SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---------- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER: 000-50592
K-FED BANCORP
(Exact name of registrant as specified in its charter)
FEDERAL 20-0411486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1359 N. GRAND AVENUE COVINA, CA 91724
(Address of principal executive office) (Zip Code)
(800)524-2274
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1)has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No X*
--- ---
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes No X*
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: Common Stock, $.01 par value - 1,000 shares outstanding as of March 24,
2004.*
* The registrant's Registration Statement on Form S-1 was declared
effective on February 12, 2004.
Form 10-Q
K-FED BANCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of December 31, 2003 and June 30, 2003 1
Consolidated Statements of Income for the
Three and Six Months Ended December 31,
2003 and 2002 2
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2003 and 2002 3
Selected Notes to Consolidated Financial
Statements 4
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 12
Item 4: Controls and Procedures 13
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings 13
Item 2: Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 13
Item 3: Defaults upon Senior Securities 14
Item 4: Submission of Matters to a Vote of
Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 14
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
DOLLARS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
2003 2003
---------------- ----------------
ASSETS
ASSETS
Cash and due from banks $ 83,847 $ 4,545
Federal funds sold 343,545 11,645
---------------- ----------------
Total cash and cash equivalents 427,392 16,190
Interest bearing deposits in other financial 2,970 6,437
institutions
Held-to-maturity investments, fair value of
$55,398 and $14,373 at December 31, 2003 and
June 30, 2003, respectively 54,958 14,247
Loans 380,766 391,921
Less allowance for loan losses (2,128) (2,281)
---------------- ----------------
Loans, net 378,638 389,640
Accrued interest receivable 1,598 1,669
Premises and equipment, net 1,608 1,289
Other assets 7,026 4,281
---------------- ----------------
Total assets 874,190 433,753
================ ================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Deposits
Interest Bearing $ 750,436 $ 316,120
Noninterest bearing 34,868 30,119
---------------- ----------------
Total deposits 785,304 346,239
Federal Home Loan Bank advances 50,000 50,000
Accrued expenses and other liabilities 2,150 2,119
---------------- ----------------
Total liabilities 837,454 398,358
Commitments and contingent liabilities
STOCKHOLDER'S EQUITY:
Serial preferred stock, $.01 par value; 2,000,000
shares authorized; issued and outstanding -
none - -
Common stock, $.01 par value; 18,000,000
authorized; issued and outstanding - 1,000 - -
Retained earnings 36,736 35,395
---------------- ----------------
Total stockholder's equity 36,736 35,395
---------------- ----------------
Total liabilities and stockholder's equity $ 874,190 433,753
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ----------------------------
2003 2002 2003 2002
------------- ------------ ----------- ------------
INTEREST INCOME
Interest and fees on loans $ 4,732 $ 4,710 $ 9,332 $ 9,055
Interest on investment securities, 509 115 712 295
taxable
Federal Home Loan Bank dividends - 13 28 26
Other interest 132 224 197 440
------------- ------------ ----------- ------------
Total interest income 5,373 5,062 10,269 9,816
------------- ------------ ----------- ------------
INTEREST EXPENSE
Interest on Federal Home Loan Bank
advances 377 285 757 294
Interest on deposits 2,014 1,773 3,971 3,499
------------- ------------ ----------- ------------
Total interest expense 2,391 2,058 4,728 3,793
------------- ------------ ----------- ------------
Net interest income 2,982 3,004 5,541 6,023
Provision for loan losses 62 368 92 571
------------- ------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,920 2,636 5,449 5,452
------------- ------------ ----------- ------------
NONINTEREST INCOME
Service charges and fees 491 438 988 823
ATM fees and charges 283 271 571 542
Commissions 58 66 110 130
Other noninterest income (23) 20 (56 37
------------- ------------ ----------- ------------
Total noninterest income 809 795 1,613 1,532
------------- ------------ ----------- ------------
NONINTEREST EXPENSES
Salaries and benefits 1,319 1,306 2,629 2,623
Occupancy and equipment 323 286 647 577
ATM expense 241 229 483 478
Advertising and promotional 66 117 153 235
Professional services 71 79 168 167
Other operating expense 374 401 750 787
------------- ------------ ----------- ------------
Total noninterest expenses 2,394 2,418 4,830 4,867
------------- ------------ ----------- ------------
