a 14-month high in
early-July, before declining slightly on profit taking and disappointing
economic data related to an increase in jobless claims. Throughout late July and
early August, the stock market reacted to continued uncertainty about the
strength of the economic recovery, the potential for ongoing military action in
Iraq, and increasingly larger projected federal budget deficits. Weaker than
expected numbers for consumer confidence and manufacturing activity pulled the
boarder market lower at the close of
RP FINANCIAL, LC.
PAGE 4.12
the third quarter, which ended a streak of six monthly gains in the DJIA.
Comparatively, at the start of the fourth quarter stocks showed renewed
strength, as optimism about third quarter earnings and employment data for
September provided a boost to the broader market. By mid-October the DJIA and
the NASDAQ hit 16- and 19-month highs, respectively, primarily on the basis of
some favorable third quarter earnings reports. The broader stock market rally
cooled in mid-October, as the result of profit taking and the posting of some
less favorable third quarter earnings by some bellwether technology and
manufacturing stocks. As an indication of the general trends in the nation's
stock markets over the past year, as of November 7, 2003, the DJIA closed at
9809.79, an increase of 14.9% from one year earlier, while the NASDAQ stood at
1970.74, an increase of 43.15% over the same time period. The Standard & Poors
500 Index closed at 1053.21 on November 7, 2003, an increase of 16.68% from a
year ago.
The market for thrift stocks has strengthened over the past 12 months,
reflecting the impact of trends in the broader market and merger and acquisition
activity. Thrift stocks performed well in October 2002, reflecting generally
favorable third quarter earnings reports from the thrift sector. The gains
recorded in thrift issues in October were sustained into-early November 2002,
which was supported by the rally in the broader stock market and growing
speculation that the Federal Reserve would cut rates in November. Despite the
larger than expected rate cut by the Federal Reserve, thrift stocks eased lower
in mid-November. The downward pressure in thrift issues was attributable to
concerns about potential margin compression and mortgage servicing rights
impairment resulting from the decline in short-term interest rates. However,
thrift issues recovered in late-November 2002, as financial issues participated
in the broader market rally. Thrift issues settled into a narrow trading range
in December, reflecting the lack of meaningful news in the financial sector and
an uncertain outlook for 2003.
Financial stocks participated in the broader market rally at the beginning
of the new year, particularly those with relatively high dividend yields in
light of the elimination of dividend taxation set forth in the government's
economic stimulus package. Despite generally favorable fourth quarter earnings,
thrift issues eased lower in late-January 2003. Thrift issues traded in a narrow
range throughout February and into mid-March, thereby outperforming the broader
market. The stronger performance exhibited by thrift stocks continued to be
supported
RP FINANCIAL, LC.
PAGE 4.13
by the relatively low risk characteristics associated with residential lenders,
as well as the general earnings benefit of operating in a low interest rate
environment with a relatively steep yield curve. Thrift stocks remained fairly
stable at close of the first quarter, exhibiting far less volatility compared to
the boarder stock market that produced dramatic day-to-day swings as investors
reacted to the most recent news on the war's direction.
Financial stocks eased higher at the beginning of the second quarter, as
positive news on the war with Iraq lifted stocks in general. First quarter
earnings that were generally in-line with expectations sustained the positive
trend in thrift issues through early-May, as thrift stocks participated in the
broader stock market rally. With the exception of acquisition-related price
movements, thrift stocks settled into a narrow trading range in mid-May. Thrift
stocks participated in the broader market rally in late-May, largely on the
basis of recent deal activity in the thrift sector and some favorable economic
data.
In June 2003, Freddie Mac's management shake-up had a negative ripple
effect throughout the thrift sector, but the pullback was only temporary as
thrift issues recovered in conjunction with the broader market. Profit taking
and growing speculation of a rate cut by the Federal Reserve pulled the thrift
sector lower in late-June. However, thrift issues recovered modestly at the
close of the second quarter, which was supported by merger speculation following
New York Community Bancorp's announced acquisition of Roslyn Bancorp. The rally
in the broader stock market combined with acquisition speculation in certain
regional markets served to boost thrift issues higher in July and into August.
After following the boarder stock market lower as the close of the third quarter
approached, thrift issues posted solid gains at the beginning of the fourth
quarter. A rally in the broader stock market and acquisition activity were
noteworthy factors that supported the positive trend in thrift stocks,
particularly following the announcement that the Bank of America would acquire
FleetBoston Financial Corp which sparked further speculation regarding industry
consolidation. On November 7, 2003, the SNL Index for all publicly-traded
thrifts closed at 1512.2, an increase of 42.80% from one year ago. The SNL MHC
Index closed at 2556.2 on November 7, 2003, an increase of 63.83% from one year
ago.
RP FINANCIAL, LC.
PAGE 4.14
B. THE NEW ISSUE MARKET
In addition to thrift stock market conditions in general, the new
issue market for converting thrifts is also an important consideration in
determining the Company's pro forma market value. The new issue market is
separate and distinct from the market for seasoned thrift stocks in that the
pricing ratios for converting issues are computed on a pro forma basis,
specifically: (1) the numerator and denominator are both impacted by the
conversion offering amount, unlike existing stock issues in which price change
affects only the numerator; and (2) the pro forma pricing ratio incorporates
assumptions regarding source and use of proceeds, effective tax rates, stock
plan purchases, etc. which impact pro forma financials, whereas pricing for
existing issues are based on reported financials. The distinction between
pricing of converting and existing issues is perhaps no clearer than in the case
of the price/tangible book ("P/TB") ratio in that the P/TB ratio of a converting
thrift will typically result in a discount to tangible book value whereas in the
current market for existing thrifts the P/TB ratio often reflects a premium to
tangible book value. Therefore, it is appropriate to also consider the market
for new issues, both at the time of the conversion and in the aftermarket.
Thrift offerings completed in 2003 have generally been well received.
As shown in Table 4.2, there have been six standard conversion offerings
completed during 2003, at an average price/tangible book value ratio of 72.8%
and a price/earnings multiple of 57.1 times (multiples for two of the companies
were not meaningful). There have been six second step conversions of mutual
holding companies completed since the beginning of 2003. The average pro forma
price/tangible book and price/core earnings ratios of the six second step
offerings at closing equaled 104.0% and 19.8 times, respectively.
The most comparable offerings relative to the Company's proposed
transaction involve minority stock issuances by mutual holding companies. The
average fully converted pro forma price/tangible book and fully converted
price/core earnings ratios were 78.8% and 51.1 times earnings. Both of these
transactions were oversubscribed and appreciated in a range of 56% to 69% after
the first week of trading.
In general, the recent offerings have been significantly
oversubscribed and have appreciated in the aftermarket. At the same time, we
note that several companies which have
RP FINANCIAL, LC.
PAGE 4.15
Table 4.2
Pricing Characteristics and After-Market Trends
Conversions Completed in 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional Information Pre-Conversion Data Offering Information Contribution
Financial Info. Asset Quality Charitable Found
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion Equity NPAs/ Res. Gross % % of Exp./ % of
Institution State Date Ticker Assets Assets Assets Cov. Proc. Offered Mid. Proc. Form Offering
($Mil) (%) (%) (%) ($Mil.) (%) (%) (%) (%)
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STANDARD CONVERSIONS
- --------------------
KNBT Bancorp, Inc.* (w/Acq.) PA 11/3/2003 KNBT-NASDAQ $1,748 11.57% 0.23% 152% $ 202.0 100% 132% 1.9% Stock 8.0%
Ranier Pacific Fin. Group* WA 10/21/2003 RPFG-NASDAQ $ 713 6.10% 0.17% 825% $ 79.4 100% 132% 2.3% C/S 8.0%
Community First Bancorp, Inc KY 6/27/2003 CFBC-OTC $ 33 5.55% 0.09% 428% $ 2.8 100% 132% 10.3% NA NA
Rantoul First Bank, s.b. IL 4/2/2003 RFBK-OTC $ 31 5.84% 1.45% 104% $ 1.9 100% 95% 20.0% NA NA
Provident Fin. Services, Inc. NJ 1/16/2003 PFS-NYSE $3,162 10.11% 0.41% 167% $ 596.2 100% 132% 1.5% C/S 3.9%
CCSB Financial Corp. MO 1/9/2003 CCFC-OTC $ 78 8.41% 0.06% 210% $ 9.8 100% 132% 5.8% NA NA
AVERAGES - STANDARD CONVERSIONS: $ 961 7.93% 0.40% 314% $ 148.7 100% 126% 7.0% N.A. N.A.
