As filed with the Securities and Exchange Commission on April 27, 1998
Registration No. 333-48093
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
First Kansas Financial Corporation
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(Name of Small Business Issuer in Its Charter)
Kansas 6035 48-1198888
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(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
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(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.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Proposed Maximum Proposed
Class of Securities Amount to Offering Price Maximum Aggregate Amount of
To Be Registered be Registered Per Unit Offering Price(1) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock,
$.10 Par Value 1,553,938 $10.00 $15,539,380 $4,584.12
Interest of participants in the
Profit Sharing Plan 85,000(3) $10.00 $ 850,000 $ --(2)
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 85,000 shares that may be acquired by the First Kansas Federal
Savings Association Employees' Savings and Profit Sharing Plan ("Profit
Sharing Plan") of the registrant, based upon the assumption that the assets
of the Profit Sharing Plan are used to purchase such shares. The $850,000
of participations to be registered are based on the assets of the Profit
Sharing Plan. Pursuant to Rule 475(h)(2) under the Securities Act of 1933,
no additional fee is required with respect to the interests of participants
of the Profit Sharing Plan.
(3) These shares are included in the 1,553,938 shares being registered.
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PROSPECTUS SUPPLEMENT
Supplement to the First Kansas Financial Corporation
Prospectus dated __________ ___, 1998
FIRST KANSAS FINANCIAL CORPORATION
COMMON STOCK, $0.10 PAR VALUE
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
(__________ SHARES OF COMMON STOCK AND PARTICIPATION THEREIN)
This Prospectus Supplement relates to the offer and sale to
participants (the "Participants") under the First Kansas Federal Savings
Association Employees' Savings & Profit Sharing Plan and Trust (the "Plan") of
participation interests offered under the Plan and of a maximum of __________
shares of common stock of First Kansas Financial Corporation, par value $0.10
per share (the "Common Stock"), as set forth herein.
In connection with the proposed conversion of First Kansas Federal
Savings Association (the "Association") from a mutual savings association to a
stock savings bank (the "Conversion") the Plan has been amended effective May 1,
1998, to permit Plan participants ("Participants") to invest in the Common Stock
of First Kansas Financial Corporation (the "Company"). The Plan will permit
Participants to direct the trustee of the Plan (the "Trustee") to purchase
Common Stock with Plan assets which are attributable to such Participants. This
Prospectus Supplement relates to the one time election of a Participant to
direct the purchase of Common Stock under the Plan in connection with the
Conversion and to the purchase of the Common Stock under the Plan thereafter in
the open-market.
The Prospectus dated ____________ ____, 1998, of the Company (the
"Prospectus") which is attached to this Prospectus Supplement includes detailed
information with respect to the Conversion, the Common Stock and financial
condition, results of operation and business of the Association. This Prospectus
Supplement, which provides detailed information with respect to the Plan, should
be read only in conjunction with the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "Risk Factors" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK AND THE PARTICIPATION INTERESTS UNDER THE
PLAN OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this Prospectus Supplement is _____________, 1998.
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No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Association, or the
Plan. This Prospectus Supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus Supplement and the Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Association or the Plan since the
date hereof, or that the information herein contained or incorporated by
reference is correct as of any time subsequent to the date hereof. This
Prospectus Supplement should be read only in conjunction with the Prospectus
that is attached hereto and should be retained for future reference.
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TABLE OF CONTENTS
The Offering..................................................................
Securities Offered...................................................
Election to Purchase Common Stock in Connection with the Conversion..
Value of Participation Interests.....................................
Method of Directing Investments......................................
Time for Directing Investment........................................
Irrevocability of Investment Direction...............................
Direction to Purchase Common Stock After the Conversion..............
Purchase Price of Common Stock.......................................
Nature of Participant's Interest in the Common Stock.................
Voting and Tender Rights of Common Stock.............................
Minimum Investment...................................................
Description of the Plan.......................................................
General..............................................................
Eligibility and Participation........................................
Contributions and Benefits Under the Plan............................
Limitations on Contributions.........................................
Investment of Plan Assets............................................
Benefits Under the Plan..............................................
Withdrawals and Distributions From the Plan..........................
Administration of the Plan...........................................
Reports to Plan Participants.........................................
Plan Administrator...................................................
Amendment and Termination............................................
Merger, Consolidation or Transfer....................................
Federal Income Tax Consequences......................................
ERISA and Other Qualifications.......................................
Restrictions on Resale...............................................
SEC Reporting and Short-Swing Liability..............................
Additional Information...............................................
Legal Opinions................................................................
Investment Election Form..............................................Appendix A
<PAGE>
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan
and up to ____________ shares (assuming the actual purchase price is $10 per
share) of Common Stock which may be acquired by the Plan for the account's of
employees participating in the Plan. The Company is the issuer of the Common
Stock. Only employees of the Association who meet the eligibility requirements
under the Plan may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of the
Association is contained in the attached Prospectus. The address of the
principal executive office of the Association is 600 Main Street, Osawatomie,
Kansas 66064. The Association's telephone number is (913) 755-3033.
Election to Purchase Common Stock in Connection with the Conversion
In connection with the Conversion, the Plan has been amended to permit
each Participant to direct that all or part of the funds which represent his or
her beneficial interest in the assets of the Plan may be transferred to a new
investment fund which will invest in the Common Stock ("Employer Stock Fund")
and used to purchase Common Stock issued by the Company in connection with the
Conversion. Participants will also be permitted to direct ongoing purchases of
Common Stock under the Plan after the Conversion. See "Direction to Purchase
Common Stock After Conversion." The Plan's trustee ("Trustee") will follow the
Participants' investment directions. Amounts not transferred to the Employer
Stock Fund will remain invested in the other investment funds of the Plan as
directed by the Participant (see "Investment of Plan Assets" herein).
Value of Participation Interests
The assets of the Plan were valued as of ____________ ____, 1998, and
each Participant was informed of the value of his or her beneficial interest in
the Plan. This value represented the market value as of ____________ ____, 1998,
of past contributions to the Plan by the Association and by the Participants and
earnings thereon, less previous withdrawals, if any. The assets of the Plan
shall also be valued prior to accepting a Participant's directed investment to
ascertain that such directed investment does not exceed the Participant's
account assets.
Method of Directing Investments
Appendix A of this Prospectus Supplement includes a form to direct a
transfer to the Employer Stock Fund (the "Investment Form") of all or a portion
of a Participant's account ("Account") under the Plan. If a Participant wishes
to transfer all or part of his or her beneficial interest in the assets of the
Plan to the purchase of Common Stock issued in connection with the Conversion,
he or she should indicate that investment decision on the Investment Form. The
Investment Form must be properly signed by the Participant in order for such
Investment Form to be honored by the Trustee. Additionally, a Participant may
indicate the directed investment of future contributions under the Plan for
investment in the Employer Stock Fund. If a Participant does not wish to make an
investment election to purchase Common Stock under the Plan in the Conversion,
or thereafter, he or she does not need to take any action.
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Time for Directing Investment
The deadline for submitting the Investment Form directing the transfer
of amounts to the Employer Stock Fund in order to purchase Common Stock issued
in connection with the Conversion is ____________ ____, 1998. The Investment
Form should be returned to the Association's Personnel Department by __________
p.m. on such date.
Subsequent to the Conversion, Participants will continue to be able to
direct the investment of their Account under the Plan in the Employer Stock Fund
and in the other investment alternatives, as detailed below.
Irrevocability of Investment Direction
A Participant's direction to transfer amounts credited to such
Participant's Account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable as of __________ p.m. on ____________ ____, 1998.
Direction to Purchase Common Stock After the Conversion
Following completion of the Conversion, a Participant shall be
permitted to direct that a certain percentage of such Participant's interests in
his or her Account be transferred to the Employer Stock Fund and invested in
Common Stock, or to the other investment funds available under the Plan.
