UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(AMENDMENT NO. 1)
K-FED BANCORP
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(Exact name of registrant as specified in its charter)
FEDERAL 6035 20-041486
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
1359 N. GRAND AVENUE, COVINA, CALIFORNIA 91724 (888) 869-9358
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
KAY M. HOVELAND, PRESIDENT AND CHIEF EXECUTIVE OFFICER, K-FED BANCORP
1359 N. GRAND AVENUE, COVINA, CALIFORNIA 91724 (888) 869-9358
RICHARD S. GARABEDIAN, ESQ., GARY A. LAX, ESQ. AND MICHAEL A. TROY, ESQ.
JENKENS & GILCHRIST, A PROFESSIONAL CORPORATION, 901 15TH STREET, N.W. SUITE 900
WASHINGTON, DC 20005-2301, (202) 326-1500
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(Name, address, including zip code, and telephone number, including area code, of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box. |X| ___________________
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. |_| ___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
_________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
_________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_|
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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Common Stock, par value $0.01 per share 4,562,625 $10.00 $45,626,250 $3,700
NOTE: Specific details relating to the fee calculation shall be furnished in notes to the table, including references to provisions
to Rule 457 (ss.230.457 of this chapter) relied upon, if the basis of the calculation is not otherwise evident from the information
presented in the table. If the filing fee is calculated pursuant to Rule 457(o) under the Securities Act, only the title of the
class of securities to be registered, the proposed maximum aggregate offering price for that class of securities and the amount of
registration fee need to appear in the Calculation of Registration Fee table. Any difference between the dollar amount of securities
registered for such offerings and the dollar amount of securities sold may be carried forward on a future registration statement
pursuant to Rule 429 under the Securities Act.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date
until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
PROSPECTUS SUPPLEMENT
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K-FED BANCORP
KAISER FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
This prospectus supplement relates to the offer and sale to participants in
the Kaiser Federal Bank Employees' Savings & Profit Sharing Plan and Trust
401(k) Plan of up to 4,562,625 shares of K-Fed Bancorp's common stock, par value
$.01 per share and related participation interests in the 401(k) Plan, as set
forth herein.
In connection with the proposed stock offering of the common stock of K-Fed
Bancorp, the holding company of Kaiser Federal Bank, the 401(k) Plan provides
for an investment fund consisting of K-Fed Bancorp common stock as an investment
option for the Participants in the 401(k) Plan.
The prospectus dated ___________ ____, 2004 of K-Fed Bancorp, which is
being delivered with this prospectus supplement, includes detailed information
with respect to K-Fed Bancorp, the stock offering, K-Fed Bancorp common stock
and the financial condition, results of operations and business of Kaiser
Federal Bank. This prospectus supplement, which provides detailed information
with respect to the 401(k) Plan, should be read only in conjunction with the
prospectus.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" BEGINNING ON PAGE ________ IN THE PROSPECTUS.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT
FEDERALLY INSURED OR GUARANTEED.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, NOR HAS
SUCH COMMISSION
OR OFFICE PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS __________ _____, 2004.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY K-FED BANCORP, KAISER FEDERAL BANK OR THE 401(K) PLAN. THIS
PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF K-FED BANCORP, KAISER FEDERAL BANK OR THE
401(K) PLAN SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN CONTAINED OR
INCORPORATED HEREIN BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE THIS PROSPECTUS SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY
IN CONJUNCTION WITH THE PROSPECTUS THAT IS DELIVERED HEREWITH AND SHOULD BE
RETAINED FOR FUTURE REFERENCE.
TABLE OF CONTENTS
PAGE
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THE OFFERING................................................................. 1
Securities Offered..................................................... 1
Election to Purchase K-Fed Bancorp Stock in the Stock Offering......... 1
Method of Directing Transfer........................................... 1
Time for Directing Transfer............................................ 2
Irrevocability of Transfer Direction................................... 2
Subsequent Elections................................................... 2
Purchase Price of K-Fed Bancorp Stock.................................. 2
Nature of a Participant's Interest in K-Fed Bancorp Stock.............. 2
Voting and Tender Rights of K-Fed Bancorp Stock........................ 2
Description of the Plan...................................................... 3
Introduction........................................................... 3
Eligibility and Participation.......................................... 3
Investment of Contributions............................................ 4
Financial Data......................................................... 6
Administration of the Plan............................................. 7
Reports to Plan Participants........................................... 7
Amendment and Termination.............................................. 7
Merger, Consolidation or Transfer...................................... 8
Federal Tax Aspects of the Plan........................................ 8
Restrictions on Resale................................................. 10
LEGAL OPINIONS............................................................... 10
FINANCIAL STATEMENTS......................................................... 11
401(K) PLAN, ADOPTION AGREEMENT AND SUMMARY PLAN DESCRIPTION................ A-1
FINANCIAL STATEMENTS........................................................ B-1
ELECTION FORM............................................................... C-1
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THE OFFERING
SECURITIES OFFERED
Up to 4,562,625 shares of K-Fed Bancorp common stock which may be acquired
by the 401(k) Plan for the accounts of employees participating in the 401(k)
Plan, and related participation interests, are offered hereby. K-Fed Bancorp is
the issuer of these securities. Only employees of Kaiser Federal Bank may
participate in the 401(k) Plan. Information relating to the 401(k) Plan is
contained in this prospectus supplement and information relating to K-Fed
Bancorp, the stock offering and the financial condition, results of operations
and business of Kaiser Federal Bank is contained in the prospectus delivered
herewith. The address of the principal executive office of K-Fed Bancorp is 1359
N. Grand Avenue, Covina, California 91724 and its telephone number is (800)
524-2274. The address and telephone number of Kaiser Federal Bank's principal
office are the same as K-Fed Bancorp's address and telephone number.
ELECTION TO PURCHASE K-FED BANCORP STOCK IN THE STOCK OFFERING
In connection with Kaiser Federal Bank's stock offering, the 401(k) Plan
has been amended to permit you to direct that all or part of the funds in your
account under the 401(k) Plan be transferred to the K-Fed Bancorp Stock Fund and
used to purchase K-Fed Bancorp common stock in the stock offering. The trustee
of the K-Fed Bancorp Stock Fund will follow your directions and exercise
subscription rights to purchase K-Fed Bancorp common stock in the stock offering
to the extent provided in Kaiser Federal Bank's plan of stock issuance. See "The
Stock Offering" in the prospectus. Funds not allocated to the purchase of K-Fed
Bancorp common stock will remain invested in accordance with your instructions
in effect at such time.
Respective purchases by the 401(k) Plan in the stock offering will be
counted as purchases by the individual participants at whose election they are
made to the extent of the funds directed by such participants to purchase K-Fed
Bancorp common stock, and will be subject to the purchase limitations applicable
to such individuals, rather than being counted in determining the maximum amount
that K-Fed Bancorp's or Kaiser Federal Bank's tax-qualified employee plans (as
defined in the prospectus) may purchase in the aggregate. See "The Stock
Offering" in the prospectus.
METHOD OF DIRECTING TRANSFER
Included with this prospectus supplement is an election and investment
form. If you wish to direct some or all of your funds in your account into the
K-Fed Bancorp Stock Fund to purchase K-Fed Bancorp common stock in the stock
offering, you should indicate that decision by checking the appropriate box of
the investment and election form and completing this part of the investment and
election form. If you do not wish to make such an election, you should so
indicate by checking the appropriate box of the investment and election form.
See also "Investment of Contributions - K-Fed Bancorp Stock Investment Election
Procedures" below.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the K-Fed
Bancorp Stock Fund in order to purchase K-Fed Bancorp common stock in the stock
offering is ___________________, unless extended. A participant's completed
investment and election form must be returned to the Stock Information Center by
___:____ __.m., Pacific Standard Time on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
Once received in proper form, an executed investment and election form may
not be modified, amended or revoked without the consent of Kaiser Federal Bank
unless the stock offering has not been completed within 45 days after the end of
the subscription and community offering. See also "Investment of Contributions -
K-Fed Bancorp Stock Investment Election Procedures" below.
SUBSEQUENT ELECTIONS
After the ___:___ _m., ____________, 2004 deadline, you initially will not
be permitted to direct or redirect any portion of your accounts into K-Fed
Bancorp common stock. However, Kaiser Federal Bank intends to provide for such
future investment. You will be notified when and to what extent future
investments in the K-Fed Bancorp Stock Fund may be permitted. You may direct the
trustee to sell their shares of K-Fed Bancorp common stock purchased in the
stock offering through the 401(k) Plan pursuant to the procedures outlined in
the 401(k) Plan by filing a request form with the plan administrator. See
"Investment of Contributions - Adjusting Your Investment Strategy" below.
PURCHASE PRICE OF K-FED BANCORP STOCK
The funds transferred to the K-Fed Bancorp Stock Fund for the purchase of
K-Fed Bancorp common stock in the stock offering will be used to purchase K-Fed
Bancorp common stock through the exercise of subscription rights granted to you
under Kaiser Federal Bank's plan of stock issuance. The price paid for such
shares of K-Fed Bancorp common stock will be $10.00 per share, the same price as
is paid by all other persons who purchase K-Fed Bancorp common stock in the
stock offering.
NATURE OF A PARTICIPANT'S INTEREST IN THE K-FED BANCORP STOCK
The K-Fed Bancorp common stock will be held in the name of the trustee of
the K-Fed Bancorp Stock Fund, in its capacity as trustee. The trustee will
maintain individual accounts reflecting your individual interest in the K-Fed
Bancorp Stock Fund.
VOTING AND TENDER RIGHTS OF K-FED BANCORP STOCK
The trustee as instructed by the plan administrator, will exercise voting
and tender rights attributable to all K-Fed Bancorp common stock held by the
401(k) Plan Trust as directed by participants with interests in the K-Fed
Bancorp Stock Fund.
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Shares with respect to which no instructions have been received by the trustee
or the plan administrator will be voted as the plan administrator in its
discretion determines and directs the trustee.
DESCRIPTION OF THE 401(K) PLAN
INTRODUCTION
As of January 1, 2004, our existing 401(k) Plan was amended, as reflected
above and below, into the Kaiser Federal Bank Employees' Savings & Profit
Sharing Plan and Trust. The 401(k) Plan is a profit sharing plan with a
cash-or-deferred feature described at Section 401(k) of the Internal Revenue
Code to encourage employee savings and to allow eligible employees to supplement
their income upon retirement.
REFERENCE TO FULL TEXT OF 401(K) PLAN. The following statements are
summaries of certain provisions of the 401(k) Plan. They are not a complete
description of such provisions. The full text of the 401(k) Plan and Declaration
of Trust which is filed as an exhibit to the registration statement of which
this prospectus supplement is a part and is incorporated by reference herein.
Copies of the 401(k) Plan are available to all employees upon request to the
plan administrator. Each employee is urged to read carefully the full text of
the 401(k) Plan.
REFERENCE TO SUMMARY 401(K) PLAN DESCRIPTION. Certain information regarding
the 401(k) Plan is contained in the Summary Plan Description, a copy of which is
attached to, and made a part of, this prospectus supplement.
TAX AND SECURITIES LAWS. You should consult with legal counsel regarding
the tax and securities laws implications of participation in the 401(k) Plan.
Any directors, officers or beneficial owners of more than 10% of the outstanding
shares of common stock should consider the applicability of Sections 16(a) and
16(b) of the Securities Exchange Act of 1934, as amended, to their participation
in the 401(k) Plan.
ELIGIBILITY AND PARTICIPATION
All employees of Kaiser Federal Bank, who have met the eligibility
requirements of the 401(k) Plan may participate in it. See Employee
"Eligibility" in the Summary Plan Description attached hereto.
As of _______________ ____, 2004, there were approximately __________
employees eligible to participate in the 401(k) Plan, and _____ employees had
elected to participate in the 401(k) Plan.
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INVESTMENT OF CONTRIBUTIONS
INVESTMENT OPTIONS. All amounts credited to your account under the 401(k)
Plan are held in the 401(k) Plan and Declaration of Trust, which is administered
by the trustees appointed by Kaiser Federal Bank's Board of Directors.
You must instruct the trustee as to how funds held in your accounts are to
be invested. In addition to the K-Fed Bancorp Stock Fund, you may elect to
instruct the trustee to invest such funds in any or all of the following
investment options:
o MONEY MARKET FUND a fund that invests in a broad range of
high-quality, short-term securities with high credit ratings known as
money market instruments,
o STABLE VALUE FUND a fund that invests primarily in guaranteed
investment contracts, which are individually negotiated investments
offered by insurance companies,
o GOVERNMENT BOND FUND a fund that invests in a portfolio of U.S.
Treasury bonds with twenty years or more to maturity,
o S&P 500 STOCK FUND a fund that invests in most or all of the same
stocks held in the S&P 500 Index,
o (S&P 500/VALUE STOCK FUND a fund that invests in most or all of the
stocks held in the S&P/BARRA Value Index,
o (S&P 500/GROWTH STOCK FUND a fund that invests in most or all of the
stocks held in the S&P/BARRA Growth Index,
o (S&P 500/MIDCAP STOCK FUND a fund that invests in most or all of the
same stocks held in the S&P MidCap 400 Index,
o RUSSELL 2000 STOCK FUND a fund that invests in most or all of the
same stocks held in the Russell 2000 Index,
o INTERNATIONAL STOCK FUND a fund that invests in a diversified
portfolio of approximately one thousand foreign stocks representing
companies in approximately twenty countries located in Western Europe
and the Pacific Rim,
o INCOME PLUS ASSET ALLOCATION FUND a fund that invests approximately
80% of the Fund's portfolio in US bonds, money-market instruments, and
stable value investments such as guaranteed investment contracts,
o GROWTH & INCOME ASSET ALLOCATION FUND a fund that invests in a
diversified portfolio that is divided almost equally between stocks
and fixed income investments, with a percentage of the Fund held in
stable value investments such as guaranteed investment contracts,
4
o GROWTH & ASSET ALLOCATION FUND a fund that invests 80% of its
assets in U.S. stocks and 20% of its assets in international stocks ,
and
o NASDAQ 100 Index Fund a fund that invests in most of all of the same
stocks held in the Nasdaq 100 Index, it reflects Nasdaq's largest
non-Financial companies across major industry groups including
computer hardware and software, telecommunications, retail/wholesale
trade and biotechnology
A brief description of the K-Fed Bancorp Stock Fund is set forth below. For
descriptions of the other investment options available to you, you may request a
prospectus for each of the investment options pursuant to the instructions in
"Participant Direction of Investment" in the Summary Plan Description attached
hereto. The Bank of New York is the trustee for all funds except for the K-Fed
Bancorp Stock Fund, and Kaiser Federal Bank will be the plan administrator. If
no investment direction is given, all contributions to a participant's account
will be invested in the Money Market Fund.
K-FED BANCORP STOCK FUND. Effective until _____________, 2004, ___:___
__.m., or such later date as elected by K-Fed Bancorp, you may elect to direct
the trustee to transfer some or all of the funds in their accounts to the
Employer Stock Fund to purchase K-Fed Bancorp common stock in the stock
offering. The price paid for shares of K-Fed Bancorp common stock will be the
same price as is paid by all other persons who purchase K-Fed Bancorp common
stock in the stock offering. The number of shares, if any, subject to purchase
for your account is not currently determinable. Any cash dividends received on
K-Fed Bancorp common stock held by the 401(k) Plan will be reinvested in
accordance with your investment instructions then in effect.
AN INVESTMENT IN K-FED BANCORP COMMON STOCK INVOLVES CERTAIN RISKS. NO
ASSURANCE CAN BE GIVEN THAT SHARES OF K-FED BANCORP COMMON STOCK PURCHASED
PURSUANT TO THE 401(K) PLAN WILL THEREAFTER BE ABLE TO BE SOLD AT A PRICE EQUAL
TO OR IN EXCESS OF THE PURCHASE PRICE. SEE ALSO "RISK FACTORS" BEGINNING ON PAGE
___ IN THE PROSPECTUS.
K-FED BANCORP STOCK INVESTMENT ELECTION PROCEDURES. You may instruct the
trustee to purchase K-Fed Bancorp common stock by redirecting funds from your
existing account into the K-Fed Bancorp Stock Fund by filing an investment and
election form with the plan administrator on or prior to the deadline for making
the election. Total funds redirected by you into the K-Fed Bancorp Stock Fund
must represent whole share amounts (i.e., must be divisible by the $10.00 per
share purchase price) and must be allocated in increments from investment
options containing your 401(k) Plan funds. When you instruct the trustee to
redirect the funds in your existing account into the K-Fed Bancorp Stock Fund in
order to purchase K-Fed Bancorp common stock, the trustee will liquidate funds
from the appropriate investment option(s) and apply such redirected funds as
requested, in order to effect the new allocation.
5
For example, you may fund an election to purchase 100 shares of K-Fed
Bancorp common stock by redirecting the aggregate purchase price of $1,000 for
such shares from the following investment options (provided the necessary funds
are available in such investment options):
o 10% from the Money Market Fund,
o 30% from the S&P 500 Stock Fund, and
o 60% from the S&P MidCap Stock Fund.
In such case, the trustee would liquidate $100 of your funds from the Money
Market Fund, $300 from funds in the S&P 500 Stock Fund and $600 from funds in
the S&P MidCap Stock Fund to raise the $1,000 aggregate purchase price. If your
instructions cannot be fulfilled because you do not have the required funds in
one or more of the investment options to purchase the shares of K-Fed Bancorp
common stock subscribed for, you will be required to file a revised investment
and election form with the plan administrator by the election deadline. Once
received in proper form, an executed Election Form investment and election form
may not be modified, amended or rescinded without the consent of Kaiser Federal
Bank unless the stock offering has not been completed within 45 days after the
end of the subscription and community offering.
ADJUSTING YOUR INVESTMENT STRATEGY. Until changed in accordance with the
terms of the 401(k) Plan, future allocations of your contributions would remain
unaffected by the election to purchase K-Fed Bancorp common stock through the
401(k) Plan in the stock offering. You may modify a prior investment allocation
election or request the transfer of funds to another investment vehicle by
filing a written notice, with such modification or request taking effect after
the valuation of accounts, which occurs daily. However, modifications and fund
transfers relating to the K-Fed Bancorp Stock Fund are permitted only during an
"Investment Change Period." An "Investment Change Period" opens at the beginning
of the third day after K-Fed Bancorp issues a "Quarterly Earnings Release" and
closes at the end of the twelfth business day after such release. A "Quarterly
Earnings Release" meansis any press release issued by the K-Fed Bancorp for
general distribution which announces, for the first time, K-Fed Bancorp's
results of operations for a particular fiscal quarter. Kaiser Federal Bank
anticipates these opportunities will occur four times per year. Kaiser Federal
Bank will attempt to notify you of the commencement of each Investment Change
Period but will not assume responsibility for doing so.
VALUATION OF ACCOUNTS. The net gain (or loss) of the Trust from investments
(including interest payments, dividends, realized and unrealized gains and
losses on securities, and any expenses paid from the Trust) are determined daily
and are allocated among the accounts of Participants according to the balance of
each such account as of the end of each day. For purposes of such allocations,
all assets of the Trust are valued at their fair market value pursuant to the
method described in the 401(k) Plan.
FINANCIAL DATA
EMPLOYER CONTRIBUTIONS. For the year ended December 31, 2003, Kaiser
Federal Bank made matching contributions in the
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amount of $11,119 into the Kaiser Federal Bank Employees' Savings and Profit
Sharing Plan and Trust.
If K-Fed Bancorp implements other stock-based benefit plans, such as an
employee stock ownership plan or a restricted stock plan, Kaiser Federal Bank
may determine to reduce its matching contribution under the 401(k) Plan in order
to reduce overall expenses. K-Fed Bancorp plans to implement an employee stock
ownership plan as well as a restricted stock plan. If K-Fed Bancorp adopts a
restricted stock plan, it would not submit the plan for stockholder approval for
at least six months following completion of the stock offering.
PERFORMANCE OF K-FED BANCORP STOCK. As of the date of this prospectus
supplement, no shares of K-Fed Bancorp common stock have been issued or are
outstanding to the general public and there is no established market for the
K-Fed Bancorp common stock. Accordingly, there is no record of the historical
performance of the K-Fed Bancorp common stock.
PERFORMANCE OF INVESTMENT OPTIONS. The following table provides performance
data with respect to the investment options available under the 401(k) Plan,
based on information provided to K-Fed Bancorp by The Pentegra Group.
THE INFORMATION SET FORTH BELOW WITH RESPECT TO THE INVESTMENT OPTIONS HAS
BEEN REPRODUCED FROM MATERIALS SUPPLIED BY THE PENTEGRA GROUP. KAISER FEDERAL
BANK AND K-FED BANCORP TAKE NO RESPONSIBILITY FOR THE ACCURACY OF SUCH
INFORMATION.
ADDITIONAL INFORMATION REGARDING THE INVESTMENT OPTIONS MAY BE AVAILABLE
FROM THE PENTEGRA GROUP OR KAISER FEDERAL BANK. YOU SHOULD REVIEW ANY AVAILABLE
ADDITIONAL INFORMATION REGARDING THESE INVESTMENTS BEFORE MAKING AN INVESTMENT
DECISION UNDER THE 401(K) PLAN.
Net Investment Performance
----------------------------
For Twelve-
Month Period December 31,
Ended 2003
December 31, Annualized
2003 5 Years
-------------- -------------
Money Market Fund...................................... 1.3% 3.9%
==== ====
Stable Value Fund...................................... 4.9% 5.9%
==== ====
Government Bond Fund................................... 1.9% 6.3%
==== ====
S&P 500 Stock Fund..................................... 28.6% -0.6%
===== =====
S&P 500/Value Stock Fund............................... 31.3% 1.8%
===== ====
S&P 500/Growth Stock Fund.............................. 25.5% -3.6%
===== =====
S&P MidCap Stock Fund.................................. 35.8% 9.3%
===== ====
Russell 2000 Stock Fund................................ 46.7% 7.1%
===== ====
International Stock Fund............................... 37.9% -0.7%
===== =====
Income Plus Asset Allocation Fund...................... 12.6% 4.8%
===== ====
Growth & Income Asset Allocation Fund.................. 20.7% 3.2%
===== ====
Growth Asset Allocation Fund........................... 29.4% 0.4%
===== ====
NASDAQ 100 Index Fund.................................. 49.0% -4.3%
===== =====
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YOU SHOULD NOTE THAT PAST PERFORMANCE IS NOT NECESSARILY AN INDICATOR OF
FUTURE RESULTS.
ADMINISTRATION OF THE 401(K) PLAN
TRUSTEES. The trustees are appointed by the Board of Directors of Kaiser
Federal Bank to serve at its pleasure. The trustee for all funds except the
K-Fed Bancorp Stock Fund is The Bank of New York and the trustee of the K-Fed
Bancorp Stock Fund is Kaiser Federal Bank.
The trustees receive and hold the contributions to the 401(k) Plan in trust
and distribute them to you and your beneficiaries in accordance with the
provisions of the 401(k) Plan. The trustees are responsible, following your
direction, for effectuating the investment of contributions in K-Fed Bancorp
common stock and the other investment options.
REPORTS TO 401(K) PLAN PARTICIPANTS
As soon as practicable after the end of each calendar quarter, the plan
administrator will furnish you with a statement showing (i) balances in your
account as of the end of that period, (ii) the amount of contributions allocated
to your accounts for that period, and (iii) the number of units in each of the
funds.
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AMENDMENT AND TERMINATION
Kaiser Federal Bank intends to continue its participation in the 401(k)
Plan. Nevertheless, Kaiser Federal Bank may terminate the 401(k) Plan at any
time. If the 401(k) Plan is terminated in whole or in part, then, regardless of
other provisions in the 401(k) Plan, if you are affected by such termination you
shall become fully vested in all of your accounts.
FEDERAL TAX ASPECTS OF THE 401(K) PLAN
The 401(k) Plan will be administered to comply in operation with the
requirements of Section 401(a) of the Internal Revenue Code and the requirements
which are applicable to a qualified cash-or-deferred arrangement under Section
401(k) of the Internal Revenue Code. Assuming that the 401(k) Plan is
administered in accordance with such sections of the Internal Revenue Code, your
participation in the 401(k) Plan should have the following implications for
federal income tax purposes:
(a) Amounts contributed to your account, and the investment earnings on the
account, are not includable in your federal taxable income until such
contributions or earnings are actually distributed or withdrawn from the 401(k)
Plan. Special tax treatment may apply to the taxable portion of any distribution
that includes K-Fed Bancorp common stock or qualifies as a lump sum distribution
(as described below).
(b) Income earned on assets by the 401(k) Plan and Declaration of Trust
will not be taxable to the trust.
LUMP SUM DISTRIBUTIONS. A distribution from the 401(k) Plan to you or your
beneficiary will qualify as a lump sum distribution if it is made:
o within one taxable year to you or your beneficiary;
o on account of your death or separation from service, or after you
attain age 59-1/2; and
o consists of the balance of your account under this 401(k) Plan and
all other profit sharing plans, if any, maintained by Kaiser Federal
Bank or K-Fed Bancorp
The portion of any lump sum distribution that is required to be included in
your or your beneficiary's taxable income for federal income tax purposes, the
total taxable amount, consists of the entire amount of such lump sum
distribution made by you to this 401(k) Plan and the amount of after-tax
contributions, if any, made by you to any other profit sharing plans maintained
by Kaiser Federal Bank which is included in such distribution.
AVERAGING RULES. Except as described below with respect to distributions of
K-Fed Bancorp common stock, the portion of the total taxable amount of a lump
9
sum distribution that is attributable to participation after 1973 in this 401(k)
Plan or in any other profit-sharing plan maintained by Kaiser Federal Bank, the
ordinary income portion, will be taxable generally as ordinary income for
federal income tax purposes. However, if you have completed five years of
participation in this 401(k) Plan and each other profit-sharing plan making the
lump sum distribution prior to the taxable year in which the distribution is
made, or your beneficiary who receives a lump sum distribution on account of
your death (regardless of the period of your participation in this 401(k) Plan
or any other profit-sharing plan maintained by Kaiser Federal Bank), may elect
to have the ordinary income portion of such lump sum distribution taxed
according to special averaging rules. The election of the special averaging
rules must apply to all lump sum distributions received by you or your
beneficiary from this 401(k) Plan and all other qualified plans during the
taxable year. Furthermore, if a lump sum distribution includes K-Fed Bancorp
stock, the recipient is not currently taxable on the net unrealized appreciation
of such securities at the time of the distribution, unless the recipient
otherwise elects to pay the tax on the net unrealized appreciation at the time
of the distribution.
ROLLOVER TO ANOTHER QUALIFIED PLAN OR TO AN IRA. You may defer federal
income taxation of all or any portion of the total taxable amount of a lump sum
distribution (including the proceeds from the sale of any K-Fed Bancorp common
stock included in the lump sum distribution) to the extent that such amount, or
a portion thereof, is contributed, within 60 days after the date of your
receipt, to another qualified plan or to an individual retirement account,
commonly referred to as an IRA. If a beneficiary is your surviving spouse the
beneficiary also may defer federal income taxation of all or any portion of the
total taxable amount of a lump sum distribution to the extent that such amount,
or a portion thereof, is contributed, within 60 days after the date of its
receipt by the surviving spouse, to an IRA. If less than the total taxable
amount of a lump sum distribution is contributed to another qualified plan or to
an IRA within the applicable 60-day period, the amount not so contributed must
be included in your or the beneficiary's taxable ordinary income for federal
income tax purposes and will not be eligible for the special averaging rules or
capital gain treatment. If all or any portion of the total taxable amount of a
lump sum distribution is contributed by you or your beneficiary to an IRA within
the applicable 60-day period, any subsequent distribution from the IRA will not
be eligible for the special averaging rules or capital gain treatment.
ADDITIONAL TAX ON EARLY DISTRIBUTIONS. For taxable years beginning after
December 31, 1986, if you receive a distribution from the 401(k) Plan prior to
attaining age 55 you will be subject to an additional income tax equal to 10% of
the amount of the distribution. The 10% additional income tax will not apply,
however, to the extent the distribution is rolled over into an IRA or another
qualified plan or the distribution is:
o made to a beneficiary (or to your estate) on or after your death,
o attributable to you being disabled within the meaning of Section
72(m)(7) of the Internal Revenue Code,
10
o part of a series of substantially equal periodic payments (not less
frequently than annually) made for your life (or life expectancy)
or the joint lives (or joint life expectancies) of you and your
beneficiary,
o made to you after separation from service under the 401(k) Plan
after attainment of age 55,
o made to pay medical expenses to the extent deductible for federal
income tax purposes,
o pursuant to a qualified domestic relations order, or
o made to effect the distribution of excess contributions or excess
deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE 401(K) PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE INTERNAL REVENUE
CODE AND IS NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE
FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS
FROM THE 401(K) PLAN. ACCORDINGLY, YOU MAY WISH TO CONSULT A TAX ADVISOR
CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND
RECEIVING DISTRIBUTIONS FROM THE 401(K) PLAN.
IF YOU ARE SUBJECT TO TAXES IMPOSED BY STATE, LOCAL AND OTHER TAXING
AUTHORITIES, INCLUDING FOREIGN GOVERNMENTS, YOU SHOULD ALSO CONSULT WITH YOUR
OWN ATTORNEY OR TAX ADVISER REGARDING THE TAX CONSEQUENCES THEREUNDER.
RESTRICTIONS ON RESALE
Any person receiving shares of K-Fed Bancorp common stock under the 401(k)
Plan who is an "affiliate" of Kaiser Federal Bank or K-Fed Bancorp as the term
"affiliate" is used in Rules 144 and 405 under the Securities Act of 1933 (e.g.,
directors, officers and substantial shareholders of K-Fed Bancorp and Kaiser
Federal Bank) may re-offer or resell such shares only pursuant to a registration
statement or, assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the Securities Act of 1933.
Any person who may be an "affiliate" of Kaiser Federal Bank or K-Fed Bancorp may
wish to consult with counsel before transferring any K-Fed Bancorp common stock
owned by him or her. In addition, you are advised to consult with counsel as to
the applicability of Section 16 of the Securities Exchange Act of 1934 which may
restrict the sale of K-Fed Bancorp common stock acquired under the 401(k) Plan,
or other sales of K-Fed Bancorp common stock.
LEGAL OPINIONS
The validity of the issuance of the K-Fed Bancorp common stock will be
passed upon by Jenkens & Gilchrist, A Professional Corporation, 901 Fifteenth
Street, N.W., Suite 900, Washington, D.C. 20005 which firm acted as special
counsel for K-Fed Bancorp and Kaiser Federal Bank in connection with K-Fed
Bancorp's stock offering.
11
FINANCIAL STATEMENTS
The financial statements and schedules of the 401(k) Plan have been
prepared by management in accordance with the applicable provisions of the
Employee Retirement and Income Security Act and are included in this prospectus
supplement.
12
EXHIBIT A
PENTEGRA SERVICES, INC.
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN
BASIC PLAN DOCUMENT
TABLE OF CONTENTS
ARTICLE I PURPOSE AND DEFINITIONS.................................................................... 1
ARTICLE II PARTICIPATION AND MEMBERSHIP............................................................... 11
Section 1 Eligibility Requirements................................................................... 11
Section 2 Exclusion of Certain Employees............................................................. 12
Section 3 Waiver of Eligibility Requirements......................................................... 12
Section 4 Exclusion of Non-Salaried Employees........................................................ 12
Section 5 Commencement of Participation.............................................................. 13
Section 6 Termination of Participation............................................................... 14
ARTICLE III CONTRIBUTIONS.............................................................................. 15
Section 1 Contributions by Members................................................................... 15
Section 2 Elective Deferrals by Members.............................................................. 15
Section 3 Transfer of Funds and Rollover Contributions by Members.................................... 16
Section 4 Employer Contributions - General........................................................... 17
Section 5 Employer Matching Contributions............................................................ 17
Section 6 Employer Basic Contributions............................................................... 18
Section 7 Supplemental Contributions by Employer..................................................... 18
Section 8 The Profit Sharing Feature................................................................. 19
Section 9 The 401(k) Feature......................................................................... 21
Section 10 Determining the Actual Deferral Percentages................................................ 23
Section 11 Determining the Actual Contribution Percentages............................................ 25
Section 12 The Aggregate Limit Test................................................................... 29
Section 13 Remittance of Contributions................................................................ 31
Section 14 Safe Harbor CODA........................................................................... 32
ARTICLE IV INVESTMENT OF CONTRIBUTIONS................................................................ 34
Section 1 Investment by Trustee or Custodian......................................................... 34
Section 2 Member Directed Investments................................................................ 35
Section 3 Employer Securities........................................................................ 35
ARTICLE V MEMBERS' ACCOUNTS, UNITS AND VALUATION..................................................... 36
ARTICLE VI VESTING OF ACCOUNTS........................................................................ 37
Section 1 Vesting of Member Contributions, 401(k) Deferrals, Qualified
Nonelective Contributions and Rollover Contributions....................................... 37
Section 2 Vesting of Employer Contributions.......................................................... 37
Section 3 Forfeitures................................................................................ 41
ARTICLE VII WITHDRAWALS AND DISTRIBUTIONS.............................................................. 43
Section 1 General Provisions......................................................................... 43
Section 2 Withdrawals While Employed................................................................. 44
Section 3 Distributions Upon Termination of Employment............................................... 46
Section 4 Distributions Due to Disability............................................................ 51
Section 5 Distributions Due to Death................................................................. 51
Section 6 Minimum Required Distributions............................................................. 52
ARTICLE VIII LOAN PROGRAM............................................................................... 58
Section 1 General Provisions ........................................................................ 58
Section 2 Loan Application........................................................................... 58
Section 3 Permitted Loan Amount...................................................................... 60
Section 4 Source of Funds for Loan................................................................... 60
Section 5 Conditions of Loan......................................................................... 61
Section 6 Crediting of Repayment..................................................................... 61
Section 7 Cessation of Payments on Loan.............................................................. 62
Section 8 Loans to Former Members.................................................................... 62
ARTICLE IX ADMINISTRATION OF PLAN AND ALLOCATION
OF RESPONSIBILITIES...................................................................... 63
Section 1 Fiduciaries................................................................................ 63
Section 2 Allocation of Responsibilities Among the Fiduciaries....................................... 66
Section 3 No Joint Fiduciary Responsibilities........................................................ 66
Section 4 Investment Manager......................................................................... 66
Section 5 Advisor to Fiduciary....................................................................... 67
Section 6 Service in Multiple Capacities............................................................. 67
Section 7 Appointment of Plan Administrator.......................................................... 67
Section 8 Powers of the Plan Administrator........................................................... 67
Section 9 Duties of the Plan Administrator........................................................... 68
Section 10 Action by the Plan Administrator........................................................... 68
Section 11 Discretionary Action....................................................................... 68
Section 12 Compensation and Expenses of Plan Administrator............................................ 68
Section 13 Reliance on Others......................................................................... 69
Section 14 Self Interest.............................................................................. 69
Section 15 Personal Liability - Indemnification....................................................... 69
Section 16 Insurance.................................................................................. 70
Section 17 Claims Procedures.......................................................................... 70
Section 18 Claims Review Procedures................................................................... 71
ARTICLE X MISCELLANEOUS PROVISIONS................................................................... 72
Section 1 General Limitations........................................................................ 72
Section 2 Top Heavy Provisions....................................................................... 80
Section 3 Information and Communications............................................................. 84
Section 4 Small Account Balances..................................................................... 84
Section 5 Amounts Payable to Incompetents, Minors or Estates......................................... 84
Section 6 Non-Alienation of Amounts Payable.......................................................... 84
Section 7 Unclaimed Amounts Payable.................................................................. 85
Section 8 Leaves of Absence.......................................................................... 85
Section 9 Return of Contributions to Employer........................................................ 87
Section 10 Controlling Law............................................................................ 87
ARTICLE XI AMENDMENT & TERMINATION.................................................................... 88
Section 1 General.................................................................................... 88
Section 2 Termination of Plan and Trust.............................................................. 88
Section 3 Liquidation of Trust Assets in the Event of Termination.................................... 88
Section 4 Partial Termination........................................................................ 89
Section 5 Power to Amend............................................................................. 89
Section 6 Solely for Benefit of Members, Terminated
Members and their Beneficiaries.......................................................... 90
Section 7 Successor to Business of the Employer...................................................... 90
Section 8 Merger, Consolidation and Transfer......................................................... 90
Section 9 Revocability............................................................................... 91
TRUSTS ESTABLISHED UNDER THE PLAN............................................................................... 92
ARTICLE I
PURPOSE AND DEFINITIONS
SECTION 1.1
This Plan and Trust, as evidenced hereby, and the applicable Adoption Agreement
and Trust Agreement(s), are designed and intended to qualify in form as a
qualified profit sharing plan and trust under the applicable provisions of the
Internal Revenue Code of 1986, as now in effect or hereafter amended, or any
other applicable provisions of law including, without limitation, the Employee
Retirement Income Security Act of 1974, as amended. Effective January 1, 2001,
except as otherwise provided, the Plan is hereby amended and restated in its
entirety to provide as follows:
SECTION 1.2
The following words and phrases as used in this Plan shall have the following
meanings:
(A) "ACCOUNT" means the Plan account established and maintained in respect
of each Member pursuant to Article V, to which Account shall be
allocated, as applicable, the Member=s after-tax amounts, 401(k)
amounts, Employer matching amounts, basic amounts, supplemental
amounts, profit sharing amounts, qualified non-elective contribution
amounts, rollover amounts, and funds directly transferred to the Plan.
(B) "ACTUAL DEFERRAL PERCENTAGE TEST SAFE HARBOR" means the method
described in Section 3.14 (A) of Article III for satisfying the actual
deferral percentage test of ss.401(k)(3) of the Code.
(C) "ACTUAL DEFERRAL PERCENTAGE TEST SAFE HARBOR CONTRIBUTIONS" means
Employer matching contributions and non-elective contributions
described in section 3.14 (A) (1) of Article III.
(D) "ADOPTION AGREEMENT" means the separate document by which the Employer
has adopted the Plan and specified certain of the terms and provisions
hereof. If any term, provision or definition contained in the Adoption
Agreement is inconsistent with any term, provision or definition
contained herein, the one set forth in the Adoption Agreement shall
govern. The Adoption Agreement shall be incorporated into and form an
integral part of the Plan.
1
(E) "BENEFICIARY" means the person or persons designated to receive any
amount payable under the Plan upon the death of a Member. Such
designation may be made or changed only by the Member on a form
provided by, and filed with, the Third Party Administrator prior to
his death. If the Member is not survived by a Spouse and if no
Beneficiary is designated, or if the designated Beneficiary
predeceases the Member, then any such amount payable shall be paid to
such Member=s estate upon his death.
(F) "BOARD" means the Board of Directors of the Employer adopting the
Plan.
(G) "BREAK IN SERVICE" means:
1. Where an Employer has elected, in its Adoption Agreement, to use
the hours of service method for eligibility and/or vesting, a
Plan Year during which an individual has not completed more than
500 Hours of Employment, as determined by the Plan Administrator
in accordance with the IRS Regulations. Solely for purposes of
determining whether a Break in Service has occurred, an
individual shall be credited with the Hours of Employment which
such individual would have completed but for a maternity or
paternity absence, as determined by the Plan Administrator in
accordance with this Paragraph, the Code and the applicable
regulations issued by the DOL and the IRS; provided, however,
that the total Hours of Employment so credited shall not exceed
501 and the individual timely provides the Plan Administrator
with such information as it may require. Hours of Employment
credited for a maternity or paternity absence shall be credited
entirely (i) in the Plan Year in which the absence began if such
Hours of Employment are necessary to prevent a Break in Service
in such year, or (ii) in the following Plan Year. For purposes of
this Paragraph, maternity or paternity absence shall mean an
absence from work by reason of the individual=s pregnancy, the
birth of the individual=s child or the placement of a child with
the individual in connection with the adoption of the child by
such individual, or for purposes of caring for a child for the
period immediately following such birth or placement.
2. Where an Employer has elected to use the elapsed time method for
eligibility and/or vesting service, a Period of Severance of at
least 12 consecutive months.
2
(H) "CODE" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.
(I) "COMMENCEMENT DATE" means the date on which an Employer begins to
participate in the Plan.
(J) "CONTRIBUTION DETERMINATION PERIOD" means the Plan Year, fiscal year,
or calendar or fiscal quarter, as elected by an Employer, upon which
eligibility for and the maximum permissible amount of any Profit
Sharing contribution, as defined in Article III, is determined.
Notwithstanding the foregoing, for purposes of Article VI,
Contribution Determination Period means the Plan Year.
(K) "DISABILITY" means a Member=s disability as defined in Article VII,
Section 7.4.
(L) "DOL" means the United States Department of Labor.
(M) "EMPLOYEE" means any person in Employment, and who receives
compensation from, the Employer, and any leased employee within the
meaning of Section 414(n)(2) of the Code. The term "leased employee"
means any person (other than an employee of the recipient) who
pursuant to an agreement between the recipient and any other person
("leasing organization") has performed services for the recipient (or
for the recipient and related persons determined in accordance with
Section 414(n) (6) of the Code) on a substantially full time basis for
a period of at least one year, and such services are performed under
primary direction or control by the recipient. Contributions or
benefits provided a leased employee by the leasing organization which
are attributable to services performed for the recipient employer
shall be treated as provided by the recipient employer.
A leased employee shall not be considered an employee of the recipient
if: (i) such employee is covered by a money purchase pension plan
providing: (1) a nonintegrated employer contribution rate of at least
10 percent of compensation, as defined in Section 415(c) (3) of the
Code, but including amounts contributed pursuant to a salary reduction
agreement which are excludable from the employee's gross income under
Section 125, Section 402(e)(3), Section 402(h)(1) (B) or Section
403(b) of the Code, (2) immediate participation, and (3) full and
immediate vesting; and (ii) leased employees do not constitute more
than 20 percent of the recipient's non-highly compensated work force.
3
(N) "EMPLOYER" means the entity named in the Adoption Agreement and any
other entity which, together therewith, constitutes an affiliated
service group (as defined in Section 414(m)(2) of the Code) , any
corporation which, together therewith, constitutes a controlled group
of corporations as defined in Section 1563 of the Code, and any other
trade or business (whether incorporated or not) which, together
therewith, are required to be aggregated under Sections 414(b),
414(c), or 414(o) of the Code. For purposes of the definition of
"Salary" in Section 1.2(II) and Article III of the Plan, "Employer"
shall refer only to the applicable entity that is participating in the
Plan.
(O) "EMPLOYMENT" means service with an Employer.
(P) "ENROLLMENT DATE" means the date on which an Employee becomes a Member
as provided under Article II.
(Q) "ERISA" means the Employee Retirement Income Security Act of 1974, as
now in effect or as hereafter amended.
(R) "FIDUCIARY" means any person who (i) exercises any discretionary
authority or control with respect to the management of the Plan or
control with respect to the management or disposition of the assets
thereof, (ii) renders any investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of the Plan, or has any discretionary authority or
responsibility to do so, or (iii) has any discretionary authority or
responsibility in the administration of the Plan, including any other
persons (other than trustees) designated by any Named Fiduciary to
carry out fiduciary responsibilities, except to the extent otherwise
provided by ERISA.
(S) "HIGHLY COMPENSATED EMPLOYEE" means for Plan Years beginning after
December 31, 1996, an Employee (i) who is a 5 percent owner at any
time during the look-back year or determination year, or (ii)(a) who
is employed during the deter-mination year and who during the
look-back year received compensation from the Employer in excess of
$80,000 (as adjusted pursuant to the Code and Regulations for changes
in the cost of living), and (b) if elected by the Employer was in the
top-paid group of Employees for such look-back year.
4
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the 12-month period immediately preceding the
determination year. The Employer may, however, as indicated in the
Adoption Agreement, make a calendar year data election. If a calendar
year data election is made, the look- back year shall be the calendar
year ending within the Plan Year for purposes of determining who is a
Highly Compensated Employee (other than for 5% owners).
The top-paid group shall consist of the top 20 percent of the
Employees when ranked on the basis of compensation paid by the
Employer.
The determination of who is a Highly Compensated Employee will be made
in accordance with Section 414(q) of the Code and the IRS Regulations
thereunder.
A highly compensated former employee is based on the rules applicable
to determining Highly Compensated Employee status as in effect for
that determination year, in accordance with section 1.414(q)-1T, A-4
of the temporary Income Tax Regulations and IRS Notice 97-45.
In determining whether an employee is a Highly Compensated Employee
for years beginning in 1997, the amendments to section 414(q) stated
above are treated as having been in effect for years beginning in
1996.
(T) "HOUR OF EMPLOYMENT" means each hour during which an Employee performs
service (or is treated as performing service as required by law) for
the Employer and, except in the case of military service, for which he
is directly or indirectly paid, or entitled to payment, by the
Employer (including any back pay irrespective of mitigation of
damages), all as determined in accordance with applicable DOL
Regulations.
(U) "INVESTMENT MANAGER" means any Fiduciary other than a Trustee or Named
Fiduciary who (i) has the power to manage, acquire or dispose of any
asset of the Plan; (ii) is (a) registered as an investment advisor
under the Investment Advisors Act of 1940; (b) is a bank, as defined
in such Act, or (c) is an insurance company qualified to perform the
services described in clause (i) hereof under the laws of more than
one state of the United States; and (iii) has acknowledged in writing
that he is a Fiduciary with respect to the Plan.
(V) "IRS" means the United States Internal Revenue Service.
5
(W) "LEAVE OF ABSENCE" means an absence authorized by an Employee=s
Employer and approved by the Plan Administrator, on a uniform basis,
in accordance with Article X.
(X) "MEMBER" means an Employee enrolled in the membership of the Plan
under Article II.
(Y) "MONTH" means any calendar month.
(Z) "NAMED FIDUCIARY" means the Fiduciary or Fiduciaries named herein or
in the Adoption Agreement who jointly or severally have the authority
to control and manage the operation and administration of the Plan.
(AA) "NON-HIGHLY COMPENSATED EMPLOYEE" means an Employee who is not a
Highly Compensated Employee.
(BB) "NORMAL RETIREMENT AGE" means the Member=s sixty-fifth (65th) birthday
unless otherwise specified in the Adoption Agreement.
(CC) "PERIOD OF SERVICE" means the aggregate of all periods commencing with
the Employee's first day of employment or reemployment with the
Employer and ending on the date a Break in Service begins. The first
day of employment or reemployment is the first day the Employee
performs an Hour of Employment. An Employee will also receive credit
for any Period of Severance of less than 12 consecutive months,
provided that the Employee returns to Employment within 12 months of
the Employee's retirement, quit or discharge or, if earlier, within 12
months of the date the Employee was first absent from service for any
other reason.
(DD) "PERIOD OF SEVERANCE" means a continuous period of time during which
the Employee is not employed by the Employer. Such period begins on
the date the Employee retires, quits or is discharged, or if earlier,
the 12 month anniversary of the date on which the Employee was
otherwise first absent from service.
In the case of an individual who is absent from work for maternity or
paternity reasons, the 12-consecutive month period beginning on the
first anniversary of the first day of such absence shall not
constitute a Break in Service. For purposes of this paragraph, an
absence from work for maternity or paternity reasons means an absence
(a) by reason of the pregnancy of the individual, (b) by reason of the
birth of a child of the individual, (c) by reason of the placement of
a child with the
6
individual in connection with the adoption of such child by such
individual, or (d) for purposes of caring for such child for a period
beginning immediately following such birth or placement.
(EE) "PLAN" means the Employees' Savings & Profit Sharing Plan as evidenced
by this document, the applicable Adoption Agreement and all subsequent
amendments thereto.
(FF) "PLAN ADMINISTRATOR" means the Named Fiduciary or, as designated by
such Named Fiduciary and approved by the Board in accordance with
Article IX, any officer or Employee of the Employer.
(GG) "PLAN YEAR" means a consecutive 12-month period ending December 31
unless otherwise specified in the Adoption Agreement.
(HH) "REGULATIONS" means the applicable regulations issued under the Code,
ERISA or other applicable law, by the IRS, the DOL or any other
governmental authority and any proposed or temporary regulations or
rules promulgated by such authorities pending the issuance of such
regulations.
(II) "SALARY" means regular basic monthly salary or wages, exclusive of
special payments such as overtime, bonuses, fees, deferred
compensation (other than pre-tax elective deferrals pursuant to a
Member=s election under Article III), severance payments, and
contributions by the Employer under this or any other plan (other than
before-tax contributions made on behalf of a Member under a Code
Section 125 cafeteria plan and, effective for Plan Years beginning on
or after January 1, 2001, qualified transportation fringe benefits
under Code Section 132(f), unless the Employer specifically elects to
exclude such contributions or benefits). Commissions shall be included
at the Employer=s option within such limits, if any, as may be set by
the Employer in the Adoption Agreement and applied uniformly to all
its commissioned Employees. In addition, Salary may also include, at
the Employer=s option, special payments such as (i) overtime or (ii)
overtime plus bonuses. As an alternative to the foregoing definition,
at the Employer=s option, Salary may be defined to include total
taxable compensation reported on the Member=s IRS Form W-2, plus
deferrals, if any, pursuant to Section 401(k) and Section 125 of the
Code, plus, effective for Plan Years beginning on or after January 1,
2001, qualified transportation fringe benefits under Code Section
132(f) (unless the Employer specifically elects to exclude such
Section 125 deferrals or Section 132(f) amounts), but excluding
7
compensation deferred from previous years. In no event may a Member=s
Salary for any Plan Year exceed for purposes of the Plan $150,000
(adjusted for cost of living to the extent permitted by the Code and
the IRS Regulations).
For Plan Years beginning after December 31, 1996, the family member
aggregation rules of Code Section 414(q)(6) (as in effect prior to the
Small Business Job Protection Act of 1996) are eliminated.
(JJ) "SOCIAL SECURITY TAXABLE WAGE BASE" means the contribution and benefit
base attributable to the OASDI portion of Social Security employment
taxes under Section 230 of the Social Security Act (42 U.S.C. '430) in
effect on the first day of each Plan Year.
(KK) "SPOUSE" or "SURVIVING SPOUSE" means the individual to whom a Member
or former Member was married on the date such Member withdraws his
Account, or if such Member has not withdrawn his Account, the
individual to whom the Member or former Member was married on the date
of his death.
(LL) "THIRD PARTY ADMINISTRATOR" or "TPA" means Pentegra Services, Inc., a
non-fiduciary provider of administrative services appointed and
directed by the Plan Administrator or the Named Fiduciary either
jointly or severally.
(MM) "TRUST"means the Trust or Trusts established and maintained pursuant
to the terms and provisions of this document and any separately
maintained Trust Agreement or Agreements.
(NN) "TRUSTEE" generally means the person, persons or other entities
designated by the Employer or its Board as the Trustee or Trustees
hereof and specified as such in the Adoption Agreement and any
separately maintained Trust Agreement or Agreements.
(OO) "TRUST AGREEMENT" means the separate document by which the Employer or
its Board has appointed a Trustee of the Plan, specified the terms and
conditions of such appointment and any fees associated therewith.
(PP) "TRUST FUND" means the Trust Fund or Funds established by the Trust
Agreement or Agreements.
(QQ) "UNIT" means the unit of measure described in Article V of a Member=s
proportionate interest in the available Investment Funds (as defined
in Article IV).
8
(RR) "VALUATION DATE" means any business day of any month for the Trustee,
except that in the event the underlying portfolio(s) of any Investment
Fund cannot be valued on such date, the Valuation Date for such
Investment Fund shall be the next subsequent date on which the
underlying portfolio(s) can be valued. Valuations shall be made as of
the close of business on such Valuation Date(s).
(SS) "YEAR OF EMPLOYMENT" means a period of service of 12 months.
(TT) "YEAR OF SERVICE" means any Plan Year during which an individual
completed at least 1,000 Hours of Employment, or satisfied any
alternative requirement, as determined by the Plan Administrator in
accordance with any applicable Regulations issued by the DOL and the
IRS.
(UU) "YEAR OF ELIGIBILITY SERVICE" means where an Employer designates a one
or two 12-consecutive-month eligibility waiting period, an Employee
must complete at least 1,000 Hours of Employment during each
12-consecutive-month period (measured from his date of Employment and
then as of the first day of each Plan Year commencing after such date
of Employment); provided, however, if an Employee is credited with
1,000 Hours of Employment in both the initial eligibility computation
period and the first Plan Year which commences prior to the first
anniversary of the Employee's employment commencement date, the
Employee will be credited, for eligibility purposes, with two Years of
Eligibility Service. Where an Employer designates an eligibility
waiting period of less than 12 months, an Employee must, for purposes
of eligibility, complete a required number of hours (measured from his
date of Employment and each anniversary thereafter) which is arrived
at by multiplying the number of months in the eligibility waiting
period requirement by 83 ; provided, however, if an Employee completes
at least 1,000 Hours of Employment within the 12 month period
commencing on his Employment commencement date or during any Plan Year
commencing after such Employment commencement date, such Employee will
be treated as satisfying the eligibility service requirements.
SECTION 1.3
The masculine pronoun wherever used shall include the feminine pronoun.
9
90
ARTICLE II
PARTICIPATION AND MEMBERSHIP
SECTION 2.1 ELIGIBILITY REQUIREMENTS
The Employer may elect as a requirement for eligibility to participate in the
Plan (i) the completion of a service period equal to any number of months not to
exceed 12 consecutive months, or (ii) the completion of a service period equal
to one or two 12-consecutive-month periods, and/or (iii) if the Employer so
elects, it may adopt a minimum age requirement from age 18 to age 21. Such
election shall be made and reflected on the Adoption Agreement. Notwithstanding
the foregoing, in the case of an Employer that adopts the 401(k) feature under
Section 3.9, the eligibility requirements under such feature shall not exceed
the period described in clause (i) above, and, at the election of the Employer,
attainment of age 21 as described in clause (iii) above.
Notwithstanding the foregoing, the Employer may elect in the Adoption Agreement
to establish as an eligibility requirement (as a minimum service requirement,
minimum age requirement, or both) for Employer matching contributions, Employer
basic contributions Employer supplemental contributions, and/or Employer Profit
Sharing contributions (i) the completion of any number of months not to exceed
12 consecutive months, or (ii) the completion of one or two 12-consecutive-month
periods, and/or (iii) if the Employer so elects, it may adopt a minimum age
requirement from age 18 to age 21. Such election shall be made and reflected in
the Adoption Agreement.
In implementing the eligibility service periods described above, (i) if an
Employer designates in the Adoption Agreement an eligibility service crediting
method based on the hours of service method, the satisfaction of the eligibility
service requirement shall be dependent on the completion of a Year of
Eligibility Service and (ii) if an Employer designates in the Adoption Agreement
an eligibility service crediting method based on the elapsed time method, the
satisfaction of the eligibility service requirement shall be dependent on the
completion of the requisite Period of Service.
If a non-vested Member terminates employment without a vested interest in his
Account derived from Employer contributions, Years of Employment (or, as
applicable, Years of Service) before a period of consecutive Breaks in Service
will not be taken into account for eligibility purposes if the number of
consecutive Breaks in Service in such period equals or exceeds the greater of
five or the aggregate number of Years of Employment (or, as applicable Years of
Service) before such break. If a Member's service is disregarded pursuant to
this paragraph, such Member will be treated as a new Employee for eligibility
purposes.
10
SECTION 2.2 EXCLUSION OF CERTAIN EMPLOYEES
To the extent provided in the Adoption Agreement, the following Employees may be
excluded from participation in the Plan:
(i) Employees not meeting the age and service requirements;
(ii) Employees who are included in a unit of Employees covered by a
collective bargaining agreement between the Employee representatives
and one or more Employers if there is evidence that retirement
benefits were the subject of good faith bargaining between such
Employee representatives and such Employer(s). For this purpose, the
term "Employee representative" does not include any organization
where more than one-half of the membership is comprised of owners,
officers and executives of the Employer;
(iii) Employees who are non-resident aliens and who receive no earned
income from the Employer which constitutes income from sources
within the United States; and
(iv) Employees described in Section 2.4 or included in any other
ineligible job classifications set forth in the Adoption Agreement.
SECTION 2.3 WAIVER OF ELIGIBILITY REQUIREMENTS
The Employer, at its election, may waive the eligibility requirement(s) for
participation specified above for (i) all Employees, or (ii) all those employed
on or up to 12 months after its Commencement Date under the Plan. Subject to the
requirements of the Code, the eligibility waiting period shall be deemed to have
been satisfied for an Employee who was previously a Member of the Plan.
All Employees whose Employment commences after the expiration date of the
Employer=s waiver of the eligibility requirement(s), if any, shall be enrolled
in the Plan in accordance with the eligibility requirement(s) specified in the
Adoption Agreement.
SECTION 2.4 EXCLUSION OF NON-SALARIED EMPLOYEES
The Employer, at its election, may exclude non-salaried (hourly paid) Employees
from
11
participation in the Plan, regardless of the number of Hours of Employment such
Employees complete in any Plan Year. Notwithstanding the foregoing, for purposes
of this Section and all purposes under the Plan, a non-salaried Employee that is
hired following the adoption date of the Plan by the Employer, but prior to the
adoption of this exclusion by the Employer, shall continue to be deemed to be an
Employee and will continue to receive benefits on the same basis as a salaried
Member, despite classification as a non-salaried Employee.
SECTION 2.5 COMMENCEMENT OF PARTICIPATION
Every eligible Employee (other than non-salaried or such other Employees who, at
the election of the Employer, are excluded from participation) shall commence
participation in the Plan on the later of:
(1) The Employer=s Commencement Date, or
(2) The first day of the month or calendar quarter (as designated by the
Employer in the Adoption Agreement) coinciding with or next following his
satisfaction of the eligibility requirements as specified in the Adoption
Agreement.
The date that participation commences shall be hereinafter referred to as the
Enrollment Date. Notwithstanding the above, no Employee shall under any
circumstances become a Member unless and until his enrollment application is
filed with, and accepted by, the Plan Administrator. The Plan Administrator
shall notify each Employee of his eligibility for membership in the Plan and
shall furnish him with an enrollment application in order that he may elect to
make or receive contributions on his behalf under Article III at the earliest
possible date consonant with this Article.
If an Employee fails to complete the enrollment form furnished to him, the Plan
Administrator shall do so on his behalf. In the event the Plan Administrator
processes the enrollment form on behalf of the Employee, the Employee shall be
deemed to have elected not to make any contributions and/or elective deferrals
under the Plan, if applicable.
IN THE EVENT A MEMBER IS NO LONGER A MEMBER OF AN ELIGIBLE CLASS OF EMPLOYEES
AND BECOMES INELIGIBLE TO PARTICIPATE BUT HAS NOT INCURRED A BREAK IN SERVICE,
SUCH EMPLOYEE WILL PARTICIPATE IMMEDIATELY UPON RETURNING TO AN ELIGIBLE CLASS
OF EMPLOYEES. IF SUCH MEMBER INCURS A BREAK IN SERVICE, ELIGIBILITY WILL BE
DETERMINED UNDER THE BREAK IN SERVICE RULES OF THE PLAN.
IN THE EVENT AN EMPLOYEE WHO IS NOT A MEMBER OF AN ELIGIBLE CLASS OF EMPLOYEES
BECOMES A MEMBER OF AN ELIGIBLE CLASS, SUCH EMPLOYEE WILL PARTICIPATE
IMMEDIATELY IF SUCH EMPLOYEE HAS SATISFIED THE MINIMUM AGE AND SERVICE
REQUIREMENTS AND WOULD HAVE OTHERWISE PREVIOUSLY BECOME A MEMBER.
12
SECTION 2.6 TERMINATION OF PARTICIPATION
Membership under all features and provisions of the Plan shall terminate upon
the earlier of (a) a Member's termination of Employment and payment to him of
his entire vested interest, or (b) his death.
13
ARTICLE III
CONTRIBUTIONS
SECTION 3.1 CONTRIBUTIONS BY MEMBERS
If the Adoption Agreement so provides, each Member may elect to make
non-deductible, after-tax contributions under the Plan, based on increments of
1% of his Salary, provided the amount thereof, when aggregated with the amount
of any pre-tax effective deferrals, does not exceed the limit established by the
Employer in the Adoption Agreement. All such after-tax contributions shall be
separately accounted for, nonforfeitable and distributed with and in addition to
any other benefit to which the Member is entitled hereunder. A Member may change
his contribution rate as designated in the Adoption Agreement, but reduced or
suspended contributions may not subsequently be made up.
SECTION 3.2 ELECTIVE DEFERRALS BY MEMBERS
If the Adoption Agreement so provides, each Member may elect to make pre-tax
elective deferrals (401(k) deferrals) under the Plan, based on increments of 1%
of his Salary, provided the amount thereof, when aggregated with the amount of
any after-tax contributions, does not exceed the limit established by the
Employer in the Adoption Agreement. Alternatively, a Member may elect to
contribute for a Plan Year a dollar amount which does not exceed the maximum
amount permitted under this Section 3.2 or the limit established by the Employer
in the Adoption Agreement for such Plan Year and a pro-rata portion shall be
withheld from each payment of Salary to such Member for the balance of the Plan
Year remaining after the election takes effect. All such 401(k) deferrals shall
be separately accounted for, nonforfeitable and distributed under the terms and
conditions described under Article VII with and in addition to any other benefit
to which the Member is entitled hereunder. A Member may change his 401(k)
deferral rate or suspend his 401(k) deferrals as designated in the Adoption
Agreement, but reduced or suspended deferrals may not subsequently be made up.
Notwithstanding any other provision of the Plan, no Member may make 401(k)
deferrals during any Plan Year in excess of $7,000 multiplied by the adjustment
factor as provided by the Secretary of the Treasury. The adjustment factor shall
mean the cost of living adjustment factor prescribed by the Secretary of the
Treasury under Section 402(g)(5) of the Code for years beginning after December
31, 1987, as applied to such items and in such manner as the Secretary shall
provide. In the event that the aggregate amount of
14
such 401(k) deferrals for a Member exceeds the limitation in the previous
sentence, the amount of such excess, increased by any income and decreased by
any losses attributable thereto, shall be refunded to such Member no later than
the April 15 of the Plan Year following the Plan Year for which the 401(k)
deferrals were made. If a Member also participates, in any Plan Year, in any
other plans subject to the limitations set forth in Section 402(g) of the Code
and has made excess 401(k) deferrals under this Plan when combined with the
other plans subject to such limits, to the extent the Member, in writing
designates to the TPA any 401(k) deferrals under this Plan as excess deferrals
by no later than the March 1 of the Plan Year following the Plan Year for which
the 401(k) deferrals were made, the amount of such designated excess, increased
by any income and decreased by any losses attributable thereto, shall be
refunded to the Member no later than the April 15 of the Plan Year following the
Plan Year for which the 401(k) deferrals were made.
SECTION 3.3 TRANSFER OF FUNDS AND ROLLOVER CONTRIBUTIONS BY MEMBERS
Each Member may elect to make, directly or indirectly, a rollover contribution
to the Plan of amounts held on his behalf in (i) an employee benefit plan
qualified under Section 401(a) of the Code, or (ii) an individual retirement
account or annuity as described in Section 408(d)(3) of the Code. All such
amounts shall be certified in form and substance satisfactory to the Plan
Administrator by the Member as being all or part of an Aeligible rollover
distribution@ or a "rollover contribution" within the meaning of Section
402(c)(4) or Section 408(d)(3), respectively, of the Code. Such rollover
amounts, along with the earnings related thereto, will be accounted for
separately from any other amounts in the Member's Account. A Member shall have a
nonforfeitable vested interest in all such rollover amounts.
The Employer may, at its option, permit Employees who have not satisfied the
eligibility requirements designated in the Adoption Agreement to make a rollover
contribution to the Plan.
The Trustee of the Plan may also accept a direct transfer of funds, which meets
the requirements of Section 1.411(d)-4 of the IRS Regulations, from a plan which
the Trustee reasonably believes to be qualified under Section 401(a) of the Code
in which an Employee was, is, or will become, as the case may be, a participant.
If the funds so directly transferred are transferred from a retirement plan
subject to Code Section 401(a)(11), then such funds shall be accounted for
separately and any subsequent distribution of those funds, and earnings thereon,
shall be subject to the provisions of Section 7.3 which are applicable when an
Employer elects to provide an annuity option under the Plan.
15
SECTION 3.4 EMPLOYER CONTRIBUTIONS - GENERAL
The Employer may elect to make regular or discretionary contributions under the
Plan. Such Employer contributions may be in the form of (i) matching
contributions, (ii) basic contributions, (iii) safe harbor CODA contributions
and/or (iv) profit sharing contributions as designated by the Employer in the
Adoption Agreement and/or (i) supplemental contributions and/or (ii) qualified
nonelective contributions as permitted under the Plan. Each such contribution
type shall be separately accounted for by the TPA.
SECTION 3.5 EMPLOYER MATCHING CONTRIBUTIONS
The Employer may elect to make regular matching contributions under the Plan.
Such matching contributions on behalf of any Member shall be conditioned upon
the Member making after-tax contributions under Section 3.1 and/or 401(k)
deferrals under Sections 3.2 and 3.9.
If so adopted, the Employer shall contribute under the Plan on behalf of each of
its Members an amount equal to a percentage (as specified by the Employer in the
Adoption Agreement) of the Member=s after-tax contributions and/or 401(k)
deferrals not in excess of a maximum percentage as specified by the Employer in
the Adoption Agreement (in increments of 1%) of his Salary. The percentage
elected by the Employer shall based on a formula not to exceed 200% or in
accordance with one of the schedules of matching contribution formulas listed
below, and must be uniformly applicable to all Members.
Years of Employment Matching %
------------------- ----------
Formula Step 1 Less than 3 50%
At least 3 but less than 5 75%
5 or more 100%
Formula Step 2 Less than 3 100%
At least 3 but less than 5 150%
5 or more 200%
16
SECTION 3.6 EMPLOYER BASIC CONTRIBUTIONS
The Employer may elect to make regular basic contributions under the Plan. Such
basic contributions on behalf of any Member shall not be conditioned upon the
Member making after-tax contributions and/or (401(k) deferrals under this
Article III. If so adopted, the Employer shall contribute to the Plan on behalf
of each Member (as specified by the Employer in the Adoption Agreement) an
amount equal to a percentage not to exceed 15% (as specified by the Employer in
the Adoption Agreement) in increments of 1% of the Member=s Salary. The
percentage elected by the Employer shall be uniformly applicable to all Members.
The Employer may elect, if basic contributions are made on behalf of its Members
on a monthly basis, to restrict the allocation of such basic contribution to
those Members who were employed with the Employer on the last day of the month
for which the basic contribution is made.
SECTION 3.7 SUPPLEMENTAL CONTRIBUTIONS BY EMPLOYER
An Employer may, at its option, make a supplemental contribution under Formula
(1) or (2) below:
FORMULA (1) A uniform percentage (as specified by the Employer) of each
Member=s contributions not in excess of a maximum percentage (if
the Employer elects to impose such a maximum) of the Member's
Salary which were received by the Plan during the Plan Year with
respect to which the supplemental contribution relates. If the
Employer elects to make such a supplemental contribution, it
shall be made on or before the last day of the second month in
the Plan Year following the Plan Year described in the preceding
sentence on behalf of all those Members who were employed with
the Employer on the last working day of the Plan Year with
respect to which the supplemental contribution relates.
FORMULA (2) A uniform dollar amount per Member or a uniform percentage
(limited to a specific dollar amount, if elected by the Employer)
of each Member=s Salary for the Plan Year (or, at the election of
the Employer, the Employer's fiscal year) to which the
supplemental contribution relates. If the Employer elects to make
such a supplemental contribution, it shall be made within the
time prescribed by law, including extensions of time, for filing
of the Employer's federal income tax return on behalf of all
those Members who were employed with the Employer on the last
working day of the Plan Year (or
17
the fiscal year) to which the supplemental contribution relates.
The Employer may, at its option, elect to make a contribution
under this paragraph to only those Members whose Salary is less
than an amount to be specified by the Employer to the extent that
such Salary limit is less than the dollar amount under Section
414(q) of the Code for such year. The percentage contributed
under this Formula (2) shall be limited in accordance with the
Employer's matching formula and basic contribution rate, if any,
under this Article such that the sum of the Employer's Formula
(2) supplemental contribution plus all other Employer
contributions under this Article shall not exceed 15% of Salary
for such year.
SECTION 3.8 THE PROFIT SHARING FEATURE
An Employer may, at its option, adopt the Profit Sharing Feature as described
herein, subject to any other provisions of the Plan, where applicable. This
Feature may be adopted either in lieu of, or in addition to, any other Plan
Feature contained in this Article III. The Profit Sharing Feature is designed to
provide the Employer a means by which to provide discretionary contributions on
behalf of Employees eligible under the Plan.
If this Profit Sharing Feature is adopted, the Employer may contribute on behalf
of each of its eligible Members, on an annual (or at the election of the
Employer, quarterly) basis for any Plan Year or fiscal year of the Employer (as
the Employer shall elect), a discretionary amount not to exceed the maximum
amount allowable as a deduction to the Employer under the provisions of Section
404 of the Code, and further subject to the provisions of Article X.
Any such profit sharing contribution must be received by the Trustee within the
time prescribed by law, including extensions of time, for filing of the
Employer's federal income tax return following the close of the Contribution
Determination Period on behalf of all those Members who are entitled to an
allocation of such profit sharing contribution as set forth in the Adoption
Agreement. For purposes of making the allocations described in this paragraph, a
Member who is on a Type 1 nonmilitary Leave of Absence (as defined in Sections
1.2(W) and 10.8(B)(1)) or a Type 4 military Leave of Absence (as defined in
Sections 1.2(W) and 10.8(B)(4)) shall be treated as if he were a Member who was
an Employee in Employment on the last day of such Contribution Determination
Period.
Profit sharing contributions shall be allocated to each Member=s Account for the
Contribution Determination Period at the election of the Employer, in accordance
with one of the following options:
18
Profit Sharing Formula 1 - In the same ratio as each Member=s Salary during
such Contribution Determination Period bears to
the total of such Salary of all Members.
Profit Sharing Formula 2 - In the same ratio as each Member=s Salary for the
portion of the Contribution Determination Period
during which the Member satisfied the Employer=s
eligibility requirement(s) bears to the total of
such Salary of all Members.
The Employer may integrate the Profit Sharing Feature with Social Security in
accordance with the following provision. The annual (or quarterly, if
applicable) profit sharing contributions for any Contribution Determination
Period (which period shall include, for the purposes of the following maximum
integration levels provided hereunder where the Employer has elected quarterly
allocations of contributions, the four quarters of a Plan Year or fiscal year)
shall be allocated to each Member's Account at the election of the Employer, in
accordance with one of the following options:
Profit Sharing Formula 3 - In a uniform percentage (as specified by the
Employer in the Adoption Agreement) of each
Member=s Salary during the Contribution
Determination Period (the "Base Contribution
Percentage@), plus a uniform percentage (as
specified by the Employer in the Adoption
Agreement) of each Member=s Salary for the
Contribution Determination Period in excess of the
Social Security Taxable Wage Base for such
Contribution Determination Period (the "Excess
Contribution Percentage@).
Profit Sharing Formula 4 - In a uniform percentage (as specified by the
Employer in the Adoption Agreement) of each
Member=s Salary for the portion of the
Contribution Determination Period during which the
Member satisfied the Employer=s eligibility
requirement(s), if any, up to the Base
Contribution Percentage for such Contribution
Determination Period, plus a uniform percentage
(as specified by the Employer in the Adoption
Agreement) of
19
each Member=s Salary for the portion of the
Contribution Determination Period during which the
Member satisfied the Employer=s eligibility
requirement(s), equal to the Excess Contribution
Percentage.
The Excess Contribution Percentage described in Profit Sharing Formulas 3 and 4
above may not exceed the lesser of (i) the Base Contribution Percentage, or (ii)
the greater of (1) 5.7% or (2) the percentage equal to the portion of the Code
Section 3111(a) tax imposed on employers under the Federal Insurance
Contributions Act (as in effect as of the beginning of the Plan Year) which is
attributable to old-age insurance. For purposes of this Subparagraph,
"compensation@ as defined in Section 414(s) of the Code shall be substituted for
"Salary@ in determining the Excess Contribution Percentage and the Base
Contribution Percentage.
Notwithstanding the foregoing, the Employer may not adopt the Social Security
integration options provided above if any other integrated defined contribution
or defined benefit plan is maintained by the Employer during any Contribution
Determination Period.
SECTION 3.9 THE 401(K) FEATURE
The Employer may, at its option, adopt the 401(k) Feature described hereunder
and in Section 3.2 above for the exclusive purpose of permitting its Members to
make 401(k) deferrals to the Plan.
The Employer may make, apart from any matching contributions it may elect to
make, Employer qualified nonelective contributions as defined in Section
1.401(k)-1(g)(13) of the Regulations. The amount of such contributions shall not
exceed 15% of the Salary of all Members eligible to share in the allocation when
combined with all Employer contributions (including 401(k) elective deferrals)
to the Plan for such Plan Year. Allocation of such contributions shall be made,
at the election of the Employer, to the accounts of (i) all Members, or (ii)
only Members who are not Highly Compensated Employees. Allocation of such
contributions shall be made, at the election of the Employer, in the ratio (i)
which each eligible Member's Salary for the Plan Year bears to the total Salary
of all eligible Members for such Plan Year, or (ii) which each eligible Member's
Salary not in excess of a fixed dollar amount specified by the Employer for the
Plan Year bears to the total Salary of all eligible Members taking into account
Salary for each such Member not in excess of the specified dollar amount.
Notwithstanding any provision of the Plan to the contrary,
20
such contributions shall be subject to the same vesting requirements and
distribution restrictions as Members' 401(k) deferrals and shall not be
conditioned on any election or contribution of the Member under the 401(k)
feature. Any such contributions must be made on or before the last day of the
second month after the Plan Year to which the contribution relates. Further, for
purposes of the actual deferral percentage or actual contribution percentage
tests described below, the Employer may apply (in accordance with applicable
Regulations) all or any portion of the Employer qualified nonelective
contributions for the Plan Year toward the satisfaction of the actual deferral
percentage test. Any remaining Employer qualified nonelective contributions not
utilized to satisfy the actual deferral percentage test may be applied (in
accordance with applicable Regulations) to satisfy the actual contribution
percentage test.
Effective for Plan Years beginning after December 31, 1996, the actual deferral
percentages for Highly Compensated Employees shall, in accordance with the Code
and IRS Regulations, satisfy either (i) or (ii) as follows:
(i) PRIOR YEAR TESTING: Notwithstanding any other provision of this 401(k)
Feature, the actual deferral percentage for a Plan Year for Members who are
Highly Compensated Employees for such Plan Year and the prior year's actual
deferral percentage for Members who were Non-Highly Compensated Employees
for the prior Plan Year must satisfy one of the following tests:
(a) the actual deferral percentage for a Plan Year for Members who are
Highly Compensated Employees for the Plan Year shall not exceed the
prior year's actual deferral percentage of those Members who are not
Highly Compensated Employees for the prior Plan Year multiplied by
1.25; or
(b) the actual deferral percentage for a Plan Year for Members who are
Highly Compensated Employees for the Plan Year shall not exceed the
prior year's actual deferral percentage for Members who were
Non-Highly Compensated Employees for the prior Plan Year multiplied by
2.0, provided that the actual deferral percentage for Members who are
Highly Compensated Employees does not exceed the actual deferral
percentage for Members who were Non-Highly Compensated Employees in
the prior Plan Year by more than 2 percentage points. This
determination shall be made in accordance with the procedure described
in Section 3.10 below.
For the first Plan Year that the Plan permits any Member to make elective
deferrals and this is not a successor plan, for purposes of the foregoing
tests, the prior year's
21
Non-Highly Compensated Employees' actual deferral percentage shall be 3
percent unless the Employer has elected in the Adoption Agreement to use
the current Plan Year's actual deferral percentage for these Members. The
Employer may elect in the Adoption Agreement to change from the Prior Year
Testing method to the Current Year Testing method in accordance with the
Code and IRS Regulations.
