KFED K-Fed Bancorp (MM)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

                 (Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended:   June 30, 2010

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number: 000-50592

 

	K-Fed Bancorp
(Exact name of registrant as specified in its charter)

 

	Federal				20-0411486
(State or other jurisdiction of incorporation)				(I.R.S. Employer Identification No.)

	1359 N. Grand Avenue, Covina, CA				91724
(Address of principal executive offices)				(Zip Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of exchange on which registered
Common Stock, $.01 par value per share		The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K      x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

           Large accelerated filer o                                                                          Accelerated filer o

           Non-accelerated filer o                                                                            Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes   o   No   x

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average bid and asked price of such common equity as of December 31, 2009 was $33.4 million. There were 13,290,200 shares of the registrant’s common stock, $.01 par value per share, outstanding at August 24, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

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K-FED BANCORP

Annual Report on Form 10-K

For the Fiscal Year Ended June 30, 2010

Table of Contents

 

		Page
Part I.
Item 1.	Business.	2
Item 1A.	Risk Factors.	44
Item 1B.	Unresolved Staff Comments.	55
Item 2.	Properties.	55
Item 3.	Legal Proceedings.	56
Item 4.	Removed and Reserved.	56
Part II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	56
Item 6.	Selected Financial Data.	58
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	60
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk.	73
Item 8.	Financial Statements and Supplementary Data.	75
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	75
Item 9A.	Controls and Procedures.	75
Item 9B.	Other Information.	75
Part III.
Item 10.	Directors, Executive Officers and Corporate Governance.	75
Item 11.	Executive Compensation.	76
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	76
Item 13.	Certain Relationships and Related Transactions and Director Independence.	76
Item 14.	Principal Accountant Fees and Services.	76
Part IV.
Item 15.	Exhibits and Financial Statement Schedules.	77
	Signatures.	78

 

Part I.

 

Item 1. Business.

 

General

 

K-Fed Bancorp (the “Company”) is a federally-chartered stock holding company that was formed in July 2003 as a wholly-owned subsidiary of K-Fed Mutual Holding Company (the “MHC”), a federally-chartered mutual holding company, in connection with the mutual holding company reorganization of Kaiser Federal Bank (the “Bank”), a federally chartered stock savings bank. Upon completion of the mutual holding company reorganization in July 2003, K-Fed Bancorp acquired all of the capital stock of Kaiser Federal Bank. On March 30, 2004, K-Fed Bancorp completed a minority stock offering in which it sold 5,686,750 shares, or 39.09%, of its outstanding common stock to eligible depositors of Kaiser Federal Bank and the Kaiser Federal Bank employee stock ownership plan in a subscription offering. The remaining 8,861,750 outstanding shares of K-Fed Bancorp’s common stock are owned by K-Fed Mutual Holding Company. At June 30, 2010, K-Fed Mutual Holding Company owned 66.7% of the outstanding shares of common stock of K-Fed Bancorp, with the remaining 33.3%, or 4,428,450 shares held by public stockholders.  K-Fed Bancorp owns 100% of Kaiser Federal Bank’s outstanding common stock.

 

At June 30, 2010, K-Fed Bancorp had consolidated assets of $866.8 million, deposits of $630.7 million and stockholders’ equity of $94.7 million.  K-Fed Bancorp has not engaged in any significant business to date.  Its primary activity is holding all of the outstanding shares of common stock of Kaiser Federal Bank.  K-Fed Bancorp does not maintain offices separate from those of Kaiser Federal Bank or utilize persons other than certain of Kaiser Federal Bank’s officers.  Our executive offices are located at 1359 North Grand Avenue, Covina, California 91724 and our telephone number is (626) 339-9663.

 

Kaiser Federal Bank is a community oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. We are headquartered in Covina, California, with branches or financial service centers in Pasadena, Covina, Bellflower, Harbor City, Los Angeles and Panorama City to serve Los Angeles County, financial service centers in Fontana and Riverside to serve San Bernardino and Riverside counties, and one financial service center in Santa Clara to serve Santa Clara County. Financial service centers provide all of the services as our full service branches except they do not disburse cash; however, there is an on-site ATM that dispenses cash.

