As filed with the Securities and Exchange Commission on May 1, 1998
Registration No. 333-48093
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
First Kansas Financial Corporation
(Name of Small Business Issuer in Its Charter)
Kansas 6035 48-1198888
------ ---- ----------
(State or Other Jurisdiction (Primary SIC No.) (I.R.S. Employer
of Incorporation or Organization) Identification No.)
600 Main Street, Osawatomie, Kansas 66064
(913) 755-3033
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(Address and Telephone Number of Principal Executive Offices and
Principal Place of Business)
Mr. Larry V. Bailey
President and Chief Executive Officer
First Kansas Financial Corporation
600 Main Street, Osawatomie, Kansas 66064
(913) 755-3033
(Name, Address and Telephone Number of Agent for Service)
Please send copies of all communications to:
John J. Spidi, Esq.
Jean A. Milner, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO
THE PUBLIC: As soon as practicable after this registration
statement becomes effective.
<PAGE>
PROSPECTUS
Up to 1,553,938 Shares of Common Stock
FIRST KANSAS FINANCIAL CORPORATION
(Proposed Holding Company for First Kansas Federal Savings Bank)
600 Main Street
Osawatomie, Kansas 66064
(913) 755-3033
================================================================================
First Kansas Federal Savings Association is converting from the mutual
to the stock form of organization. As part of the conversion, First Kansas
Federal Savings Association will become a wholly owned subsidiary of First
Kansas Financial Corporation and will change its name to First Kansas Federal
Savings Bank. First Kansas Financial Corporation was formed in February 1998 and
upon consummation of the conversion will own all of the shares of First Kansas
Federal Savings Bank. The common stock of First Kansas Financial Corporation is
being offered for sale to the public in accordance with a plan of conversion.
The plan of conversion must be approved by the Office of Thrift Supervision and
by a majority of the votes eligible to be cast by members of First Kansas
Federal Savings Association. No common stock will be sold if First Kansas
Federal Savings Association does not receive these approvals or if First Kansas
Financial Corporation does not receive orders for at least the minimum number of
shares.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted First Kansas Federal Savings Bank to be between $9,987,500 and
$13,512,500 which establishes the number of shares to be offered. Subject to
Office of Thrift Supervision approval, up to 1,553,938 shares, an additional 15%
above the maximum number of shares, may be offered. Based on these estimates, we
are making the following offering of shares of common stock:
<TABLE>
<CAPTION>
<S> <C> <C>
o Price Per Share: $10.00
o Number of Shares
Minimum/Maximum/Maximum, as adjusted: 998,750 to 1,351,250 to 1,553,938
o Underwriting Commissions and Other Expenses
Minimum/Maximum/Maximum, as adjusted: ^ $450,000 to $500,000 to $500,000
--------------------------------
o Net Proceeds to First Kansas Financial Corporation
Minimum/Maximum/Maximum, as adjusted: $9,538,000 to $13,013,000 to $15,039,000
o Net Proceeds per Share
Minimum/Maximum/Maximum, as adjusted: $9.55 to $9.63 to $9.69
</TABLE>
Please refer to Risk Factors beginning on page ^ 14 of this document.
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 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
(913) 755-3350^
CAPITAL RESOURCES, INC.
__________, 1998
<PAGE>
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TABLE OF CONTENTS
Page
Questions and Answers About the Stock Offering............................. 1
Summary.................................................................... 3
Selected Financial and Other Data.......................................... 6
Recent Developments ....................................................... 9
Risk Factors............................................................... ^ 14
--
Proposed Purchases by Directors and Officers............................... ^ 17
--
Use of Proceeds............................................................ ^ 18
--
Dividends.................................................................. ^ 18
--
Market for the Common Stock................................................ ^ 19
--
Capitalization............................................................. ^ 20
--
Pro Forma Data............................................................. ^ 21
--
Historical and Pro Forma Capital Compliance................................ ^ 26
--
The Conversion............................................................. ^ 27
--
Consolidated Statements of Earnings........................................ ^ 39
--
Management's Discussion and Analysis ...................................... ^ 40
--
Business of First Kansas Financial Corporation............................. ^ 50
--
Business of First Kansas Federal Savings Association....................... ^ 50
--
Regulation................................................................. ^ 67
--
Taxation................................................................... ^ 72
--
Management of First Kansas Financial Corporation........................... ^ 74
--
Management of First Kansas Federal Savings Association..................... ^ 74
--
Restrictions on Acquisitions of First Kansas Financial Corporation......... ^ 80
--
Description of Capital Stock............................................... ^ 83
--
Indemnification of Officers and Directors.................................. ^ 84
--
Legal and Tax Matters...................................................... ^ 84
--
Experts.................................................................... ^ 85
--
Registration Requirements.................................................. ^ 85
--
Where You Can Find Additional Information.................................. ^ 85
--
Index to Consolidated Financial Statements................................. ^ 86
--
This document contains forward-looking statements which involve risks
and uncertainties. First Kansas Financial Corporation's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors" beginning on page ____ of this
document.
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<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the offering?
A: The purpose of the offering is to raise capital and change our
corporate form of organization. The offering gives you the chance to
become a stockholder of our newly formed holding company, First Kansas
Financial Corporation. Stockholders will share indirectly in our future
as a federal stock savings bank. The stock offering will increase our
capital and funds for lending and investment activities. As a stock
savings institution operating through a holding company structure, we
will have greater flexibility for investments.
Q: How do I purchase the stock?
A: You must complete and return the stock order form to us (no copies will
be accepted) together with your payment, on or before 12:00 noon,
__________, __________, 1998. If we do not receive sufficient orders by
that time, the offering may be extended until ________ ____, 1998.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares or $250. The maximum purchase is
15,000 shares (or $150,000) for any individual person or persons
ordering through a single account. No person, related person or persons
acting together, may purchase in total more than 20,000 shares (or
$200,000). We may decrease or increase the maximum purchase limitation
without notifying you. In the event that the offering is
oversubscribed, there will not be enough shares to fill all orders.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription in the subscription offering, the stock
will be offered in the following priorities:
o Priority 1 - Persons who had a deposit account with us of at
least $50.00 on September 30, 1996.
o Priority 2 - Tax Qualified Employee Plans (the employee stock
ownership plan of First Kansas Federal Savings Bank).
o Priority 3 - Persons who had a deposit account of at least
$50.00 with us on March 31, 1998.
o Priority 4 - Other persons entitled to vote on the approval of
the conversion.
If the above persons do not subscribe for all of the shares, the remaining
shares may be offered, with the help of Capital Resources, Inc., in a community
offering or a syndicated community offering. In the event of a community
offering, we will give a preference to natural persons who reside in Miami,
Bourbon, Mitchell and Phillips counties, Kansas. In a syndicated community
offering, we would offer any remaining shares to the general public through a
group of brokers/dealers organized by Capital Resources, Inc. We have the right
to reject any stock order in the community offering or syndicated community
offering.
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1
<PAGE>
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Q: What particular factors should I consider when deciding whether to buy
the stock?
A: Although the common stock ^ is expected to be listed on the Nasdaq ^
National Market, an active and liquid market for the stock may not
develop and, even if developed, may not be maintained. This may make it
difficult for you to resell the shares you purchase. Also, before you
decide to purchase stock, you should read this prospectus, including
the "Risk Factors" section on pages ____-____.
Q: As a depositor or borrower member of First Kansas Federal Savings
Association, what will happen if I do not purchase any stock?
A: You presently have voting rights since we are in the mutual form;
however, once we convert, voting rights will be held only by the
stockholders. You are not required to purchase stock. Your deposit
accounts, certificate accounts and any loans you may have with us will
not be affected.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. In addition, if you have any questions you should
contact:
Stock Information Center
First Kansas Financial Corporation
600 Main Street
Osawatomie, Kansas 66064
(913) ^ 755-3350
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2
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements of First
Kansas Federal Savings Association. References in this document to "we", "us",
and "our" refer to First Kansas Federal Savings Association either in its
present form or as a stock savings bank following the conversion, after which
our name will change to First Kansas Federal Savings Bank. In certain instances
where appropriate, "we", "us", or "our" refers collectively to First Kansas
Financial Corporation and First Kansas Federal Savings Association. References
in this document to the "Company" refer to First Kansas Financial Corporation.
The Companies
First Kansas Financial Corporation
600 Main Street
Osawatomie, Kansas 66064
(913) 755-3033
First Kansas Financial Corporation is not an operating company and has
not engaged in any significant business to date. It was formed in February 1998
as a Kansas-chartered corporation to be the holding company for First Kansas
Federal Savings Bank. The holding company structure will provide greater
flexibility in terms of operations, expansion and diversification. See page
- ----------.
First Kansas Federal Savings Association
600 Main Street
Osawatomie, Kansas 66064
(913) 755-3033
First Kansas Federal Savings Association was originally chartered in
1899 under the name "The Consolidated Building and Loan Association" and
commenced operations that same year. In 1938 we became a member of the Federal
Home Loan Bank System, obtained a federal charter and changed our name to "First
Federal Savings and Loan Association of Osawatomie." In 1983, we changed our
name to "First Kansas Federal Savings Association." We are a community and
customer oriented federal mutual savings association with six branch offices
located in Miami, Bourbon, Mitchell and Phillips counties. We provide financial
services to individuals, families and small businesses. Historically, we have
emphasized residential mortgage lending, primarily originating one- to
four-family mortgage loans. At December 31, 1997, we had total assets of $95.7
million, deposits of $85.7 million, and total equity of $6.6 million. See pages
________ to ________.
The Stock Offering
We are offering between 998,750 and 1,351,250 shares of common stock at
$10.00 per share. We may increase the offering to 1,553,938 shares without
further notice to you. We would do this for two reasons: changes in our
financial condition or market conditions that occur before we complete the
conversion; or to fill the order from our employee stock ownership plan. Any
increase over 1,351,250 shares would require the approval of the Office of
Thrift Supervision (the "OTS"). If we do increase the size of the offering
within these limits, you may not change or cancel any stock order previously
delivered to us.
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3
<PAGE>
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Stock Purchases
The shares of common stock will be offered on the basis of priorities.
If you are a depositor or borrower member, you will receive subscription rights
to purchase the shares. The shares will be offered first to persons with
subscription rights in a subscription offering, and any remaining shares may be
offered in a community offering or syndicated community offering. See pages
_______ to ______.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the
estimated market value of the common stock by Capital Resources Group, Inc., an
appraisal firm experienced in appraisals of savings institutions, which is
affiliated with Capital Resources, Inc. Capital Resources Group, Inc. has
estimated that in its opinion as of March 6, 1998, the estimated valuation range
of the common stock was between $9,987,500 and $13,512,500 (with a ^ midpoint of
$11,750,000). The estimated valuation range of the shares is our estimated
market value after giving effect to the sale of shares in this offering.
The appraisal was based ^ both upon our financial condition and
operations and upon the effect of the additional capital we will raise in this
offering. The $10.00 price per share was determined by our board of directors.
It is the price most commonly used in stock offerings involving conversions of
mutual savings institutions. The independent appraisal will be updated before we
complete the conversion. If the estimated valuation range of the common stock is
either below $9,987,500 or above $15,539,380, you will be notified and will have
the opportunity to modify or cancel your order. See pages ________ to
__________.
Termination of the Offering
The subscription offering will terminate at __:__ _.m., Osawatomie,
Kansas Time, on ________ ____, 1998. ^ Any community offering or syndicated
community offering^ may terminate at any time without notice, but no later than
________ ____, 1998, without approval by the OTS.
Benefits to Management from the Offering
Our employees will participate in the offering through individual
purchases and through purchases of stock by our employee stock ownership plan,
which is a type of retirement plan. We also intend to implement a restricted
stock plan and a stock option plan, which may benefit the President and other
officers and directors. If we adopt the restricted stock plan, our officers and
directors will be awarded stock at no cost to them. The restricted stock plan
and stock option plan may not be adopted until after the conversion and are
subject to stockholder approval and compliance with OTS regulations.
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4
<PAGE>
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Use of the Proceeds Raised from the Sale of Common Stock
Half of the net proceeds the Company receives from the sale of its
common stock will be contributed to the Association as payment for our stock.
Part of the remaining funds will be loaned to the bank employee stock ownership
plan to fund its purchase of 8% of the shares sold in the conversion. Remaining
proceeds will initially be placed in short-term investments. These funds may
later be used for stock repurchases or for the payment of dividends.
The funds the Association receives from the sale of our stock to the
Company will increase our capital for future lending and investment and will
also be used to improve our facilities and enhance the services we offer. A
portion of the funds we receive may also be used to fund the purchase of up to
4% of the shares for the restricted stock plan which is expected to be adopted
following the conversion. See page __________.
Dividends
First Kansas Financial Corporation does not initially expect to pay
dividends and no decision has been made regarding the future declaration of
dividends. We may, however, ^ at a later time establish a dividend policy. See
page __________.
Market for the Common Stock
^ It is expected that our common stock ^ will be traded on the Nasdaq ^
National Market under the symbol ^"FKAN". An active and liquid trading market,
however, may not develop or be maintained. Investors should have a long-term
investment intent. Persons purchasing shares may not be able to sell their
shares when they desire or sell them at a price equal to or above $10.00.
Capital Resources, Inc. is expected to make a market in the common stock.
Capital Resources, Inc. will, however, not be subject to any obligation with
respect to such efforts. See page __________.
Important Risks in Owning First Kansas Financial Corporation's Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages __ -________ of this document.
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5
<PAGE>
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SELECTED FINANCIAL AND OTHER DATA
We are providing the following summary financial information about us
for your benefit. This information is derived from our audited financial
statements. The following information is only a summary and you should read it
in conjunction with our financial statements and notes beginning on page F-1.
Selected Financial Data
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- -------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets................................................ $95,655 $101,245 $91,192 $90,325 $93,192
Cash and cash equivalents............................. 4,600 4,222 2,305 2,395 1,037
Loans receivable, net(1).............................. 46,563 42,827 30,755 29,705 33,651
Investment securities, held-to-maturity............... 3,852 2,800 4,341 5,409 5,548
Mortgage-backed securities, held-to-maturity.......... 20,937 24,861 26,059 47,436 49,775
Mortgage-backed securities, available-for-
sale................................................ 16,833 23,723 25,315 2,748 --
Loans held for sale................................... -- -- 76 90 699
Deposits.............................................. 85,651 83,723 82,489 84,098 87,389
FHLB borrowings....................................... 2,550 11,350 1,900 -- --
Equity................................................ 6,610 5,795 5,952 5,655 5,155
Number of:
Deposit accounts...................................... ^ 15,439 14,740 14,227 11,697 12,353
------
Full service offices.................................. 6 6 6 6 6
</TABLE>
- -----------------------------
(1) Loans receivable, net is comprised of total loans less allowance for
loan losses, deferred loan fees and the undisbursed portion of loans in
process.
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6
<PAGE>
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Summary of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income........................ ^ $6,895 $6,544 $6,106 $5,886 $6,541
Interest expense....................... ^ 4,239 4,016 3,668 3,267 3,629
------- ----- ----- ----- -----
Net interest income.................. 2,656 2,528 2,438 2,619 2,912
Provision for loan losses.............. 35 -- 1 2 23
------ ------ ------ ------ ------
Net interest income after
provision for loan losses.......... 2,621 2,528 2,437 2,617 2,889
Noninterest income..................... 852 710 462 387 542
------ ------ ------ ------ ------
Subtotal............................. 3,473 3,238 2,899 3,004 3,431
Noninterest expense(1)................. 2,352 2,952 2,294 2,084 2,023
------ ------ ----- ----- -----
Earnings before income taxes.......... 1,121 286 605 920 1,408
Income tax expense..................... 449 115 242 346 530
------ ------ ------ ------ ------
Net income .......................... $ 672 $ 171 $ 363 $ 574 $ 878
====== ====== ====== ====== ======
</TABLE>
- ----------------
(1) Noninterest expense for the year ended December 31, 1996 included a
one-time deposit insurance special assessment of $545,000 to
recapitalize the Savings Association Insurance Fund of the FDIC.
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7
<PAGE>
Key Operating Ratios
<TABLE>
<CAPTION>
At or For the Years Ended
December 31,
-------------------------
1997 1996(5)
---- -------
<S> <C> <C>
Performance ratios:
Return on total assets(1) ....................................................................... 0.67% 0.18%
Return on total equity(2) ....................................................................... 10.78 2.85
Interest rate spread ............................................................................ 2.52 2.44
Net interest margin(3) .......................................................................... 2.75 2.70
Ratio of noninterest expense to average total assets ............................................ 2.34 3.03
Ratio of average interest-earning assets to average
interest-bearing liabilities .................................................................. 105.18 106.13
Ratio of net interest income after provision for loan
losses, to total noninterest expense .......................................................... 111.95 86.04
Asset quality ratios:
Non-performing assets to total assets at end of period(4) ....................................... 0.08 0.02
Non-performing loans to total loans ............................................................. 0.17 0.04
Allowance for loan losses to non-performing loans ............................................... 226.58 858.82
Allowance for loan losses to loans receivable, net .............................................. 0.38 0.34
Net charge-offs during the period to average loans
outstanding during the period ................................................................. -- 0.01
Capital ratios:
Equity to assets at period end .................................................................. 6.91 5.72
Ratio of average equity to average assets ....................................................... 6.21 6.15
</TABLE>
- --------------
(1) Ratio of net earnings to average total assets.
(2) Ratio of net earnings to average total equity.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Non-performing assets include non-accrual loans, foreclosed real estate
and other repossessed assets.
(5) For 1996, return on total assets, return on total equity and the ratio
of noninterest expense to average total assets, excluding the effect of
the special assessment to recapitalize the SAIF (see footnote 1 on page
7), were .51%, 8.31% and 2.47%, respectively.
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8
<PAGE>
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RECENT DEVELOPMENTS
Selected Financial and Other Data
Set forth below are summaries of our historical financial and other
data at the dates and for the periods indicated. Financial data as of March 31,
1998 and for the three months ended March 31, 1998 and 1997 are unaudited. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. The summary of
operations and other data for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations for the fiscal year ending
December 31, 1998.
Selected Financial Data
<TABLE>
<CAPTION>
At At
March 31, December 31,
--------- ------------
1998 1997
---- ----
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
Total amount of:
Assets............................................................... $94,492 $95,655
Cash and cash equivalents............................................ 5,464 4,600
Loans receivable, net(1)............................................. 44,937 46,563
Investment securities, held-to-maturity.............................. 3,873 3,852
Mortgage-backed securities, held-to-maturity......................... 20,534 20,937
Mortgage-backed securities, available-for-sale....................... 17,081 16,833
Loans held for sale.................................................. -- --
Deposits............................................................. 85,389 85,651
FHLB borrowings...................................................... 650 2,550
Equity............................................................... 6,953 6,610
Number of:
Deposit accounts..................................................... 15,494 15,439
Full service offices................................................. 6 6
</TABLE>
- -----------------------------
(1) Loans receivable, net is comprised of total loans less allowance for
loan losses, deferred loan fees and the undisbursed portion of loans in
process.
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9
<PAGE>
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Summary of Operations
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
(In thousands)
(Unaudited)
<S> <C> <C>
Interest income....................................................... $1,649 $1,719
Interest expense...................................................... 989 1,055
------ ------
Net interest income................................................. 660 664
Provision for loan losses............................................. 7 --
------ ------
Net interest income after provision for loan losses................ 653 664
Noninterest income.................................................... 201 179
------ ------
Subtotal............................................................ 854 843
Noninterest expense................................................... 569 559
------ ------
Earnings before income taxes.......................................... 285 284
Income tax expense.................................................... 113 108
------ ------
Net income ......................................................... $ 172 $ 176
==== ====
</TABLE>
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10
<PAGE>
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Key Operating Ratios
<TABLE>
<CAPTION>
At or For the Three Months Ended
March 31,
------------------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Performance ratios:
Return on total assets(1)......................................... .72% .69%
Return on total equity(2)......................................... 10.15 11.83
Interest rate spread.............................................. 2.45 2.42
Net interest margin(3)............................................ 2.82 2.69
Ratio of noninterest expense to average total assets.............. 2.39 2.22
Ratio of average interest-earning assets to average
interest-bearing liabilities.................................... 106.34 104.88
Ratio of net interest income after provision for loan
losses, to total noninterest expense............................ 114.61 118.82
Asset quality ratios:
Non-performing assets to total assets at end of period(4)......... -- --
Non-performing loans to total loans............................... -- --
Allowance for loan losses to non-performing loans................. 373.91 14,100.00
Allowance for loan losses to loans receivable, net................ .38 .33
Net charge-offs during the period to average loans
outstanding during the period................................... -- --
Capital ratios:
Equity to assets at period end.................................... 7.36 6.06
Ratio of average equity to average assets......................... 7.10 5.90
</TABLE>
- ----------------
(1) Ratio of net earnings to average total assets.
(2) Ratio of net earnings to average total equity.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Non-performing assets include non-accrual loans, foreclosed real estate
and other repossessed assets.
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11
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
Total assets decreased by $1.2 million or 1.27% due primarily to repayment of
FHLB borrowings and lines of credit.
Deposits decreased by $262,000 million due primarily to competitive rates
offered by other local institutions. Advances from the FHLB decreased by $1.9
million or 74.51% as a result of prepayment.
Total equity increased $343,000 as a result of first quarter earnings and
improvements in our available- for-sale securities portfolio.
Non-Performing Assets and Delinquencies
Loans accounted for on a non-accrual basis decreased to $46,000 at March 31,
1998 from $79,000 at December 31, 1997. This decrease was the result of several
such loans becoming current in payment. At March 31, 1998, the Association had
no repossessed assets or real estate owned. The allowance for loan losses was
$172,000 at March 31, 1998.
Comparison of the Results of Operations for the Three Months Ended March 31,
1998 and 1997
Net Income. Net income decreased by $4,000 or 2.27% to net income of $172,000
for the three months ended March 31, 1997 from net income of $176,000 for the
same three months of fiscal 1998. The return on average assets increased to
0.72% from 0.69% for the three months ended March 31, 1998 and 1997,
respectively.
Net Interest Income. Net interest income decreased $4,000, or .60%, from
$664,000 for the three months ended March 31, 1997, to $660,000 for the three
months ended March 31, 1998.
Interest Income. Interest income decreased $70,000 for the three months ended
March 31, 1998 compared to the three months ended March 31, 1997. The decrease
in interest income was primarily attributable to fewer interest-earning assets.
The average balance of interest-earning assets decreased by 5.97%. The average
yield on interest-earning assets increased moderately to 7.02% from 7.01% for
the quarters ended March 31, 1998 and 1997, respectively.
Interest Expense. Interest expense decreased $66,000 from $1,055,000 for the
three months ended March 31, 1997, to $989,000 for the three months ended March
31, 1998. The decrease in interest expense was attributable to reduced FHLB
borrowings. The average balance of deposits increased by $2.0 million and the
average balance of advances from the FHLB decreased by $8.9 million, from the
three months ended March 31, 1997 to the three months ended March 31, 1998.
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12
<PAGE>
- --------------------------------------------------------------------------------
Non-Interest Income. Non-interest income increased by $22,000 primarily due to
an increase in service charges on deposit accounts of $29,000.
Non-Interest Expense. Non-interest expense increased by $10,000 primarily due to
inflation.
Income Taxes. Income tax expense amounted to $108,000 for the three months ended
March 31, 1997 compared to $113,000 for the three months ended March 31, 1998.
Capital Resources
Management monitors our risk-based capital and leverage capital ratios in order
to assess compliance with regulatory guidelines. At March 31, 1998, the
Association had tangible capital, leverage, and total risk- based capital of
6.88%, 6.88%, and 19.27%, respectively, which exceeded the OTS's minimum
requirements of 1.5%, 3.0% and 8.0%, respectively.
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13
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Intent to Remain Independent
We have operated as an independent community savings institution since
1899. It is our intention to continue to operate as an independent community
institution following the conversion. Accordingly, you are urged not to
subscribe for shares of our common stock if you anticipate a quick sale of our
institution. See "Business of First Kansas Financial Corporation."
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between what we earn on our
interest-earning assets (such as mortgage loans and investment securities) and
what we pay on our interest-bearing liabilities (such as deposits and
borrowings). Most of our mortgage loans have rates of interest which are
adjustable and are generally originated with terms of up to 30 years, while our
deposit accounts have significantly shorter terms to maturity. During the first
year of an adjustable-rate loan, we usually offer an introductory rate that is
below market, which may result in lower interest income during this time. Some
of our interest-earning assets have fixed-rates of interest and have longer
effective maturities than our interest-bearing liabilities, which results in the
yield on our interest-earning assets generally adjusting more slowly to changes
in interest rates than the cost of our interest-bearing liabilities. As a
result, our net interest income will be adversely affected by material and
prolonged increases in interest rates. In addition, rising interest rates may
result in a lack of customer demand for loans, which would adversely affect our
earnings. See "Management's Discussion and Analysis -- Asset/Liability
Management."
Changes in interest rates can also affect the average life of loans and
mortgage-backed securities. Historically a reduction in interest rates has
resulted in increased prepayments of loans and mortgage-backed securities, as
borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
As a result of the conversion, our equity will increase substantially.
Our expenses will increase because of the costs associated with our employee
stock ownership plan, restricted stock plan, and the costs of being a public
company. We also expect expenses to increase because of planned improvements to
our facilities and equipment. In addition, we are building a new office to
replace our existing Paola branch office. This, we anticipate, will be completed
in June 1998. The cost of this new facility, including the land, will be
approximately $1.1 million, although this amount will be partially offset by
funds received from the sale of the existing Paola branch office. We do not know
if we will receive sufficient other income to offset these additional costs.
Because of the increases in our equity and expenses, our return on equity may
decrease as compared to our performance in previous years. A lower return on
equity could limit the trading price potential of the common stock. Moreover, we
initially intend to invest the net proceeds in short-term investments which
generally have lower yields than residential mortgage loans. For 1997 our return
on total equity was 10.78%. See "Use of Proceeds."