INCOME BEFORE INCOME TAX EXPENSE 1,335 1,013 2,232 2,117
Income tax expense 520 418 841 873
------------- ------------ ----------- ------------
NET INCOME $ 815 $ 595 $ 1,391 $ 1,244
============= ============ =========== ============
EARNINGS PER COMMON SHARE:
Basic n/m* n/m* n/m* n/m*
Diluted n/m* n/m* n/m* n/m*
* NOT MEANINGFUL. SEE NOTE 4
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
DOLLARS IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------
2003 2002
--------------------- -------------------
OPERATING ACTIVITIES
Net income $ 1,391 $ 1,244
Adjustments to reconcile net income to cash provided
by operating activities:
Amortization of net premium on investments 83 2
Amortization of premiums on loan purchases 1,699 269
Accretion of loan origination fees (59) (22)
Provision for loan losses 92 571
Depreciation and amortization 196 135
Federal Home Loan Bank stock dividend (28) (26)
Loss on equity investment 82 -
Net change in accrued interest receivable 71 (82)
Net change in other assets (539) (213)
Net changes in accrued expenses and other
liabilities 31 (609)
--------------------- -------------------
Net cash provided by operating activities 3,019 1,269
--------------------- -------------------
INVESTING ACTIVITIES
Purchases of held-to-maturity investments (47,813) -
Proceeds from maturities of held-to-maturity 7,019 9,933
investments
Net change in time deposits with other financial 3,467 18,032
institutions
Purchases of loans (93,394) (69,946)
Net change in loans, excluding loan purchases 102,664 (765)
Purchase of Federal Home Loan Bank stock (171) (1,479)
Purchase of equity investment (2,089) -
Purchase of premises and equipment (515) (183)
--------------------- -------------------
Net cash used in investing activities (30,832) (44,408)
--------------------- -------------------
FINANCING ACTIVITIES
Net change in Federal Home Loan Bank advances - 48,000
Net change in deposits 439,065 28,762
Distribution to capitalize K-Fed Mutual Holding (50) -
Company (Parent)
--------------------- -------------------
Net Cash provided by financing activities 439,015 76,762
--------------------- -------------------
Net change in cash and cash equivalents 411,202 33,623
Cash and cash equivalents, at beginning of year 16,190 4,330
--------------------- -------------------
Cash and cash equivalents, at end of period $ 427,392 $ 37,953
===================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and Federal Home Loan Bank $ 4,743 $ 3,811
advances
Income taxes paid $ 606 $ 1,250
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------------
NATURE OF BUSINESS: K-Fed Bancorp (the "Company") is a wholly owned subsidiary
of K-Fed Mutual Holding Company (the "Parent"). The Company and its Parent are
holding companies. The Company's sole subsidiary, Kaiser Federal Bank (the
"Bank"), is a federally chartered savings association, which provides retail and
commercial banking services to individuals and business customers from its four
branch locations throughout California. While the Bank originates all types of
retail and commercial real estate loans, the majority of its residential real
estate loans have been purchased from other financial institutions.
BASIS OF PRESENTATION: The consolidated financial statements presented in this
quarterly report include the accounts of K-Fed Bancorp and its wholly-owned
subsidiary, Kaiser Federal Bank. The financial statements of K-Fed Bancorp have
been prepared in conformity with accounting principals generally accepted in the
United States of America (GAAP) for interim financial information and
predominant practices followed by the financial services industry, and are
unaudited. Interim statements are subject to possible adjustment in connection
with the annual audit of the Company for the year ending June 30, 2004. In the
opinion of the Company's management, all adjustments consisting of normal
recurring accruals necessary for a fair presentation of the financial condition
and results of operations for the interim periods included herein have been
made.
The results of operations for the three and six month periods ended December 31,
2003 are not necessarily indicative of the results of operations that may be
expected for any other interim period or for the year ending June 30, 2004.
Certain information and note disclosures normally included in the Company's
annual financial statements have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with a reading of the consolidated financial statements and notes
included in the Registration Statement on Form S-1 filed by the Company with the
Securities and Exchange Commission (File Number 333-111029), as amended,
initially filed on December 9, 2003, and declared effective on February 12, 2004
("Registration Statement"). Certain amounts in the 2002 financial statements
have been reclassified to conform to the 2003 presentation with no effect on net
income.