MEDIANS - STANDARD CONVERSIONS: $ 396 7.26% 0.20% 188% $ 44.6 100% 132% 4.1% N.A. N.A.
SECOND STEP CONVERSIONS
- -----------------------
Bank Mutual Corporation * WI 10/30/2003 BKMU-NASDAQ $2,865 11.25% 0.24% 186% $ 410.6 52% 132% 1.5% NA NA
Jefferson Bancshares,Inc.* TN 7/1/2003 JFBI-NASDAQ $ 265 13.47% 1.37% 140% $ 66.1 79% 132% 2.4% C/S 4.5%
First Niagara Financial
Group NY 1/21/2003 FNFG-NASDAQ $ 3,291 10.02% 0.42% 102% $ 410.0 58% 100% 4.0% NA NA
Wayne Savings Bancshares,
Inc.* OH 1/9/2003 WAYN-NASDAQ $ 337 8.02% 0.89% 22% $ 20.4 52% 100% 7.3% NA NA
Sound Federal Bancorp, Inc. NY 1/7/2003 SFFS-NASDAQ $ 673 9.84% 0.16% 268% $ 77.8 59% 132% 2.3% NA NA 8
Bridge Street Financial,
Inc.* NY 1/6/2003 CNB-NASDAQ $ 179 9.58% 0.45% 133% $ 15.1 56% 104% 4.2% NA NA 0
AVERAGES - SECOND STEP CONVERSIONS: $ 1,268 10.36% 0.59% 142% $ 166.7 59% 117% 3.6% N.A. N.A.
MEDIANS - SECOND STEP CONVERSIONS: $ 505 9.93% 0.44% 137% $ 72.0 57% 118% 3.2% N.A. N.A.
MUTUAL HOLDING COMPANIES(6)
- ---------------------------
Flatbush Federal Bancorp * NY 10/21/203 FLTB-OTCBB $ 140 6.00% 0.01% NM $ 8.7 47% 132% 8.2% NA NA
ASB Holding Company NJ 10/3/2003 ASBH-OCCBB $ 373 6.05% 0.14% 248% $ 16.7 30% 132% 3.5% NA NA 8
Averages - Mutual Holding Companies: $ 257 6.03% 0.08% 248% $ 12.7 39% 132% 5.8% N.A. N.A.
Medians - Mutual Holding Companies: $ 257 6.03% 0.08% 248% $ 12.7 39% 132% 5.8% N.A. N.A.
Averages - All Conversions: $ 992 8.70% 0.44% 230% $ 121.4 74% 123% 5.4% N.A. N.A.
Medians - All Conversions: $ 355 9.00% 0.24% 167% $ 43.3 69% 132% 3.7% N.A. N.A.
- ------------------------------------------------------------------------------------------------------------------------------------
(continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Insider Purchases Pro Forma Data Post-IPO Pricing Trends
Pricing Ratios(3) Financial Charac. Closing Price:
Benefit Plans Initial First After After
Recog Mgmt.& Dividend Core Core Core IPO Trading % First % First %
ESOP Plans Dirs. Yield P/TB P/E P/A ROA TE/A ROE Price Day Change Week(4) Change Month(5) Change
(%) (%) (%)(2) (%) (%) (x) (%) (%) (%) (%) ($) ($) (%) ($) (%) ($) (%)
- ------------------------------------------------------------------------------------------------------------------------------------
8.0% 4.0% 2.2% 0.00% 90.3% 28.8x 15.6% 0.7% 17.3% 3.6% $10.00 $16.88 68.8% $16.82 68.2% $16.82 68.2%
8.0% 4.0% 0.7% 0.00% 75.7% 71.0x 10.8% 0.2% 14.3% 1.1% $10.00 $16.99 69.9% $16.60 66.0% $16.70 67.0%
0.0% 4.0% 13.5% 0.00% 66.3% NM 8.0% 0.0% 12.0% -0.2% $10.00 $12.00 20.0% $12.00 20.0% $12.05 20.5%
8.0% 4.0% 8.4% 0.00% 61.9% NM 6.0% -1.8% 9.7% -18.2 $10.00 $11.51 15.1% $12.00 20.0% $12.35 23.5%
8.0% 4.0% 0.8% 0.00% 75.3% 18.7x 16.7% 0.9% 22.2% 3.9% $10.00 $15.50 55.0% $15.65 56.5% $15.15 51.5%
8.0% 4.0% 14.3% 0.00% 67.1% 81.7x 11.4% 0.1% 17.0% 0.8% $10.00 $12.00 20.0% $12.31 23.1% $12.50 25.0%
6.7% 4.0% 6.7% 0.00% 72.8% 57.1x 11.4% 0.0% 15.4% -1.5% $10.00 $14.15 41.5% $14.23 42.3% $14.26 42.6%
8.0% 4.0% 5.3% 0.00% 71.2% 71.0x 11.1% 0.1% 15.6% 0.9% $10.00 $13.75 37.5% $13.98 39.8% $13.83 38.3%
0.0% 4.0% 0.2% 1.20% 120.5% 29.1x 24.2% 0.8% 20.1% 3.8% $10.00 $11.78 17.8% $11.85 18.5% $11.73 17.3%
8.0% 4.0% 5.7% 1.16% 90.9% 18.3x 26.0% 1.4% 28.6% 5.0% $10.00 $12.39 23.9% $12.50 25.0% $14.00 40.0%
5.0% 4.0% 0.3% 1.76% 124.8% 19.5x 19.4% 1.0% 15.5% 6.4% $10.00 $11.27 12.7% $11.45 14.5% $11.18 11.8%
8.0% 4.0% 2.2% 4.50% 89.4% 17.7x 11.0% 0.6% 12.3% 4.6% $10.00 $11.20 12.0% $11.20 12.0% $11.15 11.5%
8.0% 4.0% 0.9% 2.00% 110.9% 16.1x 17.9% 1.1% 16.1% 6.9% $10.00 $11.00 10.0% $11.20 12.0% $11.61 16.1%
8.0% 4.0% 1.4% 1.60% 87.4% 18.1x 13.9% 0.8% 16.1% 4.8% $10.00 $10.16 1.6% $10.70 7.0% $10.94 9.4%
4.8% 4.0% 1.8% 2.04% 104.0% 19.8x 18.7% 0.9% 18.1% 5.2% $10.00 $11.30 13.0% $11.48 14.8% $11.77 17.7%
6.5% 4.0% 1.2% 1.68% 100.9% 18.2x 18.6% 0.9% 16.1% 4.9% $10.00 $11.24 12.4% $11.33 13.3% $11.40 14.0%
8.0% 4.0% 4.2% 0.00% 77.6% 69.4x 11.9% 0.1% 10.5% 1.2% $8.00 $13.10 63.8% $12.50 56.3% $13.35 66.9%
8.0% 6.7% 1.4% 0.00% 79.9% 32.8x 13.2% 0.4% 16.6% 2.4% $10.00 $16.20 62.0% $16.90 69.0% $16.75 67.5%
8.0% 5.3% 2.8% 0.00% 78.8% 51.1x 12.6% 0.3% 13.5% 1.8% $9.00 $14.65 62.9% $14.70 62.6% $15.05 67.2%
8.0% 5.3% 2.8% 0.00% 78.8% 51.1x 12.6% 0.3% 13.5% 1.8% $9.00 $14.65 62.9% $14.70 62.6% $15.05 67.2%
6.1% 4.2% 4.0% 0.87% 87.0% 35.7x 14.7% 0.5% 16.3% 1.9% $9.86 $13.00 32.3% $13.12 33.4% $13.31 35.4%
8.0% 4.0% 1.8% 0.00% 83.7% 19.5x 13.6% 0.6% 16.1% 3.7% $10.00 $12.00 20.0% $12.16 21.6% $12.43 24.3%
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Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not Applicable, Not Available.