14
<PAGE>
Lack of Active Market for Common Stock
^ It is expected that the Company's common stock ^ will be traded on
the Nasdaq ^ National Market under the symbol ^"FKAN." A condition for quotation
on Nasdaq is that at least three market makers make, or agree to make, a market
in the stock. We will encourage and assist at least three market makers to make
a market in the common stock. Capital Resources, Inc. has indicated its intent
to make a market in the common stock upon completion of the Offering. It is,
however, under no obligation to do so, nor if it begins to do so, is it under
any obligation to continue to make a market in the stock.
An active trading market may not develop or be maintained. If an active
market does not develop, you may not be able to sell your shares promptly or ^
at a price equal to or above the price you paid for them. See "Market for the
Common Stock."
Fluctuations in Stockholders' Equity
Changes in interest rates also can affect the value of the Company's
investment and mortgage-backed securities and the ability to realize gains from
the sale of those assets which are included as available-for-sale. Generally,
the value of fixed-rate instruments fluctuate inversely with changes in interest
rates. Increases in interest rates generally result in decreases in the carrying
value of interest-earning assets which are classified as available-for-sale,
which would adversely affect the Company's results of operations if sold by the
Company, or the Company's stockholders' equity if retained by the Company as a
result of Statement of Financial Accounting Standards No. 115.
The market value and the amortized cost of the mortgage-backed
securities available-for-sale portfolio was $16.8 million and $17.3 million,
respectively, at December 31, 1997. Debt and equity securities which are
classified as "available-for-sale" are carried at fair value. Unrealized gains
and losses, net of income tax effect, are recorded as a separate component of
stockholders' equity and are excluded from income. As a result, if market rates
should increase in the future, then the market value of the Company's securities
available-for-sale is likely to decease, which will have an adverse effect upon
the Company's stockholders' equity, and conversely, a decrease in interest rates
will likely cause an increase in the Company's stockholders' equity.
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in the Company's articles of incorporation and bylaws, the
general corporation code of Kansas, and certain federal regulations may make it
difficult for someone to pursue a tender offer, change in control or takeover
attempt which is opposed by our management and board of directors. These
provisions include: restrictions on the acquisition of the Company's equity
securities and limitations on voting rights; the classification of the terms of
the members of the board of directors; certain provisions relating to meetings
of stockholders; denial of cumulative voting to stockholders in the election of
directors; the ability to issue preferred stock and additional shares of common
stock without shareholder approval; and supermajority provisions for the
approval of certain business combinations. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current board of
directors or management of the Company more difficult. In addition, the effect
of these provisions could be to limit the trading price potential of our stock.
See "Restrictions on Acquisition of First Kansas Financial Corporation."
15
<PAGE>
Possible Voting Control by Directors and Officers
Based upon the midpoint of the estimated valuation range, our officers
and directors intend to purchase approximately 7.57% of the common stock offered
in the conversion. These purchases together with the purchase of shares by our
employee stock ownership plan, as well as the potential acquisition of common
stock through the stock option plan and restricted stock plan, together with the
votes of a few supporters, could make it difficult for a stockholder to obtain
majority support for stockholder proposals which are opposed by our management
and board of directors. In addition, the voting of those shares could block the
approval of transactions (i.e., business combinations and amendments to our
articles of incorporation and bylaws) requiring the approval of 80% of the
stockholders under the Company's articles of incorporation. See "Proposed
Purchases by Directors and Officers," "Management of First Kansas Federal
Savings Association -- Executive Compensation," "Description of Capital Stock,"
and "Restrictions on Acquisition of First Kansas Financial Corporation"
Possible Dilutive Effect of Restricted Stock Plan and Stock Options
Upon completion of the conversion, shareholders will be asked to
approve the restricted stock plan and stock option plan. If approved, we will
issue stock and options to purchase stock to our officers and directors through
these plans. If the shares for the restricted stock plan and stock options are
issued from our authorized but unissued stock, your voting interests may be
diluted by up to approximately 12.3% and the trading price of our stock may be
potentially limited. See "Pro Forma Data," "Management of First Kansas Federal
Savings Association -- Proposed Future Stock Benefit Plans," and "-- Restricted
Stock Plan."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the OTS and the Federal Deposit Insurance Corporation (the "FDIC"). Bills have
been introduced in Congress that could consolidate the OTS with the Office of
the Comptroller of the Currency ("OCC") and require the Bank to adopt a
commercial bank charter. If we become a commercial bank, our investment
authority and the ability of the Company to engage in diversified activities may
be limited, which could adversely affect our value and profitability. See
"Regulation."
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, the Company
may not repurchase its shares. During each of the second and third years
following the conversion, the Company may repurchase up to 5% of its outstanding
shares. During those periods, even if we believe that additional repurchases
would be a good use of funds, we would not be able to do so without first
obtaining OTS approval. There is no assurance that OTS approval would be given.
See "The Conversion -- Restrictions on Repurchase of Shares."
Possible Year 2000 Computer Problems
A great deal of information has been disseminated about the widespread
computer problems that may arise in the year 2000. Computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Association.
Data processing is also essential to most other financial institutions and many
other companies.
16
<PAGE>
All our material data processing that could be affected by this problem
is provided by a third party service bureau. The service bureau used by the
Association has advised us that it expects to resolve this potential problem by
the third quarter of 1998, and to begin testing the system in the fourth
quarter. ^ If by the end of this year it appears that our primary data
processing service bureau will be unable to resolve this problem in a timely
manner, then we will identify a secondary data processing service provider to
complete the task. If we are unable to do this, we will identify those steps
necessary to minimize the negative impact the computer problems could have on
us. If we are unable to resolve this potential problem in time, ^ we will likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Association. See
"Management's Discussion and Analysis --Year 2000 Issues."
Possible Delay in Completing the Offering
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
conversion following the meeting of our members at which the Plan is being
submitted for approval. If delays are experienced, significant changes may occur
in our estimated pro forma market value upon conversion together 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 conversion is terminated, we
will charge all conversion expenses against current income and any funds
collected by us in the offering will be promptly returned, with interest, to
each potential investor.
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common
stock by each director and executive officer and their associates in the
conversion. Shares purchased by officers and directors in the conversion may not
be sold for at least one year. The table assumes that 1,175,000 shares (the
midpoint of the estimated valuation range) of the common stock will be sold at
$10.00 per share and that sufficient shares will be available to satisfy
subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Sold(1)
---- ------------------------- ------------ ------------ -------
<S> <C> <C> <C> <C>
J. Darcy Domoney Chairman 4,000 $ 40,000 0.34%
James E. Breckenridge Director 10,000 100,000 0.85
William R. Butler, Jr. Director 5,000 50,000 0.43
Roger L. Coltrin Director 20,000 200,000 1.70
Donald V. Meyer Director 20,000 200,000 1.70
Larry V. Bailey Director, President,
CEO and CFO 20,000 200,000 1.70
Daniel G. Droste Senior Vice President &
Treasurer 5,000 50,000 0.43
Galen E. Graham Senior Vice President &
Secretary 5,000 50,000 0.43
------ ------- ----
89,000 $890,000 7.57%
====== ======= ====
</TABLE>
- ---------------
(1) Does not include shares purchased by the employee stock ownership plan (the
"ESOP"). The numbers in this column have been rounded and may not add to
match the total.
17
<PAGE>
USE OF PROCEEDS
The Company will contribute half of the net proceeds from the offering
to the Association. A portion of the net proceeds to be retained by the Company
will be loaned to our employee stock ownership plan to fund its purchase of 8%
of the shares sold in the conversion. ^ See "Pro Forma Data." The balance of the
net proceeds retained by the Company will ^ initially be placed in short-term
investments. ^ These remaining proceeds may also serve as a source of funds for
the payment of dividends to stockholders or for the repurchase of the shares. ^
See "Business of First Kansas Financial Corporation."
The funds contributed to the Association by the Company will be used
for general corporate purposes including: (i) originating and purchasing loans,
(ii) investment in U.S. Government and federal agency securities, (iii)
investment in mortgage-backed securities, or (iv) repaying FHLB advances.
Initially we intend to invest the net proceeds in short-term investments until
we can deploy the proceeds into higher yielding assets. The funds added to our
capital will also strengthen our capital position. Although there are no such
current plans, the net proceeds may later be used to expand upon or diversify
our activities. We will use a portion of the funds to improve our facilities and
equipment. Some of the net proceeds may also be used to fund the purchase of 4%
of the shares for a restricted stock plan (the "RSP") which is anticipated to be
adopted following the conversion. ^ See "Pro Forma Data."
The net proceeds may vary because the total expenses of the conversion
may be more or less than those estimated. We expect our estimated expenses to
range from ^ $450,000 to $500,000 (even if the maximum of the estimated
valuation range is increased to up to $15,539,380). Our estimated net proceeds
will range from $9,538,000 to $13,013,000 (or up to $15,039,000 in the event the
maximum of the estimated valuation range is increased to $15,539,380). See "Pro
Forma Data." The net proceeds will also vary if expenses are different or if the
number of shares to be issued in the conversion is adjusted to reflect a change
in our estimated valuation range. Payments for shares made through withdrawals
from existing deposit accounts with us will not result in the receipt of new
funds for investment by us but will result in a reduction of our liabilities and
interest expense as funds are transferred from interest-bearing certificates or
accounts.
DIVIDENDS
Upon conversion, the Company's board of directors will have the
authority to declare dividends on the shares, subject to statutory and
regulatory requirements. Initially, however, the Company does not expect to pay
cash dividends^ and no decision has been made regarding the future declaration
of dividends. Any declaration of dividends by the board of directors will depend
upon a number of factors, including: (i) the amount of the net proceeds retained
by the Company in the conversion, (ii) investment opportunities available, (iii)
capital requirements, (iv) regulatory limitations, (v) results of operations and
financial condition, (vi) tax considerations, and (vii) general economic
conditions. Upon review of such considerations, the board may authorize future
dividends if it deems such payment appropriate and in compliance with applicable
law and regulation. For a period of one year following the completion of the
conversion, we do not intend to pay any extraordinary dividends that would be
treated for tax purposes as a return of capital or take any actions to pursue or
propose such dividends. In addition, there can be no assurance that regular or
special dividends will be paid, or, if paid, will continue to be paid. See
"Historical and Pro Forma Capital Compliance", "The Conversion -- Effects of
Conversion to Stock Form on Depositors and Borrowers of First Kansas Federal
Savings Association -- Liquidation Account" and "Regulation -- Dividend and
Other Capital Distribution Limitations."
18
<PAGE>
The Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders although the source of such dividends
will be dependent in part upon the receipt of dividends from the Association.
The Company is subject, however, to the requirements of Kansas law, which
generally requires that dividends be declared and paid out of a company's
surplus, or if there is no surplus, out of the company's net profits for the
fiscal year in which the dividend is declared or for the preceding fiscal year.
In addition to the foregoing, the portion of our earnings which has
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to the Company without the
payment of federal income taxes by us at the then current income tax rate on the
amount deemed distributed, which would include the amount of any federal income
taxes attributable to the distribution. See "Taxation -- Federal Taxation" and
Note 11 to our financial statements. The Association does not contemplate any
distribution that would result in a recapture of the bad debt reserve or
otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
As a newly organized corporation, the Company has never issued capital
stock, and consequently there is no established market for the common stock. ^
It is expected that the Company's common stock will be traded on the Nasdaq
National Market under the symbol ^"FKAN". Capital Resources, Inc. is expected to
make a market in the common stock. Making a market may include the solicitation
of potential buyers and sellers in order to match, buy and sell orders. Capital
Resources, Inc., however, will not be subject to any obligation with respect to
such efforts. If the common stock cannot be ^ traded on the Nasdaq ^ National
Market, it is expected that the ^ common stock will be ^ traded on the Nasdaq
SmallCap Market.
The development of an active trading market depends on the existence of
willing buyers and sellers. An active trading market in our common stock may not
develop or be maintained. You could have difficulty disposing of your shares and
so you should not view the shares as a short-term investment. You may not be
able to sell your shares at a price equal to or above the price you paid for the
shares.
19
<PAGE>
CAPITALIZATION
The following table presents, as of December 31, 1997, our historical
capitalization and the consolidated capitalization of the Company after giving
effect to the conversion and the other assumptions set forth below and under
"Pro Forma Data," based upon the sale of shares at the minimum, midpoint,
maximum, and 15% above the maximum of the EVR at a price of $10.00 per share.
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of (2)(3)
------------------------------------------------
Historical
Capitalization
at December 31, 998,750 1,175,000 1,351,250 1,553,938
1997 Shares Shares Shares Shares
------ --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) .................................. ^ $85,651 $ 85,651 $ 85,651 $ 85,651 $ 85,651
Borrowed funds ............................... 2,550 2,550 2,550 2,550 2,550
-------- -------- -------- -------- --------
Total deposits and borrowed funds .......... ^ $88,201 $ 88,201 $ 88,201 $ 88,201 $ 88,201
-------- ======== ======== ======== ========
Stockholders' equity:
Preferred stock, $.10 per share, 2,000,000
shares authorized; none to be issued ...... $ -- $ -- $ -- $ -- $ --
Common stock, $.10 par value, 8,000,000
shares authorized; total shares to be
issued as reflected ....................... -- 100 118 135 155
Additional paid-in capital ................... -- 9,438 11,157 12,878 14,884
Retained earnings, substantially restricted 6,935 6,935 6,935 6,935 6,935
Net unrealized gains (losses) on
available-for-sale securities ............ (325) (325) (325) (325) (325)
-------- -------- -------- -------- --------
Total equity(4) ............................ 6,610 16,148 17,885 19,623 21,649
Less:
Common stock acquired by ESOP .............. -- (799) (940) (1,081) (1,243)
Common stock acquired by RSP ............... -- (400) (470) (541) (622)
-------- -------- -------- -------- --------
Total stockholders' equity ................... $ 6,610 $ 14,949 $ 16,475 $ 18,001 $ 19,784
======== ======== ======== ======== ========
as a % of total assets ..................... 6.91% 14.37% 15.61% 16.82% 18.18%
======== ======== ======== ======== ========
</TABLE>
- ---------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of common stock after
the conversion in the event of implementation of the Option Plan or RSP.
See "Management of First Kansas Federal Savings Association - Proposed
Future Stock Benefit Plans -- Stock Option Plan" and "-- Restricted Stock
Plan."
(3) Assumes that 8% and 4% of the shares issued in the conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased by
the RSP in the conversion. It is assumed on a pro forma basis that the RSP
will be adopted by the board of directors, approved by stockholders of the
Company, and approved by the OTS. It is assumed that the RSP will purchase
common stock at $10.00 per share in the open market within one year of the
conversion in order to give an indication of its effect on capitalization.
The pro forma presentation does not show the impact of: (a) results of
operations after the conversion, (b) changing market prices of shares of
common stock after the conversion, or (c) a smaller than 4% purchase by the
RSP. Assumes that the funds used to acquire the ESOP shares will be
borrowed from the Company for a ten year term at the prime rate as
published in The Wall Street Journal. For an estimate of the impact of the
ESOP on earnings, see "Pro Forma Data." The Association intends to make
contributions to the ESOP sufficient to service and ultimately retire its
debt. The amount to be acquired by the ESOP and RSP is reflected as a
reduction from stockholders' equity. The issuance of authorized but
unissued shares for the RSP in an amount equal to 4% of the outstanding
shares of common stock will have the effect of diluting existing
stockholders' interests by 3.8%. There can be no assurance that stockholder
approval of the RSP will be obtained. See "Management of First Kansas
Federal Savings Association - Proposed Future Stock Benefit Plans -
Restricted Stock Plan."
(4) Includes retained earnings and unrealized gains and losses on
available-for-sale securities, net of taxes. The equity of the Association
will be substantially restricted after the conversion. See "Dividends,"
"Regulation - Dividends and Other Capital Distribution Limitations," "The
Conversion - Effects of conversion to Stock Form on Depositors and
Borrowers of First Kansas Federal Savings Association - Liquidation
Account" and Note 16 to the Financial Statements.
20
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, investable net proceeds
are currently estimated to be between $8.3 million and $13.2 million at the
minimum and maximum, as adjusted, of the estimated valuation range (the "EVR"),
based upon the following assumptions: (i) 8% of the shares will be sold to the
ESOP and 7.57% shares will be sold to executive officers and their associates;
(ii) Capital Resources, Inc. will receive a fee of (a) 1.25% of the aggregate
dollar amount of common stock sold in the conversion to investors who reside in
Kansas and in those counties of Missouri contiguous to Kansas (excluding the
sale of shares to the ESOP, executive officers, directors and their associates),
and (b) 1.05% of the aggregate dollar amount of common stock sold in the
conversion to investors who reside outside the areas described in (a) (iii) no
shares will be sold in a syndicated community offering; (iv) other conversion
expenses, excluding the sales fees paid to Capital Resources, Inc., will be
$380,000; and (v) 4% of the shares will be sold to the RSP. In addition, because
management of the Association presently intends to adopt the RSP within the
first year following the conversion, a purchase by the RSP in the conversion has
been included with the pro forma data to give an indication of the effect of a
4% purchase by the RSP, at a $10.00 per share purchase price in the market, even
though the RSP does not currently exist and is prohibited by OTS regulation from
purchasing shares in the conversion. The pro forma presentation does not show
the effect of: (a) results of operations after the conversion, (b) changing
market prices of the shares after the conversion, (c) less than a 4% purchase by
the RSP, or (d) dilutive effects of newly issued shares under the restricted
stock plan and the stock option plan (see footnotes 2 and 3).
The following table sets forth our historical net earnings and equity
prior to the conversion and the pro forma consolidated net earnings and
stockholders' equity of the Company following the conversion. Unaudited pro
forma consolidated net earnings and equity have been calculated for the fiscal
year ended December 31, 1997 as if the common stock to be issued in the
conversion had been sold at January 1, 1997 and the estimated net proceeds had
been invested at 5.50%, which was approximately equal to the one-year U.S.
Treasury bill rate at December 31, 1997. The one-year U.S. Treasury bill rate,
rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on deposits, has been used to estimate income on
net proceeds because it is believed that the one-year U.S. Treasury bill rate is
a more accurate estimate of the rate that would be obtained on an investment of
net proceeds from the offering. In calculating pro forma income, an effective
state and federal income tax rate of 40.0% has been assumed, resulting in an
after tax yield of 3.30% for the fiscal year ended December 31, 1997.
Withdrawals from deposit accounts for the purchase of shares are not reflected
in the pro forma adjustments. The computations are based upon the assumptions
that 998,750 shares (minimum of EVR), 1,175,000 shares (midpoint of EVR),
1,351,250 shares (maximum of EVR) or 1,553,938 shares (maximum, as adjusted, of
the EVR) are sold at a price of $10.00 per share. As discussed under "Use of
Proceeds," a portion of the net proceeds that the Company will receive will be
loaned to the ESOP to fund its anticipated purchase of 8% of shares issued in
the conversion. It is assumed that the yield on the net proceeds of the
conversion retained by the Company will be the same as the yield on the net
proceeds of the conversion transferred to us. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares. Per share amounts have been computed as if the
shares had been outstanding at the beginning of the periods or at the dates
shown, but without any adjustment of per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
21
<PAGE>
The stockholders' equity information is not intended to represent the
fair market value of the shares, or the current value of our assets or
liabilities, or the amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. For additional information regarding
the liquidation account, see "The Conversion -- Certain Effects of the
Conversion to Stock Form on Depositors and Borrowers of First Kansas Federal
Savings Association -- Liquidation Account" and Note 16 to the Financial
Statements. The pro forma income derived from the assumptions set forth above
should not be considered indicative of the actual results of our operations for
any period. Such pro forma data may be materially affected by a change in the
price per share or number of shares to be issued in the conversion and by other
factors. For information regarding investment of the proceeds see "Use of
Proceeds" and "The Conversion -- Stock Pricing" and "-- Change in Number of
Shares to be Issued in the Conversion."
22
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
-------------------------------------------------
998,750 1,175,000 1,351,250 1,553,938
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................ $ 9,988 $ 11,750 $ 13,513 $ 15,539
Less estimated offering expenses ...................... (450) (475) (500) (500)
-------- -------- -------- --------
Estimated net proceeds .............................. 9,538 11,275 13,013 15,039
Less: ESOP funded by the Company .................... 799 940 1,081 1,243
RSP funded by the Company ............................ 400 470 541 622
-------- -------- -------- --------
Estimated investable net proceeds .................. $ 8,339 $ 9,865 $ 11,391 $ 13,174
======== ======== ======== ========
Net income:
Historical net income ............................... $ 672 $ 672 $ 672 $ 672
Pro forma earnings on investable net proceeds ....... 276 326 376 436
Pro forma ESOP adjustment(1) ........................ (48) (56) (65) (75)
Pro forma RSPs adjustment(2) ........................ (48) (56) (65) (75)
-------- -------- -------- --------
Total ................................................ $ 851 $ 886 $ 918 $ 957
======== ======== ======== ========
Net income per share - basic and diluted:(4)
Historical net income per share ..................... $ 0.72 $ 0.62 $ 0.54 $ 0.47
Pro forma earnings on net proceeds .................. 0.30 0.30 0.30 0.30
Pro forma ESOP adjustment(1) ........................ (0.05) (0.05) (0.05) (0.05)
Pro forma RSP adjustment(2) ......................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Total(3) ............................................. $ 0.92 $ 0.82 $ 0.74 $ 0.67
======== ======== ======== ========
Ratio of offering price to pro forma earnings per
share(3) .............................................. 10.87x 12.20x 13.51x 14.93x
======== ======== ======== ========
Stockholders' equity:(4)
Historical .......................................... $ 6,610 $ 6,610 $ 6,610 $ 6,610
Estimated net proceeds .............................. 9,538 11,275 13,013 15,039
Less: Common stock acquired by ESOP(1) .............. (799) (940) (1,081) (1,243)
Common stock acquired by RSP(2) .............. (400) (470) (541) (622)
-------- -------- -------- --------
Total ........................................ $ 14,949 $ 16,475 $ 18,001 $ 19,784
======== ======== ======== ========
Stockholders' equity (book value) per share:(4)
Historical .......................................... $ 6.62 $ 5.62 $ 4.89 $ 4.25
Estimated net proceeds .............................. 9.55 9.60 9.63 9.68
Less: Common stock acquired by ESOP(1) .............. (0.80) (0.80) (0.80) (0.80)
Common stock acquired by RSP(2) .............. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Total ................................................ $ 14.97 $ 14.02 $ 13.32 $ 12.73
======== ======== ======== ========
Offering price as percentage of pro forma
stockholders' equity per share(5) ..................... 66.80% 71.33% 75.08% 78.55%
======== ======== ======== ========
</TABLE>
(Footnotes on following page)
23
<PAGE>
- --------------
(1) Assumes 8% of the shares sold in the conversion are purchased by the ESOP,
and that the funds used to purchase such shares are borrowed from the
Company. The approximate amount expected to be borrowed by the ESOP is not
reflected as a liability but is reflected as a reduction of capital. We
intend to make annual contributions to the ESOP over a ten year period in
an amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes: (i) that 3,995, 4,700, 5,405 and
6,216 ^weighted average shares at the minimum, mid-point, maximum and
maximum, as adjusted of the EVR, were committed to be released during the
year ended December 31, 1997 at 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 ("AICPA"); (ii) the effective tax
rate was 40.0% for such period; and (iii) only the ESOP shares committed to
be released were considered outstanding for purposes of the per share net
earnings. The pro forma stockholders' equity per share calculation assumes
all ESOP shares were outstanding, regardless of whether such shares would
have been released. Because the Company will be providing the ESOP loan,
only principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. As a result, to the extent the value of
the shares appreciates over time, compensation expense related to the ESOP
will increase. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the conversion were
committed to be released during the period ended December 31, 1997. See
Note 5 below. If it is assumed that all of the ESOP shares were included in
the calculation of earnings per share for the period ended at December 31,
1997, earnings per share would have been $.85, $.75, $.68, and $.62,
respectively, based on the sale of shares at the minimum, midpoint, maximum
and the maximum, as adjusted, of the EVR. See "Management of First Kansas
Federal Savings Association -- Other Benefits -- Employee Stock Ownership
Plan."
(2) Assumes the purchase by the RSP of 39,950, 47,000, 54,050 and 62,157 shares
at the minimum, mid-point, maximum, and maximum, as adjusted of the EVR.
The assumption in the pro forma calculation is that (i) shares were
purchased by the Company following the conversion, (ii) the purchase price
for the shares purchased by the RSP was equal to the purchase price of
$10.00 per share and (iii) 20% of the amount contributed was an amortized
expense during such period. Such amount does not reflect possible increases
or decreases in the value of such stock relative to the Purchase Price. As
we accrue compensation expense to reflect the five year vesting period of
such shares pursuant to the RSP, the charge against capital will be reduced
accordingly. Implementation of the RSP within one year of conversion would
be subject to regulatory review and stockholder approval at a meeting of
our stockholders to be held no earlier than six months after the
conversion. If the shares to be purchased by the RSP are assumed at January
1, 1997 to be newly issued shares purchased from the Company by the RSP at
the Purchase Price, at the minimum, midpoint, maximum and maximum, as
adjusted, of the EVR, pro forma stockholders' equity per share would have
been $14.78, $13.87, $13.19 and $12.63, respectively, and pro forma
earnings per share would have been $.90, $.80, $.72 and $.65 for the year
ended December 31, 1997. If the RSP is funded from newly issued shares,
stockholders' voting interests could be diluted by up to approximately
3.8%. See "Management of First Kansas Federal Savings Association --
Proposed Future Stock Benefit Plans -- Restricted Stock Plan."
(3) Pro forma net income per share calculations include the number of shares
assumed to be sold in the conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the period.