(ii) CURRENT YEAR TESTING:
If elected by the Employer in the Adoption Agreement, the actual deferral
percentage tests in (a) and (b) above, will be applied by comparing the
current Plan Year's actual deferral percentage for Members who are Highly
Compensated Employees for such Plan Year with the current Plan Year's
actual deferral percentage for Members who are Non-Highly Compensated
Employees for such year. Once made, this election can only be changed and
the Prior Year Testing method applied if the Plan meets the requirements
for changing to Prior Year Testing set forth in IRS Notice 98-1 (or
superseding guidance).
A MEMBER IS A HIGHLY COMPENSATED EMPLOYEE FOR A PARTICULAR PLAN YEAR IF HE MEETS
THE DEFINITION OF A HIGHLY COMPENSATED EMPLOYEE IN EFFECT FOR THAT PLAN YEAR.
SIMILARLY, A MEMBER IS A NON-HIGHLY COMPENSATED EMPLOYEE FOR A PARTICULAR PLAN
YEAR IF HE DOES NOT MEET THE DEFINITION OF A HIGHLY COMPENSATED EMPLOYEE IN
EFFECT FOR THAT PLAN YEAR.
SECTION 3.10 DETERMINING THE ACTUAL DEFERRAL PERCENTAGES
For purposes of this 401(k) Feature, the actual deferral percentage for a Plan
Year means, for a specified group of Members for a Plan Year, the average of the
ratios (calculated separately for each Member in such group) of (a) the amount
of 401(k) deferrals (including, as provided in Section 3.9, any Employer
qualified nonelective contributions) made to the Member=s account for the Plan
Year, to (b) the amount of the Member=s compensation (as defined in Section
414(s) of the Code) for the Plan Year or, alternatively, where specifically
elected by the Employer, for only that part of the Plan Year during which the
Member was eligible to participate in the Plan.
An Employee=s actual deferral percentage shall be zero if no 401(k) deferral
(or, as provided in Section 3.9, Employer qualified nonelective contribution) is
made by him or on his behalf for such applicable Plan Year. If the Plan and one
or more other plans which include cash or deferred arrangements are considered
as one plan for purposes of Sections 401(a)(4) and 410(b) of the Code, the cash
or deferred arrangements included in such plans shall be treated as one
arrangement for purposes of this 401(k) Feature.
22
The TPA shall determine as of the end of the Plan Year whether one of the actual
deferral percentage tests specified in Section 3.9 above is satisfied for such
Plan Year. This determination shall be made after first determining the
treatment of excess deferrals within the meaning of Section 402(g) of the Code
under Section 3.2 above. In the event that neither of such actual deferral
percentage tests is satisfied, the TPA shall, to the extent permissible under
the Code and the IRS Regulations, refund the excess contributions for the Plan
Year in the following order of priority: by (i) refunding such amounts deferred
by the Member which were not matched by his Employer (and any earnings and
losses allocable thereto), and (ii) refunding amounts deferred for such Plan
Year by the Member (and any earnings and losses allocable thereto), and, to the
extent permitted under the Code and applicable IRS Regulations, forfeiting
amounts contributed for such Plan Year by the Employer with respect to the
Member=s 401(k) deferrals that are returned pursuant to this Paragraph (and any
earnings and losses allocable thereto).
The distribution of such excess contributions shall be made to Highly
Compensated Employees to the extent practicable before the 15th day of the third
month immediately following the Plan Year for which such excess contributions
were made, but in no event later than the end of the Plan Year following such
Plan Year or, in the case of the termination of the Plan in accordance with
Article XI, no later than the end of the twelve-month period immediately
following the date of such termination.
FOR PURPOSES OF THIS 401(K) FEATURE, "EXCESS CONTRIBUTIONS" MEANS, WITH RESPECT
TO ANY PLAN YEAR, THE EXCESS OF THE AGGREGATE AMOUNT OF 401(K) DEFERRALS (AND
ANY OTHER AMOUNTS CONTRIBUTED BY THE EMPLOYER THAT ARE TAKEN INTO ACCOUNT IN
DETERMINING THE ACTUAL DEFERRAL PERCENTAGE OF HIGHLY COMPENSATED EMPLOYEES FOR
SUCH PLAN YEAR) (COLLECTIVELY, "401(K) AMOUNTS") MADE TO THE ACCOUNTS OF HIGHLY
COMPENSATED EMPLOYEES FOR SUCH PLAN YEAR, OVER THE MAXIMUM AMOUNT OF SUCH
DEFERRALS THAT COULD BE MADE BY SUCH MEMBERS WITHOUT VIOLATING THE REQUIREMENTS
DESCRIBED ABOVE. THE EXCESS CONTRIBUTIONS TO BE DISTRIBUTED SHALL BE DETERMINED
BY REDUCING 401(K) AMOUNTS MADE BY OR ON BEHALF OF HIGHLY COMPENSATED EMPLOYEES
BEGINNING WITH THE HIGHLY COMPENSATED EMPLOYEE WITH THE LARGEST 401(K) AMOUNTS
FOR THE PLAN YEAR UNTIL SUCH AMOUNT IS REDUCED TO BE EQUAL TO THE HIGHLY
COMPENSATED EMPLOYEE WITH THE NEXT LARGEST 401(K) AMOUNT. THE PROCEDURE
DESCRIBED IN THE PRECEDING SENTENCE SHALL BE REPEATED UNTIL ALL EXCESS
CONTRIBUTIONS HAVE BEEN ELIMINATED and, as applicable, refunded.
WHERE AN EMPLOYER HAS ELECTED, IN THE ADOPTION AGREEMENT, TO ALLOW MEMBER
CONTRIBUTIONS, A MEMBER MAY TREAT EXCESS CONTRIBUTIONS ALLOCATED TO HIM AS AN
AMOUNT DISTRIBUTED TO THE MEMBER AND THEN CONTRIBUTED BY THE MEMBER TO THE PLAN.
23
RECHARACTERIZED AMOUNTS WILL REMAIN NONFORFEITABLE. AMOUNTS MAY NOT BE
RECHARACTERIZED BY A HIGHLY COMPENSATED EMPLOYEE TO THE EXTENT THAT SUCH AMOUNT
IN COMBINATION WITH OTHER EMPLOYEE CONTRIBUTIONS MADE BY THAT EMPLOYEE WOULD
EXCEED ANY STATED LIMIT UNDER THE PLAN ON EMPLOYEE CONTRIBUTIONS.
RECHARACTERIZATION MUST OCCUR NO LATER THAN 2 1/2 MONTHS AFTER THE LAST DAY OF
THE PLAN YEAR IN WHICH SUCH EXCESS CONTRIBUTIONS AROSE AND IS DEEMED TO OCCUR NO
EARLIER THAN THE DATE THE LAST HIGHLY COMPENSATED EMPLOYEE IS INFORMED IN
WRITING OF THE AMOUNT RECHARACTERIZED AND THE CONSEQUENCES THEREOF.
RECHARACTERIZED AMOUNTS WILL BE TAXABLE TO THE MEMBER FOR THE MEMBER'S TAXABLE
YEAR IN WHICH THE MEMBER WOULD HAVE RECEIVED THEM IN CASH.
SECTION 3.11 DETERMINING THE ACTUAL CONTRIBUTION PERCENTAGES
Notwithstanding any other provision of this Section 3.11, effective for Plan
Years beginning after December 31, 1996, the actual contribution percentage for
the Plan Year for Highly Compensated Employees shall, in accordance with the
Code and IRS Regulations, satisfy either (i) or (ii) as follows:
(i) PRIOR YEAR TESTING
(a) the actual contribution percentage for a Plan Year for Members who are
Highly Compensated Employees for the Plan Year shall not exceed the
prior Plan Year's actual contribution percentage for Members who were
Non-Highly Compensated Employees for the prior Plan Year multiplied by
1.25, or
(b) the actual contribution percentage for Members who are Highly
Compensated Employees for the Plan Year shall not exceed the prior
year's actual contribution percentage for Members who were Non-Highly
Compensated Employees for the prior Plan Year multiplied by 2,
provided that the actual contribution percentage for Members who are
Highly Compensated Employees does not exceed the actual contribution
percentage for Members who were Non-Highly Compensated Employees in
the prior Plan Year by more than 2 percentage points.
For the first Plan Year this Plan permits any Member to make after-tax
contributions pursuant to Section 3.1, provides for Employer matching
contributions (pursuant to Section 3.5), or both, and this is not a
successor plan, for purposes of the foregoing tests, the prior Plan Year's
Non-Highly Compensated
24
Employees' actual contribution percentage shall be 3 percent unless the
Employer has elected in the Adoption Agreement to use the current Plan
Year's actual contribution percentage for these Members.
(ii) CURRENT YEAR TESTING
If elected by the Employer in the Adoption Agreement, the actual
contribution percentage tests in (a) and (b), above, will be applied by
comparing the current Plan Year's actual contribution percentage for
Members who are Highly Compensated Employees for such Plan Year with the
current Plan Year's actual contribution percentage for Members who are
Non-Highly Compensated Employees for such year. Once made, this election
can only be changed and the Prior Year Testing method applied if the Plan
meets the requirements for changing to Prior Year Testing set forth in IRS
Notice 98-1 (or superseding guidance).
For purposes of this Article III, the "actual contribution percentage@ for
a Plan Year means for a specified group of Employees, the average of the
ratios (calculated separately for each Employee in such group) of (A) the
sum of (i) Member after-tax contributions credited to his Account for the
Plan Year, (ii) Employer matching contributions and/or supplemental
contributions under Formula 1 credited to his Account as described in this
Article for the Plan Year, and (iii) in accordance with and to the extent
permitted by the IRS Regulations, 401(k) deferrals (and, as provided in
Section 3.9, any Employer qualified nonelective contributions) credited to
his Account, to (B) the amount of the Member=s compensation (as defined in
Section 414(s) of the Code) for the Plan Year or, alternatively, where
specifically elected by the Employer, for only that part of the Plan Year
during which the Member was eligible to participate in the Plan. An
Employee=s actual contribution percentage shall be zero if no such
contributions are made by him or on his behalf for such Plan Year.
The TPA shall determine as of the end of the Plan Year whether one of the
actual contribution percentage tests specified above is satisfied for such
Plan Year. This determination shall be made after first determining the
treatment of excess deferrals within the meaning of Section 402(g) of the
Code under Section 3.2 above and then determining the treatment of excess
contributions under Section 3.10 above. In the event that neither of the
actual contribution percentage tests is satisfied, the TPA shall (i) refund
the excess aggregate contributions to the extent attributable to Member
after-tax contributions and vested matching contributions for which the
underlying Member after-tax contributions or 401(k) deferrals are not
subject to correction under the actual deferral percentage or actual
contribution percentage tests for such year (and any income related
thereto) and (ii) forfeit the excess aggregate contributions to the extent
attributable to non-vested Employer matching contributions and vested
Employer matching contributions for which the underlying Member after-tax
contributions or 401(k) deferrals are subject to correction under the
actual deferral percentage or
25
actual contribution percentage tests for such year (and any income related
thereto), in the manner described below.
For purposes of this Article III, "excess aggregate contributions" means,
with respect to any Plan Year and with respect to any Member, the excess of
the aggregate amount of contributions (and any earnings and losses
allocable thereto) made as (i) Member after-tax contributions credited to
his Account for the Plan Year, (ii) Employer matching contributions and/or
supplemental contributions under Formula 1 credited to his Account as
described in this Article for the Plan Year, and (iii) in accordance with
and to the extent permitted by the IRS Regulations, 401(k) deferrals (and,
as provided in Section 3.9, any Employer qualified nonelective
contributions) credited to his Account (if the Plan Administrator elects to
take into account such deferrals and contributions when calculating the
actual contribution percentage) of Highly Compensated Employees for such
Plan Year, over the maximum amount of such contributions that could be made
as Employer contributions, Member contributions and 401(k) deferrals of
such Members without violating the requirements of any Subparagraph of this
Section 3.11.
To the extent excess aggregate contributions must be refunded or forfeited
for a Plan Year, such excess amounts will be refunded (or, as applicable,
forfeited) first to the Highly Compensated Employees with the largest
Contribution Percentage Amounts (as defined below) taken into account in
calculating the actual contribution percentage test for the year the excess
arose and continuing in descending order until all the excess aggregate
contributions are refunded (or, as applicable, forfeited). For purposes for
the preceding sentence, the "largest amount" is determined after
distribution of any excess aggregate contributions. For purposes of this
paragraph, "Contribution Percentage Amounts" means the sum of Member
after-tax contributions, Employer matching contributions, Employer
supplemental contributions under Formula (1), and qualified matching
contributions ( to the extent not taken into account for purposes of the
actual deferral percentage test) made under the Plan on behalf of the
Member for the Plan Year. However, such Contribution Percentage Amounts
shall not include Employer matching contributions that are forfeited either
to correct excess aggregate contributions or because the contributions to
which they relate are excess deferrals, excess contributions or excess
aggregate contributions.
The refund or forfeiture of such excess aggregate contributions shall be
made with respect to such Highly Compensated Employees to the extent
practicable before
26
the 15th day of the third month immediately following the Plan Year for
which such excess aggregate contributions were made, but in no event later
than the end of the Plan Year following such Plan Year or, in the case of
the termination of the Plan in accordance with Article XI, no later than
the end of the twelve-month period immediately following the date of such
termination.
FOR PURPOSES OF THIS SECTION, THE CONTRIBUTION PERCENTAGE (WHICH SHALL MEAN
THE RATIO OF THE MEMBER'S CONTRIBUTION PERCENTAGE AMOUNTS TO THE MEMBER'S
COMPENSATION FOR THE PLAN YEAR) FOR ANY MEMBER WHO IS A HIGHLY COMPENSATED
EMPLOYEE AND WHO IS ELIGIBLE TO HAVE CONTRIBUTION PERCENTAGE AMOUNTS
ALLOCATED TO HIS ACCOUNT UNDER TWO OR MORE PLANS DESCRIBED IN SECTION
401(A) OF THE CODE, OR ARRANGEMENTS DESCRIBED IN SECTION 401(K) OF THE CODE
THAT ARE MAINTAINED BY THE EMPLOYER, SHALL BE DETERMINED AS IF THE TOTAL OF
SUCH CONTRIBUTION PERCENTAGE AMOUNTS WAS MADE UNDER EACH PLAN. IF A HIGHLY
COMPENSATED EMPLOYEE PARTICIPATES IN TWO OR MORE CASH OR DEFERRED
ARRANGEMENTS THAT HAVE DIFFERENT PLAN YEARS, ALL CASH OR DEFERRED
ARRANGEMENTS ENDING WITH OR WITHIN THE SAME CALENDAR YEAR SHALL BE TREATED
AS A SINGLE ARRANGEMENT. NOTWITHSTANDING THE FOREGOING, CERTAIN PLANS SHALL
BE TREATED AS SEPARATE IF MANDATORILY DISAGGREGATED UNDER REGULATIONS UNDER
SECTION 401(M) OF THE CODE.
IN THE EVENT THAT THIS PLAN SATISFIES THE REQUIREMENTS OF SECTIONS 401(M),
401(A)(4) OR 410(B) OF THE CODE ONLY IF AGGREGATED WITH ONE OR MORE OTHER
PLANS, OR IF ONE OR MORE OTHER PLANS SATISFY THE REQUIREMENTS OF SUCH
SECTIONS OF THE CODE ONLY IF AGGREGATED WITH THIS PLAN, THEN THIS SECTION
SHALL BE APPLIED BY DETERMINING THE ACTUAL CONTRIBUTION PERCENTAGE OF
EMPLOYEES AS IF ALL SUCH PLANS WERE A SINGLE PLAN. ANY ADJUSTMENTS TO THE
NON-HIGHLY COMPENSATED EMPLOYEE ACTUAL CONTRIBUTION PERCENTAGE FOR THE
PRIOR YEAR WILL BE MADE IN ACCORDANCE WITH IRS NOTICE 98-1 AND ANY
SUPERSEDING GUIDANCE, UNLESS THE EMPLOYER HAS ELECTED IN THE ADOPTION
AGREEMENT TO USE THE CURRENT YEAR TESTING METHOD. PLANS MAY BE AGGREGATED
IN ORDER TO SATISFY SECTION 401(M) OF THE CODE ONLY IF THEY HAVE THE SAME
PLAN YEAR AND USE THE SAME ACTUAL CONTRIBUTION PERCENTAGE TESTING METHOD.
FOR PURPOSES OF THE ACTUAL CONTRIBUTION PERCENTAGE TEST, EMPLOYEE
CONTRIBUTIONS ARE CONSIDERED TO HAVE BEEN MADE IN THE PLAN YEAR IN WHICH
CONTRIBUTED TO THE TRUST. MATCHING CONTRIBUTIONS AND QUALIFIED NONELECTIVE
CONTRIBUTIONS WILL BE
27
CONSIDERED MADE FOR A PLAN YEAR IF MADE NO LATER THAN THE END OF THE
12-MONTH PERIOD BEGINNING ON THE DAY AFTER THE CLOSE OF THE PLAN YEAR.
THE EMPLOYER SHALL MAINTAIN RECORDS SUFFICIENT TO DEMONSTRATE SATISFACTION
OF THE ACTUAL CONTRIBUTION PERCENTAGE TEST AND THE AMOUNT OF QUALIFIED
NONELECTIVE CONTRIBUTIONS USED IN SUCH TEST.
A MEMBER IS A HIGHLY COMPENSATED EMPLOYEE FOR A PARTICULAR PLAN YEAR IF HE MEETS
THE DEFINITION OF A HIGHLY COMPENSATED EMPLOYEE IN EFFECT FOR THAT PLAN YEAR.
SIMILARLY, A MEMBER IS A NON-HIGHLY COMPENSATED EMPLOYEE FOR A PARTICULAR PLAN
YEAR IF HE DOES NOT MEET THE DEFINITION OF A HIGHLY COMPENSATED EMPLOYEE IN
EFFECT FOR THAT PLAN YEAR.
SECTION 3.12 THE AGGREGATE LIMIT TEST
Notwithstanding any other provision of the Plan, effective for Plan Years
beginning after December 31, 1996, the sum of the actual deferral percentage and
the actual contribution percentage determined in accordance with the procedures
described above of those Employees who are Highly Compensated Employees may not
exceed the aggregate limit as determined below.
For purposes of this Article III, the "aggregate limit" for a Plan Year is the
greater of:
(1) The sum of:
(a) 1.25 times the greater of the actual deferral percentage of the
Non-Highly Compensated Employees for the prior Plan Year or the
actual contribution percentage of the Non-Highly Compensated
Employees for the Plan Year, and
(b) two percentage points plus the lesser of the actual deferral
percentage or actual contribution percentage referred to in (a)
above. In no event, however, shall the percentages described in
the preceding sentence exceed two times the lesser of the
relevant actual deferral percentage or the relevant actual
contribution percentage; or
(2) The sum of:
(a) 1.25 times the lesser of the actual deferral percentage of the
Non-Highly Compensated Employees for the prior Plan Year or the
actual contribution
28
percentage of the Non-Highly Compensated Employees for the Plan
Year, and
(b) two percentage points plus the greater of the actual deferral
percentage or the actual contribution percentage referred to in
(a) above. In no event, however, shall the percentage described
in the preceding sentence exceed two times the greater of the
relevant actual deferral percentage or the relevant actual
contribution percentage; provided, however, that if a less
restrictive limitation is prescribed by the IRS, such limitation
shall be used in lieu of the foregoing. The calculation of the
aggregate limit, as defined above, shall be determined in
accordance with the Code and the IRS Regulations.
The TPA shall determine as of the end of the Plan Year whether the aggregate
limit has been exceeded. This determination shall be made after first
determining the treatment of excess deferrals within the meaning of Section
402(g) of the Code under Section 3.2 above, then determining the treatment of
excess contributions under Section 3.10 above, and then determining the
treatment of excess aggregate contributions under this Article III. In the event
that the aggregate limit is exceeded, the actual contribution percentage of
those Employees who are Highly Compensated Employees shall be reduced in the
same manner as described in Section 3.11 of this Article until the aggregate
limit is no longer exceeded, unless the TPA designates, in lieu of the reduction
of the actual contribution percentage, a reduction in the actual deferral
percentage of those Employees who are Highly Compensated Employees, which
reduction shall occur in the same manner as described in Section 3.10 of this
Article until the aggregate limit is no longer exceeded. Notwithstanding the
provisions of Sections 3.2 and 3.10 above, the amount of excess contributions to
be distributed, with respect to a Member for a Plan Year, shall be reduced by
any excess deferrals distributed to such Member for such Plan Year.
If the Employer has elected in the Adoption Agreement to use the Current Year
Testing method, then, in calculating the aggregate limit for a particular Plan
Year, the Non-Highly Compensated Employees' actual deferral percentage and
actual contribution percentage for that Plan Year, instead of the prior Plan
Year, is used.
SECTION 3.13 REMITTANCE OF CONTRIBUTIONS
The contributions of both the Employer and the Plan Members shall be recorded by
the Employer and remitted to the TPA for transmittal to the Trustee or custodian
or directly to the Trustee or custodian so that (i) in the case of Employer
contributions the Trustee or custodian shall be in receipt thereof by the 15th
day of the month next following the
29
month in respect of which such contributions are payable and (ii) in the case of
Member after-tax contributions and 401(k) deferrals, the Trustee or custodian
shall be in receipt thereof by the 15th business day of the month following the
month in which the Member contributions are received by the Employer or the 15th
business day of the month following the month in which such amount would
otherwise have been payable to the Member in cash. Such amounts shall be used to
provide additional Units pursuant to Article V.
SECTION 3.14 SAFE HARBOR CODA
If the Employer has elected the safe harbor CODA option in the Adoption
Agreement, the provisions of this Section 3.14 shall apply for the Plan Year and
any provisions relating to the actual deferral percentage test described in
ss.401(k)(3) of the Code or the actual contribution percentage test described in
ss.401(m)(2) of the Code do not apply. To the extent that any other provision of
the Plan is inconsistent with the provisions of this Section, the provisions of
this Section govern.
(A) Actual Deferral Percentage Test Safe Harbor
(1) Unless the Employer elects in the Adoption Agreement to make Enhanced
Matching Contributions (as provided in the Adoption Agreement) or safe
harbor nonelective contributions, the Employer will contribute monthly
or on another periodic basis for the Plan Year a safe harbor matching
contribution to the Plan on behalf of each eligible Employee equal to
(i) 100 percent of the amount of the Employee's 401(k) deferrals that
do not exceed 3 percent of the Employee's Salary for the Plan Year,
plus (ii) 50 percent of the amount of the Employee's 401(k) deferrals
that exceed 3 percent of the Employee's Salary but that do not exceed
5 percent of the Employee's Salary ("Basic Matching Contributions").
(2) The Member's benefit derived from ADP Test Safe Harbor Contributions
is nonforfeitable and may not be distributed earlier than separation
from service, death, disability, an event described in ss.401(k)(10)
of the Code, or the attainment of age 59 1/2. In addition, such
contributions must satisfy the ADP Test Safe Harbor without regard to
permitted disparity under ss.401(l) of the Code.
(3) At least 30 days, but not more than 90 days, before the beginning of
the Plan Year, the Employer will provide each Eligible Employee a
comprehensive notice of the Employee's rights and obligations under
the Plan, written in a manner calculated to be understood by the
average Eligible Employee. If an Employee becomes eligible after the
90th day before the beginning of the Plan
30
Year and does not receive the notice for that reason, the notice must
be provided no more than 90 days before the Employee becomes eligible
but not later than the date the Employee becomes eligible.
(4) In addition to any other election periods provided under the Plan,
each Eligible Employee may make or modify a deferral election during
the 30-day period immediately following receipt of the notice
described above.
31
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
SECTION 4.1 INVESTMENT BY TRUSTEE OR CUSTODIAN
All contributions to the Plan shall, upon receipt by the TPA, be delivered to
the Trustee or custodian to be held in the Trust Fund and invested and
distributed by the Trustee or custodian in accordance with the provisions of the
Plan and Trust Agreement. The Trust Fund shall consist of one or more of the
Investment Funds or other applicable investment vehicles designated by the
Employer in the Adoption Agreement.
With the exception of the Employer Stock Fund or, if applicable, the Employer
Certificate of Deposit Fund, the Trustee may in its discretion invest any
amounts held by it in any Investment Fund in any commingled or group trust fund
described in Section 401(a) of the Code and exempt under Section 501(a) of the
Code or in any common trust fund exempt under Section 584 of the Code, provided
that such trust fund satisfies any requirements of the Plan applicable to such
Investment Funds. To the extent that the Investment Funds are at any time
invested in any commingled, group or common trust fund, the declaration of trust
or other instrument pertaining to such fund and any amendments thereto are
hereby adopted as part of the Plan.
The Employer will designate in the Adoption Agreement which of the Investment
Funds or other applicable investment vehicles will be made available to Members
and the terms and conditions under which such Funds will operate with respect to
employee direction of allocations to and among such designated Funds and the
types of contributions and/or deferrals eligible for investment therein.
To the extent made available under the Plan, the Employer may elect, in the
Adoption Agreement, to allow Members to direct the investment of their Accounts,
pursuant to, and in accordance with, such rules and procedures as may be
prescribed by the Employer or the Plan Sponsor, to a self-directed brokerage
account. Where an Employer elects to provide a self-directed brokerage account
under the Plan, the Trustee may invest amounts held by it in a self-directed
brokerage account maintained by Charles Schwab & Co., Inc. (or any other entity
which provides a self-directed brokerage account) on behalf of Plan Members who
elect to utilize such investment vehicle.
32
SECTION 4.2 MEMBER DIRECTED INVESTMENTS
To the extent permitted by the Employer as set forth in the Adoption Agreement,
each Member shall direct in writing that his contributions and deferrals, if
any, and the contributions made by the Employer on his behalf shall be invested
(a) entirely in any one of the investment vehicles made available by the
Employer, or (b) among the available investment vehicles in any combination of
multiples of 1%. If a Member has made any Rollover contributions in accordance
with Article III, Section 3.3, such Member may elect to apply separate
investment directions to such rollover amounts. Any such investment direction
shall be followed by the TPA until changed. Subject to the provisions of the
following paragraphs of this Section, as designated in the Adoption Agreement, a
Member may change his investment direction as to future contributions and also
as to the value of his accumulated Units in each of the available investments by
filing written notice with the TPA. Such directed change(s) will become
effective upon the Valuation Date coinciding with or next following the date
which his notice was received by the TPA or as soon as administratively
practicable thereafter. If the Adoption Agreement provides for Member directed
investments, and if a Member does not make a written designation of an
Investment Fund or Funds, or other investment vehicle, the Employer or its
designee shall direct the Trustee to invest all amounts held or received on
account of the Member in the Investment Fund which in the opinion of the
Employer best protects principal.
Except as otherwise provided below, a Member may not direct a transfer from the
Stable Value Fund to the Government Money Market Fund or the Employer
Certificate of Deposit Fund. A Member may direct a transfer from any other
investment vehicle to the Government Money Market Fund or the Employer
Certificate of Deposit Fund provided that amounts previously transferred from
the Stable Value Fund to such investment vehicle remain in such vehicle for a
period of three months prior to being transferred to the Government Money Market
Fund or the Employer Certificate of Deposit Fund.
SECTION 4.3 EMPLOYER SECURITIES
If the Employer so elects in the Adoption Agreement, the Employer and/or Members
may direct that contributions will be invested in Qualifying Employer Securities
(within the meaning of Section 407(d)(5) of ERISA) through the Employer Stock
Fund.
33
ARTICLE V
MEMBERS' ACCOUNTS, UNITS AND VALUATION
The TPA shall establish and maintain an Account for each Member showing his
interests in the available Investment Funds or other applicable investments, as
designated by the Employer in the Adoption Agreement. The interest in each
Investment Fund shall be represented by Units.
As of each Valuation Date, the value of a Unit in each Investment Fund shall be
determined by dividing (a) the sum of the net assets at market value determined
by the Trustee by (b) the total number of outstanding Units.
The number of additional Units to be credited to a Member=s interest in each
available Investment Fund, as of any Valuation Date, shall be determined by
dividing (a) that portion of the aggregate contributions and/or deferrals by and
on behalf of the Member which was directed to be invested in such Investment
Fund and received by the Trustee by (b) the Unit value of such Investment Fund.
The value of a Member=s Account may be determined as of any Valuation Date by
multiplying the number of Units to his credit in each available Investment Fund
by that Investment Fund's Unit value on such date and aggregating the results.
If, and to the extent, a Member's Account is invested pursuant to a
self-directed brokerage account, the investments held in that account shall be
valued by the brokerage firm maintaining such account in accordance with such
procedures as may be determined by such brokerage firm.
A MEMBER IS TREATED AS BENEFITING UNDER THE PLAN FOR ANY PLAN YEAR DURING WHICH
THE MEMBER RECEIVED OR IS DEEMED TO RECEIVE AN ALLOCATION IN ACCORDANCE WITH
SECTION 1.410 (B)-3(A) OF THE CODE.
34
ARTICLE VI
VESTING OF ACCOUNTS
SECTION 6.1 VESTING OF MEMBER CONTRIBUTIONS, 401(K) DEFERRALS, QUALIFIED
NONELECTIVE CONTRIBUTIONS, AND ROLLOVER CONTRIBUTIONS
All Units credited to a Member=s Account based on after-tax contributions and/or
401(k) deferrals made by the Member and any earnings related thereto (including
any rollover contributions allocated to a Member's Account under the Plan and
any earnings thereon) and, as provided in Section 3.9, Employer qualified
nonelective contributions made on behalf of such Member shall be immediately and
fully vested at all times.
SECTION 6.2 VESTING OF EMPLOYER CONTRIBUTIONS
Except as provided in Section 6.1, the Employer may, at its option, elect one of
the available vesting schedules described herein for each of the employer
contribution types applicable under the Plan as designated in the Adoption
Agreement.
SCHEDULE 1: All applicable Employer contributions (and related earnings)
shall be immediately and fully vested. If the eligibility
requirement(s) selected by the Employer under the Plan require(s)
that an Employee complete a service period which is longer than
12 consecutive months, this vesting Schedule 1 shall be
automatically applicable.
SCHEDULE 2: All applicable Employer contributions (and related earnings)
shall vest in accordance with the schedule set forth below:
Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
SCHEDULE 3: All applicable Employer contributions (and related earnings)
shall vest in accordance with the schedule set forth below:
35
Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 5 0%
5 or more 100%
SCHEDULE 4: All applicable Employer contributions (and related earnings)
shall vest in accordance with the schedule set forth below:
Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 3 0%
3 or more 100%
SCHEDULE 5: All applicable Employer contributions (and related earnings)
shall vest in accordance with the schedule set forth below:
Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 1 0%
1 but less than 2 25%
2 but less than 3 50%
3 but less than 4 75%
4 or more 100%
SCHEDULE 6: All applicable Employer contributions (and related earnings)
shall vest in accordance with the schedule set forth below:
Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 3 0%
3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
SCHEDULE 7: All applicable Employer contributions (and related earnings)
shall vest in accordance with the schedule set forth in the
Adoption Agreement prescribed by the Employer in accordance with
applicable law.
Notwithstanding the vesting schedules above, a Member=s interest in his Account
shall become 100% vested in the event that (i) the Member dies while in service
with the Employer and the TPA has received notification of death, (ii) the
Member has been
36
approved for Disability, pursuant to the provisions of Article VII, and the TPA
has received notification of Disability, or (iii) the Member has attained Normal
Retirement Age while in service with the Employer.
Except as otherwise provided hereunder, in the event that the Employer adopts
the Plan as a successor plan to another defined contribution plan qualified
under Sections 401(a) and 501(a) of the Code, or in the event that the Employer
changes or amends a vesting schedule adopted under this Article (or if the Plan
is deemed amended by an automatic change to or from a top-heavy vesting
schedule), any Member who was covered under such predecessor plan or, the
pre-amendment vesting schedule under the Plan, and has completed at least 3
Years of Employment (or, as applicable, 3 years of service) may elect to have
the nonforfeitable percentage of the portion of his Account which is subject to
such vesting schedule computed under such predecessor plan's vesting provisions,
or computed without regard to such change or amendment under the Plan (a
"Vesting Election"). Any Vesting Election shall be made by notifying the TPA in
writing within the election period hereinafter described. The election period
shall begin on the date such amendment is adopted or the date such change is
effective, or the date the Plan, which serves as a successor plan, is adopted or
effective, as the case may be, and shall end no earlier than the latest of the
following dates: (i) the date which is 60 days after the day such amendment is
adopted; (ii) the date which is 60 days after the day such amendment or change
becomes effective; (iii) the date which is 60 days after the day the Member is
given written notice of such amendment or change by the TPA; (iv) the date which
is 60 days after the day the Plan is adopted by the Employer or becomes
effective; or (v) the date which is 60 days after the day the Member is given
written notice that the Plan has been designated as a successor plan. Any such
election, once made, shall be irrevocable.
To the extent permitted under the Code and Regulations, the Employer may, at its
option, elect to treat all Members who are eligible to make a Vesting Election
as having made such Vesting Election if the vesting schedule resulting from such
an election is more favorable than the Vesting Schedule that would apply
pursuant to the Plan amendment. Furthermore, subject to the requirements of the
applicable Regulations, the Employer may elect to treat all Members, who were
employed by the Employer on or before the effective date of the change or
amendment, as subject to the prior vesting schedule, provided such prior
schedule is more favorable.
In the event that an Employer elects, in its Adoption Agreement, to use the hour
of service method for determining vesting service, Years of Service shall be
substituted for Years of Employment for all purposes under this Article VI.
37
NO AMENDMENT TO THE PLAN SHALL BE EFFECTIVE TO THE EXTENT THAT IT HAS THE EFFECT
OF DECREASING A MEMBER'S ACCRUED BENEFIT. NOTWITHSTANDING THE PRECEDING
SENTENCE, A MEMBER'S ACCOUNT BALANCE MAY BE REDUCED TO THE EXTENT PERMITTED
UNDER SECTION 412(C)(8) OF THE CODE. FOR PURPOSES OF THIS PARAGRAPH, A PLAN
AMENDMENT WHICH HAS THE EFFECT OF DECREASING A MEMBER'S ACCOUNT BALANCE, WITH
RESPECT TO BENEFITS ATTRIBUTABLE TO SERVICE BEFORE THE AMENDMENT SHALL BE
TREATED AS REDUCING AN ACCRUED BENEFIT. FURTHERMORE, IF THE VESTING SCHEDULE OF
A PLAN IS AMENDED, IN THE CASE OF AN EMPLOYEE WHO IS A MEMBER AS OF THE LATER OF
THE DATE SUCH AMENDMENT IS ADOPTED OR THE DATE IT BECOMES EFFECTIVE, THE
NONFORFEITABLE PERCENTAGE (DETERMINED AS OF SUCH DATE) OF SUCH EMPLOYEE'S
EMPLOYER-DERIVED ACCRUED BENEFIT WILL NOT BE LESS THAN THE PERCENTAGE COMPUTED
UNDER THE PLAN WITHOUT REGARD TO SUCH AMENDMENT.
NO AMENDMENT TO THE PLAN SHALL BE EFFECTIVE TO ELIMINATE OR RESTRICT AN OPTIONAL
FORM OF BENEFIT. THE PRECEDING SENTENCE SHALL NOT APPLY TO A PLAN AMENDMENT THAT
ELIMINATES OR RESTRICTS THE ABILITY OF A MEMBER TO RECEIVE PAYMENT OF HIS
ACCOUNT BALANCE UNDER A PARTICULAR OPTIONAL FORM OF BENEFIT IF THE AMENDMENT
SATISFIES THE CONDITIONS IN (1) AND (2) BELOW:
(1) The amendment provides a single-sum distribution form that is
otherwise identical to the optional form of benefit eliminated or
restricted. For purposes of this condition (1), a single-sum
distribution form is otherwise identical only if it is identical in
all respects to the eliminated or restricted optional form of benefit
(or would be identical except that it provides greater rights to the
Member) except with respect to the timing of payments after
commencement.
(2) The amendment is not effective unless the amendment provides that the
amendment shall not apply to any distribution with an annuity starting
date earlier than the earlier of: (i) the 90th day after the date the
Member receiving the distribution has been furnished a summary that
reflects the amendment and that satisfies the ERISA requirements at 29
CFR 2520.104b-3 relating to a summary of material modifications or
(ii) the first day of the second Plan Year following the Plan Year in
which the amendment is adopted. (1)
SECTION 6.3 FORFEITURES
If a Member who was partially vested in his Account on the date of his
termination of Employment returns to Employment, his Years of Employment (or, as
applicable, years of
38
service) prior to the Break(s) in Service shall be included in determining
future vesting and, if he returns before incurring 5 consecutive one year Breaks
in Service, any amounts forfeited from his Account shall be restored to his
Account provided, however, that if such a Member has received a distribution
pursuant to Article VII, his nonvested Account shall not be restored unless he
repays to the Plan the full amount distributed to him before the earlier of (i)
5 years after the first date on which the Member is subsequently reemployed by
the Employer, or (ii) the close of the first period of 5 consecutive one-year
Breaks in Service commencing after the withdrawal. The amount restored to the
Member=s Account will be valued on the Valuation Date coinciding with or next
following the later of (i) the date the Employee is rehired, or (ii) the date a
new enrollment application is received by the TPA. If a Member terminates
Employment without any vested interest in his Account, he shall (i) immediately
be deemed to have received a total distribution of his Account and (ii)
thereupon forfeit his entire Account; provided that if such Member returns to
Employment before the number of consecutive one-year Breaks in Service equals or
exceeds the greater of (i) 5, or (ii) the aggregate number of the Member=s Years
Employment (or, as applicable, Years of Service) prior to such Break in Service,
his Account shall be restored in the same manner as if such Member had been
partially vested at the time of his termination of Employment and had his
nonvested Account restored upon a return to employment, and his Years of
Employment (or, as applicable, Years of Service) prior to incurring the first
Break in Service shall be included in any subsequent determination of his
vesting service.
Forfeited amounts, as described in the preceding paragraph, shall be made
available to the Employer, through a transfer from the Member's Account to the
Employer Credit Account, upon: (1) if the Member had a vested interest in his
Account at his termination of Employment, the earlier of (i) the date as of
which the Member receives a distribution of his entire vested interest in his
Account or (ii) the date upon which the Member incurs 5 consecutive one-year
Breaks in Service, or (2) the date of the Member's termination of Employment, if
the Member then has no vested interest in his Account. Once so transferred, such
amounts shall be used at the option of the Employer to (i) offset any
contributions to be made by the Employer for that Contribution Determination
Period or (ii) be allocated to all eligible Members deemed to be employed as of
the last day of the Contribution Determination Period. The Employer Credit
Account, referenced in this Subparagraph, shall be maintained to receive, in
addition to the forfeitures described above, (i) contributions in excess of the
limitations contained in Section 415 of the Code, (ii) Employer contributions
made in advance of the date allocable to Members, if any, and (iii) amounts, if
any, forfeited pursuant to Sections 3.10 and 3.11.
39
NO FORFEITURES WILL OCCUR SOLELY AS A RESULT OF AN EMPLOYEE'S WITHDRAWAL OF
EMPLOYEE CONTRIBUTIONS UNDER ARTICLE VII OF THE PLAN.
40
ARTICLE VII
WITHDRAWALS AND DISTRIBUTIONS
SECTION 7.1 GENERAL PROVISIONS
The Employer will define in the Adoption Agreement the terms and conditions
under which withdrawals and distributions will be permitted under the Plan. All
payments in respect of a Member=s Account shall be made in cash from the Trust
Fund and in accordance with the provisions of this Article or Article XI except
that if the Adoption Agreement so provides, a Member may elect to have his
Account, to the extent then invested in the Employer Stock Fund, distributed in
the form of Employer Stock in accordance with the provisions of this Article or
Article XI. The amount of payment will be determined in accordance with the
vested value of the Member's Account on the Valuation Date coinciding with or
next following the date proper notice is filed with the TPA, unless following
such Valuation Date a decrease in the value of the Member=s investment in any of
the available Investment Funds or other Account investments occurs prior to the
date the Member's Account is paid in which case that part of the payment which
is based on such investments shall equal the value of such investments
determined as of the date of payment which date shall occur as soon as
administratively practicable on or following the Valuation Date such proper
notice is filed with the TPA. If units are redeemed to make a payment of
benefits, the redemption date Unit value with respect to a Member=s investment
in any of the available Investment Funds shall equal the value of a Unit in such
Investment Fund, as determined in accordance with the valuation method
applicable to Unit investments in such Investment Fund on the date the Member=s
investment is redeemed.
Except where otherwise specified, payments provided under this Article will be
made in a lump sum as soon as practicable after such Valuation Date or date of
redemption, as may be applicable, subject to any applicable restriction on
redemption imposed on amounts invested in any of the available Investment Funds.
Any partial withdrawal shall be deemed to come (to the extent available for
withdrawal):
o First from the Member's after-tax contributions made prior to January 1,
1987.
o Next from the Member's after-tax contributions made after December 31, 1986
plus earnings on all of the Member's after-tax contributions.
o Next from the Member's rollover contributions plus earnings thereon.
41
o Next from the Employer matching contributions plus earnings thereon.
o Next from the Employer supplemental contributions plus earnings thereon.
o Next from the Employer basic contributions plus earnings thereon.
o Next from the Employer safe harbor CODA contributions plus earnings
thereon.
o Next from the Member's 401(k) deferrals plus earnings thereon.
o Next from the Employer qualified nonelective contributions plus earnings
thereon.
o Next from the Employer profit sharing contributions plus earnings thereon.
SECTION 7.2 WITHDRAWALS WHILE EMPLOYED
The Employer may, at its option, permit Members to make withdrawals from one or
more of the portions of their Accounts while employed by the Employer, as
designated in the Adoption Agreement, under the terms and provisions described
herein.
VOLUNTARY WITHDRAWALS - To the extent permitted by the Employer as specified in
the Adoption Agreement, a Member may voluntarily withdraw some or all of his
Account (other than his 401(k) deferrals and Employer qualified nonelective
contributions treated as 401(k) deferrals except as hereinafter permitted) while
in Employment by filing a notice of withdrawal with the TPA; provided, however,
that in the event his Employer has elected to provide annuity options under
Section 7.3 and the Member elects an annuity form of payment, no withdrawals may
be made from a married Member's Account without the written consent of such
Member's Spouse (which consent shall be subject to the procedures set forth in
Section 7.3). Only one in-service withdrawal may be made in any Plan Year from
each of the rollover amount of the Member's Account and the remainder of the
Member's Account. This restriction shall not, however, apply to a withdrawal
under this Section in conjunction with a hardship withdrawal.
Notwithstanding the foregoing paragraph, a Member may not withdraw any matching,
basic, supplemental, profit sharing or, solely in the case of the events
described in clause (iii) or (iv), qualified nonelective contributions made by
the Employer under Article III unless (i) the Member has completed 60 months of
participation in the Plan; (ii) the withdrawal occurs at least 24 months after
such contributions were made by the Employer; (iii) the Employer terminates the
Plan without establishing a qualified successor plan; or (iv) the Member dies,
is disabled, retires, attains age 592 or terminates Employment. For purposes of
the preceding requirements, if the Member's Account includes amounts which
42
have been transferred from a defined contribution plan established prior to the
adoption of the Plan by the Employer, the period of time during which amounts
were held on behalf of such Member and the periods of participation of such
Member under such defined contribution plan shall be taken into account.
Effective as of January 1, 1997, if an Employer does not permit Members to make
withdrawals from their Account while employed and a Member has attained age 70
1/2 prior to terminating employment with his Employer, such Member may withdraw
some or all of his Account under the terms and provisions of this Section 7.2.
If an Employer, in the Adoption Agreement, permits Members to withdraw 401(k)
deferrals and qualified non-elective contributions (and the income allocable to
each) while employed by the Employer, such deferrals or contributions are not
distributable earlier than upon separation from service, death, disability,
attainment of age 59 1/2 or hardship. Such amounts may also be distributed, in
accordance with Section 401(k)(2)(B)(i)(II) of the Code and the IRS Regulations
thereunder, upon: (i) termination of the Plan without the establishment of
another defined contribution plan other than an employee stock ownership plan
(as defined in Section 4975(e)(7) or Section 409 of the Code) or a simplified
employee pension plan (defined in Code Section 408(k) or a SIMPLE IRA plan
(defined in Code Section 408(p)), or (ii) the disposition by a corporation to an
unrelated corporation of substantially all of the assets (within the meaning of
Section 409(d)(2) of the Code) used in a trade or business of such corporation
if such corporation continues to maintain this Plan after the disposition, but
only with respect to employees who continue employment with the corporation
acquiring such assets, or (iii) the disposition by a corporation to an unrelated
entity of such corporation's interest in a subsidiary (within the meaning of
Section 409(d)(3) of the Code) if such corporation continues to maintain this
Plan, but only with respect to employees who continue employment with such
subsidiary.
HARDSHIP WITHDRAWALS - If designated by the Employer in the Adoption Agreement,
a Member may make a withdrawal of his 401(k) deferrals, Employer qualified
nonelective contributions which are treated as elective deferrals, and any
earnings credited thereto prior to January 1, 1989, prior to attaining age 592,
provided that the withdrawal is solely on account of an immediate and heavy
financial need and is necessary to satisfy such financial need. For the purposes
of this Article, the term "immediate and heavy financial need@ shall be limited
to the need of funds for (i) the payment of medical expenses (described in
Section 213(d) of the Code) incurred by the Member, the Member=s Spouse, or any
of the Member=s dependents (as defined in Section 152 of the Code), (ii) the
payment of tuition and room and board for the next 12 months of post-secondary
education of the Member, the Member=s Spouse, the Member=s children, or any of
the
43
Member=s dependents (as defined in Section 152 of the Code), (iii) the purchase
(excluding mortgage payments) of a principal residence for the Member, or (iv)
the prevention of eviction of the Member from his principal residence or the
prevention of foreclosure on the mortgage of the Member=s principal residence.
For purposes of this Article, a distribution generally may be treated as
"necessary to satisfy a financial need" if the Plan Administrator reasonably
relies upon the Member's written representation that the need cannot be relieved
(i) through reimbursement or compensation by insurance or otherwise, (ii) by
reasonable liquidation of the Member=s available assets, to the extent such
liquidation would not itself cause an immediate and heavy financial need, (iii)
by cessation of Member contributions and/or deferrals pursuant to Article III of
the Plan, to the extent such contributions and/or deferrals are permitted by the
Employer, or (iv) by other distributions or nontaxable (at the time of the loan)
loans from plans maintained by the Employer or by any other employer, or by
borrowing from commercial sources on reasonable commercial terms. The amount of
any withdrawal pursuant to this Article shall not exceed the amount required to
meet the demonstrated financial hardship, including any amounts necessary to pay
any federal income taxes and penalties reasonably anticipated to result from the
distribution as certified to the Plan Administrator by the Member.
Notwithstanding the foregoing, no amounts may be withdrawn on account of
hardship pursuant to this Article prior to a Member's withdrawal of his other
available Plan assets without regard to any other withdrawal restrictions
adopted by the Employer.
SECTION 7.3 DISTRIBUTIONS UPON TERMINATION OF EMPLOYMENT
In accordance with the provisions for distributions designated by the Employer
in the Adoption Agreement, a Member who terminates Employment with the Employer
may request a distribution of his Account at any time thereafter up to
attainment of age 702. Except as otherwise provided by the Employer in the
Adoption Agreement, a Member may withdraw all or a portion of his Account at any
time after termination of employment and any amounts paid under this Article may
not be returned to the Plan.
Any distribution made under this Section 7.3 requires that a Request for
Distribution be filed with the TPA. If a Member does not file such a Request,
the value of his Account will be paid to him as soon as practicable after his
attainment of age 702, but in no event shall payment commence later than April 1
of the calendar year following the calendar year in which the Member attains age
702 unless otherwise provided by law.
LUMP SUM PAYMENTS - A Member may request a distribution of all or a part of his
Account no more frequently than once per calendar year by filing the proper
Request for Distribution with the TPA. In the event the Employer has elected to
provide an annuity option under
44
the Plan, no distributions may be made from a married Member's Account without
the written consent of such married Member's spouse (which consent shall be
subject to the procedures set forth below).
INSTALLMENT PAYMENTS - To the extent designated by the Employer in the Adoption
Agreement and in lieu of any lump sum payment of his total Account, a Member who
has terminated his Employment may elect in his Request for Distribution to be
paid in installments (no less frequently than annually), provided that a Member
shall not be permitted to elect an installment period in excess of his remaining
life expectancy (or the joint life expectancy of the Member and his designated
Beneficiary) and if a Member attempts such an election, the TPA shall deem him
to have elected the installment period with the next lowest multiple within the
Member's remaining life expectancy. For purposes of installment payments under
this Section 7.3, the Member's life expectancy (or the joint life expectancy of
the Member and his designated Beneficiary) shall not be recalculated. The amount
of each installment will be equal to the value of the total Units in the
Member=s Account, multiplied by a fraction, the numerator of which is one and
the denominator of which is the number of remaining installments including the
one then being paid, so that at the end of the installment period so elected,
the total Account will be liquidated. The value of the Units will be determined
in accordance with the Unit values on the Valuation Date on or next following
the TPA's receipt of his Request for Distribution and on each anniversary
thereafter subject to applicable Regulations under Code Section 401(a)(9).
Payment will be made as soon as practicable after each such Valuation Date, but
in no event shall payment commence later than April 1 of the calendar year
following the calendar year in which the Member attains age 702 subject to the
procedure for making such distributions described below. The election of
installments hereunder may not be subsequently changed by the Member, except
that upon written notice to the TPA, the Member may withdraw the balance of the
Units in his Account in a lump sum at any time, notwithstanding the fact that
the Member previously received a distribution in the same calendar year.
ANNUITY PAYMENTS - The Employer may, at its option, elect to provide an annuity
option under the Plan. To the extent so designated by the Employer in the
Adoption Agreement and in lieu of any lump sum payment of his total Account, a
Member who has terminated his Employment may elect in his Request for
Distribution to have the value of his total Account be paid as an annuity
secured for the Member by the Plan Administrator through a individual annuity
contract purchased by the Plan. In the event the Employer elects to provide the
annuity option under the Plan and a Member elects an annuity form of payment,
the following provisions shall apply:
45
UNMARRIED MEMBERS - Any unmarried Member who has terminated his Employment may
elect, in lieu of any other available payment option, to receive a benefit
payable by purchase of a single premium contract providing for (i) a single life
annuity for the life of the Member or (ii) an annuity for the life of the Member
and, if the Member dies leaving a designated Beneficiary, a 50% survivor annuity
for the life of such designated Beneficiary.
MARRIED MEMBERS - Except as otherwise provided below, (i) any married Member who
has terminated his Employment shall receive a benefit payable by purchase of a
single premium contract providing for a Qualified Joint and Survivor Annuity, as
defined below, and (ii) the Surviving Spouse of any married Member who dies
prior to the date payment of his benefit commences shall be entitled to a
Preretirement Survivor Annuity, as defined below. Notwithstanding the foregoing,
any such married Member may elect to receive his benefit in any other available
form, and may waive the Preretirement Survivor Annuity, in accordance with the
spousal consent requirements described herein.
For purposes of this Section 7.3, the term Qualified Joint and Survivor Annuity@
means a benefit providing an annuity for the life of the Member, ending with the
payment due on the last day of the month coinciding with or preceding the date
of his death, and, if the Member dies leaving a Surviving Spouse, a survivor
annuity for the life of such Surviving Spouse equal to one-half of the annuity
payable for the life of the Member under his Qualified Joint and Survivor
Annuity, commencing on the last day of the month following the date of the
Member=s death and ending with the payment due on the first day of the month
coinciding with or preceding the date of such Surviving Spouse=s death.
For purposes of this Section 7.3, the term APreretirement Survivor Annuity@
means a benefit providing for payment of 50% of the Member=s Account balance as
of the Valuation Date coinciding with or preceding the date of his death.
Payment of a Preretirement Survivor Annuity shall commence in the month
following the month in which the Member dies or as soon as practicable
thereafter; provided, however, that to the extent required by law, if the value
of the amount used to purchase a Preretirement Survivor Annuity exceeds $3,500,
then payment of the Preretirement Survivor Annuity shall not commence prior to
the date the Member reached (or would have reached, had he lived) Normal
Retirement Age without the written consent of the Member=s Surviving Spouse.
Absence of any required consent will result in a deferral of payment of the
Preretirement Survivor Annuity to the month following the month in which occurs
the earlier of (i) the date the required consent is received by the TPA or (ii)
the date the Member would have reached Normal Retirement Age had he lived.
46
The TPA shall furnish or cause to be furnished, to each married Member with an
Account subject to this Section 7.3, explanations of the Qualified Joint and
Survivor Annuity and Preretirement Survivor Annuity. A Member may, with the
written consent of his Spouse (unless the TPA makes a written determination in
accordance with the Code and the Regulations that no such consent is required),
elect in writing (i) to receive his benefit in a single lump sum payment within
the 90-day period ending on the date payment of his benefit commences; and (ii)
to waive the Preretirement Survivor Annuity within the period beginning on the
first day of the Plan Year in which the Member attains age 35 and ending on the
date of his death. Any election made pursuant to this Subparagraph may be
revoked by a Member, without spousal consent, at any time within which such
election could have been made. Such an election or revocation must be made in
accordance with procedures developed by the TPA and shall be notarized.
Notwithstanding anything to the contrary, effective for Plan Years beginning
after December 31, 1996, the 90-day period in which a Member may, with the
written consent of his Spouse, elect in writing to receive his benefit in a
single lump sum shall not end before the 30th day after the date on which
explanations of the Qualified Joint and Survivor Annuity and Preretirement
Survivor Annuity are provided. A Member may elect (with any applicable spousal
consent) to waive any requirement that the written explanation be provided at
least 30 days before the annuity starting date (or to waive the 30-day
requirement under the preceding sentence) if the distribution commences more
than seven days after such explanation is provided.
Notwithstanding the preceding provisions of this Section 7.3, any benefit of
$3,500, subject to the limits of Article X, or less, shall be paid in cash in a
lump sum in full settlement of the Plan=s liability therefor; provided, however,
that in the case of a married Member, no such lump sum payment shall be made
after benefits have commenced without the consent of the Member and his Spouse
or, if the Member has died, the Member=s Surviving Spouse. Furthermore, if the
value of the benefit payable to a Member or his Surviving Spouse is greater than
$3,500 and the Member has or had not reached his Normal Retirement Age, then to
the extent required by law, unless the Member (and, if the Member is married and
his benefit is to be paid in a form other than a Qualified Joint and Survivor
Annuity, his Spouse, or, if the Member was married, his Surviving Spouse)
consents in writing to an immediate distribution of such benefit, his benefit
shall continue to be held in the Trust until a date following the earlier of (i)
the date of the TPA=s receipt of all required consents or (ii) the date the
Member reaches his earliest possible Normal Retirement Age under the Plan (or
would have reached such date had he lived), and thereafter shall be paid in
accordance with this Section 7.3.
47
Solely to the extent required under applicable law and regulations, and
notwithstanding any provisions of the Plan to the contrary that would otherwise
limit a Distributee's election under this Subparagraph, a Distributee may elect,
at the time and in the manner prescribed by the TPA, to have any portion of an
Eligible Rollover Distribution paid directly to an Eligible Retirement Plan
specified by the Distributee in a Direct Rollover. For purposes of this
Subparagraph, the following terms shall have the following meanings:
ELIGIBLE ROLLOVER DISTRIBUTION - Any distribution of all or any portion of the
balance to the credit of the Distributee, except that an Eligible Rollover
Distribution does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Distributee or the joint lives (or
joint life expectancies) of the Distributee and the Distributee's designated
Beneficiary, or for a specified period of ten years or more; any distribution to
the extent such distribution is required under Section 401(a)(9) of the Code;
and the portion of any distribution that is not includable in gross income
(determined without regard to the exclusion for net unrealized appreciation with
respect to employer securities).
Effective January 1, 1999, an Eligible Rollover Distribution excludes hardship
withdrawals as defined in Section 401(k)(2)(B)(i)(IV) of the Code which are
attributable to Member's 401(k) deferrals under Treasury Regulation Section
1.401(k)-1(d)(2)(ii).
ELIGIBLE RETIREMENT PLAN - An individual retirement account described in Section
408(a) of the Code, an individual retirement annuity described in Section 408(b)
of the Code, an annuity plan described in Section 403(a) of the Code, or a
qualified trust described in Section 401(a) of the Code, that accepts the
Distributee's Eligible Rollover Distribution. However, in the case of an
Eligible Rollover Distribution to a Surviving Spouse, an Eligible Retirement
Plan is an individual retirement account or an individual retirement annuity.
DISTRIBUTEE - A Distributee may be (i) an Employee, (ii) a former Employee,
(iii) an Employee's Surviving Spouse, (iv) a former Employee's Surviving Spouse,
(v) an Employee's Spouse or former Spouse who is an alternate payee under a
qualified domestic relations order, as defined in Section 414(p) of the Code, or
(vi) a former Employee's Spouse or former Spouse who is an alternate payee under
a qualified domestic relations order, as defined in Section 414(p) of the Code,
with respect to the interest of the Spouse or former Spouse.
DIRECT ROLLOVER - A payment by the Plan to the Eligible Retirement Plan
specified by the Distributee.
48
SECTION 7.4 DISTRIBUTIONS DUE TO DISABILITY
A Member who is separated from Employment by reason of a disability which is
expected to last in excess of 12 consecutive months and who is either (i)
eligible for, or is receiving, disability insurance benefits under the Federal
Social Security Act or (ii) approved for disability under the provisions of any
other benefit program or policy maintained by the Employer, which policy or
program is applied on a uniform and nondiscriminatory basis to all Employees of
the Employer, shall be deemed to be disabled for all purposes under the Plan.
The Plan Administrator shall determine whether a Member is disabled in
accordance with the terms of the immediately preceding paragraph; provided,
however, approval of Disability is conditioned upon notice to the Plan
Administrator of such Member=s Disability within 13 months of the Member=s
separation from Employment. The notice of Disability shall include a
certification that the Member meets one or more of the criteria listed above.
Upon determination of Disability, a Member may withdraw his total Account
balance under the Plan and have such amounts paid to him in accordance with the
applicable provisions of this Article VII, as designated by the Employer. If a
disabled Member becomes reemployed subsequent to withdrawal of some or all of
his Account balance, such Member may not repay to the Plan any such withdrawn
amounts.
SECTION 7.5 DISTRIBUTIONS DUE TO DEATH
Subject to the provisions of Section 7.3 above, if a married Member dies, his
Spouse, as Beneficiary, will receive a death benefit equal to the value of the
Member=s Account determined on the Valuation Date on or next following the TPA=s
receipt of notice that such Member died; provided, however, that if such
Member=s Spouse had consented in writing to the designation of a different
Beneficiary, the Member=s Account will be paid to such designated Beneficiary.
Such nonspousal designation may be revoked by the Member without spousal consent
at any time prior to the Member=s death. If a Member is not married at the time
of his death, his Account will be paid to his designated Beneficiary.
A Member may elect that upon his death, his Beneficiary, pursuant to this
Section 7.5, may receive, in lieu of any lump sum payment, payment in 5 annual
installments (10 if the Spouse is the Beneficiary, provided that the Spouse's
remaining life expectancy is at least 10 years) whereby the value of 1/5th of
such Member=s Units (or 1/10th in the case of a spousal Beneficiary, provided
that the Spouse's remaining life expectancy is at least 10 years) in each
available Investment Fund will be determined in accordance with the Unit values
on the Valuation Date on or next following the TPA=s receipt of notice of the
Member=s death and on each anniversary of such Valuation Date. Payment will be
made as soon as practicable after each Valuation Date until the Member=s Account
is exhausted. Such election may be filed at any time with the Plan Administrator
prior to the Member=s death and may not be changed or revoked after such
Member=s death. If such an election is not in effect at the time of the Member=s
death, his Beneficiary
49
(including any spousal Beneficiary) may elect to receive distributions in
accordance with this Article, except that any balance remaining in the deceased
Member=s Account must be distributed on or before the December 31 of the
calendar year which contains the 5th anniversary (the 10th anniversary in the
case of a spousal Beneficiary, provided that the Spouse's remaining life
expectancy is at least 10 years) of the Member=s death. Notwithstanding the
foregoing, payment of a Member=s Account shall commence not later than the
December 31 of the calendar year immediately following the calendar year in
which the Member died or, in the event such Beneficiary is the Member=s
Surviving Spouse, on or before the December 31 of the calendar year in which
such Member would have attained age 702, if later (or, in either case, on any
later date prescribed by the IRS Regulations). If, upon the Spouse=s or
Beneficiary=s death, there is still a balance in the Account, the value of the
remaining Units will be paid in a lump sum to such Spouse=s or Beneficiary=s
estate.
SECTION 7.6 MINIMUM REQUIRED DISTRIBUTIONS
Effective as of January 1, 1997, payment of a Member's Account shall not
commence later than April 1 of the calendar year following the later of (i) the
calendar year in which the Member attains age 70 1/2 or (ii) the calendar year
in which the Member retires; provided however, if the Member is a 5 percent
owner (as described in Section 416(i) of the Code), at any time during the Plan
Year ending with or within the calendar year in which the Employee attains age
70 1/2, any benefit payable to such Member shall commence no later than April 1
of the calendar year following the calendar year in which the Member attains age
70 1/2.
A) SUBJECT TO SECTION 7.3, JOINT AND SURVIVOR ANNUITY REQUIREMENTS, THE
REQUIREMENTS OF THIS SECTION SHALL APPLY TO ANY DISTRIBUTION OF A MEMBER'S
INTEREST AND WILL TAKE PRECEDENCE OVER ANY INCONSISTENT PROVISIONS OF THIS
PLAN. UNLESS OTHERWISE SPECIFIED, THE PROVISIONS OF THIS SECTION 7.6 APPLY
TO CALENDAR YEARS BEGINNING AFTER DECEMBER 31, 1984.
ALL DISTRIBUTIONS REQUIRED UNDER THIS SECTION 7.6 SHALL BE DETERMINED AND
MADE IN ACCORDANCE WITH THE PROPOSED REGULATIONS UNDER SECTION 401(A)(9) OF
THE CODE, INCLUDING THE MINIMUM DISTRIBUTION INCIDENTAL BENEFIT REQUIREMENT
OF SECTION 1.401(A)(9)-2 OF THE PROPOSED REGULATIONS.
THE ENTIRE INTEREST OF A MEMBER MUST BE DISTRIBUTED OR BEGIN TO BE
DISTRIBUTED NO LATER THAN THE MEMBER'S REQUIRED BEGINNING DATE.
50
B) AS OF THE FIRST DISTRIBUTION CALENDAR YEAR, DISTRIBUTIONS, IF NOT MADE IN A
SINGLE-SUM, MAY ONLY BE MADE OVER ONE OF THE FOLLOWING PERIODS (OR A
COMBINATION THEREOF):
(1) the life of the Member,
(2) the life of the Member and a designated beneficiary,
(3) a period certain not extending beyond the life expectancy of the
Member, or
(4) a period certain not extending beyond the joint and last survivor
expectancy of the Member and a designated beneficiary.
C) If the Member's interest is to be distributed in other than a single sum,
the following minimum distribution rules shall apply on or after the
required beginning date:
(1) If a Member's benefit is to be distributed over (a) a period not
extending beyond the life expectancy of the Member or the joint life
and last survivor expectancy of the Member and the Member's designated
beneficiary or (b) a period not extending beyond the life expectancy
of the designated beneficiary, the amount required to be distributed
for each calendar year, beginning with distributions for the first
distribution calendar year, must at least equal the quotient obtained
by dividing the Member's benefit by the applicable life expectancy.
(2) For calendar years beginning before January 1, 1989, if the Member's
spouse is not the designated beneficiary, the method of distribution
selected must assure that at least 50% of the present value of the
amount available for distribution is paid within the life expectancy
of the Member.
(3) For calendar years beginning after December 31, 1988, the amount to be
distributed each year, beginning with distributions for the first
distribution calendar year shall not be less than the quotient
obtained by dividing the Member's benefit by the lesser of (a) the
applicable life expectancy or (b) if the Member's spouse is not the
designated beneficiary, the applicable divisor determined from the
table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the proposed
regulations. Distributions after the death of
51
the Member shall be distributed using the applicable life expectancy
in paragraph (1) above as the relevant divisor without regard to
Proposed Regulations Section 1.401(a)(9)-2.
(4) The minimum distribution required for the Member's first distribution
calendar year must be made on or before the Member's required
beginning date. The minimum distribution for other calendar years,
including the minimum distribution for the distribution calendar year
in which the employee's required beginning date occurs, must be made
on or before December 31 of that distribution calendar year.
If the Member's benefit is distributed in the form of an annuity purchased from
an insurance company, distributions thereunder shall be made in accordance with
the requirements of Section 401(a)(9) of the Code and the proposed regulations
thereunder.
D) Distributions beginning before death. If the Member dies after
distribution of his interest has begun, the remaining portion of such
interest will continue to be distributed at least as rapidly as under
the method of distribution being used prior to the Member's death.
E) Distributions beginning after death. 1) If the Member dies before
distribution of his or her interest begins, distribution of the
Member's entire interest shall be completed by December 31 of the
calendar year containing the fifth anniversary of the Member's death
except to the extent that an election is made to receive distributions
in accordance with (a) or (b) below:
(a) if any portion of the Member's interest is payable to a
designated beneficiary, distributions may be made over the life
or over a period certain not greater than the life expectancy of
the designated beneficiary commencing on or before December 31 of
the calendar year immediately following the calendar year in
which the Member died;
(b) if the designated beneficiary is the Member's surviving spouse,
the date distributions are required to begin in accordance with
(a) above shall not be earlier than the later of (i) December 31
of the calendar year immediately
52
following the calendar year in which the Member died and (ii)
December 31 of the calendar year in which the Member would have
attained age 70 1/2.
2) If the Member has not made an election pursuant to this Section 7.6 by
the time of his death, the Member's designated beneficiary must elect the
method of distribution no later than the earlier of (i) December 31, of the
calendar year in which distributions would be required to begin under this
Section, or (ii) December 31 of the calendar year which contains the fifth
anniversary of the date of death of the Member. If the Member has no
designated beneficiary, or if the designated beneficiary does not elect a
method of distribution, distribution of the Member's entire interest must
be completed by December 31 of the calendar year containing the fifth
anniversary of the Member's death.
F) For purposes of paragraph (E) above, if the surviving spouse dies after the
Member, but before payments to such spouse begin, the provisions of
paragraph (E), with the exception of paragraph (E)(1)(b) therein, shall be
applied as if the surviving spouse were the Member.
G) For the purposes of paragraphs (D) and (E), distribution of a Member's
interest is considered to begin on the Member's required beginning date
(or, if paragraph (F) above is applicable, the date distribution is
required to begin to the surviving spouse pursuant to paragraph (E) above).
If distribution in the form of an annuity irrevocably commences to the
Member before the required beginning date, the date distribution is
considered to begin is the date distribution actually commences.
H) Applicable life expectancy. The life expectancy (or joint and last survivor
expectancy) calculated using the attained age of the Member (or designated
beneficiary as of the Member's (or designated beneficiary's) birthday in
the applicable calendar year reduced by one for each calendar year which
has elapsed since the date life expectancy was first calculated. If life
expectancy is being recalculated, the applicable life expectancy shall be
the life expectancy as so recalculated. The applicable calendar year shall
be the first distribution calendar year, and if life expectancy is being
recalculated such succeeding calendar year.
53
I) Designated beneficiary. The individual who is designated as the beneficiary
under the Plan in accordance with Section 401(a)(9) of the Code and the
proposed regulations thereunder.
J) Distribution calendar year. A calendar year for which a minimum
distribution is required. For distributions beginning before the Member's
death, the first distribution calendar year is the calendar year
immediately preceding the calendar year which contains the Member's
required beginning date. For distributions beginning after the Member's
death, the first distribution calendar year is the calendar year in which
distributions are required to begin pursuant to paragraphs (D), (E), (F)
and (G) above.
K) Life expectancy. Life expectancy and joint and last survivor expectancy are
computed by use of the expected return multiples in Tables V and VI of
Section 1.72-9 of the Income Tax Regulations.
Unless otherwise elected by the Member (or spouse, in the case of
distributions described in paragraph (E)(1)(b) above) by the time
distributions are required to begin, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Member
(or spouse) and shall apply to all subsequent years. The life expectancy of
a nonspouse beneficiary may not be recalculated.
(L) Member's benefit.
(1) The account balance as of the last valuation date in the calendar year
immediately preceding the distribution calendar year (valuation
calendar year) increased by the amount of any contributions or
forfeitures allocated to the account balance as of dates in the
valuation calendar year after the valuation date and decreased by
distributions made in the valuation calendar year after the valuation
date.
(2) Exception for second distribution calendar year. For purposes of
paragraph (1) above, if any portion of the minimum distribution for
the first distribution calendar year is made in the second
distribution calendar year on or before the required beginning date,
the amount of the minimum
54
distribution made in the second distribution calendar year shall be
treated as if it had been made in the immediately preceding
distribution calendar year.
55
ARTICLE VIII
LOAN PROGRAM
SECTION 8.1 GENERAL PROVISIONS
An Employer may, at its option, make available the loan program described herein
for any Member (and, if applicable under Section 8.8 of this Article, any
Beneficiary), subject to applicable law. The Employer shall so designate its
adoption of the loan program and the terms and provisions of its operation in
the Adoption Agreement. There shall be a reasonable origination fee and/or an
annual administration fee assessed to the Member's Account for each loan made to
a Member or Beneficiary. In the event that amounts are transferred to the Plan
from a retirement plan subject to Section 401(a)(11) of the Code, no loans may
be made from a married Member's Account without the written consent of such
Member's Spouse (in accordance with the spousal consent rules set forth under
Section 7.3). In the event the Employer elects to permit loans to be made from
rollover contributions and earnings thereon, as designated in the Adoption
Agreement, loans shall be available from the Accounts of any Employees of the
Employer who have not yet become Members. Only one loan may be made to a Member
in the Plan Year, except that if an Employer provides in the Adoption Agreement
to make loans available from Employee rollover contributions and the earnings
thereon, a Member will be permitted to request a second loan in the Plan Year to
the extent of Employee rollover contributions and earnings thereon subject to
any other limitations provided under this Article.
The Employer may elect, in the Adoption Agreement, to make the loan program
available only in the event of hardship or financial necessity. Hardship or
financial necessity is defined as a significant health expense or a loss of
income due to illness or disability incurred by a Member, or the death of a
Member or an immediate family member of a Member. Hardship or financial
necessary also includes the purchase of a Member's principal place of residence
as well as paying for a college education (including graduate studies) for
either a Member or a Member's dependents.
SECTION 8.2 LOAN APPLICATION
Subject to the restrictions described in the paragraph immediately following, a
Member in Employment may borrow from his Account in each of the available
Investment Funds by filing a loan application with the TPA. Such application
(hereinafter referred to as a "completed application@) shall (i) specify the
terms pursuant to which the loan is requested to be made and (ii) provide such
information and documentation as the TPA shall require, including a note, duly
executed by the Member, granting a security interest of an amount not greater
than 50% of his vested Account, to secure the loan. With respect to
56
such Member, the completed application shall authorize the repayment of the loan
through payroll deductions. Such loan will become effective upon the Valuation
Date coinciding with or next following the date on which his completed
application and other required documents were submitted, subject to the same
conditions with respect to the amount to be transferred under this Section which
are specified in the Plan procedures for determining the amount of payments made
under Article VII of the Plan.
The Employer shall establish standards in accordance with the Code and ERISA
which shall be uniformly applicable to all Members eligible to borrow from their
interests in the Trust Fund similarly situated and shall govern the TPA=s
approval or disapproval of completed applications. The terms for each loan shall
be set solely in accordance with such standards.
The TPA shall, in accordance with the established standards, review and approve
or disapprove a completed application as soon as practicable after its receipt
thereof, and shall promptly notify the applying Member of such approval or
disapproval. Notwithstanding the foregoing, the TPA may defer its review of a
completed application, or defer payment of the proceeds of an approved loan, if
the proceeds of the loan would otherwise be paid during the period commencing on
December 1 and ending on the following January 31.
Subject to the preceding paragraph and Section 8.6, upon approval of a completed
application, the TPA shall cause payment of the loan to be made from the
available Investment Fund(s) in the same proportion that the designated portion
of the Member's Account is invested at the time of the loan, and the relevant
portion of the Member's interest in such Investment Fund(s) shall be cancelled
and shall be transferred in cash to the Member. The TPA shall maintain
sufficient records regarding such amounts to permit an accurate crediting of
repayments of the loan.
Notwithstanding any provision of this Article VIII to the contrary, if an
Employer has elected in the Adoption Agreement to condition loans based upon a
Member's demonstrated hardship or financial necessity, the Plan Administrator,
in a uniform and nondiscriminatory manner, shall determine whether a Member has
incurred a hardship or financial necessity following the Member filing a loan
application with the TPA.
SECTION 8.3 PERMITTED LOAN AMOUNT
The amount of each loan may not be less than $1,000 nor more than the maximum
amount as described below. The maximum amount available for loan under the Plan
(when added
57
to the outstanding balance of all other loans from the Plan to the borrowing
Member) shall not exceed the lesser of: (a) $50,000 reduced by the excess (if
any) of (i) the highest outstanding loan balance attributable to the Account of
the Member requesting the loan from the Plan during the one-year period ending
on the day preceding the date of the loan, over (ii) the outstanding balance of
all other loans from the Plan to the Member on the date of the loan, or (b) 50%
of the value of the Member=s vested portion of his Account as of the Valuation
Date on or next following the date on which the TPA receives the completed
application for the loan and all other required documents. In determining the
maximum amount that a Member may borrow, all vested assets of his Account will
be taken into consideration, provided that, where the Employer has not elected
to make a Member's entire Account available for loans or where a Member's
Account contains investments in a self-directed brokerage account which shall
not be available for loans, in no event shall the amount of the loan exceed the
value of such vested portion of the Member=s Account from which loans are
permissible.
SECTION 8.4 SOURCE OF FUNDS FOR LOAN
The amount of the loan will be deducted from the Member=s Account in the
available Investment Funds in accordance with Section 8.2 of this Article and
the Plan procedures for determining the amount of payments made under Article
VII. Loans shall be deemed to come (to the extent the Employer permits Members
to take loans from one or more of the portions of their Accounts, as designated
in the Adoption Agreement):
o First from the vested Employer profit sharing contributions plus earnings
thereon.
o Next from the Employer qualified nonelective contributions plus earnings
thereon.
o Next from the Member's 401(k) deferrals plus earnings thereon.
o Next from the Member's safe harbor CODA contributions plus earnings
thereon.
o Next from the vested Employer basic contributions plus earnings thereon.
o Next from the vested Employer supplemental contributions plus earnings
thereon.
o Next from the vested Employer matching contributions plus earnings thereon.
o Next from the Member's rollover contributions plus earnings thereon.
o Next from the Member's after-tax contributions made after December 31,1986
plus earnings on all of the Member's after-tax contributions.
o Next from the Member's after-tax contributions made prior to January
1,1987.
58
SECTION 8.5 CONDITIONS OF LOAN
Each loan to a Member under the Plan shall be repaid in level monthly amounts
through regular payroll deductions after the effective date of the loan, and
continuing thereafter with each payroll. Except as otherwise required by the
Code and the IRS Regulations, each loan shall have a repayment period of not
less than 12 months and not in excess of 60 months, unless the purpose of the
loan is for the purchase of a primary residence, in which case the loan may be
for not more than 180 months. After the first 3 monthly payments of the loan
have been satisfied, the Member may pay the outstanding loan balance (including
accrued interest from the due date).
The rate of interest for the term of the loan will be established as of the loan
date, and will be the Barron=s Prime Rate (base rate) plus 1% as published on
the last Saturday of the preceding month, or such other rate as may be required
by applicable law and determined by reference to the prevailing interest rate
charged by commercial lenders under similar circumstances. The applicable rate
would then be in effect through the last business day of the month.
Repayment of all loans under the Plan shall be secured by 50% of the Member=s
vested interest in his Account, determined as of the origination of such loan.