PRINCIPLES OF CONSOLIDATION: At December 31, 2003, the Company's sole assets
consisted of approximately $50,000 in cash and its investment in the Bank. The
Company had no operations during the period ended December 31, 2003. All
material intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES: The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect amounts reported in the consolidated financial statements. Changes in
these estimates and assumptions are considered reasonably possible and may have
a material impact on the consolidated financial statements and thus actual
results could differ from the amounts reported and disclosed herein. The Company
considers the allowance for loan losses and the amortization of loan purchase
premiums to be critical accounting estimates.
At December 31, 2003, there were no material changes in the Company's
significant accounting policies or critical accounting estimates from those
disclosed in the Company's Registration Statement.
4
NOTE 2 - ADOPTION OF PLAN OF STOCK ISSUANCE
----------------------------------
On November 22, 2003, and amended on February 9, 2004, the Board of Directors
adopted a plan of stock issuance pursuant to which K-Fed Bancorp will sell a
minority interest of its common stock to eligible depositors of the Bank in a
subscription offering and, if necessary, to the general public if a community or
a syndicated community offering is held. The majority of the common stock will
be owned by K-Fed Mutual Holding Company.
Pursuant to regulations of the Office of Thrift Supervision (OTS) K-Fed Bancorp
will not initiate any action within the term of its three year business plan in
the furtherance of payment of a special distribution or return of capital to
stockholders of K-Fed Bancorp.
The OTS imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding
company, such as Kaiser Federal Bank, must file an application or a notice with
the OTS at least thirty days before making a capital distribution. A savings
institution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the
applications processing rules of the OTS; (ii) the total amount of all capital
distributions, including the proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings bank's net income for
that year to date plus the institution's retained net income for the preceding
two years; (iii) it would not adequately be capitalized after the capital
distribution; or (iv) the distribution would violate an agreement with the OTS
or applicable regulators.
A liquidation account will not be established since the Bank's members retain
their rights as members of the mutual holding company.
Kaiser Federal Bank will be required to file a capital distribution notice or
application with the OTS before paying any dividend to K-Fed Bancorp. However,
capital distributions by K-Fed Bancorp, as a savings and loan holding company,
will not be subject to the OTS capital distribution rules.
The OTS may disapprove a notice or deny an application for a capital
distribution if (i) the savings institution would be undercapitalized following
the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a
prohibition contained in any statute, regulation or agreement.
Costs, including underwriting discounts, if any, to complete the stock offering
are expected to be deferred and deducted from the proceeds from the sale of
capital stock. If the stock offering does not take place, all costs incurred
will be charged to expense. Deferred costs aggregated $326,894 as of December
31, 2003 and are included in other assets in the December 31, 2003 Statement of
Financial Condition.
NOTE 3 - STOCKHOLDER'S EQUITY
--------------------
In conjunction with the adoption of the above-mentioned plan of stock issuance,
K-Fed Bancorp amended its charter to increase the amount of common stock
authorized for issuance from 9,000,000 shares to 18,000,000 shares. Preferred
stock authorized for issuance was also increased from 1,000,000 shares to
2,000,000 shares.
NOTE 4 - EARNINGS PER SHARE
------------------
Earnings per share is not presented for the period from July 1, 2003 (the date
of conversion to a stock company) though December 31, 2003 as the earnings per
share calculation for that period is not meaningful. Earnings per share are
5
not presented for the periods prior to the conversion to stock form since the
Bank was a mutual savings association and no stock was outstanding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains certain forward-looking statements
and information relating to the Company and the Bank that are based on the
beliefs of management as well as assumptions made by and information currently
available to management. In addition, in portions of this document the words
"anticipate," "believe," "estimate," "expect," "intend," "should" and similar
expressions or the negative thereof, as they relate to the Company or the Bank
or their management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company and/or the Bank with respect
to forward-looking events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND JUNE 30, 2003.