Accordingly, 75,905, 89,300, 102,695 and 118,099 shares have been
subtracted from the shares assumed to be sold at the minimum, mid-point,
maximum, and maximum, as adjusted, of the EVR, respectively, and 922,845,
1,085,700, 1,248,555 and 1,435,839 shares are assumed to be outstanding at
the minimum, mid-point, maximum, and maximum, as adjusted of the EVR. See
Note 1 above.
(4) Assumes that following the consummation of the conversion, the Company will
adopt the Option Plan, which if implemented within one year of conversion
would be subject to regulatory review and board of director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company stockholders to be held no earlier than six months
after the conversion. Under the Option Plan, employees and directors could
be granted options to purchase an aggregate amount of shares equal
24
<PAGE>
to 10% of the shares issued in the conversion at an exercise price equal to
the market price of the shares on the date of grant. In the event the
shares issued under the Option Plan were newly issued rather than purchased
in the open market, the voting interests of existing stockholders could be
diluted by up to approximately 9.1%. At the minimum, midpoint, maximum and
the maximum, as adjusted, of the EVR, if all shares under the Option Plan
were newly issued at the beginning of the respective periods and the
exercise price for the option shares were equal to the Purchase Price, the
number of outstanding shares would increase to 1,098,625, 1,292,500,
1,486,375 and 1,709,332, respectively, pro forma stockholders' equity per
share would have been $14.52, $13.66, $13.02 and $12.48, respectively and
pro forma earnings per share would have been $.86, $.77, $.70 and $.63,
respectively.
(5) The amounts shown do not reflect the federal income tax consequences of the
potential restoration to income of the bad debt reserves for income tax
purposes, which would be required in the event of liquidation. The amounts
shown also do not reflect the amounts required to be distributed in the
event of liquidation to eligible depositors from the liquidation account
which will be established upon the consummation of the conversion. Pro
forma stockholders' equity information is not intended to represent the
fair market value of the shares, the current value of our assets or
liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the conversion and by other factors.
25
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents our historical and pro forma capital
position relative to our capital requirements as of December 31, 1997. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to us, see "Regulation -- Savings Institution Regulation --
Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma(1)
-----------------------------------------------------------------------------------
$15,539,380
$9,987,500 $11,750,000 $13,512,500 Maximum,
Minimum Midpoint Maximum as adjusted
--------------------- ------------------- ------------------- -------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............$6,610 6.91% $10,180 10.18% $10,837 10.75% $11,494 11.31% $12,264 11.96%
===== ==== ====== ===== ====== ===== ====== ===== ====== =====
Tangible capital(3).....$6,280 6.58% $9,850 9.87% $10,507 10.45% $11,164 11.02% $11,934 11.67%
Tangible capital
requirement.......... 1,431 1.50 1,496 1.50 1,508 1.50 1,520 1.50 1,534 1.50
----- ---- ----- ---- ------ ----- ------ ----- ------ -----
Excess..................$4,849 5.08% $ 8,354 8.37% $ 8,999 8.95% $ 9,644 9.52% $10,400 10.17%
===== ==== ====== ==== ====== ===== ====== ===== ====== =====
Core capital(3).........$6,280 6.58% $9,850 9.87% $10,507 10.45% $11,164 11.02% $11,934 11.67%
Core capital
requirement(4)........ 2,861 3.00 2,993 3.00 3,016 3.00 3,040 3.00 3,068 3.00
----- ---- ----- ---- ------ ----- ------ ----- ------ -----
Excess..................$3,419 3.58% $6,857 6.87% $ 7,491 7.45% $ 8,124 8.02% $ 8,866 8.67%
===== ==== ===== ==== ====== ===== ====== ===== ====== =====
Total risk-based
capital(4)............$6,443 18.39% $10,013 27.88% $10,670 29.58% $11,327 31.26% $12,097 33.22%
Risk-based capital
requirement........... 2,803 8.00 2,873 8.00 2,886 8.00 2,898 8.00 2,913 8.00
----- ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess..................$3,640 10.39% $ 7,140 19.88% $ 7,784 21 .58% $ 8,429 23.26% $ 9,134 25.22%
===== ===== ====== ===== ====== ====== ====== ===== ====== =====
</TABLE>
- -----------------
(1) Institutions must value available-for-sale debt securities at amortized
cost, rather than at fair value, for purposes of calculating regulatory
capital. Institutions are still required to comply with SFAS No. 115 for
financial reporting purposes. The pro forma data has been adjusted to
reflect reductions in our capital that would result from an assumed 8%
purchase by the ESOP and 4% purchase by the RSP as of December 31, 1997. It
is assumed that the Company will retain 50% of net proceeds from the
offering. See "Use of Proceeds."
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) The unrealized loss on securities available-for-sale of $325,000 has been
added back to GAAP Capital to arrive at our Tangible and Core Capital.
(4) Our Risk-Based Capital includes our Tangible Capital plus $163,000 of our
allowance for loan losses. Our risk-weighted assets as of December 31, 1997
totalled approximately $35.0 million. Net proceeds available for investment
by us are assumed to be invested in interest earning assets that have a
20.0% risk-weighting.
26
<PAGE>
THE CONVERSION
Our board of directors and the OTS have approved the Plan subject to
approval by our members, and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval. OTS approval, however, does not
constitute a recommendation or endorsement of the Plan.
General
On December 16, 1997, our board of directors adopted a Plan of
Conversion, pursuant to which we will convert from a federally chartered mutual
savings association to a federally chartered stock savings bank and become a
wholly owned subsidiary of the Company. The conversion will include adoption of
the proposed ^ federal stock charter and ^ bylaws which will authorize the
issuance of capital stock by us. Under the Plan, our capital stock is being sold
to the Company and the common stock of the Company is being offered to our
eligible depositors and other members and then to the public. The conversion
will be accounted for at historical cost in a manner similar to a pooling of
interests. The OTS has approved the Company's application to become a savings
and loan holding company and to acquire all of our common stock to be issued in
the conversion.
The shares 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 of common stock may be offered
in a community offering on a best efforts basis through Capital Resources, Inc.
in such a manner as to promote a wide distribution of the shares. The community
offering, if any, may commence anytime subsequent to the commencement of the
subscription offering. Shares not subscribed for in the subscription and
community offerings may be offered for sale by the Company on a best efforts
basis in a syndicated community offering conducted by Capital Resources, Inc. We
have the right, in our sole discretion, to accept or reject, in whole or in
part, any orders to purchase shares of the common stock received in the
community and syndicated community offerings. See "-- Community Offering."
Shares of common stock in an amount equal to our pro forma market value
as a stock savings institution must be sold in order for the conversion to
become effective. The community offering or syndicated community offering must
be completed within 45 days after the last day of the subscription offering
period unless such period is extended by us with the approval of the OTS. The
Plan provides that the conversion must be completed within 24 months after the
date of the approval of the Plan by our members.
In the event that we are unable to complete the sale of common stock
and effect the conversion within 45 days after the end of the subscription
offering, we may request an extension of the period by the OTS. No assurance can
be given that the extension would be granted if requested. Due to the volatile
nature of market conditions, no assurances can be given that our valuation would
not substantially change during any such extension. If the EVR of the shares
must be amended, no assurance can be given that such amended EVR would be
approved by the OTS. Therefore, it is possible that if the conversion cannot be
completed within the requisite period, we may not be permitted to complete the
conversion. A substantial delay caused by an extension of the period may also
significantly increase the expense of the conversion. No sales of the shares may
be completed in the offering unless the Plan is approved by our members.
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 following approval of the Plan at the meeting of our members that will be
required to complete the sale of shares being offered in the conversion. If
27
<PAGE>
delays are experienced, significant changes may occur in our estimated pro forma
market value upon conversion together 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 conversion is terminated, we will charge all conversion expenses
against current income and any funds collected by us in the offering will be
promptly returned, with interest, to each potential investor.
Effects of Conversion to Stock Form on Depositors and Borrowers of First Kansas
Federal Savings Association
Voting Rights. Currently in our mutual form, our depositor and certain
borrower members have voting rights and may vote for the election of directors.
Following the conversion, all voting rights will be held solely by stockholders.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the conversion.
Furthermore, the amounts and terms of loans and obligations of the borrowers
under their individual contractual arrangements with us will not be affected by
the conversion.
Tax Effects. We have received an opinion from our counsel, Malizia,
Spidi, Sloane & Fisch, P.C. on the federal tax consequences of the conversion.
The opinion has been filed as an exhibit to the registration statement of which
this ^ prospectus is a part and covers those federal tax matters that are
material to the transaction. The opinion provides, in part, that: (i) the
conversion will qualify as a reorganization under Section 368(a)(1)(F) of the
Code, and no gain or loss will be recognized by us by reason of the proposed
conversion; (ii) no gain or loss will be recognized by us upon the receipt of
money from the Company for our stock, and no gain or loss will be recognized by
the Company upon the receipt of money for the shares; (iii) our assets will have
the same basis before and after the conversion; (iv) the holding period of our
assets will include the period during which the assets were held by us in our
mutual form; (v) no gain or loss will be recognized by the Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members upon the
issuance to them of withdrawable savings accounts in us in the stock form in the
same dollar amount as their savings accounts in us in the mutual form plus an
interest in our liquidation account in the stock form in exchange for their
savings accounts in us in the mutual form; (vi) provided that the amount to be
paid for the shares pursuant to the subscription rights is equal to the fair
market value of such shares, no gain or loss will be recognized by Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members under
the Plan upon the distribution to them of nontransferable subscription rights;
(vii) the basis of each account holder's savings accounts after the conversion
will be the same as the basis of his savings accounts prior to the conversion,
decreased by the fair market value of the nontransferable subscription rights
received and increased by the amount, if any, of gain recognized on the
exchange; (viii) the basis of each account holder's interest in the liquidation
account will be zero; (ix) the holding period of the common stock acquired
through the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised; (x) we will succeed to and take into account
our earnings and profits or deficit in earnings and profits as of the date of
conversion; (xi) immediately after conversion, we will succeed to the bad debt
reserve accounts previously held by us, and the bad debt reserves will have the
same character in our hands after conversion as if no distribution or transfer
had occurred; and (xii) the creation of the liquidation account will have no
effect on our taxable income.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part
on the assumption that the exercise price of the subscription rights will be
approximately equal to the fair market value of those shares at the time of the
completion of the proposed conversion. We have received an opinion of Capital
Resources Group, Inc. which, based on certain assumptions, concludes that the
subscription rights to be
28
<PAGE>
received by Eligible Account Holders and other eligible subscribers do not have
any economic value at the time of distribution or at the time the subscription
rights are exercised. Such opinion is based on the fact that such rights are:
(i) acquired by the recipients without payment therefor, (ii) non-transferable,
(iii) of short duration, and (iv) afford the recipients the right only to
purchase shares at a price equal to their estimated fair market value, which
will be the same price at which shares for which no subscription right is
received in the subscription offering will be offered in a public offering. If
the subscription rights granted to Eligible Account Holders or other eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
would be taxable only to those Eligible Account Holders or other eligible
subscribers who exercise the subscription rights in an amount equal to such
value (either as a capital gain or ordinary income), and we could recognize gain
on such distribution.
We are also subject to Kansas income taxes and have received an opinion
from Winkler, Lee, Tetwiler, Domoney & Schultz that the conversion will be
treated for Kansas state tax purposes similar to the conversion's treatment for
federal tax purposes. The opinion has been filed as an exhibit to the
registration statement to which this ^ prospectus is a part and covers those
state tax matters that are material to the transaction.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane
& Fisch, P.C., Winkler, Lee, Tetwiler, Domoney & Schultz and Capital Resources
Group, Inc. have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the Kansas tax authorities. Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members are
encouraged to consult with their own tax advisers as to the tax consequences in
the event the subscription rights are deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each depositor is entitled to equal distribution of
any of our assets, pro rata according to the value of his/her accounts,
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts). Each depositor's pro rata
share of such remaining assets would be in the same proportion as the value of
his/her deposit accounts was to the total value of all deposit accounts held by
us at the time of liquidation.
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
of our other general creditors. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled upon our complete liquidation after
conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account held in us on the qualifying
date, September 30, 1996. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, March 31, 1998. The interest as to
each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any annual closing date (December 31) is less
than the amount in such account on the
29
<PAGE>
respective qualifying dates, then the interest in this special liquidation
account would be reduced at that time by an amount proportionate to any such
reduction, and the interest would cease to exist if such deposit account was
closed. The interest in the special liquidation account will never be increased
despite any increase in the related deposit account after the respective
qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we in our converted form are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
Non-transferable subscription rights to purchase shares of the common
stock have been granted to persons and entities entitled to purchase shares in
the subscription offering under the Plan. If the community offering or
syndicated community offering, as described below, extends beyond 45 days
following the completion of the subscription offering, subscribers will be
resolicited. Subscription priorities have been established for the allocation of
stock to the extent that more shares are subscribed for than are to be issued in
the conversion subject to the purchase limitations set forth in the Plan and as
described below under "-- Limitations on Purchases of Shares." The following
priorities have been established:
Category 1: Eligible Account Holders (First Priority). Eligible Account Holders
are persons who had a deposit account of at least $50 with us on September 30,
1996. Each Eligible Account Holder will receive non-transferable subscription
rights on a priority basis to purchase that number of shares of common stock
which is equal to the greater of 15,000 shares ($150,000), or 15 times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares to be issued 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 (subject to the maximum purchase limitation). If there is an
oversubscription in this category, shares shall be allocated among subscribing
Eligible Account Holders so as to permit each such account holder, to the extent
possible, to purchase the lesser of 100 shares or the total amount of his
subscription. Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Only a
person(s) with a qualifying deposit as of the eligibility record date (or a
successor entity or estate) shall receive subscription rights in this category.
Any Person(s) added to a Savings Account after the Eligibility Record Date is
not an Eligible Account Holder. Subscription rights received by officers and
directors in this category based on their increased deposits with us in the
one-year period preceding September 30, 1996, are subordinated to the
subscription rights of other Eligible Account Holders. See "-- Limitations on
Purchases and Transfer of Shares."
Category 2: Tax-Qualified Employee Benefit Plans (Second Priority). Our
tax-qualified employee benefit plans ("Employee Plans") have been granted
subscription rights to purchase up to 8% of the total shares issued in the
conversion. The ESOP is an Employee Plan.
The right of Employee Plans to subscribe for shares is subordinate to
the right of the Eligible Account Holders to subscribe for shares. However, in
the event the offering results in the issuance of shares above the maximum of
the EVR (i.e., more than 1,351,250 shares), the Employee Plans have a priority
right to fill their subscription (the ESOP, the only Employee Plan, currently
intends to purchase up to 8% of the common stock issued in the conversion). The
Employee Plans may, however, determine
30
<PAGE>
to purchase some or all of the shares covered by their subscriptions after the
conversion in the open market or, if approved by the OTS, out of authorized but
unissued shares in the event of an oversubscription.
Category 3: Supplemental Eligible Account Holders (Third Priority). Supplemental
Eligible Account Holders are persons who had a deposit account of at least $50
with us on March 31, 1998. Each Supplemental Eligible Account Holder who is not
an Eligible Account Holder will receive non-transferable subscription rights to
purchase that number of shares which is equal to the greater of 15,000 shares
($150,000), or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares 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 is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders (subject to the maximum
purchase limitation). If the allocation made in this paragraph results in an
oversubscription, shares shall be allocated among subscribing Supplemental
Eligible Account Holders so as to permit each such account holder, to the extent
possible, to purchase the lesser of 100 shares or the total amount of his
subscription. Any shares not so allocated shall be allocated among the
subscribing Supplemental Eligible Account Holders on an equitable basis, related
to the amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Supplemental Eligible Account Holders.
See "--Limitations on Purchases and Transfer of Shares."
The rights of Supplemental Eligible Account Holders to subscribe for
shares is subordinate to the rights of the Eligible Account Holders and Employee
Plans to subscribe for shares.
Category 4: Other Members (Fourth Priority). Other Members are persons who have
a deposit account of at least $50 on April 30, 1998, the voting record date of
our special meeting, and borrowers also as of the voting record date of our
special meeting. Each Other Member who is not an Eligible Account Holder or
Supplemental Eligible Account Holder, will receive non-transferable subscription
rights to purchase up to 15,000 shares ($150,000) to the extent such shares are
available following subscriptions by Eligible Account Holders, Employee Plans,
and Supplemental Eligible Account Holders. In the event there are not enough
shares to fill the orders of the Other Members, the subscriptions of the Other
Members will be allocated so that each subscribing Other Member will be entitled
to purchase the lesser of 100 shares or the number of shares ordered. Any
remaining shares will be allocated among Other Members whose subscriptions
remain unsatisfied on a 100 share (or whatever lesser amount is available) per
order basis until all orders have been filled on the remaining shares have been
allocated. See "-- Limitations on Purchases and Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the shares pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any shares under the
Plan if he resides in a foreign country or in a state with respect to which any
of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in that state or foreign country;
(ii) the granting of subscription rights or offer or sale of shares of common
stock to those persons would require either us or our employees to register
under the securities laws of that state or foreign country as a broker or
dealer, or to register or otherwise qualify our securities for sale in that
state or foreign country; or (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise. No payments will be made in lieu
of the granting of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are
31
<PAGE>
granted and only for his or her account. Each person subscribing for shares will
be required to certify that he/she is purchasing shares solely for his/her own
account and has not entered into an agreement or understanding regarding the
sale or transfer of those shares. The regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase subscription rights or shares of common stock prior to the completion
of the conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights or which appear to
us to present other irregularities.
Expiration Date. The Subscription Offering will expire at ____:____
p.m., Osawatomie, Kansas Time, on ________ ____, 1998 (Expiration Date).
Subscription rights will become void if not exercised prior to the Expiration
Date.
Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the subscription offering, we may offer
shares in a community offering, with a preference to natural persons who reside
in Miami, Bourbon, Mitchell and Phillips counties, Kansas, on a best-efforts
basis through Capital Resources, Inc. in such a manner as to promote a wide
distribution of the common stock. Any orders received in connection with the
community offering, if any, will receive a lower priority than orders properly
made in the subscription offering by persons exercising Subscription Rights.
Common stock sold in the community offering will be sold at the same price as
all shares in the subscription offering. We have the right to reject any orders
in the community offering.
No person ordering through a single account will be permitted to
purchase more than 15,000 shares or $150,000 of common stock in the community
offering. In addition, no person, related person or persons acting together, may
purchase in all categories more than 20,000 shares or $200,000 of stock sold in
the conversion. To order common stock in connection with the community offering,
if held, an executed stock order and account withdrawal authorization (if
applicable) must be received prior to the termination of the community offering.
Promptly upon receipt of available funds, together with a properly executed
stock order and account withdrawal authorization, if applicable, and
certification, Capital Resources, Inc. will forward funds for any order in a
community offering to the Bank to be deposited in a subscription escrow account.
The date by which orders must be received in the community offering
("community offering Expiration Date") will be set by us at the time of
commencement of the community offering; provided however, if the offering is
extended beyond ________ ____, 1998, each subscriber will have the opportunity
to maintain, modify, or rescind his order. In such event, all funds received in
the community offering will be promptly returned with interest unless the
subscriber affirmatively indicates otherwise.
If an order in the community offering is accepted, promptly after the
completion of the conversion, a certificate for the appropriate amount of shares
will be forwarded to Capital Resources, Inc. as nominee for the beneficial
owner. In the event that an order is not accepted in the community offering or
the conversion is not consummated, we will promptly refund with interest the
funds received to Capital Resources, Inc. which will then return the funds to
the purchaser's account. If the appraisal of the estimated market value of the
Association and the Company is less than $9,987,500 or more than $15,539,380,
each subscriber will have the right to modify or rescind his order. The Plan
also permits Capital Resources, Inc. to conduct a syndicated community offering,
but this is not expected to occur. If a syndicated community offering does
occur, it will occur on a best-efforts basis through Capital
32
<PAGE>
Resources, Inc. on terms negotiated prior to commencement of the syndicated
community offering and, therefore, Capital Resources, Inc. will not be committed
to purchase any shares.
Ordering and Receiving Shares
Use of Order Forms. Rights to subscribe for stock in the subscription
offering or to purchase stock in the community offering (if any) may only be
exercised by completing an original order form. Persons ordering shares in the
subscription offering must deliver by mail or in person a properly completed and
executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "-- Payment for
Shares." Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. Once submitted, subscription orders cannot be revoked without our
consent unless the conversion is not completed within 45 days of the Expiration
Date.
In the event an order form (i) is not delivered and is returned to us
by the United States Postal Service or we are unable to locate the addressee,
(ii) is not received or is received after the Expiration Date, (iii) is
defectively completed or executed, or (iv) is not accompanied by full payment
for the shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment), the subscription rights for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed order form within the time period specified. We may, but
will not be required to, waive any irregularity on any order form or require the
submission of corrected order forms or the remittance of full payment for
subscribed shares by such date as we specify. The waiver of an irregularity on
an order form in no way obligates us to waive any other irregularity on that or
on any other order form. Waivers will be considered on a case by case basis.
Photocopies of order forms, payments from private third parties, or electronic
transfers of funds will not be accepted. Our interpretation of the terms and
conditions of the Plan and of the acceptability of the order forms will be
final. We have the right to investigate any irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule l5c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of common stock may be made (i)
in cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us. Appropriate means by which such withdrawals may be
authorized are provided in the order form. Once such a withdrawal has been
authorized, no portion of the designated withdrawal amount may be used by the
subscriber for any purpose other than to purchase the shares. Where payment has
been authorized to be made through withdrawal from a savings account, the sum
authorized for withdrawal will continue to earn interest at the contract rate
until the conversion has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. Payments made in cash or by check or money order, will be placed
in a segregated savings account and interest will be paid by us at our passbook
savings account rate from the date payment is received until the conversion is
completed or terminated. An executed order form, once received by us, may not be
modified, amended, or rescinded without our consent,
33
<PAGE>
unless the conversion is not completed within 45 days after the conclusion of
the subscription offering, in which event subscribers may be given an
opportunity to increase, decrease, or rescind their order. In the event that the
conversion is not consummated, all funds submitted pursuant to the offering will
be refunded promptly with interest.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares in the offering, provided that such IRAs are not maintained on
deposit with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your
self-directed IRA. Because of the paperwork involved, persons owning IRAs with
us who wish to use their IRA account to purchase stock in the offering, must
contact the Stock Information Center no later than ________ ____, 1998.
The ESOP may subscribe for shares by submitting its order form along
with evidence of a loan commitment from a financial institution or the Company
for the purchase of the shares during the subscription offering and by making
payment for shares on the date of completion of the conversion.
Federal regulations prohibit us from lending funds or extending credit
to any person to purchase shares in the conversion.
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the conversion will be mailed to the person(s) at the
address noted on the order form, as soon as practicable following consummation
of the conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Plan of Distribution
Materials for the offering have been distributed to eligible
subscribers by mail. Additional copies are available at our Stock Information
Center. Our officers may be available to answer questions about the conversion.
Responses to questions about us will be limited to the information contained in
this document. Officers will not be authorized to render investment advice. All
subscribers for the shares being offered will be instructed to send payment
directly to us. The funds will be held in a segregated special escrow account
and will not be released until the closing of the conversion or its termination.
Marketing Arrangements
We have engaged Capital Resources, Inc. as our financial advisor in
connection with the offering. Capital Resources, Inc. has agreed to exercise its
best efforts to assist us in the sale of the shares in the offering. Capital
Resources, Inc. will receive a fee of (a) 1.25% of the aggregate dollar amount
of common stock sold in the offerings to investors who reside in Kansas and
those counties of Missouri contiguous to Kansas (excluding shares sold to our
directors, executive officers and their associates, and to the ESOP); and (b)
1.05% of the aggregate dollar amount of common stock sold in the offerings to
investors who reside outside the areas described in (a). We will also reimburse
Capital Resources, Inc. for its out-of-pocket expenses (up to $20,000) and legal
expenses (up to $25,000). Also, we have agreed to indemnify Capital Resources,
Inc. for reasonable costs and expenses in connection with certain claims or
liabilities which might be asserted against Capital Resources, Inc. This
indemnification covers the investigation, preparation of defense and defense of
any action, proceeding or claim relating to, among other things,
misrepresentation or breach of warranty of the written agreement between Capital
Resources, Inc. and the Association or the omission or alleged omission of a
material fact required to be stated or necessary in order to make disclosure in
the prospectus and related documents not misleading.
34
<PAGE>
We will negotiate the fees and reimbursement of expenses for Capital Resources,
Inc. before we begin any syndicated community offering.
The shares will be offered principally by the distribution of this
document and through activities conducted at the Stock Information Center. The
Stock Information Center is expected to operate during our normal business hours
throughout the offering. A registered representative employed by Capital
Resources, Inc. will be working at, and supervising the operation of, the Stock
Information Center. Capital Resources, Inc. will assist us in responding to
questions regarding the conversion and the offering and processing order forms.
Our personnel will be present in the Stock Information Center to assist Capital
Resources, Inc. with clerical matters and to answer questions related solely to
our business.
Stock Pricing
We have retained Capital Resources Group, Inc., an independent
consulting and appraisal firm, which is experienced in the evaluation and
appraisal of business entities, including savings institutions involved in the
conversion process to prepare an appraisal of our estimated market value.
Capital Resources Group, Inc. will receive fees of $15,000 for preparing the
appraisal and $5,000 for its assistance in connection with the preparation of a
business plan and also will be reimbursed reasonable out-of-pocket expenses. We
have agreed to indemnify Capital Resources Group, Inc. under certain
circumstances against liabilities and expenses arising out of or based on any
misstatement or untrue statement of a material fact contained in the information
we supplied to Capital Resources Group, Inc.