SECTION 8.6 CREDITING OF REPAYMENT
Upon lending any amount to a Member, the TPA shall establish and maintain a loan
receivable account with respect to, and for the term of, the loan. The
allocations described in this Section shall be made from the loan receivable
account. Upon receipt of each monthly installment payment and the crediting
thereof to the Member=s loan receivable account, there shall be allocated to the
Member=s Account in the available Investment Funds, in accordance with his most
recent investment instructions, the principal portion of the installment payment
plus that portion of the interest equal to the rate determined in Section 8.5 of
this Article. The unpaid balance owed by a Member on a loan under the Plan shall
not reduce the amount credited to his Account. However, from the time of payment
of the proceeds of the loan to the Member, such Account shall be deemed
invested, to the extent of such unpaid balance, in such loan until the complete
repayment thereof or distribution from such Account. Any loan repayment shall
first be deemed allocable to the portions of the Member's Account on the basis
of a reverse ordering of the manner in which the loan was originally distributed
to the Member.
SECTION 8.7 CESSATION OF PAYMENTS ON LOAN
If a Member, while employed, fails to make a monthly installment payment when
due, as specified in the completed application, subject to applicable law, he
will be deemed to have
59
received a distribution of the outstanding balance of the loan. If such default
occurs after the first 3 monthly payments of the loan have been satisfied, the
Member may pay the outstanding balance, including accrued interest from the due
date, by the last day of the calendar quarter following the calendar quarter
which contains the due date of the last monthly installment payment, in which
case no such distribution will be deemed to have occurred. Subject to applicable
law, notwithstanding the foregoing, a Member that borrows any of his 401(k)
deferrals and any of the earnings attributable thereto may not cease to make
monthly installment payments while employed and receiving a Salary from the
Employer.
Except as provided below, upon a Member=s termination of Employment, death or
Disability, or the Employer=s termination of the Plan, no further monthly
installment payments may be made. Unless the outstanding balance, including
accrued interest from the due date, is paid by the last day of the calendar
quarter following the calendar quarter which contains the date of such
occurrence, the Member will be deemed to have received a distribution of the
outstanding balance of the loan including accrued interest from the due date.
SECTION 8.8 LOANS TO FORMER MEMBERS
Notwithstanding any other provisions of this Article VIII, a member who
terminates Employment for any reason shall be permitted to continue making
scheduled repayments with respect to any loan balance outstanding at the time he
becomes a terminated Member. In addition, a terminated Member or Beneficiary may
elect to initiate a new loan from his Account, subject to the conditions
otherwise described in this Article VIII. If any terminated Member who continues
to make repayments or any terminated Member or Beneficiary who borrows from his
Account pursuant to this Section 8.8 fails to make a scheduled monthly
installment payment by the last day of the calendar quarter following the
calendar quarter which contains the scheduled payment date, he will be deemed to
have received a distribution of the outstanding balance of the loan.
ARTICLE IX
ADMINISTRATION OF PLAN AND ALLOCATION OF RESPONSIBILITIES
SECTION 9.1 FIDUCIARIES
The following persons are Fiduciaries under the Plan.
a) The Trustee,
b) The Employer,
60
c) The Plan Administrator or committee, appointed by the Employer pursuant to
this Article IX of the Plan and designated as the "Named Fiduciary" of the
Plan and the Plan Administrator, and
d) Any Investment Manager appointed by the Employer as provided in Section
9.4.
Each of said Fiduciaries shall be bonded to the extent required by ERISA.
The TPA is not intended to have the authority or responsibilities which would
cause it to be considered a Fiduciary with respect to the Plan unless the TPA
otherwise agrees to accept such authority or responsibilities in a service
agreement or otherwise in writing.
SECTION 9.2 ALLOCATION OF RESPONSIBILITIES AMONG THE FIDUCIARIES
a) THE TRUSTEE
The Employer shall enter into one or more Trust Agreements with a Trustee
or Trustees selected by the Employer. The Trust established under any such
agreement shall be a part of the Plan and shall provide that all funds
received by the Trustee as contributions under the Plan and the income
therefrom (other than such part as is necessary to pay the expenses and
charges referred to in Paragraph (b) of this Section) shall be held in the
Trust Fund for the exclusive benefit of the Members or their Beneficiaries,
and managed, invested and reinvested and distributed by the Trustee in
accordance with the Plan. Sums received for investment may be invested (i)
wholly or partly through the medium of any common, collective or commingled
trust fund maintained by a bank or other financial institution and which is
qualified under Sections 401(a) and 501(a) of the Code and constitutes a
part of the Plan; (ii) wholly or partly through the medium of a group
annuity or other type of contract issued by an insurance company and
constituting a part of the Plan, and utilizing, under any such contract,
general, commingled or individual investment accounts; or (iii) wholly or
partly in securities issued by an investment company registered under the
Investment Company Act of 1940. Subject to the provisions of Article XI,
the Employer may from time to time and without the consent of any Member or
Beneficiary (a) amend the Trust Agreement or any such insurance contract in
such manner as the Employer may deem necessary or desirable to carry out
the Plan, (b) remove the Trustee and designate a successor Trustee upon
such removal or upon the resignation of the Trustee, and (c) provide for an
alternate funding agency under the Plan. The Trustee shall make payments
under the Plan only to the extent, in the amounts, in the manner, at the
time, and to the persons as shall from time to time be set forth and
designated in written authorizations from the Plan Administrator or TPA.
61
The Trustee shall from time to time charge against and pay out of the Trust
Fund taxes of any and all kinds whatsoever which are levied or assessed
upon or become payable in respect of such Fund, the income or any property
forming a part thereof, or any security transaction pertaining thereto. To
the extent not paid by the Employer, the Trustee shall also charge against
and pay out of the Trust Fund other expenses incurred by the Trustee in the
performance of its duties under the Trust, the expenses incurred by the TPA
in the performance of its duties under the Plan (including reasonable
compensation for agents and cost of services rendered in respect of the
Plan), such compensation of the Trustee as may be agreed upon from time to
time between the Employer and the Trustee, and all other proper charges and
disbursements of the Trustee, the Employer, or the Plan Administrator.
b) THE EMPLOYER
The Employer shall be responsible for all functions assigned or reserved to
it under the Plan and any related Trust Agreement. Any authority so
assigned or reserved to the Employer, other than responsibilities assigned
to the Plan Administrator, shall be exercised by resolution of the
Employer's Board of Directors and shall become effective with respect to
the Trustee upon written notice to the Trustee signed by the duly
authorized officer of the Board advising the Trustee of such exercise. By
way of illustration and not by limitation, the Employer shall have
authority and responsibility:
(1) to amend the Plan;
(2) to merge and consolidate the Plan with all or part of the assets or
liabilities of any other plan;
(3) to appoint, remove and replace the Trustee and the Plan Administrator
and to monitor their performances;
(4) to appoint, remove and replace one or more Investment Managers, or to
refrain from such appointments, and to monitor their performances;
(5) to communicate such information to the Plan Administrator, TPA,
Trustee and Investment Managers as they may need for the proper
performance of their duties; and
(6) to perform such additional duties as are imposed by law.
62
Whenever, under the terms of this Plan, the Employer is permitted or
required to do or perform any act, it shall be done and performed by an
officer thereunto duly authorized by its Board of Directors.
c) THE PLAN ADMINISTRATOR
The Plan Administrator shall have responsibility and discretionary
authority to control the operation and administration of the Plan in
accordance with the provisions of Article IX of the Plan, including,
without limiting, the generality of the foregoing:
(1) the determination of eligibility for benefits and the amount and
certification thereof to the Trustee;
(2) the hiring of persons to provide necessary services to the Plan;
(3) the issuance of directions to the Trustee to pay any fees, taxes,
charges or other costs incidental to the operation and management of
the Plan;
(4) the preparation and filing of all reports required to be filed with
respect to the Plan with any governmental agency; and
(5) the compliance with all disclosure requirements imposed by state or
federal law.
63
d) THE INVESTMENT MANAGER
Any Investment Manager appointed pursuant to Section 9.4 shall have sole
responsibility for the investment of the portion of the assets of the Trust
Fund to be managed and controlled by such Investment Manager. An Investment
Manager may place orders for the purchase and sale of securities directly
with brokers and dealers.
SECTION 9.3 NO JOINT FIDUCIARY RESPONSIBILITIES
This Article IX is intended to allocate to each Fiduciary the individual
responsibility for the prudent execution of the functions assigned to him, and
none of such responsibilities or any other responsibilities shall be shared by
two or more of such Fiduciaries unless such sharing is provided by a specific
provision of the Plan or any related Trust Agreement. Whenever one Fiduciary is
required to follow the directions of another Fiduciary, the two Fiduciaries
shall not be deemed to have been assigned a shared responsibility, but the
responsibility of the Fiduciary giving the directions shall be deemed his sole
responsibility, and the responsibility of the Fiduciary receiving those
directions shall be to follow them insofar as such instructions are on their
face proper under applicable law. To the extent that fiduciary responsibilities
are allocated to an Investment Manager, such responsibilities are so allocated
solely to such Investment Manager alone, to be exercised by such Investment
Manager alone and not in conjunction with any other Fiduciary, and the Trustee
shall be under no obligation to manage any asset of the Trust Fund which is
subject to the management of such Investment Manager.
SECTION 9.4 INVESTMENT MANAGER
The Employer may appoint a qualified Investment Manager or Managers to manage
any portion or all of the assets of the Trust Fund. For the purpose of this Plan
and the related Trust, a "qualified Investment Manager" means an individual,
firm or corporation who has been so appointed by the Employer to serve as
Investment Manager hereunder, and who is and has acknowledged in writing that he
is (a) a Fiduciary with respect to the Plan, (b) bonded as required by ERISA,
and (c) either (i) registered as an investment advisor under the Investment
Advisors Act of 1940, (ii) a bank as defined in said Act, or (iii) an insurance
company qualified to perform investment management services under the laws of
more than one state of the United States.
Any such appointment shall be by a vote of the Board of Directors of the
Employer naming the Investment Manager so appointed and designating the portion
of the assets of the Trust Fund to be managed and controlled by such Investment
Manager. Said vote shall be evidenced by a certificate in writing signed by the
duly authorized officer of the Board and shall become effective on the date
specified in such certificate but not before delivery
64
to the Trustee of a copy of such certificate, together with a written
acknowledgment by such Investment Manager of the facts specified in the second
sentence of this Section.
SECTION 9.5 ADVISOR TO FIDUCIARY
A Fiduciary may employ one or more persons to render advice concerning any
responsibility such Fiduciary has under the Plan and related Trust Agreement.
SECTION 9.6 SERVICE IN MULTIPLE CAPACITIES
Any person or group of persons may serve in more than one fiduciary capacity
with respect to the Plan, specifically including service both as Plan
Administrator and as a Trustee of the Trust; provided, however, that no person
may serve in a fiduciary capacity who is precluded from so serving pursuant to
Section 411 of ERISA.
SECTION 9.7 APPOINTMENT OF PLAN ADMINISTRATOR
The Employer shall designate the Plan Administrator in the Adoption Agreement.
The Plan Administrator may be an individual, a committee of two or more
individuals, whether or not, in either such case, the individual or any of such
individuals are Employees of the Employer, a consulting firm or other
independent agent, the Trustee (with its consent), the Board of the Employer, or
the Employer itself. Except as the Employer shall otherwise expressly determine,
the Plan Administrator shall be charged with the full power and responsibility
for administering the Plan in all its details. If no Plan Administrator has been
appointed by the Employer, or if the person designated as Plan Administrator is
not serving as such for any reason, the Employer shall be deemed to be the Plan
Administrator. The Plan Administrator may be removed by the Employer or may
resign by giving written notice to the Employer, and, in the event of the
removal, resignation, death or other termination of service of the Plan
Administrator, the Employer shall, as soon as is practicable, appoint a
successor Plan Administrator, such successor thereafter to have all of the
rights, privileges, duties and obligations of the predecessor Plan
Administrator.
SECTION 9.8 POWERS OF THE PLAN ADMINISTRATOR
The Plan Administrator is hereby vested with all powers and authority necessary
in order to carry out its duties and responsibilities in connection with the
administration of the Plan as herein provided, and is authorized to make such
rules and regulations as it may deem necessary to carry out the provisions of
the Plan and the Trust Agreement. The Plan Administrator may from time to time
appoint agents to perform such functions involved in the administration of the
Plan as it may deem advisable. The Plan Administrator shall have the
discretionary authority to determine any questions arising in the
administration,
65
interpretation and application of the Plan, including any questions submitted by
the Trustee on a matter necessary for it to properly discharge its duties; and
the decision of the Plan Administrator shall be conclusive and binding on all
persons.
SECTION 9.9 DUTIES OF THE PLAN ADMINISTRATOR
The Plan Administrator shall keep on file a copy of the Plan and the Trust
Agreement(s), including any subsequent amendments, and all annual reports of the
Trustee(s), and such annual reports or registration statements as may be
required by the laws of the United States, or other jurisdiction, for
examination by Members in the Plan during reasonable business hours. Upon
request by any Member, the Plan Administrator shall furnish him with a statement
of his interest in the Plan as determined by the Plan Administrator as of the
close of the preceding Plan Year.
SECTION 9.10 ACTION BY THE PLAN ADMINISTRATOR
In the event that there shall at any time be two or more persons who constitute
the Plan Administrator, such persons shall act by concurrence of a majority
thereof.
SECTION 9.11 DISCRETIONARY ACTION
Wherever, under the provisions of this Plan, the Plan Administrator is given any
discretionary power or powers, such power or powers shall not be exercised in
such manner as to cause any discrimination prohibited by the Code in favor of or
against any Member, Employee or class of Employees. Any discretionary action
taken by the Plan Administrator hereunder shall be consistent with any prior
discretionary action taken by it under similar circumstances and to this end the
Plan Administrator shall keep a record of all discretionary action taken by it
under any provision hereof.
SECTION 9.12 COMPENSATION AND EXPENSES OF PLAN ADMINISTRATOR
Employees of the Employer shall serve without compensation for services as Plan
66
Administrator, but all expenses of the Plan Administrator shall be paid by the
Employer or in accordance with Section 9.2. Such expenses shall include any
expenses incidental to the functioning of the Plan, including, but not limited
to, attorney's fees, accounting and clerical charges, and other costs of
administering the Plan. Non-Employee Plan Administrators shall receive such
compensation as the Employer shall determine.
SECTION 9.13 RELIANCE ON OTHERS
The Plan Administrator and the Employer shall be entitled to rely upon all
valuations, certificates and reports furnished by the Trustee(s), upon all
certificates and reports made by an accountant or actuary selected by the Plan
Administrator and approved by the Employer and upon all opinions given by any
legal counsel selected by the Plan Administrator and approved by the Employer,
and the Plan Administrator and the Employer shall be fully protected in respect
of any action taken or suffered by them in good faith in reliance upon such
Trustee(s), accountant, actuary or counsel and all action so taken or suffered
shall be conclusive upon each of them and upon all Members, retired Members, and
Former Members and their Beneficiaries, and all other persons.
SECTION 9.14 SELF INTEREST
No person who is the Plan Administrator shall have any right to decide upon any
matter relating solely to himself or to any of his rights or benefits under the
Plan. Any such decision shall be made by another Plan Administrator or the
Employer.
SECTION 9.15 PERSONAL LIABILITY - INDEMNIFICATION
The Plan Administrator shall not be personally liable by virtue of any
instrument executed by him or on his behalf. Neither the Plan Administrator, the
Employer, nor any of its officers or directors shall be personally liable for
any action or inaction with respect to any duty or responsibility imposed upon
such person by the terms of the Plan unless such action or inaction is
judicially determined to be a breach of that person's fiduciary responsibility
with respect to the Plan under any applicable law. The limitation contained in
the preceding sentence shall not, however, prevent or preclude a compromise
settlement of any controversy involving the Plan, the Plan Administrator, the
Employer, or any of its officers and directors. The Employer may advance money
in connection with questions of liability prior to any final determination of a
question of liability. Any settlement made under this Article IX shall not be
determinative of any breach of fiduciary duty hereunder.
The Employer will indemnify every person who is or was a Plan Administrator,
officer or member of the Board or a person who provides services without
compensation to the Plan
67
for any liability (including reasonable costs of defense and settlement) arising
by reason of any act or omission affecting the Plan or affecting the Member or
Beneficiaries thereof, including, without limitation, any damages, civil penalty
or excise tax imposed pursuant to ERISA; provided (1) that the act or omission
shall have occurred in the course of the person's service as Plan Administrator,
officer of the Employer or member of the Board or was within the scope of the
Employment of any Employee of the Employer or in connection with a service
provided without compensation to the Plan, (2) that the act or omission be in
good faith as determined by the Employer, whose determination, made in good
faith and not arbitrarily or capriciously, shall be conclusive, and (3) that the
Employer's obligation hereunder shall be offset to the extent of any otherwise
applicable insurance coverage, under a policy maintained by the Employer, or any
other person, or other source of indemnification.
SECTION 9.16 INSURANCE
The Plan Administrator shall have the right to purchase such insurance as it
deems necessary to protect the Plan and the Trustee from loss due to any breach
of fiduciary responsibility by any person. Any premiums due on such insurance
may be paid from Plan assets provided that, if such premiums are so paid, such
policy of insurance must permit recourse by the insurer against the person who
breaches his fiduciary responsibility. Nothing in this Article IX shall prevent
the Plan Administrator or the Employer, at its, or his, own expense, from
providing insurance to any person to cover potential liability of that person as
a result of a breach of fiduciary responsibility, nor shall any provisions of
the Plan preclude the Employer from purchasing from any insurance company the
right of recourse under any policy by such insurance company.
SECTION 9.17 CLAIMS PROCEDURES
Claims for benefits under the Plan shall be filed with the Plan Administrator on
forms supplied by the Employer. Written notice of the disposition of a claim
shall be furnished to the claimant within 90 days after the application thereof
is filed unless special circumstances require an extension of time for
processing the claim. If such an extension of time is required, written notice
of the extension shall be furnished to the claimant prior to the termination of
said 90-day period, and such notice shall indicate the special circumstances
which make the postponement appropriate.
SECTION 9.18 CLAIMS REVIEW PROCEDURES
In the event a claim is denied, the reasons for the denial shall be specifically
set forth in the notice described in this Section 9.18 in language calculated to
be understood by the claimant. Pertinent provisions of the Plan shall be cited,
and, where appropriate, an
68
explanation as to how the claimant can request further consideration and review
of the claim will be provided. In addition, the claimant shall be furnished with
an explanation of the Plan's claims review procedures. Any Employee, former
Employee, or Beneficiary of either, who has been denied a benefit by a decision
of the Plan Administrator pursuant to Section 9.17 shall be entitled to request
the Plan Administrator to give further consideration to his claim by filing with
the Plan Administrator (on a form which may be obtained from the Plan
Administrator) a request for a hearing. Such request, together with a written
statement of the reasons why the claimant believes his claim should be allowed,
shall be filed with the Plan Administrator no later than 60 days after receipt
of the written notification provided for in Section 9.17. The Plan Administrator
shall then conduct a hearing within the next 60 days, at which the claimant may
be represented by an attorney or any other representative of his choosing and at
which the claimant shall have an opportunity to submit written and oral evidence
and arguments in support of his claim. At the hearing (or prior thereto upon 5
business days' written notice to the Plan Administrator), the claimant or his
representative shall have an opportunity to review all documents in the
possession of the Plan Administrator which are pertinent to the claim at issue
and its disallowance. A final disposition of the claim shall be made by the Plan
Administrator within 60 days of receipt of the appeal unless there has been an
extension of 60 days and shall be communicated in writing to the claimant. Such
communication shall be written in a manner calculated to be understood by the
claimant and shall include specific reasons for the disposition and specific
references to the pertinent Plan provisions on which the disposition is based.
For all purposes under the Plan, such decision on claims (where no review is
requested) and decision on review (where review is requested) shall be final,
binding and conclusive on all interested persons as to participation and
benefits eligibility, the amount of benefits and as to any other matter of fact
or interpretation relating to the Plan.
69
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.1 GENERAL LIMITATIONS
(A) In order that the Plan be maintained as a qualified plan and trust under
the Code, contributions in respect of a Member shall be subject to the
limitations set forth in this Section, notwithstanding any other provision
of the Plan. The contributions in respect of a Member to which this Section
is applicable are his own contributions and/or deferrals and the Employer's
contributions.
For purposes of this Section 10.1, a Member=s contributions shall be
determined without regard to any rollover contributions as provided in
Section 402(a)(5) of the Code.
(B) LIMITATIONS ON ALLOCATIONS
(1) IF THE MEMBER DOES NOT PARTICIPATE IN, AND HAS NEVER PARTICIPATED IN
ANOTHER QUALIFIED PLAN MAINTAINED BY THE EMPLOYER OR A WELFARE BENEFIT
FUND, AS DEFINED IN PLAN 419(E) OF THE CODE MAINTAINED BY THE
EMPLOYER, OR AN INDIVIDUAL MEDICAL ACCOUNT, AS DEFINED IN PLAN
415(L)(2) OF THE CODE, MAINTAINED BY THE EMPLOYER, OR A SIMPLIFIED
EMPLOYEE PENSION, AS DEFINED IN PLAN 408(K) OF THE CODE, MAINTAINED BY
THE EMPLOYER, WHICH PROVIDES AN ANNUAL ADDITION AS DEFINED IN
PARAGRAPH 13, THE AMOUNT OF ANNUAL ADDITIONS WHICH MAY BE CREDITED TO
THE MEMBER'S ACCOUNT FOR ANY LIMITATION YEAR WILL NOT EXCEED THE
LESSER OF THE MAXIMUM PERMISSIBLE AMOUNT OR ANY OTHER LIMITATION
CONTAINED IN THIS PLAN. IF THE EMPLOYER CONTRIBUTION THAT WOULD
OTHERWISE BE CONTRIBUTED OR ALLOCATED TO THE MEMBER'S ACCOUNT WOULD
CAUSE THE ANNUAL ADDITIONS FOR THE LIMITATION YEAR TO EXCEED THE
MAXIMUM PERMISSIBLE AMOUNT, THE AMOUNT CONTRIBUTED OR ALLOCATED WILL
BE REDUCED SO THAT THE ANNUAL ADDITIONS FOR THE LIMITATION YEAR WILL
EQUAL THE MAXIMUM PERMISSIBLE AMOUNT.
(2) Prior to determining the Member's actual compensation for the
limitation year, the Employer may determine the maximum permissible
amount for a Member on the basis of a reasonable estimation of the
Member's compensation for the limitation year, uniformly determined
for all Members similarly situated.
70
(3) As soon as is administratively feasible after the end of the
limitation year, the maximum permissible amount for the limitation
year will be determined on the basis of the Member's actual
compensation for the limitation year.
(4) If pursuant to paragraph 3 above or as a result of the allocation of
forfeitures, there is an excess amount the excess will be disposed of
as follows:
(a) Any nondeductible voluntary employee contributions (plus
attributable earnings), to the extent they would reduce the
excess amount, will be returned to the Member;
(b) If after the application of paragraph (a) an excess amount still
exists, any elective deferrals (plus attributable earnings), to
the extent they would reduce the excess amount, will be
distributed to the Member;
(c) If after the application of paragraph (b) an excess amount still
exists, and the Member is covered by the Plan at the end of the
limitation year, the excess amount in the Member's account will
be used to reduce employer contributions (including any
allocation of forfeitures) for such Member in the next limitation
year, and each succeeding limitation year if necessary.
(d) If after the application of paragraph (b) an excess amount still
exists, and the Member is not covered by the Plan at the end of a
limitation year, the excess amount will be held unallocated in a
suspense account. The suspense account will be applied to reduce
future employer contributions for all remaining Members in the
next limitation year, and each succeeding limitation year if
necessary.
(e) If a suspense account is in existence at any time during a
limitation year pursuant to this paragraph 4, it will not
participate in the allocation of investment gains and losses. If
a suspense account is in existence at any time during a
particular limitation year, all amounts in the suspense account
must be allocated and reallocated to Members' accounts before any
employer or any employee contributions may be made to the Plan
for that limitation year. Excess amounts may not be distributed
to Members or former Members. (a)
71
(5) This paragraph applies if, in addition to this Plan, the Member is
covered under another qualified master or prototype defined
contribution plan maintained by the Employer, a welfare benefit fund
maintained by the Employer, an individual medical account maintained
by the Employer, or a simplified employee pension maintained by the
Employer, that provides an annual addition as defined in paragraph 13,
during any limitation year. The annual additions which may be credited
to a Member's account under this Plan for any such limitation year
will not exceed the maximum permissible amount reduced by the annual
additions credited to a Member's account under the other qualified
master and prototype defined contribution plans, welfare benefit
funds, individual medical accounts, and simplified employee pensions
for the same limitation year. If the annual additions with respect to
the Member under other qualified master and prototype defined
contribution plans, welfare benefit funds, individual medical
accounts, and simplified employee pensions maintained by the Employer
are less than the maximum permissible amount and the employer
contribution that would otherwise be contributed or allocated to the
Member's account under this Plan would cause the annual additions for
the limitation year to exceed this limitation, the amount contributed
or allocated will be reduced so that the annual additions under all
such plans and funds for the limitation year will equal the maximum
permissible amount. If the annual additions with respect to the Member
under such other qualified master and prototype defined contribution
plans, welfare benefit funds, individual medical accounts, and
simplified employee pensions in the aggregate are equal to or greater
than the maximum permissible amount, no amount will be contributed or
allocated to the Member's account under this Plan for the limitation
year.
(6) Prior to determining the Member's actual compensation for the
limitation year, the Employer may determine the maximum permissible
amount for a Member in the manner described in paragraph 2.
(7) As soon as is administratively feasible after the end of the
limitation year, the maximum permissible amount for the limitation
year will be determined on the basis of the Member's actual
compensation for the limitation year.
72
(8) If, pursuant to paragraph 7 or as a result of the allocation of
forfeitures, a Member's annual additions under this Plan and such
other plans would result in an excess amount for a limitation year,
the excess amount will be deemed to consist of the annual additions
last allocated, except that annual additions attributable to a
simplified employee pension will be deemed to have been allocated
first, followed by annual additions to a welfare benefit fund or
individual medical account, regardless of the actual allocation date.
(9) If an excess amount was allocated to a Member on an allocation date of
this Plan which coincides with an allocation date of another plan, the
excess amount attributed to this Plan will be the product of:
(a) the total excess amount allocated as of such date, times
(a) the ratio of (i) the annual additions allocated to the Member for
the limitation year as of such date under this Plan to (ii) the
total annual additions allocated to the Member for the limitation
year as of such date under this and all the other qualified
master or prototype defined contribution plans.
(10) Any excess amount attributed to this Plan will be disposed in the
manner described in paragraph 4.
(11) If the Member is covered under another qualified defined contribution
plan maintained by the employer which is not a master or prototype
plan, annual additions which may be credited to the Member's account
under this Plan for any limitation year will be limited in accordance
with paragraphs 5 through 10 as though the other plan were a master or
prototype plan.
(12) If the employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Member in this Plan, the sum of the
Member's defined benefit plan fraction and defined contribution plan
fraction will not exceed 1.0 in any limitation year. The annual
additions which may be credited to the Member's account under this
Plan for any limitation year will be limited in accordance with
73
the adoption agreement. This paragraph 12 does not apply for
limitation years beginning on or after January 1, 2000.
(13) Definitions. - Annual additions: The sum of the following amounts
credited to a Member's account for the limitation year:
(a) employer contributions;
(b) employee contributions;
(c) forfeitures;
(d) amounts allocated, after March 31, 1984, to an individual medical
account, as defined in Plan 415(l)(2) of the Code, which is part
of a pension or annuity plan maintained by the employer are
treated as annual additions to a defined contribution plan. Also
amounts derived from contributions paid or accrued after December
31, 1985, in taxable years ending after such date, which are
attributable to post-retirement medical benefits, allocated to
the separate account of a key employee, as defined in Plan
419A(d)(3) of the Code, under a welfare benefit fund, as defined
in Plan 419(e) of the Code, maintained by the employer are
treated as annual additions to a defined contribution plan; and
(e) allocations under a simplified employee pension. For this
purpose, any excess amount applied under paragraphs 4 or 10 in
the limitation year to reduce employer contributions will be
considered annual additions for such limitation year.
Compensation will mean compensation as required to be reported under
Plans 6041, 6051, and 6052 of the Code (Wages, tips and other
compensation as reported on Form W-2). Compensation is defined as
wages within the meaning of Plan 3401(a) and all other payments of
compensation to an employee by the employer (in the course of the
employer's trade or business) for which the employer is required to
furnish the employee a written statement under Plans 6041(d),
6051(a)(3), and 6052. Compensation must be determined without regard
to any rules under Plan 3401(a) that limit the remuneration included
in wages based on the nature or location of the employment or the
services performed (such as the exception for agricultural labor in
Plan 3401(a)(2)).
74
For any self-employed individual, compensation will mean earned
income. For limitation years beginning after December 31, 1991, for
purposes of applying the limitations of this article, compensation for
a limitation year is the compensation actually paid or made available
in gross income during such limitation year. Notwithstanding the
preceding sentence, compensation for a Member in a defined
contribution plan who is permanently and totally disabled (as defined
in Section 22(e)(3) of the Internal Revenue Code) is the compensation
such Member would have received for the limitation year if the Member
had been paid at the rate of compensation paid immediately before
becoming permanently and totally disabled; for limitation years
beginning before January 1, 1997, such imputed compensation for the
disabled Member may be taken into account only if the Member is not a
Highly Compensated Employee and contributions made on behalf of such
Member are nonforfeitable when made. For limitation years beginning
after December 31, 1997, for purposes of applying the limitations of
this article, compensation paid or made available during such
limitation year shall include any elective deferral (as defined in
Code Plan 402(g)(3)), and any amount which is contributed or deferred
by the employer at the election of the employee and which is not
includible in the gross income of the employee by reason of Plan 125
or 457.
(14) Defined benefit fraction: A fraction, the numerator of which is the
sum of the Member's projected annual benefits under all the defined
benefit plans (whether or not terminated) maintained by the employer,
and the denominator of which is the lesser of 125 percent of the
dollar limitation determined for the limitation year under Plans
415(b) and (d) of the Code or 140 percent of the highest average
compensation, including any adjustments under Plan 415(b) of the Code.
Notwithstanding the above, if the Member was a Member as of the first
day of the first limitation year beginning after December 31, 1986, in
one or more defined benefit plans maintained by the employer which
were in existence on May 6, 1986, the denominator of this fraction
will not be less than 125 percent of the sum of the annual benefits
under such plans which the Member had accrued as of the close of the
last limitation year beginning before January 1, 1987, disregarding
any changes in the terms and conditions of the Plan after May 5, 1986.
The preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Plan
415 for all limitation years beginning before January 1, 1987.
75
(15) Defined contribution dollar limitation: $30,000, as adjusted under Plan
415(d).
(16) Defined contribution fraction: A fraction, the numerator of which is the
sum of the annual additions to the Member's account under all the defined
contribution plans (whether or not terminated) maintained by the employer
for the current and all prior limitation years (including the annual
additions attributable to the Member's nondeductible employee contributions
to all defined benefit plans, whether or not terminated, maintained by the
employer, and the annual additions attributable to all welfare benefit
funds, individual medical accounts, and simplified employee pensions,
maintained by the employer), and the denominator of which is the sum of the
maximum aggregate amounts for the current and all prior limitation years of
service with the employer (regardless of whether a defined contribution
plan was maintained by the employer). The maximum aggregate amount in any
limitation year is the lesser of 125 percent of the dollar limitation
determined under Plans 415(b) and (d) of the Code in effect under Plan
415(c)(l)(A) of the Code or 35 percent of the Member's compensation for
such year. If the employee was a Member as of the end of the first day of
the first limitation year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the employer which were in
existence on May 6, 1986, the numerator of this fraction will be adjusted
if the sum of this fraction and the defined benefit fraction would
otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an
amount equal to the product of (1) the excess of the sum of the fractions
over 1.0 times (2) the denominator of this fraction, will be permanently
subtracted from the numerator of this fraction. The adjustment is
calculated using the fractions as they would be computed as of the end of
the last limitation year beginning before January 1, 1987, and disregarding
any changes in the terms and conditions of the Plan made after May 5, 1986,
but using the Plan 415 limitation applicable to the first limitation year
beginning on or after January 1, 1987. The annual addition for any
limitation year beginning before January 1, 1987, shall not be recomputed
to treat all employee contributions as annual additions.
(17) For purposes of this Section, Employer shall mean the employer that adopts
this Plan, and all members of a controlled group of corporations (as
defined in Plan 414(b) of the Code as modified by Plan 415(h)), all
commonly controlled trades or
76
businesses (as defined in Plan 414(c) as modified by Plan 415(h)) or
affiliated service groups (as defined in Plan 414(m)) of which the adopting
employer is a part, and any other entity required to be aggregated with the
employer pursuant to regulations under Plan 414(o) of the Code.
(18) Excess amount: The excess of the Member's annual additions for the
limitation year over the maximum permissible amount.
(19) Highest average compensation: The average compensation for the three
consecutive years of service with the employer that produces the highest
average.
(20) Limitation year: The limitation year as specified by the Employer in the
Adoption Agreement. All qualified plans maintained by the employer must use
the same limitation year. If the limitation year is amended to a different
12- consecutive month period, the new limitation year must begin on a date
within the limitation year in which the amendment is made.
(21) Master or prototype plan: A plan the form of which is the subject of a
favorable opinion letter from the Internal Revenue Service.
(22) Maximum permissible amount: The maximum annual addition that may be
contributed or allocated to a Member's account under the Plan for any
limitation year shall not exceed the lesser of:
(a) the defined contribution dollar limitation, or
(b) 25 percent of the Member's compensation for the limitation year. The
compensation limitation referred to in (b) shall not apply to any
contribution for medical benefits (within the meaning of Plan 401(h)
or Plan 419A(f)(2) of the Code) which is otherwise treated as an
annual addition under Plan 415(l)(1) or 419A(d)(2) of the Code. If a
short limitation year is created because of an amendment changing the
limitation year to a different 12-consecutive month period, the
maximum permissible amount will not exceed the defined contribution
dollar limitation multiplied by the following fraction:
77
NUMBER OF MONTHS IN THE SHORT LIMITATION YEAR
12.
(23) Projected Annual Benefit: The annual retirement benefit (adjusted to
an actuarially equivalent straight life annuity if such benefit is
expressed in a form other than a straight life annuity or qualified
joint and survivor annuity) to which the Member would be entitled
under the terms of the Plan assuming:
(a) the Member will continue employment until normal retirement age
under the Plan (or current age, if later), and
(b) the Member's compensation for the current limitation year and all
other relevant factors used to determine benefits under the Plan
will remain constant for all future limitation years.
(C) Membership in the Plan shall not give any Employee the right to be retained
in the Employment of the Employer and shall not affect the right of the
Employer to discharge any Employee.
(D) Each Member, Spouse and Beneficiary assumes all risk in connection with any
decrease in the market value of the assets of the Trust Fund. Neither the
Employer nor the Trustee guarantees that upon withdrawal, the value of a
Member's Account will be equal to or greater than the amount of the
Member=s own deferrals or contributions, or those credited on his behalf in
which the Member has a vested interest, under the Plan.
(E) The establishment, maintenance or crediting of a Member's Account pursuant
to the Plan shall not vest in such Member any right, title or interest in
the Trust Fund except at the times and upon the terms and conditions and to
the extent expressly set forth in the Plan and the Trust Agreement.
(F) The Trust Fund shall be the sole source of payments under the Plan and the
Employer, Plan Administrator and TPA assume no liability or responsibility
for such payments, and each Member, Spouse or Beneficiary who shall claim
the right to any payment under the Plan shall be entitled to look only to
the Trust Fund for such payment.
78
SECTION 10.2 TOP HEAVY PROVISIONS
The Plan will be considered a Top Heavy Plan for any Plan Year if it is
determined to be a Top Heavy Plan as of the last day of the preceding Plan Year.
The provisions of this Section 10.2 shall apply and supersede all other
provisions in the Plan during each Plan Year with respect to which the Plan is
determined to be a Top Heavy Plan.
(A) For purposes of this Section 10.2, the following terms shall have the
meanings set forth below:
(1) "AFFILIATE" shall mean any entity affiliated with the Employer within
the meaning of Section 414(b), 414(c) or 414(m) of the Code, or
pursuant to the IRS Regulations under Section 414(o) of the Code,
except that for purposes of applying the provisions hereof with
respect to the limitation on contributions, Section 415(h) of the Code
shall apply.
(2) "AGGREGATION GROUP" shall mean the group composed of each qualified
retirement plan of the Employer or an Affiliate in which a Key
Employee is a member and each other qualified retirement plan of the
Employer or an Affiliate which enables a plan of the Employer or an
Affiliate in which a Key Employee is a member to satisfy Sections
401(a)(4) or 410 of the Code. In addition, the TPA, at the direction
of the Plan Administrator, may choose to treat any other qualified
retirement plan as a member of the Aggregation Group if such
Aggregation Group will continue to satisfy Sections 401(a)(4) and 410
of the Code with such plan being taken into account.
(3) "KEY EMPLOYEE" shall mean a "Key Employee" as defined in Sections
416(i)(1) and (5) of the Code and the IRS Regulations thereunder. For
purposes of Section 416 of the Code and for purposes of determining
who is a Key Employee, an Employer which is not a corporation may have
"officers" only for Plan Years beginning after December 31, 1985. For
purposes of determining who is a Key Employee pursuant to this
Subparagraph (3), compensation shall have the meaning prescribed in
Section 414(s) of the Code, or to the extent required by the Code or
the IRS Regulations, Section 1.415-2(d) of the IRS Regulations.
(4) "NON-KEY EMPLOYEE" shall mean a "Non-Key Employee@ as defined in
Section 416(i)(2) of the Code and the IRS Regulations thereunder.
(5) "TOP HEAVY PLAN" shall mean a "Top Heavy Plan@ as defined in Section
416(g) of the Code and the IRS Regulations thereunder.
79
(B) Subject to the provisions of Paragraph (D) below, for each Plan Year that
the Plan is a Top Heavy Plan, the Employer=s contribution (including
contributions attributable to salary reduction or similar arrangements)
allocable to each Employee (or to all eligible employees other than Key
Employees at the election of the Employer) who has satisfied the
eligibility requirement(s) of Article II, Section 2, and who is in service
at the end of the Plan Year, shall not be less than the lesser of (i) 3% of
such eligible Employee=s compensation (as defined in Section 414(s) of the
Code or to the extent required by the Code or the IRS Regulations, Section
1.415-2(d) of the Regulations), or (ii) the percentage at which Employer
contributions for such Plan Year are made and allocated on behalf of the
Key Employee for whom such percentage is the highest. For the purpose of
determining the appropriate percentage under clause (ii), all defined
contribution plans required to be included in an Aggregation Group shall be
treated as one plan. Clause (ii) shall not apply if the Plan is required to
be included in an Aggregation Group which enables a defined benefit plan
also required to be included in said Aggregation Group to satisfy Sections
401(a)(4) or 410 of the Code.
(C) If the Plan is a Top Heavy Plan for any Plan Year and (i) the Employer has
elected a vesting schedule under Article VI for an employer contribution
type which does not satisfy the minimum Top Heavy vesting requirements or
(ii) if the Employer has not elected a vesting schedule for an employer
contribution type, the vested interest of each Member, who is credited with
at least one Hour of Employment on or after the Plan becomes a Top Heavy
Plan, for each employer contribution type in his Account described in
clause (i) or (ii) above, shall not be less than the percentage determined
in accordance with the following schedule:
Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
Notwithstanding the schedule provided above, if the Plan is a Top Heavy
Plan for any Plan Year and if an Employer has elected a cliff vesting
schedule for an employer contribution type described in clause (i) or (ii)
above, the vested interest of each Member, who is credited with at least
one Hour of Employment on or after the Plan becomes a Top Heavy Plan, for
such employer contribution type in his Account, shall not be less than the
percentage determined in accordance with the following schedule:
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Completed Vested
Years of Employment Percentage
------------------- ----------
Less than 3 0%
3 or more 100%
In the event that an Employer elects, in its Adoption Agreement, to use the
hour of service method for determining vesting service, Year of Service
shall be substituted for Year of Employment for determining vesting under
this Article X.
(D) The TPA shall, to the maximum extent permitted by the Code and in
accordance with the IRS Regulations, apply the provisions of this Section
10.2 by taking into account the benefits payable and the contributions made
under any other qualified plan maintained by the Employer, to prevent
inappropriate omissions or required duplication of minimum contributions.
81
SECTION 10.3 INFORMATION AND COMMUNICATIONS
Each Employer, Member, Spouse and Beneficiary shall be required to furnish the
TPA with such information and data as may be considered necessary by the TPA.
All notices, instructions and other communications with respect to the Plan
shall be in such form as is prescribed from time to time by the TPA, shall be
mailed by first class mail or delivered personally, and shall be deemed to have
been duly given and delivered only upon actual receipt thereof by the TPA. All
information and data submitted by an Employer or a Member, including a Member=s
birth date, marital status, salary and circumstances of his Employment and
termination thereof, may be accepted and relied upon by the TPA. All
communications from the Employer or the Trustee to a Member, Spouse or
Beneficiary shall be deemed to have been duly given if mailed by first class
mail to the address of such person as last shown on the records of the Plan.
SECTION 10.4 SMALL ACCOUNT BALANCES
Notwithstanding the foregoing provisions of the Plan, and except as provided in
Section 7.3, if the value of all portions of a Member's Account under the Plan,
when aggregated, is equal to or exceeds $500, then the Account will not be
distributed without the consent of the Member prior to age 65 (at the earliest),
but if the aggregate value of all portions of his Account is less than $500,
then his Account will be distributed as soon as practicable following the
termination of Employment by the Member.
SECTION 10.5 AMOUNTS PAYABLE TO INCOMPETENTS, MINORS OR ESTATES
If the Plan Administrator shall find that any person to whom any amount is
payable under the Plan is unable to care for his affairs because of illness or
accident, or is a minor, or has died, then any payment due him or his estate
(unless a prior claim therefor has been made by a duly appointed legal
representative) may be paid to his Spouse, relative or any other person deemed
by the Plan Administrator to be a proper recipient on behalf of such person
otherwise entitled to payment. Any such payment shall be a complete discharge of
the liability of the Trust Fund therefor.
SECTION 10.6 NON-ALIENATION OF AMOUNTS PAYABLE
Except insofar as may otherwise be required by applicable law, or Article VIII,
or pursuant to the terms of a Qualified Domestic Relations Order, no amount
payable under the Plan shall be subject in any manner to alienation by
anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge
or encumbrance of any kind, and any attempt to so alienate shall be void; nor
shall the Trust Fund in any manner be liable for or subject to the debts or
liabilities of any person entitled to any such amount payable; and further, if
82
for any reason any amount payable under the Plan would not devolve upon such
person entitled thereto, then the Employer, in its discretion, may terminate his
interest and hold or apply such amount for the benefit of such person or his
dependents as it may deem proper. For the purposes of the Plan, a "Qualified
Domestic Relations Order@ means any judgment, decree or order (including
approval of a property settlement agreement) which has been determined by the
Plan Administrator, in accordance with procedures established under the Plan, to
constitute a Qualified Domestic Relations Order within the meaning of Section
414(p)(1) of the Code (or any domestic relations order entered before January 1,
1985). No amounts may be withdrawn under Article VII, and no loans granted under
Article VIII, if the TPA has received a document which may be determined
following its receipt to be a Qualified Domestic Relations Order prior to
completion of review of such order by the Plan Administrator within the time
period prescribed for such review by the IRS Regulations.
SECTION 10.7 UNCLAIMED AMOUNTS PAYABLE
If the TPA cannot ascertain the whereabouts of any person to whom an amount is
payable under the Plan, and if, after 5 years from the date such payment is due,
a notice of such payment due is mailed to the address of such person, as last
shown on the records of the Plan, and within 3 months after such mailing such
person has not filed with the TPA or Plan Administrator written claim therefor,
the Plan Administrator may direct in accordance with ERISA that the payment
(including the amount allocable to the Member=s contributions) be cancelled, and
used in abatement of the Plan=s administrative expenses, provided that
appropriate provision is made for re-crediting the payment if such person
subsequently makes a claim therefor.
SECTION 10.8 LEAVES OF ABSENCE
(A) If the Employer's personnel policies allow leaves of absence for all
similarly situated Employees on a uniformly available basis under the
circumstances described in Paragraphs (B)(1)-(4) below, then contribution
allocations and vesting service will continue to the extent provided in
Paragraphs (B)(1)-(4).
(B) For purposes of the Plan, there are four types of approved Leaves of
Absence:
(1) Nonmilitary leave granted to a Member for a period not in excess of
one year during which service is recognized for vesting purposes and
the Member is entitled to share in any supplemental contributions
under Article III or forfeitures under Article VI, if any, on a
pro-rata basis, determined by the Salary earned during the Plan Year
or Contribution Determination Period; or
83
(2) Nonmilitary leave or layoff granted to a Member for a period not in
excess of one year during which service is recognized for vesting
purposes, but the Member is not entitled to share in any contributions
or forfeitures as defined under (1) above, if any, during the period
of the leave; or
(3) To the extent not otherwise required by applicable law, military or
other governmental service leave granted to a Member from which he
returns directly to the service of the Employer. Under this leave, a
Member may not share in any contributions or forfeitures as defined
under (1) above, if any, during the period of the leave, but vesting
service will continue to accrue; or
(4) To the extent not otherwise required by applicable law, a military
leave granted at the option of the Employer to a Member who is subject
to military service pursuant to an involuntary call-up in the Reserves
of the U.S. Armed Services from which he returns to the service of the
Employer within 90 days of his discharge from such military service.
Under this leave, a Member is entitled to share in any contributions
or forfeitures as defined under (1) above, if any, and vesting service
will continue to accrue. Notwithstanding any provision of the Plan to
the contrary, if a Member has one or more loans outstanding at the
time of this leave, repayments on such loan(s) may be suspended, if
the Member so elects, until such time as the Member returns to the
service of the Employer or the end of the leave, if earlier.
(C) NOTWITHSTANDING ANY PROVISION OF THIS PLAN TO THE CONTRARY, EFFECTIVE
DECEMBER 12, 1994, CONTRIBUTION ALLOCATIONS AND VESTING SERVICE WITH
RESPECT TO QUALIFIED MILITARY SERVICE WILL BE PROVIDED IN ACCORDANCE WITH
SECTION 414(U) OF THE CODE. LOAN REPAYMENTS WILL BE SUSPENDED UNDER THIS
PLAN AS PERMITTED UNDER SECTION 414(U)(4) OF THE CODE DURING SUCH PERIOD OF
QUALIFIED MILITARY SERVICE.
84
SECTION 10.9 RETURN OF CONTRIBUTIONS TO EMPLOYER
(A) In the case of a contribution that is made by an Employer by reason of a
mistake of fact, the Employer may request the return to it of such
contribution within one year after the payment of the contribution,
provided such refund is made within one year after the payment of the
contribution.
(B) In the case of a contribution made by an Employer or a contribution
otherwise deemed to be an Employer contribution under the Code, such
contribution shall be conditioned upon the deductibility of the
contribution by the Employer under Section 404 of the Code. To the extent
the deduction for such contribution is disallowed, in accordance with IRS
Regulations, the Employer may request the return to it of such contribution
within one year after the disallowance of the deduction.
(C) In the event that the IRS determines that the Plan is not initially
qualified under the Code, any contribution made incident to that initial
qualification by the Employer must be returned to the Employer within one
year after the date the initial qualification is denied, but only if the
application for the qualification is made by the time prescribed by law for
filing the Employer's return for the taxable year in which the Plan is
adopted, or such later date as the Secretary of the Treasury may prescribe.
The contributions returned under (A), (B) or (C) above may not include any gains
on such excess contributions, but must be reduced by any losses.
SECTION 10.10 CONTROLLING LAW
The Plan and all rights thereunder shall be governed by and construed in
accordance with ERISA and the laws of the State of New York, without regard to
the principles of the conflicts of laws thereof.
85
ARTICLE XI
AMENDMENT & TERMINATION
SECTION 11.1 GENERAL
While the Plan is intended to be permanent, the Plan may be amended or
terminated completely by the Employer at any time at the discretion of its Board
of Directors. Except where necessary to qualify the Plan or to maintain
qualification of the Plan, no amendment shall reduce any interest of a Member
existing prior to such amendment. Subject to the terms of the Adoption
Agreement, written notice of such amendment or termination as resolved by the
Board shall be given to the Trustee, the Plan Administrator and the TPA. Such
notice shall set forth the effective date of the amendment or termination or
cessation of contributions.
IF THE EMPLOYER'S PLAN FAILS TO ATTAIN OR RETAIN QUALIFICATION, SUCH PLAN WILL
NO LONGER PARTICIPATE IN THIS MASTER/PROTOTYPE PLAN AND WILL BE CONSIDERED AN
INDIVIDUALLY DESIGNED PLAN.
SECTION 11.2 TERMINATION OF PLAN AND TRUST
This Plan and any related Trust Agreement shall in any event terminate whenever
all property held by the Trustee shall have been distributed in accordance with
the terms hereof.
SECTION 11.3 LIQUIDATION OF TRUST ASSETS IN THE EVENT OF TERMINATION
In the event that the Employer's Board of Directors shall decide to terminate
the Plan, or, in the event of complete cessation of Employer contributions, the
rights of Members to the amounts standing to their credit in their Accounts
shall be deemed fully vested and the Plan Administrator shall direct the Trustee
to either continue the Trust in full force and effect and continue so much of
the Plan in full force and effect as is necessary to carry out the orderly
distribution of benefits to Members and their Beneficiaries upon retirement,
Disability, death or termination of Employment; or (a) reduce to cash such part
or all of the Plan assets as the Plan Administrator may deem appropriate; (b)
pay the liabilities, if any, of the Plan; (c) value the remaining assets of the
Plan as of the date of notification of termination and proportionately adjust
Members' Account balances; (d) distribute such assets in cash to the credit of
their respective Accounts as of the notification of the termination date; and
(e) distribute all balances which have been segregated into a separate fund to
the persons entitled thereto; provided that no person in the event of
termination shall be required to accept distribution in any form other than
cash.
86
SECTION 11.4 PARTIAL TERMINATION
The Employer may terminate the Plan in part without causing a complete
termination of the Plan. In the event a partial termination occurs, the Plan
Administrator shall determine the portion of the Plan assets attributable to the
Members affected by such partial termination and the provisions of Section 11.3
shall apply with respect to such portion as if it were a separate fund.
SECTION 11.5 POWER TO AMEND
(A) Subject to Section 11.6, the Employer, through its Board of Directors,
shall have the power to amend the Plan in any manner which it deems
desirable, including, but not by way of limitation, the right to change or
modify the method of allocation of contributions, to change any provision
relating to the distribution of payment, or both, of any of the assets of
the Trust Fund. Further, the Employer may (i) change the choice of options
in the Adoption Agreement; (ii) add overriding language in the Adoption
Agreement when such language is necessary to satisfy Section 415 or Section
416 of the Code because of the required aggregation of multiple plans; and
(iii) add certain model amendments published by the IRS which specifically
provide that their adoption will not cause the Plan to be treated as
individually designed. An Employer that amends the Plan for any other
reason, will be considered to have an individually designed plan.
Any amendment shall become effective upon the vote of the Board of
Directors of the Employer, unless such vote of the Board of Directors of
the Employer specifies the effective date of the amendment.
Such effective date of the amendment may be made retroactive to the vote of
the Board of Directors, to the extent permitted by law.
(B) The Employer expressly recognizes the authority of the Sponsor,
Pentegra Services, Inc., to amend the Plan from time to time, except with
respect to elections of the Employer in the Adoption Agreement, and the
Employer shall be deemed to have consented to any such amendment. The
Employer shall receive a written instrument indicating the amendment of the
Plan and such amendment shall become effective as of the date of such
instrument. No such amendment shall in any way impair, reduce or affect any
Member's vested and nonforfeitable rights in the Plan and Trust.
87
SECTION 11.6 SOLELY FOR BENEFIT OF MEMBERS, TERMINATED MEMBERS AND THEIR
BENEFICIARIES
No changes may be made in the Plan which shall vest in the Employer, directly or
indirectly, any interest, ownership or control in any of the present or future
assets of the Trust Fund.
No part of the funds of the Trust other than such part as may be required to pay
taxes, administration expenses and fees, shall be reduced by any amendment or be
otherwise used for or diverted to purposes other than the exclusive benefit of
Members, retired Members, Former Members, and their Beneficiaries, except as
otherwise provided in Section 10.9 and under applicable law.
No amendment shall become effective which reduces the nonforfeitable percentage
of benefit that would be payable to any Member if his Employment were to
terminate and no amendment which modifies the method of determining that
percentage shall be made effective with respect to any Member with at least
three Years of Service unless such member is permitted to elect, within a
reasonable period after the adoption of such amendment, to have that percentage
determined without regard to such amendment.
SECTION 11.7 SUCCESSOR TO BUSINESS OF THE EMPLOYER
Unless this Plan and the related Trust Agreement be sooner terminated, a
successor to the business of the Employer by whatever form or manner resulting
may continue the Plan and the related Trust Agreement by executing appropriate
supplementary agreements and such successor shall thereupon succeed to all the
rights, powers and duties of the Employer hereunder. The Employment of any
Employee who has continued in the employ of such successor shall not be deemed
to have terminated or severed for any purpose hereunder if such supplemental
agreement so provides.
SECTION 11.8 MERGER, CONSOLIDATION AND TRANSFER
The Plan shall not be merged or consolidated, in whole or in part, with any
other plan, nor shall any assets or liabilities of the Plan be transferred to
any other plan unless the benefit that would be payable to any affected Member
under such plan if it terminated immediately after the merger, consolidation or
transfer, is equal to or greater than the benefit that would be payable to the
affected Member under this Plan if it terminated immediately before the merger,
consolidation or transfer.
SECTION 11.9 REVOCABILITY
This Plan is based upon the condition precedent that it shall be approved by the
Internal Revenue Service as qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code. Accordingly,
notwithstanding anything herein to the
88
contrary, if a final ruling shall be received in writing from the IRS that the
Plan does not initially qualify under the terms of Sections 401(a) and 501(a) of
the Code, there shall be no vesting in any Member of assets contributed by the
Employer and held by the Trustee under the Plan. Upon receipt of notification
from the IRS that the Plan fails to qualify as aforesaid, the Employer reserves
the right, at its option, to either amend the Plan in such manner as may be
necessary or advisable so that the Plan may so qualify, or to withdraw and
terminate the Plan.
Upon the event of withdrawal and termination, the Employer shall notify the
Trustee and provide the Trustee with a copy of such ruling and the Trustee shall
transfer, and in accordance with applicable law, pay over to the Employer (or,
as applicable and to the extent attributable to Member after-tax contributions,
401(k) deferrals or rollover amounts, to the Members) all of the net assets
under the Plan which remain after deducting the proper expense of termination
and the Trust Agreement shall thereupon terminate. For purposes of this Article
XI, "final ruling" shall mean either (1) the initial letter ruling from the
District Director in response to the Employer's original application for such a
ruling, or (2) if such letter ruling is unfavorable and a written appeal is
taken or protest filed within 60 days of the date of such letter ruling, it
shall mean the ruling received in response to such appeal or protest.
If the Plan is terminated, the Plan Administrator shall promptly notify the IRS
and such other appropriate governmental authority as applicable law may require.
Neither the Employer nor its Employees shall make any further contributions
under the Plan after the termination date, except that the Employer shall remit
to the TPA a reasonable administrative fee to be determined by the TPA for each
Member with a balance in his Account to defray the cost of implementing its
termination. Where the Employer has terminated the Plan pursuant to this
Article, the Employer may elect to transfer assets from the Plan to a successor
plan qualified under Section 401(a) of the Code in which event the Employer
shall remit to the TPA an additional administrative fee to be determined by the
TPA to defray the cost of such transfer transaction.
TRUSTS ESTABLISHED UNDER THE PLAN
Assets of the Plan are held in trust under separate Trust Agreements with the
Trustee or Trustees. Any eligible Employee or Member may obtain a copy of these
Trust Agreements from the Plan Administrator.
89
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the Plan by
the Employer, the Employer has caused these presents to be executed on its
behalf and its corporate seal to be hereunder affixed as of the ________ day of
_________________, 20__.
ATTEST:
By
- --------------------------------
Clerk Name
Title
90
108 CORPORATE PARK DRIVE
WHITE PLAINS, NY 10603-3805
TEL: 800-872-3473
FAX: 914-694-9384
ADOPTION AGREEMENT
- --------------------------------------------------------------------------------
FOR KAISER FEDERAL BANK
EMPLOYEES' SAVINGS & Profit Sharing Plan and Trust
Client No. K04
PENTEGRA
ADOPTION AGREEMENT
FOR
KAISER FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
Kaiser Federal Bank: KAISER FEDERAL BANK
---------------------------------------------------------
Address: 1359 N. GRAND AVE., COVINA, CA 91724
---------------------------------------------------------
Telephone Number: 626-339-9663
---------------------------------------------------------
Contact Person: RAE MURBACH X3210
---------------------------------------------------------
Name of Plan: KAISER FEDERAL BANK EMPLOYEES' SAVINGS & Profit
Sharing Plan and Trust
---------------------------------------------------------
E-mail address: R.MURBACH@KAISERFEDERAL.NET
---------------------------------------------------------
THIS ADOPTION AGREEMENT, upon execution by the Employer and the Trustee, and
subsequent approval by a duly authorized representative of Pentegra Services,
Inc. (the "Sponsor"), together with the Sponsor's Employees' Savings & Profit
Sharing Plan and Trust Agreement (the "Agreement"), shall constitute the Kaiser
Federal Bank Employees' Savings & Profit Sharing Plan and Trust (the "Plan").
The terms and provisions of the Agreement are hereby incorporated herein by this
reference; provided, however, that if there is any conflict between the Adoption
Agreement and the Agreement, this Adoption Agreement shall control.
The elections hereinafter made by the Employer in this Adoption Agreement may be
changed by the Employer from time to time by written instrument executed by a
duly authorized representative thereof; but if any other provision hereof or any
provision of the Agreement is changed by the Employer other than to satisfy the
requirements of Section 415 or 416 of the Internal Revenue Code of 1986, as
amended (the "Code"), because of the required aggregation of multiple plans, or
if as a result of any change by the Employer the Plan fails to obtain or retain
its tax-qualified status under Section 401(a) of the Code, the Employer shall be
deemed to have amended the Plan evidenced hereby and by the Agreement into an
individually designed plan, in which event the Sponsor shall thereafter have no
further responsibility for the tax-qualified status of the Plan. However, the
Sponsor may amend any term, provision or definition of this Adoption Agreement
or the Agreement in such manner as the Sponsor may deem necessary or advisable
from time to time and the Employer and the Trustee, by execution hereof,
acknowledge and consent thereto. Notwithstanding the foregoing, no amendment of
this Adoption Agreement or of the Agreement shall increase the duties or
responsibilities of the Trustee without the written consent thereof.
1
I. EFFECT OF EXECUTION OF ADOPTION AGREEMENT
The Employer, upon execution of this Adoption Agreement by a duly
authorized representative thereof, (choose 1 or 2):
1. Establishes as a new plan the Kaiser Federal Bank Employees'
--- Savings & Profit Sharing Plan and Trust, effective , (the
"Effective Date").
2. X Amends its existing defined contribution plan and trust KAISER
--- FEDERAL BANK RETIREMENT SAVINGS PLAN dated DECEMBER 31, 2002, in
its entirety into the Kaiser Federal Bank Employees' Savings &
Profit Sharing Plan and Trust, effective JANUARY 1, 2004, except
as otherwise provided herein or in the Agreement (the "Effective
Date").
II. DEFINITIONS
A. "Compliance Testing Method" means the prior year testing method unless
the Employer elects to use current year testing for determining the
actual deferral percentages and actual contribution percentages by
checking this line ________.
Note: Whichever testing method is selected (prior year testing or
current year testing), it must apply to both the actual deferral
percentage test and the actual contribution percentage test.
B. Employer
1. "Employer," for purposes of the Plan, shall mean:
KAISER FEDERAL BANK
--------------------------------------------------------
2. The Employer is (indicate whichever may apply):
a) A member of a controlled group of corporations under
--- Section 414(b) of the Code.
b) A member of a group of entities under common control
--- under Section 414(c) of the Code.
c) A member of an affiliated service group under Section
--- 414(m) of the Code.
d) X A corporation.
---
e) A sole proprietorship or partnership.
---
f) A Subchapter S corporation.
---
g) Other_________________________________________________.
---
2
3. Employer's Taxable Year Ends on 6/30 .
4. Employer's Federal Taxpayer Identification Number is 95-1867697 .
5. The Plan Number for the Plan is (enter 3-digit number) 002 .
C. "Entry Date" means the first day of the (choose 1 or 2):
1. Calendar month coinciding with or next following the date the
--- Employee satisfies the Eligibility requirements described in
Section V.
2. X Calendar quarter (January 1, April 1, July 1, October 1)
--- coinciding with or next following the date the Employee
satisfies the Eligibility requirements described in Section
V.
D. "Limitation Year" means the twelve (12) consecutive month period
ending on 12/31 (month/day). Note: If no 12 month period is selected,
the Limitation Year shall be the Plan Year.
E. "Member" means an Employee enrolled in the membership of the Plan.
F. "Normal Retirement Age" means (choose 1 or 2):
1. X Attainment of age 65 (select an age not less than 55 and not
--- greater than 65).
2. Later of: (i) attainment of age 65 or (ii) the fifth
--- anniversary of the date the Member commenced participation in
the Plan.
G. "Normal Retirement Date" means the first day of the first calendar
month coincident with or next following the date upon which a Member
attains his or her Normal Retirement Age.
H. "Plan Year" means the twelve (12) consecutive month period ending on
6/30 (month/day).
I. "Salary" for benefit purposes under the Plan means (choose 1, 2 or 3):
1. X Total taxable compensation as reported on Form W-2 (exclusive
--- of any compensation deferred from a prior year).
2. Basic Salary only.
---
3. Basic Salary plus one or more of the following (if 3 is
--- chosen, then choose (a) or (b), and/or (c) or (d), whichever
shall apply):
a) Commissions not in excess of $ ________
---
b) Commissions to the extent that Basic Salary plus
--- Commissions do not exceed $________
3
c) Overtime
---
d) Overtime and bonuses
---
Note: Member pre-tax contributions to a Section 401(k) plan are
always included in Plan Salary.
III. SALARY ADJUSTMENT
A. Cafeteria Plan (Section 125) Salary Adjustment.
Member pre-tax contributions to a Section 125 cafeteria plan are to be
included in Plan Salary, unless the Employer elects to exclude such
amounts by checking this line ________.
B. Transportation Fringe Benefit (Section 132(f) Adjustment).
Member pre-tax contributions for qualified transportation fringe
benefits under Code Section 132(f) are to be included in Plan Salary,
unless the Employer elects to exclude such amounts by checking this
line ________.
IV. HIGHLY COMPENSATED EMPLOYEE ELECTIONS
A. Top Paid Group Election:
In determining who is a Highly Compensated Employee, the Employer
makes the Top Paid Group election by checking this line ________. The
effect of this election is that an Employee (who is not a 5% owner at
any time during the determination year or the look-back year) with
compensation in excess of $80,000 (as adjusted) for the look-back year
is a Highly Compensated Employee only if the Employee was in the
top-paid group (i.e., the top 20% of Employees ranked on the basis of
compensation paid by the Employer) for the look-back year.
B. Calendar Year Data Election:
For determining which Employees are Highly Compensated Employees, the
look-back year will be the 12 month period immediately preceding the
determination year, except that, for NON-CALENDAR YEAR PLANS, the
look-back year will be the calendar year ending within the Plan Year
by checking this line X .
--------
V. ELIGIBILITY REQUIREMENTS
A. All Employees shall be eligible to participate in the Plan in
accordance with the provisions of Article II of the Plan, except the
following Employees shall be excluded (choose whichever shall apply):
1. X Employees who have not attained age 21 (Insert an age from 18
--- to 21).
4
2. Employees who have not completed ________ (1-11, 12 or 24)
--- consecutive months of service.
Note: Employers which permit Members to make pre-tax
elective deferrals to the Plan (see VII.A.3.) may not
elect a 24 month eligibility period.
3. Employees included in a unit of Employees covered by a
--- collective bargaining agreement, if retirement benefits were
the subject of good faith bargaining between the Employer
and Employee representatives.
4. Employees who are nonresident aliens and who receive no
--- earned income from the Employer which constitutes income
from sources within the United States.
5. Employees included in the following job classifications:
---
a) Hourly Employees.
---
b) Salaried Employees.
---
c) Flex staff employees (i.e.; any Employee who is not a
--- regular full-time or part-time Employee).
d) Short-term Employees ( i.e.; employees who are hired
--- under a written agreement which precludes membership
in the Plan and provides for a specific period of
employment not in excess of one year).
e) Leased Employees.
---
6. Employees of the following employers which are aggregated
--- under Section 414(b), 414(c) or 414(m) of the Code:
-------------------------------------------------------------
-------------------------------------------------------------
Note: If no entries are made above, all Employees shall be
eligible to participate in the Plan on the later of:
(i) the Effective Date or (ii) the first day of the
calendar month or calendar quarter (as designated by
the Employer in Section II.C.) coinciding with or
immediately following the Employee's Date of Employment
or, as applicable, Date of Reemployment.
B. Such eligibility computation period established in Section V(A) above
shall be applicable to (choose 1 or 2):
1. X Both present and future Employees.
---
2. Future Employees only.
---
5
C. Such Eligibility requirements established above shall be (choose 1 or
2):
1. X Applied to the designated Employee group on and after the
--- Effective Date of the Plan.
2. Waived for the ________ consecutive month period (may not
--- exceed 12) beginning on the Effective Date of the Plan.
D. Service Crediting Method for Eligibility (Choose 1, 2 or 3):
1. Not applicable. There is no service required for eligibility.
---
2. Hour of service method (Choose a or b):
---
a) The actual number of Hours of Employment.
---
b) 190 Hours of Employment for each month in which the
--- Employee completes at least one hour of Employment.
3. X Elapsed time method.
---
E. Requirements to Commence Receipt of Employer Contributions.
1. Employer Contributions shall be allocated to Member's Accounts in
accordance with Article III of the Plan, except that the
following Member's will not be entitled to Employer contributions
(choose (a) or (b) and/or (c)):
a) No additional requirements apply. (The eligibility
--- requirements under Section V above apply to Employer
Contributions); or
b) X Members who have not attained age 21 (Insert an age
--- from 18 21); and/or
c) X Member's who have not completed 12 (1 - 12)
--- consecutive months of service.
2. The requirement to commence receipt of Employer Contributions
established in this Section E shall apply to all Employer
Contributions provided under Section 3.4 of the Plan except:
a) Matching contributions
---
b) Basic contributions
---
c) Safe harbor CODA contributions
---
d) Supplemental contributions
---
e) Profit sharing contributions
---
6
f) Qualified non-elective contribution
---
Note: If an Employer contribution type is selected in 2
above, Member's will receive Employer contributions
based upon the eligibility requirements under Section V
above and the provisions of the Plan document for such
Employer contribution type.
VI. PRIOR EMPLOYMENT CREDIT
A. Prior Employment Credit:
Employment with the following entity or entities shall be
--- included for eligibility and vesting purposes:
----------------------------------------------------------------------
----------------------------------------------------------------------
Note: If this Plan is a continuation of a Predecessor Plan, service
under the Predecessor Plan shall be counted under this Plan.
VII. CONTRIBUTIONS
Note: Annual Member pre-tax elective deferrals, Employer matching
contributions, Employer safe harbor CODA contributions, Employer
basic contributions, Employer supplemental contributions, Employer
profit sharing contributions and Employer qualified non-elective
contributions, in the aggregate, may not exceed 15% of all Members'
Salary (excluding from Salary Member pre-tax elective deferrals).
A. Employee Contributions (fill in 1 and/or 6 if applicable; choose 2 or
3; 4 or 5):
1. X The maximum amount of monthly contributions a Member may make
--- to the Plan (both pre-tax deferrals and after-tax
contributions) is 15 % (1-75) of the Member's monthly Salary.
2. X (Choose a and/or b):
---
a) X A Member may make pre-tax elective deferrals to the
--- Plan, based on multiples of 1% of monthly Salary, or
b) X A Member may make pre-tax elective deferrals to the
--- Plan based on a specified dollar amount.
3. A Member may not make pre-tax elective deferrals to the Plan.
---
4. A Member may make after-tax contributions to the Plan, based
--- on multiples of 1% of monthly Salary.
7
5. X A Member may not make after-tax contributions to the Plan.
---
6. X An Employee may allocate a rollover contribution to the Plan
--- prior to satisfying the Eligibility requirements described
above.
B. A Member may change his or her contribution rate with respect to, if
made available, pre-tax deferrals and after-tax contributions (choose
1, 2 or 3):
1. 1 time per pay period.
---
2. 1 time per calendar month.
---
3. X 1 time per calendar quarter.
---
C. Employer Matching Contributions (fill in 1 or 6 as applicable; and if
you select 1, then choose 2, 3, 4 or 5):
1. The Employer matching contributions under 2, 3, 4 or 5 below
shall be based on the Member's contributions (both pre-tax
deferrals and after-tax contributions) not in excess of 10 %
(1-20 but not in excess of the percentage specified in A.1.
above) of the Member's Salary.
2. X The Employer shall allocate to each contributing Member's
--- Account an amount equal to 50 % (not to exceed 200%) of the
Member's contributions (both pre-tax deferrals and after-tax
contributions) for that month (as otherwise limited in
accordance with C.1. above).
3. The Employer shall allocate to each contributing Member's
--- Account an amount based on the Member's contributions for
the month (as otherwise limited in accordance with C.1.
above) and determined in accordance with the following
schedule:
Years of Employment Matching %
------------------- ----------
Less than 3 50%
At least 3, but less than 5 75%
5 or more 100%
4. The Employer shall allocate to each contributing Member's
--- Account an amount based on the Member's contributions for
the month (as otherwise limited in accordance with C.1.
above) and determined in accordance with the following
schedule:
Years of Employment Matching %
------------------- ----------
Less than 3 100%
At least 3, but less than 5 150%
5 or more 200%
8
5. The Employer shall allocate to each contributing Member's
--- Account an amount equal to ___% on the first ___% of the
Member's monthly contributions plus ___% on the next ___% of
the Member's monthly contributions.
6. No Employer matching contributions will be made to the Plan.
---
D. Safe Harbor CODA Contributions (Actual Deferral Percentage Test Safe
Harbor Contributions) (Complete 1, or 2 below):
1. The Employer shall make a safe harbor Basic Matching
--- Contribution to the Plan on behalf of each Member (i.e.;
100% of the Member's 401(k) Deferrals that do not exceed 3%
percent of the Member's Salary plus 50% of the Member's
401(k) Deferrals that exceed 3% percent of the Member's
Salary but that do not exceed 5% of the Member's Plan
Salary).
2. In lieu of safe harbor Basic Matching Contributions, the
--- Employer will make the following contributions for the Plan
Year (complete (a) and/or (b)):
a) Enhanced Matching Contributions (complete 1, 2 or 3
--- below):
(1) The Employer shall make Matching
--- Contributions to the Account of each Member
in an amount equal to the sum of:
(i) the Member's 401(k) Deferrals that
--- do not exceed ___ percent of the
Member's Salary plus
(ii) ___ percent of the Member's 401(k)
--- Deferrals that exceed ___ percent
of the Member's Salary and that do
not exceed ___ percent of the
Member's Salary.
Note: In the blank in (i) and the second
blank in (ii), insert a number that
is 3 or greater but not greater
than 6. The first and last blanks
in (ii) must be completed so that
at any rate of 401(k) Deferrals,
the Matching Contribution is at
least equal to the Matching
Contribution receivable if the
Employer were making Basic Matching
Contributions, but the rate of
match cannot increase as deferrals
increase. For example, if "4" is
inserted in the blank in (i), (ii)
need not be completed.
9
(2) 150% of the Member's contributions not to
--- exceed ___ (Enter 3% or 4%) of the Member's
Plan Salary; or
(3) 200% of the Member's contributions not to
--- exceed ___ (Enter 2% or 3%) of the Member's
Plan Salary.
b) Safe Harbor Nonelective Contributions:
---
The Employer will make a Safe Harbor Nonelective Contribution to the
Account of each Member in an amount equal to 3 percent of the Member's
Salary for the Plan Year, unless the Employer inserts a greater
percentage here ________.
E. Employer Basic Contributions (choose 1 or 2):
1. The Employer shall allocate an amount equal to ___% (based on
--- 1% increments not to exceed 15%) of Member's Salary for the
month to (choose (a) or (b)):
a) The Accounts of all Members
---
b) The Accounts of all Members who were employed with
--- the Employer on the last day of such month.
2. X No Employer basic contributions will be made to the Plan.
---
F. Employer Supplemental Contributions:
The Employer may make supplemental contributions for any Plan Year in
accordance with Section 3.7 of the Plan.
G. Employer Profit Sharing Contributions (Choose 1, 2, 3, 4, or 5):
1. X No Employer Profit Sharing Contributions will be made to the
--- Plan.
NON-INTEGRATED FORMULA
2. Profit sharing contributions shall be allocated to each
--- Member's Account in the same ratio as each eligible Member's
Salary during such Contribution Determination Period bears
to the total of such Salary of all eligible Members.
3. Profit sharing contributions shall be allocated to each
--- eligible Member's Account in the same ratio as each eligible
Member's Salary for the portion of the Contribution
Determination Period during which the Member satisfied the
Employer's eligibility requirement(s) bears to the total of
such Salary of all eligible Members.
10
INTEGRATED FORMULA
4. Profit sharing contributions shall be allocated to each
--- eligible Member's Account in a uniform percentage (specified
by the Employer as ___%) of each Member's Salary during the
Contribution Determination Period ("Base Contribution
Percentage") for the Plan Year that includes such
Contribution Determination Period , plus a uniform
percentage (specified by the Employer as ___%, but not in
excess of the lesser of (i) the Base Contribution Percentage
and (ii) the greater of (1) 5.7% or (2) the percentage equal
to the portion of the Code Section 3111(a) tax imposed on
employers under the Federal Insurance Contributions Act (as
in effect as of the beginning of the Plan Year) which is
attributable to old-age insurance) of each Member's Salary
for the Contribution Determination Period in excess of the
Social Security Taxable Wage Base ("Excess Salary") for the
Plan Year that includes such Contribution Determination
Period, in accordance with Article III of the Plan.
5. Profit sharing contributions shall be allocated to each
--- eligible Member's Account in a uniform percentage (specified
by the Employer as ___%) of each Member's Salary for the
portion of the Contribution Determination Period during
which the Member satisfied the Employer's eligibility
requirement(s), if any, plus a uniform percentage (specified
by the Employer as ___%, but not in excess of the lesser of
(i) the Base Contribution Percentage and (ii) the greater of
(1) 5.7% or (2) the percentage equal to the portion of the
Code Section 3111(a) tax imposed on employers under the
Federal Insurance Contributions Act (as in effect as of the
beginning of the Plan Year) which is attributable to old-age
insurance) of each Member's Excess Salary for the portion of
the Contribution Determination Period during which the
Member satisfied the Employer's eligibility requirement(s)
in accordance with Article III of the Plan.
H. Allocation of Employer Profit Sharing Contributions:
In accordance with Section VII, G above, a Member shall be eligible to
share in Employer Profit Sharing Contributions, if any, as follows
(choose 1 or 2):
1. A Member shall be eligible for an allocation of Employer
--- Profit Sharing Contributions for a Contribution Determination
Period if he or she is eligible to participate in the Plan
for the Plan Year to which the Profit Sharing Contributions
relates.
2. A Member shall be eligible for an allocation of Employer
--- Profit Sharing Contributions for a Contribution Determination
Period only if he or she (choose (a), (b) or (c) whichever
shall apply):
a) is employed on the last day of the Contribution
--- Determination Period, or retired, died or became
totally and permanently disabled prior to the last
day of the Contribution Determination Period.