Alternatively, a Participant may direct that a certain percentage of such
Participant's interest in the Employer Stock Fund be transferred to his or her
Account to be invested in the other investment funds available in accordance
with the terms of the Plan. Participants will be permitted to direct that future
contributions made to the Plan by or on their behalf will be invested in the
Employer Stock Fund. Following the initial election, the allocation of a
Participant's interest in the Employer Stock Fund may be changed monthly by
filing a written notice with the plan administrator.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price paid for such shares of Common Stock
will be the same price that is paid by all other persons who purchase shares of
Common Stock in the Conversion.
Account assets directed for investment in the Employer Stock Fund after
the Conversion shall be invested by the Trustee to purchase shares of Common
Stock in open market transactions. The price paid by the Trustee for shares of
Common Stock in the Conversion, or otherwise, will not exceed "adequate
consideration" as defined in Section 3(18) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
Nature of Participant's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Plan,
as trustee. Each Participant has an allocable interest in the investment funds
of the Plan but not in any particular assets of the Plan. Accordingly, a
specific number of shares of Common Stock will not be directly attributable to
the Account of any Participant. Dividend rights associated with the Common Stock
held by the
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Employer Stock Fund shall be allocated to such Employer Stock Fund. Any increase
(or decrease) in the value of such fund attributed to dividend rights shall be
reflected in a Participant's allocable interest in the Employer Stock Fund.
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights
attributable to all Common Stock held by the Trust as directed by Participants
with interests in the Employer Stock Fund. With respect to each matter as to
which holders of Common Stock have a right to vote or tender, each Participant
will be allocated a number of voting or tender instruction rights reflecting
such Participant's proportionate interest in the Employer Stock Fund. The number
of shares of Common Stock held in the Employer Stock Fund that are voted or
tendered in the affirmative and negative on each matter shall be determined by
the number of voting instruction rights or tender instruction rights exercised
in the affirmative and negative, respectively, from the Participants. With
respect to shares for which no voting instruction rights or tender instruction
rights are received by the Trustee, the Trustee shall vote or tender such shares
within its discretion as a fiduciary under the Plan or as directed by the Plan's
Administrator ("Administrator").
Minimum Investment
The minimum investment of assets directed by a Participant for the
purchase of Common Stock in the Conversion shall be $250.00 and may only be
specified in increments of $10.00. Funds may be directed for the purchase of
such Common Stock attributable to a Participant's Account whether or not such
account assets are 100% vested at the time of such investment election. With
respect to investment in the Employer Stock Fund after the Conversion, there is
no minimum level of investment specific to this investment fund.
DESCRIPTION OF THE PLAN
General
The Plan was initially adopted on December 1, 1992 and its name prior
to amendment was the Financial Institutions Thrift Plan as adopted by First
Kansas Federal Savings Association. The Plan is a deferred compensation
arrangement established in accordance with the requirements under Section 401(a)
and Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"). The Plan will be submitted to the Internal Revenue Service (the "IRS")
in a timely manner for a determination that the Plan is qualified under Section
401(a) of the Code, and that its related trust is qualified under Section 501(a)
of the Code. The Association intends that the Plan, in operation, will comply
with the requirements under Section 401(a) and Section 401(k) of the Code. The
Association will adopt any amendments to the Plan that may be necessary to
ensure the continued qualified status of the Plan under the Code and applicable
Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA.
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Neither the funding requirements contained in Part 3 of Title I of ERISA nor the
plan termination insurance provisions contained in Title IV of ERISA will be
extended to Participants (as defined below) or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR
HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT
WITH THE ASSOCIATION. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2, REGARDLESS
OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE
ASSOCIATION OR AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The statements contained in this
Prospectus Supplement are summaries of certain provisions of the Plan. They are
not complete and are qualified in their entirety by the full text of the Plan
which is filed as an exhibit to the registration statement filed with the
Securities and Exchange Commission. Copies of the Plan are available for
inspection to all employees by filing a request with the Plan Administrator.
Each employee is urged to read carefully the full text of the Plan.
Eligibility and Participation
All employees of the Employer who have attained the age of 21 are
eligible to participate in the Plan on the first day of the calendar month
coinciding with or next following the date such employee completes one year of
service (during which the employee works at least 1,000 hours during a 12-month
period) with the Association. As of December 31, 1997, there were approximately
_____ employees eligible to participate in the Plan and _____ employees had
elected to participate in the Plan.
Contributions and Benefits Under the Plan
Employee Contributions. Each Participant is permitted to elect to
reduce his or her Plan Salary (as defined below) pursuant to a "Salary Reduction
Agreement" by an amount not less than 1% and not more than __% and have that
amount ("Elective Deferral") contributed to the Plan on such Participant's
behalf. Changes in the level of such Elective Deferrals may be made to be
effective as of the first day of the following pay period in which the
Participant elects. Participants may suspend such Elective Deferrals at any
time. Such amounts are credited to the Participant's "Salary Reduction Account."
For purposes of the Plan, "Plan Salary" means a Participant's regular basic
salary plus commissions, overtime, and bonuses. However, annual commissions
included in Plan Salary may not exceed $34,400, and Plan Salary for any year may
not exceed $160,000 (indexed for cost-of-living adjustments, if any). A
Participant may elect to modify the amount contributed to the Plan under such
Participant's Salary Reduction Agreement each month by providing notice to the
Administrator in accordance with procedures established by the Administrator
from time to time. Elective Deferrals are transferred by the Association to the
Trustee.
Matching Contributions. The Association will contribute a matching
contribution ("Matching Contributions") in addition to each Participant's
Elective Deferral of up to 50% of the amount of a Participant's Elective
Deferral to a maximum of 3% of the Participant's Plan Salary. Such Matching
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Contributions are subject to revision by the Association from time to time. Such
matching contributions shall be subject to the applicable vesting schedule noted
hereinafter.
Supplemental Contributions. The Association may make supplemental
contributions for any Plan Year in accordance with the Plan by using, at the its
option, (i) a uniform percentage of each Participant's contributions which were
received by the Plan during the Plan Year with respect to which the supplemental
contribution relates, or (ii) a uniform dollar amount per Participant or a
uniform percentage of each Participant's salary for the Plan Year to which the
supplemental contribution relates.
Qualified Nonelective Contributions. The Association may, at its
option, adopt the Elective Deferral feature described under "Employee
Contributions" for the exclusive purpose of permitting its Participants to make
401(k) deferrals to the Plan. The Association may make, apart from any matching
contributions it may elect to make, qualified nonelective contributions as
defined in Section 1.401(k)- 1(g)(13) of the Treasury Regulations. The amount of
such qualified nonelective contributions shall not exceed 15% of the salary of
all Participants eligible to share in the allocation when combined with all
contibutions made by the Association to the Plan for such Plan Year.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Participant's Salary Reduction Account during any
Plan Year may not exceed the lesser of 25% of the Participant's ss.415
Compensation for the Plan Year or $30,000 (adjusted for increases in the cost of
living as permitted by the Code). A Participant's ss.415 Compensation is a
Participant's compensation, excluding any employer contribution to the Plan or
to any other plan or deferred compensation or any distributions from a plan or
deferred compensation. In addition, annual additions are limited to the extent
necessary to prevent the limitations for the combined qualified plans of the
Association from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be
used to reduce the Association's contributions for such Participant in
the next limitation year, and each succeeding limitation year if
necessary;
(ii) If an excess amount still exists, and the Participant is
not covered by the Plan at the end of the limitation year, the excess
amount will be held unallocated in a suspense account which will then
be applied to reduce future Association contributions for all remaining
Participants in the next limitation year, and each succeeding
limitation year if necessary; and
(iii) If a suspense account is in existence at any time during
the limitation year, it will not participate in the allocation of
investment gains and losses.
Limitation on Employee Contributions. The amount of a Participant's
Elective Deferrals (when aggregated with any elective deferrals of the
Participant under a simplified employee pension plan or a tax-deferred annuity),
on an annual basis, may not exceed $10,000 adjusted for increases in the cost of
living as permitted by the Code. Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed by
the
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Plan to the Participant, unless the excess deferral (together with any income
allocable thereto) is distributed to the Participant not later than the first
April 15th following the close of the taxable year in which the excess deferral
is made. Any income on the excess deferral that is distributed not later than
such date shall be treated, for federal income tax purposes, as earned and
received by the Participant in the taxable year in which the excess deferral is
made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of Elective Deferrals
that may be made to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of Elective Deferrals made
by or on behalf of all other employees eligible to participate in the Plan.