Capital Resources Group, Inc. has prepared the appraisal in reliance
upon the information contained herein, including the financial statements. The
appraisal contains an analysis of a number of factors including, but not limited
to, our financial condition and operating trends, the competitive environment
within which we operate, operating trends of certain savings institutions and
savings and loan holding companies, relevant economic conditions, both
nationally and in the State of Kansas which affect the operations of savings
institutions, and stock market values of certain savings institutions. In
addition, Capital Resources Group, Inc. has advised us that it has considered
the effect of the additional capital raised by the sale of the shares on our
estimated aggregate pro forma market value.
On the basis of the above, Capital Resources Group, Inc. has
determined, in its opinion, that as of March 6, 1998, our estimated market value
was $11,750,000. OTS regulations require, however, that the appraiser establish
a range of value for the stock to allow for fluctuations in the aggregate value
of the stock due to changing market conditions and other factors. Accordingly,
Capital Resources Group, Inc. has established a range of value from $9,987,500
to $13,512,500 for the offering, the EVR. The EVR will be updated prior to
consummation of the conversion and the EVR may increase to $15,539,380 without
resolicitation of subscriptions.
The board of directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal. The board of
directors is relying upon the expertise, experience and independence of the
appraiser and is not qualified to determine the appropriateness of the
assumptions.
In order for stock sales to take place Capital Resources Group, Inc.
must confirm to the OTS that, to the best of Capital Resources Group, Inc.'s
knowledge and judgment, nothing of a material nature has occurred which would
cause Capital Resources Group, Inc. to conclude that the Purchase Price on an
aggregate basis was incompatible with Capital Resources Group, Inc.'s estimate
of our pro forma market value in converted form at the time of the sale. If,
however, facts do not justify such a statement, an amended EVR may be
established.
35
<PAGE>
The appraisal is not a recommendation of any kind as to the
advisability of purchasing these shares. In preparing the appraisal, Capital
Resources Group, Inc. has relied upon and assumed the accuracy and completeness
of financial and statistical information provided by us. Capital Resources
Group, Inc. did not independently verify the financial statements and other
information provided by us, nor did Capital Resources Group, Inc. independently
value our assets and liabilities. The appraisal considers us only as a going
concern and it should not be viewed as our liquidation value. Moreover, because
the appraisal is based upon estimates and projections of a number of matters
which are subject to change, the market price of the common stock could decline
below $10.00. Capital Resources Group, Inc. is affiliated with Capital
Resources, Inc.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the
completion of the offerings, we may significantly increase or decrease the
number of shares to be issued in the conversion. In the event of an increase in
the valuation, we may increase the total number of shares to be issued in the
conversion. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and increase the pro forma net income
and net worth (book value) on an aggregate basis. In the event of a material
reduction in the valuation, we may decrease the number of shares to be issued to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the conversion would increase a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and decrease pro forma net
income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the conversion
results in an offering which is either less than $9,987,500 or more than
$15,539,380. Persons who did not subscribe for shares will not have the
opportunity to do so.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional purchase limitations. The
minimum purchase is 25 shares and the maximum purchase for any individual person
or persons ordering through a single account, is 15,000 shares. In addition, no
person or persons ordering through a single account, together with their
associates, or group of persons acting together, may purchase more than 20,000
shares. However, the Employee Plans may purchase up to 8% of the shares sold.
The OTS regulations governing the conversion provide that officers and directors
and their associates may not purchase, in the aggregate, more than 33% of the
shares issued pursuant to the conversion.
Depending on market conditions and the results of the offering, the
board of directors may, if the OTS agrees, increase or decrease any of the
purchase limitations without the approval of our members and without
resoliciting subscribers. If the maximum purchase limitation is increased,
persons who ordered the maximum amount will be given the first opportunity to
increase their orders. In doing so the preference categories in the offerings
will be followed.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the EVR of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order of
priority: (i) to fill the Employee Plans' subscription of up to 8% of the
Adjusted Maximum number of shares (the ESOP currently intends to subscribe for
8%); (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders; (iii) in
the event that there is an oversubscription by Supplemental Eligible Account
Holders,
36
<PAGE>
to fill unfulfilled subscriptions to Supplemental Eligible Account Holders; (iv)
in the event that there is an oversubscription by Other Members, to fill
unfulfilled subscriptions of Other Members; and (v) to fill unfulfilled
subscriptions in the community offering to the extent possible.
The term "associate" of a person means (i) any corporation or
organization (other than us or a majority-owned subsidiary of ours) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as director or in a similar fiduciary capacity
(excluding tax-qualified employee stock benefit plans), and (iii) any relative
or spouse of such person or any relative of such spouse, who has the same home
as such person or who is one of our directors or officers, or a director or
officer of any of our subsidiaries. For example, a corporation of which a person
serves as an officer would be an associate of that person, and therefore all
shares purchased by that corporation would be included with the number of shares
which that person individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president,
vice presidents in charge of principal business functions, Secretary and
Treasurer and any other person performing similar functions. All references
herein to an officer have the same meaning as used for an officer in the Plan.
To order shares in the conversion, persons must certify that their
purchase does not conflict with the purchase limitations. In the event that the
purchase limitations are exceeded by any person (including any associate or
group of persons affiliated or otherwise acting in concert with such persons),
we will have the right to purchase from that person at $10.00 per share all
shares acquired by that person in excess of the purchase limitations. If the
excess shares have been sold by that person, we may recover the profit from the
sale of the shares by that person. We may assign our right either to purchase
the excess shares or to recover the profits from their sale.
Shares of common stock purchased pursuant to the conversion will be
freely transferable, except for shares purchased by our directors and officers.
For certain restrictions on the shares purchased by directors and officers, see
"-- Restrictions on Sales and Purchases of Shares by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, the Company
may not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase up to five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program upon a determination that (1) the repurchase
program would adversely affect our financial condition, (2) the information
submitted is insufficient upon which to base a conclusion as to whether the
financial condition would be adversely affected, or (3) a valid business purpose
was not demonstrated. However, the OTS may grant special permission to
repurchase shares after six months following the conversion and to repurchase
more than five percent during each of the second and third years. In addition,
SEC rules also govern the method, time, price, and number of shares of common
stock that may be repurchased by the Company and affiliated purchasers. If, in
the future, the rules and regulations regarding the repurchase of stock are
liberalized, the Company may utilize the rules and regulations then in effect.
37
<PAGE>
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of the Company may not be
sold for one year following the conversion, except in the event of the death of
the director or officer. Any shares issued to directors and officers as a stock
dividend, stock split, or otherwise with respect to restricted stock shall be
subject to the same restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Interpretation and Amendment of the Plan
We have the authority to interpret and amend the Plan. Our
interpretations are final. Amendments to the Plan after the receipt of member
approval will not need further member approval unless required by the OTS.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by
the affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members, and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
Other
All statements made in this document are hereby qualified by the
contents of the Plan of Conversion, the material terms of which are set forth
herein. The Plan of Conversion is attached to the proxy statement mailed to
certain depositors and borrowers. Copies of the Plan are available from us and
should be consulted for further information. Adoption of the Plan by our members
authorizes us to interpret, amend or terminate the Plan.
38
<PAGE>
First Kansas Federal Savings Association
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
=======================================================================================================================
Years ended December 31, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $3,604,210 2,835,916
Investment securities 163,480 201,719
Mortgage-backed securities 2,865,950 3,339,132
Interest-bearing deposits 215,620 128,739
Dividends on FHLB stock 45,846 38,070
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 6,895,106 6,543,576
Interest expense:
Deposits (note 8) 3,778,165 3,724,057
Borrowings 461,135 291,953
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 2,655,806 2,527,566
Provision for loan losses (note 5) 35,000 -
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,620,806 2,527,566
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit account service fees 587,347 488,799
Gain on sales of loans 66,997 133,388
Gain (loss) on sales of available-for-sale
mortgage-backed securities (note 4) 55,217 (4,057)
Gain on sale of real estate held for development (note 7) 35,189 -
Other 107,069 91,626
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 851,819 709,756
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits (note 12) 1,138,777 1,088,511
Occupancy and equipment 360,582 355,558
Federal deposit insurance premiums and assessments (note 14) 42,653 734,972
Data processing 341,341 312,553
Amortization of premium on deposits assumed 60,935 60,935
Advertising 128,813 143,846
Other 278,501 255,225
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,351,602 2,951,600
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense 1,121,023 285,722
Income tax expense (note 11) 449,000 115,000
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 672,023 170,722
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements beginning on page
F-6.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is intended to assist you in
understanding our financial condition and results of operations. The information
in this section should also be read with our Financial Statements and Notes to
the Financial Statements included elsewhere in this document.
General
The Company has recently been formed and, accordingly, has no results
of operations. The following discussion relates only to our financial condition
and results of operations. Please refer to our Pro Forma Data discussion on page
__ to see the potential effects of the offering on our financial statements.
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected by
noninterest income, including, income from customer deposit account service
charges, gains on sales of loans, gains and losses from the sale of investments
and mortgage-backed securities and noninterest expense, including, primarily,
compensation and employee benefits, federal deposit insurance premiums, office
occupancy cost, and data processing cost. Our results of operations are also
affected significantly by general and economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond our control.
^ Market Risk Analysis
Our assets and liabilities may be analyzed by examining the extent to
which they are interest rate sensitive and by monitoring the expected effects of
interest rate changes on our net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to address the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by maintaining
sufficient liquid assets for material and prolonged changes in interest rates.
We originate fixed- and adjustable-rate real estate loans which
approximated 95% of our loan portfolio at December 31, 1997. To manage the
interest rate risk on this type of loan portfolio, we emphasize the origination
of adjustable-rate loans and sell a portion of our fixed-rate mortgage loans. At
December 31, 1997, adjustable-rate mortgage loans totalled $33.3 million or
70.9% of our total loan portfolio. We also maintain a portfolio of liquid assets
which includes investment securities and mortgage-backed securities. As an
asset/liability management tool, we may use alternative sources of funding if
deposit pricing in our local market area is not acceptable. Maintaining liquid
assets tends to reduce potential net income because liquid assets usually
provide a lower yield than other interest-earning assets.
40
<PAGE>
Net Portfolio Value
In order to encourage savings associations to reduce their interest
rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV
is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
("bp") change in market interest rates. A resulting change in NPV of more than
2% of the estimated present value of total assets ("PV") will require the
institution to deduct from its capital 50% of that excess change. The rules
provide that the OTS will calculate the IRR component quarterly for each
institution. Based on our asset size and risk-based capital, we have been
informed by the OTS that we are exempt from this rule. Nevertheless, the
following table presents our NPV at December 31, 1997, as calculated by the OTS,
based on quarterly information voluntarily provided by us to the OTS.
<TABLE>
<CAPTION>
^ Changes
in Market $ %
Interest Rates NPV ^ Amount Change Change in NPV NPV Ratio(1)
-------------- ------------ ------------- --------------- ------------------
(basis points)
<S> <C> <C> <C> <C>
+400 ^ 1,942,000 (7,091,000) -79% 2.19%
+300 ^ 4,247,000 (4,786,000) -53% 4.64%
+200 ^ 6,132,000 (2,901,000) -32% 6.53%
+100 ^ 7,756,000 (1,277,000) -14% 8.07%
0 9,033,000 -- 9.23%
-100 9,986,000 953,000 +11% 10.05%
^-200 10,453,000 1,420,000 +16% 10.41%
^-300 11,166,000 2,133,000 +24% 10.98%
^-400 12,027,000 2,994,000 +33% 11.67%
^
</TABLE>
- ------------
(1) Calculated as the estimated NPV divided by present value of total assets.
Management believes these calculations indicate that we would be deemed
to have a more than normal level of interest rate risk under applicable
regulatory capital requirements based on the current level of regulatory
capital.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react at different times and in
different degrees to changes in market rates of interest. The
41
<PAGE>
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while rates on other types of
assets and liabilities may lag behind changes in market interest rates. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making the calculations set
forth above. Additionally, an increased credit risk may result as many borrowers
may be unable to service their debt in the event of an interest rate increase.
Our board of directors reviews our asset and liability policies on an
annual basis. The board of directors meets quarterly to review interest rate
risk and trends, as well as liquidity and capital ratios and requirements.
Management administers the policies and determinations of the board of directors
with respect to our asset and liability goals and strategies. We expect that our
asset and liability policies and strategies will continue as described so long
as competitive and regulatory conditions in the financial institution industry
and market interest rates continue as they have in recent years.
Financial Condition
Total assets decreased $5.6 million or 5.5% to $95.7 million at
December 31, 1997 from $101.2 million at December 31, 1996. The decrease was
primarily attributable to a $6.9 million decrease in our mortgage-backed
securities available-for-sale and a $3.9 million decrease in our mortgage-backed
securities held-to-maturity, partially offset by a $3.7 million increase in our
net loan portfolio and a $1 million increase in our investment securities
held-to-maturity. Our total liabilities decreased $6.4 million or 6.7%, to $89.0
million at December 31, 1997 from $95.4 million at December 31, 1996. The
decrease was primarily attributable to a $8.8 million decrease in our borrowings
from the FHLB, partially offset by a $1.9 million increase in deposits.
Management's efforts to increase the loan portfolio during 1997 resulted in the
average balance of loans increasing by approximately $10 million. That loan
growth was funded with proceeds from the sales and maturities of investment and
mortgage-backed securities. In addition, such proceeds were used to repay FHLB
advances.
42
<PAGE>
Average Balance Sheet
The following table sets forth a summary of average balances of assets
and liabilities as well as average yield and rate information. Average balances
are based upon month-end balances, however, we do not believe the use of
month-end balances differs significantly from an average based upon daily
balances. There has been no tax equivalent adjustments made to yields.
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
---------------------- ---------------------------------------------------------------
1997 1997 1996
---------------------- ----------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Yield/ Outstanding Earned Yield Outstanding Earned/ Yield/
Balance Rate Balance /Paid Rate Balance Paid Rate
------------ ------- ---------- ------- ------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)......................... $46,563 7.83% $ 45,491 $3,604 7.92% $35,156 $2,836 8.07%
Investment securities....................... 3,852 7.26 3,147 163 5.19 2,966 202 6.80
Mortgage-backed securities.................. 37,770 6.33 43,554 2,866 6.58 51,891 3,339 6.43
Interest-bearing deposits................... 3,400 5.98 3,586 216 6.01 2,924 129 4.40
FHLB stock.................................. 661 8.05 635 46 7.25 594 38 6.39
------- ---- ------- ------ ------ ------- ------ ------
Total interest-earning assets(1)......... 92,246 7.13 96,413 $6,895 7.15 93,531 $6,543 7.00
---- ----- ------ ----- ------
Noninterest-earning assets.................... 3,409 4,024 3,874
------ ------- ------
Total assets............................. $95,655 $100,437 $97,405
====== ======= ======
Interest-bearing liabilities:
NOW and investment deposits................. 22,308 2.55% $ 22,324 567 2.54% $21,454 574 2.68%
Savings and certificate accounts............ 63,343 5.34 61,589 3,214 5.22 61,251 3,150 5.14
FHLB borrowings............................. 2,550 6.71 7,748 461 5.95 5,420 292 5.39
------ ---- ------- ------- ------ ------ ------ ------
Total interest-bearing liabilities....... 88,201 4.67 91,660 $4,242 4.63 88,126 $4,016 4.56
---- ----- ------ ----- ------
Noninterest-bearing liabilities:.............. 844 2,542 3,287
------- ------- -------
Total liabilities........................... 89,045 94,202 91,413
------ ------- ------
Equity........................................ 6,610 6,235 $ 5,992
------ ------- ------
Total liabilities and equity............. $95,655 $100,437 $97,405
====== ======= ======
Net interest income........................... $2,653 $2,527
===== =====
Net interest rate spread(2)................... 2.45% 2.52% 2.44%
==== ====== ======
Net earning assets............................ $ 4,045 $ 4,752 $5,404
====== ======= =====
Net yield on interest-earning assets(3)....... 2.75% 2.70%
====== ======
Average interest-earning assets to average
interest-bearing liabilities................ 105.18% 106.13%
====== ======
</TABLE>
- ------------------
(1) Includes non-accrual loans and loans held-for-sale. Calculated net of
deferred loan fees, loan discounts, loans in process and loan loss
reserves.
(2) Net interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
43
<PAGE>
The table below sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 vs. 1996
----------------------------------------------------------
Increase/(Decrease)
Due to
----------------------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)................................ $ 834 $ (51) $(15) $ 768
Investment securities.............................. 12 (48) (3) (38)
Mortgage-backed securities......................... (536) 76 (12) (473)
Interest-bearing deposits.......................... 29 47 11 87
FHLB stock......................................... 3 5 -- 8
----- --- --- -----
Total interest-earning assets................... 341 29 (19) 352
---- --- ----- ----
Interest-bearing liabilities:
NOW and money market deposits...................... 23 (29) (1) (7)
Savings and certificate accounts................... 17 46 -- 64
FHLB borrowings.................................... 125 30 13 169
---- --- --- ----
Total interest-bearing liabilities.............. 166 48 12 226
---- --- --- ----
Increase (decrease) in net interest income........... $ 175 $(19) $(31) $ 126
==== ==== === ====
</TABLE>
44
<PAGE>
Results of Operations for the Years Ended December 31, 1997 and 1996
Net Income. Our net income increased $501,000 for the year ended
December 31, 1997, to $672,000 from $171,000 for the year ended December 31,
1996. This increase was primarily attributable to a $128,000 increase in our net
interest income, a $142,000 increase in our noninterest income and a $600,000
decrease in our noninterest expense offset by a $35,000 increase in our
provision for loan losses and a $334,000 increase in our income tax expense due
to the increase in income before taxes.
Net Interest Income. Net interest income is the most significant
component of our income from operations. Net interest income is the difference
between interest we receive on our interest-earning assets, primarily loans,
investment and mortgage-backed securities and interest we pay on our
interest-bearing liabilities, primarily deposits. Net interest income depends on
the volume of and rates earned on interest-earning assets and the volume of and
rates paid on interest-bearing liabilities.
Our net interest income increased $128,000, or 5.0%, to $2,668,000 for
the year ended December 31, 1997, as compared to the same period in 1996. The
increase was primarily due to the growth in our average interest-earning assets
to $96.4 million in 1997 from $93.5 million in 1996 and growth in our interest
rate spread of 2.52% in 1997 compared to 2.44% in 1996.
The increase in our average interest-earning assets of $2.9 million
reflects increases of $10.3 million in our balance of average loans and $884,000
in our other interest-earning assets, partially offset by a decrease of $8.3
million in our mortgage-backed securities. The increase in our interest-earning
assets was funded by the increase in average interest-bearing liabilities.
Our interest rate spread and net yield on interest-earning assets
increased for the year ended December 31, 1997 compared to the same period in
1996 primarily due to an increase in average yield on our interest-earning
assets of 7.15% in 1997 compared to 7.00% in 1996, partially offset by an
increase in our average yield on interest-bearing deposits of 4.63% in 1997
compared to 4.56% in 1996. The increase in our average yield on interest-earning
assets was due to the sale of lower yielding mortgage-backed securities and loan
growth during 1997.
The increase in our average interest-bearing liabilities of $3.5
million reflects increases of $870,000 in our average interest-bearing demand
deposits, $338,000 in average savings and certificates of deposit and $2.3
million in average FHLB borrowings. The increase in our average FHLB borrowings
reflects the funding of the loan growth.
Provision for Loan Losses. Our provision for loan losses was $35,000 in
1997. We made no provision in 1996. The increase in the provision in 1997 was
the result of a $2.9 million increase in our one- to four-family real estate
loans and the credit risk associated with the increased loan volume.
Historically, we have emphasized our loss experience over other factors
in establishing the provision for loan losses. We review the allowance for loan
losses in relation to (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrower's
ability to repay, (iv) the estimated value of any underlying collateral, and (v)
current economic conditions. Management believes the allowance for loan losses
is at a level that is adequate to provide for estimated losses. However, there
can be no assurance that further additions will not be made to the allowance and
that such losses will not exceed the estimated amount. See "Business of First
Kansas Federal Savings Association -- Nonperforming and Problem Assets --
Allowance for Loan Losses."
45
<PAGE>
Noninterest Income. Our noninterest income increased $142,000 or 20.3%
from $698,000 in 1996 to $840,000 in 1997. This increase in our noninterest
income was due to increases of $98,000 in our deposit account service fees,
$59,000 in our gain on sales of available-for-sale mortgage-backed securities,
and $51,000 in our other noninterest income accounts, partially offset by a
$66,000 decrease in our gain on sales of real estate loans. Deposit account fees
increased during 1997 due to a higher number of accounts.
Noninterest Expense. Our noninterest expense decreased $600,000 or
20.3% from $3.0 million in 1996 to $2.4 million in 1997. The decrease in our
noninterest expense was due to a $692,000 decrease in our federal deposit
insurance premiums, offset by increases of $50,000 in our compensation and
benefits and $42,000 in our other noninterest expense accounts which was
partially attributable to increases in the processing costs related to the
growth in the number of transaction accounts. The decrease in our federal
deposit insurance premiums was due to a $545,000 one-time special assessment
levied in 1996 to recapitalize the SAIF, which did not recur in 1997. Following
the one-time special assessment, the FDIC insurance ^ premium rates decreased
from 0.230% to 0.063%, resulting in lower noninterest expense.
As a result of the conversion, our noninterest expense may increase due
to costs associated with our employee stock ownership plan, restricted stock
plan, if implemented, and the costs of being a public company. However, we
expect any such increase to be offset by increased interest income resulting
from investment of the proceeds from the conversion.
Income Tax Expense. Our income tax expense increased $334,000 from
$115,000 in 1996 to $449,000 in 1997. This increase in income tax expense is due
to the increase in our pretax income of $835,000 from $286,000 in 1996 to $1.1
million in 1997. Our effective tax rate was 40.0% and 40.2% for the years ended
December 31, 1997 and 1996, respectively.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required ratio currently is 4.0% and our
regulatory liquidity ratio average was 5.68% and 5.82% at December 31, 1997 and
1996, respectively.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investment securities and
interest-bearing deposits with other banks, advances from the FHLB of Topeka,
and funds provided from operations. While scheduled repayments of loans and
mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows, and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. We use our liquidity resources principally to fund existing and
future loan commitments, maturing certificates of deposit and demand deposit
withdrawals, to invest in other interest-earning assets, to maintain liquidity,
and meet operating expenses.
Net cash provided by our operating activities (the cash effects of
transactions that enter into our determination of net income e.g., non-cash
items, amortization and depreciation, provision for loan losses) for the year
ended December 31, 1997 was $1.1 million as compared to $195,000 for the year
ended December 31, 1996. The increase was primarily due to a $501,000 increase
in our net income, $603,000 increase in our income taxes payable, $77,000
increase in our prepaid expenses $35,000 increase in provision for loan losses
offset by increases of $35,000 in our gain on real estate held for
46
<PAGE>
development, $59,000 in our gain on sale of mortgage-backed securities and
decrease of $66,000 in our gain on sales of loans.
Net cash provided by our investing activities (i.e., cash receipts,
primarily from our investment securities and mortgage-backed securities
portfolios and our loan portfolio) for the year ended December 31, 1997 totaled
$6.2 million, an increase of $15.0 million from December 31, 1996. The increase
was primarily attributable to funding net loan growth of $3.7 million in 1997 as
compared to $12.0 million in 1996. The increase was also affected by paydowns
and maturities of investment and mortgage-backed securities of $6.4 million in
1997 as compared to $9.3 million and proceeds from sales of mortgage-backed
securities of $4.7 million in 1997 as compared to $3.3 million in 1996, as well
as purchases of investment and mortgage-backed securities of $1.0 million in
1997 as compared to $8.7 million in 1996.
Net cash used in our financing activities (i.e., cash receipts
primarily from net increases in deposits and net decreases in FHLB advances) for
1997 totaled $6.9 million, a decrease of $17.4 million from December 31, 1996.
The decrease was primarily attributable to repayments of FHLB advances of $8.8
million in 1997 as compared to proceeds advanced from the FHLB of $9.5 million
in 1996.
Approximately $40.9 million of our time deposits mature in 1998. We
expect such deposits to be renewed at market rates. In addition to this source
of continuing funding, we have a $8.0 million line of credit available through
the FHLB of Topeka.
Year 2000 Issues
The approaching millennium is causing organizations of all types to
review their computer systems for the ability to properly accommodate the year
2000. When computer systems were first developed, two digits were used to
designate the year in date calculations and "19" was assumed for the century. As
a result, there is significant concern about the integrity of date sensitive
calculations when the calendar rolls over to January 1, 2000. An older system
could interpret 01/01/00 sa January 1, 1900 potentially causing major problems
calculating interest, payment, delinquency or maturity dates.
Our internal Year 2000 Working Committee, comprised of Senior Vice
President, Daniel G. Droste, and Vice President, Mark K. Fuchs, was formed in
September 1997 to address the potential risk that Year 2000 poses for us. This
committee, which reports to both the President and the board of directors, meets
weekly. In September 1997, the committee compiled a Year 2000 Action Plan to
promote awareness of pertinent issues and to provide for evaluation and testing
of our electronic systems, programs and processes.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendor or by us could have a significant adverse
impact on our financial condition and results of operations. We have been
assured by our data processing service bureau that their computer services will
function properly on and after January 1, 2000. Our data processing service
bureau has advised us that it, in fact, anticipates completing programming
corrections by the third quarter of 1998, and commencing testing in the fourth
quarter, 1998. If by the end of this year it appears that our primary data
processing service bureau will be unable to resolve this problem in a timely
manner, then we will identify a secondary data processing service provider to
complete the task. If we are unable to do this, we will identify those steps
necessary to minimize the negative impact the computer problems could have on
us. Our computer hardware does not require specific upgrades in order to meet
Year 2000 requirements.
47
<PAGE>
Recent Accounting Pronouncements
FASB Statement on Reporting Comprehensive Income. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130. SFAS No. 130 will require the Association
to classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of this standard is not expected
to have a material impact on the Company's consolidated financial statements.