11
b) completed 1,000 Hours of Employment if the
--- Contribution Determination Period is a period of 12
months (250 Hours of Employment if the Contribution
Determination Period is a period of 3 months), or
retired, died or became totally and permanently
disabled prior to the last day of the Contribution
Determination Period.
c) is employed on the last day of the Contribution
--- Determination Period and, if such period is 12
months, completed 1,000 Hours of Employment (250
Hours of Employment if the Contribution
Determination Period is a period of 3 months), or
retired, died or became totally and permanently
disabled prior to the last day of the Contribution
Determination Period.
I. "Contribution Determination Period" for purposes of determining and
allocating Employer profit sharing contributions means (choose 1,2, 3
or 4):
1. The Plan Year.
---
2. The Employer's Fiscal Year (defined as the Plan's "limitation
--- year") being the twelve (12) consecutive month period
commencing ________ (month/day) and ending ________
(month/day).
3. The three (3) consecutive month periods that comprise each of
--- the Plan Year quarters.
4. The three (3) consecutive monthly periods that comprise each
--- of the Employer's Fiscal Year quarters. (Employer's Fiscal
Year is the twelve (12) consecutive month period commencing
________ (month/day) and ending ________ (month/day).)
J. Employer Qualified Nonelective Contributions:
The Employer may make qualified nonelective contributions for any Plan
Year in accordance with Section 3.9 of the Plan.
K. Top Heavy Contributions:
If the Plan is determined to be Top Heavy and if Top Heavy
Contributions will be made to the Plan, Top Heavy Contributions will
be allocated to: (choose 1 or 2 below):
1. Only Members who are Non-Key Employees.
---
2. X All Members.
---
12
VIII. INVESTMENTS
The Employer hereby appoints Barclays Global Investors, N.A. to serve
as Investment Manager under the Plan. The Employer hereby selects the
following Investments to be made available under the Plan (choose
whichever shall apply) and consents to the lending of securities by
such funds to brokers and other borrowers. The Employer agrees and
acknowledges that the selection of Investments made in this Section
VIII is solely its responsibility, and no other person, including the
Sponsor or Investment Manager, has any discretionary authority or
control with respect to such selection process. The Employer hereby
holds the Investment Manager harmless from, and indemnifies it
against, any liability Investment Manager may incur with respect to
such Investments so long as Investment Manager is not negligent and
has not breached its fiduciary duties.
1. X Money Market Fund
---
2. X Stable Value Fund
---
3. X Government Bond Fund
---
4. X S&P 500 Stock Fund
---
5. X S&P 500/Value Stock Fund
---
6. X S&P 500/Growth Stock Fund
---
7. X S&P MidCap Stock Fund
---
8. X Russell 2000 Stock Fund
---
9. X International Stock Fund
---
10. X Asset Allocation Funds (3)
---
X Income Plus
---
X Growth & Income
---
X Growth
---
11. (Kaiser Federal Bank) Stock Fund (the "Employer Stock Fund")
---
12. (Kaiser Federal Bank) Certificate of Deposit Fund
---
13. X NASDAQ 100 Index Fund
---
14. Self-directed Brokerage Account
---
13
IX. EMPLOYER SECURITIES
A. If the Employer makes available an Employer Stock Fund pursuant to
Section VIII of this Adoption Agreement, then voting and tender offer
rights with respect to Employer Stock shall be delegated and exercised
as follows (choose 1 or 2):
1. Each Member shall be entitled to direct the Plan
--- Administrator as to the voting and tender or exchange offer
rights involving Employer Stock held in such Member's
Account, and the Plan Administrator shall follow or cause
the Trustee to follow such directions. If a Member fails to
provide the Plan Administrator with directions as to voting
or tender or exchange offer rights, the Plan Administrator
shall exercise those rights as it determines in its
discretion and shall direct the Trustee accordingly.
2. The Plan Administrator shall direct the Trustee as to the
--- voting of all Employer Stock and as to all rights in the
event of a tender or exchange offer involving such Employer
Stock.
X. INVESTMENT DIRECTION
A. Members shall be entitled to designate what percentage of employee
contributions and employer contributions made on their behalf will be
invested in the various Investment Funds offered by the Employer as
specified in Section VIII of this Adoption Agreement except;
1. The following portions of a Member's Account will be invested at
the Employer's direction (choose whichever shall apply):
a) Employer Profit Sharing Contributions
---
Shall be invested in:
___ Employer Stock Fund
___ Employer Certificate of Deposit Fund
___ Any Investment Fund or Funds offered by the
Employer
b) Employer Matching Contributions
---
Shall be invested in:
___ Employer Stock Fund
___ Employer Certificate of Deposit Fund
___ Any Investment Fund or Funds offered by the
Employer
c) Employer Basic Contributions
---
Shall be invested in:
___ Employer Stock Fund
___ Employer Certificate of Deposit Fund
___ Any Investment Fund or Funds offered by the
Employer
14
d) ___ Employer Supplemental Contributions
Shall be invested in:
___ Employer Stock Fund
___ Employer Certificate of Deposit Fund
___ Any Investment Fund or Funds offered by the
Employer
e) ___ Employer Qualified Nonelective Contributions
Shall be invested in:
___ Employer Stock Fund
___ Employer Certificate of Deposit Fund
___ Any Investment Fund or Funds offered by the
Employer
f) ___ Employer Safe Harbor CODA Contributions under Section
3.14 of the Plan
Shall be invested in:
___ Employer Stock Fund
___ Employer Certificate of Deposit Fund
___ Any Investment Fund or Funds offered by the
Employer
2. Amounts invested at the Employer's direction may not be
--- transferred by the Member to any other Investment Fund.
3. Notwithstanding this election in 2, a Member may transfer
--- such amounts to any other Investment Fund upon (choose
whichever may apply):
a) ___ the attainment of age ___ (insert 45 or greater)
b) ___ the completion of ___ (insert 10 or greater) Years
of Employment
c) ___ the attainment of age plus Years of Employment equal
to ___ (insert 55 or greater)
B. A Member may change his or her investment direction (choose 1,2, or
3):
1. X 1 time per business day.
---
2. 1 time per calendar month.
---
3. 1 time per calendar quarter.
---
C. If a Member or Beneficiary (or the Employer, if applicable) fails to
make an effective investment direction, the Member's contributions and
Employer contributions made on the Member's behalf shall be invested
in the MONEY MARKET FUND (insert one of the Investments selected in
Section VIII of this Adoption Agreement).
15
D. Effective as of ___________________, the following additional
provisions shall apply to the Employer's Stock Fund (Check all that
apply):
1. No additional EMPLOYEE contributions may be made to the
--- Employer Stock Fund;
2. No additional EMPLOYER contributions may be made to the
--- Employer Stock Fund;
3. No investment fund transfers may be MADE TO the Employer
--- Stock Fund; and/or
4. No investment fund transfers may be MADE FROM the Employer
--- Stock Fund.
XI. VESTING SCHEDULES
A. (Choose 1, 2, 3, 4, 5, 6 or 7)
Schedule Years of Employment Vested %
-------- ------------------- --------
1. ___ Immediate Upon Enrollment 100%
2. X 2-6 Year Graded Less than 2 0%
--- 2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
3. ___ 5-Year Cliff Less than 5 0%
5 or more 100%
4. ___ 3-Year Cliff Less than 3 0%
3 or more 100%
5. ___ 4-Year Graded Less than 1 0%
1 but less than 2 25%
2 but less than 3 50%
3 but less than 4 75%
4 or more 100%
6. ___ 3-7 Year Graded Less than 3 0%
3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
16
7. ___ Other ___ Less than ___ 0%
___ but less than ___ __%
___ but less than ___ __%
___ but less than ___ __%
___ but less than ___ __%
___ or more 100%
B. With respect to the schedules listed above, the Employer elects
(choose 1, 2, 3, 4 or 5):
1. Schedule ___ solely with respect to Employer matching
contributions.
2. Schedule ___ solely with respect to Employer basic contributions.
3. Schedule ___ solely with respect to Employer supplemental
contributions.
4. Schedule ___ solely with respect to Employer profit sharing
contributions.
5. Schedule 2 with respect to all Employer contributions.
---
NOTE: Notwithstanding any election by the Employer to the contrary,
each Member shall acquire a 100% vested interest in his Account
attributable to all Employer contributions made to the Plan upon the
earlier of (i) attainment of Normal Retirement Age, (ii) approval for
disability or (iii) death. In addition, a Member shall at all times
have a 100% vested interest in; the Employer Qualified Non-Elective
Contributions, if any; Safe Harbor CODA contributions, if any; and in
the pre-tax elective deferrals and nondeductible after-tax Member
Contributions. Also, if a Plan is determined to be Top Heavy, a
different vesting schedule, other than the schedule elected above, may
apply.
C. Years of Employment Excluded for Vesting Purposes
The following Years of Employment shall be disregarded for vesting
purposes (choose whichever shall apply):
1. ___ Years of Employment during any period in which neither the
Plan nor any predecessor plan was maintained by the Employer.
2. ___ Years of Employment of a Member prior to attaining age 18.
D. Service Crediting Method for Vesting (Choose 1, 2, or 3):
1. ___ Not Applicable. Plan provides 100% vesting for all
contributions.
2. X Hour of service method (if elected, Years of Service will be
--- substituted for Years of Employment for purposes of this
Section XI) (Choose a or b):
a) X The actual number of Hours of Employment.
---
b) ___ 190 Hours of Employment for each month in which the
Employee completes at least one Hour of Employment.
17
3. ___ Elapsed time method.
XII. WITHDRAWAL PROVISIONS
A. The following portions of a Member's Account will be eligible for
in-service withdrawals, subject to the provisions of Article VII of
the Plan (choose whichever shall apply):
1. ___ Employee after-tax contributions and the earnings thereon.
In-service withdrawals permitted only in the event of (choose
whichever shall apply):
a) ___ Hardship.
b) ___ Attainment of age 59 1/2.
2. X Employee pre-tax elective deferrals and the earnings thereon.
---
Note: In-service withdrawals of all employee pre-tax
elective deferrals and earnings thereon as of December
31, 1988 are permitted only in the event of hardship or
attainment of age 59 1/2. In-service withdrawals of
earnings after December 31, 1988 are permitted only in
the event of attainment of age 59 1/2.
3. X Employee rollover contributions and the earnings thereon.
---
In-service withdrawals permitted only in the event of
(choose whichever shall apply):
a) ___ Hardship.
b) ___ Attainment of age 59 1/2.
4. X Employer matching contributions and the earnings thereon.
---
In-service withdrawals permitted only in the event of (choose
whichever shall apply):
a) X Hardship.
---
b) X Attainment of age 59 1/2.
---
5. ___ Employer basic contributions and the earnings thereon.
In-service withdrawals permitted only in the event of
(choose whichever shall apply):
a) ___ Hardship.
b) ___ Attainment of age 59 1/2.
6. ___ Employer supplemental contributions and the earnings thereon.
In-service withdrawals permitted only in the event of
(choose whichever shall apply):
a) ___ Hardship.
b) ___ Attainment of age 59 1/2.
18
7. ___ Employer profit sharing contributions and the earnings
thereon.
In-service withdrawals permitted only in the event of
(choose whichever shall apply):
a) ___ Hardship.
b) ___ Attainment of age 59 1/2.
8. ___ Employer qualified nonelective contributions and earnings
thereon.
Note: In-service withdrawals of all employer qualified
nonelective contributions and earnings thereon are
permitted only in the event of attainment of age
59 1/2.
9. ___ Employer safe harbor CODA contributions and earnings thereon.
Note: In-service withdrawals of employer safe harbor CODA
contributions and earnings thereon are permitted only
in the event of attainment of age 59 1/2.
10. ___ No in-service withdrawals shall be allowed.
B. Notwithstanding any elections made in Subsection A of this Section XII
above, the following portions of a Member's Account shall be excluded
from eligibility for in-service withdrawals (choose whichever shall
apply):
1. ___ Employer contributions, and the earnings thereon, credited to
the Employer Stock Fund.
2. ___ Employer contributions, and the earnings thereon, credited to
the Employer Certificate of Deposit Fund.
3. ___ All contributions and deferrals, and the earnings thereon,
credited to the Employer Stock Fund.
4. ___ All contributions and deferrals, and the earnings thereon,
credited to the Employer Certificate of Deposit Fund.
5. ___ Other:_____________________________________________________
Note: A Member's Account will be available for in-service
withdrawals upon attaining age 70 1/2 notwithstanding any
provisions of this Section XII to the contrary.
XIII. DISTRIBUTION OPTION (CHOOSE WHICHEVER SHALL APPLY)
1. ___ Lump Sum and partial lump sum payments only.
2. X Lump Sum and partial lump sum payments plus one or more of the
--- following (choose (a) and /or (b)):
a) X Installment payments.
---
b) X Annuity payments.
---
19
3. ___ Distributions in kind of Employer Stock.
XIV. LOAN PROGRAM (CHOOSE 1, 2, 3 OR 4, IF APPLICABLE)
1. ___ No loans will be permitted from the Plan.
2. X Loans will be permitted from the Member's Account.
---
3. ___ Loans will be permitted from the Member's Account, EXCLUDING
(choose whichever shall apply):
(1) ___ Employer Profit sharing contributions and the earnings
thereon.
(2) ___ Employer matching contributions and the earnings
thereon.
(3) ___ Employer basic contributions and the earnings thereon.
(4) ___ Employer supplemental contributions and the earnings
thereon.
(5) ___ Employee after-tax contributions and the earnings
thereon.
(6) ___ Employee pre-tax elective deferrals and the earnings
thereon.
(7) ___ Employee rollover contributions and the earnings
thereon.
(8) ___ Employer qualified nonelective contributions and the
earnings thereon.
(9) ___ Employer safe harbor CODA contributions and the earnings
thereon.
(10) ___ Any amounts to the extent invested in the Employer Stock
Fund.
(11) ___ Any amounts to the extent invested in the Employer
Certificate of Deposit Fund.
4. ___ Loans will only be permitted from the Member's Account in the case
of hardship or financial necessity as defined under Section 8.1 of
the Plan.
XV. ADDITIONAL INFORMATION
If additional space is needed to select or describe an elective feature of
the Plan, the Employer should attach additional pages and use the following
format:
The following is hereby made a part of Section --- of the Adoption
Agreement and is thus incorporated into and made a part of the Kaiser
Federal Bank Employees' Savings & Profit Sharing Plan and Trust.
Signature of Employer's Authorized Representative_________________________
Signature of Trustee______________________________________________________
Supplementary Page ____ of [total number of pages].
XVI. PLAN ADMINISTRATOR
20
The Named Plan Administrator under the Plan shall be the (choose 1, 2, 3 or
4):
Note: Pentegra Services, Inc. may not be appointed Plan Administrator.
1. X Employer
---
2. ___ Employer's Board of Directors
3. ___ Plan's Administrative Committee
4. ___ Other (if chosen, then provide the following information)
Name:______________________________________________________
Address:___________________________________________________
Tel No:____________________________________________________
Contact:___________________________________________________
NOTE: IF NO NAMED PLAN ADMINISTRATOR IS DESIGNATED ABOVE, THE EMPLOYER
SHALL BE DEEMED THE NAMED PLAN ADMINISTRATOR.
21
XVII. TRUSTEE
The Employer hereby appoints The Bank of New York to serve as Trustee
for all Investment Funds under the Plan except the Employer Stock
Fund.
The Employer hereby appoints the following person(s) or entity to
serve as Trustee under the Plan for the Employer Stock Fund.*
Name:____________________________________________________________
Address:_________________________________________________________
Telephone No:________________________ Contact:_________________
_____________________________________________________________
Signature of Trustee
(Required only if the Employer is serving as its own Trustee)
* Subject to approval by The Bank of New York, if The Bank of New York is
appointed as Trustee for the Employer Stock Fund.
The Employer hereby appoints The Bank of New York to serve as Custodian
under the Plan for the Employer Stock Fund in the event The Bank of New
York does not serve as Trustee for such Fund.
22
EXECUTION OF ADOPTION AGREEMENT
By execution of this Adoption Agreement by a duly authorized representative of
the Employer, the Employer acknowledges that it has established or, as the case
may be, amended a tax-qualified retirement plan into the Kaiser Federal Bank
Employees' Savings & Profit Sharing Plan and Trust (the "Plan"). The Employer
hereby represents and agrees that it will assume full fiduciary responsibility
for the operation of the Plan and for complying with all duties and requirements
imposed under applicable law, including, but not limited to, the Employee
Retirement Income Security Act of 1974, as amended, and the Internal Revenue
Code of 1986, as amended. In addition, the Employer represents and agrees that
it will accept full responsibility for complying with any applicable
requirements of federal or state securities law as such laws may apply to the
Plan and to any investments thereunder.
The adopting Employer may rely on an opinion letter issued by the IRS as
evidence that the Plan is qualified under Section 401 of the Code only to the
extent provided in IRS Announcement 2001-77, 2001-30 I.R.B. The Employer may not
rely on the opinion letter in certain other circumstances or with respect to
certain qualification requirements, which are specified in the opinion letter
issued with respect to the plan and in IRS Announcement 2001-77. In order to
have reliance in such circumstances or with respect to such qualification
requirements, application for a determination letter must be made to Employee
Plans Determinations of the IRS.
THE FAILURE TO PROPERLY COMPLETE THE ADOPTION AGREEMENT MAY RESULT IN
DISQUALIFICATION OF THE PLAN AND TRUST EVIDENCED THEREBY.
The Sponsor will inform the Employer of any amendments to the Plan or of the
discontinuance or abandonment of the Plan by the Sponsor.
Any inquiries regarding the adoption of the Plan should be directed to the
Sponsor as follows:
Pentegra Services, Inc.
108 Corporate Park Drive
White Plains, New York 10604
(914) 694-1300
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed by its duly authorized officer this ________ day of _________, 20__.
Kaiser Federal Bank
By:______________________________________
Name:____________________________________
Title:___________________________________
23
PENTEGRA SERVICES, INC.
- --------------------------------------------------------------------------------
KAISER FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND
TRUST
Summary Plan Description
SUMMARY PLAN DESCRIPTION
FOR
KAISER FEDERAL BANK
COVINA, CALIFORNIA
EFFECTIVE JANUARY 1, 2004
PENTEGRA SERVICES, INC.
108 CORPORATE PARK DRIVE
WHITE PLAINS, NY 10604
[LOGO] PENTEGRA
RETIREMENT PLAN SOLUTIONS
PENTEGRA GROUP
108 CORPORATE PARK DRIVE
WHITE PLAINS, NY 10604
TEL: 800.872.3473
FAX: 914.694.9384
WWW.PENTEGRA.COM
TO PARTICIPATING EMPLOYEES OF KAISER FEDERAL BANK:
We are pleased to present this booklet so that you may better understand and
appreciate the benefit which is provided by your employer by establishing the
Kaiser Federal Bank Employees' Savings & Profit Sharing Plan and Trust (the
"Plan").
The Plan enables you to save and invest on a regular, long term basis. All
contributions to the Plan (a defined contribution plan) are paid to the Trustee
to be invested in the investment options offered under the Plan. An individual
account is maintained for each member. Under certain conditions, a member may
make withdrawals or loans from his account based on its market value.
The Plan offers federal income tax advantages. The employee does not pay taxes
on employer contributions or investment income until he/she withdraws them. An
employer subject to income tax may deduct its contributions.
This booklet highlights the main features of the Plan. The Plan and Trust
contain the governing provisions and should be consulted as official text in all
cases. If there is any conflict between this booklet (Summary Plan Description)
and the Plan Document, the Plan Document will control.
YOUR EMPLOYER,
KAISER FEDERAL BANK
SUMMARY OF YOUR BENEFITS
- --------------------------------------------------------------------------------
ELIGIBILITY You will be eligible for membership in the Plan on the first
day of the calendar quarter (January 1, April 1, July 1 or
October 1) coincident with or next following your attainment
of age 21.
You will be eligible to receive employer contributions on the
first day of the calendar quarter (January 1, April 1, July 1
or October 1) coincident with or next following the date you
complete 1 year of employment and attain age 21.
PLAN SALARY Plan Salary is defined as total taxable compensation as
reported on Form W-2 (exclusive of any compensation deferred
from a prior year). In addition, any pre-tax contributions
which you make to an Internal Revenue Code Section 401(k) plan
as well as any pre-tax contributions to a Section 125
cafeteria plan and, unless the employer elects otherwise,
Qualified Transportation Fringe benefits as defined under
Section 132(f) of the Internal Revenue Code, are included in
Plan Salary.
PLAN
CONTRIBUTIONS EMPLOYEE - You may elect to make pre-tax contributions of 1%
to 15% (in 1% increments) of Plan Salary. Alternatively, you
may elect to make a pre-tax contribution to the Plan of a
specified dollar amount (not to exceed 15% of your monthly
Plan Salary).
EMPLOYER - Your employer will contribute an amount equal to
50% of your contribution to the Plan.
The above percentage rate shall apply to only the first 10% of
your Plan Salary (see "Plan Salary" section of this booklet).
ILLUSTRATION
------------
EMPLOYEE EMPLOYER
CONTRIBUTION RATE MATCHING CONTRIBUTION
----------------- ---------------------
1% 0.50%
2% 1.00%
3% 1.50%
4% 2.00%
5% 2.50%
6% 3.00%
7% 3.50%
8% 4.00%
9% 4.50%
10-15% 5.00%
Please refer to the "Making Withdrawals From Your Account"
section of this booklet to determine if there are any
restrictions on employer contributions on account of a
withdrawal.
VESTING You will be 100% vested in any employer contributions after
you complete 6 years of employment. You are always 100% vested
(i.e., you will not give up any units when you terminate
employment) in any contributions you make to the Plan.
LOANS You may take a loan from your account and pay your account
back with interest. Please refer to the "Borrowing From Your
Account" section of this booklet to determine how you may take
a loan from your account.
SUMMARY OF YOUR BENEFITS
- --------------------------------------------------------------------------------
(continued)
WITHDRAWALS While you are working, you may withdraw all or part of your
vested account balance subject to certain limitations. You may
also make withdrawals from your account after termination of
employment.
DISABILITY If you are disabled, you will be entitled to the same
withdrawal rights as if you had terminated employment.
DEATH If you die before the value of your account is paid to you,
your beneficiary may receive the full value of your account or
may defer payment within certain limits. If you are married,
your spouse will be your beneficiary unless your spouse
consents in writing to the designation of a different
beneficiary.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Determining Your Eligibility................................................. 1
Reenrollment................................................................. 1
Making Contributions to the Plan............................................. 2
o Plan Contributions.............................................. 2
o Allocation of Contributions..................................... 2
o Rollovers....................................................... 2
o Plan Salary..................................................... 2
Investing Your Account....................................................... 3
o Investment of Contributions .................................... 3
o Valuation of Accounts........................................... 3
o Reporting to Members............................................ 4
Vesting...................................................................... 5
Making Withdrawals From Your Account......................................... 6
o Upon Termination of Employment.................................. 6
o Upon Disability................................................. 7
o Upon Death...................................................... 7
Borrowing From Your Account.................................................. 8
Plan Limitations............................................................. 9
Top Heavy Information........................................................10
Disputed Claims Procedure....................................................10
Qualified Domestic Relations Orders ("QDROs")................................10
Statement of Member's Rights.................................................11
Plan Information.............................................................12
DETERMINING YOUR ELIGIBILITY
- --------------------------------------------------------------------------------
EMPLOYEE You will be eligible for membership in the Plan on the first
ELIGIBILITY day of the calendar quarter (January 1, April 1, July 1 or
October 1) coincident with or next following your attainment
of age 21.
You will be eligible to receive employer contributions on the
first day of the calendar quarter (January 1, April 1, July 1
or October 1) coincident with or next following the date you
complete 1 year of employment and attain age 21.
You will become a member as soon as a properly executed
enrollment application is received and processed by Pentegra
Services, Inc. Your membership will continue until the earlier
of (a) your termination of employment and payment to you of
your entire account or (b) your death.
REENROLLMENT If you terminate employment and are subsequently reemployed by
the same employer, you will be eligible for immediate
reenrollment.
1
MAKING CONTRIBUTIONS TO THE PLAN
- --------------------------------------------------------------------------------
PLAN EMPLOYEE - You may elect to make pre-tax contributions of 1%
CONTRIBUTIONS to 15% (in 1% increments) of Plan Salary (see "Plan Salary"
section of this booklet). Alternatively, you may elect to make
a pre-tax contribution to the Plan of a specified dollar
amount (not to exceed 15% of your monthly Plan Salary). You
may elect not to make any contributions. You may change the
rate at which you are contributing once per calendar quarter.
You may suspend your contributions at any time, but suspended
contributions may not be subsequently made up.
EMPLOYER - Your employer will contribute an amount equal to
50% of your contribution to the Plan.
The above percentage rate shall apply to only the first 10% of
your Plan Salary (see "Plan Salary" section of this booklet).
Please refer to the "Making Withdrawals From Your Account"
section of this booklet to determine if there are any
restrictions on employer contributions on account of
withdrawal.
Your employer has an account for each member. All of your own
contributions and any employer contributions will be allocated
to this account. The total of the value of your account
ALLOCATION OF represents your interest in the Plan.
CONTRIBUTIONS
INTERNAL REVENUE SERVICE NONDISCRIMINATION RULES
If you are a highly compensated employee, a portion of your
contributions and/or employer contributions, made on your
behalf, if any, may have to be returned to you in order to
comply with special Internal Revenue Service (IRS)
nondiscrimination rules (See "Plan Limitations" section of
this booklet for other limitations). In general, a highly
compensated employee is an employee who:
(a) was a 5% owner at any time during the current or
preceding year, or
(b) received annual compensation from the employer for the
preceding year in excess of $90,000 (indexed for
cost-of-living adjustments, if any).
ROLLOVERS You may make a rollover contribution of an eligible rollover
distribution from any other Internal Revenue Service qualified
retirement plan or an individual retirement arrangement (IRA).
These funds will be maintained in a separate rollover account
in which you will have a nonforfeitable vested interest.
Please note that you may establish a "rollover" account within
the Plan prior to satisfying the Employer's eligibility
requirements. However, the establishment of a "rollover"
account prior to satisfying such eligibility will not
constitute active membership in the Plan.
PLAN SALARY Plan Salary is defined as total taxable compensation as
reported on Form W-2 (exclusive of any compensation deferred
from a prior year). In addition, any pre-tax contributions
which you make to an Internal Revenue Code Section 401(k) plan
as well as any pre-tax contributions to a Section 125
cafeteria plan and, unless the employer elects otherwise,
Qualified Transportation Fringe benefits as defined under
Section 132(f) of the Internal Revenue Code, are included in
Plan Salary. However, Plan Salary for any year may not exceed
$205,000 for 2004 (indexed for cost-of-living adjustments).
INVESTING YOUR ACCOUNT
- --------------------------------------------------------------------------------
INVESTMENT OF Contributions are invested at your direction in one or more of
CONTRIBUTIONS the investment funds provided under your Plan. These funds are
described in greater detail in your enrollment kit.
2
Contributions made by you are invested at your direction in
one or more of the investment funds in whole percentages. You
may apply different investment instructions to amounts already
accumulated as opposed to future contributions. Certain
restrictions may apply. Changes in investment instructions may
be made by submitting a properly completed form or by using
Pentegra by Phone, the Pentegra Voice Response System. You may
access Pentegra by Phone by calling 1-800-433-4422.
Any changes made by using Pentegra by Phone which are received
by Stock Market Closing (usually 4 p.m. Eastern Time) will be
processed at the business day's closing price. Transaction
changes received after Stock Market Closing will be processed
on the next business day. Your plan allows for a change of
investment allocation on a daily basis.
Investment changes made by submitting a form are effective on
the valuation date (see "Valuation of Accounts" section of
this booklet) on which your written notice is processed.
No amounts invested in the Stable Value Fund may be
transferred directly to the Money Market Fund. Stable Value
Fund amounts transferred to and invested in any of the other
funds provided under the Plan for a period of three months may
be transferred to the Money Market Fund upon the submission of
a separate Change of Investment form.
If no investment direction is given, all contributions
credited to a participant's account will be invested in the
Money Market Fund.
The Plan uses a unit system for valuing each Investment Fund.
Under this system each participant's share in any Investment
Fund is represented by units. The unit value is determined as
of the close of business each regular business day (daily
valuation). The total dollar value of a participant's share in
any Investment Fund as of any valuation date is determined by
multiplying the number of units to the participant's credit by
the unit value of the Fund on that date. The sum of the values
of the Funds you select represents the total value of your
VALUATION OF Plan account.
ACCOUNTS
Transaction requests, such as withdrawals, change of
investment elections, distributions, that are received by
Pentegra Services, Inc. (assuming proper receipt of all
pertinent information) will be processed as directed by the
Plan Administrator.
NOTE: IF FOR SOME REASON (SUCH AS SHUT DOWN OF FINANCIAL
MARKETS) THE UNDERLYING PORTFOLIO OF ANY INVESTMENT FUND
CANNOT BE VALUED, THE VALUATION DATE FOR SUCH INVESTMENT FUND
SHALL BE THE NEXT DAY ON WHICH THE UNDERLYING PORTFOLIOS CAN
BE VALUED.
INVESTING YOUR ACCOUNT
- --------------------------------------------------------------------------------
(continued)
REPORTING TO As soon as practicable after the end of each calendar quarter
MEMBERS you will receive a personal statement from the plan. This
statement provides information about your account including
its market value in each investment fund. Activity for the
quarter is reported by investment fund and contribution type.
3
VESTING
- --------------------------------------------------------------------------------
"Vesting" is the process under which you earn a
non-forfeitable right to the units in your account. You are
always 100% vested (i.e., you will not give up any units when
you terminate employment) in any contributions you make to the
Plan.
With respect to any employer contributions credited to your
account, the following schedule will dictate when vesting will
occur:
YEARS OF EMPLOYMENT VESTING PERCENTAGE
------------------- ------------------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
You will also become 100% vested in the employer contributions
and earnings thereon credited to your account upon your death,
approved disability or attainment of age 65 while employed
with this employer.
If you terminate employment with this employer prior to
completing 2 years of service, you will forfeit all of the
employer contributions and earnings thereon credited to your
account. However, if you are reemployed by this employer prior
to incurring 5 consecutive 1-year breaks in service, measured
from your date of termination, you are eligible to have the
amount of the forfeiture and your corresponding vesting
service restored to your account.
If you terminate employment with this employer after
completing 2 years of service, but prior to becoming 100%
vested, you will forfeit the non-vested portion of the
employer contributions and earnings thereon credited to your
account. If you are reemployed by this employer prior to
incurring 5 consecutive 1-year breaks in service, you are
eligible to have the amount of the forfeiture restored to your
account. If you received a distribution of the vested portion
of your account prior to incurring 5 consecutive 1-year breaks
in service, such restoration is conditioned on your paying
back to your account the amount of your prior vested balance
within 5 years of the date it was distributed to you. In
either event, your prior vesting service will be recredited to
your account.
4
MAKING WITHDRAWALS FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
ACCOUNT WHILE EMPLOYED
WITHDRAWAL You may make a total or partial withdrawal of the vested
portion of your account by filing the appropriate form with
the Plan Administrator for transmittal to Pentegra Services,
Inc. A withdrawal is based on the unit values on the valuation
date coinciding with the date that a properly completed
withdrawal form is received and processed by Pentegra
Services, Inc. (see "Valuation of Accounts" section of this
booklet).
Under current law, an excise tax of 10% is generally imposed
on the taxable portion of withdrawals occurring prior to your
attainment of age 59 1/2. There arE certain exceptions to the
10% excise tax. For example, the 10% excise tax will not apply
to withdrawals made on account of separation from service at
or after attainment of age 55, death or disability.
In general, employer contributions credited on your behalf
will not be available for in-service withdrawal until such
employer contributions have been invested in the Plan for at
least 24 months (2 years) or you have been a participant in
the Plan for at least 60 months (5 years) or the attainment of
age 59 1/2.
As required by Internal Revenue Service Regulations, a
withdrawal of your pre-tax contributions prior to age 59 1/2
or termination of employment can only be made on account of a
hardship. In addition, an in-service withdrawal of employer
matching contributions prior to attaining age 59 1/2 and
termination of employment can only be made on account of a
hardship. The existence of an immediate and heavy financial
need, and the lack of any other available financial resources
to meet this need, must be demonstrated for a hardship
withdrawal. The following situations will be considered to
constitute an immediate and heavy financial need:
(1) Medical expenses (other than amounts paid by insurance).
(2) The purchase of a principal residence (mortgage payments
are excluded).
(3) Tuition, including room and board, for the next 12
months of post-secondary education.
(4) The prevention of the eviction from a principal
residence or foreclosure on the mortgage of a principal
residence.
Only one in-service withdrawal may be made in any Plan Year.
UPON TERMINATION OF EMPLOYMENT
You may leave your account with the Plan and defer
commencement of receipt of your vested balance until April 1
of the calendar year following the calendar year in which you
attain age 70 1/2. However, if your account under the plan,
when aggregated, is less than $500.00 then your account will
be distributed to you as soon as practicable following your
date of termination. You may make withdrawals from your
account(s) at any time after you terminate employment. You may
continue to change the investment instructions with respect to
your remaining account balance and make withdrawals as
provided above. (See "Investment of Contributions" section of
this booklet).
You may elect to receive your benefit in the form of (i) an
annuity payable for your life, (ii) a lump sum, or (iii) in
the form of annual installments with the right to take in a
lump sum the vested balance of your account at anytime during
such can receive annual installments will be the next lower
payment period. If the actuarial determination of your life
expectancy is less than the period you elect,
5
MAKING WITHDRAWALS FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
(continued)
the maximum period over which you can receive annual
installments will be the next lower payment period.
If you are married and you have elected to receive your
benefit in the form of a life annuity, your spouse must
consent in writing to waive the right to receive a qualified
joint and survivor annuity form of payment.
UPON DISABILITY
If you are disabled in accordance with the definition of
disability under the Plan, you will be entitled to the same
withdrawal rights as if you had terminated your employment
You are disabled under the Plan if you are eligible to receive
(i) disability insurance benefits under Title II of the
Federal Social Security Act or (ii) disability benefits under
any other Internal Revenue Service qualified employee benefits
plan or long-term disability plan of your employer.
UPON DEATH
If you die when you are a participant of the Plan, the value
of your entire account will be payable to your beneficiary. If
you are married at the time of your death your spouse will be
the beneficiary of your death benefit (unless your spouse
consents in writing to the designation of a different
beneficiary). If you are not married at the time of your death
or your spouse consents to a different beneficiary, such
beneficiary may elect to receive the benefit in the form of a
lump sum, in the form of installment payments over a period
not to exceed 5 years (10 years if your spouse is your
beneficiary) or under the life expectancy method.
Notwithstanding the above, if your account under the Plan is
less than $500, then your account will be distributed to your
beneficiary as soon as practicable following your date of
death regardless of your marital status at the time of your
death.
6
BORROWING FROM YOUR ACCOUNT
- --------------------------------------------------------------------------------
LOANS You may borrow from the vested portion of your account. You
may borrow any amount between $1,000 and $50,000 (reduced by
your highest outstanding loan balance(s) from the Plan during
the preceding 12 months). In no event may you borrow more than
50% of the vested balance of your account.
The amount of your loan will be deducted on the valuation date
(see "Valuation of Accounts" section of this booklet)
coinciding with the date that Pentegra Services, Inc. receives
and processes your properly executed Loan Application,
Promissory Note and Disclosure Statement and Truth-in-Lending
Statement. On request, the Plan Administrator will provide you
with the application form. The loan will not affect your right
to continue making contributions or to receive the
corresponding employer contributions.
The rate of interest for the term of the loan will be
established as of the loan date, and shall be a reasonable
rate of interest generally comparable to the rates of interest
then in effect at a major banking institution (e.g., the
Barron's Prime Rate (base rate) plus 1%).
Repayments are made through payroll deductions and will be
transmitted along with the Employer's contribution reports.
The repayment period is between 1 and 15 years for loans used
exclusively for the purchase of a primary residence or 1 and 5
years for all other loans, at your option. After 3 monthly
payments have been made, you may repay the outstanding balance
of the loan (subject to the terms of your loan document). If a
loan includes any employee pre-tax amounts, you will not be
permitted to default on the loan repayment while employed.
Your employer is required to withhold the loan repayments from
your salary.
As you repay the loan, the principal portion, together with
the interest, will be credited to your account. In this way,
you will be paying interest to yourself. A $50.00 origination
fee and a $40.00 annual administrative fee will be subtracted
from your account. The origination fee, plus the first year's
administrative fee will be deducted proportionately from your
account at the time of origination. Subsequent annual
administrative fees will be deducted from your account each
year on or about the anniversary date of the loan origination.
In the event that you leave employment or die before repaying
the loan, the outstanding balance will be due and, if not paid
by the end of the calendar quarter following the calendar
quarter in which you terminate employment or die, will be
deemed a distribution and subject to the applicable tax
treatment. However, you may elect upon termination of
employment to continue to repay the loan on a monthly basis
directly to Pentegra Services, Inc.
7
PLAN LIMITATIONS
- --------------------------------------------------------------------------------
PLAN Internal Revenue Service ("IRS") requirements impose certain
LIMITATIONS limitations on the amount of contributions that may be made to
this and other qualified plans. In general, the annual
"contributions" made to a defined contribution plan such as
this Plan, in respect of any member, may not exceed the lesser
of 100% of the member's total compensation or $41,000. (This
amount may be subject to periodic adjustment by the IRS at
some time in the future). For this purpose, "contributions"
include employer contributions, member 401(k) contributions
and member after-tax contributions. The annual member
contributions allocated to a member's 401(k) account may not
exceed $13,000 (indexed for cost-of-living adjustments).
Further, if your employer has another tax-qualified plan in
effect, these limits are subject to additional restrictions.
Each member and beneficiary assumes the risk in connection
with any decrease in the market value of his account. The
benefit to which you may be entitled upon your withdrawal of
account cannot be determined in advance.
As a defined contribution plan, the Plan is not covered by the
plan termination insurance provisions of Title IV of the
Employee Retirement Income Security Act of 1974 ("ERISA").
Therefore, your benefits are not insured by the Pension
Benefit Guaranty Corporation in the event of a plan
termination.
Except as may otherwise be required by applicable law or
pursuant to the terms of a Qualified Domestic Relations Order,
amounts payable by the Plan generally may not be assigned, and
if any person entitled to a payment attempts to assign it, his
interest in the amount payable may be terminated and held for
the benefit of that person or his dependents.
If Pentegra Services, Inc. cannot locate any person entitled
to a payment from the Plan and if 5 years have elapsed from
the due date of such payment, the Plan Administrator may
cancel all payments due him to the extent permitted by law.
Membership in the Plan does not give you the right to
continued employment with your employer or affect your
employer's right to terminate your employment.
The Plan's qualified status is subject to IRS approval and any
requirements the IRS may impose.
The employer may terminate the Plan at any time. If the Plan
is terminated, there will be no further contributions to the
Plan for your account.
8
- --------------------------------------------------------------------------------
TOP HEAVY A "top heavy" plan is a plan under which more than 60% of the
INFORMATION accrued benefits (account values) are for key employees. Key
employees generally include officers and shareholders earning
more than $130,000 per year (indexed for cost-of-living
adjustments), 5% owners of the Employer, and 1% owners of the
Employer earning more than $150,000 per year. If your
employer's plan is top heavy for a particular plan year, you
may be entitled to a minimum employer contribution equal to
the lesser of 3% of your Plan Salary or the greatest
percentage contributed by the employer for any key employee.
This minimum contribution would be offset by the regular
contribution made by your employer (See "Plan Contributions"
section of this booklet).
In order to receive the minimum contribution for any plan
year, you must be employed on the last day of the plan year.
If your employer also provides a defined benefit or another
defined contribution plan, your minimum benefit may be
provided under such plan.
DISPUTED If you disagree with respect to any benefit to which you feel
CLAIMS you are entitled, you should make a written claim to the Plan
PROCEDURE Administrator of the Plan. If your claim is denied, you will
receive written notice explaining the reason for the denial
within 90 days after the claim is filed.
The Plan Administrator's decision shall be final unless you
appeal such decision in writing to the Plan Administrator of
the Plan, within 60 days after receiving the notice of denial.
The written appeal should contain all information you wish to
be considered. The Plan Administrator will review the claim
within 60 days after the appeal is made. Its decision shall be
in writing, shall include the reason for such decision and
shall be final.
A QDRO is a judgment, decree or order which has been
determined by the Plan Administrator, in accordance with the
QUALIFIED procedures established under the provisions of the Plan, to
DOMESTIC constitute a QDRO under the Internal Revenue Code.
RELATIONS
ORDERS ("QDROS") To obtain copies of the Plan's QDRO Procedures, free of
charge, please contact the Plan Administrator. (Please refer
to the "Plan Information" section of this booklet to obtain
the Plan Administrator's address and phone number).
9
MEMBER RIGHTS
- --------------------------------------------------------------------------------
STATEMENT OF As a member of the Plan, you are entitled to certain rights
MEMBER'S and protection under ERISA which provides that all members
RIGHTS shall be entitled to:
Examine, without charge, at the Plan Administrator's
office or at other specified locations, all plan
documents, and copies of all documents filed by the Plan
Administrator with the U. S. Department of Labor such as
detailed annual reports and plan descriptions.
Obtain copies of all plan documents and other plan
information upon written request to the Plan
Administrator. The Administrator may make a reasonable
charge for the copies.
Receive a summary of the Plan's annual financial report.
The Plan Administrator is required by law to furnish
each member with a copy of such summary.
In addition to creating rights for Plan members, ERISA imposes
duties upon the people who are responsible for the operation
of the Plan. The people who operate your Plan, called
"fiduciaries", have a duty to do so prudently and in the
interest of you and other plan members and beneficiaries. No
one may fire you or otherwise discriminate against you in any
way to prevent you from obtaining a benefit or exercising your
rights under ERISA. If your claim for a benefit is denied in
whole or in part, you will receive a written explanation of
the reason for the denial. As already explained, you also have
the right to have your claim reconsidered.
Under ERISA, there are steps you can take to enforce the above
rights. For instance, if you request materials from the Plan
Administrator and do not receive them within 30 days, you may
file suit in a federal court. In such a case, the court may
require the Plan Administrator to provide the materials and
pay you up to $110 a day until you receive them, unless such
materials were not sent for reasons beyond the Administrator's
control. If you have a claim for benefits which is denied or
ignored, in whole or in part, you may file suit in a state or
federal court.
In addition, if you disagree with the Plan Administrator's
decision (or lack thereof) concerning the qualified status of
a domestic relations order subsequent to the 18 month period
prescribed in Section 414(p) of the Code, after you have
complied with the remedies prescribed by the Plan's QDRO
Procedures and the Disputed Claims Procedure outlined in this
Summary Plan Description, you may file suit in federal court.
If it should happen that Plan fiduciaries misuse the Plan's
money, or if you are discriminated against for asserting your
rights, you may seek assistance from the U.S. Department of
Labor or, after you have complied with the Disputed Claims
Procedure outlined in this Summary Plan Description, you may
file suit in a federal court. The court will decide who should
pay court costs and legal fees. If you are successful, the
court may order the person you have sued to pay these costs
and fees. If you lose, the court may order you to pay such
costs and fees (for example, if it finds your claim is
frivolous).
If you have any questions about your Plan, you should contact
the Plan Administrator. If you have any questions about this
statement or your rights under ERISA, you should contact the
nearest Area Office of the U.S. Labor-Management Services
Administration, Department of Labor.
This Statement of ERISA Rights is required by federal law and
regulation.
10
PLAN INFORMATION
- --------------------------------------------------------------------------------
PLAN NAME:
Kaiser Federal Bank Employees' Savings &
Profit Sharing Plan and Trust
PLAN ADMINISTRATOR:
Kaiser Federal Bank
1359 N. Grand Avenue
Covina, CA 91724
Phone No: (626) 339-9663
Employer Identification Number: 95-1867697
Plan Number: 002
Plan Year End: June 30
TRUSTEE:
The Bank of New York
1 Wall Street
New York, NY 10286
Phone: (212) 635-8115
AGENT FOR SERVICE OF LEGAL PROCESS:
Kaiser Federal Bank
ADMINISTRATIVE SERVICES:
Record-keeping services are provided by:
Pentegra Services, Inc.
108 Corporate Park Drive
White Plains, New York 10604
Phone No.: (914) 694-1300 FAX No.: (914) 694-6429
(800) 872-3473
11
EXHIBIT B
Form 5500 Annual Return/Report of Employee Benefit Plan Official Use Only
Department of the Treasury This form is required to be filed under sections 104 and 4065 of the Employee OMB Nos. 1210-0110
Internal Revenue Service Retirement Income Security Act of 1974 (ERISA) and sections 6039D, 6047(e), 1210-0089
Department of Labor 6057(b), and 6058(a) of the Internal Revenue Code (the Code). 2002
Pension and Welfare Benefits -> Complete all entries in accordance with This Form is Open to
Administration the instructions to the Form 5500. Public Inspection
Pension Benefit Guaranty Corp.
- ------------------------------------------------------------------------------------------------------------------------------------
PART I ANNUAL REPORT IDENTIFICATION INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
For the calendar plan year 2000 or fiscal plan year beginning , and ending ,
- ------------------------------------------------------------------------------------------------------------------------------------
A This return/report is for:
(1)___a multiemployer plan;
(2) X a single-employer plan (other than a multiple-employer plan);
---
(3)___a multiple-employer plan; or
(4)___a DFE (specify)
B This return/report is:
(1)___the first return/report filed for the plan;
(2)___an amended return/report;
(3)___the final return/report filed for the plan;
(4)___a short plan year return/report (less than 12 months)
C If the plan is a collectively-bargained plan, check here ................................................................... ___
D If filing under an extension of time or the DVFC program, check box and attach required information ........................ X
- ------------------------------------------------------------------------------------------------------------------------------------
PART II BASIC PLAN INFORMATION - ENTER ALL REQUESTED INFORMATION.
- ------------------------------------------------------------------------------------------------------------------------------------
1a Name of plan
Kaiser Federal Bank Retirement Savings Plan
1b Three-digit plan number (PN)
002
1c Effective date of plan (mo., day, yr.)
12/01/1985
2a Plan sponsor's name and address (employer, if for a single-employer plan)
Kaiser Federal Bank
c/o 1359 N. Grand Avenue
Covina California 91724-1016
2b Employer Identification Number (EIN)
95-1867697
2c Sponsor's telephone number
626-339-9663
2d Business code (see instructions)
522130
- ------------------------------------------------------------------------------------------------------------------------------------
CAUTION: A penalty for the late or incomplete filing of this return/report will be assessed unless reasonable cause is established.
- ------------------------------------------------------------------------------------------------------------------------------------
- --
Under penalties of perjury and other penalties set forth in the instructions, I declare that I have examined this return/report,
including accompanying schedules, statements, and attachments, and to the best of my knowledge and belief, it is true, correct,
and complete.
- ------------------------------------------------------------------------------------------------------------------------------------
Signature of plan administrator Date Typed or printed name of individual signing as plan
/s/ Kay M. Hoveland 9-9-03 Kay M. Hoveland
- ------------------------------------------------------------------------------------------------------------------------------------
Signature of employer/plan sponsor/DFE Date Typed or printed name of individual signing as employer, plan
sponsor or DFE as applicable.
/s/ Kay M. Hoveland 9-9-03 Kay M. Hoveland
- ------------------------------------------------------------------------------------------------------------------------------------
FOR PAPERWORK REDUCTION ACT NOTICE AND OMB CONTROL NUMBERS, SEE THE INSTRUCTIONS FOR FORM 5500. v5.0 Form 5500 (2002)
- ------------------------------------------------------------------------------------------------------------------------------------
Official Use Only
Form 5500 (2002) Page 2
- ------------------------------------------------------------------------------------------------------------------------------------
3a Plan administrator's name and address (If same as plan sponsor, enter "Same")
SAME
3b Administrator's EIN
3c Administrator's telephone number
4 If the name and/or EIN of the plan sponsor has changed since the last return/report filed for this plan, enter the name,
EIN and the plan number from the last return/report below:
a Sponsor's name
Kaiser Federal
b EIN
95-1867697
c PN
001
5 Preparer information (optional)
a Name (including firm name, if applicable) and address
b EIN
c Telephone number
- ------------------------------------------------------------------------------------------------------------------------------------
6 Total number of participants at the beginning of the plan year ................................................(6) 79
- ------------------------------------------------------------------------------------------------------------------------------------
7 Number of participants as of the end of the plan year (welfare plans complete only lines 7a, 7b, 7c, and 7d)
a Active participants..........................................................................................(7a) 73
b Retired or separated participants receiving benefits.........................................................(7b) 0
c Other retired or separated participants entitled to future benefits..........................................(7c) 9
d Subtotal. Add lines 7a, 7b, and 7c...........................................................................(7d) 82
e Deceased participants whose beneficiaries are receiving or are entitled to receive benefits..................(7e) 2
f Total. Add lines 7d and 7e...................................................................................(7f) 84
g Number of participants with account balances as of the end of the plan year
(only defined contribution plans complete this item).........................................................(7g) 72
h Number of participants that terminated employment during the plan year with accrued benefits
that were less than 100% vested..............................................................................(7h) 15
i If any participant(s) separated from service with a deferred vested benefit, enter the number of
separated participants required to be reported on a Schedule SSA (Form 5500).................................(7i) 1
8 Benefits provided under the plan (complete 8a through 8c, as applicable)
X a Pension benefits (check this box if the plan provides pension benefits and enter the applicable pension feature codes
from the List of Plan Characteristics Codes printed in the instructions):
2E 2F 2G 2J 2K 3E
- --------------------------------------------------
b Welfare benefits (check this box if the plan provides welfare benefits and enter the applicable welfare feature codes
from the List of Plan Characteristics Codes printed in the instructions):
- --------------------------------------------------
9a Plan funding arrangement (check all that apply)
(1) X Insurance
(2) Section 412(i) insurance contracts
(3) X Trust
(4) General assets of the sponsor
9b Plan benefit arrangement (check all that apply)
(1) X Insurance
(2) Section 412(i) insurance contracts
(3) X Trust
(4) General assets of the sponsor
- ------------------------------------------------------------------------------------------------------------------------------------
Official Use Only
Form 5500 (2002) Page 3
- ------------------------------------------------------------------------------------------------------------------------------------
10 Schedules attached (Check all applicable boxes and, where indicated, enter the number attached. See instructions.)
A PENSION BENEFIT SCHEDULES
(1) X R (Retirement Plan Information)
(2) X 1 T (Qualified Pension Plan Coverage Information)
If a Schedule T is not attached because the plan is relying on
coverage testing information for a prior year, enter the year.................. _____
(3) B (Actuarial Information)
(4) E (ESOP Annual Information)
(5) X SSA (Separated Vested Participant Information)
B FINANCIAL SCHEDULES
(1) H (Financial Information)
(2) X I (Financial Information -- Small Plan)
(3) X 1 A (Insurance Information)
(4) C (Service Provider Information)
(5) X D (DFE/Participating Plan Information)
(6) G (Financial Transaction Schedules)
(7) X 1 P (Trust Fiduciary Information)
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EXHIBIT C
KAISER FEDERAL BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
PARTICIPANT ELECTION TO INVEST IN K-FED BANCORP STOCK
1. PARTICIPANT DATA
- -------------------------------------------------------------------------------------------------------
Print your full name above (Last, first, middle initial) Social Security Number
- -------------------------------------------------------------------------------------------------------
Street Address City State Zip
$
- ----------------------------------------------------------- ------------------ ---------------------
Balance of Participant's Plan Accounts at ___________, 2004 Date of Birth Date of Hire
2. INVESTMENT DIRECTION
The Kaiser Federal Bank Employees' Savings & Profit Sharing Plan and Trust
(the "401(k) Plan") is giving participants a special opportunity to invest their
account balances in common stock issued by K-Fed Bancorp in connection with the
stock offering by K-Fed Bancorp. This election may be made during the
Subscription and Community Offering, with respect to the balance in your
accounts under the 401(k) Plan (hereinafter referred to as your "Accounts") as
of ______________. Please review the Subscription and Community Prospectus dated
________ ____, 2004 (the "Prospectus") and the Prospectus Supplement (the
"Supplement") dated ___________ ___, 2004 before making any decision.
Investing in K-Fed Bancorp stock entails some risks, and we encourage you
to discuss this investment decision with your spouse and your investment
advisor. The 401(k) Plan's Trustee and the Plan Administrator are not authorized
to make any representations about this investment other than what appears in the
Prospectus and Supplement, and you should not rely on any information other than
what is contained in the Prospectus and Supplement.
Any shares purchased by the 401(k) Plan pursuant to your election will be
subject to the conditions or restrictions otherwise applicable to K-Fed Bancorp
stock, as discussed in the Prospectus and Supplement. In addition, once you have
elected to have your account invested in K-Fed Bancorp stock, you may have
limited opportunities to change this investment decision. ANY PART OF YOUR
ACCOUNT INVESTED IN K-FED BANCORP STOCK MAY BE CHANGED TO AN ALTERNATIVE
AUTHORIZED INVESTMENT UNDER THE 401(K) PLAN ONLY DURING AN "INVESTMENT CHANGE
PERIOD."
An "Investment Change Period" opens at the beginning of the third day
after the K-Fed Bancorp issues a "Quarterly Earnings Release" and closes at the
end of the twelfth business day after such release. The term "Quarterly Earnings
Release" means any press release issued by the K-Fed Bancorp for general
distribution which announces, for the first time, K-Fed Bancorp's results of
operations for a particular fiscal quarter. K-Fed Bancorp anticipates these
opportunities will occur four times per year. K-Fed Bancorp will attempt to
notify Participants of the commencement of each Investment Change Period but
will not assume responsibility for doing so.
[ ] I choose to invest in _______ shares (___ share minimum) of K-Fed Bancorp
stock at $10.00 per share, with the aggregate purchase price to be
obtained by the Trustee's use of assets currently held in my Accounts. I
hereby direct the Trustee to obtain the funds necessary to purchase such
shares of K-Fed Bancorp stock by using funds in my current Accounts from
among the following Investment Options in the following percentages (in
not less than 10% increments):
[ ] Money Market Fund __________ %
[ ] Stable Value Fund __________ %
[ ] Government Bond Fund __________ %
[ ] S&P 500 Stock Fund __________ %
[ ] S&P 500/Value Stock Fund __________ %
[ ] S&P 500/Growth Stock Fund __________ %
[ ] S&P MidCap Stock Fund __________ %
[ ] Russell 2000 Stock Fund __________ %
[ ] International Stock Fund __________ %
[ ] Income Plus Asset Allocation Fund __________ %
[ ] Growth & Income Asset Allocation Fund __________ %
[ ] Growth Asset Allocation Fund __________ %
[ ] NASDAQ 100 Index Fund __________ %
[ ] I choose not to invest any of my Accounts in K-Fed Bancorp stock.
3. PARTICIPANT SIGNATURE AND ACKNOWLEDGMENT - REQUIRED
By signing this PARTICIPANT INVESTMENT ELECTION, I authorize and direct the Plan
Administrator and Trustee to carry out my instructions. I acknowledge that I
have been provided with and read a copy of the Prospectus and Supplement
relating to the issuance of K-Fed Bancorp stock, and I have read the explanation
provided in Part 2 of this form. I am aware of the risks involved in the
investment in K-Fed Bancorp stock, and understand that the Trustee and Plan
Administrator are not responsible for my choice of investment.
- ------------------------------------------ ----------------------------------
Participant's Signature Date Signed
Signed before me this ___day of________________, 2004 _______________________
Notary Public
My Commission Expires_________________________________
PLEASE COMPLETE AND RETURN BY ___:______ __.M, COVINA,
CALIFORNIA TIME ON ___________, 2004
PROSPECTUS
Up to 4,562,625 Shares of Common Stock
K-FED BANCORP
(Holding Company for Kaiser Federal Bank)
K-Fed Bancorp is a federally-chartered stock corporation that is offering
for sale up to 4,562,625 shares of its common stock to the public at $10.00 per
share. K-Fed Bancorp is the holding company for Kaiser Federal Bank. The shares
being offered will represent 46.0% of the outstanding common stock of K-Fed
Bancorp after the completion of this stock offering. K-Fed Mutual Holding
Company, a federally-chartered mutual holding company, will own the remainder of
the outstanding common stock of K-Fed Bancorp. K-Fed Bancorp expects its common
stock to be listed for trading on the Nasdaq National Market under the symbol
"KFED."
===================================================================================================================
TERMS OF THE OFFERING
Maximum,
Minimum Maximum as adjusted(1)
------- ------- --------------
Per Share Price............................... $ 10.00 $ 10.00 $ 10.00
Number of Shares.............................. 2,932,500 3,967,500 4,562,625
Underwriting Commission and Other Expenses.... $ 1,230,000 $ 1,358,000 $ 1,432,000
Net Proceeds to K-Fed Bancorp................. $28,096,000 $38,317,000 $44,194,000
Net Proceeds Per Share........................ $ 9.58 $ 9.66 $ 9.69
===================================================================================================================
(1) Represents an amount that is 15% more than the maximum of the offering range
as a result of changes in financial or market conditions. The sale of stock at
this amount does not require the resolicitation of subscribers.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 1 OF THIS DOCUMENT.
Keefe, Bruyette & Woods will use its best efforts to assist K-Fed Bancorp
in selling at least the minimum number of shares shown above but does not
guarantee that this number will be sold. Keefe, Bruyette & Woods is not
obligated to purchase any shares of common stock in the offering. Keefe,
Bruyette & Woods intends to make a market in the common stock. The minimum
number of shares an individual investor may purchase is 25 shares or $250.
Directors and executive officers of K-Fed Bancorp, together with their
associates, and the employee stock ownership plan intend to purchase $4,896,000
and $5,724,000 in the offering, or 16.7% and 14.5% of the offering based on the
minimum and maximum, respectively, of the total shares sold in the offering. The
employee stock ownership plan intends to purchase 8.0% of the stock sold in the
offering. These purchases will count towards the minimum purchases needed to
complete the offering, and will be made for investment purposes only and not for
resale.
The stock offering to the depositors of Kaiser Federal Bank will end at
12:00 Noon, Pacific Standard Time, on _________, 2004. We may also commence a
community offering and a syndicated community offering concurrently with, during
or promptly after the subscription offering. We may extend the offerings,
without notice to you, but they must be completed or terminated by ________,
2006. K-Fed Bancorp will hold all funds of subscribers in an interest-bearing
account at Kaiser Federal Bank or in an interest bearing trust account at PFF
Bank & Trust, Pomona, California, an institution insured by the Federal Deposit
Insurance Corporation, until the stock offering is completed or terminated.
Funds will be returned promptly with interest if the stock offering is
terminated.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY OTHER FEDERAL AGENCY OR STATE SECURITIES REGULATOR HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
For information on how to subscribe, call the stock information center at
(877) 848-4663
---------------------------------------------------------
KEEFE, BRUYETTE & WOODS
---------------------------------------------------------
___________________, 2004
[MAP of Registrant's market area to be produced here.]
- --------------------------------------------------------------------------------
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY UNDERSTAND THE
STOCK OFFERING, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, INCLUDING THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS OF K-FED BANCORP.
THE COMPANIES:
K-FED BANCORP
1359 N. GRAND AVENUE
COVINA, CALIFORNIA 91724
(800) 524-2274
K-Fed Bancorp is a federally-chartered stock corporation that was formed in
July 2003 for the purpose of acquiring all of the capital stock that Kaiser
Federal Bank issued upon its reorganization into a mutual holding company
structure. Currently, all of the outstanding common stock of K-Fed Bancorp is
held by K-Fed Mutual Holding Company, a federally-chartered mutual holding
company.
The shares being offered will represent 46.0% of the outstanding common
stock of K-Fed Bancorp after the completion of this stock offering. K-Fed Mutual
Holding Company will own the remainder of the outstanding common stock of K-Fed
Bancorp. The following chart shows the corporate structure after completion of
the stock offering.
<c>
- ------------------------------------- ---------------------------------------------------------
K-Fed Mutual Holding Company Minority Stockholders of K-Fed Bancorp
- ------------------------------------- ---------------------------------------------------------
54% 46%
- ---------------------------------------------------------------------------------------------------
K-Fed Bancorp
- ---------------------------------------------------------------------------------------------------
100%
--------------------------
Kaiser Federal Bank
--------------------------
K-Fed Bancorp has not engaged in any significant business since its
formation in July 2003. Its primary activity is holding all of the stock of
Kaiser Federal Bank. K-Fed Bancorp will invest the proceeds of the offering as
discussed under "How We Intend to Use the Proceeds." In the future, it may
pursue other business activities, including mergers and acquisitions, investment
alternatives and diversification of operations. There are, however, no current
understandings or agreements regarding these activities.
i
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- --------------------------------------------------------------------------------
K-FED MUTUAL HOLDING COMPANY
1359 N. GRAND AVENUE
COVINA, CALIFORNIA 91724
(800) 524-2274
K-Fed Mutual Holding Company is a federally-chartered mutual holding
company that was formed in July 2003 in connection with the mutual holding
company reorganization of Kaiser Federal Bank.
K-Fed Mutual Holding Company currently owns 100% of the outstanding common
stock of K-Fed Bancorp. So long as K-Fed Mutual Holding Company is in existence,
it will at all times own at least a majority of the outstanding common stock of
K-Fed Bancorp. It is anticipated that the only business activity of K-Fed Mutual
Holding Company going forward will be to own a majority of K-Fed Bancorp's
common stock.
KAISER FEDERAL BANK
1359 N. GRAND AVENUE
COVINA, CALIFORNIA 91724
(800) 524-2274
Kaiser Federal Bank is a federally-chartered stock savings association that
was organized in 1953 as the Kaiser Foundation Hospital Employees Federal Credit
Union. In 1972, the credit union's name was changed to Kaiser Permanente Federal
Credit Union to reflect its field of membership which included the employees of
the Kaiser Permanente Medical Care Program who were primarily located in
California from San Francisco County to San Diego County. In November 1999,
Kaiser Permanente Federal Credit Union converted its charter from a federal
credit union to a federal mutual savings association and, as a result, also
serves the general public. Kaiser Federal Bank reorganized into a mutual holding
company structure in July 2003.
We serve California through our four offices located in Los Angeles, San
Bernadino and Santa Clara Counties and a network of 30 automated teller machines
("ATM"). Our ATMs are primarily available at the Kaiser Permanente major medical
centers located in Redwood City, California and south to San Diego County. Our
principal business consists of attracting retail deposits from the general
public by paying competitive interest rates on our deposit accounts. We invest
those funds primarily in loans secured by first mortgages on owner-occupied,
one- to four-family residences, as well as loans secured by multi-family
residences and commercial real estate. We also offer automobile loans, and, to a
lesser extent, other consumer loans. At September 30, 2003, we had total assets
of $448.6 million, total deposits of $360.6 million and total stockholders'
equity of $35.9 million. See "Business of Kaiser Federal Bank - General."
THE STOCK OFFERING
We are offering common stock to the public primarily to allow us to grow
through expanded operations, as well as through increased branching and
acquisitions, although none of these activities are specifically contemplated at
this time. See "The Stock Offering - Purposes of the Stock Offering."
ii
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- --------------------------------------------------------------------------------
We are offering between 2,932,500 and 3,967,500 shares of K-Fed Bancorp
common stock at $10.00 per share. Because of possible changes in financial
market conditions or that of Kaiser Federal Bank, among other factors, before we
complete the stock offering, the number of shares we offer may increase to
4,562,625 shares with the approval of the Office of Thrift Supervision, without
any notice or resolicitation opportunity provided to you. If so, you will not
have the chance to change or cancel your stock order.
Keefe, Bruyette & Woods will assist us in selling the stock. For further
information about Keefe, Bruyette & Woods' role in the offering, see "The Stock
Offering - Marketing Arrangements."
HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE
The independent appraisal by RP Financial, LC., dated as of November 7,
2003, established the offering range. This appraisal was based on our financial
condition and operations and the effect of the additional capital raised in the
stock offering.
The appraisal incorporated an analysis of a peer group of publicly-traded
thrift holding companies and mutual holding companies that RP Financial, LC.
considered to be comparable to K-Fed Bancorp. This analysis included an
evaluation of the average and median price-to-earnings and price-to-book value
ratios indicated by the market prices of the peer companies. RP Financial, LC.
applied the peer group's pricing ratios, as adjusted for certain qualitative
valuation factors, to account for differences between K-Fed Bancorp and the peer
group, to K-Fed Bancorp's pro forma earnings and book value to derive the
estimated pro forma market value of K-Fed Bancorp.
RP Financial, LC. has estimated that as of November 7, 2003, the pro forma
market value of K-Fed Bancorp on a fully converted basis ranged from a minimum
of $63.8 million to a maximum of $86.3 million. Based on this valuation and the
$10.00 per share price, the number of shares of common stock to be sold by K-Fed
Bancorp will range from 6,375,000 shares to 8,625,000 shares. The $10.00 price
per share was selected primarily because $10.00 is the price per share most
commonly used in stock offerings of this type. K-Fed Bancorp is offering 46.0%
of these shares, or between 2,932,500 and 3,967,500 shares, for purchase by
eligible depositors of Kaiser Federal Bank and to the general public in a
community offering if all the shares offered in the subscription offering are
not subscribed for in that offering. K-Fed Mutual Holding Company will own
between 3,442,500 and 4,657,500 shares of K-Fed Bancorp at the completion of the
stock offering.
The following table presents a summary of selected pricing ratios for the
peer group companies and the resulting pricing ratios for K-Fed Bancorp, with
such ratios adjusted to their fully converted equivalent basis. Compared to the
average pricing of the peer group, K-Fed Bancorp's pro forma pricing ratios at
the maximum of the offering range indicated a premium of 54% on a
price-to-earnings basis and a discount of 20% on a price-to-book basis. The
estimated appraised value and the resulting premium/discount took into
consideration the potential financial impact of the stock offering.
iii
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- --------------------------------------------------------------------------------
Fully Converted Equivalent Pro Forma
--------------------------------------
Price-to-Earnings Price-to-Book
Multiple Value Ratio
--------------------------------------
K-FED BANCORP
Maximum (3,967,500 shares sold)....... 42.07x 78.96%
Minimum (2,932,500 shares sold)....... 29.90 70.75
VALUATION OF PEER GROUP COMPANIES AS OF
NOVEMBER 7, 2003(1)
Averages.............................. 32.58 98.38
Medians............................... 32.58 100.13
- ---------------
(1) Reflects earnings for the most recent trailing twelve month period for which
data is publicly available.
THE INDEPENDENT APPRAISAL IS NOT NECESSARILY INDICATIVE OF THE POST-STOCK
ISSUANCE MARKET VALUE. DO NOT ASSUME OR EXPECT THAT THE VALUATION OF K-FED
BANCORP AS INDICATED ABOVE MEANS THAT THE COMMON STOCK WILL TRADE AT OR ABOVE
THE $10.00 PURCHASE PRICE AFTER THE STOCK OFFERING.
The independent valuation must be updated before we complete the stock
offering. The amount of common stock being offered may be increased by up to 15%
without notice to persons who have subscribed for stock, so that a total of
4,562,625 shares would be sold in the offering. We received authorization from
the Office of Thrift Supervision to conduct the stock offering on ________,
2004. The updated independent valuation will be subject to the further approval
of the Office of Thrift Supervision before we can complete the stock offering.
If the updated independent valuation would result in more than 4,562,625 shares
being sold, we would notify such persons and they would have the opportunity to
confirm, change or cancel their subscription orders. See "Pro Forma Data."
Terms of the Offering
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors who held at least $50.00 with us on October 31, 2001.
(2) The K-Fed Bancorp Employee Stock Ownership Plan.
(3) Depositors who held at least $50.00 with us on December 31, 2003.
Shares of common stock not subscribed for in the subscription offering will
be offered to the general public in a direct community offering with a
preference to natural persons residing in Los Angeles, San Bernardino and Santa
Clara Counties, California and, if necessary, a syndicated community offering.
We reserve the right, in our sole discretion, to accept or reject any orders to
purchase shares of common stock received in the direct community offering and
the syndicated community offering. See "The Stock Offering."
iv
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- --------------------------------------------------------------------------------
TERMINATION OF THE OFFERING
The subscription offering will end at 12:00 Noon, Pacific Standard Time on
________, 2004, unless extended. The direct community offering and syndicated
community offering, if utilized, will also end at 12:00 Noon, Pacific Standard
Time on ________, 2004, unless extended. If fewer than the minimum number of
shares are subscribed for in the subscription offering and we do not get orders
for the remaining shares by ________, 2004, we will either:
(1) promptly return any payment you made to us, with interest, or cancel
any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the extension
and of your rights to confirm, cancel or change your order. If we
extend the offering and you do not respond to the notice, then we will
cancel your order and return your payment, with interest, or cancel
any withdrawal authorization you gave us. We must complete or
terminate the offering by ________, 2006.
HOW WE WILL USE THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
We intend to use the net proceeds received from the stock offering as
follows:
Maximum, as
Minimum Maximum adjusted
------------ ----------------- ---------------
(In Thousands)
Gross Proceeds.................................. $29,325 $39,675 $45,626
Less: Estimated underwriting commission
and other offering expenses................... 1,230 1,358 1,432
------------ ----------------- ---------------
Net Proceeds.................................... 28,095 38,317 44,194
Less:
Investment in Kaiser Federal Bank............ 14,048 19,159 22,097
Loan to our employee stock ownership plan.... 2,346 3,174 3,650
Funding of the restricted stock plan......... 1,173 1,587 1,825
------------ ----------------- ---------------
Net cash proceeds retained by K-Fed Bancorp..... $10,528 $14,397 $16,622
============ ================= ===============
The net proceeds retained by K-Fed Bancorp and Kaiser Federal Bank may
ultimately be used to support lending activities and possible future expansion
of Kaiser Federal Bank through acquisitions and new offices, although none of
these activities are currently planned. We intend to use the proceeds at K-Fed
Bancorp for general corporate purposes which may include investments in
securities, repurchasing stock and paying dividends. See "How We Intend to Use
the Proceeds."
WE CURRENTLY INTEND TO PAY A CASH DIVIDEND IN THE FUTURE
We currently intend to pay cash dividends in the future. The amount and
timing of any dividends, however, have not yet been determined. Although future
dividends are not guaranteed, based on our pro forma net income and
stockholders' equity, we believe K-Fed Bancorp will be capable of paying a
dividend after completion of this offering.
K-Fed Bancorp currently has no intention to initiate any action which leads
to a return of capital (as distinguished from a dividend) to stockholders of
K-Fed Bancorp. Regulations of the Office of Thrift Supervision prohibit a return
of capital during the term of the three year business plan submitted by Kaiser
Federal Bank to the Office of Thrift Supervision in connection with the stock
offering.
v
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- --------------------------------------------------------------------------------
If we pay dividends to stockholders of K-Fed Bancorp, it is anticipated
that any dividends payable to K-Fed Mutual Holding Company would be waived,
subject to Office of Thrift Supervision approval. Under Office of Thrift
Supervision regulations, such dividends would not result in dilution to public
stockholders in the event K-Fed Mutual Holding Company converts to stock form in
the future. See "How We Are Regulated."
THE COMMON STOCK IS EXPECTED TO BE LISTED FOR TRADING ON THE NASDAQ NATIONAL
MARKET
We expect our common stock to be listed for trading on the Nasdaq National
Market under the symbol "KFED." Our application to list our stock on the Nasdaq
National Market is currently pending. However, due to the unpredictability of
the stock market and other factors, persons purchasing shares may not be able to
sell their shares when they want to, or at a price equal to or above $10.00 per
share.
LIMITATIONS ON THE PURCHASE OF COMMON STOCK IN THE STOCK OFFERING
The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or group of
persons through a single deposit account is $150,000 of common stock, which
equals 15,000 shares.
The maximum purchase by any person in the direct community offering is
$150,000 of common stock, which equals 15,000 shares.
The maximum purchase in the subscription offering, direct community
offering and syndicated community offering combined with any person, related
persons or persons acting together is $600,000 or 60,000 shares of the common
stock sold in the stock offering.
If any of the following persons purchase common stock, their purchases when
combined with your purchases cannot exceed $600,000 or 60,000 shares of the
common stock sold in the stock offering:
o your spouse or relatives of you or your spouse living in your house;
o companies, trusts or other entities in which you have an interest or
hold a position; or
o other persons who may be acting in concert with you.
vi
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- --------------------------------------------------------------------------------
HOW TO PURCHASE COMMON STOCK
NOTE: ONCE WE RECEIVE YOUR ORDER, YOU CANNOT CANCEL OR CHANGE IT WITHOUT
OUR CONSENT. IF K-FED BANCORP INTENDS TO SELL FEWER THAN 2,932,500 SHARES OR
MORE THAN 4,562,625 SHARES, ALL SUBSCRIBERS WILL BE NOTIFIED AND GIVEN THE
OPPORTUNITY TO CONFIRM, CHANGE OR CANCEL THEIR ORDERS. IF YOU DO NOT RESPOND TO
THIS NOTICE, WE WILL RETURN YOUR FUNDS PROMPTLY WITH INTEREST.
If you want to subscribe for shares, you must complete an original stock
order form and drop it off at any office of Kaiser Federal Bank or send it,
together with full payment or withdrawal authorization, to Kaiser Federal Bank
in the postage-paid envelope provided. You must sign the certification that is
part of the stock order form. We must receive your stock order form before the
end of the offering period.
You may pay for shares in any of the following ways:
o BY CASH, if delivered in person to any office of Kaiser Federal Bank.
o BY CHECK OR MONEY ORDER made payable to K-Fed Bancorp.
o BY AUTHORIZING A WITHDRAWAL FROM AN ACCOUNT AT KAISER FEDERAL BANK
INCLUDING CERTIFICATES OF DEPOSIT DESIGNATED ON THE STOCK ORDER FORM.
To use funds in an individual retirement account ("IRA") at Kaiser
Federal Bank, you must transfer your account to a self-directed
account with an unaffiliated institution or broker. Please contact the
stock information center at (877) 848-4663 for assistance as soon as
possible but not later than at least one week before the end of the
offering.
We will pay interest on your subscription funds at the rate Kaiser Federal
Bank pays on regular savings accounts, currently 0.35%, from the date it
receives your funds until the stock offering is completed or terminated. All
funds authorized for withdrawal from deposit accounts with Kaiser Federal Bank
will earn interest at the applicable account rate until the stock offering is
completed. There will be no early withdrawal penalty for withdrawals from
certificates of deposit used to pay for stock.
TAX CONSEQUENCES OF THE STOCK OFFERING
K-Fed Bancorp and Kaiser Federal Bank have received an opinion of its
special counsel, Jenkens & Gilchrist, A Professional Corporation, Dallas, Texas,
that:
o K-Fed Bancorp will incur no gain or loss upon its receipt of money in
exchange for the issuance of its shares of common stock.
o No gain or loss will be recognized by Kaiser Federal Bank's eligible
account holders and supplemental eligible account holders upon the
distribution to them of non-transferable subscription rights to
purchase common stock.
vii
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- --------------------------------------------------------------------------------
K-Fed Bancorp and Kaiser Federal Bank have also obtained an opinion from
RSM McGladrey, Inc., Riverside, California, that the tax effects of the stock
offering under California tax laws will be substantially the same as described
above with respect to the federal income tax laws.
For a further discussion of the tax consequences of the stock offering, see
"The Stock Offering - Effects of the Stock Offering - Tax Effects of the Stock
Offering."
BENEFITS TO MANAGEMENT FROM THE OFFERING
We intend to establish the K-Fed Bancorp Employee Stock Ownership Plan
which will purchase 8.0% of the shares sold in this offering. A loan from K-Fed
Bancorp to the plan, funded by a portion of the proceeds from this offering,
will be used to purchase these shares. The loan will accrue interest at the
prime rate in effect at the time the loan is made. The K-Fed Bancorp Employee
Stock Ownership Plan will provide a retirement benefit to all employees eligible
to participate in the plan.
We also intend to adopt a stock option plan and a restricted stock plan for
the benefit of directors, officers and employees, subject to stockholder
approval. If we adopt the restricted stock plan, some of these individuals will
be awarded stock at no cost to them. As a result, the employee stock ownership
plan and the restricted stock plan will increase the voting control of
management without a cash outlay by the recipient.