(1) Non-OTS regulated thrift. (5) Latest price if offering is more than one week but less
(2) As a percent of MHC offering for MHC transactions. than one month old.
(3) Does not take into account the adoption of SOP 93-6. (6) Mutual holding company pro forma data on full conversion basis.
(4) Latest price if offering is less than one week old. (7) Simultaneously converted to commercial bank charter.
(8) Converted to a commercial bank charter.
November 7, 2003
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RP FINANCIAL, LC.
PAGE 4.16
recently completed offerings including KNBT Bancorp, Rainier Pacific Financial
Group and Flatbush Federal Bancorp have traded down relative to their first day
closing price.
C. THE ACQUISITION MARKET
Also considered in the valuation was the potential impact on the
Company's stock price of recently completed and pending acquisitions of other
savings institutions operating in California. As shown in Exhibit IV-5, there
have been more than 50 thrift and bank acquisitions of California-based savings
institutions completed or announced between the beginning of 2001 through
year-to-date 2003. To the extent that acquisition speculation may impact the
Company's, we have largely taken this into account in selecting companies which
operate in the MHC form of ownership. Accordingly, the Peer Group companies are
considered to be subject to the same type of acquisition speculation that may
influence K-Fed Bancorp's trading price.
* * * * * * * * * * *
In determining our valuation adjustment for marketing of the issue, we
considered trends in both the overall thrift market, the new issue market
including the new issue market for MHC shares and the local acquisition market
for thrift stocks. Taking these factors and trends into account, RP Financial
concluded that a slight upward adjustment was appropriate in the valuation
analysis for purposes of marketing of the issue.
8. MANAGEMENT
K-Fed Bancorp's management team appears to have experience and expertise in
all of the key areas of the Company's operations. Exhibit IV-5 provides summary
resumes of K-Fed Bancorp's Board of Directors and senior management. The
Company, given its asset size, has been effective in implementing an operating
strategy that can be well managed by the Company's present organizational
structure as indicated by the financial characteristics of the Company. K-Fed
Bancorp currently does not have any executive management positions that are
vacant.
Similarly, the returns, capital positions and other operating measures of
the Peer Group companies are indicative of well-managed financial institutions,
which have Boards and
RP FINANCIAL, LC.
PAGE 4.17
management teams that have been effective in implementing competitive operating
strategies. Therefore, on balance, we concluded no valuation adjustment relative
to the Peer Group was appropriate for this factor.
9. EFFECT OF GOVERNMENT REGULATION AND REGULATORY REFORM
In summary, as a federally-insured savings and loan association operating
in the MHC form of ownership, K-Fed Bancorp will operate in substantially the
same regulatory environment as the Peer Group members -- all of whom are
adequately capitalized institutions and are operating with no apparent
restrictions. Exhibit IV-6 reflects the Company's pro forma regulatory capital
ratios. The one difference noted between K-Fed Bancorp and the small minority of
Peer Group companies that operate as FDIC regulated institutions was in the area
of regulatory policy regarding dividend waivers (see the discussion above for
"Dividends"). Since this factor was already accounted for in the "Dividends"
section of this appraisal, no further adjustment has been applied for the effect
of government regulation and regulatory reform.
SUMMARY OF ADJUSTMENTS
Overall, based on the factors discussed above, we concluded that the
Company's pro forma market value should reflect the following valuation
adjustments relative to the Peer Group:
Key Valuation Parameters: Valuation Adjustment
------------------------ --------------------
Financial Condition Slight Downward
Profitability, Growth and Viability of Earnings Slight Downward
Asset Growth No Adjustment
Primary Market Area No Adjustment
Dividends No Adjustment
Liquidity of the Shares Slight Upward
Marketing of the Issue Slight Upward
Management No Adjustment
Effect of Government Regulations and Regulatory
Reform No Adjustment
RP FINANCIAL, LC.
PAGE 4.18
BASIS OF VALUATION - FULLY-CONVERTED PRICING RATIOS
As indicated in Chapter III, the valuation analysis included in this
section places the Peer Group institutions on equal footing by restating their
financial data and pricing ratios on a "fully-converted" basis. We believe there
are a number of characteristics of MHC shares that make them different from the
shares of fully-converted companies. These factors include: (1) lower
aftermarket liquidity in the MHC shares since less than 50% of the shares are
available for trading; (2) no opportunity for public shareholders to exercise
voting control, thus limiting the potential for acquisition speculation in the
stock price; (3) the potential pro forma impact of second-step conversions on
the pricing of MHC institutions; (4) the regulatory policies regarding the
dividend waiver policy by MHC institutions; and (5) the middle-tier structure
maintained by certain MHCs which facilitates the ability for stock repurchases.
The above characteristics of MHC shares have provided MHC shares with different
trading characteristics versus fully-converted companies. To account for the
unique trading characteristics of MHC shares, RP Financial has placed the
financial data and pricing ratios of the Peer Group on a fully-converted basis
to make them comparable for valuation purposes. Using the per share and pricing
information of the Peer Group on a fully-converted basis accomplishes a number
of objectives. First, such figures eliminate distortions that result when trying
to compare institutions that have different public ownership interests
outstanding. Secondly, such an analysis provides ratios that are comparable to
the pricing information of fully-converted public companies, and more
importantly, are directly applicable to determining the pro forma market value
range of the 100% ownership interest in K-Fed Bancorp as an MHC. Lastly, such an
analysis allows for consideration of the potential dilutive impact of dividend
waiver policies adopted by the Federal agencies. This technique is validated by
the investment community's evaluation of MHC pricing, which also incorporates
the pro forma impact of a second-step conversion based on the current market
price.
To calculate the fully-converted pricing information for MHCs, the reported
financial information for the public MHCs must incorporate the following
assumptions, based on completed second step conversions to date: (1) all shares
owned by the MHC are assumed to be sold at the current trading price in a second
step-conversion; (2) the gross proceeds from such a sale were adjusted to
reflect reasonable offering expenses and standard stock based benefit plan
RP FINANCIAL, LC.
PAGE 4.19
parameters that would be factored into a second-step conversion of MHC
institutions; (3) net proceeds are assumed to be reinvested at market rates on
an after-tax basis; and (4) for FDIC-regulated institutions, the public
ownership interest is adjusted to reflect the pro forma impact of the waived
dividends pursuant to applicable regulatory policy. Book value per share and
earnings per share figures for the public MHCs were adjusted by the impact of
the assumed second step conversion, resulting in an estimation of book value per
share and earnings per share figures on a fully-converted basis. Table 4.3 on
the following page shows the calculation of per share financial data
(fully-converted basis) for each of the 10 public MHC institutions that form the
Peer Group.