FASB Statement on Earnings Per Share. In March 1997, FASB issued SFAS
No. 128. The Statement establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. This Statement simplifies the standards for computing
earnings per share previously found in Accounting Principles Board ("APB")
Opinion No. 15, Earnings per Share ("EPS"), and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of Opinion 15.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. SFAS No. 128 will be adopted
by us in the initial period after December 15, 1997.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion- 1966, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. This
Statement eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions 10 and
15 and Statement 47 and consolidates them in this Statement for ease of
retrieval and for greater visibility to nonpublic entities. The Statement is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 will be adopted by us in the initial period after December 15,
1997.
FASB Statement ^ on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method"
48
<PAGE>
prescribed by APB Opinion No. 25. Under the intrinsic value based method,
compensation cost is the excess of the market price of the stock at the grant
date over the amount an employee must pay to acquire the stock. However, most
stock option plans have no intrinsic value at the grant date and, as such, no
compensation cost is recognized under APB Opinion No. 25. Entities electing to
continue use of the accounting treatment of APB Opinion No. 25 must make certain
pro forma disclosures as if the fair value based method had been applied. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into in fiscal years beginning after December 15, 1995. Pro forma disclosures
must include the effects of all awards granted in fiscal years beginning after
December 15, 1994. We expect to use the "intrinsic value based method" as
prescribed by APB Opinion No. 25.
FASB Statement on Disclosures about Segments of an Enterprise and
Related Information. In June 1997, the FASB issued SFAS No. 131. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this standard is not
expected to have a material impact on the Company's consolidated financial
statements.
FASB Statement on Employers' Disclosures about Pensions and Other
Postretirement Benefits. In February 1998, the FASB issued SFAS No. 132. SFAS
No. 132 revises employers' disclosures about pension and other postretirement
benefit plans. SFAS No. 132 does not change the measurement or recognition of
those plans and is effective for fiscal years beginning after December 15, 1997.
The adoption of this standard is not expected to have a material impact on the
Company's consolidated financial statements.
49
<PAGE>
BUSINESS OF FIRST KANSAS FINANCIAL CORPORATION
The Company is not an operating company and has not engaged in any
significant business to date. It was formed in February 1998 as a
Kansas-chartered corporation to be the holding company for First Kansas Federal
Savings Bank. The holding company structure ^ will facilitate: (i)
diversification into non-banking activities, (ii) acquisitions of other
financial institutions, such as savings institutions, (iii) expansion within
existing and into new market areas, and (iv) stock repurchases without adverse
tax consequences. There are, however, no present plans regarding
diversification, acquisitions, expansion or repurchases.
Since the Company will own only one savings association, it generally
will not be restricted in the types of business activities in which it may
engage, provided that we retain a specified amount of our assets in
housing-related investments. The Company initially will not conduct any active
business and does not intend to employ any persons other than officers but will
utilize our support staff from time to time.
The office of the Company is located at 600 Main Street, Osawatomie,
Kansas. The telephone number is (913) 755-3033.
BUSINESS OF FIRST KANSAS FEDERAL SAVINGS ASSOCIATION
First Kansas Federal Savings Association was originally chartered in
1899 as "The Consolidated Building and Loan Association" and commenced
operations that same year. In 1938, we became a member of the Federal Home Loan
Bank System, obtained a federal charter and changed our name to "First Federal
Savings and Loan Association of Osawatomie." In 1983, we changed our name to
"First Kansas Federal Savings Association." We are a community and customer
oriented federal mutual savings association with six branch offices located in
Miami, Bourbon, Mitchell and Phillips counties. We provide financial services to
individuals, families and small businesses. Historically, we have emphasized
residential mortgage lending, primarily originating one- to four-family mortgage
loans. At December 31, 1997, we had total assets of $95.7 million, deposits of
$85.7 million, and total equity of $6.6 million.
The Association opened its first branch in 1964 in Paola and its second
branch in 1974 in Louisburg. In 1981, we opened the branch at Fort Scott in an
attempt to diversify geographically. This office proved very successful in
generating deposits and by 1982 our asset size was $54 million. In November
1982, we continued our expansion plans by acquiring the liabilities of North
Kansas Savings Association, an insolvent institution which was in receivership
with the Federal Savings and Loan Insurance Corporation. With this acquisition,
we added the Beloit and Phillipsburg offices and our asset size grew to $85
million.
The principal sources of funds for our activities are deposits,
payments on loans and borrowings from the FHLB of Topeka. Funds are used
principally for the origination of adjustable-rate mortgage loans, but also for
the origination of fixed-rate mortgage loans, secured by first mortgages on one-
to four-family residences located in our local communities, and for the purchase
of investment securities. One- to four-family mortgage loans totalled $42.9
million, or 91.3% of our total loans receivable portfolio at December 31, 1997.
Our principal sources of revenue are interest received on loans and on
investments and our principal expense is interest paid on deposits.
50
<PAGE>
Market Area
Each of the Association's six offices is located in a small city
ranging in population from 2,000 to 8,000. Each area boasts a healthy, stable
economy with a low unemployment rate. Our main office is located in Osawatomie,
which together with the Paola and Louisburg branch offices, are bedroom
communities of Kansas City. Within 30 miles of Kansas City, businesses in these
areas promise to benefit from the southward spread of this growing metropolitan
area. Osawatomie, Paola and Louisburg fall within Miami County.
Our other branch offices are located in Fort Scott, Beloit and
Phillipsburg, which, respectively, fall within Bourbon, Mitchell, and Phillips
counties. Fort Scott has a diversified economic base of light industry and
agriculture. The Beloit and Phillipsburg economies of north central Kansas are
based primarily on agriculture and related industries.
Lending Activities
Most of our loans are mortgage loans which are secured by one- to
four-family residences. We also make multi-family, commercial, land and
construction loans, as well as consumer and commercial loans. Most of the loans
we originate have rates of interest which are adjustable ("adjustable-rate"). We
also originate fixed-rate mortgage ("fixed") loans.
The following table sets forth information concerning the types of
loans held by us.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1997 1996
---------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Mortgage loans:
One- to four-family.............................. $42,853 91.29% $39,482 91.51%
Multi-family..................................... 1,045 2.23 1,062 2.46
Commercial....................................... 534 1.14 575 1.33
Land............................................. 141 0.30 78 0.18
Construction..................................... 126 0.27 130 0.30
------- ------- ------- -------
Total mortgage loans........................... 44,700 95.23 41,327 95.78
------ ------ ------ ------
Consumer loans..................................... 1,728 3.68 1,421 3.29
Commercial loans................................... 513 1.09 399 0.93
------ ------ ------ ------
Total loan portfolio........................... 46,941 100.00% 43,146 100.00%
------ ======= ------ =======
Less:
Loans in process................................. 81 61
Deferred fees and discounts...................... 118 112
Allowance for loan losses........................ 179 146
------- -------
Total loans receivable, net.................... $46,563 $42,827
====== ======
</TABLE>
51
<PAGE>
The following table sets forth the estimated maturity of our loan
portfolio at December 31, 1997. The table does not include the effects of
possible prepayments or scheduled principal repayments. All mortgage loans are
shown as maturing based on the date of the last payment required by the loan
agreement.
<TABLE>
<CAPTION>
Mortgage Commercial Consumer Total
Loans(1) Loans Loans Loans
-------- ----- ----- -----
(In thousands)
Amounts due:
<S> <C> <C> <C> <C>
Within 1 year................... $ 123 $ 2 $ 289 $ 414
Over 1 to 5 years............... 1,394 206 1,344 2,944
Over 5 years.................... 43,183 305 95 43,583
------ --- ------ ------
Total amount due.............. $44,700 $513 $1,728 $46,941
====== === ===== ======
</TABLE>
- ---------------
(1) Includes construction loans.
The following table sets forth the dollar amount of all loans due after
December 31, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed-rates Adjustable-rates Total
----------- ---------------- -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C>
One- to four-family............................... $11,158 $31,572 $42,730
Multi-family...................................... -- 1,045 1,045
Commercial........................................ 145 390 535
Land.............................................. -- 141 141
Construction...................................... 94 32 126
------- ------- -------
Total mortgage loans............................ 11,397 33,180 44,577
------ ------ ------
Consumer loans...................................... 1,439 -- 1,439
Commercial loans.................................... 511 -- 511
------- -------- -------
Total loan portfolio............................ $13,347 $33,180 $46,527
====== ====== ======
</TABLE>
52
<PAGE>
The following information contains information concerning changes in
the amount of loans held by us.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------
1997 1996
---- ----
<S> <C> <C>
Total net loans receivable at beginning of period............. $42,827 $30,755
Loans originated:
Mortgage
One- to four-family....................................... 10,110 10,648
Land...................................................... 111 18
Consumer loans.............................................. 1,695 1,242
Commercial loans............................................ 525 423
------ ------
Total loans originated...................................... 12,441 12,331
Loans purchased:
One- to four-family......................................... 2,878 11,701
Loans sold.................................................... (3,384) (5,600)
Principal repayments.......................................... (8,140) (6,396)
Decrease (increase) in other items, net....................... (59) 36
------- ------
Net increase (decrease) in loans receivable................. 3,736 12,072
------ ------
Net loans, end of period...................................... $46,563 $42,827
====== ======
</TABLE>
Mortgage Loans:
One- to Four-Family Residential Loans. Our primary lending activity
consists of originating and purchasing one- to four-family residential mortgage
loans secured by property located in our market areas. About two-thirds of our
loan portfolio is comprised of adjustable-rate mortgage ("ARM") loans which we
retain for our portfolio. The remainder consists of fixed-rate loans which we
originate either to resell in the secondary market or to retain in our
portfolio, depending on the yield on the loan and on our asset/liability
management objectives. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or repay loans at their option.
The interest rate on our ARM loans is based on an index plus a stated
margin. We usually offer discounted initial interest rates on ARM loans.
Borrowers qualify for the ARM loan at the initial interest rate. However, ARM
loan borrowers are, for loan approval, required to meet lower income-to-debt
ratios than those required for fixed-rate loans. ARM loans provide for periodic
interest rate adjustments upward or downward of up to 1% per adjustment. The
interest rate may not increase more than 5% over the life of the loan. Our ARM
loans typically reprice annually, after the initial adjustment period of one
year, three years or five years, with most loans having terms to maturity of 30
years. ARM loans are offered to all applicants; however, in a relatively low
interest rate environment, borrowers may prefer a fixed-rate to ARM loans.
Consumer preference in our market area for ARM loans has recently been weak.
53
<PAGE>
Our fixed-rate loans generally have terms of 15 or 30 years with
principal and interest payments calculated using up to a 30-year amortization
period. Loans originated with a loan-to-value ratio in excess of 80% require
private mortgage insurance. The maximum loan-to-value ratio on mortgage loans
secured by non-owner occupied properties generally is limited to 80%. We conform
our loans to the standards that are used in the mortgage industry allowing our
loans to be readily sold in the secondary market. We do not currently retain
servicing rights to those loans sold in the secondary market.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
Multi-Family and Commercial Loans. Multi-family and commercial loans
generally have a loan-to-value ratio of 80% or less. These loans do not have
terms greater than 30 years. Our multi-family loans are secured by multiple
six-plex and four-plex units. Commercial real estate loans are secured by office
buildings, churches and other commercial properties.
Multi-family and commercial real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us. Most construction loans convert to
permanent loans with us after 6 months.
Residential Construction Loans. We make residential construction
loans/permanent loans on one- to four-family residential property to the
individuals who will be the owners and occupants upon completion of
construction. Only interest payments are required during construction and these
are to be paid from the borrower's own funds. These loans are underwritten using
the same criteria as applied in the underwriting of one- to four-family mortgage
loans. The maximum loan-to-value ratio is 80%. Upon completion of construction,
regular principal and interest payments commence.
Land Loans. We also make land loans which are secured by raw land in
our market area, to be used for agriculture or residential construction. At
December 31, 1997, land loans totalled $141,000 or 0.30% of our total loan
portfolio.
Consumer Loans:
We offer consumer loans in order to provide a wider range of financial
services to our customers and because these loans provide higher interest rates
and shorter terms than many of our other loans. Consumer loans totalled $1.7
million or 3.7% of our total loans at December 31, 1997. Our consumer loans
consist primarily of direct automobile loans.
54
<PAGE>
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Commercial Loans:
Our commercial loan portfolio is comprised of loans to several local
businesses, and at December 31, 1997 represented $513,000, or 1.1% of our total
loan portfolio.
Loan Approval Authority and Underwriting. Our loan committee, which is
comprised of Larry V. Bailey, Daniel G. Droste and Galen E. Graham, approves all
loans. The loan committee has authority to approve loans in any category up to
$400,000. Loan requests above this amount must be approved by the board of
directors.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers. Private mortgage insurance will also be required in
certain instances.
Construction/permanent loans are made on individual properties. Funds
advanced during the construction phase are held in a loans-in-process account
and disbursed at various stages of completion, following physical inspection of
the construction by a loan officer or appraiser.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 60 days of the loan application. Loan commitments in excess of
this period may be issued upon payment of a non-refundable fee or upon agreement
on an interest rate float, allowing us to adjust the interest rate on the loan.
At December 31, 1997, commitments to cover originations of mortgage loans
totalled $143,000. We believe that virtually all of our commitments will be
funded.
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loan to one borrower limit was $900,000 at
December 31, 1997. At December 31, 1997, the aggregate loans of our five largest
borrowers have outstanding balances of between $304,953 and $1,045,431. The
latter amount is made up of three loans, each of which was in existence before
the loan to one borrower limits were imposed in 1989. All of these loans were
performing in accordance with their terms.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 16 days past due, a
notice of nonpayment is sent to the borrower. After the loan becomes 22 days
past due, another notice of nonpayment, accompanied by a personal letter, is
sent to the borrower. If the loan continues in a delinquent status for
55
<PAGE>
90 days past due and no repayment plan is in effect, foreclosure proceedings
will be initiated. The borrower will be notified when foreclosure is commenced.
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when, in our opinion, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned, as of the dates indicated. For
the year ended December 31, 1997, interest income that would have been recorded
on loans accounted for on a nonaccrual basis under the original terms of such
loans was immaterial.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
One- to four-family.................................. $ 75 $ 6
Consumer............................................. 4 11
----- -----
Total ............................................. 79 17
----- -----
Accruing loans delinquent 90 days or more:
One- to four-family.................................. -- --
Consumer............................................. -- --
----- -----
Total.............................................. -- --
----- -----
Total non-performing loans....................... 79 17
----- -----
Foreclosed assets:
One- to four-family.................................. -- --
Consumer............................................. -- --
----- -----
Total.............................................. -- --
----- -----
Total non-performing assets............................ $ 79 $ 17
===== =====
Total non-performing loans as a
percentage of net loans.............................. 0.17% 0.04%
==== ====
Total non-performing assets as a
percentage of total assets........................... 0.08% 0.02%
==== ====
</TABLE>
Classified Assets. OTS regulations provide for a classification system
for problem assets of savings associations which covers all problem assets.
Under this classification system, problem assets of savings institutions such as
ours are classified 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 borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the savings 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
56
<PAGE>
improbable." 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. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. 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 a savings association 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. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital. Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
At December 31, 1997, we had loans classified as special mention,
substandard, doubtful and loss as follows:
At
December 31,
1997
----
(In thousands)
Special mention............................. $ --
Substandard................................ 123
Doubtful assets............................. 6
Loss assets................................ 5
----
Total.................................. $ 134
=====
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in our loan portfolio. The evaluation, including a review of all loans on which
full collectibility of interest and principal may not be reasonably assured,
considers: (i) our past loan loss experience, (ii) known and inherent risks in
our portfolio, (iii) adverse situations that may affect the borrower's ability
to repay, (iv) the estimated value of any underlying collateral, and (v) current
economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. In addition, our
determination as to the amount of allowance for loan losses is subject to review
by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
allowance.
57
<PAGE>
The following table illustrates the allocation of the allowance for
loan losses for each category of loans. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1997 1996
----------------------------------------- ---------------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans.............................
One- to four-family...................... $137 91.29% $115 91.51%
Multi-family............................. -- 2.23 -- 2.46
Commercial............................... -- 1.14 -- 1.33
Land..................................... -- 0.30 -- 0.18
Construction............................. -- 0.27 -- 0.30
Consumer................................... 42 3.68 31 3.29
Commercial................................ -- 1.09 -- 0.93
---- ------ ---- -------
Total allowance....................... $179 100.00% $146 100.00%
=== ====== === ======
</TABLE>
The following table sets forth information with respect to our
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period....................... $ 146 $ 148
------- -------
Charge-offs:
One- to four-family................................ -- --
Consumer........................................... (5) (6)
------- ------
(5) (6)
------- ------
Recoveries:
One- to four-family................................ -- --
Consumer .......................................... 3 4
------- -------
3 4
------- -------
Net charge-offs...................................... (2) (2)
Provision for loan losses............................ 35 --
------- -------
Balance at end of period............................. $ 179 $ 146
======= ======
Allowance for loan losses to total
non-performing loans at end of period.............. 226.58% 858.82%
======= ======
Allowance for loan losses to net loans at
end of period...................................... 0.38% 0.34%
======= =======
</TABLE>
58
<PAGE>
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation -- Savings
Institution Regulation -- Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." The level of liquid assets varies depending
upon several factors, including: (i) the yields on investment alternatives, (ii)
our judgment as to the attractiveness of the yields then available in relation
to other opportunities, (iii) expectation of future yield levels, (iv)
asset/liability management, and (v) our projections as to the short-term demand
for funds to be used in loan origination and other activities. We classify our
investment securities as "available-for-sale" or "held-to-maturity" in
accordance with SFAS No. 115. At December 31, 1997, our investment portfolio
policy permitted investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits (up to six months), (viii) collateralized automobile
receivables, and (ix) investment grade corporate bonds, commercial paper and
mortgage derivative products. See "-- Mortgage-Backed Securities." The board of
directors may authorize additional investments.
Our investment securities "available-for-sale" and "held-to-maturity"
portfolios at December 31, 1997, did not contain securities of any issuer with
an aggregate book value in excess of 10% of our equity, excluding those issued
by the United States government agencies.
Mortgage-Backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities and collateralized mortgage
obligations ("CMOs"). Mortgage-backed securities can serve as collateral for
borrowings and, through repayments, as a source of liquidity. Mortgage-backed
securities represent a participation interest in a pool of single-family or
other type of mortgages. Principal and interest payments are passed from the
mortgage originators, through intermediaries (generally quasi-governmental
agencies) that pool and repackage the participation interests in the form of
securities, to investors such as us. The quasi-governmental agencies guarantee
the payment of principal and interest to investors and include the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA"), and Federal National Mortgage Association ("FNMA").
At December 31, 1997, our mortgaged-backed securities portfolio
classified as "available-for-sale" totalled $16.8 million, and our
mortgage-backed securities portfolio classified as "held-to-maturity" totalled
$20.9 million. Each security was issued by GNMA, FHLMC or FNMA. Expected
maturities will differ from contractual maturities due to scheduled repayments
and because borrowers may have the right to call or prepay obligations with or
without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
The interest rate risk characteristics of the underlying pool of mortgages
(i.e., fixed-rate or adjustable-rate) and the prepayment risk, are passed on to
the certificate holder. The life of a mortgage-backed pass-through security is
equal to the life of the underlying mortgages. Mortgage-backed securities issued
by FHLMC and GNMA make up a majority of the pass-through certificates market.
59
<PAGE>
CMOs have been developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor. A CMO can be collateralized directly by mortgages, but
more often is collateralized by mortgage-backed securities issued or guaranteed
by the GNMA, FNMA or the FHLMC and held in trust for CMO investors. In contrast
to mortgage-backed securities in which the cash flow is received pro rata by all
security holders, the cash flow from the mortgage loans underlying a CMO is
segmented and paid in accordance with a predetermined priority to investors
holding various CMO tranches. Different classes of bonds are created, each with
its own stated maturity, estimated average life, coupon rate, and prepayment
characteristics. Notwithstanding the importance of the CMO structure to an
evaluation of timing and amount of cash flow, it is essential to understand the
coupon rates on the mortgages underlying the CMO to assess the prepayment
sensitivity of the CMO tranches. Most of the CMOs owned by us are government
agency guaranteed. A few of the CMOs consist of small private issues
collateralized by mortgage loans and include extra credit enhancements
sufficient to earn the highest credit ratings from independent rating agencies.
At December 31, 1997, our CMO portfolio classified as "available-for-sale" had a
carrying value of $13.9 million, and our CMO portfolio classified as
"held-to-maturity" had a carrying value of $17.7 million.
Investment Portfolio. The following table sets forth the carrying value
of our investments. See Notes 2, 3 and 4 to our financial statements elsewhere
in this document.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Investments held-to-maturity:
U.S. agency securities................................... $ 3,852 $ 2,800
Mortgage-backed securities held-to-maturity............. 20,937 24,861
Mortgage-backed securities available-for-sale........... 16,833 23,723
Interest-bearing deposits............................... 3,400 3,300
FHLB stock............................................... 661 615
------- -------
Total investments .................................... $45,683 $55,299
====== ======
</TABLE>
60
<PAGE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investments at December 31, 1997 by contractual maturity. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
------------------ ------------------- ------------------ ----------------- --------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments:
U.S. Agency securities...... $ 800 5.31% $2,000 6.05% $ -- --% $ 1,052 8.05% $ 3,852 7.26% $ 3,952
Mortgage-backed securities.. -- -- -- -- 4,722 6.33 33,048 6.34 37,770 6.33 37,728
Interest-bearing deposits... 3,400 5.98 -- -- -- -- -- -- 3,400 5.98 3,400
FHLB stock.................. -- -- -- -- -- -- 661 8.05 661 8.05 661
-------- ------ ------ ------ ------ ------ ------ ---- ------- ---- ------
Total investments........ $4,200 5.85% $2,000 6.05% $4,722 6.33% $34,761 6.42% $45,683 6.41% $45,741
===== ====== ===== ==== ===== ==== ====== ==== ====== ==== ======
</TABLE>
61
<PAGE>
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including checking accounts, regular savings accounts, money
market accounts, and term certificate accounts. IRA accounts are also offered.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate.
The interest rates paid by us on deposits are set weekly at the
direction of our senior management. Interest rates are determined based on our
liquidity requirements, interest rates paid by our competitors, and our growth
goals and applicable regulatory restrictions and requirements.
Regular savings, money market demand and NOW accounts constituted $29.4
million, or 34.31%, of our deposit portfolio at December 31, 1997. Certificates
of deposit constituted $56.3 million or 65.69% of the deposit portfolio of which
$3.1 million or 3.62% of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. Such deposits are offered at negotiated rates.
As of December 31, 1997, we had no brokered deposits.
62
<PAGE>
At December 31, 1997, our deposits were represented by the various
types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Percentage of
Category Term Rate(1) Amount Balance Total Deposits
- -------- ---- ------- ------ ------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Transactions and Savings:
NOW accounts None 2.51% $ 50 $ 9,573 11.18%
Passbook accounts None 2.84 50 7,080 8.27
Money market demand accounts None 3.04 ^ 1,000 10,807 12.62
Noninterest-bearing accounts None -- 50 1,928 2.25
------ ------
Total non-certificates 29,388 34.31
------ ------
Certificates of Deposit:
Fixed Term, Fixed-rate 1-6 months 5.14 500 4,955 5.78
Fixed Term, Fixed-rate 7-12 months 5.64 500 22,889 26.72
Fixed Term, Fixed-rate 13-24 months 5.56 500 11,249 13.13
Fixed Term, Fixed-rate 25-36 months 5.91 500 10,628 12.41
Fixed Term, Fixed-rate 37-60 months 5.76 500 4,704 5.49
Fixed Term, Fixed-rate 61-84 months 5.94 500 1,354 1.58
Fixed Term, Fixed-rate 85-120 months 6.96 500 484 0.57
------- ------
Total certificates of deposit 56,263 65.69
------ ------
Total deposits $85,651 100.00%
====== ======
</TABLE>
- ----------------
(1) Indicates weighted average interest rate at December 31, 1997.
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
At December 31,
--------------------------------
1997 1996
---- ----
(In thousands)
3.00-3.99%...................... $ 11 $ 639
4.00-4.99%...................... 1,216 3,880
5.00-5.99%...................... 44,991 43,005
6.00-6.99%...................... 9,816 7,343
7.00% and over.................. 229 273
------- -------
Total....................... $56,263 $55,140
====== ======
63
<PAGE>
The following table sets forth the time deposits in the Association
classified by interest rate as of the dates indicated.
<TABLE>
<CAPTION>
Amount Due
One to Two to Over
Interest Rate One Year Two Years Three Years Three Years Total
- ------------- ---------------------- ---------------------- -------------- ------------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
3.00 - 3.99%.................... $ 11 $ -- $ -- $ -- $ 11
4.00 - 4.99%.................... 1,124 92 -- -- 1,216
5.00 - 5.99%.................... 36,110 5,836 2,202 843 44,991
6.00 - 6.99%.................... 3,507 2,100 2,780 1,429 9,816
7.00% and over.................. 109 99 4 17 229
------- ------ ------ ------ -------
Total...................... $40,861 $8,127 $4,986 $2,289 $56,263
====== ===== ===== ===== ======
</TABLE>
The following table indicates the amount of our certificates of
deposits of $100,000 or more by time remaining until maturity as of December 31,
1997.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months............... $ 882
Three through six months.......... 606
Six through twelve months......... 1,276
Over twelve months............... 340
-----
$3,104
======
64
<PAGE>
Borrowings. Advances (borrowings) may be obtained from the FHLB of
Topeka to supplement our supply of lendable funds. Advances from the FHLB of
Topeka are typically secured by a pledge of our stock in the FHLB of Topeka, a
portion of our first mortgage loans and other assets. Each FHLB credit program
has its own interest rate (which may be fixed or adjustable) and range of
maturities. We may borrow up to $69.6 million from the FHLB of Topeka. If the
need arises, we may also access the Federal Reserve Bank discount window to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements. At December 31, 1997, borrowings from the FHLB of Topeka totalled
$2.6 million ($1.9 million of which were short-term borrowings maturing on May
15, 1998). We had no other borrowings outstanding. At December 31, 1996, FHLB
advances were $11.4 million.