Specifically, the actual deferral percentage (i.e., the average of the ratios,
calculated separately for each eligible employee in each group, by dividing the
amount of Elective Deferrals credited to the Salary Reduction Account of such
eligible employee by such eligible employee's compensation for the Plan Year) of
the Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual deferral percentage of all other eligible employees, or (ii) the lesser
of (a) 200% of the actual deferral percentage of all other eligible employees,
or (b) the actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such Plan
Years (i.e., the average of the ratios calculated separately for each eligible
employee in each group, by dividing the amount of voluntary employee and
employer matching contributions credited to the Account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual contribution percentage of all other eligible employees, or (ii) the
lesser of (a) 200% of the actual contribution percentage of all other eligible
employees, or (y) the actual contribution percentage of all other eligible
employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who,
during the Plan Year who, (1) was a 5% owner (i.e., owns directly or indirectly
more than 5% of the stock of an employer, or stock possessing more than 5% of
the total combined voting power of all stock of an employer), or (2) received
compensation from an employer for the preceding year in excess of $80,000 and,
if the employer so elects, was in the top 20% of employees by compensation for
such year. The dollar amounts in the foregoing sentence adjust annually to
reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Association will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a
Top-Heavy Plan (as defined below), then (i) the Association may be required to
make certain minimum contributions to the Plan on behalf of non-key employees
(as defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan maintained by the Association.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any
Plan Year if, as of the last day of the preceding Plan Year, the aggregate
balance of the Accounts of Participants who are Key
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Employees exceeds 60% of the aggregate balance of the Accounts of all
Participants. Key Employees generally include any employee who, at any time
during the Plan Year or any of the four preceding Plan Years, is (1) an officer
of the Association having annual compensation in excess of $60,000 who is in an
administrative or policy-making capacity, (2) one of the ten employees having
annual compensation in excess of $30,000 and owning, directly or indirectly, the
largest interests in the Company, (3) a 5% owner (i.e., owns directly or
indirectly more than 5% of the stock of the Company, or stock possessing more
than 5% of the total combined voting power of all stock of the Company) or (4) a
1% owner of the Company having annual compensation in excess of $150,000.
Investment of Plan Assets
All amounts credited to Participants' Accounts under the Plan are held
in the Plan's trust (the "Trust") which is administered by the Trustee appointed
by the Association's Board of Directors. Prior to the Conversion, all Plan
assets are invested in the funds listed below, except for the Employer Stock
Fund. Upon the Conversion, the Accounts of a Participant held in trust under the
Plan will be invested by the Trustee, at the direction of the Participant, in
the following funds, including the Employer Stock Fund:
a. Money Market Fund
b. Stable Value Fund
c. Government Bond Fund
d. S&P 500 Stock Fund
e. S&P MidCap Stock Fund
f. International Stock Fund
g. Income Plus Asset Allocation Fund (Income Plus)
h. Asset Allocation Fund (Growth)
i. Asset Allocation Fund (Growth and Income)
A brief summary of such funds is as follows:
Money Market Fund: Invests in a broad range of high-quality short-term
instruments. Its objective is short-term to achieve competitive short-term rates
of return while preserving the value of a Participant's principal.
Stable Value Fund: Invests primarily in Guaranteed Investment Contracts
and Synthetic Guaranteed Investment Contracts. Its objective is short-to
intermediate-term: to achieve a stable return over short to intermediate periods
of time while preserving the value of a Participant's investment.
Government Bond Fund: Invests in U.S. Treasury bonds with a maturity of
20 years or more. Its objective is long-term: to earn a higher level of income
along with the potential for capital appreciation.
S&P 500 Stock Fund: Invests in the stocks of a broad array of
established U.S. companies. Its objective is long-term: to earn higher returns
by investing in the largest companies in the U.S. economy.
S&P MidCap Stock Fund: Invests in the stocks of mid-sized U.S.
companies. Its objective is long-term: to earn higher returns which reflect the
growth potential of such companies.
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International Stock Fund: Invests in over 1,000 foreign stocks in 20
countries. Its objective is long-term: to offer the potential return of
investing in the stocks of established non-U.S. companies, as well as the
potential risk-reduction of broad diversification.
Income Plus Asset Allocation Fund (Income Plus): Invests approximately
80% of its portfolio in a combination of stable value investments and U.S.
bonds. The balance is invested in U.S. and international stocks. Its objective
is intermediate-term: to preserve the value of a Participant's investment over
short periods of time and to offer some potential for growth.
Asset Allocation Fund (Growth): Invests the majority of its assets in
stocks -- domestic as well as international. Its objective is long-term: to
pursue high growth of a Participant's investment over time.
Asset Allocation Fund (Growth and Income): Invests in U.S. domestic and
international stocks, U.S. domestic bonds, and stable value investments. Its
objective is intermediate-term: to provide a balance between the pursuit of
growth and protection from risk.
Employer Stock Fund
The Employer Stock Fund will consist of cash and investments in Common
Stock made on and after the effective date of the Conversion. Cash dividends
paid on Common Stock held in the Employer Stock Fund will be credited to a cash
dividend subaccount for each Participant investing in the Employer Stock Fund.
On the occasion of the payment of a cash dividend, the Trustee may use the
dividend to purchase additional shares of Common Stock. The Trustee will, to the
extent practicable, use all amounts held by it in the Employer Stock Fund to
purchase shares of Common Stock of the Company as of the effective date of the
Conversion. Following the Conversion, the Employer Stock Fund may purchase
shares of Common Stock in the open-market or from Participants Accounts
directing the sale of such account assets. Pending investment in Common Stock,
assets held in the Employer Stock Fund will be placed in bank deposits or other
short-term investments.
When Common Stock is purchased in the Conversion no sales commissions
will be paid. The Association expects to pay any transfer fees and other
expenses incurred in the purchase of Common Stock for the Employer Stock Fund. A
Participant's Account will be adjusted to reflect changes in the value of shares
of Common Stock resulting from stock dividends, stock splits and similar
changes.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund.
In connection with the Conversion, Participants may, prior to the
expiration of the Subscription Offering being conducted by the Company in
connection with the Conversion, elect to liquidate all or part of their
investments in the other investment funds under the Plan and transfer the
liquidation proceeds to the Employer Stock Fund. See "Time for Directing
Investment." Such an investment election will be evidenced by a properly signed
and timely delivered Investment Form. The Trustee will then subscribe to
purchase in the Conversion the maximum number of shares of Common Stock of the
Holding Company that may be purchased by Participants with the amounts allocated
to the Employer Stock Fund as of the end of the subscription period. In all
instances, purchases by Participants shall be subject to the individual purchase
limitations set forth in the Association's Plan of Conversion.
8
<PAGE>
The Association or the Plan Trustee may adopt investment guidelines,
which may limit or restrict a Participant's investment in the Employer Stock
Fund. In no event may any Participant purchase in the aggregate shares of Common
Stock through the Employer Stock Fund, or otherwise, in an amount in excess of
15,000 shares of Common Stock being offered by the Company in the Conversion
(20,000 shares with those acting in concert). (See the discussion under "The
Conversion -- Limitations on Purchases of Shares" in the accompanying Prospectus
for clarification of purchases aggregated for purposes of this purchase
limitation.)
Each Participant who makes an election to direct investment of assets
under the Employer Stock Fund may liquidate such investment at a future date, in
whole, or in part, by filing a notice with the Trustee in accordance with
established procedures to dispose of such Plan investment and reinvest the net
proceeds in an alternative investment under the Plan, by submitting such request
to the Plan Administrator prior to any calendar month. The Trustee shall
complete such sale as soon as administratively feasible. The process of such
sale, net of expenses, shall be allocated to the Participant's Account and
reinvested in accordance with the Plan.
Please refer to the section "Restrictions on Resale" contained herein
for additional information related to the sale of Common Stock held under the
Employer Stock Fund as an investment in a Participant's Account.