VALUATION APPROACHES: FULLY-CONVERTED BASIS
In applying the accepted valuation methodology promulgated by the OTS and
adopted by the FDIC, i.e., the pro forma market value approach, including the
fully-converted analysis described above, we considered the three key pricing
ratios in valuing K-Fed Bancorp's to-be-issued stock -- price/earnings ("P/E"),
price/book ("P/B"), and price/assets ("P/A") approaches -- all performed on a
pro forma basis including the effects of the stock proceeds. In computing the
pro forma impact of the conversion and the related pricing ratios, we have
incorporated the valuation parameters disclosed in K-Fed Bancorp's prospectus
for reinvestment rate, effective tax rate and stock benefit plan assumptions
(summarized in Exhibits IV-7 and IV-8). Pursuant to the minority stock offering,
we have also incorporated the valuation parameters disclosed in K-Fed Bancorp's
prospectus for offering expenses. The assumptions utilized in the pro forma
analysis in calculating the Company's full conversion value are described more
fully below.
o CONVERSION EXPENSES. Offering expenses have been assumed to equal 3.0%
of the gross proceeds, which is typical of the level of offering
expenses recorded in offerings that were comparable to the Company's
full conversion value.
o EFFECTIVE TAX RATE. The Company has determined the marginal effective
tax rate on the net reinvestment benefit of the conversion proceeds to
be 41.15%.
o REINVESTMENT RATE. The pro forma section in the prospectus
incorporates a 1.15% reinvestment rate, equivalent to the average of
the prevailing yield for a U.S. Treasury bills with a one year
maturity as of September 30, 2003.
RP FINANCIAL, LC.
PAGE 4.20
Table 4.3
Calculation of Implied Per Share Data -- Incorporating MHC Second Step Conversion
Comparable Institution Analysis
For the Twelve Months Ended June 30, 2003
Current Ownership Current Per Share Data (MHC Ratios)
----------------------- -------------------------------------
Total Public MHC Core Book Tang.
Shares Shares Shares EPS EPS Value Book Assets
------ ------ ------ --- --- ----- ---- ------
(000) (000) (000) ($) ($) ($) ($) ($)
Publicly-Traded MHC Institutions
- --------------------------------
ALLB Alliance Bank MHC of PA (20.0) 3,441 688 2,753 $0.30 $0.30 $10.18 $10.18 $111.76
BCSB BCSB Bankcorp MHC of MD (36.0) 3,874 2,112 3,762 $0.33 $0.25 $7.84 $7.37 $108.91
GCBC Green Co Bcrp MHC of NY (43.0) 2,042 870 1,172 $1.08 $1.07 $14.26 $14.26 $125.84
GOV Gouverneur Bcp MHC of NY(42.4) 2,278 966 1,312 $0.26 $0.23 $7.71 $7.71 $38.99
JXSB Jcksnville Bcp MHC of IL(45.6) 1,941 871 1,070 $0.37 $0.04 $10.68 $9.07 $134.55
ONFC Oneida Fincl MHC of NY (45.7) 4,939 2,179 2,760 $0.73 $0.58 $10.19 $7.69 $86.91
PBHC Pathfinder BC MHC of NY (39.1) 2,433 1,020 1,413 $0.56 $0.45 $8.83 $6.86 $116.37
ROME Rome Bncp Inc MHC of NY (41.6) 4,277 1,174 3,103 $0.57 $0.57 $8.55 $8.55 $60.35
WCFB Wbstr Cty Fed MHC of IA (38.5) 3,772 723 3,049 $0.35 $0.35 $5.97 $5.94 $28.17
WFD Westfield Finl MHC of MA(47.0) 9,980 4,834 5,146 $0.31 $0.36 $12.52 $12.52 $81.15
Pro Forma
Impact of Second Step Conversion(4) Per Share Data (Fully-Converted)(4) Pro Forma(5)
--------------------------------------- ----------------------------------- -----------------
Share Gross Net Incr. Net Incr. Core Book Tang. Public
Price Proceeds (Capital(2) Income(3) EPS EPS Value Book Assets Pct. Dilution
----- -------- ----------- --------- --- --- ----- ---- ------ ---- --------
($) ($000) ($000) ($000) ($) ($) ($) ($) ($) (%) (
Publicly-Traded MHC Institutions
- --------------------------------
ALLB Alliance Bank MHC of PA (20.0) $29.09 $86,756 $80,864 $952 0.54 $0.54 $31.58 $31.58 $126.81 18.7% -1.2%
BCSB BCSB Bankcorp MHC of MD (36.0) $18.00 $67,716 $58,236 $630 0.44 $0.36 $17.75 $17.28 $118.82 36.0% 0.0%
GCBC Green Co Bcrp MHC of NY (43.0) $32.24 $37,785 $32,495 $352 1.25 $1.24 $30.17 $30.17 $141.75 42.6% 0.0%
GOV Gouverneur Bcp MHC of NY(42.4) $12.00 $15,744 $13,540 $147 0.32 $0.29 $13.65 $13.65 $44.93 42.4% 0.0%
JXSB Jcksnville Bcp MHC of IL(45.6) $16.41 $17,559 $15,100 $163 0.45 $0.12 $18.46 $16.85 $142.33 44.9% 0.0%
ONFC Oneida Fincl MHC of NY (45.7) $24.00 $66,240 $56,966 $616 0.85 $0.70 $21.72 $19.22 $98.44 44.1% 0.0%
PBHC Pathfinder BC MHC of NY (39.1) $17.25 $24,374 $20,962 $227 0.65 $0.54 $17.45 $15.48 $124.99 41.9% 0.0%
ROME Rome Bncp Inc MHC of NY (41.6) $27.56 $85,519 $73,546 $796 0.76 $0.76 $25.75 $25.75 $77.55 27.4% 0.0%
WCFB Wbstr Cty Fed MHC of IA (38.5) $13.00 $39,637 $34,088 $369 0.45 $0.45 $15.01 $14.98 $37.21 19.2% 0.0%
WFD Westfield Finl MHC of MA(47.0) $24.20 $125,760 $109,375 $1,199 0.43 $0.48 $23.36 $23.36 $91.64 48.2% -0.2%
(1) Gross proceeds calculated as stock price multiplied by the number of shares owned by the mutual holding company (i.e.,
non-public shares).
(2) Net increase in capital reflects gross proceeds less offering expenses, contra-equity account for leveraged ESOP and deferred
compensation account for restricted stock plan. For institutions with assets at the MHC level, the net increase in capital also
includes consolidation of MHC assets with the capital of the institution concurrent with hypothetical second step.
Offering expense percent 2.00%
ESOP percent purchase 8.00%
Recognition plan percent 4.00%
(3) Net increase in earnings reflects after-tax reinvestment income (assumes ESOP and recognition plan do not generate reinvestment
income), less after-tax ESOP amortization and recognition plan vesting: After-tax reinvestment 2.31% ESOP loan term (years) 10
Recognition plan vesting (years) 5 Effective tax rate 34.00%
(4) Figures reflect adjustments to "non-grandfathered" companies to reflect dilutive impact of cumulative dividends waived by the
MHC (reflect FDIC policy regarding waived dividends). (5) Reflects pro forma ownership position of minority stockholders after
taking into account the OTS and FDIC policies regarding waived dividends assuming a hypothetical second step. For OTS
"grandfathered" companies, dilution reflects excess waived dividends and MHC assets. For all other companies, dilution reflects
all waived dividends and MHC assets.