GENERAL. Deposits increased $439.1 million to $785.3 million at December 31,
2003 from $346.2 million at June 30, 2003. A significant amount of this deposit
growth was related to deposits received from out of state depositors as a result
of K-Fed Bancorp filing an application with the Office of Thrift Supervision to
complete the proposed stock offering. Out of state depositors established
accounts or added new funds to existing accounts in the sum of $319.6 million
from July 1, 2003 to December 31, 2003. The remaining growth came from normal
operations, as well as from in-state depositors who opened new accounts or added
funds to existing accounts in anticipation of the stock offering. In response to
this growth in deposits and growth in our underlying core business, assets
increased $440.4 million, or 101.5%, to $874.2 million at December 31, 2003 from
$433.8 million at June 30, 2003. Asset growth was comprised of $411.2 million in
cash and cash equivalents and $40.8 million in investment securities (including
mortgage-backed securities). As a result of this deposit growth, Kaiser Federal
Bank was not well-capitalized at December 31, 2003. We anticipate the withdrawal
of nearly all deposits made in anticipation of the stock offering, thereby
allowing us to return to our well-capitalized status.
LOANS. Our net loan portfolio decreased $11.0 million, or 2.8%, to $378.6
million at December 31, 2003 from $389.6 million at June 30, 2003. This decrease
was primarily attributable to continued higher than average levels in the volume
of one- to four-family real estate loan prepayments, which resulted in a decline
in this portfolio of $32.2 million, or 12.4%, to $227.4 million from $259.6
million. Other decreases in the loan portfolio occurred in the consumer loan
portfolio, which decreased $1.0 million, or 1.5% to $65.4 million from $66.4
million. These decreases in the portfolio were partially offset by increases in
the multi-family and commercial real estate loan portfolio, which increased
$22.7 million, or 35.7%, to $86.2 million from $63.5 million.
INVESTMENTS. Our investment portfolio increased $40.8 million, or 287.3%, to
$55.0 million at December 31, 2003 from $14.2 million at June 30, 2003. The
increase is attributable to the purchase of additional collateralized mortgage
obligations with cash received through significant prepayments in the one- to
four-family real estate loan portfolio and continued growth in deposits,
excluding the estimated temporary growth at the end of the period due to
6
deposits related to the stock offering. Interest bearing deposits in other
financial institutions decreased $3.4 million to $3.0 million from $6.4 million
as a result of the maturity of time deposits.
DEPOSITS. Total deposits increased $439.1 million, or 126.8%, to $785.3 million
at December 31, 2003 from $346.2 million at June 30, 2003. This growth primarily
resulted from deposits received from out of state depositors during December
2003 in order to establish subscription rights for the stock offering. Out of
state deposits for new and existing accounts during the month ended December 31,
2003 increased by $316.7 million. The remaining growth came from normal
operations, as well as from in-state depositors who opened new accounts or added
funds to existing accounts in anticipation of the stock offering. After the
completion of our stock offering, and consistent with the experience of other
institutions in connection with stock offerings similar to that of K-Fed
Bancorp, we anticipate the withdrawal of almost all of these deposits
established in anticipation of the stock offering.
EQUITY. Total stockholder's equity increased by $1.3 million to $36.7 million at
December 31, 2003, as a result of the retention of earnings, partially offset by
a $50,000 distribution made in order to capitalize K-Fed Mutual Holding Company,
the parent company of K-Fed Bancorp. Our equity to assets ratio under GAAP was
4.20% at December 31, 2003 compared to 8.16% at June 30, 2003. The decrease in
our equity-to-assets ratio was a result of the noted deposit activity that
significantly increased customer deposits and concurrently cash and cash
equivalents. As a result of this influx of deposits, our tier 1 capital ratio
was 4.20%, our tier 1 risk based capital ratio was 9.99% and our total capital
ratio was 10.56%, at December 31, 2003. At September 30, 2003, these ratios were
8.00%, 12.70% and 13.50%, respectively. We are considered to be adequately
capitalized on December 31, 2003. At September 30, 2003, however, Kaiser Federal
Bank's capital ratios were in excess of the amount to be considered
well-capitalized.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
AND DECEMBER 31, 2002.