Investments in the Employer Stock Fund may involve certain special
risks related to investment in Common Stock of the Company. For a discussion of
these risk factors, see "Special Considerations" in the Prospectus. Please note
that investment in the Employer Stock Fund is not an investment in a savings
account or certificate of deposit, and such investment in the Common Stock
through the Employer Stock Fund is not insured by the FDIC or any other
regulatory agency. Further, no assurances can be given with respect to the price
at which such Common Stock may be sold in the future.
Investment Accounts
The Trust assets are invested by the Trustee pursuant to Participants'
directions, as described below. Each investment fund is valued as of the last
day of each month.
Each Participant directs that the contributions made shall be invested
to purchase units for his or her credit in one or more of the above listed
funds. You may elect a new investment mix for future contributions to the Plan
only once per calendar month. Participants are entitled to designate what
percentage of employee contributions and employer contributions made on their
behalf will be invested in the various investment funds offered by the Plan.
Reallocation and reinvestment of previously invested contributions may be made
annually. To the extent that a Participant fails to make an investment
direction, his or her accounts are invested in units of the Money Market Fund.
The Plan provides that a Participant may direct the Trustee to invest
all or a portion of his or her Account in the investment funds set forth above.
In addition, as of May 1, 1998, a Participant may make an investment election to
invest all, or a portion thereof, of a Participant's Account in the Employer
Stock Fund for the purchase of Common Stock to be purchased in the Conversion,
or thereafter, as described below. Participants may change their investment
direction or direct a transfer among investment funds, provided that changes of
investment direction or directions to transfer may be made by a Participant
prior to the first day of each month.
9
<PAGE>
A Participant may elect to have both past and future contributions and
additions to the Participant's Accounts invested in such other accounts as set
forth above. These elections will be effective, provided such notice is filed in
accordance with procedures established by the Plan Administrator from time to
time. Any amounts credited to a Participant's Accounts for which investment
direction is not given will be invested in accordance with the terms of the
Plan.
The net gain (or loss) of the invested funds from investments
(including interest payments, dividends, realized and unrealized gains and
losses on securities, and expenses paid from the Trust) will be determined
monthly during the Plan Year. For purposes of such allocations, all assets of
the Trust are valued at their fair market value.
Contributions under the Plan have been invested in the various
investment accounts available for investment under the funds as described
herein. The annual percentage return on these funds for calendar years 1997,
1996, and 1995 was approximately:
<TABLE>
<CAPTION>
Fund 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C>
Money Market Fund 5.5% 5.6% 4.4%
Stable Value Fund 6.2% 6.5% 6.8%
Government Bond Fund 15.4% (2.3)% 32.0%
S&P 500 Stock Fund 32.7% 22.3% 36.9%
S&P MidCap Stock Fund 31.5% 18.6% 30.2%
International Stock Fund 3.6% 10.6% 15.0%
Income Plus Asset Allocation Fund (Income Plus) 8.9% 8.3% 12.9%
Asset Allocation Fund (Growth) 19.0% 18.0% 31.4%
Asset Allocation Fund (Growth & Income) 13.6% 12.3% 20.5%
Employer Stock Fund N/A N/A N/A
</TABLE>
Benefits Under the Plan
Vesting. A Participant, at all times, has a fully vested,
nonforfeitable interest in any contributions that such Participant makes to the
Plan, including the earnings thereon.
A Participant will become vested and have a nonforfeitable interest in
contributions from the Association based on the number of years of service and
the vesting schedule set forth below.
<TABLE>
<CAPTION>
Number of Full Years of Service Nonforfeitable % of Account
------------------------------- ---------------------------
<S> <C>
Less than 5 years 0%
5 or more years 100%
</TABLE>
Withdrawals and Distributions From the Plan
General. All payments in respect of a Participant's Account shall be
made in cash from the Plan's trust fund and in accordance with the provisions of
the Plan. The amount of payment will be
10
<PAGE>
determined in accordance with the Unit (as defined in the Plan) values on the
valuation date coinciding with or next following the date proper notice if filed
with the Administrator, unless following such valuation date a decrease in the
Unit values of the Participant's investment in any of the available investment
funds occurs prior to the date such Units of the Participant are redeemed in
which case that part of the payment which must be provided through the sale of
existing Units shall equal the value of such Units determined on the date of
redemption which date shall occur as soon as administratively practicable on or
following the valuation date such proper notice is filed with the Administrator.
The redemption date Unit value with respect to a Participant's investment in any
of the available investment funds shall equal the value of a Unit in such
investment fund, as determined in accordance with the valuation method
applicable to Unit investments in such investment fund on the date the
Participant's investment is redeemed.
Payments will generally be made in a lump sum as soon as practicable
after such valuation date or date of redemption, as may be applicable, subject
to any applicable restriction on redemption imposed on amounts invested in any
of the available Investment Funds.
Any partial withdrawal shall be deemed to come initially from the
Participant's after-tax contributions made prior to January 1, 1987, then from
the Participant's after-tax contributions made after December 31, 1986 plus
earnings on all of the Participant's after-tax contributions. Any partial
withdrawal amounts exceeding the two preceding categories will be deemed to come
from additional categories as provided in Section 7.1 of the Plan.
Withdrawals Prior to Termination of Employment. The Association may, at
its option, permit Participants to make withdrawals from one or more of the
portions of their Accounts while employed by the Association under the terms and
provisions described in the Plan.
To the extent permitted by the Association, a Participant may
voluntarily withdraw some or all of his or her Account (other than his or her
Elective Deferrals and qualified nonelective contributions treated as 401(k)
deferrals except as hereinafter permitted) while in employment by filing a
notice of withdrawal with the Administrator. Only one in-service withdrawal may
be made in any Plan Year from each of the rollover amount of the Participant's
Account and the remainder of the Participant's Account. This restriction shall
not, however, apply to a withdrawal in conjunction with a hardship withdrawal.
Notwithstanding the foregoing paragraph, a Participant may not withdraw
any matching, supplemental, or qualified nonelective contributions unless (i)
the Participant has completed 60 months of participation in the Plan; (ii) the
withdrawal occurs at least 24 months after such contributions were made by the
Association; (iii) the Association terminates the Plan without establishing a
qualified successor plan; or (iv) the Participant dies, is disabled, retires,
attains age 59 1/2 or terminates employment with the Association. For purposes
of the preceding requirements, if the Participant's Account includes amounts
which have been transferred from a defined contribution plan established prior
to the adoption of the Plan by the Association, the period of time during which
amounts were held on behalf of such Participant and the periods of participation
of such Participant under such defined contribution plan shall be taken in
account.
A Participant may make a withdrawal of his Elective Deferrals,
qualified nonelective contributions which are treated as elective deferrals, and
any earnings credited thereto prior to January 1, 1989, prior to attaining age
59 1/2, provided that the withdrawal is solely on account of an immediate and
heavy financial need and is necessary to satisfy such financial need. The term
"immediate and heavy financial
11
<PAGE>
need" shall be limited to the need of funds for (i) the payment of medical
expenses (described in Section 213(d) of the Code) incurred by the Participant,
the Participant's spouse, or any of the Participant's dependents (as defined in
Section 152 of the Code), (ii) the payment of tuition and room and board for the
next 12 months of post-secondary education of the Participant, the Participant's
spouse, the Participant's children, or any of the Participant's dependents (as
defined in Section 152 of the Code), (iii) the purchase (excluding mortgage
payments) of a principal residence for the Participant, or (iv) the prevention
of eviction of the Participant from his principal residence or the prevention of
foreclosure on the mortgage of the Participant's principal residence. The amount
of any hardship withdrawal shall not exceed the amount required to meet the
demonstrated financial hardship, including any amounts necessary to pay any
federal income taxes and penalties reasonably anticipated to result from the
distribution as certified to the Administrator by the Participant.