Source: Corporate reports, offering circulars, and RP(R)Financial, LC. calculations. The information provided in this report has
been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such
information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 4.21
o STOCKBENEFIT PLANS. The assumptions for the stock benefit plans, i.e.,
the ESOP and Recognition Plan, are consistent with the structure as
approved by the Company's Board and the disclosure in the pro forma
section of the prospectus. Specifically, the ESOP is assumed to
purchase 8.0% of the stock in conversion at the initial public
offering price, with the Company funded ESOP loan amortized on a
straight-line basis over 10 years. The Recognition Plan is assumed to
purchase 4.0% of the stock in the aftermarket at a price equivalent to
the initial public offering price and will be amortized on a
straight-line basis over five years.
In our estimate of value, we assessed the relationship of the pro forma
pricing ratios relative to the Peer Group, recent conversions and MHC offerings.
RP Financial's valuation placed an emphasis on the following:
o P/E APPROACH. The P/E approach is generally the best indicator of
long-term value for a stock. Given the similarities between the
Company's and the Peer Group's earnings composition and overall
financial condition, the P/E approach was carefully considered in this
valuation. At the same time, recognizing that (1) the earnings
multiples will be evaluated on a pro forma fully-converted basis for
the Company as well as for the Peer Group and (2) the Peer Group on
average has had the opportunity to realize the benefit of reinvesting
the minority offering proceeds, we also gave weight to the other
valuation approaches.
o P/B APPROACH. P/B ratios have generally served as a useful benchmark
in the valuation of thrift stocks, particularly in the context of an
initial public offering, as the earnings approach involves assumptions
regarding the use of proceeds. RP Financial considered the P/B
approach to be a valuable indicator of pro forma value taking into
account the pricing ratios under the P/E and P/A approaches. We have
also modified the P/B approach to exclude the impact of intangible
assets (i.e., price/tangible book value or "P/TB"), in that the
investment community frequently makes this adjustment in its
evaluation of this pricing approach.
o P/A APPROACH. P/A ratios are generally a less reliable indicator of
market value, as investors typically assign less weight to assets and
attribute greater weight to book value and earnings. Furthermore, this
approach as set forth in the regulatory valuation guidelines does not
take into account the amount of stock purchases funded by deposit
withdrawals, thus understating the pro forma P/A ratio. At the same
time, the P/A ratio is an indicator of franchise value, and, in the
case of highly capitalized institutions, high P/A ratios may limit the
investment community's willingness to pay market multiples for
earnings or book value when ROE is expected to be low.
The Company will adopt Statement of Position ("SOP") 93-6, which will cause
earnings per share computations to be based on shares issued and outstanding
excluding unreleased ESOP
RP FINANCIAL, LC.
PAGE 4.22
shares. For purposes of preparing the pro forma pricing analyses, we have
reflected all shares issued in the offering, including all ESOP shares, to
capture the full dilutive impact, particularly since the ESOP shares are
economically dilutive, receive dividends and can be voted. However, we did
consider the impact of the adoption of SOP 93-6 in the valuation.
Based on the application of the three valuation approaches, taking into
consideration the valuation adjustments discussed above, RP Financial concluded
that as of November 7, 2003 the pro forma market value of K-Fed Bancorp's full
conversion offering equaled $75,000,000 at the midpoint, equal to 7,500,000
shares at $10.00 per share. 1. PRICE-TO-EARNINGS ("P/E"). The application of the
P/E valuation method requires calculating the Company's pro forma market value
by applying a valuation P/E multiple (fully-converted basis) to the pro forma
earnings base. In applying this technique, we considered both reported earnings
and a recurring earnings base, that is, earnings adjusted to exclude any
one-time non-operating items, plus the estimated after-tax earnings benefit of
the reinvestment of the net proceeds. The Company's reported earnings equaled
$2,366,000 for the 12 months ended September 30, 2003. In deriving K-Fed
Bancorp's core earnings, the only adjustment made to reported earnings was to
eliminate a non-recurring expense attributable to the reorganization into the
mutual holding company structure equal to $220,000, which was incurred in fiscal
2003. As shown below, on a tax effected basis, assuming an effective marginal
tax rate of 41.15% for the gains eliminated, the Company's core earnings were
determined to equal $2,496,000 for the 12 months ended September 30, 2003 (Note:
see Exhibit IV-9 for the adjustments applied to the Peer Group's earnings in the
calculation of core earnings).
Amount
------
($000)
Net income $2,366,000
Adjustment for non-recurring items(1) 130,000
-------
Core earnings estimate $2,496,000
(1) Non-recurring expense of $220,000, tax effected at 41.15%.
RP FINANCIAL, LC.
PAGE 4.23
Based on K-Fed Bancorp's reported and estimated core earnings, and
incorporating the impact of the pro forma assumptions discussed previously, the
Company's pro forma reported and core P/E multiples (fully-converted basis) at
the $75.0 million midpoint value equaled 35.86 times and 33.76 times,
respectively, indicating a premium of 10.1% and a discount of 5.0% relative to
the Peer Group's average reported and core P/E multiples (fully-converted basis)
of 32.58 times and 35.54 times, respectively (see Table 4.4). At the
supermaximum of the valuation range, the Company's pro forma reported and core
P/E multiples (fully-converted basis) equaled 49.53 times and 46.51 times,
respectively, indicating premiums of 38.1% and 30.9% relative to the comparative
Peer Group average multiples. The implied discounts or premiums reflected in the
Company's pro forma P/E multiples take into consideration the Company's pro
forma P/B and P/A ratios. On a reported basis, the Company's pro forma P/E
multiples based on reported and core earnings equaled 33.51 and 31.67 times at
the midpoint, respectively (see Table 4.5). At the supermaximum of the range,
the Company's reported and core earnings multiples based on the minority stock
offering equaled 45.12 and 42.60 times, respectively. In comparison, the Peer
Group average multiples based on reported and core earnings equaled 38.50 and
39.07 times, respectively.
2. PRICE-TO-BOOK ("P/B"). The application of the P/B valuation method
requires calculating the Company's pro forma market value by applying a
valuation P/B ratio, as derived from the Peer Group's P/B ratio (fully-converted
basis), to K-Fed Bancorp's pro forma book value (fully-converted basis). Based
on the $75.0 million midpoint valuation, K-Fed Bancorp's pro forma P/B and P/TB
ratios both equaled 75.25%. In comparison to the average fully converted P/B and
P/TB ratios for the Peer Group of 98.38% and 102.22%, the Company's ratios
reflected a discount of 23.5% on a P/B basis and a discount of 26.4% on a P/TB
basis. RP Financial considered the discounts under the P/B approach to be
reasonable, in light of the previously referenced valuation adjustments, the
nature of the calculation of the P/B ratio which mathematically results in a
ratio discounted to book value and the resulting pricing ratios indicated under
the earnings approach.
RP FINANCIAL, LC.
PAGE 4.24
Price/ Price/
Book Tangible
I. FULLY CONVERTED BASIS (see Table 4.4) Value Book Value
------------------------- ----- ----------
K-Fed Bancorp Midpoint 75.25% 75.25%
K-Fed Bancorp Supermaximum 82.50 82.50
Peer Group (At 11/07/2003)
Average 98.38% 102.22%
Median 100.13% 103.88%
K-Fed Bancorp Midpoint Discount Relative to
Peer Group Average 23.51% 26.38%
Peer Group Median 24.84% 27.56%
K-Fed Bancorp Supermaximum Discount Relative to
Peer Group Average 16.14% 19.29%
Peer Group Median 17.61% 20.58%
II. REPORTED BASIS (see Table 4.5)
K-Fed Bancorp Midpoint 115.41% 115.41%
K-Fed Bancorp Supermaximum 132.89% 132.89%
Peer Group (At 11/07/2003)
Average 221.50% 239.07%
Median 221.93% 235.16%
K-Fed Bancorp Midpoint Discount Relative to
Peer Group Average 47.90% 51.73%
Peer Group Median 48.00% 50.92%
K-Fed Bancorp Supermaximum Discount Relative to
Peer Group Average 40.00% 44.41%
Peer Group Median 40.12% 43.49%
3. PRICE-TO-ASSETS ("P/A"). The P/A valuation methodology determines
market value by applying a valuation P/A ratio (fully-converted basis) to the
Company's pro forma asset base, conservatively assuming no deposit withdrawals
are made to fund stock purchases. In all likelihood there will be deposit
withdrawals, which results in understating the pro forma P/A ratio which is
computed herein. At the midpoint of the valuation range, K-Fed Bancorp's full
RP FINANCIAL, LC.