The following table presents the total value of the shares of common stock,
at the maximum of the offering range, which would be acquired by the employee
stock ownership plan and the total value of all shares to be available for award
and issuance under the restricted stock plan. The table assumes that the value
of the shares is $10.00 per share and the amount of the shares in the plan is
equal to 4.0% of the shares sold at the maximum of the offering range. The table
does not include a value for the options because the price paid for the option
shares will be equal to the fair market value of the common stock on the day
that the options are granted. As a result, financial gains can be realized under
an option only if the market price of common stock increases.
Number Estimated Percentage of
of Value of Shares Sold
Shares Shares in the Offering
-------------- ------------- -----------------
Employee stock ownership plan...... 317,400 $3,174,000 8.0%
Restricted stock awards............ 158,700 1,587,000 4.0
Stock options...................... 396,750 -- 10.0
-------------- ------------- -----------------
Total.......................... 872,850 $ 4,761,000 22.0%
============== ============= =================
For a further discussion of benefits to management, see "Management."
viii
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- --------------------------------------------------------------------------------
STOCK INFORMATION CENTER
If you have any questions regarding the stock offering or the stock order
form, please call the stock information center at (877) 848-4663.
Kaiser Federal Bank has a website (http:\\www.kaiserfederal.com). Upon
completion of the subscription offering on ______________, 2004, the website
will provide a current update on the status of the offering.
SUBSCRIPTION RIGHTS
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not do so. We will not accept any stock orders that we
believe involve the transfer of subscription rights.
IMPORTANT RISKS IN OWNING K-FED BANCORP'S COMMON STOCK
Before you decide to purchase stock, you should read the "Risk Factors"
section on pages 1 to 45 of this document for information regarding certain
risks of the stock offering.
POSSIBLE CONVERSION OF K-FED MUTUAL HOLDING COMPANY TO STOCK FORM
In the future, K-Fed Mutual Holding Company may convert from the mutual to
capital stock form, in a transaction commonly known as a "second-step
conversion." This second-step conversion may be undertaken in order to, among
other things, raise additional capital for K-Fed Bancorp or facilitate an
acquisition transaction. K-Fed Mutual Holding Company is not fully converting to
stock form at this time because the expected net proceeds from the stock
offering are sufficient in our opinion to support the growth of K-Fed Bancorp
and Kaiser Federal Bank anticipated at this time.
In a second-step conversion, members of K-Fed Mutual Holding Company would
have subscription rights to purchase common stock of K-Fed Bancorp or its
successor, and the public stockholders of K-Fed Bancorp would be entitled to
exchange their shares of common stock for an equal percentage of shares of the
converted K-Fed Mutual Holding Company. This percentage may be adjusted to
reflect any assets owned by K-Fed Mutual Holding Company. K-Fed Bancorp's public
stockholders, therefore, would own approximately the same percentage of the
resulting entity as they owned prior to the second-step conversion. The Board of
Directors has no current plans to undertake a "second-step conversion"
transaction. See "How We Are Regulated - Conversion of K-Fed Mutual Holding
Company to Stock Form."
RESTRICTIONS ON ACQUISITION OF K-FED BANCORP AND KAISER FEDERAL BANK
Federal law restricts the ability of any person, firm or entity to acquire
K-Fed Bancorp, Kaiser Federal Bank or their respective capital stock. No such
person, firm or entity may acquire more than 25% of any class of voting stock of
K-Fed Bancorp or Kaiser Federal Bank without approval by the Office of Thrift
Supervision. In addition, for a period of three years following completion of
the stock offering, Office of Thrift Supervision regulations generally prohibit
any person from acquiring or making an offer to acquire beneficial ownership of
more than 10% of the stock of K-Fed Bancorp or Kaiser Federal Bank without
approval from the Office of Thrift Supervision. Certain provisions of the
charter and bylaws of K-Fed Bancorp and Kaiser Federal Bank affect the ability
of any person, firm or entity to acquire control of K-Fed Bancorp and Kaiser
Federal Bank. These provisions include limitations on voting rights of persons
owning more than 10% of any class of outstanding voting stock of K-Fed Bancorp
or Kaiser Federal Bank.
ix
- --------------------------------------------------------------------------------
RISK FACTORS
YOU SHOULD CONSIDER THESE RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO MAKE AN INVESTMENT IN
K-FED BANCORP'S COMMON STOCK.
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO OUR SUBSTANTIAL NUMBER OF
MULTI-FAMILY, COMMERCIAL REAL ESTATE AND CONSUMER LOANS, WHICH COULD INCREASE
THE LEVEL OF OUR PROVISION FOR LOAN LOSSES.
Our outstanding multi-family, commercial real estate and automobile and
other consumer loans accounted for approximately one-third of our total loan
portfolio as of September 30, 2003. Generally, we consider these types of loans
to involve a higher degree of risk compared to first mortgage loans on one- to
four-family, owner occupied residential properties. These loans have higher
risks than loans secured by residential real estate for the following reasons:
o MULTI-FAMILY REAL ESTATE LOANS. Repayment is dependent on income being
generated in amounts sufficient to cover operating expenses and debt
service.
O COMMERCIAL REAL ESTATE LOANS. Repayment is dependent on income being
generated in amounts sufficient to cover operating expenses and debt
service.
o CONSUMER LOANS. Consumer loans (such as automobile loans) are
collateralized, if at all, with assets that may not provide an
adequate source of repayment of the loan due to depreciation, damage
or loss.
Because of our planned increased emphasis on multi-family and commercial
real estate loans, we may determine it necessary to increase the level of our
provision for loan losses. Increased provisions for loan losses would reduce our
profits. For further information concerning the risks associated with commercial
real estate, consumer and multi-family loans, see "Business of Kaiser Federal
Bank - Lending Activities" and "- Asset Quality."
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO ITS RAPID EXPANSION, THE
VOLUME OF PURCHASED LOANS AND THE UNSEASONED NATURE OF THE PORTFOLIO.
Since November 1, 1999, when we converted from a credit union to September
30, 2003, our loan portfolio has grown from $102.0 million to $377.1 million, an
increase of 269.7%. From June 30, 2001 to September 30, 2003, our loan portfolio
grew by over $236.3 million, an increase of 167.8%. In addition, approximately
69.6% of our one- to four-family residential mortgage loan portfolio and 50.7%
of our multi-family loan portfolio consists of loans that we purchased from
other lenders without recourse. These loans are secured by properties located
throughout California. including areas where we are not as familiar with local
economic conditions as we are in our primary market areas. Purchased loans also
do not typically lead to the establishment of a customer relationship that can
provide future lending or other banking opportunities that could be beneficial
to us.
We typically pay a premium when we purchase these loans, and amortize the
premium as an expense over the remaining term of the loan. In the event of a
prepayment of the loan prior to maturity we must recognize the remaining premium
as an expense and as a result, particularly in
1
a declining interest rate environment, substantial prepayments will negatively
affect our income as well as the loss of an earning asset until we reinvest the
proceeds. As
In addition, as a result of this rapid expansion, a significant portion of
our portfolio is unseasoned, with the risk that these loans may not have had
sufficient time to perform to properly indicate the potential magnitude of
losses. We do, however, underwrite every loan that we purchase in accordance
with our underwriting standards. During this time frame, we have also
experienced a declining rate environment. Our unseasoned adjustable rate loans
have not, therefore, been subject to an interest rate environment which causes
them to adjust to the maximum level and may involve risks resulting from
potentially increasing payment obligations by the borrower as a result of
repricing.
CHANGES IN INTEREST RATES MAY HURT OUR PROFITS.
To be profitable, we have to earn more money in interest that we receive on
loans and our investments than we pay in interest to our depositors and lenders.
Interest rates are at historically low levels. If interest rates rise, our net
interest income could be reduced because interest paid on interest-bearing
liabilities, including deposits and borrowings, increases more quickly than
interest received on interest-earning assets, including loans and
mortgage-backed and related securities. In addition, rising interest rates may
hurt our income because they may reduce the demand for loans and the value of
our mortgage-related and investment securities. In the alternative, if interest
rates decrease, our net interest income could increase. However, in a declining
rate environment, we may also be susceptible to the payoff or refinance of high
rate mortgage loans that could reduce our net interest income. For a further
discussion of how changes in interest rates could impact us, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management and Market Risk."
AFTER THIS OFFERING, OUR RETURN ON EQUITY WILL BE LOW COMPARED TO OTHER
COMPANIES AND OUR COMPENSATION EXPENSES WILL INCREASE. THIS COULD NEGATIVELY
IMPACT THE PRICE OF OUR STOCK.
The proceeds we will receive from the sale of our common stock will
significantly increase our capital and it will take us time to fully use this
capital in our business operations. Our compensation expenses will also increase
because of the costs associated with stock-based incentive plans. Therefore, we
expect our initial return on equity to be below our historical level and less
than our regional and national peers. For the year ended June 30, 2003, our
return on equity was 7.13% and for the three months ended September 30, 2003,
was 6.46% (annualized). On a pro forma basis, at the maximum of the offering
range, our return on equity would have been 3.10% on an annualized basis for the
three month period ended September 30, 2003 and 3.32% for the year ended June
30, 2003, compared to industry and peer group averages of 9.46% and 5.08%,
respectively. This low return on equity could hurt our stock price. We cannot
guarantee when or if we will achieve returns on equity that are comparable to
industry peers. For further information regarding pro forma income and expenses,
see "Pro Forma Data."
2
WE INTEND TO GRANT STOCK OPTIONS AND RESTRICTED STOCK TO THE BOARD AND
MANAGEMENT FOLLOWING THE STOCK OFFERING WHICH COULD REDUCE YOUR OWNERSHIP
INTEREST.
If approved by a vote of the stockholders, we intend to establish a stock
option plan with a number of shares equal to 10.0% of the shares sold in the
stock offering and a restricted stock plan with a number of shares equal to 4.0%
of the shares sold in the stock offering, worth approximately $1,587,000 at the
purchase price and assuming the maximum of the offering range, for the benefit
of directors, officers and employees of K-Fed Bancorp and Kaiser Federal Bank.
Stock options are paid for by the recipient in an amount equal to the fair
market value of the stock on the date of the grant. The payments are not made
until the option is actually exercised by the recipient. Restricted stock is a
bonus paid in the form of stock rather than cash, and is not paid for by the
recipient. Awards under these plans will reduce the ownership interest of all
stockholders. For further discussion regarding these plans, see "Pro Forma Data"
and "Management - Benefits - Stock Benefit Plans."
OUR HISTORIC RELIANCE ON A GROUP OF CUSTOMERS EMPLOYED BY THE SAME COMPANY
EXPOSES US TO GREATER RISK THAN A DIVERSIFIED CUSTOMER BASE.
As a credit union, we were limited to making loans to our members, which
consisted primarily of employees of the Kaiser Permanente Medical Care Program.
As of September 30, 2003, 45.0% of our deposits were held by members who were
employed by the Kaiser Permanente Medical Care Program and 17.0% of our loan
portfolio balance consisted of loans to employees of the Kaiser Permanente
Medical Care Program. Although this group has historically had relatively stable
employment and sources of income, adverse financial conditions affecting the
healthcare industry in California could negatively affect this group's ability
to repay their outstanding loans. This risk will continue until we are able to
further diversify our customer base as a savings institution. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PERSONS WHO PURCHASE STOCK IN THE OFFERING WILL OWN A MINORITY OF K-FED
BANCORP'S COMMON STOCK AND WILL NOT BE ABLE TO EXERCISE VOTING CONTROL OVER MOST
MATTERS PUT TO A VOTE OF STOCKHOLDERS.
Public stockholders will own a minority of the outstanding shares of K-Fed
Bancorp's common stock after the stock offering. The same directors and
executive officers who manage K-Fed Bancorp also manage K-Fed Mutual Holding
Company. The Board of Directors of K-Fed Mutual Holding Company will be able to
exercise voting control over most matters put to a vote of stockholders because
it will own a majority of K-Fed Bancorp's common stock. For example, K-Fed
Mutual Holding Company may exercise its voting control to prevent a sale or
merger transaction in which stockholders could receive a premium for their
shares or to approve employee benefit plans.
In addition, K-Fed Bancorp's directors, executive officers and their
associates are expected to purchase approximately 255,000 shares sold in the
offering, which represent 8.7%, 7.4% and 6.5% of the shares sold at the minimum,
midpoint and maximum of the offering range, respectively. These purchases,
together with the purchase of 8.0% of the shares sold in the offering by the
K-Fed Bancorp Employee Stock Ownership Plan will result in
3
the inside ownership of K-Fed Bancorp common stock of 14.5% at the maximum of
the offering range. Furthermore, if stockholders of K-Fed Bancorp approve the
restricted stock plan and the stock option plan, and provided that all shares
under the restricted stock plan are awarded and all options under the stock
option plan are awarded and exercised, directors and executive officers may own
up to an additional 14.0% or 555,450 shares of the outstanding common stock at
the maximum of the offering range. See "Management - Benefits" and "Proposed
Stock Purchases by Management."
HOLDERS OF K-FED BANCORP COMMON STOCK MAY NOT BE ABLE TO SELL THEIR SHARES WHEN
DESIRED IF A LIQUID TRADING MARKET DOES NOT DEVELOP, OR FOR $10.00 OR MORE PER
SHARE EVEN IF A LIQUID TRADING MARKET DEVELOPS.
We have never issued common stock to the public. Consequently, there is no
established market for the common stock. We expect our common stock to be listed
for trading on the Nasdaq national market under the symbol "KFED." We cannot
predict whether a liquid trading market in shares of K-Fed Bancorp's common
stock will develop or how liquid that market might become. Persons purchasing
shares may not be able to sell their shares when they desire if a liquid trading
market does not develop or sell them at a price equal to or above $10.00 per
share even if a liquid trading market develops.
MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER INVESTMENT OF THE OFFERING
PROCEEDS AND MAY MAKE INVESTMENTS WITH WHICH YOU DISAGREE.
The net offering proceeds to K-Fed Bancorp are estimated to range from
$28.1 million to $38.3 million at the minimum and the maximum of the offering
range, respectively, and management intends to use these funds for general
business purposes, giving management substantial discretion over their
investment. You may disagree with investments that management makes. See "How We
Intend to Use the Proceeds."
STRONG COMPETITION IN OUR PRIMARY MARKET AREA MAY REDUCE OUR ABILITY TO ATTRACT
AND RETAIN DEPOSITS AND OBTAIN LOANS.
We operate in a competitive market for the attraction of deposits, which is
our primary source of funds, and the ability to obtain loans through origination
or purchase. Historically, our most direct competition for savings deposits has
come from credit unions, community banks, large commercial banks and thrift
institutions in our primary market area. We also compete for loans and deposits
on a statewide basis in California as a result of our expansive branch and ATM
network. Particularly in times of extremely low or extremely high interest
rates, we have faced additional significant competition for investors' funds
from short-term money market securities and other corporate and government
securities.
Our competition for loans comes principally from mortgage bankers,
commercial banks, other thrift institutions and insurance companies. In
addition, we rely heavily on purchased and broker originated loans and such
sources of loans could be affected by conditions beyond our
4
control. Such competition for deposits and the origination and purchase of loans
may limit our future growth and earnings prospects.
OUR DEPOSIT RATES HAVE HELPED US TO ACHIEVE OUR DEPOSIT GROWTH.
We have priced our deposit rates competitively in recent years to achieve
our deposit growth. If we are unable or unwilling, due to market conditions or
otherwise, to continue to pay competitive rates to rate sensitive depositors,
these deposits may be withdrawn and we will be required to find other funding
sources for our operations. Other funding sources, such as Federal Home Loan
Bank borrowings, may present higher funding costs than the deposits they
replace.
IF ECONOMIC CONDITIONS DETERIORATE, OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION COULD BE ADVERSELY IMPACTED AS BORROWERS' ABILITY TO REPAY LOANS
DECLINES AND THE VALUE OF THE COLLATERAL SECURING OUR LOANS DECREASES.
Our financial results may be adversely affected by changes in prevailing
economic conditions, including decreases in real estate values, changes in
interest rates which may cause a decrease in interest rate spreads, adverse
employment conditions, the monetary and fiscal policies of the federal and
California state governments and other significant external events. Because we
have a significant amount of real estate loans, decreases in real estate values
could adversely affect the value of property used as collateral. Adverse changes
in the economy may also have a negative effect on the ability of our borrowers
to make timely repayments of their loans, which would have an adverse impact on
our earnings. In this regard, at September 30, 2003, 99.4% of our loans were to
individuals and businesses in California. At September 30, 2003, the rate of
unemployment (not seasonally adjusted) in the State of California was 6.1%, in
Los Angeles County, it was 6.8%, in San Bernardino County, it was 5.5% and in
Santa Clara County, it was 7.5%, the latter reflecting the downturn in the
technology employment base. The unemployment rate for the United States was 5.8%
on that date. In addition, the State of California has a reported budget deficit
of about $38 billion and it may take aggressive measures such as increasing
various state taxes, reducing state expenditures and other cost-cutting
initiatives to balance the state's budget. These measures may negatively effect
the California economy and Kaiser Federal Bank.
SELECTED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial Condition
Data" and "Selected Operations Data" for, and as of the end of, each of the
years ended June 30, 2003, 2002 and 2001 is derived from our audited
consolidated financial statements. This summary information as of June 30, 2000,
is also derived from our audited consolidated financial statements. Financial
data at September 30, 2003 and for the three months ended September 30, 2003 and
2002 are unaudited. Financial data at June 30, 1999 and for the years ended June
30, 2000 and 1999 are also unaudited as a result of Kaiser Federal Bank's change
to a fiscal year ending June 30th, beginning with the fiscal year ended June 30,
2000. Financial data at, and for the year ended March 31, 1999, is derived from
our audited consolidated financial statements and presented for comparative
purposes. Financial data for the
5
three months ended June 30, 1999 is unaudited and presented to show the
transitional period between the change in fiscal year end. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included. The results of operations
and other data for the three months ended September 30, 2003 are not necessarily
indicative of the results of operations for the fiscal year ending June 30,
2004. The following information is only a summary and you should read it in
conjunction with our consolidated financial statements and notes beginning on
page F-2.
6
At June 30, At March 31,
At September 30, ------------------------------------------------------------- ------------
2003 2003 2002 2001 2000 1999 1999
---------------- ---------- ---------- ---------- ---------- ---------- ------------
(Unaudited) (In Thousands) (Unaudited)
SELECTED FINANCIAL CONDITION DATA:
Total assets.................... $448,556 $433,753 $289,194 $230,026 $197,786 $184,796 $191,054
Cash and cash equivalents....... 21,352 16,190 4,330 31,182 10,037 5,515 13,010
Loans, net.................... 377,141 389,640 236,914 140,839 115,568 104,431 100,807
Securities available-for-sale... -- -- -- -- 4,448 1,610 2,002
Securities held-to-maturity..... 38,979 14,247 19,787 18,552 24,500 22,500 21,500
Other investments
(interest-bearing
term deposit)................. 891 6,437 23,378 35,431 40,018 46,448 49,767
FHLB stock...................... 2,800 2,602 1,008 649 607 572 540
Deposits........................ 360,567 346,239 252,038 197,588 167,401 156,663 163,203
Total borrowings................ 50,000 50,000 2,000 -- -- -- --
Total stockholder's equity...... 35,921 35,395 32,956 31,049 29,446 27,460 27,149
Three Months Ended
September 30, Year Ended June 30,
----------------------- ------------------------------------------------------------------
2003 2002 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
SELECTED OPERATIONS DATA: (Unaudited) (In Thousands) (Unaudited) (Unaudited)
Total interest income............ $ 4,896 $ 4,754 $ 20,444 $ 16,597 $ 15,107 $ 13,140 $ 12,787
Total interest expense........... 2,337 1,735 8,365 6,622 6,452 5,624 5,635
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income............ 2,559 3,019 12,079 9,975 8,655 7,516 7,152
Provision for loan losses........ 30 203 1,124 1,147 768 197 581
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses...... 2,529 2,816 10,955 8,828 7,887 7,319 6,571
Customer service charges......... 785 658 2,879 2,260 1,577 1,433 1,297
Gain on sale of credit card
portfolio................ -- -- -- -- 123 -- --
Other non-interest income........ 19 79 307 582 326 348 373
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-interest income........ 804 737 3,186 2,842 2,026 1,781 1,670
Total non-interest expense....... 2,436 2,449 9,992 8,618 7,139 6,817 6,333
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes....... 897 1,104 4,149 3,052 2,774 2,283 1,907
Income tax provision(1).......... 321 455 1,710 1,145 1,208 268 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income(1).................... $ 576 $ 649 $ 2,439 $ 1,907 $ 1,566 $ 2,015 $ 1,907
========== ========== ========== ========== ========== ========== ==========
(CONTINUED)
Three Months Year Ended
Ended June 30, March 31,
--------------- --------------
1999 1999
--------------- --------------
(Unaudited)
SELECTED OPERATIONS DATA:
$3,162 $12,791
Total interest income............ 1,395 5,663
Total interest expense........... --------------- --------------
1,767 7,128
Net interest income............ 216 532
Provision for loan losses........ --------------- --------------
Net interest income after 1,551 6,596
provision for loan losses......
326 1,269
Customer service charges.........
Gain on sale of credit card -- --
portfolio................ 75 376
Other non-interest income........ --------------- --------------
401 1,645
Total non-interest income........
1,631 6,193
Total non-interest expense....... --------------- --------------
321 2,048
Income before income taxes.......
-- --
Income tax provision(1).......... --------------- --------------
$ 321 $ 2048
Net income(1).................... =============== ==============
- ---------------------------------
(1) Had Kaiser Federal Bank been subject to federal and state income taxes for
the fiscal years ended June 30, 2000, 1999 and March 31, 1999 and the three
months ended June 30, 1999, income tax expense and net income would have
been approximately $936,000 and $1.35 million; $782,000 and $1.12 million;
$840,000 and $1.21 million; and $132,000 and $189,000, respectively.
7
At or For the Three
SELECTED FINANCIAL RATIOS AND Months Ended At or For the Year Ended
OTHER DATA: September 30, June 30,
----------------------- ------------------------------------------------------------------
2003(5) 2002(5) 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets).... 0.52% 0.89% 0.68% 0.76% 0.76% 1.05% 1.03%
Return on equity (ratio of net
income to average equity).......... 6.46% 7.80% 7.13% 6.01% 5.22% 7.11% 7.17%
Return on assets, net of tax(1)...... 0.52% 0.89% 0.68% 0.76% 0.76% 0.70% 0.61%
Return on equity, net of tax(1)...... 6.46% 7.80% 7.13% 6.01% 5.22% 4.75% 4.23%
INTEREST RATE SPREAD INFORMATION:
Average during period................ 2.05% 3.68% 2.98% 3.37% 3.42% 3.18% 3.19%
End of period........................ 2.39% 3.93% 2.84% 3.30% 4.46% 3.74% 3.69%
Net interest margin(2)............... 2.37% 4.24% 3.42% 4.06% 4.31% 4.00% 3.98%
Ratio of operating expense to
average total assets............... 2.21% 3.36% 2.77% 3.42% 3.46% 3.54% 3.42%
Efficiency ratio(3).................. 72.44% 65.20% 65.46% 67.24% 66.84% 73.32% 71.79%
Ratio of average interest-earning
assets to average
interest-bearing liabilities....... 114.77% 122.89% 118.57% 125.42% 127.80% 127.73% 125.18%
QUALITY RATIOS:
Non-performing assets to total
assets............................. 0.05% 0.05% 0.01% 0.07% 0.20% 0.03% 0.22%
Allowance for loan losses to non
performing loans(4)................ 3,566.67% 2,250.60% 8,773.08% 1,263.77% 1,291.21% 3,196.30% 315.27%
Allowance for loan losses to total
loans (6).......................... 0.59% 0.71% 0.58% 0.73% 0.83% 0.74% 1.04%
Net charge-offs to average
outstanding loans(6)............... 0.07% 0.13% 0.19% 0.33% 0.35% 0.40% 0.35%
Non-performing loans to total
loans(6)........................... 0.02% 0.03% 0.01% 0.06% 0.06% 0.02% 0.33%
CAPITAL RATIOS:
Equity to total assets at end of
period............................. 8.00% 11.31% 8.16% 11.40% 13.50% 14.89% 14.86%
Average equity to average assets..... 8.08% 11.41% 9.47% 12.58% 14.55% 14.72% 14.35%
Tier 1 leverage...................... 8.00% 11.31% 8.16% 11.40% 13.50% 14.89% 14.86%
Tier 1 risk-based.................... 12.70% 18.84% 14.20% 19.87% 24.86% 28.00% 29.59%
Total risk based..................... 13.50% 19.89% 15.11% 20.92% 25.80% 28.82% 30.77%
OTHER DATA:
Number of full-service offices....... 2 2 2 2 2 2 2
Number of loans...................... 10,398 11,081 11,020 11,394 11,852 13,006 12,638
Number of deposit accounts........... 64,455 63,844 64,495 63,663 61,600 58,625 57,395
- ---------------------------------
(1) Had Kaiser Federal Bank been subject to federal and state income taxes for
the fiscal year ended June 30, 1999, income tax expense and net income
would have been approximately $782,000 and $1.1 million, respectively. In
addition, income tax expense and net income for the fiscal year ended June
30, 2000 would have been $936,000 and $1.3 million, respectively.
(2) Net interest income divided by average interest-earning assets.
(3) Efficiency ratio represents non-interest expense as a percentage of net
interest income plus non-interest income.
(4) The allowance for loan losses at June 30, 2003, 2002, 2001, 2000 and 1999
was $2.3 million, $1.7 million, $1.2 million, $863,000, and $1.1 million,
respectively. The allowance for loan losses at September 30, 2003 and 2002
was $2.2 million and $1.9 million, respectively.
(5) Ratios for the three month periods have been annualized.
(6) Total loans are net of deferred fees and costs.
8
RECENT DEVELOPMENTS
The following tables set forth certain information concerning our
consolidated financial position and results of operations at the dates and for
the periods indicated. Information at December 31, 2003 and September 30, 2003
and the three and six months ended December 31, 2003 and 2002 are unaudited,
but, in the opinion of management, contain all adjustments (none of which were
other than normal recurring entries) necessary for a fair presentation of the
results of such periods. The results of operations for the three and six month
periods ended December 31, 2003 are not necessarily indicative of the results of
operations which may be expected for the year ending June 30, 2004. This
information should be read in conjunction with our consolidated financial
statements and related notes beginning on page F-2 of this prospectus.
At December 31, At September 30, At June 30,
2003 2003 2003
--------------- ---------------- ----------
(Unaudited) (In Thousands)
Selected Financial Condition
Data:
Total assets $874,190 $448,556 $433,753
Cash and cash equivalents 427,392 21,352 16,190
Loans, net 378,638 377,141 389,640
Securities available-for-sale -- -- --
Securities held-to-maturity 54,958 38,979 14,247
Other investments
(interest-bearing 2,970 891 6,437
term deposit)...............
FHLB stock 2,800 2,800 2,602
Deposits 785,304 360,567 346,239
Total borrowings 50,000 50,000 50,000
Total stockholder's equity 36,736 35,921 35,395
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Selected Operations Data: (Unaudited and in Thousands)
Total interest income $5,373 $5,062 $10,269 $9,816
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
Customer service charges 774 709 1,560 1,366
Gain on sale of credit card
portfolio...................
Other non-interest income..... 35 86 53 166
---------- ---------- ---------- ----------
Total non-interest income 809 795 1,613 1,532
Total non-interest expense 2,394 2,418 4,830 4,867
---------- ---------- ---------- ----------
Income before income taxes 1,335 1,013 2,232 2,117
Income tax provision 520 418 841 873
---------- ---------- ---------- ----------
Net income $815 $595 $ 1,391 $1,244
========== ========== ========== ==========
9
Selected Financial Ratios At or For the Three At or For the Six
and Other Data: Months Ended Months Ended
December 31, December 31,
---------------------- ------------------------
2003(1) 2002(1) 2003(1) 2002(1)
---------- ---------- ---------- ----------
PERFORMANCE RATIOS:
Return on assets
(ratio of net income to
average total assets)....... 0.57% 0.69% 0.54% 0.77%
Return on equity (ratio of
net income to average
equity)..................... 8.98% 7.02% 7.73% 7.41%
INTEREST RATE SPREAD
INFORMATION:
Average during period 2.06% 3.08% 2.05% 3.32%
End of period 1.54% 2.92% 1.43% 2.96%
Net interest margin(2) 2.20% 3.56% 2.25% 3.83%
Ratio of operating expense
to average total assets..... 1.68% 2.81% 1.88% 3.03%
Efficiency ratio(3) 63.15% 63.65% 67.51% 64.42%
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 108.26% 119.27% 110.72% 120.87%
QUALITY RATIOS:
Non-performing assets to
total assets 0.02% 0.08% 0.02% 0.08%
Allowance for loan losses to
non performing loans(4).....2,533.33% 1,209.94% 2,533.33% 1,209.94%
Allowance for loan losses to
total loans (4) (5)......... 0.56% 0.67% 0.56% 0.67%
Net charge-offs to average
outstanding loans(5)........ 0.20% 0.24% 0.13% 0.19%
Non-performing loans to total
loans(5).................... 0.02% 0.06% 0.02% 0.06%
CAPITAL RATIOS:
Equity to total assets at end
of period 4.20% 9.33% 4.20% 9.33%
Average equity to average
assets 6.35% 9.84% 6.99% 10.46%
Tier 1 leverage 4.20% 9.33% 4.20% 9.33%
Tier 1 risk-based 9.99% 16.23% 9.99% 16.23%
Total risk based 10.56% 17.21% 10.56% 17.21%
- ---------------------------------
(1) Ratios for the three and six month periods have been annualized.
(2) Net interest income divided by average interest-earning assets.
(3) Efficiency ratio represents non-interest expense as a percentage of net
interest income plus non-interest income.
(4) The allowance for loan losses at both December 31, 2003 and 2002 was $2.1
million.
(5) Total loans are net of deferred fees and costs.
10
REGULATORY 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. See "How We Are
Regulated - Regulatory Capital Requirements"
Minimum Required
to Be Well
Capitalized
Under Prompt
Minimum Capital Corrective
Actual Requirements Action Provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- --------- ---------- ---------
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RECENT DEVELOPMENTS
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).
Assets. 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.
11
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
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 AND BORROWINGS. 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 remained 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. See "How We Are Regulated - Regulatory Capital Requirements"
and "Pro Forma Regulatory Capital Analysis."
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 both 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.
12
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.
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: formula and specific allowances. The formula allowance is determined
by applying an estimated loss percentage to various groups 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 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
13
its judgment of information available to it at the time of its examination. See
"Business of Kaiser Federal Bank - Asset Quality - Allowance for Loan Losses."
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.
NON-INTEREST INCOME. Our non-interest income remained consistent at
$800,000 for both quarters ending December 31, 2003 and 2002.
NON-INTEREST 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.
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
14
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 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.
NON-INTEREST INCOME. Non-interest 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.
NON-INTEREST EXPENSES. Non-interest 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.
15
K-FED BANCORP
K-Fed Bancorp is a federally-chartered stock corporation formed in July
2003. K-Fed Bancorp has not engaged in any business to date and serves as the
holding company of Kaiser Federal Bank. K-Fed Bancorp is a savings association
holding company registered with the Office of Thrift Supervision. K-Fed
Bancorp's executive offices are located at 1359 N. Grand Avenue, Covina,
California and its telephone number is 800-524-2274.
K-Fed Bancorp's current principal assets are the common stock of Kaiser
Federal Bank and $50,000 in cash it received from Kaiser Federal Bank as its
initial capitalization. K-Fed Bancorp will invest the proceeds of the offering
as discussed under "How We Intend to Use the Proceeds." In the future, it may
pursue other business activities, including mergers and acquisitions, investment
alternatives and diversification of operations. There are, however, no current
understandings or agreements for these activities.
Initially following the completion of the stock offering, K-Fed Bancorp
will not be an operating company and will have no significant assets other than
100% of the outstanding common stock of Kaiser Federal Bank, the net proceeds it
retains from the stock offering and its loan to the K-Fed Bancorp Employee Stock
Ownership Plan and will have no significant liabilities. See "How We Intend to
Use the Proceeds." K-Fed Bancorp intends to utilize the support staff and
offices of Kaiser Federal Bank and will pay Kaiser Federal Bank for these
services. If K-Fed Bancorp expands or changes its business in the future, it may
hire its own employees.
KAISER FEDERAL BANK
Kaiser Federal Bank is a federally-chartered and insured stock savings
association providing banking services to the general public through four
offices located in Los Angeles, San Bernadino and Santa Clara Counties. We also
maintain an ATM network with 30 locations in northern and southern California,
primarily located at Kaiser Permanente major medical centers in southern
California. Kaiser Federal Bank converted from a federal credit union to a
federally chartered mutual savings association on November 1, 1999 and to a
stock savings on July 1, 2003 when Kaiser Federal Bank reorganized into a mutual
holding company structure. At September 30, 2003, Kaiser Federal Bank had total
assets of $448.6 million, total deposits of $360.6 million and total
stockholders' equity of $35.9 million. For more information regarding the
business and operations of Kaiser Federal Bank, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of
Kaiser Federal Bank."
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences. We also
originate multi-family residential loans, automobile loans, commercial real
estate loans and, to a lesser extent, consumer loans. See "Business of Kaiser
Federal Bank - General."
Kaiser Federal Bank is examined and regulated by the Office of Thrift
Supervision, which is our primary federal regulator. Kaiser Federal Bank is also
regulated by the Federal Deposit Insurance Corporation ("FDIC"). Kaiser Federal
Bank is required to have certain reserves set by the Federal Reserve Board and
is a member of the Federal Home Loan Bank of
16
San Francisco, which is one of the 12 regional banks in the Federal Home Loan
Bank System. The executive offices of Kaiser Federal Bank are located at 1359 N.
Grand Avenue, Covina, California and its telephone number is 800-524-2274.
K-FED MUTUAL HOLDING COMPANY
K-Fed Mutual Holding Company is a federally-chartered mutual holding
company formed in July 2003 and registered with the Office of Thrift
Supervision. K-Fed Mutual Holding Company's executive offices are located at
1359 N. Grand Avenue, Covina, California and its telephone number is
800-524-2274.
K-Fed Mutual Holding Company's principal assets are the common stock of
K-Fed Bancorp and $50,000 in cash it received from Kaiser Federal Bank as its
initial capitalization. At the present time, we expect that K-Fed Mutual Holding
Company will not engage in any business activity other than its investment in a
majority of the common stock of K-Fed Bancorp. Federal law and regulations
require that as long as K-Fed Mutual Holding Company is in existence, it must
own a majority of K-Fed Bancorp's common stock. Following completion of the
stock offering, K-Fed Mutual Holding Company will own approximately 54.0% of
K-Fed Bancorp's outstanding common stock. Federal law, regulation, and the plan
of stock issuance permit K-Fed Mutual Holding Company to convert to the stock
form of organization. For additional information regarding a stock conversion of
K-Fed Mutual Holding Company, see "How We are Regulated - K-Fed Bancorp -
Conversion of K-Fed Mutual Holding Company to Stock Form."
HOW WE INTEND TO USE THE PROCEEDS
Although the actual net proceeds from the sale of the shares of common
stock cannot be determined until the stock offering is completed, we presently
anticipate that the net proceeds from the sale of the shares of common stock
will be between $28.1 million at the minimum of the offering range and $38.3
million at the maximum of the offering range and may be up to $44.2 million
assuming an increase in the estimated value of the common stock sold in the
estimated offering range by 15%. See "Pro Forma Data" and "The Stock Offering -
How We Determined Our Price and the Number of Shares to be Sold in the Stock
Offering" as to the assumptions used to arrive at such amounts.
17
We intend to use the net proceeds received from the stock offering as
follows:
Maximum, as
Minimum Maximum adjusted
------------ ----------------- ---------------
(In Thousands)
Gross Proceeds............................................ $29,325 $39,675 $45,626
Less: Estimated underwriting commission and other
offering expenses....................................... 1,230 1,358 1,432
------------ ----------------- ---------------
Net Proceeds.............................................. 28,095 38,317 44,194
Less:
Investment in Kaiser Federal Bank...................... 14,048 19,159 22,097
Loan to our employee stock ownership plan.............. 2,346 3,174 3,650
Funding of the restricted stock plan................... 1,173 1,587 1,825
------------ ----------------- ---------------
Net cash proceeds retained by K-Fed Bancorp............... $10,528 $14,397 $16,622
============ ================= ===============
K-Fed Bancorp will retain up to 50.0% of the net stock offering proceeds
from which the loan will be made to the employee stock ownership plan, and will
invest the remaining proceeds in Kaiser Federal Bank. The portion of the net
proceeds used by K-Fed Bancorp to make a loan to the employee stock ownership
plan will enable the employee stock ownership plan to purchase up to 8.0% of the
shares of common stock sold in the stock offering. Based upon the sale of
2,932,500 shares of common stock and 3,967,500 shares of common stock at the
minimum and maximum of the estimated offering range, respectively, the loan to
the employee stock ownership plan would be $2.35 million and $3.17 million,
respectively. See "Management - Benefits - Employee Stock Ownership Plan." The
remaining net proceeds initially retained by K-Fed Bancorp may be used to invest
in U.S. Government and federal agency securities of various maturities,
mortgaged-backed or other securities, deposits in either Kaiser Federal Bank or
other financial institutions, or a combination thereof. The net proceeds may
ultimately be used to support Kaiser Federal Bank's lending activities and any
future expansion of operations, although no new banking offices or acquisition
transactions are specifically being considered at this time.
The net proceeds from the stock offering may also be used for other
business and investment purposes, including the payment of regular or special
cash dividends, possible repurchases of the common stock or returns of capital.
K-Fed Bancorp and Kaiser Federal Bank have no plans, however, to declare or pay
any return of capital on the common stock. Management of K-Fed Bancorp may
consider expanding or diversifying its activities, as opportunities become
available.
In the future, the board of directors of K-Fed Bancorp may determine, based
on the existing facts and circumstances, to repurchase shares of common stock,
subject to any applicable regulatory requirements. Repurchases of stock by K-Fed
Bancorp, which may be at prices above or below the initial offering price, will
generally be conducted through an open market repurchase program subject to
applicable regulations. Any stock repurchases will be subject to the
determination of K-Fed Bancorp's board of directors that Kaiser Federal Bank
will be capitalized in excess of all applicable regulatory requirements after
any such repurchases. Such facts and circumstances may include, but will not be
limited to:
o market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase
18
the book value and/or earnings per share of the remaining outstanding
shares, and an improvement in K-Fed Bancorp's return on equity;
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and
o any other circumstances in which repurchases would be in the best
interests of K-Fed Bancorp and its stockholders.
The portion of the net proceeds used by K-Fed Bancorp to invest in Kaiser
Federal Bank will be added to Kaiser Federal Bank's general funds to be used for
general corporate purposes, including increased lending activities. While the
amount of net proceeds received by Kaiser Federal Bank will further strengthen
its capital position, which already exceeds all regulatory requirements, the
stock offering is not planned solely to increase Kaiser Federal Bank's
regulatory capital. The net proceeds may be used as described above to support
lending activities as well as future expansion of operations, although no new
branches or acquisitions are currently planned.
The net proceeds may vary because total expenses of the stock offering may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the stock offering is adjusted to reflect a
change in the estimated pro forma market value of Kaiser Federal Bank. Payments
for shares made through withdrawals from existing deposit accounts at Kaiser
Federal Bank will not result in the receipt of new funds for investment by
Kaiser Federal Bank but will result in a reduction of Kaiser Federal Bank's
interest expense and liabilities as funds are transferred from interest-bearing
certificates or other deposit accounts.
OUR POLICY REGARDING DIVIDENDS
The board of directors of K-Fed Bancorp intends to pay cash dividends on
the common stock in the future. The payment of dividends will depend upon a
number of factors, including capital requirements, K-Fed Bancorp's and Kaiser
Federal Bank's financial condition and results of operations, tax
considerations, statutory and regulatory limitations and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, will not be reduced or eliminated in future periods. Special cash
dividends, stock dividends or returns of capital may, to the extent permitted by
regulations, be paid in addition to, or in lieu of, regular cash dividends.
K-Fed Bancorp intends to file consolidated tax returns with Kaiser Federal Bank.
Accordingly, it is anticipated that any cash distributions made by K-Fed Bancorp
to its stockholders would be treated as cash dividends and not as a non-taxable
return of capital for federal and state tax purposes. See "Taxation."
Dividends from K-Fed Bancorp will depend, in large part, upon receipt of
dividends from Kaiser Federal Bank, because K-Fed Bancorp initially will have no
source of income other than dividends from Kaiser Federal Bank, earnings from
the investment of proceeds from the sale of shares of common stock retained by
K-Fed Bancorp and interest payments with respect to K-Fed Bancorp's loan to the
K-Fed Bancorp Employee Stock Ownership Plan. A regulation of the Office of
Thrift Supervision imposes limitations on "capital distributions" by savings
institutions. See "How We are Regulated - Limitations on Dividends and Other
Capital Distributions."
19
If we pay dividends to stockholders of K-Fed Bancorp, it is anticipated
that any dividends payable to K-Fed Mutual Holding Company would be waived,
subject to Office of Thrift Supervision approval. Under Office of Thrift
Supervision regulations, such dividends would not result in dilution to public
stockholders if K-Fed Mutual Holding Company converts to stock form in the
future. See "How We are Regulated - Limitations on Dividends and Other Capital
Distributions."
K-Fed Bancorp currently has no intention to initiate any action which leads
to a return of capital (as distinguished from a dividend) to stockholders of
K-Fed Bancorp. Regulations of the Office of Thrift Supervision prohibit a return
of capital during the three-year term of the business plan submitted by Kaiser
Federal Bank to the Office of Thrift Supervision in connection with the stock
offering.
MARKET FOR THE COMMON STOCK
K-Fed Bancorp has never issued capital stock, other than to K-Fed Mutual
Holding Company, and consequently, there is no established market for the common
stock at this time. K-Fed Bancorp has applied to have its common stock quoted on
the Nasdaq National Market under the symbol "KFED" upon completion of the stock
offering. There can be no assurance, however, that K-Fed Bancorp will meet
Nasdaq's listing requirements. The development of a liquid public market depends
on the existence of willing buyers and sellers, the presence of which is not
within the control of K-Fed Bancorp, Kaiser Federal Bank or any market maker.
Accordingly, the number of active buyers and sellers of the common stock at any
particular time may be limited. In addition, Keefe, Bruyette & Woods has
indicated its intention to register with the National Association of Securities
Dealers, Inc. to be able to trade K-Fed Bancorp shares and to assist K-Fed
Bancorp in identifying other firms to do the same. See "Risk Factors."
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the stock offering is completed. However, net proceeds are
currently estimated to be between $28.1 million and $38.3 million, or $44.2
million in the event the estimated offering range is increased by 15%, based
upon the following assumptions:
o all shares of common stock will be sold through non-transferable
rights to subscribe for the common stock, in order of priority, to
eligible account holders, the proposed employee stock ownership plan
and supplemental eligible account holders and, should shares remain,
also through a community offering;
o Keefe, Bruyette & Woods will receive a marketing fee equal to 1.35% of
the gross proceeds of the stock offering excluding shares sold to
directors, officers, employees and the employee stock ownership plan
upon completion of the stock offering;
o total expenses, excluding the marketing fees paid to Keefe, Bruyette &
Woods, are estimated to be approximately $898,000. Actual expenses may
vary from those estimated.
20
Pro forma consolidated net income and stockholders' equity of K-Fed Bancorp
have been calculated for the three months ended September 30, 2003 and the year
ended June 30, 2003, as if the common stock to be sold in the stock offering had
been sold at the beginning of the periods and the net proceeds had been invested
at 1.15%, which represents the yield on one-year U.S. Government securities at
September 30, 2003. The effect of withdrawals from deposit accounts for the
purchase of common stock has not been reflected. A tax rate of 41.15% has been
assumed for the periods, resulting in an after-tax yield of 0.68%. Historical
and pro forma per share amounts have been calculated by dividing historical and
pro forma amounts by the indicated number of shares of common stock, as adjusted
to give effect to the restricted stock plan and the employee stock ownership
plan. See Notes 3 and 4 to the tables below. No effect has been given in the pro
forma stockholders' equity calculations for the assumed earnings on the net
proceeds. K-Fed Bancorp intends to retain up to 50.0% of the net proceeds from
the stock offering and to make a loan to fund the purchase of 8.0% of the common
stock by the employee stock ownership plan. See "How We Intend to Use the
Proceeds."
No effect has been given in the tables to the issuance of additional shares
of common stock pursuant to the proposed stock option plan. The table below
gives effect to the restricted stock plan, which is expected to be adopted by
K-Fed Bancorp following the stock offering and presented along with the stock
option plan to stockholders for approval at an annual or special meeting of
stockholders to be held at least six months following the completion of the
stock offering. If the restricted stock plan is approved by stockholders, the
restricted stock plan intends to acquire an amount of common stock equal to 4.0%
of the shares of common stock sold in the stock offering, either through open
market purchases or from authorized but unissued shares of common stock, if
permissible. The table below assumes that stockholder approval has been
obtained, as to which there can be no assurance, and that the shares acquired by
the restricted stock plan are purchased in the open market at $10.00 per share.
No effect has been given to K-Fed Bancorp's results of operations after the
stock offering, the market price of the common stock after the stock offering or
a less than 4.0% purchase by the restricted stock plan. See "Management -
Benefits - Stock Benefit Plans."
The pro forma stockholders' equity is not intended to represent the fair
market value of the common stock and may be different than amounts that would be
available for distribution to stockholders in the event of liquidation.
21
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE FOREGOING TRANSACTIONS AT THE DATES ON WHICH SUCH
TRANSACTIONS ACTUALLY OCCUR AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE
RESULTS OF OPERATIONS. PRO FORMA STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE
BETWEEN THE STATED AMOUNT OF ASSETS AND LIABILITIES OF K-FED BANCORP COMPUTED IN
ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF
AMERICA ("GAAP").
At or For the Three Months Ended
September 30, 2003
------------------------------------------------------------------------
2,932,500 3,450,000 3,967,500 4,562,625
Shares Shares Sold Shares Sold Shares Sold
Sold at at $10.00 at $10.00 at $10.000
$10.00 Per Per Share Per Share Per Share
Share (Midpoint of (Maximum of (Maximum of
(Minimum Range) Range) Range, as
of Range) Adjusted)(1)
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
Gross proceeds.................................... $29,325 $34,500 $39,675 $45,626
Less offering expenses and commissions............ 1,229 1,294 1,358 1,432
--------------- --------------- --------------- ---------------
Estimated net proceeds......................... 28,096 33,206 38,317 44,194
Less:
Shares purchased by the employee stock
ownership plan(3)............................. (2,346) (2,760) (3,174) (3,650)
Shares purchased by the restricted stock
plan(4)....................................... (1,173) (1,380) (1,587) (1,825)
--------------- --------------- --------------- ---------------
Estimated proceeds available for investment(2).... $24,577 $29,066 $33,556 $38,719
=============== =============== =============== ===============
Net income:
Historical..................................... $ 576 $ 576 $ 576 $ 576
Pro forma income on net proceeds............... 42 49 57 66
Pro forma employee stock ownership plan
adjustment(3).................................. (35) (41) (47) (54)
Pro forma restricted stock plan adjustment(4)..... (35) (41) (47) (54)
--------------- --------------- --------------- ---------------
Pro forma net income.............................. $ 548 $ 543 $ 539 $ 534
=============== =============== =============== ===============
Net income per share:
Historical..................................... $ 0.09 $ 0.08 $ 0.07 $ 0.06
Pro forma income on net proceeds, as
adjusted..................................... 0.01 0.01 0.01 0.01
Pro forma employee stock ownership plan
adjustment(4)................................ (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan
adjustment(5) (0.01) (0.01) (0.01) (0.01)
--------------- --------------- --------------- ---------------
Pro forma net income per share(4)(5)(6)........... $ 0.08 $ 0.07 $ 0.06 $ 0.05
=============== =============== =============== ===============
Number of shares outstanding for pro forma net
income per share calculations(5)............... 6,146,265 7,230,900 8,315,535 9,562,865
22
At or For the Three Months Ended
September 30, 2003
------------------------------------------------------------------------
2,932,500 3,450,000 3,967,500 4,562,625
Shares Shares Sold Shares Sold Shares Sold
Sold at at $10.00 at $10.00 at $10.000
$10.00 Per Per Share Per Share Per Share
Share (Midpoint of (Maximum of (Maximum of
(Minimum Range) Range) Range, as
of Range) Adjusted)(1)
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
Offering price to pro forma net income per share.. 31.25x 35.71x 41.67x 50.00x
=============== =============== =============== ===============
Stockholders' equity:
Historical..................................... $35,921 $35,921 $35,921 $35,921
Estimated net proceeds......................... 28,096 33,206 38,917 44,194
Less:
Common stock acquired by the employee
stock ownership plan(3)................. (2,346) (2,760) (3,174) (3,650)
Common stock acquired by the
restricted stock plan(4)................ (1,173) (1,380) (1,587) (1,825)
--------------- --------------- --------------- ---------------
Pro forma stockholders' equity(3)(4)........... $60,498 $64,987 $69,477 $74,640
=============== =============== =============== ===============
Stockholders' equity per share:
Historical..................................... $ 5.63 $ 4.79 $ 4.16 $ 3.62
Estimated net proceeds......................... 4.41 4.43 4.44 4.46
Less:
Common stock acquired by the
employee stock ownership plan(3)........ (0.37) (0.37) (0.37) (0.37)
Common stock acquired by the
restricted stock plan(4)................ (0.18) (0.18) (0.18) (0.18)
--------------- --------------- --------------- ---------------
Pro forma stockholders' equity(4)(5)(6)........ $ 9.49 $ 8.67 $ 8.05 $ 7.53
=============== =============== =============== ===============
Offering price as a percentage of pro forma
stockholders' equity(5)......................... 105.37% 115.34% 124.22% 132.80%
Number of shares outstanding for pro forma
stockholders' equity per share calculations(5).. 6,375,000 7,500,000 8,625,000 9,918,750
23
At or For the Year Ended
June 30, 2003
------------------------------------------------------------------------
2,932,500 3,450,000 3,967,500 4,562,625
Shares Shares Sold Shares Sold Shares Sold
Sold at at $10.00 at $10.00 at $10.000
$10.00 Per Per Share Per Share Per Share
Share (Midpoint of (Maximum of (Maximum of
(Minimum Range) Range) Range, as
of Range) Adjusted)(1)
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
Gross proceeds........................................... $29,325 $34,500 $39,675 $45,626
Less offering expenses and commissions................... 1,229 1,294 1,358 1,432
--------------- --------------- --------------- ---------------
Estimated net proceeds............................... $28,096 $33,206 $38,317 $44,194
Less:
Shares purchased by the employee stock ownership
plan(3)............................................. (2,346) (2,760) (3,174) (3,650)
Shares purchased by the restricted stock plan(4).... (1,173) (1,380) (1,587) (1,825)
--------------- --------------- --------------- ---------------
Estimated proceeds available for investment(2)........... $24,577 $29,066 $33,556 $38,719
=============== =============== =============== ===============
Net income:
Historical............................................. $2,439 $2,439 $2,439 $2,439
Pro forma income on net proceeds....................... 166 197 227 262
Pro forma employee stock ownership plan
adjustment(3)........................................ (138) (162) (187) (215)
Pro forma restricted stock plan adjustment(4)............ (138) (162) (187) (215)
--------------- --------------- --------------- ---------------
Pro forma net income..................................... $2,329 $2,312 $2,292 $2,271
=============== =============== =============== ===============
Net income per share:
Historical............................................. $0.40 $0.34 $0.29 $0.25
Pro forma income on net proceeds, as adjusted.......... 0.03 0.03 0.03 0.03
Pro forma employee stock ownership plan
adjustment(3)........................................ (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment(4).......... (0.02) (0.02) (0.02) (0.02)
--------------- --------------- --------------- ---------------
Pro forma net income per share(4)(5)(6).................. $0.39 $0.33 $0.28 $0.24
--------------- --------------- --------------- ---------------
Number of shares outstanding for pro forma net
income per share calculations(5)....................... 6,163,860 7,251,600 8,339,340 9,590,241
Offering price to pro forma net income per share......... 25.64x 30.30x 35.71x 41.67x
=============== =============== =============== ===============
24
At or For the Year Ended
June 30, 2003
------------------------------------------------------------------------
2,932,500 3,450,000 3,967,500 4,562,625
Shares Shares Sold Shares Sold Shares Sold
Sold at at $10.00 at $10.00 at $10.000
$10.00 Per Per Share Per Share Per Share
Share (Midpoint of (Maximum of (Maximum of
(Minimum Range) Range) Range, as
of Range) Adjusted)(1)
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
Stockholders' equity:
Historical..................................... $35,395 $35,395 $35,395 $35,395
Estimated net proceeds......................... 28,096 33,206 38,317 44,194
Less:
Common stock acquired by the employee
stock ownership plan(3).................. (2,346) (2,760) (3,174) (3,650)
Common stock acquired by the restricted
stock plan(4)............................ (1,173) (1,380) (1,587) (1,825)
--------------- --------------- --------------- ---------------
Pro forma stockholders' equity(3)(4)............. $59,972 $64,461 $68,951 $74,114
=============== =============== =============== ===============
Stockholders' equity per share:
Historical..................................... $ 5.55 $ 4.72 $ 4.10 $ 3.57
Estimated net proceeds......................... 4.41 4.43 4.44 4.46
Less:
Common stock acquired by the employee
stock ownership plan(3).................. (0.37) (0.37) (0.37) (0.37)
Common stock acquired by the restricted
stock plan(4)............................ (0.18) (0.18) (0.18) (0.18)
--------------- --------------- --------------- ---------------
Pro forma stockholders' equity(4)(5)(6).......... $ 9.41 $ 8.60 $ 7.99 $ 7.48
=============== =============== =============== ===============
Offering price as a percentage of pro forma
stockholders' equity(5)........................ 106.27% 116.28% 125.16% 133.69%
Number of shares outstanding for pro forma
stockholders' equity per share calculations(5). 6,375,000 7,500,000 8,625,000 9,918,750
- ---------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the stock offering.
(2) Estimated net proceeds, available for investment, consist of the estimated
net proceeds from the stock offering minus (i) the proceeds attributable to
the purchase by the employee stock ownership plan and (ii) the value of the
shares to be purchased by the restricted stock plan, subject to stockholder
approval, after the stock offering at an assumed purchase price of $10.00
per share.
(3) It is assumed that 8.0% of the shares of common stock sold in the stock
offering will be purchased by the employee stock ownership plan with funds
loaned by K-Fed Bancorp. K-Fed Bancorp and Kaiser Federal Bank intend to
make annual contributions to the employee stock ownership plan in an amount
at least equal to the principal and interest requirement of the debt. The
pro forma net earnings assumes (i) that the loan to the employee stock
ownership plan is payable over 10 years, with the employee stock ownership
plan shares having an average fair value of $10.00 per share in accordance
with Statement of Position ("SOP") 93-6 of the American Institute of
Certified Public Accountants, entitled "Employers' Accounting for Employee
Stock Ownership Plans," and (ii) the effective tax rate was 41.15% for the
period. See "Management - Benefits - Employee Stock Ownership Plan."
(4) It is assumed that the restricted stock plan will purchase, following
stockholder approval of such plan, a number of shares of common stock equal
to 4.0% of the shares of common stock sold in the stock offering for
issuance to directors, officers and
25
employees. Funds used by the restricted stock plan to purchase the shares
initially will be contributed to the restricted stock plan by K-Fed
Bancorp. It is further assumed that the shares were acquired by the
restricted stock plan at the beginning of the period presented in open
market purchases at the purchase price and that 20% of the amount
contributed, net of taxes at 41.15%, was an amortized expense during the
year ended June 30, 2003. It was assumed that the amortized expense for the
three months ended September 30, 2003 was 5.0% (3/12 of 20%) of the amount
contributed net of taxes at 41.15%. Statement of Financial Accounting
Standards ("SFAS") No. 128 requires that unvested shares under the
restricted stock plan be excluded from the basic net income per share
calculation and included in the diluted net income per share calculation
only if they are dilutive under the treasury stock method. The issuance of
authorized but unissued shares of common stock pursuant to the restricted
stock plan in the amount of 4.0% of the common stock sold in the offering
would dilute the voting interests of existing stockholders by approximately
1.81%. See "Management - Benefits - Stock Benefit Plans."
(5) The per share calculations are determined by adding the number of shares
sold in the stock offering and for purposes of calculating net income per
share, in accordance with SOP 93-6 subtracting 211,140 shares, 248,400
shares, 285,660 shares, and 328,509 shares, at the minimum, midpoint,
maximum and 15% above the maximum of the offering range, respectively,
representing the employee stock ownership plans shares which have not been
committed for release during the year ended June 30, 2003 and subtracting
228,735 shares, 269,100 shares, 309,465 shares, and 355,885 shares,
respectively, for the three month period ended September 30, 2003. See Note
3 above. For purposes of calculating pro forma stockholders' equity per
share, it is assumed that shares outstanding total 6,375,000 shares at the
minimum of the estimated pro forma market value of Kaiser Federal Bank on a
fully converted basis, or the estimated valuation range, 7,500,000 shares
at the midpoint of the range, 8,625,000 shares at the maximum of the range
and 9,918,750 shares at 15% above the maximum of the range, respectively.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by K-Fed
Bancorp following the stock offering and presented for approval by
stockholders at an annual or special meeting of stockholders of K-Fed
Bancorp held at least six months following the completion of the stock
offering. If the stock option plan is approved by stockholders, it is
assumed that an amount equal to 10.0% of the common stock sold in the stock
offering, or 293,250 shares at the minimum of the estimated offering range,
345,000 shares at the midpoint of the range, 396,750 shares at the maximum
of the range and 456,263 shares at 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of common
stock pursuant to the exercise of options under the stock option plan will
result in the dilution of existing stockholders' voting interests by
approximately 4.40%. This assumes stockholder approval of the stock option
plan, that all these options were exercised at the beginning of the period
at an exercise price of $10.00 per share and that the shares to fund the
restricted stock plan are acquired through open market purchases at the
purchase price. See "Management - Benefits - Stock Benefit Plans."
26
CAPITALIZATION
The following table presents the historical consolidated capitalization of
K-Fed Bancorp at September 30, 2003, and the pro forma consolidated
capitalization of K-Fed Bancorp after giving effect to the stock offering, based
upon the sale of the number of shares shown below and the other assumptions set
forth under "Pro Forma Data."
K-Fed Bancorp - Pro Forma
Based Upon Sale at $10.00 Per Share
--------------------------------------------------------------------------
4,562,625
Shares(1)
K-Fed 2,932,500 3,450,000 3,967,500 (Maximum
Bancorp Shares Shares Shares of Range,
Historical (Minimum (Midpoint (Maximum as
Capitalization of Range) of Range) of Range) Adjusted)
-------------- ----------- ----------- ----------- ------------
(In Thousands)
Deposits(2)....................................... $360,567 $360,567 $360,567 $360,567 $360,567
Borrowings........................................ 50,000 50,000 50,000 50,000 50,000
-------------- ----------- ----------- ----------- ------------
Total deposits and borrowings..................... $410,567 $410,567 $410,567 $410,567 $410,567
============== =========== =========== =========== ============
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000
shares authorized, none issued................. $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value, 18,000,000
shares authorized; shares to be issued as
reflected(3)................................... -- 64 75 86 99
Additional paid-in capital.................. -- 28,032 33,131 38,231 44,095
Retained earnings........................... 35,921 35,921 35,921 35,921 35,921
Less:
Common stock to be acquired by the employee
stock ownership plan(4)........................ -- (2,346) (2,760) (3,174) (3,650)
Common stock to be acquired by the restricted
stock plan(5).................................. -- (1,173) (1,380) (1,587) (1,825)
-------------- ----------- ----------- ----------- ------------
Total stockholders' equity........................ $35,921 $60,498 $64,987 $69,477 $74,640
============== =========== =========== =========== ============
- ---------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the stock offering. Any withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(3) Includes 1,000 shares held at September 30, 2003 by K-Fed Mutual Holding
Company and shares to be held by K-Fed Mutual Holding Company after the
stock offering. Reflects the issuance of the shares of common stock to be
sold in the stock offering. No effect has been given to the issuance of
additional shares of common stock pursuant to the proposed stock option
plan. The authorized common and preferred stock of K-Fed Bancorp will be
increased to these amounts in connection with the stock offering. See "Pro
Forma Data" and "Management - Benefits - Stock Benefit Plans."
(4) Assumes that 8.0% of the common stock sold in the stock offering will be
purchased by the employee stock ownership plan, which is reflected as a
reduction from stockholders' equity. The employee stock ownership plan
shares will be purchased with funds loaned to the employee stock ownership
plan by K-Fed Bancorp. See "Pro Forma Data" and "Management - Benefits -
Employee Stock Ownership Plan."
(5) K-Fed Bancorp intends to adopt a restricted stock plan and to submit such
plan to stockholders at an annual or special meeting of stockholders held
at least six months following the completion of the stock offering. If the
plan is approved by stockholders, K-Fed Bancorp intends to contribute
sufficient funds to the restricted stock plan to enable the plan to
purchase a number of shares of common stock equal to 4.0% of the common
stock sold in the stock offering. Assumes that stockholder approval has
been obtained and that the shares have been purchased in the open market at
the purchase price. However, in the event K-Fed Bancorp issues authorized
but unissued shares of common stock to the restricted stock plan in the
amount of 4.0% of the common stock sold in the stock offering, the voting
interests of existing stockholders would be
27
diluted by approximately 1.81%. The shares are reflected as a compensation
expense resulting in a reduction of stockholders' equity. See "Pro Forma
Data" and "Management - Benefits - Stock Benefit Plans."
28
PRO FORMA REGULATORY CAPITAL ANALYSIS
At September 30, 2003, Kaiser Federal Bank exceeded all of its applicable
regulatory capital requirements. The table sets forth the historical regulatory
capital of Kaiser Federal Bank at September 30, 2003 and the pro forma
regulatory capital of Kaiser Federal Bank after giving effect to the stock
offering, based upon the sale of the number of shares shown in the table. The
pro forma regulatory capital amounts reflect the receipt by Kaiser Federal Bank
of 50.0% of the net stock proceeds. The pro forma risk-based capital amounts
assume the investment of the net proceeds received by Kaiser Federal Bank in
assets which have a risk-weight equal to the average risk-weight of Kaiser
Federal Bank's assets, under applicable regulations, as if such net proceeds had
been received and so applied at September 30, 2003. See "How We Are Regulated"
and "Management's Discussion and Analysis of Recent Developments."
29
Pro Forma at September 30, 2003
------------------------------------------------------
Historical at 2,932,500 Shares 3,450,000 Shares
September 30, 2003 Sold at $10.00 per Share Sold at $10.00 per Share
---------------------- ------------------------ ------------------------
Percent of Percent of Percent of
Amount Assets Amount Assets Amount Assets
---------- ---------- ---------- ---------- ---------- ----------
Equity capital under GAAP............ $35,871 8.00% $46,400 10.06% $48,334 10.42%
Tangible capital:
Actual........................... $35,871 8.00% $46,400 10.06% $48,334 10.42%
Requirement...................... 6,728 1.50 6,921 1.50 6,957 1.50
---------- ---------- ---------- ---------- ---------- ----------
Excess........................... $29,143 6.50% $39,479 8.56% $41,377 8.92%
Core capital
Actual........................... $35,871 8.00% $46,400 10.06% $48,334 10.42%
Requirement...................... 17,942 4.00 18,457 4.00 18,551 4.00
---------- ---------- ---------- ---------- ---------- ----------
Excess........................... $17,929 4.00% $27,943 6.06% $29,783 6.42%
Risk-based capital
Actual........................... $38,118 13.50% $48,647 16.74% $50,581 17.32%
Requirement...................... 22,595 8.00 23,244 8.00 23,362 8.00
---------- ---------- ---------- ---------- ---------- ----------
Excess........................... $15,523 5.50% $25,403 8.74% $27,219 9.32%
Tier I to risk weighted assets
Actual........................... $35,871 12.70% $46,400 15.97% $48,334 16.55%
Requirement...................... 11,298 4.00 11,622 4.00 11,681 4.00
---------- ---------- ---------- ---------- ---------- ----------
Excess........................... $24,573 8.70% $34,778 11.97% $36,653 12.55%
(CONTINUED)
Pro Forma at September 30, 2003
----------------------------------------------------
3,967,500 Shares 4,562,625 Shares
Sold at $10.00 per Share Sold at $10.00 per Share
------------------------ ------------------------
Percent of Percent of
Amount Assets Amount Assets
---------- ---------- ---------- ----------
Equity capital under GAAP............ $50,269 10.78% $52,493 11.20%
Tangible capital:
Actual........................... $50,269 10.78% $52,493 11.20%
Requirement...................... 6,992 1.50 7,032 1.50
---------- ---------- ---------- ----------
Excess........................... $43,277 9.28% $45,461 9.70%
Core capital
Actual........................... $50,269 10.78% $52,493 11.20%
Requirement...................... 18,645 4.00 18,753 4.00
---------- ---------- ---------- ----------
Excess........................... $31,623 6.78% $33,740 7.20%
Risk-based capital
Actual........................... $52,516 17.89% $54,740 18.54%
Requirement...................... 23,481 8.00 23,617 8.00
---------- ---------- ---------- ----------
Excess........................... $29,035 9.89% $31,123 10.54%
Tier I to risk weighted assets
Actual........................... $50,269 17.13% $52,493 17.78%
Requirement...................... 11,740 4.00 11,808 4.00
---------- ---------- ---------- ----------
Excess........................... $38,528 13.13% $40,685 13.78%
- ---------------------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
30
THE STOCK OFFERING
THE BOARDS OF DIRECTORS OF K-FED BANCORP AND KAISER FEDERAL BANK HAVE
ADOPTED AND THE OFFICE OF THRIFT SUPERVISION HAS APPROVED THE PLAN OF STOCK
ISSUANCE. THE OFFICE OF THRIFT SUPERVISION APPROVAL IS SUBJECT TO SATISFACTION
OF CERTAIN CONDITIONS IMPOSED BY THE OFFICE OF THRIFT SUPERVISION. THE OFFICE OF
THRIFT SUPERVISION APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN OF STOCK ISSUANCE.
GENERAL
On November 22, 2003, we adopted a plan of stock issuance, which we amended
on January 20, 2004, pursuant to which we will sell our common stock to eligible
depositors of Kaiser Federal Bank. Under the plan, K-Fed Bancorp common stock is
being offered to our eligible depositors, our employee stock ownership plan and
then to the public. The Office of Thrift Supervision has approved K-Fed
Bancorp's amended plan of stock issuance.
The shares of K-Fed Bancorp common stock are first being offered in a
subscription offering to holders of subscription rights. To the extent shares of
common stock remain available after the subscription offering, shares may be
offered in a direct community offering on a best efforts basis through Keefe,
Bruyette & Woods in such a manner as to promote a wide distribution of the
shares. The direct community offering, if any, may commence with, at any time
during, or as soon as practicable after the commencement of the subscription
offering. Shares not subscribed for in the subscription offering and direct
community offering may be offered for sale on a best efforts basis in a
syndicated community offering conducted by Keefe, Bruyette & Woods. We have the
right, in our sole discretion, to accept or reject, in whole or in part, any
orders to purchase shares of common stock received in the direct community
offering and the syndicated community offering. See "- Direct Community
Offering" and "- Syndicated Community Offering."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of stock issuance. See "- Limitations
on Stock Purchases."
The completion of the offering is subject to market conditions and other
factors beyond our control. No assurance can be given as to the length of time
that will be required to complete the sale of shares being offered in the stock
offering. If delays are experienced, significant changes may occur in the
estimated offering range with corresponding changes in the offering price and
the net proceeds to be realized by us from the sale of the shares. In the event
the stock offering is terminated, we will charge all stock offering expenses
against current income and any funds collected by us in the offering will be
promptly returned, with interest, to each subscriber.
PURPOSES OF THE STOCK OFFERING
K-Fed Bancorp is offering for sale its common stock in the stock offering
at an aggregate price based on an independent valuation. The proceeds from the
sale of common stock of K-Fed Bancorp will provide Kaiser Federal Bank with new
equity capital, which will support future deposit growth and expanded
operations. While Kaiser Federal Bank currently exceeds all regulatory capital
requirements to be considered adequately capitalized, the sale of stock, coupled
with the accumulation of earnings, less dividends or other reductions in
capital, from year to year, represents a means for the orderly preservation and
expansion of Kaiser Federal Bank's capital base in order to support our future
growth. If our current growth continues at our historical rate, and if we expand
further as we currently plan, we will need the additional capital to remain
adequately capitalized under regulatory capital
31
requirements. The investment of the net proceeds of the offering also will
provide additional income to further enhance Kaiser Federal Bank's future
capital position.
Additionally, our stronger capital position after the offering will enhance
operating flexibility, support future expansion, and provide a cushion for
absorbing unanticipated losses. Kaiser Federal Bank will receive approximately
50.0% of the net proceeds of the stock offering as equity capital, to be used
initially to invest in short-term investments and adjustable rate
mortgage-backed securities, then later for making loans within our market area.
K-Fed Bancorp will also use a portion of the cash proceeds to extend a loan to
the K-Fed Bancorp Employee Stock Ownership Plan
EFFECTS OF THE STOCK OFFERING
GENERAL. The stock offering will have no effect on Kaiser Federal Bank's
present business of accepting deposits and investing its funds in loans and
other investments permitted by law. The stock offering will not result in any
change in the existing services provided to depositors and borrowers, or in our
existing office, management and staff. Kaiser Federal Bank will continue to be
subject to regulation, supervision and examination by the Office of Thrift
Supervision and the FDIC.
DEPOSITS AND LOANS. Each holder of a deposit account in Kaiser Federal Bank
at the time of the stock offering will continue as an account holder in Kaiser
Federal Bank after the stock offering, and the stock offering will not affect
the deposit balance, interest rate or other terms of such accounts. Each account
will be insured by the FDIC to the same extent as before the stock offering.
Depositors in Kaiser Federal Bank will continue to hold their existing
certificates and other evidence of their accounts. The stock offering will not
affect the loan terms of any borrower from Kaiser Federal Bank. The amount,
interest rate, maturity, security for and obligations under each loan will
remain as they existed prior to the stock offering.
CONTINUITY. During the process, the normal business of Kaiser Federal Bank
of accepting deposits and making loans will continue without interruption.
Following completion of the stock offering, Kaiser Federal Bank will continue to
be subject to regulation by the Office of Thrift Supervision, and FDIC insurance
of accounts will continue without interruption. After the stock offering, Kaiser
Federal Bank will continue to provide services for depositors and borrowers
under current policies and by its present management and staff.
The board of directors presently serving Kaiser Federal Bank will continue
to serve as the board of directors of Kaiser Federal Bank after the stock
offering. The members of the board of directors of K-Fed Bancorp will consist of
the individuals currently serving on the board of directors of K-Fed Bancorp,
which are the same directors serving for Kaiser Federal Bank. After the stock
offering, the voting stockholders of K-Fed Bancorp will elect approximately
one-third of K-Fed Bancorp's directors annually. All current officers of K-Fed
Bancorp and Kaiser Federal Bank will retain their positions with K-Fed Bancorp
and Kaiser Federal Bank, respectively, after the stock offering.
VOTING RIGHTS. As a federally-chartered stock corporation, all voting
rights of K-Fed Bancorp are held solely by its sole stockholder, K-Fed Mutual
Holding Company. All voting rights of Kaiser Federal Bank are held solely by its
sole stockholder, K-Fed Bancorp. All voting rights of K-Fed Mutual Holding
Company are held by the depositors of Kaiser Federal Bank at the applicable
record date. After the stock offering, the voting rights of K-Fed Bancorp will
be held by stockholders consisting of K-Fed Mutual Holding Company and
individuals who purchased shares in, or following,
32
the stock offering. K-Fed Mutual Holding Company will own a majority of the
outstanding common stock of K-Fed Bancorp, and thus the board of directors of
K-Fed Mutual Holding Company, which is composed of the same individuals who are
directors of K-Fed Bancorp, will control the affairs of K-Fed Bancorp, including
the election of directors of K-Fed Bancorp.
DEPOSITORS' RIGHTS IF WE LIQUIDATE. In the event of a voluntary liquidation
of Kaiser Federal Bank, the holder of Kaiser Federal Bank's common stock, which
is K-Fed Bancorp, would be entitled to any assets remaining upon a liquidation,
dissolution or winding up of Kaiser Federal Bank and, except through their
liquidation interests in Kaiser Federal Bank, as discussed below, holders of
deposit accounts in Kaiser Federal Bank would not have any interest in these
assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Kaiser Federal Bank following completion of the stock offering,
holders of deposit accounts in Kaiser Federal Bank would be entitled, pro rata
to the value of their accounts and to distribution of any assets of K-Fed Mutual
Holding Company remaining after the claims of all creditors of Kaiser Federal
Bank are satisfied. Stockholders of K-Fed Bancorp will have no liquidation or
other rights with respect to Kaiser Federal Bank solely as stockholders.
In the event of a liquidation, dissolution or winding up of K-Fed Bancorp,
each holder of shares of the common stock would be entitled to receive, after
payment of all debts and liabilities of K-Fed Bancorp, a pro rata portion of all
assets of K-Fed Bancorp available for distribution to holders of the common
stock.
There currently are no plans to liquidate Kaiser Federal Bank, K-Fed
Bancorp or K-Fed Mutual Holding Company
TAX EFFECTS OF THE STOCK OFFERING. K-Fed Bancorp and Kaiser Federal Bank
have received an opinion from their special counsel, Jenkens & Gilchrist, A
Professional Corporation, Dallas, Texas, as to the material federal income tax
consequences of the stock offering on Kaiser Federal Bank and K-Fed Bancorp, and
as to the generally applicable material federal income tax consequences of the
stock offering on Kaiser Federal Bank's account holders and to persons who
purchase common stock in the offering. This opinion has been filed as an exhibit
to K-Fed Bancorp's registration statement with the Securities and Exchange
Commission ("SEC") of which this prospectus is a part.
The opinion provides that:
o K-Fed Bancorp will incur no gain or loss upon its receipt of money in
exchange for the issuance of shares of its common stock; and
o no gain or loss will be recognized by Kaiser Federal Bank's eligible
account holders and supplemental eligible account holders upon the
distribution to them of non-transferable subscription rights to
purchase common stock.
The opinion of Jenkens & Gilchrist, A Professional Corporation, is based in
part upon, and subject to the continuing validity in all material respects
through the date of the compliance of the stock offering of various
representations of Kaiser Federal Bank, upon assumptions and qualifications,
including that the stock offering is completed in the manner and according to
the terms provided in the plan of stock issuance. This opinion is also based
upon the Internal Revenue Code, regulations now in effect or proposed, current
administrative rulings and practice and judicial authority, all of which are
subject to change and any change may be made with retroactive effect. Unlike
private letter rulings
33
received from the Internal Revenue Service ("IRS"), an opinion is not binding
upon the IRS and there can be no assurance that the IRS will not take a position
contrary to the positions reflected in this opinion, or that this opinion will
be upheld by the courts if challenged by the IRS.
K-Fed Bancorp and Kaiser Federal Bank have also obtained an opinion from
RSM McGladrey, Inc., Riverside, California, that the tax effects of the stock
offering under California tax laws will be substantially the same as described
above with respect to federal income tax laws.