Distributions Upon Termination of Employment. A Participant who
terminates employment with the Association may request a distribution of his or
her Account at any time thereafter up to attainment of age 70 1/2; provided,
however, such Participant files a request for distribution with the
Administrator. If a Participant does not file such a request, the value of his
or her Account will be paid as soon as practicable after the Participant's
attainment of age 70 1/2, but in no event shall payment commence later than
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2 unless otherwise provided by law. A Participant
may request a distribution of all or a part of his or her Account no more
frequently than once per calendar year by filing the proper request for
distribution with the Administrator.
In lieu of any lump sum payment of his or her total Account, a
Participant who has terminated employment may elect in the request for
distribution to be paid in up to 20 annual installments, provided that a
Participant shall not be permitted to elect an installment period in excess of
his or her remaining life expectancy. The amount of each installment will be
equal to the value of the total Units in the Participant's Account, multiplied
by a fraction, the numerator of which is one and the denominator of which is the
number of remaining annual installments including the one then being paid, so
that at the end of the installment period so elected, the total Account will be
liquidated. The value of the Units will be determined in accordance with the
Unit values on the valuation date on or next following the Administrator's
receipt of the Participant's request for distribution and on each anniversary
thereafter subject to applicable Treasury Regulations under Code Section
401(a)(9). The election to receive installment payments may not be subsequently
changed by the Participant unless written notice is provided to the
Administrator. A Participant may withdraw the balance of the Units in his or her
Account in a lump sum at any time, notwithstanding the fact that the Participant
previously received a distribution in the same calendar year.
Distributions due to Disability. A Participant who is separated from
employment by reason of a disability (as defined by the Plan) may withdraw his
or her total Account balance under the Plan and have such amounts paid to him or
her in accordance with the terms of the Plan. If a disabled Participant becomes
reemployed subsequent to withdrawal of some or all of his or her Account
balance, such Participant may not repay to the Plan any such withdrawn amounts.
Distributions due to Death. If a married Participant dies, his or her
spouse, as beneficiary, will receive a death benefit equal to the value of the
Participant's Account determined on the valuation date on or next following the
Administrator's receipt of notice that such Participant died; provided however,
that if a Participant's spouse had consented in writing to the designation of a
different beneficiary, the
12
<PAGE>
Participant's Account will be paid to such designated beneficiary. If a
Participant is not married at the time of his death, his or her Account will be
paid to his or her designated beneficiary.
Distributions of Common Stock. Participants receiving a distribution
from the Plan where assets under the Plan have been directed by the Participant
to be invested in the Employer Stock Fund may have such assets distributed in
kind in the form of Common Stock.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
The Association, effective May 1, 1998, will administer the Plan. The
Trustee with respect to the Plan is the named fiduciary of the Plan for purposes
of Section 402 of ERISA. The Bank of New York will serve as Trustee for all
investment funds under the Plan except the Employer Stock Fund. The
Association's President and Chief Executive Officer, Larry V. Bailey, will serve
as trustee with respect to the Employer Stock Fund ("Employer Stock Fund
Trustee"). The Plan Administrator is responsible for the administration of the
Plan, interpretation of the provisions of the Plan, prescribing procedure for
filing applications for benefits, preparation and distribution of information
explaining the Plan, maintenance of plan records, books of account and all other
data necessary for the proper administration of the Plan, and preparation and
filing of all returns and reports relating to the Plan which are required to be
filed with the U.S. Department of Labor and the IRS, and for all disclosures
required to be made to Participants, beneficiaries and others under Sections 104
and 105 of ERISA.
The Trustee receives and holds the contributions to the Plan in trust
and distributes them to Participants and beneficiaries in accordance with the
terms of the Plan and the directions of the Plan Administrator. The Trustee is
responsible for investment of the assets of the Trust. The address of the Plan
Administrator and the Employer Stock Fund Trustee is 600 Main Street,
Osawatomie, Kansas 66064. The address of the Bank of New York is ____________.
Reports to Plan Participants
The Administrator will furnish to each Participant a statement at least
monthly showing (i) the balance in the Participant's Account as of the end of
that period, (ii) the amount of contributions allocated to the Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any). Participants investing in the Employer
Stock Fund shall also receive a copy of the Company's Annual Report to
Stockholders and a proxy statement related to the Company's stockholder
meetings.
Amendment and Termination
It is the intention of the Association to continue the Plan
indefinitely. Nevertheless, the Association within its sole discretion may
terminate the Plan at any time. The Association reserves the right to make, from
time to time, any amendment or amendments to the Plan that do not cause any part
13
<PAGE>
of the Trust to be used for, or diverted to, any purpose other than the
exclusive benefit of Participants or their beneficiaries; provided, however,
that the Association may make any amendment it determines necessary or
desirable, with or without retroactive effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust assets to another plan, the Plan requires
that each Participant would (if either the Plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation or
transfer that is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation or transfer (if
the Plan had then terminated).
Federal Income Tax Consequences
The following discussion is only a brief summary of certain federal
income tax aspects of the Plan which are of general application under the Code
and is not intended to be a complete or definitive description of the federal
income tax consequences of participating in or receiving distributions from the
Plan. The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Participants are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan has been submitted to the IRS for a determination that it is
qualified under Section 401(a) and 401(k) of the Code, and that the related
Trust is exempt from tax under Section 501(a) of the Code. A plan that is
"qualified" under these sections of the Code is afforded special tax treatment
which include the following: (1) the sponsoring employer is allowed an immediate
tax deduction for the amount contributed to the Plan each year; (2) Participants
pay no current income tax on amounts contributed by the employer on their
behalf; and (3) earnings of the plan are tax-exempt thereby permitting the
tax-free accumulation of income and gains on investments. The Plan will be
administered to comply in operation with the requirements of the Code as of the
applicable effective date of any change in the law. The Association expects to
timely adopt any amendments to the Plan that may be necessary to maintain the
qualified status of the Plan under the Code.
Assuming that the Plan is administered in accordance with the
requirements of the Code, participation in the Plan under existing federal
income tax laws will have the following effects:
(a) Amounts contributed to a Participant's Salary Reduction
Account and the earnings on this Account are not includable in a
Participant's federal taxable income until such contributions or
earnings are actually distributed or withdrawn from the Plan. Special
tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualifies as a Lump Sum Distribution (as
described below).
(b) Income earned on assets held by the Trust will not be
taxable to the Trust.
14
<PAGE>
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a Lump Sum Distribution if it
is made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Association. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total taxable
amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plans maintained by the Association which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation in this Plan or in any other
profit-sharing plan maintained by the Association (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in this Plan or any other profit-sharing plan maintained by an employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of capital assets.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Stock (i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan). The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution will be
considered either short-term capital gain or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of such distribution to the extent allowed by the
Treasury Regulations.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Pursuant to a change in law, effective January 1, 1993, virtually
all distributions from the Plan may be rolled over to another qualified plan or
to an individual retirement account ("IRA") without regard to whether the
distribution is a Lump Sum Distribution or a Partial Distribution. Effective
January 1, 1993, Participants have the right to elect to have the Trustee
transfer all or any portion of an "eligible rollover distribution" directly to
another plan qualified under Section 401(a) of the Code or to an IRA. If the
Participant does not elect to have an "eligible rollover distribution"
transferred directly to another qualified plan or to an IRA, the distribution
will be subject to a mandatory federal withholding tax equal
15
<PAGE>
to 20% of the taxable distribution. An "eligible rollover distribution means any
amount distributed from the Plan except: (i) a distribution that is (a) one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives of the Participant and his or her designated beneficiary, or (b) for a
specified period of ten years or more; (ii) any amount that is required to be
distributed under the minimum distribution rules; and (iii) any other
distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of Lump Sum
Distributions, that are not rolled over or transferred.
Additional Tax on Early Distributions. Generally, a Participant who
receives a distribution from the Plan prior to attaining age 59 1/2 will be
subject to an additional income tax equal to 10% of the taxable amount of the
distribution. The 10% additional income tax will not apply, however, to the
extent the distribution is rolled over into an IRA or another qualified plan or
the distribution is (i) made to a beneficiary (or to the estate of the
Participant) on or after the death of the Participant, (ii) attributable to the
Participant's being disabled within the meaning of Section 72(m)(7) of the Code,
(iii) part of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
and his beneficiary, (iv) made to the Participant after separation from service
on account of early retirement under the Plan after attainment of age 55, (v)
made to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
The foregoing is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant is urged to consult a tax advisor concerning the
federal, state, and local tax consequences of participating in and receiving
distributions from the Plan.