PAGE 4.25
conversion value equaled 14.64% of pro forma assets. Comparatively, the Peer
Group companies exhibited an average P/A ratio (fully-converted basis) of
23.41%, which implies a discount of 37.46% to the Company's pro forma P/A ratio
(fully-converted basis). On a reported basis, the Peer Group companies exhibited
an average P/A ratio of 15.71%, which implies a discount of 42.9% to the
Company's pro forma P/A ratio.
COMPARISON TO RECENT CONVERSIONS AND MHC OFFERINGS
As indicated at the beginning of this chapter, RP Financial's analysis of
recent conversion and MHC offering pricing characteristics at closing and in the
aftermarket has been limited to a "technical" analysis and, thus, the pricing
characteristics of recent conversions and MHC offerings is not the primary
determinate of value herein. Particular focus was placed on the P/TB approach in
this analysis, since the P/E multiples do not reflect the actual impact of
reinvestment and the source of the stock proceeds (i.e., external funds vs.
deposit withdrawals). The two other mutual holding company transactions
completed in 2003 had an average pro forma P/B equal to 78.8% on a
fully-converted basis and 51.1 times pro forma fully-converted earnings. The
Company's pro forma fully-converted P/B ratio at the midpoint reflects a 4.5%
discount from the closing ratio of these recent transactions and a 4.7% premium
relative to the 82.5% fully-converted P/B ratio at the supermaximum of the
offering range.
VALUATION CONCLUSION
Based on the foregoing, it is our opinion that, as of November 7, 2003, the
estimated aggregate pro forma market value of the shares to be issued
immediately following the conversion, including the shares issued publicly, as
well as to the MHC, equaled $75,000,000 at the midpoint, equal to 7,500,000
shares offered at a per share value of $10.00. Pursuant to conversion
guidelines, the 15% offering range indicates a minimum value of $63.750 million
and a maximum value of $86.250 million. Based on the $10.00 per share offering
price determined by the Board, this valuation range equates to total shares
outstanding of 6,375,000 at the minimum and 8,625,000 at the maximum. In the
event the appraised value is subject to an increase, the aggregate pro forma
market value may be increased up to a supermaximum value of
RP FINANCIAL, LC.
PAGE 4.26
$99.188 million without a resolicitation. Based on the $10.00 per share offering
price, the supermaximum value would result in total shares outstanding of
9,918,750. The Board of Directors has established a public offering range such
that the public ownership of the Company will constitute a 46.0% ownership
interest. Accordingly, the offering to the public of the minority stock, will
equal $29.325 million at the minimum, $34.500 million at the midpoint, $39.675
million at the maximum and $45.626 million at the supermaximum of the valuation
range. The pro forma valuation calculations relative to the Peer Group
(fully-converted basis) are shown in Table 4.4 and are detailed in Exhibit IV-7
and Exhibit IV-8; the pro forma valuation calculations relative to the Peer
Group based on reported financials are shown in Table 4.5 and are detailed in
Exhibits IV-10 and IV-11.
RP FINANCIAL, LC.
PAGE 4.27
Table 4.4
MHC Institutions -- Implied Pricing Ratios, Full Conversion Basis
K-Fed Bancorp and the Comparables
As of November 7, 2003
Fully Converted
Implied Value Per Share(8)
---------------- ------------------------
Pricing Ratios(3)
Price/ Market Core 12 Mo. Book Value ---------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core
- --------------------- -------- ----- ------ ----- --- --- --- ---- ------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x)
K-FED BANCORP
Superrange $10.00 $99.19 $0.22 $12.12 49.53x 82.50% 18.61% 82.50% 46.51x
Maximum $10.00 $86.25 $0.25 $12.66 42.07x 78.96% 16.53% 78.96% 39.56x
Midpoint $10.00 $75.00 $0.30 $13.29 35.86x 75.25% 14.64% 75.25% 33.76x
Minimum $10.00 $63.75 $0.35 $14.13 29.90x 70.75% 12.68% 70.75% 28.18x
ALL PUBLIC COMPANIES(7)
Averages $23.82 $402.81 $1.01 $15.16 17.78x 160.47% 16.82% 170.79% 20.29x
Medians -- -- -- -- 16.51x 148.75% 15.39% 160.11% 19.40x
ALL NON-MHC STATE OF CA(7)
Averages $35.27 $1,649.07 $1.86 $17.41 16.46x 196.17% 16.76% 201.13% 17.15x
Medians -- -- -- -- 13.99x 190.83% 16.35% 202.59% 16.86x
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
Averages $21.38 $90.77 $0.55 $21.49 32.58x 98.38% 23.41% 102.22% 35.54x
Medians -- -- -- -- 32.58x 100.13% 23.66% 103.88% 34.29x
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
ALLB Alliance Bank MHC of PA (20.0) $29.09 $106.76 $0.54 $31.58 N.M. 92.12% 22.94% 92.12% N.M.
BCSB BCSB Bankcorp MHC of MD (36.0) $18.00 $105.73 $0.36 $17.75 40.91x 101.41% 15.15% 104.17% 50.00x
GOV Gouverneur Bancorp MHC of NY (42.4) $12.00 $27.34 $0.29 $13.65 37.50x 87.91% 26.71% 87.91% 41.38x
GCBC Green Co. Bancorp MHC of NY (43.0) $32.24 $65.83 $1.24 $30.17 25.79x 106.86% 22.74% 106.86% 26.00x
JXSB Jacksonville Bancorp MHC of IL (45.6) $16.41 $31.85 $0.12 $18.46 36.47x 88.89% 11.53% 97.39% N.M.
ONFC Oneida Financial MHC of NY (45.7) $24.00 $118.54 $0.70 $21.72 28.24x 110.50% 24.38% 124.87% 34.29x
PBHC Pathfinder BC MHC of NY (39.1) $17.25 $41.97 $0.54 $17.45 26.54x 98.85% 13.80% 111.43% 31.94x
ROME Rome Bancorp Inc. MHC of NY (41.6) $27.56 $117.87 $0.76 $25.75 36.26x 107.03% 35.54% 107.03% 36.26x
WCFB Webster City Fed. MHC of IA (38.5) $13.00 $49.04 $0.45 $15.01 28.89x 86.61% 34.94% 86.78% 28.89x
WFD Westfield Financial MHC of MA (47.0) $24.20 $242.75 $0.48 $23.36 N.M. 103.60 %26.41% 103.60% N.M.