GENERAL. We had net income of $815,000 and $595,000 for the three months ended
December 31, 2003 and 2002, respectively. The increase of $220,000 was primarily
due to a decrease in the provision for loan losses of $306,000, partially offset
by an increase in income taxes of $102,000.
NET INTEREST INCOME. Net interest income remained unchanged at $3.0 million for
the three months ended December 31, 2003 and December 31, 2002. For the three
months ended December 31, 2003, average interest-earning assets increased to
$541.2 million from $337.8 million for the same period a year ago, primarily as
a result of the noted deposit activity. Offsetting this increase in average
interest-earning assets was a 202 basis point decline in our net yield on
interest earning assets to 3.97% for the quarter ended December 31, 2003 from
5.99% for the comparable quarter in 2002.
INTEREST INCOME. Interest income for the three months ended December 31, 2003
compared to the same period in 2002 increased $311,000, or 6.1% to $5.4 million
from $5.1 million. The increase was the result of a $203.4 million increase in
the average balance of our interest-earning assets as a result of loan purchases
and originations, significantly offset by changes in the loan portfolio mix,
with the majority of loans purchased being real estate loans, which carry a
lower rate than our consumer loan portfolio, and accelerated loan premium
amortizations due to continued high loan prepayment levels experienced during
the three months ended December 31, 2003. A low interest rate environment and
our shifting of the loan portfolio mix during the three months ended December
31, 2003, as compared to December 31, 2002 offset increases in average loans
resulting in interest earned on total loans remaining steady at $4.7 million for
each quarter. The average yield on loans was 5.15% for the three months ended
December 31, 2003 as compared to 6.68% for the three months ended December 31,
2002.
7
INTEREST EXPENSE. Interest expense increased $333,000, or 16.2%, for the three
months ended December 31, 2003 to $2.4 million as compared to $2.1 million for
the three months ended December 31, 2002. The change is primarily attributable
to the significant increase in deposits, partially offset by lower interest
rates. The average interest rates on interest-bearing liabilities decreased to
1.91% for the three months ended December 31, 2003 from 2.91% for the three
months ended December 31, 2002. Average interest-bearing liabilities increased
to $499.9 million, or 76.5%, at December 31, 2003 from $283.2 million at
December 31, 2002.
PROVISION FOR LOAN LOSSES. Management assesses the allowance for loan losses on
a quarterly basis. In evaluating the level of allowance for loan losses,
management considers the types and amounts of loans in the loan portfolio,
historical loss experience, peer group information, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral, estimated losses relating to specifically identified loans, and
current economic conditions. The allowance is increased by provisions for loan
losses, which are charged against income. Our policies require the review of
assets on a regular basis, and we appropriately classify loans as well as other
assets if warranted. We believe we use the best information available to make a
determination with respect to the allowance for loan losses, recognizing that
adjustments may be necessary depending upon a change in economic conditions.
Our methodology for analyzing the allowance for loan losses consists of two
components: general and specific allowances. The general allowance is determined
by applying an estimated loss percentage to various homogenous pools of loans.
The loss percentages are based on historical loan loss experiences for consumer
loans and peer and industry averages for real estate lending in order to balance
the recent and substantial increase in this type of lending with the limited
historical loan losses experienced by Kaiser Federal Bank for these latter types
of loans. The specific allowance component is created when management believes
that the collectibility of a specific large loan, such as a real estate,
multifamily, or commercial real estate loan, has been impaired and a loss is
probable.
While management uses the best information available to make loan loss allowance
evaluations, adjustments to the allowance may be necessary based on changes in
economic and other conditions. We anticipate that our allowance for loan losses
will be adjusted as we continue to implement Kaiser Federal Bank's strategy of
originating and purchasing primarily residential real estate loans.
Additionally, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The
Office of Thrift Supervision may require the recognition of adjustments to the
allowance for loan losses based on its judgment of information available to it
at the time of its examination.
Our provision for loan losses decreased $306,000 to $62,000 for the three months
ended December 31, 2003 compared to $368,000 for the three months ended December
31, 2002. The allowance for loan losses as a percent of total loans was 0.56% at
December 31, 2003 as compared to 0.67% at December 31, 2002. The decrease in the
provision is primarily attributable to the significant shift in the loan
portfolio mix from consumer loans to real estate secured loans, which have
experienced a lower rate of loss. We used the same methodology and generally
similar assumptions in assessing the adequacy of the allowance for consumer and
real estate loans for both periods.