ERISA and Other Qualifications
As noted above, the Plan is subject to certain provisions of ERISA and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
Restrictions on Resale
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Association or the Company as the term "affiliate" is used in
Rules 144 and 405 under the Securities Act of 1933 ("1933 Act") (e.g.,
directors, officers and substantial shareholders of the Company) may reoffer or
resell such shares only pursuant to a registration statement filed under the
1933 Act or, assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the 1933 Act. Any person who
may be an "affiliate" of the Association or the Company may wish to consult with
counsel before transferring any Common Stock owned by him or her. Participants
who serve as directors, officers or 10% stockholders of the Company are advised
to consult with counsel as to the applicability of Section 16 of the 1934 Act
which may restrict the sale of Common Stock where acquired under the Plan, or
other sales of Common Stock. In addition, directors and officers of the
Association may be restricted from transferring shares purchased in the
Conversion for a period of one year in accordance with regulations of the Office
of Thrift Supervision.
16
<PAGE>
Persons who are not deemed to be "affiliates" of the Association or the
Company at the time of resale will be free to resell any shares of Common Stock
received by them under the Plan, either publicly or privately, without regard to
the registration and Prospectus delivery requirements of the 1993 Act or
compliance with the restrictions and conditions contained in the exemptive rules
thereunder. An "affiliate" is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Association or the Company. Normally, a director, principal officer or
major shareholder of a corporation may be deemed to be an "affiliate" of that
corporation. A person who may be deemed an "affiliate" at the time of a proposed
resale will be permitted to make public resales of the Common Stock only
pursuant to a "reoffer" prospectus or in accordance with the restrictions and
conditions contained in Rule 144 in any three-month period may not exceed the
greater of one percent of the Common Stock then outstanding or the average
weekly trading volume reported on the National Association of Securities Dealers
Automated Quotation System during the four calendar weeks prior to the sale.
Such sales may be made only though brokers without solicitation and only at a
time when the Company is current in filing the reports required of it under the
1934 Act.
SEC Reporting and Short-Swing Liability
Section 16 of the 1934 Act imposes reporting and liability requirements
on officers, directors, and persons beneficially owning more than ten percent of
the stock of public companies, such as the Company. Section 16(a) of the 1934
Act requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the SEC. Certain
changes in beneficial ownership, such as purchases, sales, gifts and
participation in savings and retirement plans must be reported periodically,
either on a Form 4 within ten days after the end of the month in which a change
occurs, or annually on a Form 5 within 45 days after the close of the Company's
fiscal year. Participation in the Employer Stock Fund of the Plan by officers,
directors and persons beneficially owning more than ten percent of the Common
Stock of the Company must be reported to the SEC annually on a Form 5 by such
individuals.
In addition to the reporting requirements described above, Section
16(b) of the 1934 Act provides for the recovery by the Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Common Stock ("Section 16(b) Persons") resulting from the
purchase and sale or sale and purchase of the Common Stock within any six-month
period. The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for participant- directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon the
timing of elections to acquire or dispose of employer securities for the
accounts of Section 16(b) Persons. Except for distributions of Common Stock due
to death, disability, retirement, termination of employment or under a qualified
domestic relations order, under the Plan, Section 16(b) Persons are required to
hold shares of Common Stock distributed for six months after receiving such a
distribution.
Additional Information
This Prospectus Supplement dated ____________ ____, 1998, is part of
the Prospectus of the Company dated ___________ ____, 1998. This Prospectus
Supplement shall be delivered to Plan Participants in conjunction with the
Prospectus and is not complete unless it is accompanied by the Prospectus dated
____________ ____, 1998.
17
<PAGE>
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C., which acted as special
counsel for the Company and the Association in connection with the Conversion.
18
<PAGE>
Exhibit A: Investment Form
<PAGE>
Appendix-A
----------
FIRST KANSAS FEDERAL SAVINGS ASSOCIATION
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
------------------------------------------------
Participant Voluntary Investment Election Form
------------------------------------------------
- ----------------------------------------- ----------------------
Name of Plan Participant Social Security Number
1. Instructions.
-------------
In connection with the proposed Conversion of First Kansas Federal
Savings Association ("Association") from a mutual savings association to a stock
based organization (the "Conversion"), the Employees' Savings & Profit Sharing
Plan and Trust as adopted by First Kansas Federal Savings Association ("Plan")
has been amended to permit participants to direct all, or a portion, of the
assets attributable to their Participant Account as of _____________ ____, 1998,
into a new fund: the Employer Stock Fund. The assets attributable to a
Participant's Account under the Plan transferred at the direction of the
Participant into the Employer Stock Fund will be used to purchase shares of
common stock (the "Common Stock") of First Kansas Financial Corporation
("Company") to be issued in the initial stock offering of the Company.
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form with
Larry V. Bailey, at 600 Main Street, Osawatomie, Kansas 66064, who will retain
this form and return a copy to you. If you need any assistance in completing
this form, please contact Larry V. Bailey at (913) 755-3033. If you do not
complete and return this form to the Plan Administrator by _____________ ____,
1998, at 12:00 p.m., the funds credited to your accounts under the Plan will
continue to be invested in accordance with your prior investment direction, or
in accordance with the terms of the Plan if no investment direction has been
provided.
2. Investment Directions.
----------------------
As a Participant in the Plan, I hereby voluntarily elect to direct the
Trustee of the Plan to invest the below indicated dollar sum of my Participant
Account balance under the Plan as indicated below.
I hereby voluntarily elect and request to direct investment of the
below indicated dollar amount of my Participant Account funds for the purchase
of the Common Stock to be issued in the Association's mutual-to-stock Conversion
as indicated below (minimum investment of $250.00; rounded to the nearest $10.00
increment; maximum investment permissible is 15,000 shares of the Common Stock
being offered or $150,000.00): $________________. Enter your $ level of
requested purchase through the Plan. Such amount does not exceed the vested
portion of assets held under the Plan for the underlying Participant. Please
note that the actual number of shares of Common Stock purchased on your behalf
under the Plan may be limited or reduced in accordance with the Plan of
Conversion of the Association based upon the total number of shares of Common
Stock subscribed for by other parties.
<PAGE>
All other funds in my Participant Account will remain invested as
previously requested. All future contributions under the Plan will continue to
be invested as previously requested.
3. Acknowledgement.
I fully understand that this self-directed portion of my Participant
Account does not share in the overall net earnings, gains, losses, and
appreciation or depreciation in the value of assets held by the Plan's other
investment funds, but only in my Account's allocable portion of such items from
the Directed Investment Account invested in the Common Stock. I understand that
the Plan's Trustee, in complying with this election and in following my
directions for the investment of my account, is not responsible or liable in any
way for the expenses or losses that may be incurred by my Account assets
invested in Common Stock under the Employer Stock Fund.
I further understand that this one time election shall become
irrevocable by me upon execution and submission of this Investment Form.
Only properly signed forms delivered to the Plan Trustee on or before
____________ ____, 1998, at 12:00 p.m. , will be honored.
The undersigned Participant acknowledges that he or she has received
and read the Prospectus of the First Kansas Financial Corporation, dated
____________ ____, 1998, the Prospectus Supplement dated ____________ ____,
1998, regarding the Employees' Savings & Profit Sharing Plan and Trust as
adopted by First Kansas Federal Savings Association and this Investment Form.
The undersigned hereby acknowledges that the shares of Common Stock to be
purchased with the funds noted above are not savings accounts or deposits and
are not insured by the Federal Deposit Insurance Corporation, the Bank Insurance
Fund, the Savings Association Insurance Fund or any other governmental agency.