The following table sets forth the terms of our short-term FHLB
advances.
At or for the period ended
--------------------------------------
December 31, 1997 December 31, 1996
----------------- -----------------
(Dollars in thousands)
Balance at year end.............. $2,550 $11,350
Average balance outstanding
during the period.............. 7,748 5,420
Maximum amount outstanding
at any month-end during
the period..................... 10,350 11,350
Weighted average interest rate
during the period.............. 6.71% 6.51%
Competition
Competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
finance companies, and multi-state regional banks in our market areas.
Competition for funds also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from commercial banks, thrift institutions, credit unions
and mortgage bankers.
65
<PAGE>
Properties
We own four of our six offices and lease two of them. The net book
value of this real property at December 31, 1997, was $476,000. Our total
investment in office equipment had a net book value of $155,000 at December 31,
1997.
<TABLE>
<CAPTION>
Year Net Book Value Of
Leased or Year Leased Lease Real Property at
Location Owned or Acquired Expires December 31, 1997
---------------- ----- ------------ ------- ------------------
MAIN OFFICE:
<S> <C> <C> <C> <C>
600 Main Street Owned 1974 N/A $198,000
Osawatomie, Kansas 66064
BRANCH OFFICES:
29 West Wea Owned 1964 N/A $60,000
Paola, Kansas 66071
2205 South Main Owned 1981 N/A $161,000
Fort Scott, Kansas 66701
100 West Amity Owned 1974 N/A $55,000
Louisburg, Kansas 66053
125 North Mill Leased 1984 2002 $2,000
Beloit, Kansas 67420
762 4th Street Leased 1984 1998 --
Phillipsburg, Kansas 67661
</TABLE>
We are in the process of building a new office in Paola. It will be
located at 1310 Baptiste Drive, Paola, Kansas 66071. This office is expected to
be completed in June 1998 and will, including the land, cost approximately $1.1
million. At December 31, 1997, capitalized construction and land costs totalled
$359,000. After we move into the new facility, we will sell the existing Paola
office.
Personnel
At December 31, 1997 we had 31 full-time employees and 7 part-time
employees. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
Subsidiary Activity
The Association is permitted to invest up to 2% of its assets in the
capital stock of, or loans to, subsidiary corporations. An additional investment
of 1% of assets is permitted when the additional investment is utilized
primarily for community development purposes. Pursuant to these limitations, as
of December 31, 1997, we were authorized to invest up to approximately $1.9
million in the stock of,
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<PAGE>
or loans to, service corporations (based upon the 2% limitation). The
Association has one wholly-owned service corporation, First Enterprises, Inc.
("FEI"). In recent years, FEI has been primarily utilized as an agency for the
sale of credit life insurance, mortgage life insurance and certain fixed- and
variable-rate annuities. However, in August 1995, we purchased for development
through FEI an 8.3 acre tract of land in Paola, known as Baptiste Commons, as
seven commercial sites, one of which would be a proposed site for a new office
building replacing the existing Paola facility. Our investment in this real
estate development project will continue to decline as the remaining lots are
sold. At December 31, 1997, the total investment in this real estate was
$355,000.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not a party to any legal proceedings which are
expected to have a material adverse effect on our financial statements.
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
references to applicable laws and regulation.
Holding Company Regulation
General. The Company will be required to register and file reports with
the OTS and will be subject to regulation and examination by the OTS. In
addition, the OTS will have enforcement authority over the Company and any
non-savings institution subsidiaries. This will permit the OTS to restrict or
prohibit activities that it determines to be a serious risk to us. This
regulation is intended primarily for the protection of our depositors and not
for the benefit of you, as stockholders of the Company.
QTL Test. Since the Company will only own one savings institution, it
will be able to diversify its operations into activities not related to banking,
but only so long as we satisfy the QTL test. If the Company controls more than
one savings institution, it would lose the ability to diversify its operations
into nonbanking related activities, unless such other savings institutions each
also qualify as a QTL or were acquired in a supervised acquisition. See "--
Savings Institution Regulation -- Qualified Thrift Lender Test. "
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution, we
are subject to extensive regulation by the OTS and the FDIC. Our lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. We are also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve").
The OTS, in conjunction with the FDIC, regularly examines us and
prepares reports for the consideration of our board of directors on any
deficiencies that the OTS finds in our operations. Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law,
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especially in such matters as the ownership of savings accounts and the form and
content of our mortgage documents.
We must file reports with the OTS and the FDIC concerning our
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in regulations, whether by the OTS, the FDIC or any other
government agency, could have a material adverse impact on our operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the BIF
and the SAIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such assessment rates if
such target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit insurance
fund. This risk level is determined based on the institution's capital level and
the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below the level required by law. The BIF
had, however, met its required reserve level during the third calendar quarter
of 1995. As a result, deposit insurance premiums for deposits insured by the BIF
were substantially less than premiums for deposits such as ours which are
insured by the SAIF. Legislation to capitalize the SAIF and to eliminate the
significant premium disparity between the BIF and the SAIF became effective
September 30, 1996. The recapitalization plan provided for a special assessment
equal to $.657 per $100 of SAIF deposits held at March 31, 1995, in order to
increase SAIF reserves to the level required by law. Certain BIF institutions
holding SAIF-insured deposits were required to pay a lower special assessment.
Based on our deposits at March 31, 1995, we paid a pre-tax special assessment of
$544,797.
The recapitalization plan also provides that the cost of prior failures
which were funded through the issuance of Fico Bonds (bonds issued to fund the
cost of savings institution failures in prior years) will be shared by members
of both the SAIF and the BIF. This will increase BIF assessments for healthy
banks to approximately $.013 per $100 of deposits in 1997. SAIF assessments for
healthy savings institutions in 1997 will be approximately $.064 per $100 in
deposits and may be reduced, but not below the level set for healthy BIF
institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and
widened the spread of those rates. The FDIC's action established a base
assessment schedule for the SAIF with rates ranging from 4 to 31 basis points,
and an adjusted assessment schedule that reduces these rates by 4 basis points.
As a result, the effective SAIF rates range from 0 to 27 to basis points as of
October 1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
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<PAGE>
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and elimination of the separate
federal regulation of thrifts. As a result, we might have to convert to a
different financial institution charter and be regulated under federal law as a
bank, including being subject to the more restrictive activity limitations
imposed on national banks. We cannot predict the impact of our conversion to, or
regulation as, a bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. Our capital ratios are set forth under "Historical and Pro Forma Capital
Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio
value with data submitted by the institution and the interest rate risk
measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, to be deducted from an institution's total capital will be
based on the institution's Thrift Financial Report filed two quarters earlier.
Savings institutions with less than $300 million in assets and a risk-based
capital ratio above 12% are generally exempt from filing the interest rate risk
schedule with their Thrift Financial Reports. However, the OTS may require any
exempt
69
<PAGE>
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Although the rule is not yet in effect, due to our net
size and risk-based capital level, we are exempt from the interest rate risk
component.
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends by us to the Company. In addition,
we may not declare or pay a cash dividend on our capital stock if the effect
would be to reduce our regulatory capital below the amount required for the
liquidation account to be established at the time of the conversion. See "The
Conversion -- Effects of Conversion to Stock Form on Depositors and Borrowers of
First Kansas Federal Savings Association -- Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
September 30, 1997, we qualified as a Tier 1 institution.
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Under certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. The Association is unable to predict whether or when the proposed
regulation will become effective.
In the event our capital falls below our fully phased-in requirement or
the OTS notifies us that we are in need of more than normal supervision, we
would become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75 %
of net income over the most recent four
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quarter period. Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.
A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a savings institution cannot distribute regulatory
capital that is needed for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test. If we maintain an appropriate level of
qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualify as a QTL, we will continue to enjoy full borrowing privileges
from the FHLB of Topeka. The required percentage of QTIs is 65% of portfolio
assets (defined as all assets minus intangible assets, property used by the
institution in conducting its business and liquid assets equal to 10% of total
assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings institutions may include shares of stock
of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is
determined on a monthly basis in nine out of every 12 months. As of December 31,
1997, we were in compliance with our QTL requirement with approximately 93% of
our assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Within
certain limits, affiliates are permitted to receive more favorable loan terms
than non-affiliates. Our affiliates include the Company and any company which
would be under common control with us. In addition, a savings institution may
not extend credit to any affiliate engaged in activities not permissible for a
bank holding company or acquire the securities of any affiliate that is not a
subsidiary. The OTS has the discretion to treat subsidiaries of savings
institution as affiliates on a case-by-case basis.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1997, our required liquid
asset ratio was 4%. Our average liquid asset ratio at December 31, 1997 was
5.68%. Monetary penalties may be imposed upon institutions for violations of
liquidity requirements.
Federal Home Loan Bank System. We are a member of the FHLB of Topeka,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds
deposited by savings institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
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As a member, we are required to purchase and maintain stock in the FHLB
of Topeka in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. At December 31, 1997, we had $661,000 in FHLB stock, at cost,
which was in compliance with this requirement. The FHLB imposes various
limitations on advances such as limiting the amount of certain types of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve. The Federal Reserve 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) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve may be used to
satisfy the liquidity requirements that are imposed by the OTS. At December 31,
1997, our reserve met the minimum level required by the Federal Reserve.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. We had no borrowings from the Federal Reserve System at
December 31, 1997.
TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
Generally, thrifts with $500 million of assets or less may still use the
experience method in determining additions to bad debt reserves, which is also
available to small banks. Larger thrifts must use the specific charge off method
regarding bad debts. Any reserve amounts added to our bad debt reserve after
1987 will be recaptured into our taxable income over a six year period beginning
in 1996. A thrift may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential lending test.
This recapture will not have a material impact on us.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987.
If a savings institution's qualifying assets (generally, loans secured
by residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of December 31, 1997,
at least 60% of our assets were qualifying assets as defined in the Code. No
assurance can be given that we will meet the 60% test for subsequent taxable
years.
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Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution to you, our stockholders
(including distributions made on dissolution or liquidation), unless we include
the amount in income. Distributable amounts may be reduced by any amount deemed
necessary to pay the resulting federal income tax. As of December 31, 1997, we
had $718,000 of accumulated earnings, representing our base year tax reserve,
for which federal income taxes have not been provided. If such amount is used
for any purpose other than bad debt losses, including a dividend distribution or
a distribution in liquidation, it will be subject to federal income tax at the
then current rate.
The Code imposes an alternative minimum tax ("AMT") on a corporation's
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased
by certain preference items, including the excess of the tax bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the experience method. Only 90% of AMTI can be
offset by net operating loss carryovers of which we currently have none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, our AMTI is increased by an amount equal to 75 % of the amount by
which our adjusted current earnings exceeds our AMTI (determined without regard
to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2 million is imposed on corporations, including us, whether
or not an AMT is paid. For tax years beginning in 1998 a corporation that has
had average annual gross receipts of $5 million or less over its 1995, 1996 and
1997 tax years will be a "small corporation." Once the corporation is recognized
as a small corporation it will be exempt from the AMT for so long as its average
annual gross receipts for the prior 3 year period does not exceed $7,500,000.
The Company will be recognized as a small corporation.
The Company may exclude from its income 100% of dividends received from
us as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend.
Our federal income tax returns have not been audited by the IRS during
the past ten years.
State Taxation
The Association files Kansas income tax returns. For Kansas income tax
purposes, savings institutions are presently taxed at a rate of up to 6.5% of
net income, which is calculated based on federal taxable income, subject to
certain adjustments. The State of Kansas also imposes franchise and privilege
taxes on savings institutions which, in the case of First Kansas, do not
constitute significant tax items.
Our state tax returns have not been audited by the State of Kansas
during the past ten years.
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MANAGEMENT OF FIRST KANSAS FINANCIAL CORPORATION
Our board of directors consists of the same individuals who serve as
directors of our subsidiary, First Kansas Federal Savings Association. Our
articles of incorporation and bylaws require that directors be divided into
three classes, as nearly equal in number as possible. Each class of directors
serves for a three-year period, with approximately one-third of the directors
elected each year. Our officers will be elected annually by the board and serve
at the board's discretion. See "Management of First Kansas Federal Savings
Association."
MANAGEMENT OF FIRST KANSAS FEDERAL SAVINGS ASSOCIATION
Directors and Executive Officers
Our board of directors is composed of six members each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our current charter and bylaws and our proposed stock charter and
bylaws require that directors be divided into three classes, as nearly equal in
number as possible. Our officers are elected annually by our board and serve at
the board's discretion.
The following table sets forth information with respect to our
directors and executive officers, all of whom will continue to serve in the same
capacities after the conversion.
<TABLE>
<CAPTION>
Age at Current
December 31, Director Term
Name 1997 Position Since Expires(1)
- ---- ---- -------- -------- -------
<S> <C> <C> <C> <C>
J. Darcy Domoney 44 Chairman 1995 2001
James E. Breckenridge 50 Director 1977 2000
William R. Butler, Jr. 68 Director 1977 2000
Roger L. Coltrin 58 Director 1996 2000
Donald V. Meyer 52 Director 1989 1999
Larry V. Bailey 55 Director, President, 1989 1999
CEO and CFO
Daniel G. Droste 40 Senior Vice President N/A N/A
& Treasurer
Galen E. Graham 58 Senior Vice President N/A N/A
& Secretary
</TABLE>
- -----------------
(1) The terms for directors of the Company are the same as those of First
Kansas Federal Savings Association. A director whose term expires
during the year would serve until the next annual meeting that would
typically occur in April of the following year.
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The business experience for the past five years of each of the
directors and executive officers is as follows:
J. Darcy Domoney has served the Association as a director since 1995
and as chairman since January 1997. Mr. Domoney is a partner in the law firm of
Winkler, Lee, Tetwiler, Domoney & Schultz. He is a member of the Paola Rotary
Club and is on the Rotary District Youth Exchange Committee.
James E. Breckenridge has been a director of the Association since
1977. Since January 1997 Mr. Breckenridge has been employed by Thorn Industries,
an appliance, electronics and furniture store. He is also an independent
insurance salesperson for Morris and Associate Insurance. Until January 1996,
Mr. Breckenridge was President and majority stockholder of Breck's Inc., a men's
clothing store.
William R. Butler, Jr. has been a member of the Board of Directors of
the Association since 1977. He has been actively involved in the local
community, having owned and operated several retail businesses in Osawatomie.
Mr. Butler has served as an Osawatomie City Councilman and presently serves as a
Miami County Commissioner. Mr. Butler is a member of the Osawatomie Chamber of
Commerce, a member of the Miami County Crimestoppers, and serves as a director
of the Miami County Economic Development Corp.
Roger L. Coltrin served the Association as an advisory director since
1989. In January 1996 he became a voting director. Mr. Coltrin is the manager of
the Runyan Funeral Home and until 1997 was a majority stockholder in this
business. He is a member of the Past Mayors Council, the High School Site
Committee and the local Lions Clubs. Mr. Coltrin is also a member of the
Louisburg Chamber of Commerce.
Donald V. Meyer has been a director of the board since 1989 and was
chairman of the board for four years. He is a dentist with a solo practice in
Paola.
Larry V. Bailey has served the Association since 1989 as President and
Chief Executive Officer ("CEO"). He is also Chief Financial Officer ("CFO") of
the Association and a member of the Board of Directors. Mr. Bailey was a
director of the Osawatomie Chamber of Commerce, is the treasurer of both the
local Lions Club and the Miami County Economic Development Corporation, and he
is a director of Osawatomie's "Christmas in October."
Daniel G. Droste is a Senior Vice President and the Treasurer of the
Association. He has been employed with us since 1979. Mr. Droste is also the
Treasurer and Webelos Den Leader for Cub Scout Pack 3100 and a member of the
Paola Sunrise Lions Club. He is also currently the Chairman of the Holy Trinity
Church Building Committee and Co-Chairman of the Holy Trinity Church Development
Team. He has also over the past several years been an active participant in the
"Christmas in October" program.
Galen E. Graham has served as an executive officer of the Association
since 1970. He is a Senior Vice President and the Secretary of the Association.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended December
31, 1997, the board of directors held 12 regular meetings and no special
meetings. No director attended fewer than 75% of the total meetings of the board
of directors and committees on which such director served during this time
period.
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Director Compensation
Each director is paid monthly. Total aggregate fees paid to the
directors for the year ended December 31, 1997 were $40,800. Since January 1,
1998, each director (including the chairman of the board) has been paid a
monthly fee of $1,000.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1997. No other employee earned in excess of $100,000 for the year
ended December 31, 1997.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------
Other Annual All Other
Name and Principal Position Salary Bonus Compensation Compensation
- --------------------------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C>
Larry V. Bailey
Director, President, CEO, & CFO $120,000 $15,000 (1) $11,845(2)
</TABLE>
- -----------------
(1) Other annual compensation does not equal the lesser of $50,000 or 10% of
the total of individual's annual salary and bonus.
(2) Includes Association matching contributions of $3,167 under the 401(k) Plan
and Association contributions of $8,678 made pursuant to the Profit Sharing
Plan. No benefits accrued under the Association's Supplemental Executive
Retirement Plan during the year ended December 31, 1997.
Employment Agreement. We have entered into an employment agreement with
our President, Larry V. Bailey. Mr. Bailey's base salary under the employment
agreement is $120,000. The employment agreement has a term of three years. The
agreement is terminable by us for "just cause" as defined in the agreement. If
we terminate Mr. Bailey without just cause, he will be entitled to a
continuation of his salary from the date of termination through the remaining
term of the agreement but in no event for a period of less than twenty-four
months. The employment agreement contains a provision stating that in the event
of the termination of employment in connection with any change in control of us,
Mr. Bailey will be paid a lump sum amount equal to 2.99 times his five year
average annual taxable cash compensation. If such payments had been made under
the agreement as of December 31, 1997, such payments would have equaled
approximately $347,209. The aggregate payments that would have been made to Mr.
Bailey would be an expense to us, thereby reducing our net income and our
capital by that amount. The agreement may be renewed annually by our board of
directors upon a determination of satisfactory performance within the board's
sole discretion. If Mr. Bailey shall become disabled during the term of the
agreement, he shall continue to receive payment of 100% of the base salary for a
period of 12 months and ^ 65% of such base salary for the remaining term of such
agreement. Such payments shall be reduced by any other benefit payments made
under other disability programs in effect for our employees.
Supplemental Executive Retirement Plan. We have implemented a
supplemental executive retirement plan ("SERP") for the benefit of our
President, Mr. Bailey. The SERP will provide Mr. Bailey with a supplemental
retirement benefit in addition to benefits under the Pension Plan and the
proposed ESOP. Under the SERP, Mr. Bailey's retirement pension will be
supplemented by the crediting of an additional 15 years of service, provided
that he retires after attainment of age 58. Therefore the
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SERP will provide a retirement benefit equal to 30% of final average earnings at
retirement after age 65, in addition to the projected benefit of 36% of final
average earnings under the Pension Plan (Pension Plan benefits are calculated
based upon 2% times years of service times Final Average Earnings). Benefits
payable under the Pension Plan will be reduced for retirement prior to age 65
based upon fewer years of service. Additionally, the SERP will reduce the ^
Pension Plan reduction for retirement prior to age 65 from 3% per year to 2% per
year. Payments under the SERP are accrued for financial reporting purposes
during the period of employment. The SERP is unfunded. All benefits payable
under the SERP would be paid from our current assets. There are no tax
consequences to either participant or us related to the SERP prior to payment of
benefits. Upon receipt of payment of benefits, the participant will recognize
taxable ordinary income in the amount of such payments received and we will be
entitled to recognize a tax-deductible compensation expense at that time.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees
of ours, to be implemented upon the completion of the conversion. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the Plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the conversion. The ESOP intends to
borrow funds from the Company. The loan is expected to be for a term of ten
years at an annual interest rate equal to the prime rate as published in The
Wall Street Journal. Presently it is anticipated that the ESOP will purchase up
to 8% of the common stock to be issued in the offering (i.e., ^ 94,000 shares,
based on the midpoint of the EVR). The loan will be secured by the shares
purchased and earnings of ESOP assets. Shares purchased with such loan proceeds
will be held in a suspense account for allocation among participants as the loan
is repaid. We anticipate contributing approximately ^ $94,000 annually (based on
a ^ $940,000 purchase) to the ESOP to meet principal obligations under the ESOP
loan, as proposed. It is anticipated that all such contributions will be
tax-deductible. This loan is expected to be fully repaid in approximately 10
years.
Shares sold above the maximum of the EVR (i.e., more than 1,351,250
shares) may be sold to the ESOP before satisfying remaining unfilled orders of
Eligible Account Holders to fill the ESOP's subscription or the ESOP may
purchase some or all of the shares covered by its subscription after the
conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant benefits become vested in plan allocations
following five years of service. Employment prior to the adoption of the ESOP
shall be credited for the purposes of vesting. Vesting will be accelerated upon
retirement, death, disability, change in control of the Company, or termination
of the ESOP. Forfeitures will be reallocated to participants on the same basis
as other contributions in the plan year. Benefits may be payable in the form of
a lump sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
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The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees 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 no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Proposed Future Stock Benefit Plans
Stock Option Plan. The ^ board of directors ^ intends to adopt a stock
option plan (the Option Plan) following the conversion, subject to approval by
the Company's stockholders, at a stockholders' meeting to be held no sooner than
six months after the conversion. The Option Plan would be in compliance with the
OTS regulations in effect. See "-- Restrictions on Stock Benefit Plans." If the
Option Plan is implemented within one year after the conversion, in accordance
with OTS regulations, a number of shares equal to 10% of the aggregate shares of
common stock to be issued in the offering (i.e., 117,500 shares based upon the
sale of 1,175,000 shares at the midpoint of the EVR) would be reserved for
issuance by the Company upon exercise of stock options to be granted to our
officers, directors and employees from time to time under the Option Plan. The
purpose of the Option Plan would be to provide additional performance and
retention incentives to certain officers, directors and employees by
facilitating their purchase of a stock interest in the Company. Under the OTS
regulations, the Option Plan, would provide for a term of 10 years, after which
no awards could be made, unless earlier terminated by the board of directors
pursuant to the Option Plan and the options would vest over a five year period
(i.e., 20% per year), beginning one year after the date of grant of the option.
Options would be granted based upon several factors, including seniority, job
duties and responsibilities, job performance, our financial performance and a
comparison of awards given by other savings institutions converting from mutual
to stock form.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan. It would receive the option price for each
share issued to optionees upon the exercise of such options. Shares issued as a
result of the exercise of options will be either authorized but unissued shares
or shares purchased in the open market by the Company. However, no purchases in
the open market will be made that would violate applicable regulations
restricting purchases by the Company. The exercise of options and payment for
the shares received would contribute to the equity of the Company.
If the Option Plan is implemented more than one year after the
conversion, the Option Plan will comply with OTS regulations and policies that
are applicable at such time.
Restricted Stock Plan. The ^ boards of directors ^ intend to adopt the
RSP following the conversion, the objective of which is to enable us to retain
personnel and directors of experience and ability in key positions of
responsibility. The Company expects to hold a stockholders' meeting no sooner
than six months after the conversion in order for stockholders to vote to
approve the RSP. If the RSP is implemented within one year after the conversion,
in accordance with applicable OTS regulations, the shares granted under the RSP
will be in the form of restricted stock vesting over a five year period (i.e.,
20% per year) beginning one year after the date of grant of the award.
Compensation expense to the Association in the amount of the fair market value
of the common stock granted will be recognized pro rata over the years during
which the shares are payable. Until they have vested, such shares may not be
sold, pledged or otherwise disposed of and are required to be held in escrow.
Any shares not so allocated would be voted by the RSP Trustees. The RSP will be
implemented in accordance with applicable OTS regulations. See "-- Restrictions
on Stock Benefit Plans." Awards would be granted based
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upon a number of factors, including seniority, job duties and responsibilities,
job performance, our performance and a comparison of awards given by other
institutions converting from mutual to stock form. The RSP would be managed by a
committee of non-employee directors (the "RSP Trustees"). The RSP Trustees would
have the responsibility to invest all funds contributed by us to the trust
created for the RSP (the "RSP Trust").
We expect to contribute sufficient funds to the RSP so that the RSP
Trust can purchase, in the aggregate, up to 4% of the amount of common stock
that is sold in the conversion. The shares purchased by the RSP would be
authorized but unissued shares or would be purchased in the open market. In the
event the market price of the common stock is greater than $10 per share, our
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10 per share, our contribution will be decreased. In recognition
of their prior and expected services to us and the Company, as the case may be,
the officers, other employees and directors responsible for implementation of
the policies adopted by the board of directors and our profitable operation
will, without cost to them, be awarded stock under the RSP. Based upon the sale
of 1,175,000 shares of common stock in the offering at the midpoint of the EVR,
the RSP Trust is expected to purchase up to 47,000 shares of common stock.
If the RSP is implemented more than one year after the conversion, the
RSP will comply with such OTS regulations and policies that are applicable at
such time.
Restrictions on Stock Benefit Plans. OTS regulations provide that in
the event stock option or management and/or employee stock benefit plans are
implemented within one year from the date of conversion, such plans must comply
with the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans, the shares may not exceed 3% of the
shares issued in the conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under the option plan or the restricted
stock plans, (6) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan, (7) all plans
must be approved by a majority of the total votes eligible to be cast at any
duly called meeting of the Company's stockholders held no earlier than six
months following the conversion, (8) for stock option plans, the exercise price
must be at least equal to the market price of the stock at the time of grant,
(9) for restricted stock plans, no stock issued in a conversion may be used to
fund the plan, (10) neither stock option awards nor restricted stock awards may
vest earlier than 20% as of one year after the date of stockholder approval and
20% per year thereafter, and vesting may be accelerated only in the case of
disability or death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received.