Dividends(4) Financial Characteristics(6)
------------------------ -------------------------------------------------
Reported Core
Amount/ Payout Total Equity NPAs/ -------------------------
Financial Institution Share Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE
- --------------------- ----- ----- -------- ------ ------ ------ --- --- --- ---
($) (%) (%) ($Mil) (%) (%) (%) (%) (%) (%)
K-FED BANCORP
Superrange $0.00 0.00% 0.00% $533 22.56% 0.04% 0.38% 1.66% 0.40% 1.77%
Maximum $0.00 0.00% 0.00% $522 20.93% 0.04% 0.39% 1.88% 0.42% 2.00%
Midpoint $0.00 0.00% 0.00% $512 19.46% 0.04% 0.41% 2.10% 0.43% 2.23%
Minimum $0.00 0.00% 0.00% $503 17.92% 0.04% 0.42% 2.37% 0.45% 2.51%
ALL PUBLIC COMPANIES(7)
Averages $0.46 2.02% 37.02% $2,244 10.59% 0.76% 0.91% 9.46% 0.68% 6.69%
Medians -- -- -- -- -- -- -- -- -- --
ALL NON-MHC STATE OF CA(7)
Averages $0.34 1.05% 18.30% $8,994 8.05% 0.30% 1.18% 15.16% 0.83% 11.15%
Medians -- -- -- -- -- -- -- -- -- --
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
Averages $0.43 2.20% 55.73% $401 23.95% 0.82% 0.70% 2.87% 0.64% 2.51%
Medians -- -- -- -- -- -- -- -- -- --
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
ALLB Alliance Bank MHC of PA (20.0) $0.36 1.24% 66.67% $465 24.90% 2.60% 0.44% 1.71% 0.44% 1.71%
BCSB BCSB Bankcorp MHC of MD (36.0) $0.50 2.78% N.M. $698 14.94% 0.11% 0.40% 2.49% 0.33% 2.04%
GOV Gouverneur Bancorp MHC of NY (42.4) $0.26 2.17% N.M. $102 30.38% 0.78% 0.73% 2.36% 0.66% 2.14%
GCBC Green Co. Bancorp MHC of NY (43.0) $0.72 2.23% 58.06% $289 21.28% 0.11% 0.95% 4.23% 0.94% 4.20%
JXSB Jacksonville Bancorp MHC of IL (45.6) $0.30 1.83% N.M. $276 12.97% 1.80% 0.33% 2.47% 0.09% 0.66%
ONFC Oneida Financial MHC of NY (45.7) $0.56 2.33% N.M. $486 22.06% N.A. 0.88% 3.99% 0.72% 3.29%
PBHC Pathfinder BC MHC of NY (39.1) $0.40 2.32% 74.07% $304 13.96% 1.02% 0.54% 3.65% 0.45% 3.03%
ROME Rome Bancorp Inc. MHC of NY (41.6) $0.29 1.05% 38.16% $332 33.20% 0.33% 1.00% 2.96% 1.00% 2.96%
WCFB Webster City Fed. MHC of IA (38.5) $0.68 5.23% N.M. $140 40.34% 0.39% 1.24% 3.01% 1.24% 3.01%
WFD Westfield Financial MHC of MA (47.0) $0.20 0.83%4 1.67% $919 25.49% 0.26% 0.47% 1.84% 0.53% 2.05%
(1) Current stock price of minority stock. Average of High/Low or Bid/Ask price per share.
(2) EPS (estimated core earnings) is based on reported trailing 12 month data, adjusted to omit non-operating gains and losses on a
tax-effected basis. Public MHC data reflects additional earnings from reinvestment of proceeds of second step conversion.
(3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB = Price to Tangible Book; and P/Core = Price to Core
Earnings. Ratios are pro forma assuming a second step conversion to full stock form.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings (earnings adjusted to reflect second step
conversion).
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month earnings and average equity
and assets balances.
(7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating
characteristics.
(8) Figures estimated by RP Financial to reflect a second step conversion of the MHC to full stock form.
Source: Corporate reports, offering circulars, and RP(R) Financial, LC. calculations. The information provided in this report has
been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such
information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIAL, LC.
PAGE 4.28
Table 4.5
Public Market Pricing
K-Fed Bancorp and the Comparables
As of November 7, 2003
Market
Capitalization Per Share Data
------------------ ------------------------
Core Book Pricing Ratios(3)
Price/ Market 12 Mo. Value ------------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core
- --------------------- -------- ----- ------ ----- --- --- --- ---- ------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x)
K-FED BANCORP
Superrange $10.00 $99.19 $0.23 $7.53 45.12x 132.89 20.36% 132.89% 42.60x
Maximum $10.00 $86.25 $0.27 $8.06 38.86x 124.14 17.89% 124.14% 36.71x
Midpoint $10.00 $75.00 $0.32 $8.66 33.51x 115.41 15.70% 115.41% 31.67x
Minimum $10.00 $63.75 $0.37 $9.49 28.26x 105.38 13.47% 105.38% 26.72x
ALL PUBLIC COMPANIES(7)
Averages $23.82 $402.81 $1.01 $15.16 17.78x 160.47 16.82% 170.79% 20.29x
Medians - - - - 16.51x 148.75 15.39% 160.11% 19.40x
ALL NON-MHC STATE OF CA(7)
Averages $35.27 $1,649.07 $1.86 $17.41 16.46x 218.92 16.76% 229.63% 19.09x
Medians - - - - 13.99x 190.83 16.35% 202.60% 17.51x
COMPARABLE GROUP AVERAGES
Averages $21.38 $34.06 $0.42 $9.67 38.50x 221.50 27.52% 239.07% 39.07x
Medians - - - - 37.14x 221.93 26.82% 235.16% 38.33x
STATE OF CA
BYFC Broadway Financial Corp of CA $14.22 $26.04 $0.78 $8.88 18.00x 160.14 12.03% 160.14% 18.23x
CCBI Commercial Capital Bancorp of CA $21.00 $470.30 $0.33 $4.08 29.17x 514.71 33.31% 600.00% N.M.
DSL Downey Financial Corp. of CA $47.25 $1,319.65 $2.46 $31.13 12.77x 151.78 11.05% 152.37% 19.21x
FPTB First PacTrust Bancorp of CA $21.50 $112.66 $0.68 $16.53 32.58x 130.07 21.17% 130.07% 31.62x
FED FirstFed Financial Corp. of CA $47.32 $805.01 $3.31 $23.66 13.07x 200.00 18.05% 204.23% 14.30x
GDW Golden West Financial of CA $100.73 $15,301.00 $6.72 $35.63 14.90x 282.71 21.19% 282.71% 14.99x
HWFG Harrington West Financial of CA $16.95 $73.36 $1.44 $10.37 11.94x 163.45 8.49% 184.84% 11.77x
HTHR Hawthorne Financial Corp. of CA $27.14 $314.69 $2.29 $14.94 12.51x 181.66 12.04% 211.04% 11.85x
NDE IndyMac Bancorp of CA $29.76 $1,653.53 ($1.30) $16.42 10.94x 181.24 15.51% 188.24% N.M.
PFB PFF Bancorp, Inc. of Pomona CA $37.60 $623.14 $2.07 $17.26 17.33x 217.84 20.01% 218.73% 18.16x
PPBI Pacific Premier Bancorp of CA (7) $9.25 $12.33 $1.75 $8.90 4.34x 103.93 4.92% 103.93% 5.29x
PROV Provident Financial Holdings of CA $31.93 $152.37 $0.79 $22.40 9.02x 142.54 12.08% 142.86% 40.42x
QCBC Quaker City Bancorp, Inc. of CA $44.15 $278.81 $3.34 $22.03 12.33x 200.41 17.19% 200.96% 13.22x
UPFC Unitd PanAm Financial Corp. of CA $17.11 $272.00 $0.93 $6.13 18.40x 279.12 20.16% 279.12% 18.40x
WES Westcorp of Irvine CA $37.10 $1,684.45 $2.20 $14.31 17.50x 259.26 12.33% 259.44% 16.86x
COMPARABLE GROUP
ALLB Allliance Bank MHC of PA (20.0) $29.09 $20.01 $0.30 $10.18 N.M. 285.76 26.03% 285.76% N.M.