Investment in such Common Stock will expose the undersigned to the investment
risks and potential fluctuations in the market price of such Common Stock. Such
investment in the Common Stock does not offer any guarantees regarding
maintenance of the principal value of such investment or any projections or
guarantees associated with future value or dividend payments with respect to
such Common Stock. The undersigned has read and understands the above listed
documents and hereby voluntarily makes and consents to this investment election
and voluntarily signed his (her) name as of the date listed below. If you so
elect, you may choose not to make any investment decision at this time.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------- ------------- --------------------------- -------------
Witness Date Participant Date
- -------------------- ------------- --------------------------- -------------
Witness Date Participant's Spouse Date
For the Trustee For the Plan Administrator
- --------------- --------------------------
- -------------------- ------------- --------------------------- -------------
Date Date
</TABLE>
<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>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
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 46,823
Investment securities, held-to-maturity.............................. 21,281 21,548
Mortgage-backed securities, held-to-maturity......................... 3,195 3,199
Mortgage-backed securities, available-for-sale....................... 2,668 2,946
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.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
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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,
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<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.
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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
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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.
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<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
====== ======
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<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
======
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<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.
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<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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<PAGE>
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
70
<PAGE>
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.
71
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
83
<PAGE>
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:
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.
-----------------------
* Previously filed
** To be filed by amendment
<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 April 27, 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 April 27, 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>
<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1998
Registration No. 333-48093
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT
NO. 1
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
- --------------------------------------------------------------------------------
(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>
INDEX TO EXHIBITS TO PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2
The exhibits filed as part of this Registration Statement are
as follows:
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.
-------------------------------
* Previously filed
** To be filed by amendment
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
ATTORNEYS AT LAW
1301 K STREET, N.W.
SUITE 700 EAST
WASHINGTON, D.C. 20005
(202) 434-4660
FACSIMILE: (202) 434-4661
WRITER'S DIRECT DIAL NUMBER
April 27, 1998
Board of Directors
First Kansas Federal Savings Association
600 Main Street
Osawatomie, Kansas 66064
Re: Federal Income Tax Opinion Relating to the Proposed Conversion of
First Kansas Federal Savings Association from a
Federally-Chartered Mutual Savings Association to a
Federally-Chartered Stock Savings Bank Pursuant to Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended
-----------------------------------------------------------------
Members of the Board:
In accordance with your request, set forth hereinbelow is the opinion
of this firm relating to material federal income tax consequences of the
proposed conversion (the "Conversion") of First Kansas Federal Savings
Association (the "Association") from a federally-chartered mutual savings
association to a federally-chartered capital stock savings bank (the "Stock
Bank"), and formation of a parent holding company (the "Holding Company") which
will simultaneously acquire all of the outstanding stock of Stock Bank. As
proposed, the Conversion will be implemented pursuant to Section 368(a)(1)(F) of
the Internal Revenue Code of 1986, as amended (the "Code").
We have examined such corporate records, certificates and other
documents as we have considered necessary or appropriate for this opinion. In
such examination, we have accepted, and have not independently verified, the
authenticity of all original documents, the accuracy of all copies, and the
genuineness of all signatures. Further, the capitalized terms which are used in
this opinion and are not expressly defined herein shall have the meaning
ascribed to them in the Bank's Plan of Conversion adopted on December 16, 1997,
as amended (the "Plan of Conversion").
STATEMENT OF FACTS
------------------
Based solely upon our review of such documents, and upon such
information as the Association has provided to us (which we have not attempted
to verify in any respect), and in reliance upon such documents and information,
we understand the relevant facts with respect to the Conversion to be as
follows:
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 2
The Association is a federally-chartered mutual savings association. As
a mutual savings association, the Association has no authorized capital stock.
Instead, the Association, in mutual form, has a unique equity structure. A
savings depositor of the Association is entitled to interest income on his or
her account balance as declared and paid by the Association. A savings depositor
has no right to a distribution of any earnings of the Association, but rather
these amounts become retained earnings of the Association. However, a savings
depositor has a right to share pro rata, with respect to the withdrawal value of
his or her respective savings account, in any liquidation proceeds distributed
in the event the Association is ever liquidated. Voting rights in the
Association are held by its members. Each member is entitled to cast one vote
for each $100 or a fraction thereof of the withdrawal value of the member's
account and each borrower member is entitled to one vote. Each member shall have
a maximum of 1,000 votes. All of the interests held by a savings depositor in
the Association cease when such depositor closes his or her account(s) with the
Association.
The Board of Directors of the Association has decided that in order to
promote the growth and expansion of the Association through the raising of
additional capital, it would be advantageous for the Association to: (i) convert
from a federally-chartered mutual savings association to a federally-chartered
capital stock savings bank, and (ii) arrange for the Holding Company to
simultaneously acquire all of the Stock Bank's stock. The Association's Board of
Directors has determined that in order to provide greater flexibility in future
operations of the Association, including diversification of business
opportunities and acquisition, it is advantageous to have the Stock Bank's stock
held by the Holding Company. Pursuant to the Plan of Conversion, the
Association's certificate of incorporation to operate as a mutual savings bank
will be amended and a new certificate of incorporation will be acquired to allow
it to continue its operations in the form of a federally-chartered capital stock
savings bank. The Plan of Conversion provides for the conversion of the
Association from mutual-to-stock form, and an appraisal of the pro forma market
value of the stock of the Stock Bank, which will be owned solely by the Holding
Company. The Plan of Conversion must be approved by the Office of Thrift
Supervision ("OTS"), and by an affirmative vote of at least a majority of the
total votes eligible to be cast at a special meeting of the Association's
members called to vote on the Plan of Conversion.
The Holding Company is being formed under the laws of the State of
Kansas for the purpose of the proposed transaction described herein, to engage
in business as a savings and loan holding company and to hold all of the stock
of the Stock Bank. The Holding Company will issue shares of its voting common
stock ("Holding Company Stock") upon completion of the Conversion, as described
below, to persons purchasing such shares through a Subscription Offering and to
the general public in a Public Offering.
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 3
Following appropriate regulatory approval, the Plan of Conversion
provides for the issuance of shares of Holding Company Stock to eligible
depositors and borrowers of the Association and others as described below and
set forth in the Plan of Conversion. The aggregate purchase price at which all
shares of Holding Company Stock will be offered and sold pursuant to the Plan of
Conversion will be equal to the estimated pro forma market value of the
Association at the time of the Conversion as held as a subsidiary of the Holding
Company. The estimated pro forma market value will be determined by an
independent appraiser. Pursuant to the Plan of Conversion, all such shares of
Holding Company Stock will be issued and sold at a uniform price per share. The
Conversion and the sale of newly issued shares of the Stock Association's stock
to the Holding Company will be deemed effective concurrently with the closing of
the sale of Holding Company Stock.
As required by OTS regulations, shares of Holding Company Stock will be
offered pursuant to non-transferable subscription rights on the basis of
preference categories. All shares must be sold and to the extent that Holding
Company Stock is available, no subscriber will be allowed to purchase less than
25 shares of Holding Company Stock, provided that the aggregate purchase price
does not exceed $500. The Association has established various preference
categories under which shares of Holding Company Stock may be purchased and a
public offering category for the sale of shares not purchased under the
preference categories. If the third preference category is determined to be
inappropriate to the Conversion, then there will only be three preference
categories consisting of the first, second, and fourth preference categories set
forth below, and all references herein to Supplemental Eligible Account Holder
and the Supplemental Eligibility Record Date shall not be applicable to the
subject transaction.
The first preference category is reserved for the Association's
Eligible Account Holders. The Plan of Conversion defines "Eligible Account
Holder" as any person holding a Qualifying Deposit. The Plan of Conversion
defines "Qualifying Deposit" as the aggregate balance of all savings accounts of
an Eligible Account Holder in the Association at the close of business on
September 30, 1996, which is at least equal to $50.00. If a savings account
holder of the Association qualifies as an Eligible Account Holder, he or she
will receive, without payment, non-transferable subscription rights to purchase
Holding Company Stock. The number of shares that each Eligible Account Holder
may subscribe to is equal to the greater of (a) the maximum purchase limitation
established for the Public Offering; (b) one tenth of one percent of the total
offering of shares; or (c) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Holding
Company Stock 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 the Qualifying Deposits of all Eligible Account Holders. If
there is an oversubscription, shares will be allocated among subscribing
Eligible Account Holders so as to permit each account holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation equal to 100 shares. Any shares not then allocated shall be allocated
among the subscribing Eligible Account Holders
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 4
on an equitable basis, related to the amounts of their respective deposits as
compared to the total deposits of Eligible Account Holders on the Eligibility
Record Date. Non-transferable subscription rights to purchase Holding Company
Stock received by officers and directors of the Association and their associates
based on their increased deposits in the Association in the one year period
preceding the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of nontransferable subscription rights to
purchase shares of Holding Company Stock under the first preference category.