 

We began operations as a credit union in 1953 initially serving the employees of the Kaiser Foundation Hospital in Los Angeles, California. As the Kaiser Permanente Medical Care Program evolved so did the credit union, and in 1972, it changed its name to Kaiser Permanente Federal Credit Union. The credit union grew to primarily serve Kaiser Permanente employees and physicians who worked or lived in California. The credit union serviced members with two branches, Pasadena and Santa Clara, and a network of ATMs primarily located in Kaiser Permanente medical centers. However, as a credit union, the credit union was legally restricted to serve only individuals who shared a “common bond” such as a common employer.

 

After receiving the necessary regulatory and membership approvals, on November 1, 1999, Kaiser Permanente Federal Credit Union converted to a federal mutual savings bank known as Kaiser Federal Bank which serves the general public as well as Kaiser Permanente employees. Kaiser Federal Bank reorganized into the mutual holding company structure in 2003 and became the wholly owned subsidiary of K-Fed Bancorp.

 

 

Kaiser Federal Bank’s principal business activity consists of attracting retail deposits from the general public and originating primarily loans secured by first mortgages on owner-occupied one-to-four family residences and multi-family residences located in its market area and, to a lesser extent, automobile and other consumer loans. Prior to 2007, Kaiser Federal Bank purchased, using our own underwriting standards, a significant number of first mortgages on owner-occupied, one-to-four family residences secured by properties located throughout California.  These purchases were primarily funded with Federal Home Loan Bank borrowings.  Kaiser Federal Bank also originated commercial real estate loans, but made the strategic decision to cease such lending in January 2009 in light of the downturn in economic conditions. Historically, we have not originated, or purchased, commercial business, commercial construction, or residential construction loans and have no current plans to do so.

 

Our revenues are derived principally from interest on loans and mortgage-backed and related securities. We also generate revenue from service charges and other income.

 

We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, demand deposit accounts and certificate of deposit accounts with varied terms ranging from 90 days to five years. We solicit deposits in our primary market areas of Los Angeles, Orange, San Diego, San Bernardino, Riverside, and Santa Clara counties, in California.

 

Recent Developments

 

The Board of Directors of the MHC, the Company and the Bank adopted a Plan of Conversion and Reorganization (the “Plan”) on May 27, 2010, as amended August 24, 2010.  The Plan is subject to the approval of the Company’s stockholders, the Bank’s depositors and the Office of Thrift Supervision (“OTS”), our primary banking regulator.  Pursuant to the Plan, the MHC will convert from the mutual holding company form of organization to the fully stock public form.  The MHC will then no longer exist.  Pursuant to the Plan, the Company, which owns 100% of the Bank, also will be succeeded by a Maryland corporation, Kaiser Federal Financial Group, Inc.  As part of the conversion, the MHC’s ownership interest of the Company will be offered for sale in a public offering.  The existing publicly held shares of the Company, which represent the minority ownership interest in the Company, will be exchanged for new shares of common stock of Kaiser Federal Financial Group, Inc.  The exchange ratio will ensure that immediately after the conversion and public offering, the public stockholders of the Company will own the same aggregate percentage of Kaiser Federal Financial Group, Inc. that they owned immediately prior to that time, excluding any new shares purchased in the offering or cash paid in lieu of fractional shares.  When the conversion and public offering are completed, all of the capital stock of the Bank will be owned by Kaiser Federal Financial Group, Inc.

 

Available Information

 

Our Internet address is www.k-fed.com . We make available free of charge, through our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). All SEC filings of the Company are also available at the SEC’s website, www.sec.gov .

 

Market Area

 

The financial services sector of the United States economy continues to experience a declining economic environment.  Economic conditions continued to weaken both nationally and in our market area of California.  With the tightening of credit standards, there has been an imbalance between the number of homes available for sale and the demand from qualified borrowers, creating significant downward pressure on home prices.  California, in particular, experienced significant declines in real estate values over the past several years and increasing unemployment rates as compared to the national average.