K-Fed Bancorp and Kaiser Federal Bank have received a letter from RP
Financial LC., stating its belief that the subscription rights do not have any
value, based on the fact that these rights are acquired by the recipients
without cost, are nontransferable and of short duration, and give the recipients
the right only to purchase the common stock at a price equal to its estimated
fair market value, which will be the same price as the purchase price for the
unsubscribed shares of common stock. If the subscription rights granted to
eligible subscribers are deemed to have an ascertainable value, receipt of these
rights would be taxable probably only to those eligible subscribers who exercise
the subscription rights, either as a capital gain or ordinary income, in an
amount equal to such value, and K-Fed Bancorp and Kaiser Federal Bank could
recognize gain on any distribution. Eligible subscribers are encouraged to
consult with their own tax advisor as to the tax consequences in the event that
subscription rights are deemed to have an ascertainable value. Unlike private
rulings, the letter of RP Financial, LC. is not binding on the IRS, and the IRS
could disagree with conclusions reached in the letter. In the event of any
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
HOW WE DETERMINED OUR PRICE AND THE NUMBER OF SHARES TO BE SOLD IN THE STOCK
OFFERING
The plan of stock issuance requires that the purchase price of the common
stock must be based on the appraised pro forma market value of K-Fed Bancorp and
Kaiser Federal Bank, as determined on the basis of an independent valuation.
Kaiser Federal Bank has retained RP Financial, LC. to make this valuation. RP
Financial, LC. is a firm with extensive experience in the valuation of companies
undertaking a stock offering such as the proposed offering of K-Fed Bancorp.
Kaiser Federal Bank selected RP Financial, LC. based upon its experience and
reputation in valuing stock offerings by issuers such as K-Fed Bancorp. For its
services in making this appraisal, RP Financial, LC.'s fees and out-of-pocket
expenses are estimated to be $63,000. Kaiser Federal Bank has agreed to
indemnify RP Financial, LC. and any employees of RP Financial, LC. who act for
or on behalf of RP Financial, LC. in connection with the appraisal against any
and all loss, cost, damage, claim, liability or expense of any kind, including
claims under federal and state securities laws, arising out of any misstatement
or untrue statement of a material fact or an omission to state a material fact
in the information supplied by Kaiser Federal Bank to RP Financial, LC., unless
RP Financial, LC. is determined to be negligent or otherwise at fault.
RP Financial, LC. issued its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial,
LC. also considered the following factors, among others:
o the present and projected operating results and financial condition of
K-Fed Bancorp and Kaiser Federal Bank, which were prepared by Kaiser
Federal Bank then adjusted by RP Financial, LC. to reflect the net
proceedings of the offering and the economic and demographic
conditions in Kaiser Federal Bank's existing marketing areas;
34
o certain historical, financial and other information relating to Kaiser
Federal Bank, which were prepared by Kaiser Federal Bank;
o a comparative evaluation of the operating and financial statistics of
Kaiser Federal Bank with those of other similarly situated
publicly-traded mutual holding companies;
o the aggregate size of the offering of the common stock;
o the impact of the stock offering on Kaiser Federal Bank's net worth
and earnings potential as calculated by RP Financial, LC.;
o the proposed dividend policy of K-Fed Bancorp and Kaiser Federal Bank;
and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
The appraisal also incorporated an analysis of a peer group of publicly-traded
mutual holding companies that RP Financial, LC. considered to be comparable to
K-Fed Bancorp. The peer group analysis conducted by RP Financial, LC. included a
total of 10 publicly-traded mutual holding companies with less than $1 billion
in assets. The analysis of comparable publicly-traded institutions included an
evaluation of the average and median price-to-earnings and price-to-book value
ratios indicated by the market prices of the peer companies, among other
factors. RP Financial, LC. applied the peer group's pricing ratios as adjusted
for certain qualitative valuation factors to account for differences between
K-Fed Bancorp's and the peer group, to K-Fed Bancorp's pro forma earnings and
book value to derive the estimated pro forma market value of K-Fed Bancorp.
In its review of the appraisal provided by RP Financial, LC., the board of
directors reviewed the methodologies and the appropriateness of the assumptions
used by RP Financial, LC. in addition to the factors listed above, and the board
of directors believes that these assumptions were reasonable.
On the basis of the foregoing, RP Financial, LC. has advised K-Fed Bancorp
and Kaiser Federal Bank that in its opinion, dated November 7, 2003, the
estimated pro forma market value of K-Fed Bancorp on a fully converted basis
ranged from a minimum of $63.8 million to a maximum of $87.3 million with a
midpoint of $75.0 million. The board of directors of Kaiser Federal Bank
determined that the common stock should be sold at $10.00 per share. Based on
the estimated offering range and the purchase price, and taking into account
that K-Fed Bancorp must be at least a majority owned subsidiary of K-Fed Mutual
Holding Company as long as K-Fed Mutual Holding Company is in mutual form, the
number of shares of common stock that K-Fed Bancorp will issue will range from
between 2,932,500 shares and 3,967,500 shares, with a midpoint of 3,450,000
shares. The estimated offering range may be amended with the approval of the
Office of Thrift Supervision, if required, or if necessitated by subsequent
developments in the financial condition of K-Fed Bancorp and Kaiser Federal Bank
or market conditions generally. In the event the estimated market value is
updated to amend the value of K-Fed Bancorp on a fully converted basis below
$63.6 million or above $99.2 million, which is the maximum of the estimated
fully converted valuation range, as adjusted by 15%, a new appraisal will be
filed with the Office of Thrift Supervision.
Based upon current market and financial conditions and recent practices and
policies of the Office of Thrift Supervision, in the event K-Fed Bancorp
receives orders for common stock in excess of $39.7 million (the maximum of the
estimated offering range) and up to $45.6 million (the maximum
35
of the estimated offering range, as adjusted by 15%), K-Fed Bancorp may be
required by the Office of Thrift Supervision to accept all such orders. No
assurances, however, can be made that K-Fed Bancorp will receive orders for
common stock in excess of the maximum of the estimated offering range or that,
if these orders are received, that all such orders will be accepted because
K-Fed Bancorp's final valuation and number of shares to be issued are subject to
the receipt of an updated appraisal from RP Financial, LC. which reflects an
increase in the valuation and the approval of the increase by the Office of
Thrift Supervision. In addition, an increase in the number of shares above
3,967,500 shares, will first be used, if necessary, to fill the order of the
employee stock ownership plan. There is no obligation or understanding on the
part of management to take and/or pay for any shares in order to complete the
stock offering.
The following table presents a summary of selected pricing ratios for the
peer group companies and the resulting pricing ratios for K-Fed Bancorp,
reflecting the pro forma impact of the stock offering. Compared to the average
pricing ratios of the peer group, K-Fed Bancorp's pro forma pricing ratios at
the midpoint of the offering range indicated a premium of 10% on a
price-to-earnings basis, a discount of 24% on a price-to-book basis and a
discount of 26% on a price-to-tangible book value basis. The estimated appraised
value and the resulting discounts took into consideration the potential
financial impact of the stock offering.
Pro Forma
Price to Pro Forma
Earnings Price to Pro Forma Price
Multiple(1) Book to Tangible Book
Value Ratio Value
--------------- --------------- -----------------
K-Fed Bancorp (fully converted basis) as of November 7, 2003
15% above maximum........................................... 49.53x 82.50% 82.50%
Maximum..................................................... 42.07 78.96 78.96
Midpoint.................................................... 35.86 75.25 75.25
Minimum..................................................... 29.90 70.75 70.75
All Full-Converted Thrifts Publicly Traded on the NYSE, NASDAQ &
AMEX as of November 7, 2003
Averages.................................................... 17.78x 160.47% 170.79%
Medians..................................................... 16.51 148.75 160.11
Valuation of Peer Group Institutions (fully converted basis)
as of November 7, 2003
Averages.................................................... 32.58x 98.38% 102.22%
Medians..................................................... 32.58 100.13 103.88
- ---------------------------------
(1) Reflects earnings for the most recent trailing twelve month period for
which data is publicly available.
RP FINANCIAL, LC.'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED,
AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THESE
SHARES. RP FINANCIAL, LC. DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY K-FED BANCORP OR KAISER
FEDERAL BANK, NOR DID RP FINANCIAL, LC. VALUE INDEPENDENTLY THE ASSETS OR
LIABILITIES OF K-FED BANCORP OR KAISER FEDERAL BANK. THE VALUATION CONSIDERS
KAISER FEDERAL BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF KAISER FEDERAL BANK. MOREOVER, BECAUSE
THIS 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 PURCHASING COMMON STOCK IN THE OFFERINGS WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE
OR IN THE RANGE OF THE VALUATION DESCRIBED ABOVE.
36
Prior to completion of the stock offering, the maximum of the estimated
offering range may be increased up to 15% and the number of shares of common
stock may be increased to 4,562,625 shares to reflect changes in market and
financial conditions or to fill the orders of the employee stock ownership plan
without the resolicitation of subscribers. See "- Limitations on Stock
Purchases" as to the method of distribution and allocation of additional shares
that may be issued in the event of an increase in the estimated offering range
to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the stock offering may be completed
unless prior to such completion RP Financial, LC. confirms that nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the aggregate value of the common stock to be
issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of K-Fed Bancorp and Kaiser Federal Bank. If
this confirmation is not received, K-Fed Bancorp may cancel the stock offering,
extend the offering period and establish a new estimated offering range and/or
estimated price range, extend, reopen or hold a new offering or take any other
action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of the
subscription offering, the total number of shares of common stock may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the purchase price is not below
the minimum or more than 15% above the maximum of the estimated offering range.
In the event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated offering
range or more than 15% above the maximum of such range, purchasers will be
resolicited and be permitted to continue their orders, in which case they will
need to reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at Kaiser Federal Bank's current rate of interest on savings
accounts, or be permitted to modify or rescind their subscriptions. Any change
in the estimated offering range must be approved by the Office of Thrift
Supervision.
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and K-Fed Bancorp's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net income
and stockholders' equity on an aggregate basis. A decrease in the number of
shares of common stock would increase both a subscriber's ownership interest and
K-Fed Bancorp's pro forma net income and stockholders' equity on a per share
basis while decreasing pro forma net income and stockholders' equity on an
aggregate basis. See "Risk Factors - We intend to grant stock options and
restricted stock to the board and management following the stock offering which
could reduce your ownership interest" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, LC., including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Kaiser Federal Bank and the other locations specified under
"Additional Information."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
Under the plan of stock issuance, rights to subscribe for the purchase of
common stock have been granted to the following persons in the following order
of descending priority:
37
o depositors of Kaiser Federal Bank with account balances of at least
$50.00 as of the close of business on October 31, 2001 ("Eligible
Account Holders"),
o tax-qualified employee plans, including the employee stock ownership
plan ("Tax-Qualified Employee Plans"), and
o depositors of Kaiser Federal Bank with account balances of at least
$50.00 as of the close of business on December 31, 2003 ("Supplemental
Eligible Account Holders").
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of stock issuance and as described below under "-
Limitations on Stock Purchases."
PREFERENCE CATEGORY NO. 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account
Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $150,000 or 15,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of common
stock; or
(3) 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be sold
by a fraction, of which the numerator is the amount of the qualifying
deposit of the Eligible Account Holder and the denominator is the
total amount of qualifying deposits of all Eligible Account Holders in
Kaiser Federal Bank in each case as of the close of business on
October 31, 2001, the "Eligibility Record Date," subject to the
overall purchase limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares first will be allocated among subscribing Eligible Account Holders so as
to permit each such Eligible Account Holder, to the extent possible, to purchase
a number of shares sufficient to make his or her total allocation equal to the
lesser of the number of shares subscribed for or 100 shares. Thereafter, any
shares remaining will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unfilled pro rata in the proportion that the
amounts of their respective qualifying deposits bear to the total amount of
qualifying deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. For example, if an Eligible Account Holder with
an unfilled subscription has qualifying deposits totaling $100, and the total
amount of qualifying deposits for Eligible Account Holders with unfilled
subscriptions was $1,000, then the number of shares that may be allocated to
fill this Eligible Account Holder's subscription would be 10% of the shares
remaining available, up to the amount subscribed for. Subscription rights of
Eligible Account Holders will be subordinated to the priority rights of
Tax-Qualified Employee Plans to purchase shares in excess of the maximum of the
estimated offering range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of Kaiser Federal
Bank or their associates
38
will be subordinated to the subscription rights of other Eligible Account
Holders to the extent attributable to increased deposits in the year preceding
October 31, 1999.2001.
PREFERENCE CATEGORY NO. 2: TAX-QUALIFIED EMPLOYEE PLANS. Each Tax-Qualified
Employee Plan, including the employee stock ownership plan, shall be entitled to
receive, without payment therefore, second priority, nontransferable
subscription rights to purchase up to 10.0% of the common stock, provided that
individually or in the aggregate such plans (other than that portion of such
plans which is self-directed) shall not purchase more than 10.0% of the shares
of common stock, including any increase in the number of shares of common stock
after the date hereof as a result of an increase of up to 15% in the maximum of
the estimated offering range. The proposed K-Fed Bancorp Employee Stock
Ownership Plan intends to purchase 8.0% of the shares of common stock sold in
the stock offering, or 234,600 shares and 317,400 shares based on the minimum
and maximum of the estimated offering range, respectively. Subscriptions by the
Tax-Qualified Employee Plan will not be aggregated with shares of common stock
purchased directly by or which are otherwise attributable to any other
participants in the subscription and direct community offerings, including
subscriptions of any of Kaiser Federal Bank's directors, officers, employees or
associates thereof. Subscription rights received pursuant to this category shall
be subordinated to all rights received by Eligible Account Holders to purchase
shares pursuant to Preference Category No. 1; provided, however, that
notwithstanding any other provisions of the plan of stock issuance to the
contrary, the Tax-Qualified Employee Plan shall have a first priority
subscription right to the extent that the total number of shares of common stock
sold in the stock offering exceeds the maximum of the estimated offering. In the
event that the total number of shares offered in the stock offering is increased
to an amount greater than then number of shares representing the maximum of the
estimated offering range, each Tax-Qualified Employee Plan will have a priority
right to purchase any such shares exceeding the maximum of the estimated
offering range up to an aggregate of 10.0% of the common stock sold in the stock
offering. See "Management - Benefits - Employee Stock Ownership Plan."
PREFERENCE CATEGORY NO. 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the
extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and Tax Qualified Employee Plans, each
Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of common stock in an amount equal to the greater of:
(1) $150,000 or 15,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of common
stock; or
(3) 15 times the product, rounded down to the next whole number, obtained
by multiplying the total number of shares of common stock to be issued
by a fraction, of which the numerator is the amount of the qualifying
deposit of the Supplemental Eligible Account Holder and the
denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders in Kaiser Federal Bank in each
case on the close of business on December 31, 2003, the "Supplemental
Eligibility Record Date," subject to the overall purchase limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of all Supplemental Eligible Account Holders, available shares first will be
allocated among subscribing Supplemental
39
Eligible Account Holders so as to permit each Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his total allocation, including the number of shares, if any, allocated in
accordance with Preference Category No.1, equal to the lesser of the number of
shares subscribed for or 100 shares. Thereafter, any shares remaining available
will be allocated among the Supplemental Eligible Account Holders whose
subscriptions remain unfilled pro rata in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The subscription offering
will expire at 12:00 noon, Pacific Standard Time, on __________, 2004 (the
"Subscription Expiration Date"), unless extended for up to 45 days or for such
additional periods by K-Fed Bancorp and Kaiser Federal Bank as may be approved
by the Office of Thrift Supervision. The subscription offering may not be
extended beyond _________, 2006. Subscription rights which have not been
exercised prior to the subscription expiration date, unless extended, will
become void.
K-Fed Bancorp and Kaiser Federal Bank will not execute orders until at
least the minimum number of shares of common stock, 2,932,500 shares, have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Subscription Expiration Date, unless this period
is extended with the consent of the Office of Thrift Supervision, all funds
delivered to Kaiser Federal Bank pursuant to the subscription offering will be
returned promptly to the subscribers with interest and all withdrawal
authorizations will be canceled. If an extension beyond the 45-day period
following the Subscription Expiration Date is granted, K-Fed Bancorp and Kaiser
Federal Bank will notify subscribers of the extension of time and of any rights
of subscribers to confirm, modify or rescind their subscriptions.
DIRECT COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, Tax-Qualified Employee Plans
and Supplemental Eligible Account Holders, we anticipate we will offer shares
pursuant to the plan of stock issuance to members of the general public who
receive a prospectus, with a preference given to natural persons residing in Los
Angeles, San Bernardino and Santa Clara Counties, California. These natural
persons are referred to as preferred subscribers. No person may subscribe for or
purchase more than $150,000 of common stock in the direct community offering, if
any, subject to the maximum purchase limitations. See "- Limitations on Stock
Purchases." K-Fed Bancorp and Kaiser Federal Bank may limit total subscriptions
in the direct community offering so as to assure that the number of shares
available for the syndicated community offering may be up to a specified
percentage of the number of shares of common stock. Orders for stock received in
any community offering must first be filled to a maximum of two percent of the
shares offered in the stock offering and any remaining shares must be allocated
on an equal number of shares per order until all orders have been filled.
Finally, K-Fed Bancorp and Kaiser Federal Bank may reserve shares offered
in the direct community offering for sales to institutional investors. The
opportunity to subscribe for shares of common stock in any direct community
offering will be subject to the right of K-Fed Bancorp and Kaiser Federal Bank,
in their sole discretion, to accept or reject any orders in whole or in part
from any person either at the time of receipt of an order or as soon as
practicable following the Subscription Expiration Date. The direct community
offering, if any, shall be for a period of not less than 20 days
40
nor more than 45 days unless extended by K-Fed Bancorp and Kaiser Federal Bank,
and shall commence concurrently with, during or promptly after the subscription
offering.
SYNDICATED COMMUNITY OFFERING
As a final step in the stock offering, the plan of stock issuance provides
that, if feasible, all shares of common stock not purchased in the subscription
offering and direct community offering may be offered for sale to selected
members of the general public in a syndicated community offering through a
syndicate of registered broker-dealers managed by Keefe Bruyette & Woods as
agent for K-Fed Bancorp. We call this the syndicated community offering. We
expect that the syndicated community offering will commence as soon as
practicable after termination of the subscription offering and the direct
community offering, if any. We, in our sole discretion, have the right to reject
orders in whole or in part received in the syndicated community offering.
Neither Keefe, Bruyette & Woods nor any registered broker-dealer shall have any
obligation to take or purchase any shares of common stock in the syndicated
community offering; however, Keefe, Bruyette & Woods has agreed to use its best
efforts in the sale of shares in the syndicated community offering. Orders for
stock received in any syndicated community offering must first be filled to a
maximum of two percent of the shares offered in the stock offering and any
remaining shares must be allocated on an equal number of shares per order until
all orders have been filled.
The price at which common stock is sold in the syndicated community
offering will be the same price at which shares are offered and sold in the
subscription offering and direct community offering. No person may purchase more
than $150,000 of common stock in the syndicated community offering, subject to
the maximum purchase limitations. See "- Limitations on Stock Purchases."
Keefe, Bruyette & Woods may enter into agreements with broker-dealers to
assist in the sale of the shares in the syndicated community offering, although
no agreements of this kind exist as of the date of this prospectus. No orders
may be placed or filled by or for a selected dealer during the subscription
offering. After the close of the subscription offering, Keefe, Bruyette & Woods
will instruct selected dealers as to the number of shares to be allocated to
each selected dealer. Only after the close of the subscription offering and upon
allocation of shares to selected dealers may selected dealers take orders from
their customers.
During the subscription offering and direct community offering, selected
dealers may only solicit indications of interest from their customers to place
orders with K-Fed Bancorp as of a certain order date for the purchase of shares
of K-Fed Bancorp common stock. If Keefe, Bruyette & Woods and K-Fed Bancorp
believe that not enough indications of interest and orders have been received in
the subscription offering and direct community offering to complete the stock
offering, Keefe, Bruyette & Woods will request, as of the order date, selected
dealers to submit orders to purchase shares for which they have previously
received indications of interest from their customers. The selected dealers will
send confirmations of the orders to these customers on the next business day
after the order date. The selected dealers will debit the accounts of their
customers on the settlement date, which date will be three business days from
the order date.
Customers who authorize selected dealers to debit their brokerage accounts
are required to have the funds for payment in their account on but not before
the settlement date. On the settlement date, the selected dealers will deposit
funds to the account established by Kaiser Federal Bank for each selected
dealer. Each customer's funds forwarded to Kaiser Federal Bank, along with all
other accounts held in the same title, will be insured by the FDIC up to
$100,000 in accordance with
41
applicable FDIC regulations. After payment has been received by Kaiser Federal
Bank from the selected dealers, funds will earn interest at Kaiser Federal
Bank's current rate on savings accounts until the completion or termination of
the stock offering. Funds will be promptly returned, with interest, in the event
the stock offering is not consummated as described above.
The syndicated community offering will be completed within 90 days after
the termination of the subscription offering, unless extended by K-Fed Bancorp
with the approval of the Office of Thrift Supervision, but in no event later
than _______, 2004. The syndicated community offering may not be extended past
________, 2006. See "- How We Determined Our Price and the Number of Shares to
be Sold in the Stock Offering" above for a discussion of rights of subscribers,
if any, in the event an extension is granted.
PERSONS WHO ARE NOT PERMITTED TO PARTICIPATE IN THE STOCK OFFERING
K-Fed Bancorp will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the plan of stock issuance reside. However, K-Fed Bancorp
is not required to offer stock in the subscription offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which:
o the number of persons otherwise eligible to subscribe for shares under
the plan of stock issuance who reside in such jurisdiction is small;
o the granting of subscription rights or the offer or sale of shares of
common stock to these persons would require any of K-Fed Bancorp and
Kaiser Federal Bank or their officers, directors or employees, under
the laws of that jurisdiction, to register as a broker, dealer,
salesman or selling agent or to register or otherwise qualify its
securities for sale in that jurisdiction or to qualify as a foreign
corporation or file a consent to service of process in that
jurisdiction; or
o the registration, qualification or filing in the judgment of K-Fed
Bancorp would be impracticable or unduly burdensome for reasons of
cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, K-Fed Bancorp will base its decision as to whether or not to offer the
common stock in that state on a number of factors, including but not limited to
the size of accounts held by account holders in the state, the cost of
registering or qualifying the shares or the need to register K-Fed Bancorp or
Kaiser Federal Bank, its officers, directors or employees as brokers, dealers or
salesmen.
LIMITATIONS ON STOCK PURCHASES
The plan of stock issuance includes the following limitations on the number
of shares of K-Fed Bancorp common stock which may be purchased in the stock
offering:
(1) No fewer than 25 shares of common stock may be purchased, to the
extent shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in the
subscription offering up to the greater of:
(a) $150,000 or 15,000 shares of common stock;
42
(b) one-tenth of one percent of the total offering of shares of
common stock; or
(c) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, of which the numerator is the
amount of the qualifying deposit of the Eligible Account Holder
and the denominator is the total amount of qualifying deposits of
all Eligible Account Holders in Kaiser Federal Bank in each case
as of the close of business on the Eligibility Record Date,
SUBJECT TO THE OVERALL LIMITATION IN CLAUSE (6) BELOW;
(3) The Tax-Qualified Employee Plans, including an employee stock
ownership plan, may purchase in the aggregate up to 10.0% of the
shares of common stock issued in the stock offering, and including any
additional shares sold in the event of an increase in the estimated
offering range; although at this time the employee stock ownership
plan intends to purchase only 8.0% of the shares sold in the stock
offering;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the subscription offering up to the greater of:
(a) $150,000 or 15,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares of
common stock; or
(c) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders
in Kaiser Federal Bank in each case as of the close of business
on the Supplemental Eligibility Record Date, SUBJECT TO THE
OVERALL LIMITATION IN CLAUSE (6) BELOW;
(5) Persons purchasing shares of common stock in the direct community or
syndicated public offering may purchase in the direct community or
syndicated community offering respectively, up to $150,000 or 15,000
shares of common stock, SUBJECT TO THE OVERALL LIMITATION IN CLAUSE
(6) BELOW;
(6) EXCEPT FOR THE TAX-QUALIFIED EMPLOYEE PLANS, IRRESPECTIVE OF THE
PURCHASE LIMITATIONS SET FORTH IN CLAUSES 2(C) AND 4(C) ABOVE, THE
MAXIMUM NUMBER OF SHARES OF K-FED BANCORP COMMON STOCK SUBSCRIBED FOR
OR PURCHASED IN ALL CATEGORIES OF THE OFFERINGS BY ANY PERSON,
TOGETHER WITH ASSOCIATES OF AND GROUPS OF PERSONS ACTING IN CONCERT
WITH SUCH PERSONS, SHALL NOT EXCEED $600,000 OR 60,000 SHARES OF THE
COMMON STOCK SOLD IN THE STOCK OFFERING; AND
(7) No more than 27% of the total number of shares offered for sale in the
stock offering may be purchased by directors and officers of Kaiser
Federal Bank and their associates in the aggregate, excluding
purchases by Tax-Qualified Employee Plans.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the boards of directors of K-Fed Bancorp and
Kaiser Federal Bank may, in their sole discretion, increase the individual
amount permitted to be subscribed for to a maximum of 9.99% of
43
the number of shares sold in the stock offering, provided that orders for shares
exceeding 5% of the shares being offered in the stock offering shall not exceed,
in the aggregate, 10% of the shares being offered in the stock offering.
Requests to purchase additional shares of common stock will be allocated by the
boards of directors on a pro rata basis giving priority in accordance with the
preference categories set forth in this prospectus.
The term "associate" when used to indicate a relationship with any person
means:
o any corporation or organization (other than Kaiser Federal Bank, K-Fed
Bancorp, or a majority-owned subsidiary of either of them) of which
such person is a director, officer or partner or is directly or
indirectly the beneficial owner of 10% or more of any class of equity
securities;
o any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in
a similar fiduciary capacity;
o any relative or spouse of such person, or any relative of such spouse,
who has the same home as such person or who is a director or officer
of Kaiser Federal Bank, K-Fed Bancorp or any subsidiary of Kaiser
Federal Bank, or K-Fed Bancorp or any affiliate thereof; and
o any person acting in concert with any of the persons or entities
specified above;
provided, however, that Tax-Qualified or Non-Tax Qualified Employee Plans will
not be deemed to be an associate of any director or officer of K-Fed Bancorp or
Kaiser Federal Bank, to the extent provided in the plan of stock issuance. When
used to refer to a person other than an officer or director of Kaiser Federal
Bank, the board of directors of Kaiser Federal Bank or officers delegated by the
board of directors in their sole discretion may determine the persons that are
associates of other persons.
The term "acting in concert" is defined to mean knowing participation in a
joint activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or a combination or pooling of
voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. A person or company which acts in
concert with another person or company shall also be deemed to be acting in
concert with any person or company who is also acting in concert with that other
party, except that the Tax Qualified Employee Plans will not be deemed to be
acting in concert with their trustees or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the trustee
and stock held by each plan will each be delegated. The determination of whether
a group is acting in concert shall be made solely by the board of directors of
Kaiser Federal Bank or officers delegated by such board of directors and may be
based on any evidence upon which such board or delegatee chooses to rely.
MARKETING ARRANGEMENTS
We have retained Keefe, Bruyette & Woods as our financial and marketing
advisor to consult with and to advise Kaiser Federal Bank, and to assist K-Fed
Bancorp, on a best efforts basis, in the distribution of the shares of common
stock in the subscription offering and direct community offering. The services
that Keefe, Bruyette & Woods will provide include, but are not limited to:
44
o training the employees of Kaiser Federal Bank who will perform
ministerial functions in the subscription offering and direct
community offering regarding the mechanics and regulatory requirements
of the stock offering process;
o managing the stock information center by assisting interested stock
subscribers and by keeping records of all stock orders; and
o preparing marketing materials.
For its services, Keefe, Bruyette & Woods will receive a management fee of
$25,000 and a success fee of 1.35% of the aggregate purchase price of the shares
sold in the stock offering, less any shares of common stock sold to our
directors, officers and employees and the Tax-Qualified Employee Plans. The
success fee paid to Keefe, Bruyette & Woods will be reduced by the amount of the
management fee. In the event that selected dealers are used to assist in the
sale of shares of K-Fed Bancorp common stock in the direct community offering,
these dealers will be paid a fee of up to 5.5% of the total purchase price of
the shares they sell. K-Fed Bancorp and Kaiser Federal Bank have agreed to
indemnify Keefe, Bruyette & Woods against claims or liabilities, including
liabilities under the Securities Act of 1933, as amended, and will contribute to
payments Keefe, Bruyette & Woods may be required to make in connection with any
such claims or liabilities.
Sales of shares of K-Fed Bancorp common stock will be made by registered
representatives affiliated with Keefe, Bruyette & Woods or by the broker-dealers
managed by Keefe, Bruyette & Woods. Keefe, Bruyette & Woods has undertaken that
the shares of K-Fed Bancorp common stock will be sold in a manner which will
ensure that the distribution standards of the Nasdaq Stock Market will be met. A
stock information center will be established at Kaiser Federal Bank's office
located at 1359 N. Grand Avenue, Covina, California. K-Fed Bancorp will rely on
Rule 3a4-1 of the Securities Exchange Act of 1934 and sales of K-Fed Bancorp
common stock will be conducted within the requirements of this rule, so as to
permit officers, directors and employees to participate in the sale of K-Fed
Bancorp common stock in those states where the law permits. No officer, director
or employee of K-Fed Bancorp or Kaiser Federal Bank will be compensated directly
or indirectly by the payment of commissions or other remuneration in connection
with his or her participation in the sale of common stock. Keefe, Bruyette &
Woods has not prepared a report or opinion constituting recommendations or
advice to Kaiser Federal Bank or K-Fed Bancorp in connection with the stock
offering. In addition, Keefe, Bruyette & Woods has expressed no opinion as to
the prices at which K-Fed Bancorp common stock to be offered in the stock
offering may trade.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date, unless extended, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed
any later than five days prior to that date or hand delivered any later than two
days prior to that date. Execution of the order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at Kaiser Federal Bank,
which may be given by completing the appropriate blanks in the order form, must
be received by Kaiser Federal Bank by 12:00 Noon, Pacific Standard Time, on the
Subscription Expiration Date, unless extended. In addition, K-Fed Bancorp and
Kaiser Federal Bank
45
will require a prospective purchaser to execute a certification in the form
required by applicable Office of Thrift Supervision regulations in connection
with any sale of common stock. Order forms which are not received by this time
or are executed defectively or are received without full payment, or appropriate
withdrawal instructions, are not required to be accepted. In addition, K-Fed
Bancorp will not accept orders submitted on photocopied or facsimiled order
forms nor order forms unaccompanied by an executed certification form. K-Fed
Bancorp has the right to waive or permit the correction of incomplete or
improperly executed forms, but does not represent that it will do so. Once
received, an executed order form may not be modified, amended or rescinded
without the consent of K-Fed Bancorp, unless the stock offering has not been
completed within 45 days after the end of the subscription offering, or this
period has been extended.
In order to ensure that Eligible Account Holders, Tax-Qualified Employee
Plans and Supplemental Eligible Account Holders are properly identified as to
their stock purchase priority, depositors as of the close of business on the
Eligibility Record Date, October 31, 1999,2001, or the Supplemental Eligibility
Record Date, December 31, 2003, must list all accounts on the stock order form
giving all names in each account and the account numbers.
Payment for subscriptions may be made:
o by check or money order;
o by authorization of withdrawal from deposit accounts maintained with
Kaiser Federal Bank (including a certificate of deposit); or
o in cash, if delivered in person at any office of Kaiser Federal Bank,
although we request that you exchange cash for a check with any of our
tellers.
No wire transfers will be accepted. Payments for shares subscribed for, other
than withdrawals from a deposit account at Kaiser Federal Bank, will be
deposited in a segregated deposit account at Kaiser Federal Bank or in a trust
account at PFF Bank & Trust, Pomona, California, an FDIC insured financial
institution. Interest will be paid on payments made by cash, check or money
order at our then-current savings account rate from the date payment is received
until completion of the stock offering. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rate, but
may not be used by the subscriber until all of the K-Fed Bancorp common stock
has been sold or the plan of stock offering is terminated, whichever is earlier.
If a subscriber authorizes Kaiser Federal Bank to withdraw the amount of
the purchase price from his deposit account, Kaiser Federal Bank will do so as
of the effective date of the completion of the stock offering. Kaiser Federal
Bank will waive any applicable penalties for early withdrawal from certificate
accounts.
In the event of an unfilled amount of any subscription order, Kaiser
Federal Bank will make an appropriate refund or cancel an appropriate portion of
the related withdrawal authorization, after completion of the stock offering. If
for any reason the stock offering is not consummated, purchasers will have
refunded to them all payments made, with interest, and all withdrawal
authorizations will be canceled in the case of subscription payments authorized
from accounts at Kaiser Federal Bank.
46
If any Tax-Qualified Employee Plans or Non-Tax Qualified Employee Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering and direct community offering, if
all shares are sold, or upon completion of the syndicated community offering if
shares remain to be sold in that offering. In the event that, after the
completion of the subscription offering, the amount of shares to be issued is
increased above the maximum of the estimated valuation range included in this
prospectus, the Tax-Qualified and Non-Tax Qualified Employee Plans will be
entitled to increase their subscription by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range, provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRA may use the assets of their IRAs to purchase
shares of K-Fed Bancorp common stock in the subscription offering and direct
community offering. Federal law requires that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of common stock
in the offerings make the purchases for the exclusive benefit of the IRAs. IRAs
maintained at Kaiser Federal Bank are not self-directed IRAs and any interested
parties wishing to use IRA funds for stock purchases may do so, but are advised
to contact the stock information center at (877) 848-4663 for additional
information as soon as possible.
The records of Kaiser Federal Bank will be deemed to control with respect
to all matters related to the existence of subscription rights and one's ability
to purchase shares of common stock in the subscription offering.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to rules and regulations of the Office of Thrift Supervision, no
person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the plan of stock issuance or the shares of common stock to
be issued upon their exercise. These rights may be exercised only by the person
to whom they are granted and only for that person's account. Each person
exercising subscription rights will be required to certify that the person is
purchasing shares solely for the person's own account and that the person has no
agreement or understanding regarding the sale or transfer of the shares.
Regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of common stock prior to the completion of the stock offering.
We will refer to the Office of Thrift Supervision any situations that we
believe may involve a transfer of subscription rights and will not honor orders
believed by us to involve the transfer of these rights.
DELIVERY OF CERTIFICATES
Certificates representing common stock issued in the stock offering will be
mailed by K-Fed Bancorp's transfer agent to the persons entitled thereto at the
addresses of the persons appearing on the stock order form as soon as
practicable following completion of the stock offering. Any certificates
returned as undeliverable will be held by K-Fed Bancorp until claimed by persons
legally entitled to them or otherwise disposed of in accordance with applicable
law. Until certificates for common stock
47
are available and delivered to subscribers, they may not be able to sell the
shares of common stock for which they have subscribed, even though trading of
the common stock may have commenced.
REQUIRED APPROVALS
Various approvals of the Office of Thrift Supervision are required in order
to consummate the stock offering. The Office of Thrift Supervision has approved
the plan of stock issuance subject to standard conditions.
K-Fed Bancorp is required to make certain filings with state securities
regulatory authorities in connection with the issuance of K-Fed Bancorp common
stock in the offerings.
JUDICIAL REVIEW
Any person harmed by a final action of the Office of Thrift Supervision
which approves, with or without conditions, or disapproves a plan of stock
issuance may obtain review of this action by filing in the court of appeals of
the United States for the circuit in which the principal office or residence of
the person is located, or in the United States Court of Appeals for the District
of Columbia, a written petition asking that the final action of the Office of
Thrift Supervision be modified, terminated or set aside. This petition must be
filed within 30 days after the publication of notice of final action by the
Office of Thrift Supervision. The further procedure for review is as follows: A
copy of the petition is promptly transmitted to the Office of Thrift Supervision
by the clerk of the court and then the Office of Thrift Supervision files in the
court the record in the proceeding, as provided in Section 2112 of Title 28 of
the United States Code. Upon the filing of the petition, the court has
jurisdiction, which upon the filing of the record is exclusive, to affirm,
modify, terminate, or set aside in whole or in part, the final action of the
Office of Thrift Supervision. Review of these proceedings is as provided in
Chapter 7 of Title 5 of the United States Code. The judgment and decree of the
court is final, except that they are subject to review by the Supreme Court upon
certiorari as provided in Section 1254 of Title 28 of the United States Code.
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE STOCK OFFERING
All shares of common stock purchased in connection with the stock offering
by a director or an executive officer of K-Fed Bancorp and Kaiser Federal Bank
will be subject to a restriction that the shares not be sold for a period of one
year following the stock offering except in the event of the death of the
director or officer or pursuant to a merger or similar transaction approved by
the Office of Thrift Supervision. Each certificate for restricted shares will
bear a legend giving notice of this restriction on transfer, and instructions
will be issued to the effect that any transfer within this time period of any
certificate or record ownership of the shares other than as provided above is a
violation of the restriction. Any shares of common stock issued at a later date
within this one year period as a stock dividend, stock split or otherwise with
respect to the restricted stock will be subject to the same restrictions.
Purchases of common stock of K-Fed Bancorp by directors, executive officers
and their associates during the three-year period following completion of the
stock offering may be made only through a broker or dealer registered with the
SEC, except with the prior written approval of the Office of Thrift Supervision.
This restriction does not apply, however, to negotiated transactions involving
more than 1% of K-Fed Bancorp's outstanding common stock or to purchases of
stock pursuant to an employee stock benefit plan.
48
Pursuant to Office of Thrift Supervision regulations, in general K-Fed
Bancorp may not repurchase any shares of the common stock, for a period of one
year following the stock offering, other than pursuant to (a) an offer to all
stockholders on a pro rata basis which is approved by the Office of Thrift
Supervision or (b) through open market purchases of up to five percent of the
outstanding stock where extraordinary circumstances exist.
49
PROPOSED STOCK PURCHASES BY MANAGEMENT
The following table sets forth, for each of Kaiser Federal Bank's directors
and executive officers both individually and as a group, the proposed purchases
of common stock, assuming sufficient shares are available to satisfy their
subscriptions. The amounts include shares that may be purchased through IRAs and
by associates. These purchases are intended for investment purposes only, and
not for resale. Directors, officers, their associates and employees will pay the
same price as all other purchasers in the stock offering.
At the Minimum of the At the Maximum of the
Estimated Offering Range Estimated Offering Range
------------------------ ------------------------
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ------------------------------ ---------- ----------- -------------- ----------- --------------
Directors:
- ----------
Kay M. Hoveland $300,000 30,000 1.02% 30,000 .76%
Gerald A. Murbach 300,000 30,000 1.02 30,000 .76
Robert C. Steinbach 300,000 30,000 1.02 30,000 .76
James L. Breeden 300,000 30,000 1.02 30,000 .76
Frank G. Nicewicz 150,000 15,000 0.51 15,000 .38
Rita H. Zwern 150,000 15,000 0.51 15,000 .38
Marilyn T. Owsley 300,000 30,000 1.02 30,000 .76
Executive Officers:
Daniel A. Cano 300,000 30,000 1.02 30,000 .76
Nancy J. Huber 150,000 15,000 0.51 15,000 .38
Jeanne R. Thompson
300,000 30,000 1.02 30,000 .76
All directors and executive
officers as a group (10 persons)
$2,550,000 255,000 8.67% 255,000 6.46%
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which are based on
assumptions and describe future plans, strategies and expectations of K-Fed
Bancorp and Kaiser Federal Bank. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar words. Our ability to predict results or the
actual effect of future plans or strategies is uncertain. Factors which could
have a material adverse effect on our operations include, but are not limited
to, changes in interest rates, general economic conditions, economic conditions
in the state of California, legislative and regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, fiscal policies of the California State
Government, the quality or composition of our loan or investment portfolios,
demand for loan products, competition for and the availability of, loans that we
purchase for our portfolio, deposit flows, competition, demand for financial
services in our market areas and accounting principles and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and you should not rely too much on these statements.
GENERAL
The following discussion is intended to assist in understanding the
financial condition and results of operations of Kaiser Federal Bank. The
discussion and analysis does not include any comments relating to K-Fed Bancorp,
since K-Fed Bancorp has no significant operations. The information contained in
this section should be read in conjunction with the financial statements and the
accompanying notes to the consolidated financial statements and other sections
contained in this prospectus.
Our results of operations depend primarily on our net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans and investment securities, and interest
expense on interest-bearing liabilities, which principally consist of deposits
and borrowings. Our results of operations also are affected by the level of our
provisions for loan losses, non-interest income and non-interest expenses.
Non-interest income consists primarily of service charges on deposit accounts
and ATM fees and charges. Non-interest expense consists primarily of salaries
and employee benefits, occupancy, equipment, data processing, and ATM costs. Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.
Following the completion of the stock offering we will have an employee
stock ownership plan. We also intend to adopt, subject to stockholder approval,
a restricted stock plan and a stock option plan. The implementation of the
employee stock ownership plan and the restricted stock plan will affect our
results of operations as a component of employee compensation expense. The
employee stock ownership plan will result in employee compensation expense equal
to the current market price of the shares being released and allocated to the
participants in the plan for that year. The effect the restricted stock plan
will have on employee compensation expense will be equal to the current market
price of the shares being awarded to the employees receiving the shares
recognized as compensation expense over the vesting period of the shares. Kaiser
Federal Bank may currently elect to account for stock option awards issued to
employees under Accounting Principles Board Opinion
51
("APB") No. 25 which requires recognition of compensation expense based on the
intrinsic value of the award at the measurement date, which is generally the
date of grant. The intrinsic value is equal to the difference between the
current market price of the stock and the exercise price of the stock option
award. Since the options to be issued are intended to have an exercise price
equal to the current market price of the stock there will be no compensation
expense recognized on these awards. See "Pro Forma Data."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In reviewing and understanding financial information for Kaiser Federal
Bank, you are encouraged to read and understand the significant accounting
policies used in preparing our consolidated financial statements.
These policies are described in Note 1 to the consolidated financial
statements. The accounting and financial reporting policies of Kaiser Federal
Bank conform to accounting principles generally accepted in the United States of
America and to general practices within the banking industry. Accordingly, the
consolidated financial statements require certain estimates, judgments, and
assumptions, which are believed to be reasonable, based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the periods presented. The following accounting
policies comprise those that management believes are the most critical to aid in
fully understanding and evaluating our reported financial results.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will cover
known and inherent losses in the loan portfolio, based on evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the types and amount 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.
Our methodology for analyzing the allowance for loan losses consists of
specific and general components. The specific component relates to loans that
are classified as doubtful, substandard or special mention. For such loans that
are also classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience for consumer
loans and peer group loss experience for real estate loans, adjusted for
qualitative factors.
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 or changes in accounting guidance. In
addition, 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.
53
LOANS: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred net loan origination fees, and increased
by premiums on purchased loans. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized as an adjustment to
interest income using the effective interest method over the remaining lives of
the associated loans. Loan premiums on purchased loans are accreted into
interest income as a yield adjustment over the estimated lives of the loan pools
using the effective interest method.
INVESTMENTS: Investments, mortgage-backed securities and collateralized
mortgage obligations that Kaiser Federal Bank has both the positive intent and
ability to hold to maturity are classified as held-to-maturity and carried at
cost. Purchase premiums and discounts on mortgage-backed securities and
collateralized mortgage obligations are amortized and accreted to interest
income using the effective interest method, taking into consideration assumed
prepayment patterns.
MANAGEMENT STRATEGY
Our strategy is to operate as an independent financial institution
dedicated to serving the needs of customers in our market area, which extends
from Southern California to the San Francisco Bay area as a result of our
history as a credit union serving the employees of the Kaiser Permanente Medical
Care Program. We intend to continue to attract retail deposits, with the goal of
expanding the deposit base, relying on organic growth within our current branch
infrastructure and our ATM network. We have been able to achieve deposit growth
in excess of the market average over the last several years by pricing our
deposits at a premium to the market. We may not necessarily continue that
strategy in the future. We expect our customers to use remote access methods
such as our call center and audio response unit as well as internet banking and
bill payer to access their accounts, which allows us to minimize the need for
"bricks" and "mortar" branches. We project that the majority of the deposits
will be used to originate or purchase residential real estate, multi-family or
commercial real estate loans. A majority of our loan portfolio consists of loans
that we have purchased, using our own underwriting standards. We will continue
to rely on purchased and broker sourced loans as a method of reducing costs
relating to other institutions relying primarily on internally generated loans.
Our commitment is to provide a reasonable range of products and services to meet
the needs of our customers. As part of this commitment, we will continue the
course established over the past few years of increasing our involvement in real
estate lending as well as meeting our customers' automobile loan demand. Our
goal is to grow Kaiser Federal Bank while providing cost effective services to
our market area. Financial highlights of our strategy include:
CONTINUING ASSET GROWTH AND EARNING ASSET GROWTH. We have been successful
since our 1999 conversion from a credit union to a federal savings association
in growing total assets and earning assets. Total assets have grown $256.1
million, or 133.0%, from an October 31, 1999 total of $192.5 million to a
September 30, 2003 total of $448.6 million resulting in a compounded growth rate
of 23.2%. Further, earning assets have grown $249.9 million, or 133.2%, from an
October 31, 1999 total of $187.6 million to a September 30, 2003 total of $437.5
million. The addition of new capital will allow us to continue to grow our
assets and further enhance profitability. Our rapid growth was funded primarily
by deposit growth and a $50,000,000 loan from the Federal Home Loan Bank. We
currently plan a more moderate rate of growth in order to account for potential
deposit outflows resulting from improvement in the equity markets and as
reflected in the three year business plan for Kaiser Federal Bank filed with the
Office of Thrift Supervision as part of the stock offering which projects
annualized asset growth at a rate of 15% as well as the repayment of the loan in
2005.
53
CONTINUING AS A DIVERSIFIED LENDER. We have been successful over the past
few years in growing and diversifying our loan portfolio. Since our 1999 thrift
charter conversion, we have shifted our loan portfolio from primarily consumer
loans to multi-family, and non-residential real estate loans, which represents
23.1% of our loan portfolio at September 30, 2003. After the stock offering, we
intend to continue our emphasis on originating and purchasing real estate
secured loans.
CONTINUING OUR STRONG ASSET QUALITY. Since 1999, our fiscal year-end ratio
of non-performing assets to total assets has not exceeded 0.22% of total assets
and at September 30, 2003, this ratio was 0.05%.
STRONG CAPITAL POSITION. As a result of our conservative risk management
and profitability, we have historically maintained a strong capital position.
Our equity to total assets ratio was 14.86% at June 30, 1999 and has been
reduced through asset growth to 8.00% at September 30, 2003. Additional capital
will allow us to maintain a strong capital ratio while continuing growth.
All of these initiatives are designed to improve our profitability.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND JUNE 30, 2003.
GENERAL. Total assets increased by $14.8 million, or 3.4%, to $448.6
million at September 30, 2003 from $433.8 million at June 30, 2003. The increase
reflected growth in our held-to-maturity investment portfolio of $24.8 million
to $39.0 million from $14.2 million, offset by a decrease in our net loan
portfolio of $12.5 million to $377.1 million from $389.6 million. To fund the
increase in assets, deposits increased $14.4 million to $360.6 million from
$346.2 million.
ASSETS. Our net loan portfolio decreased $12.5 million, or 3.2%, to $377.1
million at September 30, 2003 from $389.6 million at June 30, 2003. This
decrease was primarily attributable to significant increases in the volume of
one- to four-family real estate loan prepayments experienced during the period,
which resulted in a decline in this portfolio of $32.6 million, or 12.6%, to
$227.0 million from $259.6 million. With low interest rates prevailing during
this period, our California based loans were refinanced more than once when
homeowners sold their homes to move up in size or value without increasing their
mortgage payment. Originated and purchased real estate loans were not sufficient
during this period to cover usual loan payments and the prepayments. Other
decreases in the loan portfolio occurred in the consumer loan portfolio, which
decreased $3.4 million, or 5.1% to $63.0 million from $66.4 million. This
seasonal decline is historical as it precedes the available new car models and
consumer holiday spending. These decreases in the portfolio were partially
offset by the planned increases in the multi-family and commercial real estate
loan portfolio, which increased $23.5 million, or 37.0%, to $87.0 million from
$63.5 million, providing a higher yield with a strong collateral value in the
expanding population of southern California.
Our investment portfolio increased $24.8 million, or 174.6%, to $39.0
million at September 30, 2003 from $14.2 million at June 30, 2003. The increase
is attributable to the purchase of additional collateralized mortgage
obligations from cash received through significant prepayments realized in the
one- to four-family real estate loan portfolio and growth in deposits. Interest
bearing deposits in other financial institutions decreased $5.5 million to
$891,000 from $6.4 million as a result of the maturity of time deposits.
DEPOSITS AND BORROWINGS. Total deposits increased $14.4 million, or 4.2%,
to $360.6 million at September 30, 2003 from $346.2 million at June 30, 2003.
This growth resulted from increases in
54
interest bearing deposits of $18.6 million to $334.7 million from $316.1
million, partially offset by a decrease in non-interest bearing demand deposits
of $4.2 million to $25.9 million from $30.1 million. The decline in non-interest
bearing demand deposits and checking accounts is a result of the timing when
more than $15 million in biweekly payroll direct deposits are received. In June
2003, it was the 27th of the month while in September 2003 it was the 19th of
the month . Growth in interest bearing accounts continued at the annual rate of
23.5%. Federal Home Loan Bank advances remained the same as the June 30, 2003
level of advances at $50.0 million.
EQUITY. Total stockholder's equity increased by $526,000 to $35.9 million
at September 30, 2003, as a result of the retention of earnings, including 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
8.00% at September 30, 2003 compared to 8.16% at June 30, 2003.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND JUNE 30, 2002.
GENERAL. Our total assets increased by $144.6 million, or 50.0%, to $433.8
million at June 30, 2003 compared to $289.2 million at June 30, 2002. The
increase reflected growth in our net loan portfolio of $152.7 million to $389.6
million from $236.9 million, with an offsetting decrease in investment
securities and interest-bearing deposits in other financial institutions of
$22.5 million to $20.7 million from $43.2 million. To fund the increase in
assets, deposits increased $94.2 million to $346.2 million from $252.0 million,
and Federal Home Loan Bank advances increased $48.0 million to $50.0 million
from $2.0 million.
ASSETS. Our net loan portfolio increased $152.7 million, or 64.5%, from
$236.9 million at June 30, 2002 to $389.6 million at June 30, 2003. The increase
in the loan portfolio was primarily due to our efforts to expand Kaiser Federal
Bank's real estate loan portfolio through purchasing whole-loan pools from
third-party originators as well as increased loan demand as borrowers sought to
take advantage of lower market interest rates. The loan portfolio increased in
all categories, with the largest contributors being one- to four-family
adjustable-rate residential loans, which increased $113.2 million, or 153.8%, to
$186.8 million from $73.6 million. The multi-family real estate portfolio
increased by $22.0 million to $42.3 million from $20.3 million. In addition, the
commercial real estate loan portfolio increased $13.7 million to $21.3 million
from $7.6 million. Other increases in the loan portfolio were generated in the
one- to four-family fixed rate residential loan portfolio, which increased $1.1
million to $72.8 million from $71.7 million and the consumer loan portfolio,
which increased $1.5 million to $66.4 million from $64.9 million.
Cash and cash equivalents increased $11.9 million, or 276.7%, to $16.2
million at June 30, 2003 from $4.3 million at June 30, 2002 due to repayments of
loans and interest bearing deposits in other financial institutions maturing
during the period. These funds were invested in short-term assets in order to
provide partial funding to satisfy Kaiser Federal Bank's commitment to purchase
$19.1 million of residential real estate loans in August 2003 and $2.5 million
in multi-family real estate loan participations in July 2003.
Our investment portfolio decreased $5.6 million to $14.2 million at June
30, 2003 from $19.8 million at June 30, 2002. The decrease was primarily due to
the repayment of principal on mortgage-backed and related securities. Our
interest-bearing deposits in other financial institutions decreased $17.0
million to $6.4 million at June 30, 2003 from $23.4 million at June 30, 2002.
The decrease was due to the maturity and repayment of time-deposit accounts, the
proceeds of which were used to provide for funding increases in the loan
portfolio.
55
DEPOSITS. Our total deposits increased $94.2 million, or 37.4%, to $346.2
million at June 30, 2003 from $252.0 million at June 30, 2002 as a result of our
marketing initiatives and paying competitive interest rates. This growth
resulted from increases in interest-bearing deposits of $91.0 million, to $316.1
million from $225.1 million, and non-interest-bearing deposits of $3.2 million,
to $30.1 million from $26.9 million for the same time period. The additional
funding was used to support loan growth. The increase in deposit accounts is
primarily attributable to our decision to maintain the expansion and
diversification of Kaiser Federal Bank's customer base since its conversion from
a credit union charter.
BORROWINGS. Federal Home Loan Bank advances increased $48.0 million to
$50.0 million at June 30, 2003 from $2.0 million at June 30, 2002. We used the
borrowings for the funding and purchase of loans and as part of our capital and
interest rate risk management strategies. We borrowed funds from the Federal
Home Loan Bank to fund attractive loan opportunities in order to increase
interest-earning assets and enhance earnings for Kaiser Federal Bank. We
borrowed these funds to leverage our capital by increasing our asset size and
our net interest income.
EQUITY. Total equity increased $2.4 million, or 7.3%, to $35.4 million at
June 30, 2003 from $33.0 million at June 30, 2002. Our equity to assets ratio
under GAAP was 8.16% at June 30, 2003 compared to 11.40% at June 30, 2002. The
decrease in our equity to assets ratio was a result of our asset growth
described above. Total equity for the 12 months ended June 30, 2003 increased as
a result of the retention of $2.4 million in net income.
56
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following tables sets forth certain information at September 30, 2003
and for the three months ended September 30, 2003 and 2002 and for the years
ended June 30, 2003, 2002 and 2001, respectively. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived primarily from month-end balances. Management does not believe that the
use of month-end balances rather than daily average balances has caused any
material differences in the information presented.
At For the Three Months Ended September 30,
September 30, --------------------------------------------------------------------------
2003 2003(4) 2002(4)
------------- ----------------------------------- -----------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost
------------- ---------- -------- ----------- ---------- -------- -----------
(Dollars in Thousands)
INTEREST-EARNING ASSETS
Loans, net (1)(5)..................... 4.60% $382,856 $4,600 4.81% $244,304 $4,345 7.11%
Securities (2)........................ 4.04 24,147 203 3.36 16,530 180 4.34
Fed Funds............................. 1.03 17,453 51 1.17 3,163 30 3.76
Federal Home Loan Bank stock.......... 0.00 2,658 27 4.01 1,014 13 5.08
Interest-bearing deposits in other
financial institutions............. 1.05 3,515 13 1.44 19,709 185 3.75
Other interest-earning assets......... 1.99 430 2 2.05 182 1 3.01
------------- ---------- -------- ----------- ---------- -------- -----------
Total interest-earning assets......... 4.41 431,059 4,896 4.54 284,902 4,754 6.67
Non-interest earning assets........... 10,308 6,559
---------- ----------
Total assets.......................... $441,367 $291,461
========== ==========
INTEREST-BEARING LIABILITIES
Money market.......................... 1.79% $91,086 $ 419 1.84% $ 63,625 $ 404 2.54%
Savings deposits...................... 0.75 83,114 161 0.77 70,103 218 1.24
Certificates of deposit............... 3.53 151,382 1,378 3.64 96,948 1,104 4.55
FHLB advances......................... 2.97 50,000 379 3.03 1,160 9 3.08
------------- ---------- -------- ----------- ---------- -------- -----------
Total interest-bearing liabilities.... 2.42 375,582 2,337 2.49 231,836 1,735 2.99
-------- -------
Non-interest bearing liabilities...... 30,129 26,363
---------- ----------
Total liabilities..................... 405,711 258,199
Stockholders' equity.................. 35,656 33,262
---------- ----------
Total liabilities and stockholders'
equity.............................. $441,367 $291,461
========== ==========
Net interest/spread................... 1.99% $2,559 2.05% $3,019 3.68%
============= ======== =========== ======== ===========
Margin(3)............................. 2.29% 2.37% 4.24%
============= =========== ===========
Ratio of interest-earning assets
to interest-bearing liabilities....... 114.77% 122.89%
========== ==========
- ---------------------------------
(1) Calculated net of deferred fees and allowance for loan losses and includes non-accrual loans.
(2) Calculated based on amortized cost.
(3) Net interest income divided by interest-earning assets.
(4) Rates for three months have been annualized.
(5) Interest income includes loan fees of $131,000 and $81,000 for the three months ended September 30, 2003 and 2002,
respectively.
58
For the Year ended June 30,
--------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- -------- ---------- ----------- -------- ----------
INTEREST-EARNING ASSETS (Dollars in Thousands)
Loans, net (1)(4).............................. $308,163 $19,149 6.21% $175,662 $13,588 7.74%
Securities(2).................................. 13,614 561 4.12 20,234 967 4.78
Fed Funds...................................... 18,498 303 1.64 15,841 390 2.46
Federal Home Loan Bank stock................... 2,067 85 4.11 743 38 5.09
Interest-bearing deposits in
other financial institutions................. 11,053 340 3.08 33,321 1,613 4.84
Other interest-earning assets.................. 291 6 2.13 45 1 3.03
----------- -------- ---------- ----------- -------- ----------
Total interest-earning assets.................. 353,686 20,444 5.78 245,846 16,597 6.75
Non-interest earning assets.................... 7,415 6,349
----------- -----------
Total assets................................... $361,101 $252,195
=========== ===========
INTEREST-BEARING LIABILITIES
Money market................................... $73,223 $1,604 2.19% $46,552 $1,243 2.67%
Savings deposits............................... 73,524 899 1.22 62,660 933 1.49
Certificates of deposit........................ 116,573 4,824 4.14 84,188 4,414 5.24
FHLB advances.................................. 34,972 1,038 2.97 2,615 32 1.23
----------- -------- ---------- ----------- -------- ----------
Total interest-bearing liabilities............. 298,292 8,365 2.80 196,015 6,622 3.38
-------- --------
Non-interest bearing liabilities............... 28,624 24,466
----------- -----------
Total liabilities.............................. 326,916 220,481
Stockholders' equity........................... 34,185 31,714
----------- -----------
Total liabilities and stockholders' equity..... $361,101 $252,195
=========== ===========
Net interest/spread............................ $12,079 2.98% $9,975 3.37%
======== ========== ======== ==========
Margin(3)...................................... 3.42% 4.06%
========== ==========
Ratio of interest-earning assets to
interest-bearing liabilities................... 118.57% 125.42%
=========== ===========
(CONTINUED)
For the Year ended June 30,
---------------------------------------
2001
---------------------------------------
Average
Average Yield/
Balance Interest Cost
----------- --------- -----------
INTEREST-EARNING ASSETS
Loans, net (1)(4).............................. $128,359 $10,903 8.49%
Securities(2).................................. 24,270 1,492 6.15
Fed Funds...................................... 15,687 819 5.22
Federal Home Loan Bank stock................... 631 43 6.78
Interest-bearing deposits in
other financial institutions................. 31,874 1,850 5.81
Other interest-earning assets.................. -- -- --
----------- --------- -----------
Total interest-earning assets.................. 200,821 15,107 7.52
Non-interest earning assets.................... 5,575
-----------
Total assets................................... $206,396
===========
INTEREST-BEARING LIABILITIES
Money market................................... $32,913 $1,306 3.97%
Savings deposits............................... 56,496 1,093 1.94
Certificates of deposit........................ 67,727 4,052 5.98
FHLB advances.................................. -- 1 --
----------- --------- -----------
Total interest-bearing liabilities............. 157,136 6,452 4.11
---------
Non-interest bearing liabilities............... 19,235
-----------
Total liabilities.............................. 176,371
Stockholders' equity........................... 30,025
-----------
Total liabilities and stockholders' equity..... $206,396
===========
Net interest/spread............................ $8,655 3.42%
========= ===========
Margin(3)...................................... 4.31%
===========
Ratio of interest-earning assets to
interest-bearing liabilities................... 127.80%
===========
- ---------------------------------
(1) Calculated net of deferred fees and allowance for loan losses and includes non-accrual loans.
(2) Calculated based on amortized cost.
(3) Net interest income divided by interest-earning assets.
(4) Interest income includes loan fees of $443,000, $259,000 and $127,000 for the years ended June 30, 2003, 2002 and 2001,
respectively.
59
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate;
(2) changes in rate, which are changes in rate multiplied by the old volume; and
(3) changes in rate/volume, which are the changes in rate times the changes in
volume.
For the Three Months Ended For the Year Ended
September 30 June 30
2003 vs. 2002 2003 vs. 2002
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------------- -----------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- --------- -------- -------- -------- ---------- --------- ---------
(In Thousands)
INTEREST-EARNING ASSETS
- -----------------------
Loans, net(1)...................... $2,465 $(1,410) $(800) $255 $10,248 $(2,672) $(2,015) $5,561
Securities......................... 82 (40) (19) 23 (316) (134) 44 (406)
Fed Funds.......................... 134 (20) (93) 21 65 (130) (22) (87)
Federal Home Loan Bank stock....... 21 (3) (4) 14 67 (7) (13) 47
Interest-bearing deposits in
other financial institutions..... (152) (114) 94 (172) (1,080) (586) 393 (1,273)
Other interest-earning assets...... 1 -- -- 1 7 -- (2) 5
-------- --------- -------- -------- -------- ---------- --------- ---------
Total interest-earning assets...... $2,551 $(1,587) $(822) $ 142 $8,991 $(3,529) $(1,615) $3,847
======== ========= ======== ======== ======== ========== ========= =========
INTEREST-BEARING LIABILITIES
- ----------------------------
Money market....................... $ 173 $ (110) $ (48) $ 15 $ 712 $ (223) (128) $ 361
Savings deposits................... 40 (82) (15) (57) 164 (169) (29) (34)
Certificates of deposit............ 619 (221) (124) 274 1,692 (926) (356) 410
FHLB advances...................... 376 -- (6) 370 391 46 569 1,000
-------- --------- -------- -------- -------- ---------- --------- ---------
Total interest-bearing liabilities. $1,208 $ (413) $(193) $ 602 $2,959 $(1,272) $ 56 $1,743
======== ========= ======== ======== ======== ========== ========= =========
Net interest/spread................ $1,343 $(1,174) $(629) $ (460) $6,032 $(2,257) $(1,671) $2,104
======== ========= ======== ======== ======== ========== ========= =========
(CONTINUED)
For the Year Ended
June 30
2002 vs. 2001
Increase (Decrease)
Due to
----------------------------------------------
Rate/
Volume Rate Volume Net
-------- --------- -------- ---------
INTEREST-EARNING ASSETS
- -----------------------
Loans, net(1)...................... $4,003 $ (963) $(355) $2,685
Securities......................... (248) (332) 55 (525)
Fed Funds.......................... 8 (433) (4) (429)
Federal Home Loan Bank stock....... 8 (11) (2) (5)
Interest-bearing deposits in
other financial institutions..... 83 (306) (14) (237)
Other interest-earning assets...... -- -- 1 1
-------- --------- -------- ---------
Total interest-earning assets...... $3,854 $(2,045) $(319) $1,490
======== ========= ======== =========
INTEREST-BEARING LIABILITIES
- ----------------------------
Money market....................... $ 542 $ (428) $(177) $ (63)
Savings deposits................... 122 (254) (28) (160)
Certificates of deposit............ 985 (501) (122) 362
FHLB advances...................... -- -- 31 31
-------- --------- -------- ---------
Total interest-bearing liabilities. $1,649 $(1,183) $(296) $ 170
======== ========= ======== =========
Net interest/spread................ $2,205 $ (862) $ (23) $1,320
======== ========= ======== =========
- ---------------------------------
(1) Total loans are net of deferred fees and costs.
60
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2003 AND 2002.
GENERAL. We had net income of $576,000 and $649,000 for the three months
ended September 30, 2003 and 2002, respectively. The decrease of $73,000 was
primarily due to a decrease in net interest income of $460,000 offset by
decreases in the provision for loan losses of $173,000 and income tax expense of
$134,000.
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 2003 was $2.6 million compared to $3.0 million for the three
months ended September 30, 2002. The decrease was attributed to an increase in
interest expense of $602,000, partially offset by an increase in interest income
of $147,000. Our interest rate spread decreased 163 basis points to 2.05% for
the three months ended September 30, 2003 from 3.68% for the three months ended
September 30, 2002.
INTEREST INCOME. Interest income for the three months ended September 30,
2003 compared to the same period in 2002 increased $147,000, or 3.0% to $4.9
million from $4.8 million. The increase was the result of a $146.2 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 high loan prepayment levels experienced during the
three months ended September 30, 2003. Interest earned on total loans for the
three months ended September 30, 2003 was $4.6 million compared to $4.3 million
for the three months ended September 30, 2002. The average yield on loans was
4.81% for the three months ended September 30, 2003 as compared to 7.11% for the
three months ended September 30, 2002.
INTEREST EXPENSE. Interest expense increased $602,000, or 34.7%, for the
three months ended September 30, 2003 to $2.3 million as compared to $1.7
million for the three months ended September 30, 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 2.49% for the three months ended September 30, 2003 from 2.99% for
the three months ended September 30, 2002. Average interest-bearing liabilities
increased to $375.6 million, or 62.0%, at September 30, 2003 from $231.8 million
at September 30, 2002.
PROVISION FOR LOAN LOSSES. Management assesses the allowance for loan
losses on a quarterly basis. In evaluating the level of the allowance for loan
losses, management considers the types and amount 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,
61
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: formula and specific allowances. The formula allowance is determined
by applying an estimated loss percentage to various groups 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 the Bank for these types of loans. The
specific allowance component is created when management believes that the
collectibility of a specific 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. See "Business of Kaiser Federal Bank - Asset
Quality - Allowance for Loan Losses."
Our provision for loan losses decreased $173,000 to $30,000 for the three
months ended September 30, 2003 compared to $203,000 for the three months ended
September 30, 2002. The allowance for loan losses as a percent of total loans
was 0.59% at September 30, 2003 as compared to 0.71% at September 30, 2002. The
decrease in the provision is primarily attributable to the significant shift in
the loan portfolio mix from consumer loans, which have experienced a higher rate
of loss for both Kaiser Federal Bank and its peers, to real estate 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.
NON-INTEREST INCOME. Our non-interest income increased $67,000, or 9.1%,
for the three months ended September 30, 2003 to $804,000 from $737,000 for the
three months ended September 30, 2002. The increase was primarily attributable
to checking account overdraft fees.
NON-INTEREST EXPENSE. Operating expenses for the three months ended
September 30, 2003 remained consistent with other operating expenses for the
three months ended September 30, 2002 at $2.4 million.
INCOME TAX EXPENSE. Income tax expense for the three months ended September
30, 2003 was $321,000 compared to $455,000 for the three months ended September
30, 2002. Pre-tax income decreased from $1.1 million in 2002 to $897,000 in
2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2003 AND 2002.
GENERAL. We had net income of $2.4 million for the year ended June 30, 2003
and $1.9 million for the year ended June 30, 2002. The change in net income in
the 12 months ended June
62
30, 2003 resulted from higher net interest income and non-interest income that
was partially offset by increases in non-interest expense.
NET INTEREST INCOME. Net interest income increased $2.1 million, or 21.0%,
to $12.1 million for the year ended June 30, 2003 compared to $10.0 million for
the year ended June 30, 2002, reflecting a $3.8 million, or 22.9%, increase in
interest income, partially offset by a $1.8 million, or 27.3%, increase in
interest expense. Our interest rate spread decreased to 2.98% for the year ended
June 30, 2003 compared to 3.37% for the year ended June 30, 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 118.57% for year
ended June 30, 2003 compared to 125.42% for year ended June 30, 2002.
INTEREST INCOME. Total interest income increased by $3.8 million, or 22.9%,
to $20.4 million for the year ended June 30, 2003 from $16.6 million for the
year ended June 30, 2002. The increase was primarily the result of the growth of
our average loan portfolio balance, which grew by $132.5 million to $308.2
million for the year ended June 30, 2003 from $175.7 million for the year ended
June 30, 2002. Interest earned on total loans for the year ended June 30, 2003
was $19.1 million compared to $13.6 million for the year ended June 30, 2002.
The average yield on total loans decreased to 6.21% for the year ended June 30,
2003 as compared to 7.74% for the year ended June 30, 2002, primarily due to a
general decrease in the market rates of interest.
Interest income on investment securities, Federal Home Loan Bank stock and
interest-bearing deposits with other financial institutions decreased $1.7
million, or 56.7%, for the year ended June 30, 2003 to $1.3 million from $3.0
million for the year ended June 30, 2002. The change was a result of a decrease
in the average balance of the portfolio of $24.9 million to $45.2 million for
the year ended June 30, 2003 from $70.1 million for the year ended June 30,
2002, combined with a decrease on the overall average yield on total investments
of 2.85% for the year ended June 30, 2003 as compared to 4.29% for the year
ended June 30, 2002.
INTEREST EXPENSE. The increase in interest expense of $1.8 million for the
year ended June 30, 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 $32.4 million to $35.0 million for
the year ended June 30, 2003 from $2.6 million for the year ended June 30, 2002.
This created an increase in Federal Home Loan Bank interest costs of $1.0
million. Average time deposits increased by $32.4 million to $116.6 million for
the year ended June 30, 2003 from $84.2 million for the year ended June 30,
2002. This contributed to the $737,000 increase in deposit interest costs. The
average rate on interest bearing liabilities decreased from 3.38% at June 30,
2002 to 2.80% at June 30, 2003, due primarily to the liability mix changing with
generally lower market rates of interest on the new fundings. Additional
borrowings 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
year ended June 30, 2003 totaled $1.1 million, which is similar to the provision
made during the year ended
63
June 30, 2002. The allowance for loan losses as a percent of total loans was
0.58% at June 30, 2003 as compared to 0.73% at June 30, 2002. Although the
provision expense increase is due primarily to the substantial growth in the
overall loan portfolio, the decrease in the allowance for loan losses as a
percent of loans was due to the growth in loans being primarily in real estate
secured loans, which have historically experienced a lower rate of loss than
consumer loans.
NON-INTEREST INCOME. Non-interest income amounted to $3.2 million and $2.8
million for the years ended June 30, 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.
NON-INTEREST EXPENSES. Non-interest expenses increased $1.4 million, or
16.3%, to $10.0 million for the year ended June 30, 2003 compared to $8.6
million for the year ended June 30, 2002. This is primarily due to a $751,000
increase in salaries and benefits and a $220,000 increase in professional
services.
Salaries and employee benefits represented 52.6% and 52.3% of total
non-interest expense for the years ended June 30, 2003 and 2002, respectively.
Total salaries and employee benefits increased $751,000, or 16.7%, to $5.3
million for the year ended June 30, 2003 from $4.5 million for the same period
in 2002. The increase is primarily due to normal salary increases, bonuses, and
vacation accruals.
Professional services expense increased $220,000 as a result of fees
incurred for the mutual holding company reorganization of Kaiser Federal Bank.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001.
GENERAL. We had net income of $1.9 million for the year ended June 30, 2002
and $1.6 million for the year ended June 30, 2001. The change in net income in
the 12 months ended June 30, 2002 resulted from higher net interest income and
non-interest income that was partially offset by increases in non-interest
expense.
NET INTEREST INCOME. Net interest income increased $1.3 million, or 14.9%,
to $10.0 million for the year ended June 30, 2002 compared to $8.7 million for
the year ended June 30, 2001, reflecting a $1.5 million, or 9.9%, increase in
interest income, partially offset by a $170,000 or 2.6% increase in interest
expense. Our interest rate spread decreased to 3.37% for the year ended June 30,
2002 compared to 3.42% for the year ended June 30, 2001, reflecting a change in
asset mix as a result of 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 125.42% for year ended June 30, 2002
compared to 127.80% for year ended June 30, 2001.
INTEREST INCOME. Total interest income increased by $1.5 million, or 9.9%,
to $16.6 million for the year ended June 30, 2002 from $15.1 million for the
year ended June 30, 2001. The increase was primarily the result of the growth of
our average loan portfolio balance, which grew by $47.3 million to $175.7
million for the year ended June 30, 2002 from $128.4 million for the year ended
June 30, 2001. Interest earned on total loans for the year ended June 30, 2002
64
was $13.6 million compared to $10.9 million for the year ended June 30, 2001.
The average yield on total loans decreased to 7.74% for the year ended June 30,
2002 as compared to 8.49% for the year ended June 30, 2001, as a result of
primarily due to a general decrease in the market rates of interest.
Interest income on investment securities, Federal Home Loan Bank stock and
interest-bearing deposits with other financial institutions decreased $1.2
million, or 28.6%, for the year ended June 30, 2002 to $3.0 million from $4.2
million for the year ended June 30, 2001. The change was a result of a decrease
in the average balance of the portfolio of $2.4 million to $70.1 million for the
year ended June 30, 2002 from $72.5 million for the year ended June 30, 2001,
combined with a decrease on the overall average yield on total investments of
4.29% for the year ended June 30, 2002 as compared to 5.80% for the year ended
June 30, 2001.
INTEREST EXPENSE. Our increase in interest expense of $170,000 for the year
ended June 30, 2002 as compared to the year ended June 30, 2001 was primarily
due to the increase in average interest-bearing liabilities, partially offset by
lower interest rates. Average interest-bearing liabilities increased $38.9
million, or 24.7%, to $196.0 million at June 30, 2002 from $157.1 million at
June 30, 2001. However, during the same period, rates on interest-bearing
liabilities decreased 73 basis points to 3.38% from 4.11%.
PROVISION FOR LOAN LOSSES. The provision for loan losses made during the
year ended June 30, 2002 totaled $1.1 million, which is $379,000 higher than the
provision made during the year ended June 30, 2001. The allowance for loan
losses as a percent of total loans was 0.73% at June 30, 2002 as compared to
0.83% at June 30, 2001. Although the provision expense increase is due primarily
to the substantial growth in the overall loan portfolio, the decline in the
allowance for loan losses as a percentage of loans was due to the growth in
loans primarily in one- to- four-family residential secured real estate loans,
which have historically experienced a lower rate of loss than consumer loans.
NON-INTEREST INCOME. Non-interest income amounted to $2.8 million and $2.0
million for the years ended June 30, 2002 and 2001, respectively. The increase
is primarily attributed to an increase in ATM surcharge fees.
NON-INTEREST EXPENSES. Non-interest expenses increased $1.5 million, or
21.1%, to $8.6 million for the year ended June 30, 2002 compared to $7.1 million
for the year ended June 30, 2001. This is primarily due to a $1.0 million
increase in salaries and benefits and a $201,000 increase in occupancy and
equipment costs.
Salaries and employee benefits represented 52.3% and 49.0% of total
non-interest expense for the years ended June 30, 2002 and 2001, respectively.
Total salaries and employee benefits increased $1.0 million, or 28.6%, to $4.5
million for the year ended June 30, 2002 from $3.5 million for the same period
in 2001. The increase is primarily due to salary increases, bonuses, and
vacation accruals.
Occupancy and equipment expense increased $201,000 as a result of the
opening of an additional financial service center in Fontana, California as well
as increasing the leased space at our administrative offices to accommodate a
branch.
65
ASSET AND LIABILITY MANAGEMENT AND 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
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:
o Originating and purchasing adjustable rate loans,
o Originating a reasonable volume of short- and intermediate-term
consumer loans,
o Managing our deposits to establish stable deposit relationships,
66
o Using Federal Home Loan Bank advances and pricing on fixed-term
non-core deposits to align maturities and repricing terms, and
o 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.
The asset/liability management committee regularly reviews interest rate
risk by forecasting the impact of alternative interest rate environments on net
interest income and market value of portfolio equity, which is defined as the
net present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity
that are authorized by the board of directors of Kaiser Federal Bank.
The Office of Thrift Supervision provides Kaiser Federal Bank with the
information presented in the following table, which is based on information
provided to the Office of Thrift Supervision by Kaiser Federal Bank. It presents
the change in Kaiser Federal Bank's net portfolio value at September 30, 2003
(the latest data available), that would occur upon an immediate change in
interest rates based on Office of Thrift Supervision assumptions, but without
giving effect to any steps that management might take to counteract that change.