NONINTEREST INCOME. Our noninterest income remained consistent at $800,000 for
both quarters ending December 31, 2003 and 2002.
NONINTEREST EXPENSE. Operating Expenses for the three months ended December 31,
2003 remained consistent with our operating expenses for the three months ended
December 31, 2002 at $2.4 million.
8
INCOME TAX EXPENSE. Income tax expense for the three months ended December 31,
2003 was $520,000 compared to $418,000 for the three months ended December 31,
2002. Pre-tax income increased from $1.0 million in 2002 to $1.3 million in
2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
AND 2002.
GENERAL. We had net income of $1.4 million for the six months ended December 31,
2003 and $1.2 million for the six months ended December 31, 2002. The increase
in net income for the six months ended December 31, 2003 resulted from higher
net interest income and non-interest income and a lower provision for loan
losses that was partially offset by increases in non-interest expense.
NET INTEREST INCOME. Net interest income decreased $482,000, or 8.0%, to $5.5
million for the six months ended December 31, 2003 compared to $6.0 million for
the six months ended December 31, 2002, reflecting a $935,000, or 24.7%,
increase in interest expense, offset by a $453,000, or 4.6% increase in interest
income. Our interest rate spread decreased to 2.05% for the six months ended
December 31, 2003 compared to 3.32% for the six months ended December 31, 2002,
reflecting a significant change in asset mix due to increased funding and
purchasing of adjustable-rate residential real estate loans, partially offset by
lower levels of rates paid on deposits. In addition, the ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
110.72% for six months ended December 31, 2003 compared to 120.87% for six
months ended December 31, 2002.
INTEREST INCOME. Total interest income increased by $453,000, or 4.6%, to $10.3
million for the six months ended December 31, 2003 from $9.8 million for the six
months ended December 31, 2002. The increase was primarily the result of the
growth of our average loan portfolio balance, which grew by $111.1 million to
$374.8 million for the six months ended December 31, 2003 from $263.7 million
for the six months ended December 31, 2002. Interest earned on total loans for
the six months ended December 31, 2003 was $9.3 million compared to $9.1 million
for the six months ended December 31, 2002. The average yield on total loans
decreased to 4.98% for the six months ended December 31, 2003 as compared to
6.87% for the six months ended December 31, 2002, primarily due to a general
decrease in the market rates of interest and a shifting of the loan portfolio
mix from consumer to real estate.
Interest income on investment securities, Federal Home Loan Bank stock and
interest-bearing deposits with other financial institutions increased $176,000,
or 23.1%, for the six months ended December 31, 2003 to $937,000 from $761,000
for the six months ended December 31, 2002. The change was a result of an
increase in the average balance of the portfolio of $67.6 million to $118.3
million for the six months ended December 31, 2003 from $50.7 million for the
six months ended December 31, 2002, combined with a decrease on the overall
average yield on total investments of 1.58% for the six months ended December
31, 2003 as compared to 3.00% for the six months ended December 31, 2002.
INTEREST EXPENSE. The increase in interest expense of $935,000 for the six
months ended December 31, 2003 was primarily due to the increase in average
interest-bearing liabilities, partially offset by lower interest rates. Average
Federal Home Loan Bank advances increased by $27.9 million to $50.0 million for
the six months ended December 31, 2003 from $22.1 million for the six months
ended December 31, 2002. This created an increase in Federal Home Loan Bank
interest costs of $463,000. Average time deposits increased by $58.8 million to
$160.0 million for the six months ended December 31, 2003 from $101.2 million
for the six months ended December 31, 2002. This contributed to the $472,000
increase in deposit interest costs. The average rate on interest bearing
liabilities decreased from 2.92% at December 31, 2002 to 2.12% at December 31,
2003, due primarily to the liability mix changing with lower market rates of
interest on the new fundings. Additional borrowings
9
and increases in interest bearing liabilities were used to fund the growth in
loans in order to implement our leverage strategy to increase interest-earning
assets and enhance earnings.