 

 

Future growth opportunities will be influenced by the stability of the regional economy and other trends within California, including housing market conditions.  According to the U.S. Census Bureau, unemployment rates in California increased to 12.3% at June 30, 2010 from 11.6% at June 30, 2009 and 7.0% at June 2008.  This compares to the national unemployment rate of 9.5% at June 30, 2010, 9.5% at June 30, 2009 and 5.5% at June 30, 2008.  According to the U.S. Census Bureau, the unemployment rates (not seasonally adjusted) for the Los Angeles-Long Beach-Santa Ana metropolitan area, where most of our lending activity occurs increased to 11.6% at June 30, 2010 from 10.8% at June 30, 2009 and 6.8% at June 30, 2008.  The S&P/Case-Shiller Home Price Index for the Los Angeles Metropolitan Area declined by approximately 36% at May 2010 as compared to the high reported in 2006.  This compares to the S&P/Case-Shiller U.S. National Home Price Index decline of approximately 29% as compared to the high reported in 2006.  The California Association of Realtors reported single-family home sales decreased 4.2% in June 2010 as compared to June 2009.

 

According to the California Building Industry Association, housing starts gained ground in June 2010; however, production levels are still hovering around record lows.  In response to declining new home sales, builders reduced the pace of new construction over the past several years.  According to the U.S. Census Bureau, one-to-four family and multi-family building permits declined significantly in the past two years, both nationally and in California.  On a national level, one-to-four family building permits declined 35% in 2008 and 36% in 2009.  This compares to one-to-four family building permits in California declining 43% in 2008 and 44% in 2009.  Multi-family building permits declined 23% in 2008 and 49% in 2009 on a national level.  This compares to multi-family building permits in California declining 34% in 2008 and 56% in 2009.  According to the Construction Industry Research Board, for the first half of 2010 permits were up 17% when compared to the first half of 2009.  One-to-four family permits were up 8% and multi-family permits rose 35%.  While the recent improvement in construction is encouraging, the California housing market and economy have been adversely impacted by the record low levels of building permits over the past several years.

 

Competition

 

We face strong competition in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage bankers. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending.

 

We attract all of our deposits through our branch and ATM network. Competition for those deposits is principally from other savings institutions, commercial banks and credit unions, as well as mutual funds and other alternative investments. We compete for these deposits by offering superior service and a variety of deposit accounts at competitive rates. We have less than a 1% market share of deposits in each of the markets in which we compete.

Lending Activities

 

General . Historically, we originated and purchased first lien one-to-four family real estate loans throughout our market area. However, we have not purchased any one-to-four family real estate loans since June 2007 as we have focused our efforts on originating multi-family residential loans. We also originate consumer loans, primarily automobile loans.  Prior to January 2009, we also originated commercial real estate loans, but have ceased making such loans until economic conditions improve and the real estate market stabilizes.

 

Our loans carry either a fixed or an adjustable rate of interest.  We do not offer adjustable rate loans where the initial rate is below the otherwise applicable index rate (i.e., teaser rates). Mortgage loans generally have a longer term amortization, with maturities up to 30 years, depending upon the type of property with principal and interest due each month. Consumer loans are generally short term and amortize monthly or have interest payable monthly.  We also have loans in our portfolio that only require interest payments on a monthly basis. At June 30, 2010, our net loan portfolio totaled $758.0 million, which constituted 87.4% of our total assets. With respect to purchased loans, we underwrote each purchased loan in accordance with our underwriting standards. The majority of the loans that we purchased were acquired with servicing retained by the seller to allow for greater investments in real-estate lending without having to significantly increase our servicing and operations costs. We generally purchased these loans without recourse against the seller.

 

At June 30, 2010, the maximum amount which we could have loaned to any one borrower and the borrower’s related entities under applicable regulations was $13.4 million, or 15% of our unimpaired capital. At June 30, 2010, we had no loans or group of loans to related borrowers with outstanding balances in excess of this amount. Our five largest lending relationships at June 30, 2010 were as follows:

 

●

three loans to an individual totaling $7.6 million, secured by a multi-tenant medical office building and two multi-family dwellings;

 

●

seven loans to an individual for $7.5 million secured by seven multi-family dwellings ranging from eight to 50 units;

 

●

three loans to an individual for $6.8 million secured by a single tenant retail building, a single tenant supermarket building and a 15 tenant mixed use office building;

 

●

two loans to an individual for $6.5 million secured by a 16 tenant medical office building and a 54 unit multi-family dwelling; and

 

●

two loans to an individual for $5.7 million secured by a single tenant industrial building and a single tenant office building.

 

All of the loans noted in the above relationships were performing in accordance with their terms as of June 30, 2010.