BCSB BCSB Bankcorp MHC of MD (36.0) $18.00 $38.02 $0.25 $7.84 N.M. 229.59 16.53% 244.23% N.M.
GOV Gouverneur Bncrp MHC of NY (42.4) $12.00 $11.59 $0.23 $7.71 46.15x 155.64 30.78% 155.64% N.M.
GCBC Green Co. Bancorp MHC of NY (43.0) $32.24 $28.05 $1.07 $14.26 29.85x 226.09 25.62% 226.09% 30.13x
JXSB Jacksonville Bancorp MHC of IL (45.6) $16.41 $14.29 $0.04 $10.68 44.35x 153.65 12.20% 180.93% N.M.
ONFC Oneida Financial MHC of NY (45.7) $24.00 $52.30 $0.58 $10.19 32.88x 235.53 27.61% 312.09% 41.38x
PBHC Pathfinder BC MHC of NY (39.1) $17.25 $17.60 $0.45 $8.83 30.80x 195.36 14.82% 251.46% 38.33x
ROME Rome Bancorp Inc. MHC of NY (41.6) $27.56 $32.36 $0.57 $8.55 48.35x 322.34 45.67% 322.34% 48.35x
WCFB Webster City Fed. MHC of IA (38.5) $13.00 $9.40 $0.35 $5.97 37.14x 217.76 46.15% 218.86% 37.14x
WFD Westfield Financial MHC of MA (47.0) $24.20 $116.98 $0.36 $12.52 N.M. 193.29 29.82% 193.29% N.M.
Dividends(4) Financial Characteristics(6)
------------------------ -------------------------------------------------
Reported Core
Amount/ Payout Total Equity NPAs/ -------------------------- Offering
Financial Institution Share Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE Size
- --------------------- ----- ----- -------- ------ ------ ------ --- --- --- --- ----
($) (%) (%) ($Mil) (%) (%) (%) (%) (%) (%) ($Mil)
K-FED BANCORP
Superrange $0.00 0.00% 0.00% $487 15.32% 0.04% 0.45% 2.95% 0.48% 3.12% $45.6
Maximum $0.00 0.00% 0.00% $482 14.41% 0.04% 0.46% 3.19% 0.49% 3.38% $39.7
Midpoint $0.00 0.00% 0.00% $478 13.61% 0.05% 0.47% 3.44% 0.50% 3.64% $34.5
Minimum $0.00 0.00% 0.00% $473 12.79% 0.05% 0.48% 3.73% 0.50% 3.94% $29.3
ALL PUBLIC COMPANIES(7)
Averages $0.46 2.02% 37.02% $2,244 10.59% 0.76% 0.91% 9.46% 0.68% 6.69%
Medians - - - - - - - - - -
ALL NON-MHC STATE OF CA(7)
Averages $0.34 1.05% 18.30% $8,994 8.05% 0.30% 1.18% 15.16% 0.83% 11.15%
Medians - - - - - - - - - -
COMPARABLE GROUP AVERAGES
Averages $0.43 2.20% 23.18% $352 12.55% 0.82% 0.65% 5.08% 0.59% 4.38%
Medians - - - - - - - - - -
STATE OF CA
BYFC Broadway Financial Corp of CA $0.15 1.05% 19.23% $216 7.51% 0.04% 0.72% 9.39% 0.71% 9.27%
CCBI Commercial Capital Bancorp of CA $0.00 0.00% 0.00% $1,412 6.47% 0.01% 1.54% 22.09% 0.71% 10.12%
DSL Downey Financial Corp. of CA $0.36 0.76% 14.63% $11,947 7.28% 0.56% 0.88% 12.53% 0.58% 8.33%
FPTB First PacTrust Bancorp of CA $0.28 1.30% 41.18% $532 16.28% N.A. 0.73% 4.52% 0.75% 4.65%
FED FirstFed Financial Corp. of CA $0.00 0.00% 0.00% $4,46 19.02% N.A. 1.41% 16.46% 1.29% 15.05%
GDW Golden West Financial of CA $0.40 0.40% 5.95% $72,199 7.50% N.A. 1.52% 20.47% 1.51% 20.35%
HWFG Harrington West Financial of CA $0.40 2.36% 27.78% $864 5.19% N.A. 0.74% 15.11% 0.75% 15.32%
HTHR Hawthorne Financial Corp. of CA $0.00 0.00% 0.00% $2,613 6.63% 0.35% 1.05% 16.07% 1.11% 16.96%
NDE IndyMac Bancorp of CA $0.80 2.69% N.M. $10,661 8.56% 0.88% 1.68% 17.27% -0.80% -8.25%
PFB PFF Bancorp, Inc. of Pomona CA $0.64 1.70% 30.92% $3,115 9.18% N.A. 1.17% 12.64% 1.12% 12.06%
PPBI Pacific Premier Bancorp of CA (7) $0.00 0.00% 0.00% $250 4.74% 1.55% 1.18% 25.69% 0.97% 21.11%
PROV Provident Financial Holdings of CA $0.40 1.25% 50.63% $1,262 8.47% 0.12% 1.48% 16.48% 0.33% 3.68%
QCBC Quaker City Bancorp, Inc. of CA $0.80 1.81% 23.95% $1,622 8.58% 0.17% 1.46% 17.03% 1.36% 15.89%
UPFC Unitd PanAm Financial Corp. of CA $0.00 0.00% 0.00% $1,349 7.22% N.A. 1.42% 16.55% 1.42% 16.55%
WES Westcorp of Irvine CA $0.52 1.40% 23.64% $13,665 4.75% N.A. 0.77% 15.58% 0.80% 16.16%
COMPARABLE GROUP
ALLB Allliance Bank MHC of PA (20.0) $0.36 1.24% N.M. $385 9.11% 2.60% 0.28% 2.93% 0.28% 2.93%
BCSB BCSB Bankcorp MHC of MD (36.0) $0.50 2.78% N.M. $640 7.20% 0.11% 0.33% 4.26% 0.25% 3.23%
GOV Gouverneur Bncrp MHC of NY (42.4) $0.26 2.17% N.M. $89 19.77% 0.78% 0.69% 3.41% 0.61% 3.02%
GCBC Green Co. Bancorp MHC of NY (43.0) $0.72 2.23% 28.67% $257 11.33% 0.11% 0.93% 7.94% 0.92% 7.86%
JXSB Jacksonville Bancorp MHC of IL (45.6) $0.30 1.83% N.M. $261 7.94% 1.80% 0.28% 3.55% 0.03% 0.38%
ONFC Oneida Financial MHC of NY (45.7) $0.56 2.33% N.M. $429 11.72% N.A. 0.86% 7.49% 0.68% 5.95%
PBHC Pathfinder BC MHC of NY (39.1) $0.40 2.32% N.M. $283 7.59% 1.02% 0.50% 6.09% 0.40% 4.90%
ROME Rome Bancorp Inc. MHC of NY (41.6) $0.29 1.05% 13.97% $258 14.17% 0.33% 0.96% 6.74% 0.96% 6.74%
WCFB Webster City Fed. MHC of IA (38.5) $0.68 5.23% N.M. $106 21.19% 0.39% 1.28% 5.93% 1.28% 5.93%
WFD Westfield Financial MHC of MA (47.0) $0.20 0.83% 26.91% $810 15.43% 0.26% 0.38% 2.46% 0.45% 2.86%
(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items (including the SAIF
assessment) on a tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to
core earnings.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average
common equity and total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating
characteristics.
Source:Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.