PROVISION FOR LOAN LOSSES. The provision for loan losses made during the six
months ended December 31, 2003 totaled $92,000, a decrease of $479,000 from the
provision for loan losses made during the six months ended December 31, 2002.
The allowance for loan losses as a percent of total loans was 0.56% at December
31, 2003 as compared to 0.67% at December 31, 2002. This decrease is due to the
growth in loans being primarily in real estate secured loans.
NONINTEREST INCOME. Noninterest income amounted to $1.6 million and $1.5 million
for the six months ended December 31, 2003 and 2002, respectively. The increase
is primarily attributed to the implementation of a checking account overdraft
protection program as well as an increase in ATM surcharge fees.
NONINTEREST EXPENSES. Noninterest expenses decreased $37,000, or 0.8%, to $4.8
million for the six months ended December 31, 2003 compared to $4.9 million for
the six months ended December 31, 2002. This is primarily due to a decrease in
advertising and promotional expenses.
INCOME TAX EXPENSE. Income tax expense for the six months ended December 31,
2003 was $841,000 compared to $873,000 for the six months ended December 31,
2002. This represented tax expense to pre-tax income of 37.7% in 2003 and 41.2%
in 2002. The decrease in the tax expense percentage is a result of $62,000 in
estimated tax credits from an affordable housing investment in 2003.
LIQUIDITY AND COMMITMENTS
Prior to the passage of the Financial Regulatory Relief and Economic Efficiency
Act of 2000 in December 2000, we were required to maintain minimum levels of
investments that qualify as liquid assets under Office of Thrift Supervision
regulations. Liquidity may increase or decrease depending upon the availability
of funds and comparative yields on investments in relation to the return on
loans. Historically, we have maintained liquid assets at levels above the
minimum requirements imposed by Office of Thrift Supervision regulations and
above levels believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
See "Consolidated Statements of Cash Flows" contained in the Consolidated
Financial Statements included in this document.
Our liquidity, represented by cash and cash equivalents and mortgage-backed and
related securities, is a product of operating, investing and financing
activities. Our primary sources of funds are deposits; amortization, prepayments
and maturities of outstanding loans and mortgage-backed and related securities,
and other short-term investments; and funds provided from operations. While
scheduled payments from the amortization of loans and mortgage-backed related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. In addition, we invest excess funds in short-term interest-earning
assets, which provide liquidity to meet lending requirements. We also generate
cash through borrowings. We utilize Federal Home Loan Bank advances to leverage
our capital base and provide funds for our lending and investment activities and
enhance our interest rate risk management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, we maintain a strategy of
investing in various lending products. We use our sources of funds primarily
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to meet ongoing commitments, to pay maturing time deposits and savings
withdrawals, to fund loan commitments and to maintain our portfolio of
mortgage-backed and related securities. At December 31, 2003, the total approved
loan commitments unfunded amounted to $32.7 million, which includes the
unadvanced portion of loans of $6.3 million and a $25.0 million commitment to
purchase a pool of whole residential real estate loans in February 2004. Time
deposits and advances from the Federal Home Loan Bank of San Francisco scheduled
to mature in one year or less at December 31, 2003, totaled $95.7 million and
$0, respectively. Based on historical experience, management believes that a
significant portion of maturing deposits will remain with Kaiser Federal Bank,
except for the large influx of deposits in December 2003 discussed above. Kaiser
Federal Bank anticipates that we will continue to have sufficient funds, through
deposits and borrowings, to meet our current commitments.
At December 31, 2003, we had available additional advances from the Federal Home
Loan Bank of San Francisco in the amount of $140.2 million.
CAPITAL
The table below sets forth Kaiser Federal Bank's capital position relative to
its Office of Thrift Supervision capital requirements at December 31, 2003. The
definitions of the terms used in the table are those provided in the capital
regulations issued by the Office of Thrift Supervision.