Certain Related Transactions. We grant loans to our officers, directors
and employees. These loans are made in the ordinary course of business and upon
the same terms, including collateral, as those prevailing at the time for
comparable transactions and do not involve more than the normal risk of
collectibility or present any other unfavorable features, except that for
consumer loans we charge an interest rate that is 2% below the stated rate and
we waive the loan processing fees. In addition, for loans to officers, directors
and employees on their principal residence, we offer a one year adjustable-rate
loan
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at the higher of the Association's cost of funds plus 1% or the applicable
federal rate. Loans to officers and directors and their affiliates amounted to
$374,576, or 5.67% of our total equity, at December 31, 1997. Assuming the
conversion had occurred at December 31, 1997 with the issuance of 1,175,000
shares, these loans would have totalled approximately 2.27% of pro forma
consolidated stockholders' equity.
RESTRICTIONS ON ACQUISITION OF FIRST KANSAS FINANCIAL CORPORATION
While the board of directors is not aware of any effort that might be
made to obtain control of the Company after conversion, the board of directors
believes that it is appropriate to include certain provisions as part of the
Company's articles of incorporation to protect the interests of the Company and
its stockholders from hostile takeovers ("anti-takeover" provisions) which the
board of directors might conclude are not in the best interests of us or our
stockholders. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by the board of directors but which
individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over the current
market prices. As a result, stockholders who might desire to participate in such
a transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current board of directors or management of the
Company more difficult.
The following discussion is a general summary of the material
provisions of the articles of incorporation, bylaws, and certain other
regulatory provisions of the Company, which may be deemed to have such an
anti-takeover effect. The description of these provisions is necessarily general
and reference should be made in each case to the articles of incorporation and
bylaws of the Company which are filed as exhibits to the registration statement
of which this prospectus is a part. See "Where You Can Find Additional
Information" as to how to obtain a copy of these documents.
Provisions of the Company Articles of Incorporation and Bylaws
Limitations on Voting Rights. The articles of incorporation of the
Company provide that after completion of the conversion, in no event shall any
record owner of any outstanding equity security which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of
any class of equity security outstanding (the "Limit"), be entitled or permitted
to any vote in respect of the shares held in excess of the Limit. In addition,
for a period of five years from the completion of our conversion, no person may
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of the Company without the
approval of the Board of Directors.
The impact of these provisions on the submission of a proxy on behalf
of a beneficial holder of more than 10% of the common stock is (1) to disregard
for voting purposes and require divestiture of the amount of stock held in
excess of 10% (if within five years of the conversion more than 10% of the
common stock is beneficially owned by a person) and (2) limit the vote on common
stock held by the beneficial owner to 10% or possibly reduce the amount that may
be voted below the 10% level (if more than 10% of the common stock is
beneficially owned by a person more than five years after the conversion).
Unless the grantor of a revocable proxy is an affiliate or an associate of such
a 10% holder or there is an arrangement, agreement or understanding with such a
10% holder, these provisions would not restrict the ability of such a 10% holder
of revocable proxies to exercise revocable proxies for which the 10% holder is
neither a beneficial nor record owner. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The articles of incorporation of the
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Company further provide that this provision limiting voting rights may only be
amended upon the vote of 80% of the outstanding shares of voting stock.
Election of Directors. Certain provisions of the Company's articles of
incorporation and bylaws will impede changes in majority control of the board of
directors. The Company's articles of incorporation provide that the board of
directors of the Company will be divided into three staggered classes, with
directors in each class elected for three-year terms. Thus, it would take two
annual elections to replace a majority of the Company's board. The Company's
articles of incorporation provide that the size of the board of directors may be
increased or decreased only if approved by a vote of two-thirds of the whole
board of directors. 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, may be filled only by the board of directors, acting by a majority
vote of the directors then in office and any directors so chosen shall hold
office until the next succeeding annual election of directors. Finally, the
articles of incorporation and 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.
The articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The articles of incorporation
of the Company provide that a special meeting of stockholders may be called only
pursuant to a resolution adopted by a majority of the board of directors, or by
a committee of the board of directors which is authorized to call such meetings.
Absence of Cumulative Voting. The Company's articles of incorporation
provide that stockholders may not cumulate their votes in the election of
directors.
Authorized Shares. The articles of incorporation authorize the issuance
of 8,000,000 shares of common stock and 2,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide the Company's board of
directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and the
exercise of stock options. However, these additional authorized shares may also
be used by the board of directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The board of directors also has
sole authority to determine the terms of any one or more series of preferred
stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of preferred stock,
the board has the power, to the extent consistent with its fiduciary duty, to
issue a series of preferred stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
Procedures for Certain Business Combinations. The articles of
incorporation require that unless certain fair price provisions are met,
business combinations must be approved by the affirmative vote of the holders of
not less than 80% of the outstanding stock of the Company. Exceptions to this
requirement may occur if two-thirds of the members of the board of directors,
who are continuing directors, has previously approved the business transaction.
Any amendment to this provision requires the affirmative vote of at least 80% of
the shares of the Company entitled to vote generally in an election of
directors.
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Amendment to Articles of Incorporation and Bylaws. Amendments to the
Company's articles of incorporation must be approved by the Company's board of
directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the common stock; number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; director
liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the articles of
incorporation).
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of the Company entitled to vote in the election of directors, cast at a meeting
called for that purpose.
Benefit Plans. In addition to the provisions of the Company's articles
of incorporation and bylaws described above, certain benefit plans of ours
adopted in connection with the conversion contain provisions which also may
discourage hostile takeover attempts which the boards of directors might
conclude are not in the best interests of us or our stockholders. For a
description of the benefit plans and the provisions of such plans relating to
changes in control, see "Management of First Kansas Federal Savings Association
- -- Proposed Future Stock Benefit Plans."
Regulatory Restrictions. A federal regulation prohibits any person
prior to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control,
involves a 25% voting stock test, control in any manner of the election of a
majority of the institution's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of an institution's voting stock, if the acquiror
also is subject to any one of either "control factors," constitutes a rebuttable
determination of control under the regulations. The determination of control may
be rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
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DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 8,000,000 shares of common stock,
$0.10 par value per share, and 2,000,000 shares of serial preferred stock, $0.10
par value per share. The Company currently expects to issue up to 1,351,250
shares of common stock in the conversion. The Company does not intend to issue
any shares of serial preferred stock in the conversion, nor are there any
present plans to issue such preferred stock following the conversion. The
aggregate par value of the issued shares will constitute the capital account of
the Company. The balance of the purchase price will be recorded for accounting
purposes as additional paid-in capital. See "Capitalization." The capital stock
of the Company will represent nonwithdrawable capital and will not be insured by
us, the FDIC, or any other governmental agency.
Common Stock
Voting Rights. Each share of the common stock will have the same
relative rights and will be identical in all respects with every other share of
the common stock. The holders of the common stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
common stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the common stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company; (ii) any accrued dividend claims; and (iii) liquidation preferences of
any serial preferred stock which may be issued in the future.
Restrictions on Acquisition of the common stock. See "Restrictions on
Acquisition of First Kansas Financial Corporation" for a discussion of the
limitations on acquisition of shares of the common stock.
Other Characteristics. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The common stock is not subject to call for
redemption, and the outstanding shares of common stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable.
Issuance of Additional Shares. Except in the offering and possibly
pursuant to the RSP or Option Plan, the Company has no present plans, proposals,
arrangements or understandings to issue additional authorized shares of the
common stock. In the future, the authorized but unissued and unreserved shares
of the common stock will be available for general corporate purposes, including,
but not limited to, possible issuance: (i) as stock dividends; (ii) in
connection with mergers or acquisitions; (iii) under a cash dividend
reinvestment or stock purchase plan; (iv) in a public or private offering; or
(v) under employee benefit plans. See "Risk Factors -- Possible Dilutive Effect
of RSP and Stock Options" and "Pro Forma Data." Normally no stockholder approval
would be required for the issuance of these shares, except as described herein
or as otherwise required to approve a transaction in which additional authorized
shares of the common stock are to be issued.
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For additional information, see "Dividends," "Regulation" and
"Taxation" with respect to restrictions on the payment of cash dividends; "The ^
Conversion -- Restrictions on Sales and Purchases of Shares by Directors and
Officers" relating to certain restrictions on the transferability of shares
purchased by directors and officers; and "Restrictions on Acquisitions of First
Kansas Financial Corporation" for information regarding restrictions on
acquiring common stock of the Company.
Serial Preferred Stock
None of the 2,000,000 authorized shares of serial preferred stock of
the Company will be issued in the conversion. After the conversion is completed,
the board of directors of the Company will be authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof, subject to regulatory approval but without stockholder
approval. If and when issued, the serial preferred stock is likely to rank prior
to the common stock as to dividend rights, liquidation preferences, or both, and
may have full or limited voting rights. The board of directors, without
stockholder approval, can issue serial preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of the common stock. The board of directors has no present intention to issue
any of the serial preferred stock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act, and is therefore,
unenforceable.
Section 17-6305 of the Kansas General Corporation Code (the "Code")
describes those circumstances under which directors, officers, employees and
agents may be insured or indemnified against liability which they may incur in
their capacities as such. The Company's Articles of Incorporation (the
"Articles") require indemnification of directors, officers, employees or agents
of the Company to the full extent permissible under Kansas law.
The Company may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Company or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Company would have the power to indemnify such person
against such liability under the provisions of the Code or of the Articles.
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for
Capital Resources, Inc. may be passed upon by Silver, Freedman & Taff, L.L.P.,
Washington, DC. The federal income tax consequences of the conversion have been
passed upon for us by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. The
Kansas income tax consequences of the conversion have been passed upon for us by
Winkler, Lee, Tetwiler, Domoney & Schultz, Paola, Kansas. J. Darcy Domoney, a
director of both the Association and the Company, is a partner of this firm.
84
<PAGE>
EXPERTS
The financial statements of First Kansas Federal Savings Association as
of and for the years ended December 31, 1997 and 1996, appearing in this
document have been audited by KPMG Peat Marwick, independent certified public
accountants, as set forth in their report which appears elsewhere in this
document, and is included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
Capital Resources Group, Inc. is affiliated with Capital Resources,
Inc. Capital Resources Group, Inc. has consented to the publication herein of a
summary of its letters to First Kansas Federal Savings Association setting forth
its opinion as to our estimated pro forma market value in converted form and its
opinion setting forth the value of subscription rights. It has also consented to
the use of its name and statements with respect to it appearing in this
document.
REGISTRATION REQUIREMENTS
The common stock of the Company is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company will be subject to the information, proxy solicitation, insider trading
restrictions, tender offer rules, periodic reporting and other requirements of
the SEC under the Exchange Act. The Company may not deregister the common stock
under the Exchange Act for a period of at least three years following the
conversion.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and must file reports and other information with the SEC.
The Company has filed with the SEC a registration statement on Form
SB-2 under the Securities Act of 1933, as amended, with respect to the common
stock offered in this document. As permitted by the rules and regulations of the
SEC, this document does not contain all the information set forth in the
registration statement. Such information 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 such material can be obtained from the SEC
at prescribed rates. The SEC also maintains an internet address ("Web site")
that contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http://www.sec.gov". The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 are, of necessity, brief descriptions and
are not necessarily complete; each such statement is qualified by reference to
such contract or document.
First Kansas Federal Savings Association has filed an Application for
conversion with the OTS with respect to the conversion. Pursuant to the rules
and regulations of the OTS, this document omits certain information contained in
that Application. The Application may be examined at the principal office of the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 and at the Midwest Regional
Office of the OTS, 122 W. John Carpenter Freeway, Suite 600, Irving, Texas
75039.
A copy of the Articles of Incorporation and the Bylaws of the Company
are available without charge from the Company.
85
<PAGE>
First Kansas Federal Savings Association
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report........................................... F-1
Consolidated Balance Sheets............................................ F-2
Consolidated Statements of Earnings.................................... ^ 39
--
Consolidated Statements of Equity...................................... F-3
Consolidated Statements of Cash Flows.................................. F-4
Notes to Consolidated Financial Statements............................. F-6
All schedules are omitted because the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
Separate financial statements for the Company have not been included since it
will not engage in material transactions until after the conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
86
<PAGE>
Independent Auditors' Report
The Board of Directors
First Kansas Federal Savings Association:
We have audited the accompanying consolidated balance sheets of First Kansas
Federal Savings Association and subsidiary (the Association) as of December 31,
1997 and 1996 and the related consolidated statements of earnings, equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Association's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Kansas Federal
Savings Association and subsidiary as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 18, 1998
F - 1
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
====================================================================================================
Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (note 2) $ 4,599,876 4,222,017
Investment securities held-to-maturity (estimated fair value of
$3,952,000 and $2,778,000 in 1997 and 1996, respectively) (note 3) 3,852,265 2,800,000
Mortgage-backed securities available-for-sale (amortized cost of
$17,325,000 and $24,432,000 in 1997 and 1996, respectively) (note 4) 16,833,160 23,722,685
Mortgage-backed securities held-to-maturity (estimated fair value of
$20,895,000 and $24,626,000 in 1997 and 1996, respectively) (note 4) 20,936,644 24,861,361
Loans receivable, net (note 5) 46,563,162 42,827,236
Accrued interest receivable:
Investment and mortgage-backed securities 244,173 306,976
Loans receivable 246,088 221,221
Stock in Federal Home Loan Bank (FHLB) of Topeka, at cost 660,900 615,200
Premises and equipment, net (note 6) 989,772 686,926
Real estate held for development (note 7) 354,840 553,712
Premium on deposits assumed, net of accumulated amortization of
$912,263 and $851,328, respectively (note 8) 299,600 360,535
Prepaid expenses and other assets 74,621 27,826
Income tax receivable 39,629
- ----------------------------------------------------------------------------------------------------
Total assets $ 95,655,101 101,245,324
====================================================================================================
Liabilities and Equity
- ----------------------------------------------------------------------------------------------------
Liabilities:
Deposits (note 9) $ 85,650,836 83,722,941
Advances from borrowers for property taxes and insurance 128,400 141,906
Accrued interest payable 86,931 65,392
Borrowings from FHLB of Topeka (note 10) 2,550,000 11,350,000
Income taxes payable:
Current 403,404
Deferred (note 11) 160,000 86,800
Accrued expenses and other liabilities 65,189 83,440
- ----------------------------------------------------------------------------------------------------
Total liabilities 89,044,760 95,450,479
- ----------------------------------------------------------------------------------------------------
Equity:
Retained earnings (notes 11 and 13) 6,935,102 6,263,079
Unrealized loss on available-for-sale securities, net of tax (324,761) (468,234
- ----------------------------------------------------------------------------------------------------
Total equity 6,610,341 5,794,845
Commitments (note 5)
- ----------------------------------------------------------------------------------------------------
Total liabilities and equity $ 95,655,101 101,245,324
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F - 2
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Statements of Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) on
available-
Retained for-sale
earnings securities Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 6,092,357 (140,354) 5,952,003
Net earnings 170,722 -- 170,722
Change in unrealized loss on available-for-sale securities,
net ^of taxes -- (327,880) (327,880)
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,263,079 (468,234) 5,794,845
Net earnings 672,023 -- 672,023
Change in unrealized gain on available-for-sale securities,
net ^of taxes -- 143,473 143,473
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 6,935,102 (324,761) 6,610,341
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
==========================================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 672,023 170,722
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Provision for loan losses 35,000 --
Depreciation 110,324 109,530
Amortization of premium on deposits assumed 60,935 60,935
FHLB stock dividends (45,700) (37,900)
Amortization of deferred hedging loss -- 495
Amortization of loan fees (35,354) (29,684)
Accretion of discounts and amortization of premiums on
investment and mortgage-backed securities, net (36,627) (556)
Deferred income taxes (700) (18,304)
Loss on sale of real estate owned -- 780
Gain on sale of real estate held for development (35,189) --
Gain on sales of loans, net (66,997) (133,388)
(Gain) loss on sales of mortgage-backed securities available-for-sale (55,217) 4,057
Proceeds from sales of loans 3,451,382 5,809,376
Origination of loans for sale (3,384,385) (5,600,254)
Changes in assets and liabilities:
Accrued interest receivable 37,936 (7,828)
Prepaid expenses and other assets (46,795) 30,141
Accrued interest payable 21,539 (6,280)
Accrued expenses and other liabilities (18,251) 3,085
Current income taxes payable/receivable 443,033 (159,705)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,106,957 195,222
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
^
^ Loan originations, net of repayments (857,972) (319,045)
^ Loans purchased (2,877,600) (11,700,977)
Maturities of investment securities held-to-maturity -- 3,540,580
Paydowns and maturities of mortgage-backed securities available-for-sale 2,503,348 1,842,156
Paydowns and maturities of mortgage-backed securities held-to-maturity 3,932,676 3,886,851
Purchases of investment securities held-to-maturity (1,031,481) (2,000,000)
Purchases of mortgage-backed securities available-for-sale -- (2,005,793)
Purchases of mortgage-backed securities held-to-maturity -- (4,689,871)
Proceeds from sales of mortgage-backed securities available-for-sale 4,666,651 3,255,278
Proceeds from sale of real estate owned -- 11,944
Acquisition and development of real estate held for development (98,721) (553,712)
Proceeds from sale of real estate held for development 214,450 --
Additions of premises and equipment, net (294,838) (65,895)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 6,156,513 (8,798,484)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F - 4
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
=================================================================================================
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 1,927,895 1,233,564
Proceeds from borrowings from FHLB -- 9,450,000
Repayment of borrowings from FHLB (8,800,000) --
Net decrease in advances from borrowers for taxes and insurance (13,506) (163,031)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,885,611) 10,520,533
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 377,859 1,917,271
Cash and cash equivalents at beginning of year 4,222,017 2,304,746
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,599,876 4,222,017
=================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 116,000 249,000
=================================================================================================
Cash paid during the year for interest $ 4,217,761 4,022,290
=================================================================================================
Supplemental schedule of noncash investing and financing activities:
Conversion of real estate owned to loans $ -- 22,950
=================================================================================================
</TABLE>
F - 5
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
================================================================================
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of First
Kansas Federal Savings Association (the Association) and its
wholly-owned subsidiary, First Enterprises, Inc. (a real estate
development subsidiary). Intercompany balances and transactions have
been eliminated. The Association is principally engaged in single family
home lending in the State of Kansas. The Association also makes consumer
and commercial loans depending on the demand and management's assessment
of the quality of such loans.
(b) Cash Equivalents
Cash equivalents consist of interest-bearing deposits in the Federal
Home Loan Bank (FHLB) of Topeka and other financial institutions with an
original maturity of three months or less.
(c) Investment Securities
The Association accounts for its investment securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, investments are classified as held-to-maturity, which are
carried at amortized cost, or available-for-sale, which are carried at
fair value with unrealized gains and losses excluded from earnings and
reported in a separate component of equity, net of related income taxes.
Amortization and accretion of premiums and discounts are computed using
the interest method over the estimated life of the related security and
are recorded as an adjustment of interest income. Gains and losses on
sales are calculated using the specific identification method.
(d) Loans
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding principal balance adjusted for any charge-offs, the
allowance for loan losses and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
The Association determines at the time of origination whether mortgage
loans will be held for the Association's portfolio or sold in the
secondary market. Loans originated and intended for sale in the
secondary market are recorded at the lower of aggregate cost or
estimated market value. Fees received on such loans are deferred and
recognized in income as part of the gain or loss on sale.
Loan origination, commitment and related fees and certain direct
origination costs related to loans for the Association's portfolio are
deferred. The deferred fees and costs are amortized as an adjustment of
yield over the contractual term of the individual loans using the
interest method.
(e) Mortgage Banking Activities
At December 31, 1997 and 1996, the Association was servicing loans for
others amounting to $1,435,000 and $1,858,000, respectively. Loan
servicing fees include servicing fees from investors and certain charges
collected from borrowers, such as late payment fees, which are recorded
when received. The amount of escrow balances held for borrowers at
December 31, 1997 and 1996 was insignificant.
(Continued)
F - 6
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
Originated servicing rights are not recorded as assets of the
Association. SFAS No. 122, Accounting for Mortgage Servicing Rights, as
amended by SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, requires that
originated servicing rights be valued and recorded as assets when the
loan is originated and subsequently amortized as a component of
servicing cost over the expected life of the loan. The Association
adopted the provisions of SFAS No. 122 and SFAS No. 125 on January 1,
1996 and January 1, 1997, respectively. Because the Association did not
retain any servicing rights on loans originated and sold during 1997 and
1996, SFAS Nos. 122 and 125 had no effect on the Association's
consolidated financial statements.
(f) Provisions for Losses on Loans and Interest Receivable
Provisions for losses on loans receivable are based upon management's
estimate of the amount required to maintain an adequate allowance for
losses, relative to the risks in the loan portfolio. This estimate is
based on reviews of the loan portfolio, including assessment of the
estimated net realizable value of the related underlying collateral, and
consideration of historical loss experience, current economic conditions
and such other factors which, in the opinion of management, deserve
current recognition. Loans are charged-off when the probability of loss
is established, taking into consideration such factors as the borrower's
financial condition, underlying collateral and guarantees. Loans are
also subject to periodic examination by regulatory agencies. Such
agencies may require charge-offs or additions to the allowance based
upon their judgments about information available at the time of their
examination.
Accrual of interest income on loans is discontinued for those loans with
interest more than ninety days delinquent or sooner if management
believes collectibility of the interest is not probable. Management's
assessment of collectibility is primarily based on a comparison of the
estimated value of underlying collateral to the related loan and accrued
interest receivable balances. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Nonaccruing loans are returned to
accrual status when principal and interest is reasonably assured and a
consistent record of performance has been demonstrated. Payments
received on impaired or nonaccrual loans are applied to principal and
interest in accordance with the contractual terms of the loan unless
full payment of principal is not expected, in which case both principal
and interest payments received are applied as a reduction of the
carrying value of the loan.
A loan is considered impaired when it is probable the Association will
be unable to collect all amounts due - both principal and interest -
according to the contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan are
discounted at the loan's effective interest rate. Impairment may also be
measured by reference to an observable market price, if one exists, or
the fair value of the collateral for a collateral-dependent loan.
Regardless of the historical measurement method used, the Association
measures impairment based on the fair value of the collateral when it
determines foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future
cash flows at the loan's effective rate of interest as stated in the
original loan agreement.
The Association applies the methods described above to multifamily real
estate loans, commercial real estate loans and restructured loans.
Smaller balance, homogeneous loans, including one-to-four-family
residential and construction loans and consumer loans, are collectively
evaluated for impairment.
(Continued)
F - 7
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(g) Real Estate Owned and Held for Development
Real estate properties acquired through foreclosure are initially
recorded at the lower of cost or estimated fair value, less selling
costs, at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas holding costs are
expensed when incurred. Valuations are periodically performed by
management and an allowance for losses is established by a charge to
operations if the carrying value of a property exceeds its estimated
fair value, less selling costs. Real estate held for developmen
consists of a parcel of land and improvements zoned for commercial
development. Such development is carried at cost which is less than
the estimated market value. Direct costs, including interest, are
capitalized as property costs during the development period. Gains
on sales are recognized by allocating costs to parcels sold using the
relative fair value method.
(h) Stock in Federal Home Loan Bank (FHLB) of Topeka
The Association is a member of the FHLB system. As a member, the
Association is required to purchase and hold stock in the FHLB of Topeka
in an amount equal to the greater of (a) 1% of unpaid residential loans,
(b) 5% of outstanding FHLB advances, or (c) .3% of total assets. FHLB
stock is carried at cost in the accompanying consolidated balance
sheets.
(i) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using both straight-line and accelerated
methods over the estimated useful lives of the assets, which range from
three to thirty-five years. Major replacements and betterments are
capitalized while normal maintenance and repairs are charged to expense
when incurred. Gains or losses on dispositions are reflected in current
operations.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities
and their respective income tax bases. The effect on deferred tax assets
and liabilities of a change in tax rate is recognized in income in the
period that includes the enactment date.
(k) Use of Estimates
Management of the Association has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(l) New Accounting Pronouncements
SFAS No. 125 was effective for all transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31,
1996. This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings.
(Continued)
F - 8
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
Under the financial-components approach, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets
and liabilities that exist after the transfer. Many of these assets and
liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of
collateral. The adoption of this statement did not have a material
effect on the Association's consolidated financial statements.
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, deferred the effective date for transfers and
servicing of financial assets and extinguishments of liabilities related
to secured borrowings, repurchase agreements and similar instruments
occurring after December 31, 1996 to those occurring after December 31,
1997. Management believes adoption of SFAS No. 127 will not have a
material effect on the Association's financial position or results of
operations, nor will adoption require additional capital resources.
The Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income, in June 1997. SFAS No. 130 will require
the Association to classify items of other comprehensive income by their
nature in the consolidated financial statements and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of the consolidated statement of equity. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.
(2) Cash and Cash Equivalents
A comparative summary of cash and cash equivalents follows:
================================================================================
1997 1996
- --------------------------------------------------------------------------------
Cash on hand $ 650,567 411,038
Deposits at other financial institutions 549,309 510,979
Overnight FHLB deposits 3,400,000 3,300,000
- --------------------------------------------------------------------------------
$4,599,876 4,222,017
================================================================================
(Continued)
F - 9
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(3) Investment Securities
A summary of investment securities held-to-maturity and information
relating to amortized cost, approximate fair values and unrealized gains
(losses) at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
1997 cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and agency obligations
maturing within one year $ 800,000 - (636) 799,364
U. S. government and agency obligations
maturing after one year but within five years 2,000,000 - (3,616) 1,996,384
U. S. government and agency obligations
maturing after ten years 1,052,265 103,985 - 1,156,250
- ---------------------------------------------------------------------------------------------------------------------------
$ 3,852,265 103,985 (4,252) 3,951,998
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and agency obligations
maturing after one year but within five years $ 2,800,000 - (22,125) 2,777,875
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of investment securities during 1997 or 1996.