September 30, 2003
- ---------------------------------------------------------------------------------------
Change in
Interest Rates in
Basis Points ("bp") Net Portfolio Value as % of PV of Assets
(Rate Shock ---------------------------------- ----------------------------
in Rates) $ Amount $ Change % Change NPV Ratio $ Change
- --------------------- ---------- ---------- ---------- ------------- -------------
(Dollars in Thousands)
+300 bp 28,532 (18,716) -39.61 6.52 (362)
+200 bp 37,074 (10,175) -21.53 8.25 (188)
+100 bp 41,559 (5,690) -12.04 9.09 (104)
0 bp 47,249 -- -- 10.13 --
-100 bp 46,927 (322) -0.68 10.00 (14)
The following table illustrates the change in net interest income at
September 30, 2003 that would occur in the event of an immediate changes in
interest rates, with no effect given to any steps that management might take to
counter the effect of that interest movement.
67
Net Interest Income
------------------------------------------
Basis Point
Change in Rates $ Amount $ Change % Change
----------------- ------------- ------------- ------------
(Dollars in Thousands)
+300 bp 8,301 (1,935) -18.90
+200 bp 9,025 (1,211) -11.83
+100 bp 9,668 (568) -5.55
0 bp 10,236 -- --
-100 bp 10,782 546 +5.33
The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, shortcomings are
inherent in the method of analysis presented in the foregoing tables. For
example, although assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in the market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable rate mortgage loans, have
features, that restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, if interest rates change, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
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.
At September 30, 2003, our regulatory liquidity ratio, which is our liquid
assets as a percentage of net withdrawable savings deposits with a maturity of
one year or less and current borrowings, was 18.4%.
Our liquidity, represented by cash and cash equivalents and mortgage-backed
and related securities, is a product of its 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.
68
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 as described in greater detail under
"Business of Kaiser Federal Bank - Lending Activities." We use our sources of
funds primarily to meet ongoing commitments, to pay maturing time deposits and
savings withdrawals, to fund loan commitments and to maintain our portfolio of
mortgage-backed and related securities. At September 30, 2003, the total
approved loan commitments unfunded amounted to $9.2 million, which includes the
unadvanced portion of loans of $7.1 million. Time deposits and advances from the
Federal Home Loan Bank of San Francisco scheduled to mature in one year or less
at September 30, 2003, totaled $80.9 million and $0, respectively. Based on
historical experience, management believes that a significant portion of
maturing deposits will remain with Kaiser Federal Bank. Kaiser Federal Bank
anticipates that we will continue to have sufficient funds, through deposits and
borrowings, to meet our current commitments.
At September 30, 2003, we had available additional advances from the
Federal Home Loan Bank of San Francisco in the amount of $208.0 million.
CAPITAL
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. Total stockholders' equity was $35.9
million at September 30, 2003, or 8.00%, of total assets on that date. As of
September 30, 2003, we exceeded all regulatory capital requirements. Our
regulatory capital ratios at September 30, 2003 were as follows: core capital
8.00%; Tier I risk-based capital 12.70%; and total risk-based capital 13.50%.
The regulatory capital requirements to be considered well capitalized are 5%, 6%
and 10%, respectively. See "How We Are Regulated - Regulatory Capital
Requirements and "Recent Developments."
IMPACT OF INFLATION
The consolidated financial statements presented herein have been prepared
in accordance with GAAP. These principles require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturity structure of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of non-interest 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
69
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.
70
RECENT ACCOUNTING PRONOUNCEMENTS
During 2003, the following accounting standards were issued relating to the
financial services industry.
Statement of Financial Accounting Standards No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under Statement of Financial Accounting
Standard Board Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement is effective for certain contracts entered
into or modified after June 30, 2003, and for certain hedging relationships
designated after June 30, 2003. Implementation of this Statement is not expected
to have an impact on our financial position or results of operations.
Statement of Financial Accounting Standard No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, however, there is an exception for
mandatorily redeemable financial instruments which have different effective
dates. Implementation of this Statement will not have an impact on our financial
position or results of operations as we have have no financial instruments that
meet the scope of this statement.
Financial Accounting Standards Board Interpretation No. 46, "Consolidation
of Variable Interest Entities." This Interpretation defined a variable interest
entity as a corporation, partnership, trust or any other legal structure used
for the business purpose that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. This
Interpretation will require a variable interest entity to be consolidated by a
bank if that bank is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual return. The provisions of this Interpretation are required to be
applied by a public company that has an interest in a variable interest entity
for periods ending after December 15, 2003. We do not have any variable interest
entities and accordingly the implementation of this Interpretation will not
result in an impact on our financial position or results of operations.
On December 12, 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants released Statement of
Position (SOP) 03-3, "Accounting for Loans or Certain Debt Securities Acquired
in a Transfer." This SOP amends Practice Bulletin 6, "Amortization of Discounts
on Certain Acquired Loans," and provides
71
guidance on accounting for ACQUIRED loans (not loans originated by the entity)
when there has been deterioration in credit quality since the loan was
originated. This guidance includes recognition of income on loans acquired as
well as new disclosure requirements. The SOP is effective for loans acquired by
the Bank after June 30, 2005. For loans acquired by Kaiser Federal Bank prior to
June 30, 2005, and that are within the scope of Practice Bulletin 6, Kaiser
Federal Bank will continue to estimate cash flows expected to be collected over
the life of the loan, and the impairment guidance of the SOP will be applied
prospectively beginning June 30, 2005. Implementation of this Statement is not
expected to have an impact on our financial position or results of operations.
72
BUSINESS OF K-FED MUTUAL HOLDING COMPANY
K-Fed Mutual Holding Company is a federally-chartered mutual holding
company and is subject to regulation by the Office of Thrift Supervision. K-Fed
Mutual Holding Company currently owns 100% of the outstanding common stock of
K-Fed Bancorp. So long as K-Fed Mutual Holding Company is in existence, it will
at all times own at least a majority of the outstanding common stock of K-Fed
Bancorp.
It is currently anticipated that the only business activity of K-Fed Mutual
Holding Company going forward will be to own a majority of K-Fed Bancorp's
common stock. K-Fed Mutual Holding Company, however, will be authorized to
engage in any other business activities that are permissible for mutual holding
companies under federal law, including investing in loans and securities. K-Fed
Mutual Holding Company does not maintain offices separate from those of K-Fed
Bancorp or utilize any persons other than certain of K-Fed Bancorp's officers.
Directors and officers of K-Fed Mutual Holding Company are not separately
compensated for their service.
BUSINESS OF K-FED BANCORP
K-Fed Bancorp is a federally-chartered stock holding company subsidiary and
is subject to regulation by the Office of Thrift Supervision. It was organized
for the purpose of acquiring all of the capital stock that Kaiser Federal Bank
issued upon its mutual holding company reorganization from the mutual to stock
form of ownership in July 2003.
K-Fed Bancorp has not engaged in any significant business to date. Its
primary activity is holding all of the stock of Kaiser Federal Bank. K-Fed
Bancorp will invest the proceeds of the offering as discussed under "How We
Intend to Use the Proceeds" in this prospectus. In the future, it may pursue
other business activities, including mergers and acquisitions, investment
alternatives and diversification of operations. There are, however, no current
understandings or agreements for these activities. 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. Directors and officers of
K-Fed Bancorp are not separately compensated for their service.
BUSINESS OF KAISER FEDERAL BANK
GENERAL
Kaiser Federal Bank was originally established in 1953 as Kaiser Foundation
Hospital Employees Federal Credit Union. The credit union initially served 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 employees and physicians who worked or
lived in California between the Mexican border in the south and San Francisco
County to the north. The credit union serviced members with two branches,
Pasadena and Santa Clara and a network of 30 ATMs primarily located in Kaiser
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.
73
After receiving the necessary regulatory and membership approvals, on
November 1, 1999, Kaiser Permanente Federal Credit Union converted to a federal
mutual savings association known as Kaiser Federal Bank which serves the general
public as well as Kaiser employees.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and to a
lesser extent, multi-family residential loans and commercial real estate loans.
We also originate automobile and other consumer loans. Historically, we have not
made commercial business loans or construction loans. We obtain loans through
our staff, as well as through advertising in various publications.
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 time deposit accounts with varied terms
ranging from 90 days to five years. We solicit deposits in our primary market
area of San Diego, Los Angeles, San Bernardino and Santa Clara Counties,
California.
MARKET AREA
We intend to continue to be a community oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We are headquartered in Covina, California, with a branch in Pasadena to
serve Los Angeles County, a branch in Fortana to serve the San Bernardino and
Riverside Counties, and a branch in Santa Clara to serve Santa Clara County.
This expansive market area provides a large, increasing base of potential
customers with per capita income levels favorable to the national average. Los
Angeles County's economy has improved dramatically since the mid 1990's a result
of extensive overhauling and restructuring of the region's basic economic
sectors. This base consists of a diversified mix of high-technology commercial
endeavors, by-products of the defense related industries, which capitalized on
the highly educated and skilled labor force. Emerging growth areas include
telecommunications, electronics, computers, software and biomedical technologies
as well as international trade. The western portion of the San Bernardino and
Riverside Counties are adjacent to higher housing cost areas of Los Angeles,
Orange and San Diego Counties and are a magnet for new residents seeking
affordable housing as well as many local business operations. Manufacturing,
transportation and distribution companies provide thousands of jobs in this
area. Santa Clara County is in the "Silicon Valley" where high technology
industries have down sized. However, the per capita income well exceeds the
state and national average.
74
LENDING ACTIVITIES
GENERAL. We originate and purchase one- to four-family and multi-family
residential loans and to a lesser extent we originate and purchase commercial
real estate loans. We also originate consumer loans, primarily automobile loans.
Our loans carry either a fixed or an adjustable rate of interest. Consumer loans
are generally short term and amortize monthly or have interest payable monthly.
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. At September 30, 2003, our net loan portfolio totaled $377.1
million, which constituted 84.1% of our total assets. Approximately 50% of our
loan portfolio consists of purchased loans. We underwrite each purchased loan,
however, in accordance with our underwriting standards.
At September 30, 2003, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities under applicable regulations
was $5.4 million. At September 30, 2003, 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 September 30, 2003 were as follows: (1) a $1.9
million loan to purchase a 22-unit apartment building, (2) a $1.7 million loan
to purchase a shopping center, (3) a $1.7 million loan to refinance an office
building, (4) a $1.5 million loan to purchase a shopping center, and (5) a $1.5
million loan to refinance a manufacturing facility.
75
The following table presents information concerning the composition of
Kaiser Federal Bank's loan portfolio in dollar amounts and in percentages as of
the dates indicated.
AT JUNE 30,
AT SEPTEMBER 30, -------------------------------------------------------------
2003 2003 2002 2001
--------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- --------- --------- ---------- --------- --------- ----------
(Dollars in Thousands)
Real Estate
- -----------
One- to four-family...................... $227,026 60.20% $259,563 66.64% $145,383 61.03% $71,824 50.62%
Commercial............................... 25,146 6.67 21,266 5.46 7,585 3.18 -- --
Multi-family............................. 61,917 16.42 42,275 10.85 20,345 8.55 -- --
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total real estate loans............. 314,089 83.29 323,104 82.95 173,313 72.76 71,824 50.62
Other loans
- -----------
Consumer:
Automobile............................ 55,335 14.67 56,872 14.60 51,947 21.81 54,548 38.44
Home equity........................... 443 0.12 664 0.17 1,735 0.73 664 1.32
Other................................. 7,242 1.92 8,878 2.28 11,202 4.70 13,648 9.62
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total other loans................... 63,020 16.71 66,414 17.05 64,884 27.24 70,076 49.38
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total loans......................... 377,109 100.00% 389,518 100.00% 238,197 100.00% 141,900 100.00%
========== ========= ========= ==========
Less:
Net deferred loan originations fees... (344) (354) (219) (49)
Premiums on purchased loans........... 2,623 2,757 680 163
Allowance for loan losses............. (2,247) (2,281) (1,744) (1,175)
---------- --------- ---------- ---------
Total loans, net.................... $377,141 $389,640 $236,914 $140,839
========== ========= ========== =========
AT JUNE 30,
----------------------------------------
2000 1999
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ----------
Real Estate
- -----------
One- to four-family...................... $55,665 47.80% $56,952 53.97%
Commercial............................... -- -- -- --
Multi-family............................. -- -- -- --
--------- --------- --------- ----------
Total real estate loans............. 55,665 47.80 56,952 53.97
Other loans
- -----------
Consumer:
Automobile............................ 45,147 38.77 35,118 33.28
Home equity........................... 1,167 1.00 651 0.62
Other................................. 14,466 12.42 12,804 12.13
--------- --------- --------- ----------
Total other loans................... 60,780 52.20 48,573 46.03
--------- --------- --------- ----------
Total loans......................... 116,445 100.00% 105,525 100.00%
========= ==========
Less:
Net deferred loan originations fees... (14) --
Premiums on purchased loans........... -- --
Allowance for loan losses............. (863) (1,094)
--------- ---------
Total loans, net.................... $115,568 $104,431
========= =========
76
The following table shows the composition of Kaiser Federal Bank loan
portfolio by fixed- and adjustable-rate at the dates indicated.
AT JUNE 30,
AT SEPTEMBER 30, -------------------------------------------------------------
2003 2003 2002 2001
---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- --------- --------- ---------- --------- --------- ----------
(Dollars in Thousands)
FIXED-RATE LOANS
Real Estate
- -----------
One- to four-family.................... $69,130 18.33% $72,798 18.69% $71,734 30.12% $64,659 45.57%
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total real estate loans........... 69,130 18.33 72,798 18.69 71,734 30.12 64,659 45.57
Other loans
- -----------
Consumer:
Automobile.......................... 55,335 14.67 56,872 14.60 51,941 21.80 54,536 38.43
Other............................... 5,890 1.56 7,530 1.93 9,607 4.03 11,497 8.10
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total other loans................. 61,225 16.23 64,402 16.53 61,548 25.83 66,033 46.53
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total fixed-rate loans............ 130,355 34.56 137,200 35.22 133,282 55.95 130,692 92.10
---------- ---------- --------- --------- ---------- --------- --------- ----------
ADJUSTABLE-RATE
Real Estate
- -----------
One- to four-family.................... 157,896 41.87 186,765 47.95 73,649 30.92 7,165 5.05
Commercial............................. 25,146 6.67 21,266 5.46 7,585 3.18 -- --
Multi-family........................... 61,917 16.42 42,275 10.85 20,345 8.54 -- --
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total real estate loans........... 244,959 64.96 250,306 64.26 101,579 42.64 7,165 5.05
Other Loans
- -----------
Consumer:
Automobile.......................... -- -- -- -- 6 -- 12 0.01
Home equity......................... 443 0.12 664 0.17 1,735 0.73 1,880 1.32
Other............................... 1,352 0.36 1,348 0.35 1,595 0.67 2,151 1.52
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total other loans................. 1,795 0.48 2,012 0.52 3,336 1.40 4,043 2.85
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total adjustable loans............ 246,754 65.44 252,318 64.78 104,915 44.05 11,208 7.90
---------- ---------- --------- --------- ---------- --------- --------- ----------
Total loans....................... 377,109 100.00% 389,518 100.00% 238,197 100.00% 141,900 100.00%
========== ========= ========= ==========
Less:
Net deferred loan origination fees.. (344) (354) (219) (49)
Premiums on purchased loans......... 2,623 2,757 680 163
Allowance for loan losses........... (2,247) (2,281) (1,744) (1,175)
---------- --------- ---------- ---------
Total loans, net.................. $377,141 $389,640 $236,914 $140,839
========== ========= ========== =========
AT JUNE 30,
----------------------------------------
2000 1999
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ----------
FIXED-RATE LOANS
Real Estate
- -----------
One- to four-family................... $54,684 46.96% $55,659 52.74%
--------- --------- --------- ----------
Total real estate loans.......... 54,684 46.96 55,659 52.74
Other loans
- -----------
Consumer:
Automobile......................... 45,120 38.75 35,069 33.23
Other.............................. 9,051 7.77 6,311 5.99
--------- --------- --------- ----------
Total other loans................ 54,171 46.52 41,380 39.22
--------- --------- --------- ----------
Total fixed-rate loans........... 108,855 93.48 97,039 91.96
--------- --------- --------- ----------
ADJUSTABLE-RATE
Real Estate
- -----------
One- to four-family................... 981 0.84 1,293 1.22
Commercial............................ -- -- -- --
Multi-family.......................... -- -- -- --
--------- --------- --------- ----------
Total real estate loans.......... 981 0.84 1,293 1.22
Other Loans
- -----------
Consumer:
Automobile......................... 27 0.03 49 0.05
Home equity........................ 1,167 1.00 651 0.62
Other.............................. 5,415 4.65 6,493 6.15
--------- --------- --------- ----------
Total other loans................ 6,609 5.68 7,193 6.82
--------- --------- --------- ----------
Total adjustable loans........... 7,590 6.52 8,486 8.04
--------- --------- --------- ----------
Total loans...................... 116,445 100.00% 105,525 100.00%
========= ==========
Less:
Net deferred loan origination fees. (14) --
Premiums on purchased loans........ -- --
Allowance for loan losses.......... (863) (1,094)
--------- ---------
Total loans, net................. $115,568 $104,431
========= =========
77
LOAN MATURITY AND REPRICING. The following table sets forth certain
information at September 30, 2003 regarding the dollar amount of loans maturing
in Kaiser Federal Bank's portfolio based on their contractual terms to maturity,
but does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Loan balances do not include undisbursed
loan proceeds, unearned discounts, unearned income and allowance for loan
losses.
---------------------- --------------------- --------------------
One to Four Family Commerical Multi-Family Consumer-Autos
---------------------- --------------------- -------------------- -----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- --------- --------- ---------- --------- --------- ----------- ----------
At
September 30, (Dollars in Thousands)
- ----------------------------------
Within 1 year..................... $ -- --% $ -- --% $ 9 6.56% $ 446 8.09%
---------- --------- --------- ---------- --------- --------- ----------- ----------
After 1 year
After 1 Year Through 3 Years.... 28 9.91 -- -- 129 5.50 15,323 9.18
After 3 Years through 5 Years... 207 6.96 -- -- -- -- 37,884 7.53
After 5 Years through 10 Years.. 4,163 6.33 21,189 6.73 25 6.56 1,682 7.38
After 10 Years through 15 Years. 25,299 5.66 3,957 6.56 31,696 5.98 -- --
Over 15 Years................... 197,329 5.03 -- -- 30,058 5.70 -- --
---------- --------- --------- ---------- --------- --------- ----------- ----------
Total Due After 1 year............ 227,026 5.13 25,146 6.70 61,908 5.84 54.88 7.98
---------- --------- --------- ---------- --------- --------- ----------- ----------
Total............................. $227,026 5.13% $25,146 6.70% $61,918 5.84% $55,335 7.98%
========== ========= ========= ========== ========= ========= =========== ==========
Consumer-Other Total
-------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- ----------- ----------
At
September 30,
- ----------------------------------
Within 1 year..................... $ 3,189 11.11% $ 3,644 10.73%
--------- --------- ----------- ----------
After 1 year
After 1 Year Through 3 Years.... 2,197 11.08 17,677 9.39
After 3 Years through 5 Years... 717 7.14 38,808 7.52
After 5 Years through 10 Years.. 1,536 3.10 28,595 6.51
After 10 Years through 15 Years. 46 3.00 60,998 5.88
Over 15 Years................... -- -- 227,387 5.12
--------- --------- ----------- ----------
Total Due After 1 year............ 4,496 9.08% 373,465 5.85
--------- --------- ----------- ----------
Total............................. $ 7,685 9.08% $377,109 5.85%
========= ========= =========== ==========
78
The following table sets forth the dollar amount of all loans due after
September 30, 2004, which have fixed interest rates.
79
Due After September 30, 2004
-----------------------------------------------
Fixed Adjustable Total
-------------- --------------- --------------
(In Thousands)
Real Estate Loans
One-to four family........... $69,130 $157,896 $227,026
Commercial................... -- 25,146 25,146
Multi-family................. -- 61,908 61,908
-------------- --------------- --------------
Total real estate loans...... 69,130 244,950 314,080
-------------- --------------- --------------
Other Loans
Consumer:
Automobile................... 54,889 -- 54,889
Home Equity.................. -- 30 30
Other Loans.................. 4,465 1 4,466
-------------- --------------- --------------
Total other loans............ 59,354 31 59,385
-------------- --------------- --------------
Total Loans.................. $128,484 $244,981 $373,465
============== =============== ==============
Of the $377.1 million in total loans at September 30, 2003, approximately
$130.4 million have fixed rates of interest and approximately $246.7 million
have adjustable rates of interest.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. At September 30, 2003, one- to
four-family residential mortgage loans totaled $227.0 million, or 60.2%, of our
gross loan portfolio. We generally underwrite our one- to four-family loans
based on the applicant's employment and credit history and the appraised value
of the subject property. Presently, we lend up to 80% of the lesser of the
appraised value or purchase price for one- to four-family residential loans.
Should we grant a loan with a loan-to-value ratio in excess of 80%, we require
private mortgage insurance in order to reduce our exposure below 80%. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements. We currently retain
in our portfolios all single-family loans we originate. Approximately 58.0% of
our portfolio was purchased within the past year.
We currently originate one- to four-family mortgage loans on a fixed-rate
and adjustable-rate basis. Our pricing strategy for mortgage loans includes
setting interest rates that are competitive with other local financial
institutions and consistent with our internal needs. Adjustable-rate loans are
tied to a variety of indices including a rate based on U. S. Treasury securities
adjusted to a constant maturity of one year and the average of U.S. Treasury
securities adjusted to a constant maturity of one year over the previous 12
month period. A majority of our adjustable rate loans carry an initial fixed
rate of interest for either three or five years which then converts to an
interest rate that is adjusted annually based upon the applicable index. Our
home mortgages are structured with a five to thirty year maturity, with
amortizations up to a 30 year period. All of our one- to-four family loans
originated or purchased are secured by properties located in California.
80
All our real estate loans contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property. The loans originated or purchased by us are underwritten and
documented pursuant to Freddie Mac or Fannie Mae guidelines. See "-
Originations, Purchases, Sales and Repayments." See "- Asset Quality -
Non-Performing Assets" and "- Classified Assets."
MULTI-FAMILY RESIDENTIAL LENDING. We also offer multi-family residential
loans. These loans are secured by real estate located in our primary market
area. At September 30, 2003, multi-family residential loans totaled $61.9
million, or 16.4%, of our gross loan portfolio and $31.4 million of this amount
was purchased from other lenders without recourse.
Our multi-family residential loans are originated with adjustable interest
rates only. We use a number of indices to set the interest rate, including a
rate based on the constant maturity of one year U.S. Treasury securities. A
majority of our adjustable rate loans carry an initial fixed rate of interest
for either three or five years which then converts to an interest rate that is
adjusted annually based upon the applicable index. Loan-to-value ratios on our
multi-family residential loans do not exceed 75% of the appraised value of the
property securing the loan. These loans require monthly payments, amortize over
a period of up to 30 years and have maximum maturity of 15 years. These loans
are secured by properties located in California. We use mortgage bankers and
brokers to originate these loans as well as through our staff. We retain some of
the multi-family loans we originate, while selling participations in others to
manage our exposure to any one borrower.
Loans secured by multi-family residential real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family residential loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "- Loan Originations,
Purchases, Sales and Repayments."
Loans secured by multi-family residential properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by multi-family residential
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality - Non-Performing Assets."
COMMERCIAL REAL ESTATE LENDING. We offer commercial real estate loans.
These loans are secured primarily by small retail establishments, rental
properties and small office buildings located in our primary market area. At
September 30, 2003, commercial real estate loans totaled $25.1 million, or 6.7%,
of our gross loan portfolio. Our largest commercial real estate loan at
September 30, 2003, was a $1.7 million loan secured by the real estate.
81
We originate only adjustable-rate commercial real estate loans. The
interest rate on these loans is tied to a variety of indices, including a rate
based on the constant maturity of one year U.S. Treasury securities. A majority
of our adjustable-rate loans carry an initial fixed rate of interest for either
three or five years which then converts an interest rate that is adjusted
annually based upon the index. Loan-to-value ratios on our commercial real
estate loans do not exceed 75% of the appraised value of the property securing
the loan. These loans require monthly payments, amortize up to 30 years, have
maturities of up to 10 years and carry pre-payment penalties.
Loans secured by commercial real estate are underwritten based on the
income producing potential of the property, the financial strength of the
borrower and any guarantors. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
commercial real estate loans are performed by independent state licensed fee
appraisers approved by the board of directors. All the properties securing our
commercial real estate loans are located in California. See "- Loan
Originations, Purchases, Sales and Repayments."
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality - Non-Performing Loans."
CONSUMER LOANS. Historically, we offered a variety of consumer loans.
Currently we only offer loans secured by automobiles or deposits. Consumer loans
generally have shorter terms to maturity, which reduces our exposure to changes
in interest rates, and carry higher rates of interest than do one- to
four-family residential mortgage loans. At September 30, 2003, our consumer loan
portfolio, exclusive of automobile loans, totaled $7.7 million, or 2.0%, of our
gross loan portfolio. In recent years, our consumer loans, as a percentage of
our loan portfolio, has continued to decrease as we have emphasized our real
estate loan products.
The most significant component of our consumer lending is automobile loans.
We originate automobile loans only on a direct basis with the borrower. Loans
secured by automobiles totaled $55.3 million at September 30, 2003, or 14.7%, of
our gross loan portfolio at September 30, 2003. Automobile loans may be written
for up to seven years for new automobiles and a maximum of five years for used
automobiles and have fixed rates of interest. Loan to value ratios for
automobile loans are up to 100% of the sales price for new automobiles and up to
100% of value on used cars, based on valuation from official used car guides.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles. In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance. As a result, consumer
82
loan collections are dependent on the borrower's continuing financial stability
and, thus, are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. See "Risk Factors - Our loan portfolio possesses
increased risk due to our substantial number of multi-family, commercial real
estate and consumer loans, which could increase the level of our provision for
loan losses."
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
We originate loans through employees located at our offices. Walk-in
customers and referrals from our current customer base, advertisements, real
estate brokers, mortgage loan brokers and builders are also important sources of
loan originations. While we originate both adjustable-rate and fixed-rate loans,
our ability to originate loans is dependent upon customer demand for loans in
our market area. Demand is affected by local competition and the interest rate
environment. We also purchase real estate whole loans as well as participation
interests in real estate loans. In addition, we sell participation interests in
some of our larger real estate loans. We began purchasing one-to four-family
real estate loans in January 2001 and multi-family real estate loans in October
2001. We have used ten different loan brokers in these purchase transactions. As
of September 30, 2003, we had participation interests in two commercial real
estate loans. All of our other commercial real estate loans have been originated
in-house. At September 30, 2003, our real estate loan portfolio totaled $314.1
million or 83.3% of the gross loan portfolio. Purchased real estate loans at
September 30, 2003 totaled $190.3 million, or 60.6% of the real estate loan
portfolio.
83
The following table shows the loan origination, purchase, sale and
repayment activities of Kaiser Federal Bank for the periods indicated, and
includes loans originated for both our own portfolio and for sale of
participating interests.
Three Months
Ended September 30, Year Ended June 30,
---------------------------- ---------------------------------------
2003 2002 2003 2002 2001
------------ ------------ ------------ ----------- ----------
(In Thousands)
Originations by type:
- ---------------------
Adjustable rate:
Real estate - one-to four-family........ $ -- $ 789 $ 4,039 $ 2,986 $ --
- commercial................ 6,194 3,246 15,164 8,661 --
- multi-family.............. 3,629 3,044 25,662 4,115 --
Non-real estate - consumer- automobile.. -- -- -- -- --
- other-consumer........ 1,247 1,436 4,983 4,920 8,316
------------ ------------ ------------ ----------- ----------
Total adjustable-rate.............. 11,070 8,515 49,848 20,682 8,316
------------ ------------ ------------ ----------- ----------
Fixed rate:
Real estate - one-to four-family........ 7,364 5,347 31,808 18,567 6,156
Non-real estate - consumer automobile... 6,374 12,432 35,457 25,175 37,038
- other consumer........ 824 991 9,010 10,585 13,656
------------ ------------ ------------ ----------- ----------
Total fixed-rate................... 14,562 18,770 76,275 54,327 56,850
------------ ------------ ------------ ----------- ----------
Total loans originated............. 25,632 27,285 126,123 75,009 65,166
------------ ------------ ------------ ----------- ----------
Purchases:
- ----------
Real estate - one-to four-family........ 38,869 20,011 209,955 82,035 18,611
- commercial................ -- -- 1,500 -- --
- multi-family.............. 18,394 -- -- 16,298 --
------------ ------------ ------------ ----------- ----------
Total loans purchased.............. 57,263 20,011 211,455 98,333 18,611
------------ ------------ ------------ ----------- ----------
Sales and Repayments:
- ---------------------
Sales and loan participations sold...... 1,587 -- 3,111 1,063 --
Principal repayments.................... 93,717 24,860 183,146 75,982 58,322
------------ ------------ ------------ ----------- ----------
Total reductions................... 95,304 24,860 186,257 77,045 58,322
------------ ------------ ------------ ----------- ----------
Increase (decrease) in other items, net. (90) (175) 1,405 (222) (184)
------------ ------------ ------------ ----------- ----------
Net increase....................... $ (12,499) $ 22,611 $152,726 $ 96,075 $ 25,271
============ ============ ============ =========== ==========
ASSET QUALITY
The Kaiser Permanente Medical Care Program employs a large percentage of
Kaiser Federal Bank's account holders. Further, a significant concentration of
our borrowers resides in California. Although Kaiser Federal Bank has a
diversified loan portfolio, borrowers' ability to repay loans may be affected by
the economic climate of either the health care industry or the overall
geographic region in which borrowers reside. Because we have a significant
amount of real estate loans, decreases in California's real estate values could
adversely affect the value of property used as collateral. In this regard, at
September 30, 2003, the rate of unemployment (not seasonally adjusted) in the
State of California was 6.1%, with the unemployment rate for the United States
at 5.8%. In addition, the State of California has a reported budget deficit of
about $38 billion and it may take aggressive measures such as increasing various
state taxes, reducing state expenditures and other cost-cutting initiatives to
balance the state's budget. These measures may negatively affect the California
economy and Kaiser Federal Bank.
84
When a borrower fails to make a timely payment on a consumer loan, a
delinquency notice is sent when the loan is 10 days past due. When the loan is
20 days past due, we mail a subsequent delinquency notice to the borrower. Once
a loan is 30 days past due, our staff contacts the borrower by telephone to
determine the reason for delinquency and to request payment of the delinquent
amount in full or the establishment of an acceptable repayment plan to bring the
loan current. If the borrower is unable to make or keep payment arrangements,
additional collection action is taken in the form of repossession of collateral
for secured loans and small claims or legal action for unsecured loans.
For one- to four-family residential, multi-family and commercial real
estate loans serviced by us, a delinquency notice is sent to the borrower when
the loan is eight days past due. When the loan is 20 days past due, we mail a
subsequent delinquency notice to the borrower. Typically, before the loan
becomes 45 days past due, contact with the borrower is made requesting payment
of the delinquent amount in full, or the establishment of an acceptable
repayment plan to bring the loan current. If an acceptable repayment plan has
not been agreed upon, loan personnel will generally prepare a notice of intent
to foreclose. The notice of intent to foreclose allows the borrower up to 10
days to bring the account current. Once the loan becomes 60 days delinquent, and
an acceptable repayment plan has not been agreed upon, the servicing officer
will turn over the account to the deed of trust trustee with instructions to
initiate foreclosure.
Real estate loans serviced by a third party are subject to the servicing
institution's collection policies. However, we track each purchased loan
individually to ensure full payments are received as scheduled. Each month,
third party servicers are required to provide delinquent loan status reports to
our servicing officer, which are included in the month-end delinquent real
estate report to management. Contractually, third party servicers are required
to adhere to collection policies no less stringent than our policies.
DELINQUENT LOANS. The following table sets forth our loans delinquent 60 to
89 days and over 89 days past due by type, number, amount and percentage of type
at September 30, 2003.
Loans Delinquent For:
---------------------------------------------------- Total
60-89 Days 90 Days or More Delinquent Loans
----------------------- ------------------------- --------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- --------- -------- --------
(Dollars in Thousands)
One- to four-family........... -- $ -- -- $ -- -- $ --
Commercial real estate........ -- -- -- -- -- --
Multi-family.................. -- -- -- -- -- --
Home equity................... -- -- -- -- -- --
Consumer - automobile......... 7 129 3 62 10 191
Other consumer................ 60 92 1 1 61 93
------ -------- ------ -------- ------ -------
67 $ 221 4 $ 63 71 $ 284
====== ======== ====== ======== ====== =======
Delinquent loans to
total gross loans........... 0.06% 0.02% 0.08%
85
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. Generally, all loans past due 90 days and over are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.
Foreclosed assets consist of real estate and other assets which have been
acquired through foreclosure on loans. At the time of foreclosure, assets are
recorded at the lower of their estimated fair value less selling costs or the
loan balance, with any write-down charged against the allowance for loan losses.
At all dates presented, we had no troubled debt restructurings which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates.
At September 30, At June 30,
---------------------------------------------------------
2003 2003 2002 2001 2000 1999
----------------- ---- ---- ---- ---- ----
(Dollars in Thousands)
NONACCRUAL LOANS:
One- to four-family........................... $ -- $ -- $ -- $ -- $ -- $ --
Commercial real estate........................ -- -- -- -- -- --
Multi-family.................................. -- -- -- -- -- --
Consumer-automobile .......................... 62 13 138 77 26 101
Other consumer................................ 1 13 -- 14 1 246
--------- -------- -------- -------- -------- ---------
Total......................................... 63 26 138 91 27 347
--------- -------- -------- -------- -------- ---------
Non-performing loans.......................... 63 26 138 91 27 347
Repossessed assets............................ 153 26 78 378 31 54
--------- -------- -------- -------- -------- ---------
Total non-performing assets................... $ 216 $ 52 $ 216 $ 469 $ 58 $ 401
========= ======== ======== ======== ======== =========
Non-performing loans to total loans(1)........ 0.02% 0.01% 0.06% 0.06% 0.02% 0.33%
Non-performing assets to total assets......... 0.05% 0.01% 0.07% 0.20% 0.03% 0.22%
- -----------------
(1) Total loans are net of deferred fees and costs
CLASSIFIED ASSETS. Regulations provide for the classification of loans and
other assets, such as debt and equity securities considered by regulators to be
of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable."
86
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management and approved by the board of directors. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge off such amount. An institution's
determination as to the classification of its assets and the amount of its
uation allowances is subject to review by the Office of Thrift Supervision and
the FDIC, which may order the establishment of additional general or specific
loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. The
total amount of classified assets represented 6.31% of our equity capital and
0.51% of our total assets at September 30, 2003.
The aggregate amount of our classified assets at the dates indicated were
as follows:
At June 30,
At September 30, ---------------------------------------
2003 2003 2002
------------------ ------------------ ------------------
(In Thousands)
Loss $ 82 $ 83 $ --
Doubtful 1,285 1,304 1,546
Substandard 499 407 164
Special Mention 402 353 21
------------------ ------------------ ------------------
Total $ 2,268 $ 2,147 $ 1,731
================== ================== ==================
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include loss ratio analysis by type of loan and
specific allowances for identified problem loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans based on the internal risk evaluation of the loans or pools of loans.
Changes in risk evaluations of both performing and nonperforming loans affect
the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
87
The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting our key lending areas and other conditions, such as credit
quality trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss
experience in particular segments of the portfolio that existed as of the
balance sheet date and the impact that such conditions were believed to have had
on the collectibility of the loan. Senior management reviews these conditions
quarterly in discussions with our senior credit officers. To the extent that any
of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management's estimate of the
effect of such condition may be reflected as a specific allowance applicable to
such credit or portfolio segment. Where any of these conditions is not evidenced
by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the loss related to this condition
is reflected in the unallocated allowance. The evaluation of the inherent loss
with respect to these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments.
Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions in our market area.
This evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. For all
specifically reviewed loans for which it is probable that Kaiser Federal Bank
will be unable to collect all amounts due according to the terms of the loan
agreement, Kaiser Federal Bank determines impairment by computing a fair value
either based on discounted cash flows using the loan's initial interest rate or
the fair value of the collateral if the loan is collateral dependent. Large
groups of smaller balance homogenous loans that are collectively evaluated for
impairment and are excluded from specific impairment evaluation, and their
allowance for loan losses is calculated in accordance with the allowance for
loan losses policy described above.
Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Our methodology as described permits adjustments to any loss
factor used in the computation of the formula allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. In addition, management's
determination as to the amount of our allowance for loan losses is subject to
review by the Office of Thrift Supervision and the FDIC, which may require the
establishment of additional general or specific allowances based upon their
judgment of the information available to them at the time of their examination
of Kaiser Federal Bank.
At September 30, 2003, our allowance for loan losses was $2.2 million or
0.59% of the total loan portfolio and 3,566.7% of total non-performing loans.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, that may be
susceptible to significant change. In the opinion of management, the allowance,
88
when taken as a whole, is an amount that will absorb reasonable estimated loan
losses inherent in our loan portfolios.
89
The following table sets forth an analysis of our allowance for loan
losses.
For Three
Months Ended
September 30, Year Ended June 30,
------------------------ ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period................. $2,281 $1,744 $1,744 $1,175
CHARGE-OFFS:
One-to four-family......................... -- -- -- --
Commercial................................. -- -- -- --
Multi-family............................... -- -- -- --
Consumer - automobile...................... 86 181 842 990
Other consumer............................. 30 7 58 110
116 188 900 1,100
RECOVERIES:
One-to four-family......................... -- -- -- --
Commercial................................. -- -- -- --
Multi-family............................... -- -- -- --
Consumer - automobile...................... 47 107 296 503
Other consumer............................. 5 2 17 19
52 109 313 522
Net charge-offs................................ 64 79 587 578
Provision for loan losses..................... 30 203 1,124 1,147
Balance at end of period....................... $2,247 $1,868 $2,281 $1,744
Net charge-offs to average loans during
this period (1) (2)........................... 0.07% 0.13% 0.19% 0.33%
Net charge-offs to average non-
performing loans during this period(2)....... 143.82% 285.97% 715.85% 504.80%
Allowance for loan losses to non-
performing loans............................. 3,566.67% 2,250.60% 8,773.08% 1,263.77%
Allowance as a % of total loans
(end of period)(1)........................... 0.59% 0.71% 0.58% 0.73%
Year Ended June 30,
---------------------------------------
2001 2000 1999
---- ---- ----
Balance at beginning of period................. $863 $1,094 $874
CHARGE-OFFS:
One-to four-family......................... -- -- --
Commercial................................. -- -- --
Multi-family............................... -- -- --
Consumer - automobile...................... 534 145 26
Other consumer............................. 85 371 373
619 516 399
RECOVERIES:
One-to four-family......................... -- - -
Commercial................................. -- - -
Multi-family............................... -- - -
Consumer - automobile...................... 137 18 1
Other consumer............................. 26 70 37
163 88 38
Net charge-offs................................ 456 428 361
Provision for loan losses..................... 768 197 581
Balance at end of period....................... $1,175 $863 $1,094
Net charge-offs to average loans during
this period (1) (2)........................... 0.35% 0.40% 0.35%
Net charge-offs to average non-
performing loans during this period(2)....... 772.88% 228.88% 97.44%
Allowance for loan losses to non-
performing loans............................. 1,291.21% 3,196.30% 315.27%
Allowance as a % of total loans
(end of period)(1)........................... 0.83% 0.74% 1.04%
- -------------------------------
(1) Total loans are net of deferred fees and costs
(2) Rates for the three month periods have been annualized
90
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.
At June 30,
At September 30, -----------------------------------------------------------------
2003 2003 2002
-------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Gross Gross Gross
Loans Loans Loans
in Each in Each in Each
Category Category Category
Percent of to Percent of to Percent of to
Allowance Total Allowance Total Allowance Total
To Total Gross To Total Gross To Total Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------- ----------- ---------- --------- ----------- ---------- --------- ----------- ----------
(Dollars in Thousands)
Secured by one-to-four
family real estate..... $ 613 27.28% 60.20% $ 703 30.82% 66.64% $ 582 33.37% 61.04%
Secured by commercial
real estate............ 107 4.76 6.67 82 3.59 5.46 30 1.72 3.18
Secured by multi-family
real estate............ 186 8.28 16.42 132 5.79 10.85 81 4.65 8.54
Consumer-automobile..... 1,304 58.03 14.67 1,289 56.51 14.60 970 55.62 21.81
Consumer-other.......... 37 1.65 2.04 75 3.29 2.45 81 4.64 5.43
Unallocated............. -- -- -- -- -- -- -- -- --
--------- ----------- ---------- --------- ----------- ---------- --------- ----------- ----------
Total Allowance for
Loan Losses............ $2,247 100.00% 100.00% $2,281 100.00% 100.00% $1,744 100.00% 100.00%
====== ======= ======= ====== ======= ======= ====== ======= =======
2001 2000 1999
-------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Gross Gross Gross
Loans Loans Loans
in Each in Each in Each
Category Category Category
Percent of to Percent of to Percent of to
Allowance Total Allowance Total Allowance Total
To Total Gross To Total Gross To Total Gross
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
--------- ----------- ---------- --------- ----------- ---------- --------- ----------- ----------
Secured by one-to-four
family real estate..... $ 287 24.44% 50.62% $256 29.66% 47.80% $ 302 27.60% 53.97%
Secured by commercial
real estate............ -- -- -- -- -- -- -- -- --
Secured by multi-family
real estate............ -- -- -- -- -- -- -- -- --
Consumer-automobile..... 751 63.88 38.44 383 44.38 38.77 308 28.14 33.28
Consumer-other.......... 137 11.68 10.94 224 25.96 13.43 367 33.57 12.75
Unallocated............. -- -- -- -- -- -- 117 10.69 --
--------- ----------- ---------- --------- ----------- ---------- --------- ----------- ----------
Total Allowance for
Loan Losses............ $1,175 100.00% 100.00% $863 100.00% 100.00% $1,094 100.00% 100.00%
====== ======= ======= ==== ======= ======= ====== ======= =======
91
INVESTMENT ACTIVITIES
GENERAL. We are required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and are
also permitted to make certain other securities investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Commitments." Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is provided. As of September 30, 2003,
our liquidity ratio (liquid assets as a percentage of net withdrawable savings
and current borrowings) was 18.4%. Effective December 27, 2000, the law imposing
a liquidity requirement on savings associations, such as Kaiser Federal Bank,
was repealed.
We are authorized to invest in various types of liquid assets, including
U.S. Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federal savings associations may also invest their assets
in investment grade commercial paper and corporate debt securities and mutual
funds whose assets conform to the investments that a federally chartered savings
association is otherwise authorized to make directly. See "How We Are Regulated
- - Kaiser Federal Bank" for a discussion of additional restrictions on our
investment activities.
Under the direction and guidance of the Investment/Asset and Liability
Management Committee and board policy, our president has the basic
responsibility for the management of our investment portfolio. Various factors
are considered when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated short and long term interest rates, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The current structure of our investment portfolio provides liquidity when
loan demand is high, assists in maintaining earnings when loan demand is low and
maximizes earnings while satisfactorily managing risk, including credit risk,
reinvestment risk, liquidity risk and interest rate risk. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management and Market Risk."
COLLATERALIZED MORTGAGE OBLIGATIONS. We invest in collateralized mortgage
obligations as an alternative to mortgage loans and conventional mortgage-backed
securities as part of our asset liability management strategy. Management
believes that collateralized mortgage obligations represent attractive
investment alternatives relative to other investments due to the wide variety of
maturity and repayment options available through such investments. In
particular, we have, from time to time, concluded that short and intermediate
and long duration collateralized mortgage obligations (with an expected average
life of five to ten years or less) represent a better combination of rate and
duration than adjustable rate mortgage-backed securities. Because our
collateralized mortgage obligations are purchased as an alternative to mortgage
loans and because we have the ability and intent to hold such securities to
maturity, all such securities are classified as held-to-maturity. At September
30, 2003, we held $36.9 million of collateralized mortgage obligations and $2.1
million in mortgage backed securities. All of our
92
collateralized mortgage obligations and mortgage-backed securities are
guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae.
In contrast to mortgage-backed pass-through securities in which cash flow
is received (and, hence, prepayment risk is shared) pro rata by all securities
holders, the cash flows from the mortgages or mortgage-backed securities
underlying collateralized mortgage obligations are segmented and paid in
accordance with a predetermined priority to investors holding various tranches
of such securities or obligations. A particular tranche of a collateralized
mortgage obligations may therefore carry prepayment risk that differs from that
of both the underlying collateral and other tranches. It is our strategy to
purchase tranches of collateralized mortgage obligations with expected shorter
term duration and are intended to produce stable cash flows in different
interest rate environments. However, interest rate changes may affect the
duration of these securities.
To assess price volatility, the Federal Financial Institutions Examination
Council adopted a policy which requires an annual "stress" test of mortgage
derivative securities. This policy, which has been adopted by the Office of
Thrift Supervision, requires us to annually test our collateralized mortgage
obligations and other mortgage-related securities to determine whether they are
high-risk or non high-risk securities. Mortgage derivative products with an
average life or price volatility in excess of a benchmark 30-year
mortgage-backed pass-through security are considered high-risk mortgage
securities. Under the policy, savings institutions, such as Kaiser Federal Bank,
may only invest in high-risk mortgage securities in order to reduce interest
rate risk. In accordance with our policy, we do not invest in securities
classified as high-risk at the time of purchase. However, as of September 30,
2003, we had $24.2 million in high risk securities as a result of changes in
market interest rates.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Our current strategy is to hold all
securities until maturity.
93
The following table sets forth the composition of our investment portfolio
at the dates indicated.
At June 30,
At September 30, -------------------------------------------------------------------
2003 2003 2002 2001
--------------------- --------------------- --------------------- ---------------------
Carrying % of Total Carrying % of Total Carrying % of Total Carrying % of Total
Value Total Value Total Value Total Value Total
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(Dollars in Thousands)
Securities Held to Maturity:
U.S. government and federal
agencies...................... $ -- --% $ -- --% $ 8,000 40.43% $ 4,000 21.56%
Mortgage-backed securities:
Fannie Mae.................... 1,060 2.72 1,188 8.34 1,825 9.22 2,937 15.83
Ginnie Mae.................... 380 0.97 406 2.85 667 3.37 873 4.71
Freddie Mac................... 619 1.59 695 4.88 959 4.85 1,365 7.36
------- ------- ------- ------- ------- ------- ------- -------
2,059 5.28 2,289 16.07 3,451 17.44 5,175 27.90
Collateralized mortgage
obligations:
Fannie Mae.................... 12,120 31.10 7,399 51.93 6,735 34.04 4,397 23.70
Freddie Mac................... 24,800 63.62 4,559 32.00 1,601 8.09 4,980 26.84
------- ------- ------- ------- ------- ------- ------- -------
36,920 94.72 11,958 83.93 8,336 42.13 9,377 50.54
Total........................... $38,979 100.00% $14,247 100.00% $19,787 100.00% $18,552 100.00%
======= ======= ======= ======= ======= ======= ======= =======
Other earnings assets:
Interest-bearing deposits
in other financial
institutions..... 891 4.17% $ 6,437 30.52 $23,378 91.75% $35,431 55.03%
Federal Funds sold............ 17,205 80.59 11,645 55.22 975 3.83 28,300 43.96
Federal Home Loan Bank stock.. 2,800 13.11 2,602 12.34 1,008 3.96 649 1.01
Other investments............. 454 2.13 406 1.92 118 0.46 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total........................... 21,350 100.00% 21,090 100.00% 25,479 100.00% 64,380 100.00%
------- ------- ------- ------- ------- ------- ------- -------
Total........................... $60,329 $35,337 $45,266 $82,932
======= ======= ======= =======
While our collateralized mortgage backed securities and mortgage backed
securities carry a reduced credit risk as compared to whole loans due to their
issuance under government agency sponsored programs, they remain subject to the
risk that a fluctuating interest rate environment, along with other factors like
the geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of the mortgage loans and so affect both the prepayment speed,
and value, of the investment securities. As a result of these factors, the
estimated average lives of these securities will be shorter than the contractual
maturities as shown on the following table. The composition and maturities of
the investment securities portfolio, excluding Federal Home Loan Bank stock, as
of September 30, 2003, are as follows:
At September 30, 2003 At September 30, 2003
------------------------- ---------------------------------------------------------------------------
One to
Carrying % of Total One Year Five Five to 10 Over 10
Value Total or Less Years Years Years Total Securities
----------- ----------- ----------- ---------- ---------- ---------- ----------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
---------- ---------- ---------- ---------- ---------- ---------
(Dollars in Thousands)
Mortgage-backed securities $ 2,059 5.28% $ -- $ -- $ -- $ 2,059 $ 2,059 $ 2,083
Collateralized mortgage
obligations............. 36,920 94.72 -- -- 36,920 36,920 37,266
----------- --------- ---------- ---------- ---------- ---------- --------- --------
Total investment
securities................ $38,979 100.00% $ -- $ -- $ -- $38,979 $38,979 $39,349
======= ======= ========== ========== ========== ======= ======= =======
Weighted average yield.... 4.04% _ _ 4.04%
EQUITY INVESTMENT. We also had an approximate 20% investment in a limited
liability partnership, which builds and operates affordable housing projects
located in Northern California. We purchased the investment for approximately $2
million during the three month period ended September 30, 2003. The investment
is being accounted for using the equity
94
method of accounting. The investment is evaluated periodically for impairment
based on the remaining allocable tax credits.
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities, borrowings, and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts to consumers with a wide
range of interest rates and terms. Our deposits consist of time deposit
accounts, savings, money market and demand deposit accounts. We have
historically paid competitive rates on our deposit accounts. We primarily rely
on competitive pricing policies, marketing and customer service to attract and
retain these deposits. Approximately 45.0% of our deposits are from customers
who are employed by the Kaiser Permanente Medical Care Program.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and bi-weekly
direct deposits from Kaiser Permanente Medical Care Program payrolls. The
variety of deposit accounts we offer has allowed us to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand.
We have become more susceptible to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. We try to manage the pricing
of our deposits in keeping with our asset/liability management, liquidity and
profitability objectives, subject to competitive factors. Based on our
experience, we believe that our deposits are relatively stable sources of funds.
Despite this stability, our ability to attract and maintain these deposits and
the rates paid on them has been and will continue to be significantly affected
by market conditions.
95
The following table sets forth our deposit flows during the periods
indicated.
Three Months Ended
September 30, Year Ended June 30,
--------------------------- ---------------------------------------------
2003 2002 2003 2002 2001
----------- ----------- --------------- ----------- ----------
(Dollars in Thousands)
Opening balance, net.............. $346,239 $252,038 $252,038 $197,588 $167,401
Deposits/withdrawals.............. 12,383 5,146 86,871 47,849 23,749
Interest credited................. 1,945 1,711 7,330 6,601 6,438
----------- ----------- --------------- ----------- ----------
Ending balance.................... $360,567 $258,895 $346,239 $252,038 $197,588
Net increase...................... $14,328 $6,857 $94,201 $54,450 $30,187
Percent increase (1)............. 16.55% 10.88% 37.38% 27.56% 18.03%
- ---------------------
(1) Rates for the three month periods have been annualized
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs we offered at the dates indicated.
At At June 30,
September 30, ---------------------------------------------------------------------------
2003 2003 2002 2001
--------------------- ------------------------ ------------------------- ------------------------
Percentof Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Non-interest-bearing demand $25,908 7.19% $30,119 8.70% $26,904 10.67% $22,603 11.44%
Savings ................... 83,379 23.12 82,691 23.88 69,782 27.69 60,015 30.37
Money market............... 93,835 26.02 87,555 25.30 59,970 23.79 36,380 18.41
Certificates of deposit
1.00% - 1.99%.......... 17,853 4.95 12,543 3.62 -- -- -- --
2.00% - 2.99%.......... 57,302 15.89 52,072 15.04 18,627 7.39 -- --
3.00% - 3.99%.......... 30,302 8.40 26,919 7.77 19,462 7.72 -- --
4.00% - 4.99%.......... 22,340 6.20 23,145 6.68 14,713 5.84 8,476 4.29
5.00% - 5.99%.......... 12,841 3.56 13,127 3.79 16,889 6.70 25,512 12.91
6.00% - 6.99%.......... 10,855 3.02 12,124 3.50 19,425 7.71 37,814 19.14
7.00% - 7.99%.......... 5,952 1.65 5,944 1.72 6,266 2.49 6,788 3.44
-------- ------- -------- ------- -------- ------- -------- ------
Total Certificates of 157,445 43.67 145,874 42.12 95,382 37.85 78,590 39.78
-------- ------- -------- ------- -------- ------- -------- -------
Deposit....................
$360,567 100.00% $346,239 100.00% $252,038 100.00% $197,588 100.00%
======== ======= ======== ======= ======== ======= ======== =======
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The following table indicates the amount of Kaiser Federal Bank's
certificates of deposit and other deposits by time remaining until maturity as
of September 30, 2003.
September 30 September 30 September 30 September 30 September 30
2004 2005 2006 2007 2008 Total
----------------- ------------------ ----------------- ----------------- ----------------- -----------
(In Thousands)
1.00%-1.99%.......... $17,815 $ 38 $ -- $ -- $ -- $ 17,853
2.00%-2.99%.......... 45,952 10,748 537 54 11 57,302
3.00%-3.99%.......... 7,816 7,239 6,300 276 8,671 30,302
4.00%-4.99%.......... 3,014 3,205 242 5,372 10,507 22,340
5.00%-5.99%.......... 3,526 811 2,214 6,290 -- 12,841
6.00%-6.99%.......... 2,427 6,062 2,366 -- -- 10,855
7.00%-7.99%.......... 355 1,297 4,300 -- -- 5,952
----------------- ------------------ ----------------- ----------------- ----------------- -----------
$80,905 $29,400 $15,959 $11,992 $19,189 $157,445
================= ================== ================= ================= ================= ===========
$100,000 and over $17,637 $ 9,370 $ 5,150 $ 4,240 $ 6,021 $ 42,418
Below $100,000....... 63,268 20,030 10,809 7,752 13,168 115,027
----------------- ------------------ ----------------- ----------------- ----------------- -----------
Total............ $80,905 $29,400 $15,959 $11,992 $19,189 $157,445
================= ================== ================= ================= ================= ===========
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to purchase loans or to fund loan demand or when they meet our asset/liability
management goals. Our borrowings historically have consisted of advances from
the Federal Home Loan Bank of San Francisco. See Note 9 of the Notes to
Consolidated Financial Statements.
We may obtain advances from the Federal Home Loan Bank of San Francisco
upon the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At
September 30, 2003, we had $50.0 million in Federal Home Loan Bank advances
outstanding. These advances were used to fund the purchase of a $48.0 million
pool of one- to four-family loans.
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The following table sets forth information as to our Federal Home Loan Bank
advances for the periods indicated.
At or For
the Three months
Ended At or For the Year
September 30, Ended June 30,
------------------------ -----------------------------------------
2003 2002 2003 2002 2001
----------- ----------- ----------- ------------- ------------
(Dollars in Thousands)
Average balance outstanding....................... $50,000 $1,160 $34,972 $ 2,615 $ --
Maximum month-end balance......................... 50,000 2,640 50,000 13,000 --
Balance at end of period.......................... 50,000 2,640 50,000 2,000 --
Weighted average interest rate during the period.. 3.03% 3.08% 2.97% 1.23% --
Weighted average interest rate at end of period... 3.00% 1.87% 3.00% 1.17% --
SUBSIDIARY AND OTHER ACTIVITIES
At September 30, 2003, K-Fed Bancorp did not have any subsidiaries other
than Kaiser Federal Bank.
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 also
face competition from other lenders and investors with respect to loans that we
purchase.
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. As of September
30, 2003, we believe that we hold less than 1% of the deposits in our primary
market area.
EMPLOYEES
At September 30, 2003, we had a total of 92 employees, including 16
part-time employees. Our employees are not represented by any collective
bargaining group.
PROPERTIES
At September 30, 2003, we had two full service offices and two financial
service centers. Our financial services centers provide all the same services as
a full service office except dispense cash, but cash is available from an ATM
located on site. We lease the space in which our home office, executive offices
and branch offices are located. The net book value of our
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investment in premises, equipment and fixtures, excluding computer equipment,
was approximately $1.3 million at September 30, 2003.
The following table provides a list of our main and branch offices, all of
which are leased.
Owned or Lease Expiration Net Book Value
Location Lease Date September 30, 2003
- ---------------------- --------- ------------------ -------------------------
(In Thousands)
HOME AND EXECUTIVE OFFICE Leased May 2010 $228
1359 N. Grand Avenue
Covina, CA 91724
BRANCH OFFICES:
131 North El Molino Ave., Suite 100 Leased July 2005 26
Pasadena, CA 91101
3375 Scott Blvd., Suite 312 Leased June 2009 10
Santa Clara, CA 95054
9844 Sierra Ave., Suite A Leased October 2006 --
Fontana, CA 92335
We believe that our current facilities are adequate to meet the present and
immediately foreseeable needs of Kaiser Federal Bank and K-Fed Bancorp.
We use an in-house system with support provided by a third-party vendor to
maintain our data base of depositor and borrower customer information. The net
book value of our data processing and computer equipment at September 30, 2003
was approximately $383,000.
LEGAL PROCEEDINGS
From time to time, we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of this litigation or any material
impact on our financial position, results of operations or cash flows.
MANAGEMENT
MANAGEMENT OF K-FED BANCORP
The board of directors of K-Fed Bancorp consists of the same seven
individuals who currently serve as directors of Kaiser Federal Bank. The board
of directors of K-Fed Bancorp is divided into three classes, as nearly equal as
possible, with approximately one third of the directors elected each year. The
directors are elected by the stockholders of K-Fed Bancorp for three year terms,
or until their successors are elected and have qualified. The terms of the
directors of each of K-Fed Bancorp and Kaiser Federal Bank are identical. As the
sole stockholder of K-Fed Bancorp, K-Fed Mutual Holding Company elects the
directors of K-Fed
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Bancorp. Following completion of the stock offering, the directors will be
elected by K-Fed Mutual Holding Company and the holders of the common stock of
K-Fed Bancorp not held by K-Fed Mutual Holding Company.
The following individuals are the executive officers of K-Fed Bancorp and
hold the office set forth below opposite their name.
Executive Position Held
--------- -------------
Kay M. Hoveland President and Chief Executive Officer
Daniel A. Cano Chief Financial Officer
Executive officers of K-Fed Bancorp are elected annually and hold office
until their respective successors have been elected or until death, resignation
or removal by the board of directors.
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of K-Fed Bancorp is set
forth under "- Management of Kaiser Federal Bank." Directors of K-Fed Bancorp
initially will not be compensated by K-Fed Bancorp but will serve and be
compensated by Kaiser Federal Bank. It is not anticipated that separate
compensation will be paid to directors of K-Fed Bancorp until such time as these
persons devote significant time to the separate management of K-Fed Bancorp
affairs, which is not expected to occur until K-Fed Bancorp becomes actively
engaged in additional businesses other than holding the stock of Kaiser Federal
Bank. K-Fed Bancorp may determine that such compensation is appropriate in the
future.
MANAGEMENT OF KAISER FEDERAL BANK
Upon completion of the stock offering, the directors of Kaiser Federal Bank
immediately prior to the stock offering will continue to serve as directors of
Kaiser Federal Bank. The board of directors of Kaiser Federal Bank consists of
seven directors divided into three classes, with approximately one-third of the
directors elected at each annual stockholder meeting. Because K-Fed Bancorp will
continue to own all the issued and outstanding capital stock of Kaiser Federal
Bank following the stock offering, the board of directors of K-Fed Bancorp will
elect the directors of Kaiser Federal Bank.
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The following table sets forth information regarding the board of directors
of Kaiser Federal Bank as of September 30, 2003.
Term of
Positions Held With Director Office
Name Age(1) Kaiser Federal Bank Since(2) Expires
----------------------- -------- --------------------------------- ---------- ---------
Kay M. Hoveland 56 Director, President and CEO 2000 2006
Gerald A. Murbach 55 Director 2000 2006
Marilyn T. Owsley 44 Director 2000 2005
Rita H. Zwern 55 Director and Secretary 1987 2005
Robert C. Steinbach 50 Director 2000 2004
James L. Breeden 60 Director and Chairman of the 1987 2004
Board
Frank G. Nicewicz 47 Director 1995 2004
- -------------------
(1) As of September 30, 2003.
(2) Includes service as a director of Kaiser Permanente Federal Credit Union
with the exception of Directors Steinbach, Murbach, Hoveland and Owsley.
The business experience of each director for at least the past five years
is set forth below.
KAY M. HOVELAND. Ms. Hoveland has served as president and chief executive
officer of Kaiser Federal Bank since 1987.
GERALD A. MURBACH. Mr. Murbach is currently retired. He previously served
as a human resources consultant for the Universal Music Group during 2001 and
the Times Mirror newspapers from 1992 to 2001.
MARILYN T. OWSLEY. Ms. Owsley has served as a financial executive with the
Kaiser Permanente Medical Care Program since 1994.
RITA H. ZWERN. Ms. Zwern has been employed by Kaiser Foundation Health Plan
since 1984 and currently is the manager of State Programs, located in Pasadena,
California.
ROBERT C. STEINBACH. Mr. Steinbach has served as the chief inspector for
the Building and Safety Department of the City of Los Angeles since 2002 and has
been with the Department since 1985. Mr. Steinbach is the brother-in-law of
Daniel Cano, the Chief Financial Officer of Kaiser Federal Bank.
JAMES L. BREEDEN. Mr. Breeden has served as chairman of the Board of
Directors since November 2000. He is a retired hospital administrator for the
Kaiser Foundation Hospitals where he worked for 14 years.
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FRANK G. NICEWICZ. Mr. Nicewicz has been employed by Kaiser Foundation
Health Plan since 1995 and currently holds the position of financial manager in
Oakland, California.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The business experience for at least the past five years for each of three
executive officers of Kaiser Federal Bank, who do not serve as directors, is set
forth below.
DANIEL A. CANO. Age 48 years. Mr. Cano has served as chief financial
officer of Kaiser Federal Bank since 1998. Mr. Cano is also responsible for the
information technology function of Kaiser Federal Bank.
NANCY J. HUBER. Age 40 years. Ms. Huber has served as chief credit officer
since 1999 and Community Reinvestment Act officer since 2002. From 1995 until
1999, she served as vice president of credit.
JEANNE R. THOMPSON. Age 56 years. Ms. Thompson has served as chief
operating officer since 2001. She served as senior vice president for branch
operations of IndyMacBank, located in Pasadena, California from 1983 until 2001.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors meets monthly. During the fiscal year ended June 30,
2003, the board of directors held 12 meetings. No director attended fewer than
90% of the total meetings of the board of directors and committees on which the
board member served during this period.
We currently have standing Executive, Audit, Credit, Asset/Liability
Management and Human Resource Committees. We have no standing Nominating
Committee. Our Nominating Committee is established from year to year.
The Audit Committee is comprised of Mr. Nicewicz, Ms. Owsley and Mr.
Steinbach. Mr. Nicewicz serves as chairman. The Audit Committee meets quarterly
or more frequently as needed. The committee recommends the independent auditors
and reviews the audit report prepared by the independent auditors. This
committee met five times in fiscal 2003 and oversees the audit activities of
Kaiser Federal Bank.
The Asset/Liability Management Committee is chaired by Mr. Cano and
Directors Breeden and Hoveland serve as members along with Ms. Huber. The
committee meets weekly or more frequently as needed. The committee oversees
Kaiser Federal Bank's asset liability management. The committee reviews and
monitors Kaiser Federal Bank's investment portfolio, liquidity position and
interest rate risk. This committee met 51 times in fiscal 2003.
The Credit Committee oversees all loan activities. The committee approves
all loans that exceed management's loan authority, periodically reviews loans
within the loan officer's loan authority and reviews all past due loans on a
monthly basis. This committee meets weekly or more frequently as needed. The
committee is comprised of Directors Breeden and Hoveland with Ms. Huber serving
as chairperson. This committee met 51 times in fiscal 2003.
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The Executive Committee is comprised of Directors Breeden, Hoveland, Zwern
and Steinbach with Mr. Breeden serving as chairman. The committee meets monthly
or more frequently as needed. The committee is generally authorized to act on
behalf of the full board of directors when certain business matters require
prompt action. The committee met 10 times in fiscal 2003.
The Human Resource Committee is comprised of Directors Hoveland, Zwern and
Murbach. This committee meets quarterly or more frequently as needed. This
committee is authorized to develop and maintain personnel policies, compensation
standards and employee benefits. The chairman of the committee is Mr. Murbach.
The committee met four times in fiscal 2003.
DIRECTORS' COMPENSATION
Members of Kaiser Federal Bank's board of directors receive a fee of $500
per meeting attended and $300 per committee meeting attended. Executive
Committee members receive $400 per meeting attended, and the credit and
Asset/Liability Management Committee members receive $300 per meeting attended.
Attendance by telephone is compensated at a rate lower than in-person
attendance.
EXECUTIVE COMPENSATION
The following table sets forth a summary of information concerning the
compensation paid by Kaiser Federal Bank, including amounts deferred to future
periods by the officers, for services rendered in all capacities during the year
ended June 30, 2003 to the president and chief executive officer of Kaiser
Federal Bank and our three other executive officers.
Long Term
---------
Annual Compensation Compensation Awards
------------------- -------------------
Other Restricted
----- ----------
Annual Stock All Other
------ ----- ---------
Fiscal Compensation Award Compen-
------ ------------ ----- -------
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) Options(#)(2) Sation(3)
--------------------------- ---- ------ ----- ------ ------ ------------- ---------
Kay M. Hoveland 2003 $220,000 $72,000 -- -- -- $16,880
President and Chief
Executive Officer
Daniel A. Cano 2003 137,119 27,500 -- -- -- 8,115
Chief Financial Officer
Jeanne R. Thompson 2003 123,600 18,525 -- -- -- 4,842
Chief Operating Officer
Nancy J. Huber 2003 97,500 8,000 -- -- -- 5,275
Chief Credit Officer
- -------------
(1) This amount does not include personal benefits or perquisites which did not
exceed the lesser of $50,000 or 10% of the named individual's salary and
bonus.
103
(2) Kaiser Federal Bank does not have any stock option or restricted stock
plans. K-Fed Bancorp does, however, intend to adopt such plans no earlier
than six months following the stock offering. See "- Benefits - Stock
Benefit Plans."
(3) Amount represents matching contribution under Kaiser Federal Bank's 401(k)
Plan in the amount of $3,380 and director fees for Ms. Hoveland in the
amount of $13,500 for her service on the board and the Executive Committee.
The amounts reported for Mr. Cano and Ms. Thompson and Ms. Huber consists
of employer matching contributions.
BENEFITS
GENERAL. We currently provide health and welfare benefits to our employees,
including hospitalization and comprehensive medical insurance, life insurance,
subject to deductibles and copayments by employees.
KAISER FEDERAL BANK EXECUTIVE NON-QUALIFIED RETIREMENT PLAN. We also
maintain an executive deferral program for the benefit of certain senior
executives that have been designated to participate in the program. The program
allows an additional opportunity for key executives to defer a portion of their
compensation into a non-qualified deferral program to supplement their
retirement earnings. Ms. Hoveland, currently the only participant in the
program, had $273,710 in compensation deferred pursuant to this program for the
fiscal year ended June 30, 2003.
401(K) PLAN. We provide our employees a qualified profit sharing plan under
the applicable provisions of the Internal Revenue Code of 1986.
Employees who are age 21 or older are eligible to begin making salary
deferral contributions beginning in the first calendar quarter on or after they
become an employee. This is their earliest entry date. Employees are eligible to
receive contributions other than salary deferral contributions beginning in the
first calendar quarter on or after they are an employee, are age 21 or older,
and have completed one year of entry service.
Eligible employees may contribute up to 15% of their compensation each pay
period to the 401(k) Plan on a pre-tax basis, not to exceed $13,000 for the
calendar year 2004. The maximum deferral percentage and/or dollar amount may
also be limited by IRS regulations. For eligible employees, we currently match
50% of the first 10% of the compensation an employee defers each pay period.
Participants in the 401(k) Plan may use the funds to purchase the stock of K-Fed
Bancorp.
Employees are always 100% vested in the contributions they choose to defer,
whereas vesting in Kaiser Federal Bank contributions is based on years of
vesting service in which an employee works at least 1,000 hours. Vesting in
Kaiser Federal Bank contributions begins after two years of vesting service and
increases for each year of vesting service until an employee becomes fully
vested after six years of vesting service.
Employees may receive money from their vested accounts at retirement (age
65), early retirement (age 55 and 10 years of vesting service), age 59 1/2 and
still working, death, disability, or termination of employment. Employees may
obtain loans from their vested account balances or withdraw all or part of their
vested accounts (not earnings) if they can prove financial hardship and are
unable to meet their financial needs another way.
104
We may amend the 401(k) Plan at any time, except that no amendment may be
made which would reduce the interest of any participant in or beneficiary of the
401(k) Plan trust fund or divert any of the assets of the 401(k) Plan trust fund
to purposes other than the benefit of participants or their beneficiaries unless
necessary to comply with any law or regulation issued by any governmental agency
to which the 401(k) Plan is subject.
EMPLOYEE STOCK OWNERSHIP PLAN. K-Fed Bancorp intends to adopt a new benefit
plan which consists of an employee stock ownership plan for the employees of
K-Fed Bancorp and any subsidiary, including Kaiser Federal Bank, to become
effective upon the completion of the stock offering. This plan is hereafter
referred to as the "ESOP." Employees of K-Fed Bancorp and Kaiser Federal Bank
who have been credited with at least 1,000 hours of service during a twelve
month period are eligible to participate in the ESOP.
As part of the stock offering, it is anticipated that the ESOP will borrow
funds from K-Fed Bancorp. The ESOP will use these funds to purchase up to 8.0%
of the common stock sold in the stock offering. It is anticipated that this loan
will equal 100% of the aggregate purchase price of the common stock acquired by
the ESOP. The loan to the ESOP will be repaid principally from Kaiser Federal
Bank's contributions to the ESOP over a period of 10 years, and the collateral
for the loan will be the common stock purchased by the ESOP. The interest rate
for the loan is expected to be the prime rate of interest. K-Fed Bancorp may, in
any plan year, make additional discretionary contributions for the benefit of
plan participants in either cash or shares of common stock, which may be
acquired through the purchase of outstanding shares in the market or from
individual stockholders, upon the original issuance of additional shares by
K-Fed Bancorp or upon the sale of treasury shares by K-Fed Bancorp. These
purchases, if made, would be funded through additional borrowings by the ESOP or
additional contributions from K-Fed Bancorp. The timing and manner of future
contributions to the ESOP will be subject to laws and regulations and market
conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released to participants' accounts as debt service
payments are made. Shares released from the ESOP will be allocated to each
eligible participant's ESOP account based on the ratio of each such
participant's compensation to the total compensation of all eligible
participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount K-Fed Bancorp might otherwise have
contributed to the ESOP. The account balances of participants within the ESOP
will become 100% vested after seven years of service. In the case of a "change
in control," as defined in the ESOP, which triggers a termination of the ESOP,
participants will become immediately fully vested in their account balances.
Benefits are payable upon retirement or other separation from service. K-Fed
Bancorp's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated.
First Bankers Trust Company, N.A. will serve as trustee of the ESOP and Kay
M. Hoveland, Daniel A. Cano and Nancy J. Huber will serve as members of the ESOP
Committee. Under the ESOP, the trustee must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees.
Unallocated shares and allocated shares for which the employee does not provide
voting instructions, will be voted by the trustee as directed by the board of
directors of K-Fed Bancorp.
105
Generally accepted accounting principles requires that any third party
borrowing by the ESOP be reflected as a liability on K-Fed Bancorp's statement
of financial condition. Since the ESOP is borrowing from K-Fed Bancorp, such
obligations are not treated as a liability, but will be excluded from
stockholders' equity. If the ESOP purchases newly issued shares from K-Fed
Bancorp, total stockholders' equity would neither increase nor decrease, but per
share stockholders' equity and per share net earnings would decrease as the
newly issued shares are allocated to the ESOP participants.
The ESOP will be subject to the requirements of ERISA, and the regulations
of the IRS and the Department of Labor.
STAFF BONUS PLAN. We maintain an Annual Incentive Plan and a Long-Term
Incentive Plan for our key employees. Participants are awarded a percentage of
their base salary, based upon their position with Kaiser Federal Bank, that is
tied to financial goals established by Kaiser Federal Bank and the attainment of
personal performance goals established by the employee and his or her manager.
STOCK BENEFIT PLANS. In the future, we intend to adopt a stock option plan
and a restricted stock plan for the benefit of selected directors, officers and
employees. We anticipate that the stock option plan will have reserved a number
of shares equal to not more than 10.0% of the K-Fed Bancorp common stock sold in
the stock offering, and the restricted stock plan will have reserved a number of
shares equal to not more than 4.0% of the K-Fed Bancorp common stock sold in the
stock offering subject, if applicable, to regulatory limitations. Grants of
stock options will be made at a price equal to 100% of the market value on the
date of grant. Grants of common stock pursuant to the restricted stock plan will
be issued without cost to the recipient. Once a determination is made to
implement a stock option plan or restricted stock plan, it is anticipated that
any such plans will be submitted to stockholders for their consideration at
which time stockholders would be provided with detailed information regarding
such plans. If such plans are approved, and effected, they may have a dilutive
effect on K-Fed Bancorp stockholders as well as affect K-Fed Bancorp's net
income and stockholders' equity, although the actual results cannot be
determined until such plans are implemented. Any such stock option plan or
restricted stock plan will not be submitted to stockholders for approval or
implemented less than six months after the date of the completion of the stock
offering, subject to continuing Office of Thrift Supervision jurisdiction. If
either the stock option plan or the restricted stock plan are implemented within
one year of the consummation of the stock offering, the granting of options and
restricted stock will be subject to regulatory restrictions, including a
requirement that the awards vest equally over a five year period.
LOANS AND OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
We have a policy of granting loans to officers and directors, which fully
complies with all applicable federal regulations. Loans to directors and
executive officers are made in the ordinary course of business and on the same
terms and conditions as those of comparable transactions with unaffiliated third
parties prevailing at the time, in accordance with our underwriting guidelines,
and do not involve more than the normal risk of collectibility or present other
unfavorable features. In addition, all loans to directors and executive officers
are approved by at least a majority of the independent, disinterested members of
the board.
106
All loans we make to our directors and executive officers are subject to
regulations restricting loans and other transactions with affiliated persons of
Kaiser Federal Bank. Loans to all directors and executive officers and their
associates totaled approximately $578,000 at September 30, 2003, which was 1.6%
of our stockholders' equity at that date. All loans to directors and executive
officers were performing in accordance with their terms at September 30, 2003.
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to K-Fed Bancorp and Kaiser Federal Bank. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations. We believe,
however, that we have included all descriptions of laws and regulations
applicable to K-Fed Bancorp and Kaiser Federal Bank that an investor needs to
consider in making an investment decision.
Legislation is introduced from time to time in the United States Congress
that may affect the operations of K-Fed Bancorp and Kaiser Federal Bank. In
addition, the regulations governing K-Fed Bancorp and Kaiser Federal Bank may be
amended from time to time by the Office of Thrift Supervision. Any such
legislation or regulatory changes in the future could adversely affect K-Fed
Bancorp or Kaiser Federal Bank. No assurance can be given as to whether or in
what form any such changes may occur.
GENERAL
Kaiser Federal Bank, as a federally-chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Kaiser Federal Bank also is subject
to regulation by the FDIC, which insures the deposits of Kaiser Federal Bank to
the maximum extent permitted by law, and requirements established by the Federal
Reserve Board. Federally chartered savings institutions are required to file
periodic reports with the Office of Thrift Supervision and are subject to
periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting stockholders. This regulatory oversight will
continue to apply to Kaiser Federal Bank following the completion of the stock
offering.