Minimum Required
to Be Well
Capitalized
Under Prompt
Corrective
Actual Minimum Capital Requirements Action Provisions
--------------------------- ------------------------------ ----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- -------------- ------------- ------------ -----------
(Dollars in Thousands)
Total capital (to risk-
weighted assets) $38,814 10.56% $22,596 8.00% $28,244 10.00%
Tier 1 capital (to risk-
weighted assets) 36,686 9.99 11,298 4.00 16,947 6.00
Tier 1 (core) capital (to
adjusted tangible asets) 36,686 4.20 34,968 4.00 43,710 5.00
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. However, as of December 31, 2003, the Bank
was no longer considered well capitalized under the regulatory framework for
Prompt Corrective Action. As of this date, the Bank was categorized as
"adequately capitalized." The significant reduction in capital was caused by a
significant influx of deposits as a result of K-Fed Bancorp's filing an
application with the Office of Thrift Supervision to complete a proposed stock
offering. We anticipate the withdrawal of nearly all deposits made in
anticipation of the stock offering, thereby allowing us to return to our
well-capitalized status.
IMPACT OF INFLATION
The consolidated financial statements presented herein have been prepared in
accordance with GAAP. These principles require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
11
Our primary assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates, however, do not necessarily move in
the same direction or with the same magnitude as the price of goods and
services, since such prices are affected by inflation. In a period of rapidly
rising interest rates, the liquidity and maturity structure of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of noninterest expense. Such expense items as employee
compensation, employee benefits and occupancy and equipment costs may be subject
to increases as a result of inflation. An additional effect of inflation is the
possible increase in the dollar value of the collateral securing loans that we
have made. We are unable to determine the extent, if any, to which properties
securing our loans have appreciated in dollar value due to inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on assets and
pay on liabilities generally are established contractually for a period of time.
Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those
of other financial institutions, are impacted by changes in interest rates and
the interest rate sensitivity of our assets and liabilities. The risk associated
with changes in interest rates and our ability to adapt to these changes is
known as interest rate risk and is our most significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt to
manage our exposure to changes in interest rates and comply with applicable
regulations, we monitor our interest rate risk. In monitoring interest rate risk
we continually analyze and manage assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on our results of operations, we have adopted
investment/asset and liability management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability policies of Kaiser Federal Bank, which are implemented by
the asset/liability management committee.
The purpose of the asset/liability management committee is to communicate,
coordinate and control asset/liability management consistent with our business
plan and board approved policies. The committee establishes and monitors the
volume and mix of assets and funding sources taking into account relative costs
and spreads, interest rate sensitivity and liquidity needs. The objectives are
to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The asset/liability management committee generally meets on a weekly basis to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections pursuant to net present value of portfolio
equity analysis and income simulations. The asset/liability management committee
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and
12
market value of portfolio equity, which is defined as the net present value of
an institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and market value of portfolio equity that are authorized by the
board of directors of Kaiser Federal Bank. The asset/liability management
committee recommends appropriate strategy changes based on this review. The
chairman or his designee is responsible for reviewing and reporting on the
effects of the policy implementations and strategies to the board of directors
at least monthly.
In order to manage our assets and liabilities and achieve the desired liquidity,
credit quality, interest rate risk, profitability and capital targets, we have
focused our strategies on: (1) originating and purchasing adjustable rate loans;
(2) originating a reasonable volume of short- and intermediate-term consumer
loans; (3) managing our deposits to establish stable deposit relationships; (4)
using Federal Home Loan Bank advances, and pricing on fixed-term non-core
deposits to align maturities and repricing terms, and (5) attempting to limit
the percentage of fixed-rate loans in our portfolio.
At times, depending on the level of general interest rates, the relationship
between long- and short-term interest rates, market conditions and competitive
factors, the asset/liability management committee may determine to increase our
interest rate risk position somewhat in order to maintain our net interest
margin. In the future, we intend to continue our existing strategy of
originating and purchasing relatively short-term and/or adjustable rate loans.
There has not been any material change in the market risk disclosures contained
in the Company's Registration Statement on Form S-1, dated February 12, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Not applicable
13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Charter of K-Fed Bancorp (1)
3.2 Bylaws of K-Fed Bancorp (1)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
None.
---------------
(1) Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-111029), and incorporated
herein by reference
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
K-Fed Bancorp
Date: March 24, 2004 /s/ Kay M. Hoveland
----------------------- --------------------------------------
Kay M. Hoveland
President and Chief Executive Officer
/s/ Daniel A. Cano
--------------------------------------
Daniel A. Cano
Chief Financial Officer
14