(Continued)
F - 10
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(4) Mortgage-backed Securities
A summary of mortgage-backed securities and information relating to
amortized cost, approximate fair values and unrealized gains (losses) at
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
Amortized Unrealized Unrealized Fair
1997 cost gains losses value
===========================================================================================================================
<S> <C> <C> <C> <C>
Available-for-sale:
Government agency mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 331,351 386 (73) 331,664
Federal National Mortgage
Association (FNMA) 552,214 22,542 - 574,756
Government National Mortgage
Association (GNMA) 1,927,358 59,754 - 1,987,112
Collateralized mortgage obligations 14,514,422 35,263 (610,057) 13,939,628
- ---------------------------------------------------------------------------------------------------------------------------
$ 17,325,345 117,945 (610,130) 16,833,160
===========================================================================================================================
Held-to-maturity:
Government agency mortgage-backed securities:
FHLMC $ 161,414 4,994 - 166,408
FNMA 2,543,231 38,744 (1,876) 2,580,099
GNMA 499,918 42,946 - 542,864
Collateralized mortgage obligations 17,732,081 23,072 (149,852) 17,605,301
- ---------------------------------------------------------------------------------------------------------------------------
$ 20,936,644 109,756 (151,728) 20,894,672
===========================================================================================================================
1996
- ---------------------------------------------------------------------------------------------------------------------------
Available-for-sale:
Government agency mortgage-backed securities:
FHLMC $ 2,101,135 2,059 (3,552) 2,099,642
FNMA 3,218,673 46,017 (3,417) 3,261,273
GNMA 2,275,199 47,291 - 2,322,490
Collateralized mortgage obligations 16,837,236 32,309 (830,265) 16,039,280
- ---------------------------------------------------------------------------------------------------------------------------
$ 24,432,243 127,676 (837,234) 23,722,685
===========================================================================================================================
Held-to-maturity:
Government agency mortgage-backed securities:
FHLMC $ 222,808 7,423 - 230,231
FNMA 3,150,805 20,880 (16,507) 3,155,178
GNMA 576,612 43,732 - 620,344
Collateralized mortgage obligations 20,911,136 20,056 (311,313) 20,619,879
- ---------------------------------------------------------------------------------------------------------------------------
$ 24,861,361 92,091 (327,820) 24,625,632
===========================================================================================================================
</TABLE>
(Continued)
F - 11
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
The Association's portfolio of government agency mortgage-backed
securities and federal agency-backed collateralized mortgage obligations
consists primarily of first and second tranche securities with expected
maturities of three to five years. At December 31, 1997, the government
agency mortgage-backed securities had a carrying value of $6,098,000 and
consisted of approximately $3,204,000 of fixed rate securities and
$2,894,000 of variable rate securities. The collateralized mortgage
obligations had a carrying value of $31,672,000 and consisted of
approximately $18,209,000 of fixed rate securities and $13,463,000 of
variable rate securities. Collateralized mortgage obligations of the
Association are generally government agency guaranteed.
The proceeds from sales of government agency mortgage-backed securities
during 1997 were $4,666,651. Gross gains of $55,217 were realized on
those sales. The proceeds from sales of investment securities during
1996 were $3,255,278. Gross gains of $34,367 and gross losses of $38,424
were realized on those sales.
At December 31, 1997 and 1996, government agency mortgage-backed
securities with a carrying value of approximately $2,550,000 and
$2,075,000, respectively, were pledged to secure public funds on
deposit.
(5) Loans Receivable
Loans receivable consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
==========================================================================================================================
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One-to-four-family $ 42,852,979 39,481,525
Multifamily 1,045,432 1,062,433
Commercial 534,591 574,490
Land 140,977 78,314
Construction 126,336 130,000
- --------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 44,700,315 41,326,762
Consumer loans 1,727,771 1,420,993
Commercial loans 513,161 398,538
- --------------------------------------------------------------------------------------------------------------------------
Total 46,941,247 43,146,293
Less:
Unearned discounts and deferred fees 118,144 111,771
Allowance for loan losses 178,641 146,261
Undisbursed portion of loans in process 81,300 61,025
- --------------------------------------------------------------------------------------------------------------------------
Total, net $ 46,563,162 42,827,236
===========================================================================================================================
</TABLE>
The Association evaluates each customer's creditworthiness on a
case-by-case basis. Residential loans with a loan-to-value ratio
exceeding 80% are required to have private mortgage insurance. The
Association's primary lending area is in the State of Kansas.
(Continued)
F - 12
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
The weighted average annual interest rates on mortgage loans
approximated 7.69% and 7.86% at December 31, 1997 and 1996. Adjustable
rate loans have interest rate adjustment limitations and are generally
indexed to the national average cost of funds. Future market factors may
affect the correlation of the interest rate adjustment with the rates
the Association pays on the short-term deposits that have been primarily
utilized to fund these loans.
At December 31, 1997, the Association had outstanding commitments to
originate mortgage loans aggregating approximately $143,000. Of these
commitments, substantially all were variable rate commitments. The
Association also had approximately $411,000 in commitments to purchase
loans at December 31, 1997.
Loans made to directors and executive officers of the Association
approximated $375,000 and $345,000 at December 31, 1997 and 1996,
respectively. Such loans were made in the ordinary course of business.
Changes in such loans for 1997 are as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
<S> <C>
Balance at January 1, 1997 $ 345,000
Additions 217,000
Amounts collected (187,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 375,000
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
A summary of the activity in the allowance for loan losses follows:
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
Balance at beginning of year $ 146,261 147,763
Provision 35,000 -
Charge-offs (5,353) (5,580)
Recoveries 2,733 4,078
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 178,641 146,261
===========================================================================================================================
</TABLE>
Loans delinquent ninety days or more at December 31, 1997 and 1996
aggregated $79,540 and $17,076, respectively. Impaired loans are
considered insignificant at December 31, 1997 and 1996.
(Continued)
F - 13
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(6) Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 217,341 99,009
Buildings and improvements 1,077,013 1,060,391
Construction-in-progress 240,770 -
Furniture and equipment 765,559 741,886
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,300,683 1,901,286
Less accumulated depreciation 1,310,911 1,214,360
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 989,772 686,926
===========================================================================================================================
</TABLE>
(7) Real Estate Held for Development
The Association's subsidiary acquired a parcel of land in 1996 in Paola,
Kansas for the purpose of development and sale. Total cost incurred
through December 31, 1997, including capitalized interest of $37,117,
aggregated $652,433. During 1997, one lot with an allocated cost of
$118,332 was transferred to the Association for the purpose of building
a new branch facility. Additionally, two lots with allocated cost
aggregating $179,261 were sold during 1997, resulting in gains on those
sales totaling $35,189.
(8) Premium on Deposits Assumed
In accordance with the FSLIC Transfer Agreement dated November 19, 1982,
the Association assumed certain deposits of the former North Kansas
Savings Association, paying a premium on deposits assumed of $1,211,863.
The Association is amortizing the premium over twenty years on the
straight-line method.
(Continued)
F - 14
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(9) Deposits
The rates at which the Association paid interest on deposits and related
balances are summarized as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996
----------------------- ----------------------
Percent Percent
Amount of total Amount of total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts:
Noninterest $ 1,927,638 2% $ 1,521,091 2%
Regular - 2.00% - 2.99% 9,572,700 11 8,368,879 10
Money market - 3.00% - 3.50% 10,807,542 13 11,812,108 14
- ---------------------------------------------------------------------------------------------------------------------------
22,307,880 26 21,702,078 26
- ---------------------------------------------------------------------------------------------------------------------------
Passbook accounts:
Passbook - 3.00% 7,079,938 8 6,880,950 8
- ---------------------------------------------------------------------------------------------------------------------------
Certificate accounts:
0.00% - 3.99% 10,580 - 639,253 1
4.00% - 4.99% 1,216,479 1 3,880,075 5
5.00% - 5.99% 44,990,758 53 43,004,782 51
6.00% - 6.99% 9,816,069 12 7,342,652 9
7.00% - 10.99% 229,132 - 273,151 -
- ---------------------------------------------------------------------------------------------------------------------------
56,263,018 66 55,139,913 66
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 85,650,836 100% 83,722,941 100%
===========================================================================================================================
</TABLE>
The weighted average interest rates on deposits approximated 4.66% and
4.56% at December 31, 1997 and 1996, respectively.
Scheduled maturities of certificate accounts at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
===========================================================================================================================
Year Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 40,860,559
1999 8,127,111
2000 4,986,255
2001 818,505
2002 1,150,238
Thereafter 320,350
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 56,263,018
===========================================================================================================================
</TABLE>
(Continued)
F - 15
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
A summary of interest expense is as follows:
================================================================================
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Passbook and certificate accounts $ 3,213,876 3,150,181
NOW 564,289 573,876
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 3,778,165 3,724,057
===========================================================================================================================
</TABLE>
Certificates of deposit in amounts greater than $100,000 amounted to
$3,104,000 and $3,045,000 at December 31, 1997 and 1996, respectively.
Individual deposit amounts in excess of $100,000 are not federally
insured.
(10) Borrowings from Federal Home Loan Bank of Topeka
Borrowings outstanding from the FHLB of Topeka at December 31, 1997
totaled $2,550,000 with interest rates ranging from 6.2% to 6.9%,
including individual advances and $1,900,000 borrowed under a $8,000,000
line of credit with an interest rate of 6.9% at December 31, 1997.
Borrowings at December 31, 1996 totaled $11,350,000 with interest rates
ranging from 5.7% to 7.2%. Maturities of borrowings outstanding at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
Year ending
December 31, Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 1,900,000
1999 -
2000 -
2001 -
2002 650,000
- ---------------------------------------------------------------------------------------------------------------------------
$ 2,550,000
===========================================================================================================================
Weighted average rate at December 31, 1997 6.71%
===========================================================================================================================
</TABLE>
FHLB borrowings are secured by all unpledged single and multifamily
first mortgage loans, mortgage-backed securities, United States
government and agency obligations, interest-bearing deposits in other
financial institutions, stock in FHLB and FHLB overnight deposits.
(11) Income Taxes
The components of income tax expense from operations are as follows:
================================================================================
Federal State Total
- --------------------------------------------------------------------------------
(Continued)
F - 16
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31, 1997:
Current $ 384,600 65,100 449,700
Deferred (600) (100) (700)
- ---------------------------------------------------------------------------------------------------------------------------
$ 384,000 65,000 449,000
===========================================================================================================================
Year ended December 31, 1996:
Current $ 117,304 16,000 133,304
Deferred (15,122) (3,182) (18,304)
- ---------------------------------------------------------------------------------------------------------------------------
$ 102,182 12,818 115,000
===========================================================================================================================
</TABLE>
The reasons for the differences between the effective tax rates and the
expected federal income tax rate of 34% are as follows:
================================================================================
<TABLE>
<CAPTION>
Percentage
of earnings
before
income taxes
---------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected federal income tax rate 34.0% 34.0
State taxes, net of federal tax benefit 3.8 3.7
Other, net 2.3 2.5
- ---------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 40.1% 40.2
===========================================================================================================================
</TABLE>
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized loss on available-for-sale securities $ 167,343 241,243
Loan origination fees 12,000 17,000
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax asset 179,343 258,243
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment (88,000) (94,500)
FHLB dividends (109,000) (93,500)
Allowance for loan losses (108,000) (118,300)
State taxes (34,000) (35,900)
Other, net (343) (2,843)
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liability (339,343) (345,043)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (160,000) (86,800)
===========================================================================================================================
</TABLE>
(Continued)
F - 17
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
There was no valuation allowance required for deferred tax assets at
December 31, 1997 or 1996. Management believes that it is more likely
than not that the results of future operations will generate sufficient
taxable income to realize the deferred tax assets.
Prior to 1996, the Association was allowed to deduct the greater of an
experience method bad debt deduction based on actual charge-offs or a
statutory bad debt deduction based on a percentage (8%) of taxable
income before such deduction. For income tax purposes, the Association
used the experience methods in 1996 and 1997. Under the Small Business
Job Projection Act (the Act) of 1996, the allowable deduction under the
percentage of taxable income method was terminated for tax years
beginning after 1995 and will not be available to the Association for
future years. The Act also provides that federal income tax bad debt
reserves accumulated since 1988 (the base year reserve) must be
recaptured and included in taxable income over a six-year inclusion
period beginning 1998. Included in the deferred income tax liability at
December 31, 1997 is $168,000 for this recapture.
Retained earnings at December 31, 1997 and 1996 includes approximately
$718,000 for which no provision for federal income tax has been made.
This amount represents allocations of income to bad debt deductions in
years prior to 1988 for tax purposes only. Reduction of amounts
allocated for purposes other than tax bad debt losses will create income
for tax purposes only, which will be subject to the then current
corporate income tax rate.
(12) Benefit Plans
The Association participates in a multiemployer, noncontributory defined
benefit pension plan which covers all employees who have met eligibility
requirements. Because of the multiemployer plan status, the Association
does not make disclosures similar to those of single-employer plans.
Qualified part-time and full-time employees over age twenty-one are
eligible for participation after one year of service. Pension costs
associated with the plan amounted to $2,609 and $2,559 for the years
ended December 31, 1997 and 1996, respectively.
The Association has a defined contribution plan that covers
substantially all employees. Employees may contribute up to 15% of their
salary, subject to limitations under the Internal Revenue Code, and the
Association matches 50% of the employee's contribution, up to 6% of
compensation. The Association's expense under the plan for 1997 and 1996
was $22,764 and $24,241, respectively. In addition, the Association made
discretionary contributions to the plan of $54,500 and $42,000 for the
years ended December 31, 1997 and 1996, respectively.
In December 1997, the Association implemented a supplemental executive
retirement plan ("SERP") for the benefit of the Association's president
which will provide enhanced benefits at retirement. Accruals under the
SERP will commence in 1998.
(13) Regulatory Capital Requirements
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated thereunder
require institutions to have a minimum regulatory tangible capital equal
to 1.5% of total assets, a minimum 3% leverage capital ratio and a
minimum 8% risk-based capital ratio. These capital standards set forth
in the capital regulations must generally be no less stringent than the
capital standards applicable to national banks. FIRREA also specifies
the required ratio of housing-related assets in order to qualify as a
savings institution.
(Continued)
F - 18
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions such as the Association, which are defined as well
capitalized, must generally have a leverage (core) capital ratio of at
least 5%, a Tier I risk-based capital ratio of at least 6% and a total
risk-based capital ratio of at least 10%. FDICIA also provides for
increased supervision by federal regulatory agencies, increased
reporting requirements for insured depository institutions and other
changes in the legal and regulatory environment for such institutions.
The Association met all regulatory capital requirements at December 31,
1997 and 1996. The Association's actual and required capital amounts and
ratios as of December 31, 1997 were as follows:
================================================================================
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
---------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to tangible assets) $ 6,280,000 6.6% $ 1,431,000 1.5% $ - - %
Tier I leverage (core) capital (to adjusted
tangible assets) 6,280,000 6.6 2,861,000 3.0 4,769,000 5.0
Risk-based capital (to risk-weighted assets) 6,443,000 18.4 2,803,000 8.0 3,504,000 10.0
Tier I leverage risk-based capital (to risk-
weighted assets) 6,280,000 17.9 - - 2,102,000 6.0
============================================================================================================================
</TABLE>
The following table reconciles equity as reflected in the accompanying
consolidated balance sheet to selected regulatory capital amounts at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Tangible Tier I Risk-
capital leverage based
===========================================================================================================================
<S> <C> <C> <C>
Equity $6,610 6,610 6,610
Add:
General loan losses reserves - - 170
Unrealized loss on available-for-sale securities 325 325 325
Less:
Premium on deposits assumed (300) (300) (300)
Real estate held for development (355) (355) (355)
Other - - (7)
===========================================================================================================================
$6,280 6,280 6,443
===========================================================================================================================
</TABLE>
(Continued)
F - 19
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(14) Federal Deposit Insurance Premiums
The deposits of the Association are presently insured by the Savings
Association Insurance Fund (SAIF), which together with the Bank
Insurance Fund (BIF), are the two insurance funds administered by the
Federal Deposit Insurance Corporation (FDIC). In the third quarter of
1995, the FDIC lowered the premium schedule for BIF-insured institutions
in anticipation of the BIF achieving its statutory reserve ratio.
Legislation enacted on September 30, 1996, provided for a one-time
special assessment of .657% of the Association's SAIF-insured deposits
at March 31, 1995. The purpose of the assessment was to bring the SAIF
to its statutory reserve ratio. Based on the above formula, the
Association's SAIF-assessment of $544,797 was recorded in the 1996
consolidated statement of earnings.
(15) Financial Instruments With Off-balance Sheet Risk and Concentrations of
Credit Risk
The Association is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet customer financing
needs. These financial instruments consist principally of commitments to
extend credit. The Association uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Association's exposure to credit loss in the event of
nonperformance by the other party is represented by the contractual
amount of those instruments. The Association does not generally require
collateral or other security on unfunded loan commitments until such
time that loans are funded.
In addition to financial instruments with off-balance sheet risk, the
Association is exposed to varying risks associated with concentrations
of credit relating primarily to lending activities in specific
geographic areas. The Association's primary lending area consists of the
State of Kansas and substantially all of the Association's loans are to
residents of or secured by properties located in its principal lending
area. Accordingly, the ultimate collectibility of the Association's loan
portfolio is dependent upon market conditions in that area. This
geographic concentration is considered in management's establishment of
the allowance for loan losses.
The Association grants mortgage and consumer loans to customers
primarily throughout its target market of the State of Kansas. Although
the Association has a diversified loan portfolio, a substantial portion
of the borrower's ability to honor their contracts is dependent upon the
general economic condition of the target market.
(16) Plan of Conversion
On December 16, 1997, the Association's Board of Directors approved a
plan (Plan) to convert from a federally chartered mutual savings
association to a federally chartered stock savings association, subject
to approval by the Association's members. The Plan, which includes
formation of a holding company, is subject to approval by the OTS and
includes the filing of a registration statement with the Securities and
Exchange Commission. As of December 31, 1997, the Association had
incurred approximately $30,000 of costs related to this conversion which
is included in other assets. If the conversion is ultimately successful,
actual conversion costs will be accounted for as a reduction in gross
proceeds. If the conversion is unsuccessful, the conversion costs will
be expensed.
The Plan calls for the common stock of the holding company to be offered
to various parties, including an employee stock ownership plan (ESOP),
executive officers and their associates, in a subscription offering at a
price based on an independent appraisal of the Association. It is
anticipated that any shares not purchased in the subscription offering
will be offered in a community offering.
(Continued)
F - 20
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
At the time of conversion, the Association will establish a liquidation
account in an amount equal to its retained earnings as reflected in the
latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their deposit
accounts in the Association after conversion. In the event of a complete
liquidation of the Association, and only in such an event, eligible
depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account before any
liquidation may be made with respect to common stock. The Association
may not declare or pay a cash dividend if the effect thereof would cause
its net worth to be reduced below either the amount required for the
liquidation account discussed below or the regulatory capital
requirements imposed by the OTS.
(Continued)
F - 21
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
(17) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, and
SFAS No. 119, Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments, require that the Association disclose
estimated fair values for its financial instruments, both assets and
liabilities recognized and not recognized in the consolidated financial
statements. Fair value estimates have been made as of December 31, 1997
based on then current economic conditions, risk characteristics of the
various financial instruments and other subjective factors.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value:
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short
maturity of these instruments.
Investment and Mortgage-backed Securities
The fair values of investment securities are estimated based on
published bid prices or bid quotations received from securities dealers.
Loans Receivable
The fair values of loans receivable are estimated using the option-based
approach. Cash flows consist of scheduled principal, interest and
prepaid principal. Loans with similar characteristics were aggregated
for purposes of these calculations.
Accrued Interest
The carrying amount of accrued interest is assumed to be its carrying
value because of the short-term nature of these items.
Stock of FHLB
The carrying amount of such stock is estimated to approximate fair
value.
Deposits
The fair values of deposits with no stated maturity are deemed to be
equivalent to amounts payable on demand. The fair values of certificates
of deposit are estimated based on the static discounted cash flow
approach using rates currently offered for deposits of similar remaining
maturities.
Borrowings from FHLB of Topeka
The fair values of FHLB advances are estimated based on discounted
values of contractual cash flows using the rates currently available to
the Association on advances of similar remaining maturities.
(Continued)
F - 22
<PAGE>
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
================================================================================
The approximate carrying value and estimated fair value of the
Association's financial instruments are as follows:
================================================================================
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------
Carrying value Fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and interest-bearing deposits in other financial institutions $ 4,600,000 4,600,000
Investment securities 3,852,000 3,952,000
Mortgage-backed securities 37,770,000 37,728,000
Loans receivable 46,563,000 47,171,000
Accrued interest receivable 490,000 490,000
Stock in FHLB 661,000 661,000
Financial liabilities:
Deposits 85,651,000 85,628,000
FHLB borrowings 2,550,000 2,550,000
Accrued interest payable on deposits 87,000 87,000
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------
Carrying value Fair value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and interest-bearing deposits in other financial institutions $ 4,222,000 4,222,000
Investment securities 51,384,000 51,126,000
Loans receivable 42,827,000 43,103,000
Accrued interest receivable 528,000 528,000
Stock in FHLB 615,000 615,000
Financial liabilities:
Deposits 83,723,000 83,644,000
FHLB borrowings 11,350,000 11,350,000
Accrued interest payable on deposits 65,000 65,000
===========================================================================================================================
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Association's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Association's financial instruments,
fair value estimates are based on judgments regarding future loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Fair value
estimates are based on existing balance sheet financial instruments
without attempting to estimate the value of anticipated future business
and the value of assets and liabilities that are not considered
financial instruments.
F - 23
<PAGE>
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different.This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of First Kansas Federal Savings Association or
First Kansas Financial Corporation may change after the date of this prospectus.
Delivery of this document and the sales of shares made hereunder does not mean
otherwise.
First Kansas Financial Corporation
Up to 1,553,938 Shares
(Anticipated Maximum)
Common Stock
PROSPECTUS
CAPITAL RESOURCES, INC.
Dated ____ __, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of _______ __, 1998, or 90 days after commencement of
the offering of common stock, all dealers that buy, sell or trade these
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.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 27. Exhibits:
The exhibits filed as part of this Registration Statement are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1 Form of Sales Agency Agreement with Capital Resources, Inc.*
2 Plan of Conversion*
3(i) Articles of Incorporation of First Kansas Financial Corporation*
3(ii) Bylaws of First Kansas Financial Corporation*
4 Specimen Stock Certificate of First Kansas Financial Corporation*
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered*
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.*
8.2 State Tax Opinion of Winkler, Lee, Tetwiler, Domoney & Schultz*
8.3 Opinion of Capital Resources Group, Inc. as to the value of subscription rights*
10.1 Employment Agreement between First Kansas Federal Savings Association and Larry V. Bailey*
10.2 Employment Agreement between First Kansas Federal Savings Association and Daniel G. Droste*
10.3 Employment Agreement between First Kansas Federal Savings Association and Galen E. Graham*
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1
and 8.1)*
23.2 Consent of KPMG Peat Marwick*
23.3 Consent of Capital Resources Group, Inc.
23.4 Consent of Winkler, Lee, Tetwiler, Domoney & Schultz (contained in its opinion filed as
Exhibit 8.2)*
24 Power of Attorney (reference is made to the signature page)*
27 Financial Data Schedule*
99.1 Stock Order Form*
99.2 Marketing Materials*
99.3 Appraisal Report of Capital Resources Group. Inc.*
</TABLE>
---------------------
* Previously filed
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in
Osawatomie, Kansas, on May 1, 1998.
FIRST KANSAS FINANCIAL CORPORATION
By: /s/Larry V. Bailey
-------------------------------------
Larry V. Bailey
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the following
persons in the capacities indicated as of May 1, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ J. Darcy Domoney* /s/Larry V. Bailey
- -------------------------------------------- --------------------------------
J. Darcy Domoney Larry V. Bailey
Chairman of the Board and Director President, Chief Executive Officer, Chief Financial Officer
and Director
(Principal Executive and Financial Officer)
/s/ James E. Breckenridge* /s/ James J. Casaert*
- -------------------------------------------- --------------------------------
James E. Breckenridge James J. Casaert
Director Vice President
(Principal Accounting Officer)
/s/ William R. Butler, Jr.*
- --------------------------------------------
William R. Butler, Jr.
Director
/s/ Roger L. Coltrin*
- --------------------------------------------
Roger L. Coltrin
Director
/s/ Donald V. Meyer*
- --------------------------------------------
Donald V. Meyer
Director
- --------------------------------------------
*Signed pursuant to a Power of Attorney
</TABLE>
EXHIBIT 23.3
<PAGE>
[LOGO] Capital Resources Group, Inc.
1211 Connecticut Ave., N.W. - Suite 200 - Washington, DC 20036 -
Tel (202) 466-5685 - Fax (202) 466-5695
May 1, 1998
Board of Directors
First Kansas Federal Savings Association
600 Main Street
Osawatomie, Kansas 66064
Dear Board Members:
We hereby consent to the use of our firm's name, Capital Resources Group,
Inc. ("CRG"), and references to our Conversion Valuation Appraisal Report
("Report") in the Form SB-2 Registration Statement filed by First Kansas
Financial Corporation. We also consent to the filing of our Report and our
opinion regarding the value of subscription rights as exhibits to such
Registration Statement.
Very truly yours,
/s/Michael B. Seiler
-----------------------------------
Michael B. Seiler
Senior Vice President