The Office of Thrift Supervision regularly examines Kaiser Federal Bank and
prepares reports for the consideration of Kaiser Federal Bank's board of
directors on any deficiencies that it may find in Kaiser Federal Bank's
operations. Kaiser Federal Bank's relationship with its depositors and borrowers
also is regulated to a great extent by both federal and state laws, especially
in such matters as the ownership of savings accounts and the form and content of
Kaiser Federal Bank's mortgage requirements. Any change in such regulations,
whether by the FDIC, the Office of Thrift Supervision or Congress, could have a
material adverse impact on K-Fed Bancorp and Kaiser Federal Bank and their
operations.
107
K-FED BANCORP
GENERAL. K-Fed Bancorp is a federal mutual holding company subsidiary
within the meaning of Section 10(o) of the Home Owners' Loan Act. It is required
to file reports with the Office of Thrift Supervision and is subject to
regulation and examination by the Office of Thrift Supervision. In addition, the
Office of Thrift Supervision has enforcement authority over K-Fed Bancorp and
any non-savings institution subsidiaries. This permits the Office of Thrift
Supervision to restrict or prohibit activities that it determines to be a
serious risk to Kaiser Federal Bank. This regulation is intended primarily for
the protection of the depositors and not for the benefit of stockholders of
K-Fed Bancorp.
ACTIVITIES RESTRICTIONS. K-Fed Bancorp and its non-savings institution
subsidiaries are subject to statutory and regulatory restrictions on their
business activities specified by federal regulations, which include performing
services and holding properties used by a savings institution subsidiary,
activities authorized for savings and loan holding companies as of March 5,
1987, and non-banking activities permissible for bank holding companies pursuant
to the Bank Holding Company Act of 1956 or authorized for financial holding
companies pursuant to the Gramm-Leach-Bliley Act.
If Kaiser Federal Bank fails the qualified thrift lender test, K-Fed
Bancorp must, within one year of that failure, register as, and will become
subject to, the restrictions applicable to bank holding companies. See "-
Qualified Thrift Lender Test."
MERGERS AND ACQUISITIONS. K-Fed Bancorp must obtain approval from the
Office of Thrift Supervision before acquiring more than 5% of the voting stock
of another savings institution or savings and loan holding company or acquiring
such an institution or holding company by merger, consolidation or purchase of
its assets. In evaluating an application for K-Fed Bancorp to acquire control of
a savings institution, the Office of Thrift Supervision would consider the
financial and managerial resources and future prospects of K-Fed Bancorp and the
target institution, the effect of the acquisition on the risk to the insurance
funds, the convenience and the needs of the community and competitive factors.
WAIVERS OF DIVIDENDS BY K-FED BANCORP. Office of Thrift Supervision
regulations require K-Fed Mutual Holding Company to notify the Office of Thrift
Supervision of any proposed waiver of its receipt of dividends from K-Fed
Bancorp. The Office of Thrift Supervision reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (i)
the mutual holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the savings association subsidiary is controlled by
the mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association and its stock holding company;
(iii) the amount of any dividend waived by the mutual holding company is
available for declaration as a dividend solely to the mutual holding company, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings
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association in evaluating any proposed dividend under Office of Thrift
Supervision capital distribution regulations.
We anticipate that K-Fed Mutual Holding Company will waive dividends paid
by K-Fed Bancorp, if any. Under Office of Thrift Supervision regulations, our
public stockholders would not be diluted because of any dividends waived by
K-Fed Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event K-Fed Mutual Holding
Company converts to stock form.
CONVERSION OF K-FED MUTUAL HOLDING COMPANY TO STOCK FORM. The Office of
Thrift Supervision regulations permit K-Fed Mutual Holding Company to convert
from the mutual form of organization to the capital stock form of organization
(a "Conversion Transaction"). There can be no assurance when, if ever, a
Conversion Transaction will occur, and the board of directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to K-Fed
Bancorp (the "New Holding Company"), K-Fed Mutual Holding Company's corporate
existence would end, and certain depositors of Kaiser Federal Bank would receive
the right to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of common stock held by stockholders other
than K-Fed Mutual Holding Company ("Minority Stockholders") would be
automatically converted into a number of shares of common stock in the New
Holding Company determined pursuant to an exchange ratio that ensures that the
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in K-Fed Bancorp immediately prior to the Conversation
Transaction. Under OTS regulations, Minority Stockholders would not be diluted
because of any dividends waived by K-Fed Mutual Holding Company (and waived
dividends would not be considered in determining an appropriate exchange ratio),
if K-Fed Mutual Holding Company converts to stock form. The total number of
shares held by Minority Stockholders after a Conversion Transaction also would
be increased by any purchases by Minority Stockholders in the stock offering
conducted as part of the Conversion Transaction.
A Conversion Transaction requires the approval of the Office of Thrift
Supervision as well as a majority of the votes eligible to be cast by the
members of K-Fed Mutual Holding Company and a majority of the votes eligible to
be cast by the stockholders of K-Fed Bancorp other than K-Fed Mutual Holding
Company.
KAISER FEDERAL BANK
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Kaiser Federal
Bank is required to file periodic reports with the Office of Thrift Supervision
and is subject to periodic examinations by the Office of Thrift Supervision and
the FDIC. When these examinations are conducted by the Office of Thrift
Supervision and the FDIC, the examiners may require Kaiser Federal Bank to
provide for higher general or specific loan loss reserves. All savings
institutions are subject to a semi-annual assessment, based upon the savings
institution's total assets, to fund the operations of the Office of Thrift
Supervision.
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The Office of Thrift Supervision also has extensive enforcement authority
over all savings institutions and their holding companies, including Kaiser
Federal Bank and K-Fed Bancorp. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision. Except under certain circumstances, public
disclosure of final enforcement actions by the Office of Thrift Supervision is
required.
In addition, the investment, lending and branching authority of Kaiser
Federal Bank is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the Office of Thrift Supervision. Federal savings institutions are
also generally authorized to branch nationwide. Kaiser Federal Bank is in
compliance with the noted restrictions.
Kaiser Federal Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 2003, Kaiser Federal Bank's
lending limit under this restriction was $5.4 million. Kaiser Federal Bank is in
compliance with the loans-to-one-borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Kaiser Federal Bank is a member of the Savings Association Insurance Fund,
which is administered by the FDIC. Deposits are insured up to the applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the United States government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Savings Association Insurance Fund. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after
giving the Office of Thrift Supervision an opportunity to take such action, and
may terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed
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insurance premiums based upon their level of capital and supervisory evaluation.
Under the system, institutions classified as well capitalized (i.e., a core
capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital
ratio of at least 10%) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (i.e., core or Tier 1
risk-based capital ratios of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC for
each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to approximately 1.5 basis points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as Kaiser Federal Bank, are
required to maintain a minimum level of regulatory capital. The Office of Thrift
Supervision has established capital standards, including a tangible capital
requirement, a leverage ratio or core capital requirement and a risk-based
capital requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis. See "Recent Developments" and
Management's Discussion and Analysis of Recent Developments."
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 2003, Kaiser Federal Bank had no intangible
assets.
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At September 30, 2003, Kaiser Federal Bank had tangible capital of $35.9
million, or 8.00% of adjusted total assets, which is approximately $29.2 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 4.0% of
adjusted total assets unless its supervisory condition is such to allow it to
maintain a 3.0% ratio. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At September 30, 2003, Kaiser Federal Bank had no intangibles
which were subject to these tests. At September 30, 2003, Kaiser Federal Bank
had core capital equal to $35.9 million, or 8.00% of adjusted total assets,
which is $18.0 million above the minimum requirement of 4.0% in effect on that
date.
The Office of Thrift Supervision also requires savings institutions to have
core capital equal to 4% of risk-weighted assets ("Tier 1 Risk-Based"). At
September 30, 2003, Kaiser Federal Bank had Tier 1 risk-based capital of $35.9
or 12.70% of risk-weighted assets, which is approximately $13.3 million above
the minimum on such date. The Office of Thrift Supervision also requires savings
institutions to have total capital of at least 8.0% of risk-weighted assets.
Total capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The Office of Thrift Supervision is also authorized
to require a savings institution to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of
non-traditional activities.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On September 30, 2003, Kaiser Federal Bank had total risk-based capital of
$38.1 million and risk-weighted assets of $282.4 million; or total capital of
13.50% of risk-weighted assets. This amount was $15.5 million above the 8.0%
requirement in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4.0% core capital ratio, a 4.0% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until the plan is approved by the Office of Thrift Supervision, may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
Office of Thrift Supervision is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.
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As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or has
Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" will be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to reclassify
an institution into a lower capital category and impose the restrictions
applicable to such category if the institution is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any of
these measures on Kaiser Federal Bank may have a substantial adverse effect on
its operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions, such as Kaiser Federal Bank, that before
and after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Kaiser Federal Bank may pay
dividends to K-Fed Bancorp in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings institutions that do
not, or would not meet their current minimum capital requirements following a
proposed capital distribution or propose to exceed these net income limitations,
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."
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LIQUIDITY
All savings institutions, including Kaiser Federal Bank, are required to
maintain sufficient liquidity to ensure a safe and sound operation.
QUALIFIED THRIFT LENDER TEST
All savings institutions, including Kaiser Federal Bank, are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At September 30, 2003, Kaiser Federal Bank met the test with a
119.5%, ratio and has always met the test since its effectiveness.
Any savings institution that fails to meet the qualified thrift lender test
must convert to a national bank charter, unless it requalifies as a qualified
thrift lender within one year of failure and thereafter remains a qualified
thrift lender. If such an institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
such an institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any institution that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, every FDIC-insured institution has a
continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the Office of Thrift Supervision, in connection with the examination of
Kaiser Federal Bank, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Kaiser Federal Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the Office of Thrift Supervision. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, Kaiser Federal Bank may be required to devote additional funds for
investment and lending in its local community. Kaiser Federal Bank was examined
for Community Reinvestment Act compliance and received a rating of satisfactory
in its latest examination.
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TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its subsidiaries
and its affiliates are required to be on terms as favorable to the institution
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of Kaiser Federal Bank include K-Fed Bancorp
and any company which is under common control with Kaiser Federal Bank. In
addition, a savings institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Office of Thrift Supervision has the discretion to treat
subsidiaries of savings institutions as affiliates on a case by case basis.
On April 1, 2003, the Federal Reserve's Regulation W, which comprehensively
amends sections 23A and 23B, became effective. The Federal Reserve Act and
Regulation W are applicable to savings associations such as Kaiser Federal Bank.
The Regulation unifies and updates staff interpretations issued over the years,
incorporates several new interpretative proposals (such as to clarify when
transactions with an unrelated third party will be attributed to an affiliate),
and addresses new issues arising as a result of the expanded scope of nonbanking
activities engaged in by banks and bank holding companies in recent years and
authorized for financial holding companies under the Gramm-Leach-Bliley Act.
In addition, the Office of Thrift Supervision regulations prohibit a
savings institution from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
FEDERAL SECURITIES LAW
The stock of K-Fed Bancorp is registered with the SEC under the Securities
Exchange Act of 1934, as amended. K-Fed Bancorp will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Securities Exchange Act of 1934.
K-Fed Bancorp stock held by persons who are affiliates of K-Fed Bancorp may
not be resold without registration unless sold in accordance with certain resale
restrictions. Affiliates are generally considered to be officers, directors and
principal stockholders. If K-Fed Bancorp meets specified current public
information requirements, each affiliate of K-Fed Bancorp will be able to sell
in the public market, without registration, a limited number of shares in any
three-month period.
SARBANES-OXLEY ACT OF 2002.
The Sarbanes-Oxley Act of 2002 was signed into law by president Bush on
July 30, 2002 in response to public concerns regarding corporate accountability
in connection with recent
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accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The Sarbanes-Oxley Act generally applies to all companies that
file or are required to file periodic reports with the SEC, under the Securities
Exchange Act of 1934, including K-Fed Bancorp.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules and mandates further studies of certain issues by the SEC
and the Comptroller General. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts, primarily checking, NOW and Super NOW checking accounts. At September
30, 2003, Kaiser Federal Bank was in compliance with these reserve requirements.
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require institutions to
exhaust other reasonable alternative sources of funds, including Federal Home
Loan Bank borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
Kaiser Federal Bank is a member of the Federal Home Loan Bank of San
Francisco, which is one of 12 regional Federal Home Loan Banks that administers
the home financing credit function of savings institutions. Each Federal Home
Loan Bank serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required to be fully secured by sufficient collateral as
determined by the Federal Home Loan Bank. In addition, all long-term advances
are required to provide funds for residential home financing.
As a member, Kaiser Federal Bank is required to purchase and maintain stock
in the Federal Home Loan Bank of San Francisco. At September 30, 2003, Kaiser
Federal Bank had $2.8 million in Federal Home Loan Bank stock, which was in
compliance with this requirement. In past years, Kaiser Federal Bank has
received substantial dividends on its Federal Home Loan Bank stock. Over the
past two fiscal years such dividends have averaged 4.37% and were 4.11% for the
fiscal year ended June 30, 2003. For the three months ended September 30, 2003,
Kaiser Federal Bank recorded $27,672 in dividends paid by the Federal Home Loan
Bank of San Francisco as compared to $84,834 for the fiscal year ended June 30,
2003.
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Under federal law, the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Kaiser Federal Bank's Federal Home Loan Bank stock may result in a corresponding
reduction in Kaiser Federal Bank's capital.
TAXATION
FEDERAL TAXATION
GENERAL. K-Fed Bancorp and Kaiser Federal Bank are subject to federal
income taxation in the same general manner as other corporations, with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to K-Fed Bancorp or Kaiser
Federal Bank. K-Fed Bancorp has not yet filed a federal income tax return due to
its recent organization. Kaiser Federal Bank's federal income tax returns have
never been audited by the IRS.
It is anticipated that K-Fed Bancorp will elect to file a consolidated
federal income tax return with Kaiser Federal Bank commencing with the first
taxable year after completion of the stock offering. Accordingly, it is
anticipated that any cash distributions made by K-Fed Bancorp to its
stockholders would be considered to be taxable dividends and not as a
non-taxable return of capital to stockholders for federal and state tax
purposes.
In connection with the formation of K-Fed Mutual Holding Company, K-Fed
Bancorp, Kaiser Federal Bank and K-Fed Mutual Holding Company entered into a tax
allocation agreement. Because K-Fed Bancorp owns 100% of the issued and
outstanding capital stock of Kaiser Federal Bank, K-Fed Bancorp and Kaiser
Federal Bank are members of an affiliated group within the meaning of Section
1504(a) of the Internal Revenue Code, of which group K-Fed Bancorp is the common
parent corporation. As a result of this affiliation, Kaiser Federal Bank may be
included in the filing of a consolidated federal income tax return with K-Fed
Bancorp and, if a decision to file a consolidated tax return is made, the
parties agree to compensate each other for their individual share of the
consolidated tax liability and/or any tax benefits provided by them in the
filing of the consolidated federal income tax return.
METHOD OF ACCOUNTING. For federal income tax purposes, Kaiser Federal Bank
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending on June 30th, for filing its federal income tax
return.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. K-Fed Bancorp may eliminate from
its income dividends received from Kaiser Federal Bank as a wholly owned
subsidiary of K-Fed Bancorp if it elects to file a consolidated return with
Kaiser Federal Bank. The corporate dividends-received deduction is 100% or 80%,
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, depending
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on the level of stock ownership of the payor of the dividend. Corporations which
own less than 20% of the stock of a corporation distributing a dividend may
deduct 70% of dividends received or accrued on their behalf.
STATE TAXATION
K-Fed Bancorp and Kaiser Federal Bank are subject to the California
corporate (franchise) tax which is assessed at the rate of 10.84%. For this
purpose, California taxable income generally means federal taxable income
subject to certain modifications provided for in the California law.
RESTRICTIONS ON ACQUISITION
OF K-FED BANCORP AND KAISER FEDERAL BANK
The principal federal regulatory restrictions which affect the ability of
any person, firm or entity to acquire K-Fed Bancorp, Kaiser Federal Bank or
their respective capital stock are described below. Also discussed are certain
provisions in K-Fed Bancorp's stock charter and bylaws which may be deemed to
affect the ability of a person, firm or entity to acquire K-Fed Bancorp.
FEDERAL LAW
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings institution unless the Office of Thrift Supervision has
been given 60 days prior written notice. The Home Owners' Loan Act provides that
no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution (including its holding
company) is conclusively deemed to have been acquired by, among other things,
the acquisition of more than 25% of any class of voting stock of the institution
or the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock of a savings institution, where certain
enumerated "control factors" are also present in the acquisition. The Office of
Thrift Supervision may prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person.
118
These restrictions do not apply to the acquisition of a savings institution's
capital stock by one or more tax-qualified employee stock benefit plans,
provided that the plans do not have beneficial ownership of more than 25% of any
class of equity security of the savings institution.
For a period of three years following completion of the stock offering,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of K-Fed Bancorp or Kaiser Federal Bank without Office of Thrift
Supervision approval.
CHARTER AND BYLAWS OF K-FED BANCORP
The following discussion is a summary of certain provisions of the charter
and bylaws of K-Fed Bancorp that relate to restrictions of acquisitions. The
description is necessarily general and qualified by reference to the articles of
charter and bylaws.
DIRECTORS. Certain provisions of K-Fed Bancorp's bylaws will impede changes
in majority control of the board of directors. K-Fed Bancorp's bylaws provide
that the board of directors will be divided into three classes, with directors
in each class elected for three-year staggered terms. Thus, assuming a board of
three directors or more, it would take two annual elections to replace a
majority of K-Fed Bancorp's board. The bylaws also provide that any vacancy
occurring in the board of directors, including a vacancy created by an increase
in the number of directors, shall be filled by a majority vote of the directors
then in office. Finally, the bylaws impose certain notice and information
requirements in connection with the nomination by stockholders of candidates for
election to the board of directors or the proposal by stockholders of business
to be acted upon at an annual meeting of stockholders.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The federal stock charter of
K-Fed Bancorp provides that for a period of five years from the date of the
completion of the stock offering a special meeting of stockholders may be called
only through a resolution of the board of directors for matters relating to a
change in control of K-Fed Bancorp or amendments to its charter.
ABSENCE OF CUMULATIVE VOTING. K-Fed Bancorp's federal stock charter does
not provide for cumulative voting rights in the election of directors. This
means that K-Fed Mutual Holding Company, as the holder of a majority of the
shares eligible to be voted at a meeting of stockholders, may elect all of the
directors of K-Fed Bancorp and thus prevent a minority stockholder from
obtaining representation on the Board of Directors.
AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK. After the stock offering,
K-Fed Bancorp will have authorized but unissued shares of common and preferred
stock. See "Description of Capital Stock." The board of directors could use
these shares of common and preferred stock to render more difficult or to
discourage an attempt to obtain control of K-Fed Bancorp by means of a merger,
tender offer or proxy statement. We anticipate, however, that it is unlikely
that we will use the shares for this purpose, since K-Fed Mutual Holding Company
must always own at least a majority of our common stock.
Our federal stock charter also authorizes 2,000,000 shares of serial
preferred stock, no par value per share. K-Fed Bancorp is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law, and the board of directors is authorized to
119
fix the designations, and relative preferences, limitations, voting rights, if
any, including without limitation, offering rights of such shares (which could
be multiple or as a separate class). In the event of a proposed merger, tender
offer or other attempt to gain control of K-Fed Bancorp that the board of
directors does not approve, it might be possible for the board of directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede that completion of the transaction. If K-Fed
Bancorp issues any preferred stock which disparately reduced the voting rights
of the common stock, the common stock could be required to be delisted from the
Nasdaq system. An effect of the possible issuance of preferred stock, therefore
may be to deter a future attempt to gain control of K-Fed Bancorp. The board of
directors has no present plan or understanding to issue any preferred stock.
LIMITATION ON VOTING RIGHTS. The federal stock charter of K-Fed Bancorp
provides that for a period of five years from the completion of the stock
offering by K-Fed Bancorp, no person other than K-Fed Mutual Holding Company may
offer to acquire or acquire the beneficial ownership of more than 10% of any
class of equity security of K-Fed Bancorp. This provision does not apply to any
tax-qualified employee benefit plan or K-Fed Bancorp or to an underwriter or
member of an underwriting or selling group involving the public sale or resale
of securities of K-Fed Bancorp or any of its subsidiaries so long as after the
sale or resale, no underwriter or member of the selling group is a beneficial
owner of more than 10% of any class of equity securities of K-Fed Bancorp. In
addition, during this five-year period, all shares owned over the l0% limit may
not be voted in any matter submitted to stockholders for a vote.
OWNERSHIP OF COMMON STOCK BY MANAGEMENT. We expect our directors and
officers to purchase up to 255,000 shares of common stock in the offering.
Directors and officers are expected to control the voting of 6.436.5% of the
shares of common stock sold in the offering (at the maximum of the offering
range), and may control the voting of approximately 8.0% of the shares of common
stock sold in the offering through the ESOP. Under the terms of the ESOP,
unallocated shares and shares for which the employee did not provide voting
instructions will be voted by the independent trustees as directed by the Board
of Directors of K-Fed Bancorp. In addition, the officers and directors of K-Fed
Bancorp are also officers and directors of K-Fed Mutual Holding Company which,
after the stock offering, will own at least a majority of K-Fed Bancorp's common
stock.
Certain provisions of K-Fed Bancorp's stock option plan and other benefit
plans provide for benefits and cash payments in the event of a change in control
of K-Fed Bancorp. The plans provide for accelerated vesting in the event of a
change in control. These provisions may have the effect of increasing the cost
of, and thereby discouraging, a future attempt to take over K-Fed Bancorp and
thus generally may serve to perpetuate current management.
DESCRIPTION OF CAPITAL STOCK OF
K-FED BANCORP
GENERAL
K-Fed Bancorp is authorized to issue 18,000,000 shares of common stock
having a par value of $0.01 per share and 2,000,000 shares of preferred stock
having a par value of $0.01 per share. K-Fed Bancorp currently expects to issue
up to a maximum of 3,967,500 shares
120
of common stock, or 4,562,625 shares in the event that the maximum of the
estimated offering range is increased by 15%, and no shares of preferred stock
in the stock offering. Each share of K-Fed Bancorp's common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock. Upon payment of the purchase price for the common stock
in accordance with the plan of stock issuance, all of the stock will be duly
authorized, fully paid and nonassessable. Presented below is a description of
all aspects of K-Fed Bancorp's capital stock which are deemed material to an
investment decision with respect to the stock offering.
The common stock of K-Fed Bancorp will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC, or any other governmental agency. The Board of Directors can, without
stockholders approval issue additional shares of common stock although K-Fed
Mutual Holding Company so long as it is in existence, must own a majority of the
outstanding common stock of K-Fed Bancorp.
COMMON STOCK
DISTRIBUTIONS. K-Fed Bancorp can pay dividends if, as and when declared by
its board of directors, subject to compliance with limitations which are imposed
by law. The holders of common stock of K-Fed Bancorp will be entitled to receive
and share equally in these dividends as they may be declared by the board of
directors of K-Fed Bancorp out of funds legally available for such purpose. If
K-Fed Bancorp issues preferred stock, the holders of such preferred stock may
have a priority over the holders of the common stock with respect to dividends.
See "Our Policy Regarding Dividends."
VOTING RIGHTS. Holders of common stock of K-Fed Bancorp will possess
exclusive voting rights in K-Fed Bancorp. Each holder of common stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors, therefore, directors will be elected by a plurality
of the shares actually voting on the matter. Under certain circumstances, shares
in excess of 10% of the issued and outstanding shares of common stock may be
considered "excess shares" and, accordingly, not be entitled to vote. See
"Restrictions on Acquisition of K-Fed Bancorp and Kaiser Federal Bank." If K-Fed
Bancorp issues preferred stock, holders of the preferred stock may also possess
voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
Kaiser Federal Bank, K-Fed Bancorp, as holder of Kaiser Federal Bank's capital
stock, would be entitled to receive, after payment or provision for payment of
all debts and liabilities of Kaiser Federal Bank, including all deposit accounts
and accrued interest thereon, all assets of Kaiser Federal Bank available for
distribution. In the event of liquidation, dissolution or winding up of K-Fed
Bancorp, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of K-Fed Bancorp available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of liquidation or dissolution.
RIGHTS TO BUY ADDITIONAL SHARES. Holders of the common stock of K-Fed
Bancorp will not be entitled to preemptive rights with respect to any shares
which may be issued. Preemptive rights are the priority right to buy additional
shares if K-Fed Bancorp issues more shares in the
121
future. Therefore, if additional shares are issued by K-Fed Bancorp without the
opportunity for existing stockholders to purchase more shares, a stockholder's
ownership interest in the Company may be subject to dilution. The common stock
is not subject to redemption.
PREFERRED STOCK
None of the shares of K-Fed Bancorp's authorized preferred stock will be
issued in the stock offering. This stock may be issued with preferences and
designations as the board of directors may from time to time determine. The
board of directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control. K-Fed Bancorp
has no present plans to issue preferred stock. If preferred stock is issued in
the future, K-Fed Bancorp will not offer preferred stock to promoters except on
the same terms as it is offered to all other existing stockholders or to new
stockholders; or the issuance will be approved by a majority of K-Fed Bancorp's
independent directors who do not have an interest in the transaction and have
access, at K-Fed Bancorp's expense, to its or independent legal counsel.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for K-Fed Bancorp common stock is
Registrar and Transfer Company.
EXPERTS
Our consolidated statements of financial condition as of June 30, 2003 and
2002 and the related consolidated statements of income, stockholder's equity and
cash flows for each of the three years in the period ending June 30, 2003
included in this prospectus have been audited by McGladrey & Pullen, LLP,
independent auditors, as set forth in their report appearing elsewhere herein
and in the registration statement, and are included in reliance upon the reports
of this firm given upon the authority as experts in accounting and auditing.
RP Financial, LC. has consented to the publication herein of the summary of
its report to K-Fed Bancorp setting forth its opinion as to the estimated pro
forma market value of the common stock upon its issuance and its letter with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences of
the stock offering has been passed upon for K-Fed Bancorp by Jenkens &
Gilchrist, A Professional Corporation, Washington, D.C. and Dallas, Texas,
special counsel to Kaiser Federal Bank and K-Fed Bancorp. The California
franchise tax consequences of the stock issuance will be passed upon for K-Fed
Bancorp and Kaiser Federal Bank by RSM McGladrey, Inc., Riverside, California.
Certain legal matters will be passed upon for Keefe, Bruyette & Woods by Breyer
& Associates PC, McLean, Virginia.
122
ADDITIONAL INFORMATION
K-Fed Bancorp has filed with the SEC a registration statement under the
Securities Act of 1933 with respect to the common stock offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus does not
contain all the information set forth in the registration statement. This
information, including the appraisal report which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of this material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including K-Fed Bancorp. The
statements contained in this prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
statement is qualified by reference to the contract or document.
K-Fed Bancorp has filed an Application for Minority Stock Issuance with the
Office of Thrift Supervision with respect to the stock offering. This prospectus
omits certain information contained in this application. The application may be
examined at the principal office of the Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552, and at the Western Regional Office of the
Office of Thrift Supervision located at 2001 Junipero Serra Boulevard., Suite
650, Daly City, California 94014.
In connection with the stock offering, K-Fed Bancorp has registered its
common stock with the SEC under Section 12 of the Securities Exchange Act of
1934, and, upon such registration, K-Fed Bancorp and the holders of its stock
will become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and other requirements
of the Securities Exchange Act of 1934. Under the plan of stock issuance, K-Fed
Bancorp has undertaken that it will not terminate this registration for a period
of at least three years following the completion of the stock issuance.
A copy of the plan of stock issuance and the charter and bylaws of K-Fed
Bancorp, Kaiser Federal Bank and K-Fed Mutual Holding Company and the appraisal
report of RP Financial, LC. are available without charge from Kaiser Federal
Bank. Requests for such information should be directed to: Stockholder
Relations, K-Fed Bancorp, 1359 N. Grand Avenue, Covina, California 91724 at
(800) 524-2274.
123
K-FED BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report.................................................F-2
Consolidated Statements of Financial Condition at September 30, 2003
(unaudited) and June 30, 2003 and 2002.....................................F-3
Consolidated Statements of Income for the Three months Ended September 30, 2003
and 2002 (unaudited) and for the Years Ended
June 30, 2003, 2002 and 2001...............................................F-4
Consolidated Statements of Stockholder's Equity for the Three Months Ended
September 30, 2003 (unaudited) and for the Years Ended
June 30, 2003, 2002 and 2001...............................................F-5
Consolidated Statements of Cash Flows for the Three Months Ended September 30,
2003 and 2002 (unaudited) and for the Years Ended June 30, 2003, 2002
and 2001...................................................................F-6
Notes to Consolidated Financial Statements...................................F-7
All schedules are omitted because the required information is not
applicable or is included in the Consolidated Financial Statements and related
Notes.
The consolidated financial statements of K-Fed Mutual Holding Company have
been omitted because K-Fed Mutual Holding Company has not conducted any business
other than that of an organizational nature.
F-1
McGladrey & Pullen
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
K-Fed Bancorp
Covina, California
We have audited the accompanying consolidated statements of financial condition
of K-Fed Bancorp (the Company) and Subsidiary as of June 30, 2003 and 2002 and
the related consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended June 30, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of K-Fed Bancorp and
Subsidiary as of June 30, 2003 and 2002 and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2003
in conformity with accounting principles generally accepted in the United States
of America.
(M&P Signature)
Irvine, California
July 11, 2003
McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms.
F-2
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
ASSETS
JUNE 30
SEPTEMBER 30 --------------------------------------
2003 2003 2002
----------------- ----------------- -----------------
(unaudited)
Cash and due from banks $ 4,147 $ 4,545 $ 3,355
Federal funds sold 17,205 11,645 975
----------------- ----------------- -----------------
Total cash and cash equivalents 21,352 16,190 4,330
Interest bearing deposits in other financial
institutions 891 6,437 23,378
Held-to-maturity investments, fair value of $39,349,
$14,373 and $19,866 at September 30, 2003, June
30, 2003 and 2002, respectively 38,979 14,247 19,787
Loans, net 377,141 389,640 236,914
Accrued interest receivable 1,705 1,669 1,330
Premises and equipment 1,700 1,289 1,205
Other assets 6,788 4,281 2,250
----------------- ----------------- -----------------
Total assets $ 448,556 $ 433,753 $ 289,194
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Interest bearing $ 334,659 $ 316,120 $ 225,134
Non-interest bearing demand 25,908 30,119 26,904
----------------- ----------------- -----------------
Total deposits 360,567 346,239 252,038
FHLB advances 50,000 50,000 2,000
Accrued expenses and other liabilities 2,068 2,119 2,200
----------------- ----------------- -----------------
Total liabilities 412,635 398,358 256,238
----------------- ----------------- -----------------
Commitments and contingent liabilities
Stockholder's equity
Serial preferred stock; $.01 par value, 1,000,000
shares authorized; issued and outstanding - none - - -
Common stock; $.01 par value, 9,000,000 shares
authorized; 1,000 shares issued and outstanding - - -
Retained earnings 35,921 35,395 32,956
----------------- ----------------- -----------------
Total stockholders' equity 35,921 35,395 32,956
----------------- ----------------- -----------------
Total liabilities and stockholders' equity $ 448,556 $ 433,753 $ 289,194
================= ================= =================
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F - 3
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED YEARS ENDED JUNE 30
SEPTEMBER 30
------------------------------ -----------------------------------------------
2003 2002 2003 2002 2001
------------------------------ ------------ ------------- -------------
(unaudited)
INTEREST INCOME
Interest and fees on loans $ 4,600 $ 4,345 $ 19,149 $ 13,588 $ 10,903
Interest on investment
securities, taxable 203 180 561 967 1,492
FHLB dividends 27 13 85 38 43
Other interest 66 216 649 2,004 2,669
------------ ------------- ------------ ------------- -------------
Total interest income 4,896 4,754 20,444 16,597 15,107
------------ ------------- ------------ ------------- -------------
INTEREST EXPENSE
Interest on FHLB advances 379 9 1,038 32 1
Interest on deposits 1,958 1,726 7,327 6,590 6,451
------------ ------------- ------------ ------------- -------------
Total interest expense 2,337 1,735 8,365 6,622 6,452
------------ ------------- ------------ ------------- -------------
NET INTEREST INCOME 2,559 3,019 12,079 9,975 8,655
PROVISION FOR LOAN LOSSES 30 203 1,124 1,147 768
------------ ------------- ------------ ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,529 2,816 10,955 8,828 7,887
------------ ------------- ------------ ------------- -------------
NON-INTEREST INCOME
Service charges and fees 497 387 1,724 1,335 993
ATM fees and charges 288 271 1,155 925 584
Referral commissions 52 64 230 436 182
Gain on sale of credit card
portfolio - - - - 123
Other non-interest income (33) 15 77 146 144
------------ ------------- ------------ ------------- -------------
Total non-interest income 804 737 3,186 2,842 2,026
------------ ------------- ------------ ------------- -------------
NON-INTEREST EXPENSES
Salaries and benefits 1,310 1,317 5,257 4,506 3,495
Occupancy and equipment 324 292 1,193 1,079 878
ATM expense 241 250 999 869 695
Advertising and promotional 86 118 470 460 288
Professional services 96 88 555 335 291
Other operating expense 379 384 1,518 1,369 1,492
------------ ------------- ------------ ------------- -------------
Total non-interest 2,436 2,449 7,139
expenses 9,992 8,618
------------ ------------- ------------ ------------- -------------
INCOME BEFORE INCOME TAX EXPENSE 897 1,104 4,149 3,052 2,774
INCOME TAX EXPENSE 321 455 1,710 1,145 1,208
------------ ------------- ------------ ------------- -------------
NET INCOME $ 576 $ 649 $ 2,439 $ 1,907 $ 1,566
============ ============= ============ ============= =============
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F - 4
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE TOTAL
STOCK EARNINGS INCOME (LOSS) EQUITY
------------------------------------------------------------------
Balance, June 30, 2000 $ - $ 29,483 $ (37) $ 29,446
Net Income for the year ended June 30, 2001 - 1,566 1,566
Other comprehensive income:
Change in unrealized loss on securities 37 37
------------------------------------------------------------------
Balance, June 30, 2001 - 31,049 - 31,049
Net Income for the year ended June 30, 2002 - 1,907 1,907
------------------------------------------------------------------
Balance, June 30, 2002 - 32,956 - 32,956
Net Income for the year ended June 30, 2003 - 2,439 2,439
------------------------------------------------------------------
Balance, June 30, 2003 - 35,395 - 35,395
Distribution to capitalize Parent (unaudited) - (50) - (50)
Net Income for the three months ended September
30, 2003 (unaudited) - 576 576
------------------------------------------------------------------
Balance, September 30, 2003 (unaudited) $ - $ 35,921 $ - $ 35,921
==================================================================
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F - 5
K-FED BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 YEARS ENDED JUNE 30
------------------------------- --------------------------------------------
2003 2002 2003 2002 2001
------------- -------------- ------------ ------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 576 $ 649 $ 2,439 $ 1,907 $ 1,566
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Amortization of net premium on
investments 57 5 148 25 7
Amortization of premiums on loan
purchases 1,035 59 1,221 146 186
Accretion of loan origination fees (28) (5) (85) (17) -
Provision for loan losses 30 203 1,124 1,147 768
Depreciation and amortization 93 66 292 231 239
Gain on sale of credit card portfolio - - - - (123)
Increase in deferred income taxes - - (224) (113) (144)
(Increase) decrease in accrued
interest receivable (36) (30) (339) (384) 196
(Increase) decrease in other assets (2,507) (300) (213) 356 (456)
(Decrease) increase in accrued
expenses and other liabilities (51) (229) (81) 810 450
------------- ------------- ------------ ------------ ------------
Net cash (used in) provided by
operating activities (831) 418 4,282 4,108 2,689
------------- ------------- ------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of held-to-maturity
investments (25,015) - (9,628) (10,925) (14,133)
Proceeds from maturities of
held-to-maturity investments 226 7,586 15,020 9,665 24,522
Net decrease in time deposits with
other financial institutions 5,546 7,338 16,941 12,053 4,587
Purchases of loans (58,164) (20,393) (234,303) (99,935) (18,797)
Proceeds from sale of credit card
portfolio - - - - 2,647
Loan originations (25,632) (27,285) (126,123) (75,009) (65,166)
Loan principal repayments 95,258 24,810 205,440 77,593 55,214
Purchase of FHLB stock - (13) (1,594) (359) (42)
Purchases of premises and equipment (504) (136) (376) (493) (563)
------------- ------------- ------------ ------------ ------------
Net cash used in investing activities (8,285) (8,093) (134,623) (87,410) (11,731)
------------- ------------- ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from FHLB advances 12,000 25,140 52,030 2,000 -
Repayment of FHLB advances (12,000) (24,500) (4,030) - -
Net increase in deposits 14,328 6,857 94,201 54,450 30,187
Distribution to capitalize Parent (50) - - - -
------------- ------------- ------------ ------------ ------------
Net cash provided by financing
activities 14,278 7,497 142,201 56,450 30,187
------------- ------------- ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,162 (178) 11,860 (26,852) 21,145
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 16,190 4,330 4,330 31,182 10,037
------------- ------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,352 $ 4,152 $ 16,190 $ 4,330 $ 31,182
============= ============= ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits and FHLB advances $ 2,325 $ 1,720 $ 8,368 $ 6,634 $ 6,438
Income taxes paid $ 97 $ 250 $ 2,150 $ 1,015 $ 1,285
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F - 6
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
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 individual and
business customers from its 4 branches throughout California. While the
Bank originates all types of retail, and commercial real estate loans, the
majority of its residential real estate loans have been purchased from
other financial institutions. The accounting and reporting policies of the
Company and the Bank conform to accounting principles generally accepted in
the United States of America (GAAP) and general industry practices.
CHANGE IN REPORTING ENTITY: On July 1, 2003, the Bank consummated its
reorganization into a federally chartered mutual holding company form of
organization, whereby the Bank became the wholly owned subsidiary of the
newly formed Company with the Company becoming a wholly owned subsidiary of
the newly formed Parent. Since the reorganization was between organizations
under common control the transaction was accounted for in a manner similar
to a pooling of interests, whereby there was no effect on the accounting
for the Bank's assets, liabilities, equity, and earnings as of the date of
the reorganization. Also, as a result of this transaction the
capitalization of the Company has been reflected in the accompanying
financial statements as if the transaction had occurred at the beginning of
the earliest period presented.
BASIS OF PRESENTATION: The accompanying interim financial information as of
and for the periods ended September 30, 2003 and 2002 has been prepared in
accordance with the Securities and Exchange Commission rules and
regulations for reporting and therefore does not necessarily include all of
the information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP. This interim information
should be read in conjunction with the Company's audited financial
statements and related notes.
Operating results for the interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management,
the unaudited interim financial information for the three month periods
ended September 30, 2003 and 2002 reflects all adjustments, consisting of
normal recurring accruals and provisions, necessary for a fair presentation
thereof.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and the Bank. All material
intercompany balances and transactions have been eliminated in
consolidation. At September 30, 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 September 30, 2003.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS:
The preparation of consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change in the near
term relates to the determination of the allowance for loan losses.
F - 7
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on
hand, federal funds sold, demand deposits due from other banks and other
time deposits that have an original maturity of less than 90 days. For
purposes of reporting cash flows, loans and deposits are reported net.
INTEREST BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS: Interest bearing
deposits in other financial institutions mature within one year and are
carried at cost.
INVESTMENTS: Investments that the Bank has both the positive intent and
ability to hold to maturity are classified as held-to-maturity and carried
at cost adjusted for amortization of premiums and accretion of discounts
using the interest method. The sale of a security within three months of
its maturity date or after the collection of at least 85 percent of the
principal outstanding at the time the security was acquired is considered a
maturity for purposes of classification and disclosure. The Bank has not
designated any investments as trading or available-for-sale.
LOANS: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and deferred net loan origination fees, and
increased by premiums on purchased loans. Interest on loans is recognized
over the terms of the loans and is calculated using the simple interest
method on principal amounts outstanding. Loan premiums on purchased loans
are accreted into interest income as a yield adjustment over the estimated
lives of the loan pools using the effective interest method. The estimated
lives of these loan pools are re-evaluated periodically based on actual
prepayments. The current estimated lives of these loan pools range from two
to four years. Loan fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to
interest income using the effective interest method.
The Bank determines a loan to be delinquent when payments have not been
made according to contractual terms, typically evidenced by non-payment of
a monthly installment by the due date.
Accrual of interest on loans is discontinued when management believes,
after considering economics, business conditions, and collection efforts
that the borrower's financial condition is such that collection of interest
is doubtful. The Bank's policy is to stop accruing interest when the loan
becomes 90 days delinquent. All interest accrued but not collected for
loans that are placed on non-accrual status or subsequently charged off is
reversed against interest income. Income is subsequently recognized on the
cash basis until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal and future
payments are reasonably assured, in which case the loan is returned to
accrual status.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes that
collectability of the principal is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
The allowance is an amount that management believes will absorb estimated
losses relating to specifically identified loans, as well as probable
credit losses inherent in the balance of the loan portfolio, based on an
evaluation of the collectability of existing loans and prior loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. This evaluation does not
include the effects of expected losses on specific loans or groups of loans
that are related to future events or expected changes in economic
conditions. While management uses the best
F-8
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses, and may require the Bank to make adjustments to the allowance based
on their judgment about information available to them at the time of their
examinations.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as doubtful, substandard, or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience for consumer loans and
peer group loss experience for real estate loans adjusted for qualitative
factors.
A loan is impaired when it is probable, based on current information and
events, the Bank will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Commercial loans are evaluated for impairment based on their past due
status and are measured on an individual basis based on the present value
of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent. The
amount of impairment, if any, and any subsequent changes are included in
the allowance for loan losses.
Large groups of smaller balance homogenous loans are collectively evaluated
for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment disclosures.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS: The Bank accounts for
transfers and servicing of financial assets in accordance with SFAS No.
140, Accounting for Transfers and Servicing Financial Assets and
Extinguishment of Liabilities. SFAS No. 140 requires application of a
financial component's approach that focuses on control. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The statement also
distinguishes transfers of financial assets that are sales from transfers
of financial assets that are secured borrowings.
FEDERAL HOME LOAN BANK STOCK: The Bank, as a member of the Federal Home
Loan Bank (FHLB) system, is required to maintain an investment in capital
stock of the FHLB in an amount equal to the greater of 1% of its
outstanding mortgage loans or 5% of advances from the FHLB. No ready market
exists for the FHLB stock, and it has no quoted market value. The total
amount of FHLB stock included in other assets is $2,800,000, $2,601,500 and
$1,007,900 as of September 30, 2003 and June 30, 2003 and 2002,
respectively.
F-9
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
INVESTMENT IN LIMITED LIABILITY PARTNERSHIP (UNAUDITED): The Bank has an
approximate 20% investment in the California Affordable Housing Fund, a
limited liability partnership, which builds and operates affordable housing
projects located in Northern California. The Bank purchased the investment
for approximately $2,024,986 during the period ended September 30, 2003 and
has committed to fund another $1,325,000 over the next five years
contingent upon stipulations set forth in the partnership agreement. The
investment is included in other assets at September 30, 2003 and is being
accounted for using the equity method of accounting. The investment is
evaluated periodically for impairment based on the remaining allocable tax
credits. During the period ended September 30, 2003 the Bank recorded an
estimated charge to non-interest income of $40,000 for its share of losses
in the fund during this period.
PREMISES AND EQUIPMENT: Leasehold improvements and furniture and equipment
are carried at cost, less accumulated depreciation and amortization.
Furniture and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets, which is usually 3 to 5 years.
The cost of leasehold improvements is amortized using the straight-line
method over the terms of the related leases, which is usually 5 to 10
years.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
RECLASSIFICATIONS: Certain account reclassifications have been made to the
2002 and 2001 financial statements in order to conform to classifications
used in the current year. These reclassifications had no effect on
previously reported net income or equity.
2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash or on deposit
with the Federal Reserve Bank, based on a percentage of deposits. The total
of those reserve balances is approximately $675,000 at September 30, 2003
and June 30, 2003.
F-10
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
3. INVESTMENTS
Investments classified as held-to-maturity consist of the following (dollars in thousands):
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 2003 COST GAINS LOSSES VALUE
------------------ ----------------- ---------------- ---------------- -----------------
(unaudited)
Mortgage-backed securities
Fannie Mae $ 1,060 $ 14 $ - $ 1,074
Ginnie Mae 380 8 - 388
Freddie Mac 619 2 - 621
----------------- ---------------- ---------------- -----------------
2,059 24 - 2,083
----------------- ---------------- ---------------- -----------------
Collateralized mortgage obligations
Fannie Mae 12,120 221 - 12,341
Freddie Mac 24,800 151 (26) 24,925
----------------- ---------------- ---------------- -----------------
36,920 372 (26) 37,266
----------------- ---------------- ---------------- -----------------
$ 38,979 $ 396 $ (26) $ 39,349
================= ================ ================ =================
JUNE 30, 2003
Mortgage-backed securities
Fannie Mae $ 1,188 23 - 1,211
Ginnie Mae 406 7 - 413
Freddie Mac 695 10 - 705
----------------- ---------------- ---------------- -----------------
2,289 40 - 2,329
----------------- ---------------- ---------------- -----------------
Collateralized mortgage obligations
Fannie Mae 7,399 103 - 7,502
Freddie Mac 4,559 - (17) 4,542
----------------- ---------------- ---------------- -----------------
11,958 103 (17) 12,044
----------------- ---------------- ---------------- -----------------
$ 14,247 $ 143 $ (17) $ 14,373
================= ================ ================ =================
JUNE 30, 2002
Government agency securities
Fannie Mae $ 3,000 $ 2 $ - $ 3,002
FHLB 4,000 10 - 4,010
FFCB 1,000 25 - 1,025
----------------- ---------------- ---------------- -----------------
8,000 37 - 8,037
F-11
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities
Fannie Mae 1,825 10 (11) 1,824
Ginnie Mae 667 22 - 689
Freddie Mac 959 - (14) 945
----------------- ---------------- ---------------- -----------------
3,451 32 (25) 3,458
----------------- ---------------- ---------------- -----------------
Collateralized mortgage obligations
Fannie Mae 6,735 15 (1) 6,749
Freddie Mac 1,601 26 (5) 1,622
8,336 41 (6) 8,371
----------------- ---------------- ---------------- -----------------
$ 19,787 $ 110 $ (31) $ 19,866
================= ================ ================ =================
At September 30, 2003 and June 30, 2003, all of the Bank's investments consist of mortgage-backed securities.
Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or prepaid without any penalties. Therefore, the maturities of these
securities are not included in a maturity table.
There were no sales of securities during the fiscal years ending June 30, 2003 and 2002 or the three months
ended September 30, 2003.
F-12
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
4. LOANS
The composition of loans consists of the following (dollars in thousands):
SEPTEMBER 30 JUNE 30
----------------- ---------------------------------------
2003 2003 2002
----------------- ------------------ ------------------
(unaudited)
Real Estate:
One-to-Four family residential, fixed rate $ 69,130 $ 72,798 $ 71,734
One-to-Four family residential, variable rate 156,890 185,667 71,174
Multi-family residential, variable rate 61,917 42,275 20,345
Participation loans purchased, variable rate 1,006 1,098 2,475
----------------- ------------------ ------------------
Subtotal - residential and multi-family loans 288,943 301,838 165,728
----------------- ------------------ ------------------
Commercial real estate, variable rate 25,146 21,266 7,585
----------------- ------------------ ------------------
Other consumer installment loans to individuals:
Vehicle 55,335 56,872 51,947
Home equity 443 664 1,735
Loans secured by deposits 924 936 1,149
Other consumer loans, primarily unsecured 6,318 7,942 10,053
----------------- ------------------ ------------------
Subtotal - other consumer loans 63,020 66,414 64,884
----------------- ------------------ ------------------
Total loans 377,109 389,518 238,197
Deferred net loan origination fees (344) (354) (219)
Premiums on purchased loans 2,623 2,757 680
Allowance for loan losses (2,247) (2,281) (1,744)
----------------- ------------------ ------------------
$ 377,141 $ 389,640 $ 236,914
================= ================== ==================
The Bank has purchased residential loan participations originated by another financial institution. All of
these loan participations were purchased without recourse and are secured by real property. The originating
financial institution performs all servicing functions on these loans.
In the ordinary course of business, the Bank makes loans to its directors and officers at the same terms as
those prevailing at the time of origination for comparable transactions with other unrelated parties subject to
additional regulatory guidelines. Loans to directors and officers at September 30, 2003, June 30, 2003 and 2002
total $578,000, $598,000 and $1,017,000, respectively.
The Bank participates with other financial institutions in certain loans they have originated. The Bank
continues to service the participants' balance, which at September 30, 2003 totaled approximately $6.7 million
and represented 7 loans. The Bank receives a servicing fee of 25 basis points on these participated loans. The
Bank has not recorded any servicing assets or liabilities associated with these loans.
F-13
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
The following is an analysis of the changes in the allowance for loan losses (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30 YEARS ENDED JUNE 30
------------------------------- --------------------------------------------
2003 2002 2003 2002 2001
-------------- -------------- ------------- ------------- -------------
(unaudited)
Balance, beginning of year $ 2,281 $ 1,744 $ 1,744 $ 1,175 $ 863
Provision for loan losses 30 203 1,124 1,147 768
Recoveries 52 109 313 522 163
Loans charged off (116) (188) (900) (1,100) (619)
-------------- -------------- ------------- ----------------------------
Balance, end of year $ 2,247 $ 1,868 $ 2,281 $ 1,744 $ 1,175
============== ============== ============= ============= =============
There are no commercial real estate or multifamily loans that are impaired as of September 30, 2003 and June
30, 2003 and 2002.
Loans on which accrual of interest has been discontinued or reduced amounted to $63,260, $26,366 and $137,781,
respectively, at September 30, 2003, June 30, 2003 and 2002. If interest on those loans had been accrued, such
income would have approximated $2,328, $832 and $4,647 for June 30, 2003 and 2002, respectively.
Outstanding mortgage loan commitments at September 30, 2003, June 30, 2003 and 2002 total approximately
$2,094,000 (includes $1,659,000 in fixed rate commitments at September 30, 2003 which have rates ranging from
4.50% to 5.75%), $2,364,000 and $2,472,000, respectively. The Bank has also committed to purchase two mortgage
loan pools totaling $21,599,000 at June 30, 2003, however this commitment was satisfied by September 30, 2003
(unaudited).
Available credit on home equity and unsecured lines of credit is summarized as follows (dollars in thousands):
SEPTEMBER 30 JUNE 30
------------------ ---------------------------------------
2003 2003 2002
------------------ ------------------ ------------------
(unaudited)
Home equity $ 1,567 $ 1,148 $ 1,135
Other consumer 5,568 5,861 6,233
------------------ ------------------ ------------------
$ 7,135 $ 7,009 $ 7,368
================== ================== ==================
Commitments for home equity and unsecured lines of credit may expire without being drawn upon. Therefore, the
total commitment amount does not necessarily represent future cash requirements of the Bank. These commitments
are not reflected in the financial statements.
F-14
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (dollars in thousands):
SEPTEMBER 30 JUNE 30
------------------ ---------------------------------------
2003 2003 2002
------------------ ------------------ ------------------
(unaudited)
Loans $ 1,550 $ 1,570 $ 1,101
Investment securities 154 57 164
Other 1 42 65
------------------ ------------------ ------------------
$ 1,705 $ 1,669 $ 1,330
================== ================== ==================
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (dollars in thousands):
SEPTEMBER 30 JUNE 30
------------------ ---------------------------------------
2003 2003 2002
------------------ ------------------ ------------------
(unaudited)
Leasehold improvements $ 332 $ 332 $ 330
Furniture and equipment 3,590 3,089 2,782
------------------ ------------------ ------------------
3,922 3,421 3,112
Accumulated depreciation and amortization (2,222) (2,132) (1,907)
------------------ ------------------ ------------------
$ 1,700 $ 1,289 $ 1,205
================== ================== ==================
The Bank leases office space in four buildings. The operating leases contain renewal options and provisions
requiring the Bank to pay property taxes and operating expenses over base period amounts. All rental payments
are dependent only upon the lapse of time.
F-15
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
No significant lease agreements were negotiated during the three-month period ended September 30, 2003. Minimum
rental payments under operating leases with initial or remaining terms of one year or more at June 30, 2003 are
as follows (dollars in thousands):
YEARS ENDED JUNE 30
2004 $ 515
2005 471
2006 404
2007 364
2008 360
Subsequent years 661
---------------------
$ 2,775
=====================
Rental expense for the years ended June 30, 2003, 2002, and 2001 for all facilities leased under operating
leases totaled $597,000, $540,000, and $411,000 respectively. Rent expense for the three months ended September
30, 2003 and 2002 totaled $151,000 and $142,000, respectively.
7. DEPOSITS
Deposits are summarized as follows (dollars in thousands):
SEPTEMBER 30 JUNE 30
----------------- -------------------------------------
2003 2003 2002
----------------- -------------------------------------
(unaudited)
Savings $ 83,379 $ 82,691 $ 69,782
Checking accounts, non interest bearing 25,908 30,119 26,904
Money market accounts 93,835 87,555 59,970
Time certificates of deposit 157,445 145,874 95,382
----------------- ------------------ -----------------
$ 360,567 $ 346,239 $ 252,038
================= ================== =================
F-16
Deposits by maturity are summarized as follows (dollars in thousands):
SEPTEMBER 30 JUNE 30
----------------- -------------------------------------
2003 2003 2002
----------------- -------------------------------------
(unaudited)
No contractual maturity $ 203,122 $ 200,365 $ 156,656
0 - 1 year maturity 80,905 74,550 52,376
1 - 2 years maturity 29,400 22,969 14,106
2 - 3 years maturity 15,959 20,190 8,530
3 - 4 years maturity 11,992 9,156 11,491
4 - 5 years maturity 19,189 19,009 8,879
----------------- ------------------ -----------------
$ 360,567 $ 346,239 $ 252,038
================= ================== =================
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
Savings, checking accounts, money market accounts, and individual retirement accounts have no contractual
maturity. Certificate accounts have maturities of five years or less.
The aggregate amount of time deposits in denominations of $100,000 or more at September 30, 2003, June 30, 2003
and 2002 is approximately $42,418,000, $32,994,000 and $21,118,000, respectively. Generally deposits in excess
of $100,000 are not insured by the FDIC.
Time deposits in denominations of $100,000 or more by maturity are summarized as follows (dollars in
thousands):
SEPTEMBER 30 JUNE 30
----------------- -------------------------------------
2003 2003 2002
----------------- -------------------------------------
(unaudited)
0 - 1 year maturity 17,637 12,462 8,354
1 - 2 years maturity 9,370 5,638 3,391
2 - 3 years maturity 5,150 6,997 2,616
3 - 4 years maturity 4,240 1,976 4,144
4 - 5 years maturity 6,021 5,921 2,613
----------------- ------------------ -----------------
$ 42,418 $ 32,994 $ 21,118
================= ================== =================
F-17
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
Interest expense by major category is summarized as follows (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30 YEARS ENDED JUNE 30
------------------------------- --------------------------------------------
2003 2002 2003 2002 2001
-------------- -------------- ------------- ------------- -------------
(unaudited)
Money market accounts $ 419 $ 404 $ 1,604 $ 1,243 $ 1,306
Savings 161 218 899 933 1,093
Time certificates of deposit 1,378 1,104 4,824 4,414 4,052
-------------- -------------- ------------- ----------------------------
$ 1,958 $ 1,726 $ 7,327 $ 6,590 $ 6,451
============== ============== ============= ============= =============
8. CONCENTRATIONS OF CREDIT RISK
The Kaiser Permanente Medical Care Program employs a large percentage of the Bank's account holders. Further, a
significant concentration of the Bank's borrowers resides in California. Although the Bank has a diversified
loan portfolio, borrowers' ability to repay loans may be affected by the economic climate of either the health
care industry or the overall geographic region in which borrowers reside.
9. FEDERAL HOME LOAN BANK ADVANCES
The Bank utilizes a demand loan agreement with the Federal Home Loan Bank (FHLB). The terms of the agreement
call for pledging a portion of the Bank's mortgage portfolio based on the outstanding balance. As of September
30, 2003 and June 30, 2003, the Bank has pledged $295,277,242 and $299,921,599, respectively, in mortgage loans
under the terms of the agreement. At September 30, 2003 and June 30, 2003, the amount available to borrow under
this agreement is approximately $208,000,000 and $146,000,000. As of June 30, 2003, the $50,000,000 balance
consists of one fixed rate advance with an interest rate of 3.0%, which is due in October 2005. Interest is
payable monthly with principal and any unpaid accrued interest due at maturity.
There were no additional borrowings incurred during the three months ended September 30, 2003.
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to various legal actions normally associated with collections of loans and other business
activities of financial institutions, the aggregate effect of which, in management's opinion, would not have a
material adverse effect on the financial condition or results of operations of the Bank.
At September 30, 2003, June 30, 2003 and 2002, there were approximately $14,430,000, $9,272,000 and $901,000,
respectively, in cash and cash equivalents with balances in excess of insured limits.
The Bank has no outstanding commitments to sell loans or investments at September 30, 2003, June 30, 2003 and
2002.
F-18
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
11. EMPLOYEE BENEFITS
The Bank has a 401(k) pension plan that allows employees to defer a portion of their salary into the 401(k)
plan. The Bank matches 50% of the first 10% of employees' wage reductions. The Bank contributed $93,720
$73,350, and $62,767 respectively, to the plan for the years ended June 30, 2003, 2002, and 2001. For the three
months ended September 30, 2003 and 2002 the Bank contributed $35,167 and $24,739, respectively, to the plan
The Bank has an executive salary deferral program for the benefit of certain senior executives that have been
designated to participate in the program. The program allows an additional opportunity for key executives to
defer a portion of their compensation into a non-qualified deferral program to supplement their retirement
earnings. At September 30, 2003, June 30 2003 and 2002 the Bank has accrued a liability for executive deferrals
of $453,982________, $405,917, and $124,990, respectively
Effective July 1, 2001 the Bank began maintaining an Annual Incentive Plan and a Long-Term Incentive Plan for
key employees. Participants are awarded a percentage of their base salary for attaining certain personal
performance goals. The compensation expense related to these plans for the year ended June 30, 2003 and 2002
totaled $193,000 and $150,000 respectively. For the three months ended September 30, 2003 and 2002 the expense
totaled $42,000 and $48,000, respectively.
12. INCOME TAXES
The components of income tax expense are as follows (dollars in thousands):
SEPTEMBER 30 JUNE 30
------------------ -------------------------------------------------
2003 2003 2002 2001
------------------ --------------- -------------- ----------------
(unaudited)
Current
Federal $ 225 $ 1,426 $ 911 $ 1,031
State 96 508 347 321
------------------ --------------- -------------- ----------------
321 1,934 1,258 1,352
------------------ --------------- -------------- ----------------
Deferred
Federal - (166) (97) (121)
State - (58) (16) (23)
------------------ --------------- -------------- ----------------
- (224) (113) (144)
------------------ --------------- -------------- ----------------
Income tax expense $ 321 $ 1,710 $ 1,145 $ 1,208
================== =============== ============== ================
F-19
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------------------------------------------
The income tax provision differs from the amount of income tax determined by applying the United States federal
income tax rate to pretax income due to the following (dollars in thousands):
----------------
SEPTEMBER 30 JUNE 30 SEPTEMBER 30
---------------- -----------------------------------------------------------
2003 2003 2002 2001 2002
---------------- ------------ ------------ ------------------------------
(unaudited)
Federal income tax at 35%
statutory rate $ 314 $ 1,452 $ 1,068 $ 971 $ 386
State taxes, net of federal
tax benefit 63 297 218 198 79
Reversal of income tax
accrued upon expiration
of contingency (17) - (119) - -
Low income housing federal
tax credit (31) - - - -
Other, net (8) (39) (22) 39 (10)
---------------- ------------ ------------ ------------------------------
$ 321 $ 1,710 $ 1,145 $ 1,208 $ 455
================ ============ ============ ============ ================
Tax expense to priors before
income tax expense 35.8% 41.2% 37.5% 43.5% 41.2%
================ ============ ============ ============ ================
The Bank's total net deferred tax assets are as follows (dollars in thousands):
JUNE 30
---------------------------------------------
2003 2002
---------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 629 $ 436
Accrued expenses 281 121
Accrued State income tax 67 81
-------------------- --------------------
Total deferred tax assets 977 638
-------------------- --------------------
Deferred tax liabilities
Premises and equipment (89) (16)
Federal Home Loan Bank Stock dividends (78) (36)
-------------------- --------------------
Total deferred tax liabilities (167) (52)
-------------------- --------------------
Net deferred tax asset, included in other assets $ 810 $ 586
==================== ====================
F-20
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
There were no changes in total net deferred tax assets and liabilities
during the three-month period ended September 30, 2003, as income tax
expense has been estimated based on the effective rate expected to be
applicable for the full fiscal year.
13. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. The regulations require the Bank
to meet specific capital adequacy guidelines that involve quantitative
measures of Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined) to risk-weighted
assets (as defined) and Tier 1 capital to total assets (as defined).
Management's opinion, as of June 30, 2003, is that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 2003, the most recent notification from the Federal Deposit
Insurance Corporation, categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. (See Note 15) To be
categorized as well capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk based and Tier 1 leverage ratios as set forth in
the table below.
F-21
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- ------------------------------------------------------------------------------------------------------------------
There are no conditions or events since the notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are presented in the following table.
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
-------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------
(Dollars in thousands)
SEPTEMBER 30, 2003
(unaudited):
Total Capital (to
risk-weighted
assets) $ 38,118 13.50% $ 22,595 8.0% $ 28,244 10.0%
Tier 1 Capital (to
risk-weighted
assets) $ 35,871 12.70% $ 11,298 4.0% $ 16,947 6.0%
Tier 1 Capital (to
total assets) $ 35,871 8.00% $ 17,942 4.0% $ 26,469 5.0%
JUNE 30, 2003:
Total Capital (to
risk-weighted
assets) $ 37,675 15.11% $ 19,942 8.0% $ 24,927 10.0%
Tier 1 Capital (to
risk-weighted
assets) $ 35,395 14.20% $ 9,971 4.0% $ 14,956 6.0%
Tier 1 Capital (to
total assets) $ 35,395 8.16% $ 14,454 4.0% $ 21,682 5.0%
JUNE 30, 2002:
Total Capital (to
risk-weighted
assets) $ 34,700 20.92% $ 13,260 8.0% $ 16,575 10.0%
Tier 1 Capital (to
risk-weighted
assets) $ 32,956 19.87% $ 6,630 4.0% $ 9,945 6.0%
Tier 1 Capital (to
total assets) $ 32,956 11.40% $ 10,384 4.0% $ 15,577 5.0%
F-22
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- ------------------------------------------------------------------------------------------------------------------
Following is a reconciliation of the Banks stockholders equity as presented in the accompanying consolidated
balance sheet at September 30, 2003 to the regulatory capital ratios disclosed in the table above:
Total Capital Tier 1 Capital
Stockholders equity at September 30, 2003 $ 35,921 $ 35,921
Allowance for loan losses - 2,247
Parent equity (50) (50)
----------------- -----------------
$ 35,871 $ 38,118
================= =================
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using available market information and
appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a market exchange. The use of different
assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate fair value of each class of financial instruments
for which it is practicable to estimate fair value:
INVESTMENTS
Estimated fair values for investments are obtained from quoted market prices where available. Where
quoted market prices are not available, estimated fair values are based on quoted market prices of
comparable instruments.
LOANS
The estimated fair value for all fixed rate loans is determined by discounting the estimated cash flows
using the current rate at which similar loans would be made to borrowers with similar credit ratings and
maturities.
The estimated fair value for variable rate loans is the carrying amount.
The impact of delinquent loans on the estimation of the fair values described above is not considered to
have a material effect and, accordingly, delinquent loans have been disregarded in the valuation
methodologies employed.
F-23
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- ------------------------------------------------------------------------------------------------------------------
DEPOSITS
The estimated fair value of deposit accounts (savings, non interest bearing demand and money market
accounts) is the carrying amount. The fair value of fixed-maturity time certificates of deposit is
estimated by discounting the estimated cash flows using the current rate at which similar certificates
would be issued.
FHLB ADVANCES
The fair values of the FHLB advances are estimated using discounted cash flow analyses, based on the
Bank's current incremental borrowing rates for similar types of borrowing arrangements.
OTHER ON-BALANCE-SHEET FINANCIAL INSTRUMENTS
Other on-balance-sheet financial instruments include cash and cash equivalents, accrued interest
receivable, and accrued expenses and other liabilities. The carrying value of each of these financial
instruments is a reasonable estimation of fair value.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair values for the Bank's off-balance sheet loan commitments are estimated based on fees charged to
others to enter into similar agreements taking into account the remaining terms of the agreements and
credit standing of the Bank's customers. The estimated fair value of these commitments is not
significant.
The estimated fair value of the Bank's financial instruments are summarized as follows (dollars in thousands):
SEPTEMBER 30, 2003 JUNE 30, 2003 JUNE 30, 2002
----------------------- ----------------------- -----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
--------- ---------- --------- ---------- ---------- ----------
(Unaudited)
Financial Assets:
Cash and cash equivalents $ 4,147 $ 4,147 $ 16,190 $ 16,190 $ 4,330 $ 4,330
Investments
held-to-maturity 38,979 39,349 14,247 14,373 19,787 19,866
Interest bearing deposits
in other financial
institutions 891 891 6,437 6,437 23,378 23,378
Loans, net 377,141 384,150 389,640 393,048 236,914 238,247
Accrued interest receivable 1,705 1,705 1,669 1,669 1,330 1,330
Financial Liabilities:
Deposits 360,567 365,709 346,239 348,089 252,038 252,969
FHLB advances 50,000 51,178 50,000 51,689 2,000 2,000
F-24
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
The Bank assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the
fair values of the Bank's financial instruments will change when interest
rate levels change and that change may be either favorable or unfavorable
to the Bank. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate
risk. However, borrowers with fixed rate obligations are less likely to
prepay in a rising rate environment and more likely to prepay in a falling
rate environment. Conversely, depositors who are receiving fixed rates are
more likely to withdraw funds before maturity in a rising rate environment
and less likely to do so in a falling rate environment. Management monitors
rates and maturities of assets and liabilities and attempts to minimize
interest rate risk by adjusting terms of new loans and deposits and by
investing in securities with terms that mitigate the Bank's overall
interest rate risk.
F-25
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
15. SUBSEQUENT EVENT
STOCK OFFERING:
On November 22, 2003, 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. The plan is subject to
approval by the Office of Thrift Supervision (OTS).
As a condition to OTS approval of the stock offering, K-Fed Bancorp has
agreed that it will not initiate any action within one year of completion
of the stock offering 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 he capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the OTS or applicable
regulations.
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
$83,679 as of September 30, 2003.
Regulatory Capital:
F-26
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
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.
F-27
K-FED BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
JUNE 30, 2003, 2002 AND 2001
- ------------------------------------------------------------------------------------------------------------------
16. CONDENSED CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED
-------------------------------------------------------------------------
2002 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
--------------- --------------- ---------------- ---------------
Interest income $ 4,046 $ 4,039 $ 4,055 $ 4,457
Interest expense 1,764 1,676 1,555 1,627
--------------- --------------- ---------------- ---------------
Net interest income 2,282 2,363 2,500 2,830
Provision for loan losses 273 311 372 191
Non-interest income 609 682 700 851
Non-interest expense 2,132 2,100 2,145 2,241
--------------- --------------- ---------------- ---------------
Income before income tax 486 634 683 1,249
Income tax expense 200 262 286 397
--------------- --------------- ---------------- ---------------
Net income $ 286 $ 372 $ 397 $ 852
=============== =============== ================ ===============
2003
Interest income $ 4,754 $ 5,062 $ 5,271 $ 5,357
Interest expense 1,735 2,058 2,215 2,357
--------------- --------------- ---------------- ---------------
Net interest income 3,019 3,004 3,056 3,000
Provision for loan losses 203 368 282 271
Non-interest income 737 795 792 862
Non-interest expense 2,449 2,418 2,509 2,616
--------------- --------------- ---------------- ---------------
Income before income tax 1,104 1,013 1,057 975
Income tax expense 455 418 436 401
--------------- --------------- ---------------- ---------------
Net income $ 649 $ 595 $ 621 $ 574
=============== =============== ================ ===============
F-28
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO UP TO
MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST 4,562,625 SHARES
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY K-FED BANCORP,
KAISER FEDERAL BANK OR KEEFE, BRUYETTE & WOODS, INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED K-FED BANCORP
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING (Holding Company for
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY Kaiser Federal Bank)
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF K-FED BANCORP OR KAISER FEDERAL BANK SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
COMMON STOCK
--------------
TABLE OF CONTENTS
PAGE
--------------
Summary.................................................... PROSPECTUS
Risk Factors...............................................
Selected Financial and Other Data.......................... --------------
Recent Developments........................................
Management's Discussion and Analysis of
Recent Developments.....................................
K-Fed Bancorp..............................................
Kaiser Federal Bank........................................ KEEFE, BRUYETTE & WOODS, INC.
K-Fed Mutual Holding Company...............................
How We Intend to Use the Proceeds.......................... __________, 2004
Our Policy Regarding Dividends.............................
Market for the Common Stock................................
Pro Forma Data.............................................
Capitalization.............................................
Pro Forma Regulatory Capital Analysis......................
The Stock Offering.........................................
Proposed Stock Purchases by Management.....................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................
Business of K-Fed Mutual Holding Company...................
Business of K-Fed Bancorp..................................
Business of Kaiser Federal Bank............................
Management ................................................
How We Are Regulated.......................................
Taxation...................................................
Restrictions on Acquisitions of K-Fed Bancorp.
and Kaiser Federal Bank.................................
Description of Capital Stock of K-Fed Bancorp.............
Transfer Agent and Registrar...............................
Experts....................................................
Legal and Tax Opinions.....................................
Additional Information.....................................
Index to Consolidated Financial Statements.................F-1
- -----------------------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATIONS
Until the later of _____, 2004 or 25 days after the
commencement of the syndicated Community offering, if any, all
dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- -----------------------------------------------------
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance of the shares.
Counsel fees and expenses................................................... $ 200,000
NASD Filing Fee............................................................. $ 5,000
NASDAQ National Market Listing Fee.......................................... $ 100,000
Data processing fees and expenses........................................... $ 25,000
Accounting fees and expenses................................................ $ 120,000
Appraisal and business plan preparation fees and expenses................... $ 63,000
Underwriting fees(1) (including financial advisory fee and expenses)........ $ 460,000
Underwriter's counsel fees and expenses..................................... $ 40,000
Printing, postage and mailing............................................... $ 300,000
SEC Registration Fee........................................................ $ 3,700
Blue Sky fees and expenses.................................................. $ 10,000
Stock Transfer Agent and Certificates....................................... $ 20,000
OTS Application Fee......................................................... $ 6,400
Other expenses(1)........................................................... $ 5,000
TOTAL.................................................................. $1,358,000
=========
- ------------------
(1) Based on maximum of Estimated Valuation Range and excludes ESOP shares and
shares purchased by management.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
- ---------------------------------------------------
Section 545.121 of OTS Regulations (12 C.F.R. ss. 545.121) sets forth the
ability of a federal savings & loan association to indemnify its officers and
directors. This section provides that a savings association shall indemnify any
person against whom an action is brought or threatened because that person is or
was a director, officer or employee of the association for: (1) any amount for
which that person become liable under a judgment; and (2) reasonable costs and
expenses, including reasonable attorney's fees, paid or incurred by that person
in defending or settling
II-1
such action, or in enforcing his or her rights under such section if he or she
attains a favorable judgment in such enforcement action.
Indemnification shall be made to such individuals if (1) final judgments on
the merits is in the individual's favor; or (2) in case of (i) settlement; (ii)
final judgment against the individual, or (iii) final judgment in the
individual's favor, other than on the merits, if a majority of the disinterested
directors determine that the individual was acting in good faith within the
scope of his or her employment or authority as he or she could have reasonably
perceived it under the circumstances and for a purpose he or she could
reasonably have believed under the circumstances was in the best interests of
the savings association of its members.
The section also provides that no indemnification may be made unless the
association gives the OTS 60 days notice of its intention to make such
indemnification.
In addition to providing indemnification, under OTS regulations, a savings
association may obtain insurance to protect it and its officers, directors and
employees from potential losses arising from claims against any of them for
alleged wrongful acts, or wrongful acts, committed in their capacity as
directors, officers or employees. However, the savings association may not
obtain insurance which provides for payment of losses of any person incurred as
a consequence of his or her willful or criminal misconduct.
Section 545.121 of OTS regulations is subject to and qualified by 12 U.S.C.
ss. 1821(k) which provides in general that a director or officer of an insured
depository institution may be held personally liable for monetary damages by, on
behalf of, or at the request or direction of the Federal Deposit Insurance
Corporation in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
- -------------------------------------------------
The Registrant was incorporated solely for the purpose of acting as the
holding company of Kaiser Federal Bank, and no sales of its securities have
occurred to date.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------
See the Exhibit Index filed as part of this registration statement.
ITEM 17. UNDERTAKINGS
- ----------------------
The undersigned Registrant hereby undertakes:
II-2
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) Reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; and
(iii) Include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
II-3
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-4
SIGNATURES
Pursuant to the Securities Act of 1933, the registrant has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Covina, State of California, on
January 27, 2004.
K-FED BANCORP
By: /s/ Kay M. Hoveland
-----------------------------------
Kay M. Hoveland, President and
Chief Executive Officer
(DULY AUTHORIZED REPRESENTATIVE)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kay M. Hoveland his or her true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all said attorney-in-fact
and agent or his or her substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Kay M. Hoveland /s/ Daniel A. Cano
- ---------------------------------- ----------------------------------
Kay M. Hoveland Daniel A. Cano
President, Chief Executive Officer Chief Financial Officer
and Director (Principal Accounting Officer)
Date: January 27, 2004 Date: January 27, 2004
/s/ James L. Breeden /s/ Robert C. Steinbach
- ---------------------------------- ----------------------------------
James L. Breeden Robert C. Steinbach
Director and Chairman Director
Date: January 27, 2004 Date: January 27, 2004
II-5
/s/ Gerald A. Murbach /s/ Frank G. Nicewicz
- ---------------------------------- ----------------------------------
Gerald A. Murbach Frank G. Nicewicz
Director Director
Date: January 27, 2004 Date: January 27, 2004
/s/ Rita H. Zwern /s/ Marilyn T. Owsley
- ---------------------------------- ----------------------------------
Rita H. Zwern Marilyn T. Owsley
Director Director
Date: January 27, 2004 Date: January 27, 2004
II-6
EXHIBIT INDEX
Exhibits:
1.1 Engagement Letter between K-Fed Bancorp, Inc. and Keefe, Bruyette &
Woods, Inc.*
1.2 Form of Agency Agreement between K-Fed Bancorp and Keefe, Bruyette &
Woods, Inc.*
2.0 Amended Plan of Stock Issuance
3.1 Charter of K-Fed Bancorp*
3.2 Bylaws of K-Fed Bancorp*
4 Form of Common Stock Certificate of K-Fed Bancorp*
5 Opinion of Jenkens & Gilchrist regarding legality of securities being
registered*
8.1 Federal Tax Opinion of Jenkens & Gilchrist
8.2 Tax Opinion of RSM McGladrey, Inc. concerning consequences of the
Initial Public Stock Offering of K-Fed Bancorp under the California
Corporate Tax law*
10.1 Form of Employee Stock Ownership Plan*
10.2 Deferred Compensation Agreement*
21 Subsidiaries of Registrant*
23.1 Consent of Jenkens & Gilchrist (contained in Opinions included as
Exhibits 5 and 8.1)
23.2 Consent of McGladrey & Pullen, LLP.
23.3 Consent of RP Financial LC.*
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between K-Fed Bancorp, Inc. and RP Financial, LC.
99.2 Appraisal Report of RP Financial, LC.**
99.3 Letter of RP Financial, LC. with respect to Subscription Rights*
99.4 Form of Marketing Materials to be used in connection with the Offering
99.5 Order and Acknowledgement Form
- --------------
*Previously Filed
**Filed Separately