The second preference category is reserved for tax-qualified employee
stock benefit plans of the Stock Bank. The Plan of Conversion defines "tax
qualified employee stock benefit plans" as any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust meets the
requirements to be "qualified" under Section 401 of the Code. Under the Plan of
Conversion, the Stock Bank's tax-qualified employee stock benefit plans may
subscribe for up to 10% of the shares of Holding Company Stock to be offered in
the Conversion.
The third preference category is reserved for the Association's
Supplemental Eligible Account Holders. The Plan of Conversion defines
"Supplemental Eligible Account Holder" as any person (other than officers or
directors of the Association and their associates) holding a deposit in the
Association on the last day of the calendar quarter preceding the approval of
the Plan of Conversion by the OTS ("Supplemental Eligibility Record Date"). This
third preference category will only be used in the event that the Eligibility
Record Date is more than 15 months prior to the date of the latest amendment to
the Application for Approval of Conversion on Form AC filed prior to approval by
the OTS. The third preference category provides that each Supplemental Eligible
Account Holder will receive, without payment, nontransferable subscription
rights to purchase Holding Company Stock to the extent that such shares of
Holding Company Stock are available after satisfying subscriptions for shares in
the first and second preference categories above. The number of shares to which
a Supplemental Eligible Account Holder may subscribe to is the greater of (a)
the maximum purchase limitation established for the Community Offering; (b)
one-tenth of one percent of the total offering of shares; or (c) fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of the shares of Holding Company Stock to be issued by a fraction
of which the numerator is the amount of the deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of the deposits of all
Supplemental Eligible Account Holders on the Supplemental Eligibility Record
Date. Subscription rights received pursuant to the third preference category
shall be subordinated to all rights under the first and second preference
categories. Non-transferable subscription rights to be received by a
Supplemental Eligible Account Holder in the third preference category shall be
reduced by the subscription rights received by such account holder as an
Eligible Account Holder under the first and second preference categories. In the
event of an oversubscription, shares will be allocated so as to enable each
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 5
of shares sufficient to make his total allocation, including shares previously
allocated in the first and second preference categories, equal to 100 shares or
the total amount of his subscription, whichever is less. Any shares not then
allocated shall be allocated among the subscribing Supplemental Eligible Account
Holders on an equitable basis related to the amount of their respective deposits
as compared to the total deposits of Supplemental Eligible Account Holders on
the Supplemental Eligibility Record Date.
If there is no oversubscription of the Holding Company Stock in the
first, second, and third preference categories, the fourth preference category
becomes operable. In the fourth preference category, members of the Association
entitled to vote at the special meeting of members to approve the Plan of
Conversion who are not Eligible Account Holders or Supplemental Eligible Account
Holders ("Other Members") will receive, without payment, non-transferable
subscription rights entitling them to purchase Holding Company Stock. Other
Members shall each receive subscription rights to purchase up to the maximum
purchase limitation established for the Public Offering or one-tenth of one
percent of the total offering of shares, to the extent that Holding Company
Stock is available. In the event of an oversubscription by Other Members,
Holding Company Stock will be allocated pro rata according to the number of
shares subscribed for by each Other Member.
The Plan of Conversion further provides for limitations upon purchases
of Holding Company Stock. Specifically, any person by himself or herself or with
an associate or a group of persons acting in concert may subscribe for not more
than $200,000 of Holding Company Stock offered pursuant to the Plan of
Conversion, except that Tax-Qualified Employee Stock Benefit Plans may purchase
up to 10% of the total shares of Holding Company Stock issued. Subject to any
required regulatory approval and the requirements of applicable laws and
regulations, the Association may increase or decrease any of the purchase
limitations set forth herein at any time. The Board of Directors of the
Association may, in its sole discretion, increase the maximum purchase
limitation up to 5.0%. Requests to purchase additional shares of Holding Company
Stock under this provision will be allocated by the Board of Directors on a pro
rata basis giving priority in accordance with the priority rights set forth in
the Plan of Conversion. Officers and directors of the Association and their
associates may not purchase in the aggregate more than 33% of the Holding
Company Stock issued pursuant to the Conversion. Directors of the Association
will not be deemed associates or a group acting in concert solely as a result of
their membership on the board of directors of the Association. All of the shares
of Holding Company Stock purchased by officers and directors will be subject to
certain restrictions on sale for a period of one year.
The Plan of Conversion provides that no person will be issued any
subscription rights or be permitted to purchase any Holding Company Stock if
such person resides in a foreign country or in a state of the United States with
respect to which all of the following apply: (a) a small number of persons
otherwise eligible to subscribe for shares under the Plan of Conversion reside
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 6
in such state; (b) the issuance of subscription rights or the offer or sale of
the Holding Company Stock in such state, would require the Association or the
Holding Company under the securities law of such state to register as a broker
or dealer or to register or otherwise qualify its securities for sale in such
state; and (c) such registration or qualification would be impracticable for
reasons of cost or otherwise.
The Plan of Conversion also provides for the establishment of a
Liquidation Account by Stock Bank for the benefit of all Eligible Account
Holders and Supplemental Eligible Account Holders (if applicable). The
Liquidation Account will be equal in amount to the net worth of Association as
of the time of the Conversion. The establishment of the Liquidation Account will
not operate to restrict the use or application of any of the net worth accounts
of the Stock Bank, except that the Stock Bank will not declare or pay cash
dividends on or repurchase any of its stock if the result thereof would be to
reduce its net worth below the amount required to maintain the Liquidation
Account. The Liquidation Account will be for the benefit of the Association's
Eligible Account Holders and Supplemental Eligible Account Holders who maintain
accounts in the Association at the time of the Conversion. All such account
holders, including those not entitled to subscription rights for reasons of
foreign or out-of-state residency (as described above), will have an interest in
the Liquidation Account. The interest an Eligible Account Holder and
Supplemental Eligible Account Holder will have a right to receive, in the event
of a complete liquidation of the Stock Bank, is a distribution from the
Liquidation Account in the amount of the then current adjusted subaccount
balances for savings accounts then held, which will be made prior to any
liquidation distribution with respect to the capital stock of the Stock
Association.
The initial subaccount balance for a savings account held by an
Eligible Account Holder and/or Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction of which the numerator is the amount of the qualifying deposit in the
savings account, and the denominator is the total amount of qualifying deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in the
Stock Association. The initial subaccount balance will never be increased, but
may be decreased if the deposit balance in any qualifying savings account of any
Eligible Account Holder or any savings account of any Supplemental Eligible
Account Holder on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, whichever is applicable, is less
than the lesser of (1) the deposit balance in the savings account at the close
of business on any other annual closing date subsequent to the Eligibility
Record Date or the Supplemental Eligibility Record Date, or (2) the amount of
the qualifying deposit in such savings account. In such event, the subaccount
balance for the savings account will be adjusted by reducing each subaccount
balance in an amount proportionate to the reduction in the savings account
balance. Once decreased, the Plan of Conversion provides that the subaccount
balance will never be subsequently increased, and if the savings account of an
Eligible Account Holder
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 7
or Supplemental Eligible Account Holder is closed, the related subaccount
balance in the Liquidation Account will be reduced to zero.
The net proceeds from the sale of the shares of Holding Company Stock
will become the permanent capital of Holding Company, and the Holding Company
will in turn purchase 100% of the stock issued by Stock Bank, in exchange for up
to 50% of the Holding Company's stock offering net proceeds or such other
percentage as is approved by the Board of Directors with the concurrence of the
OTS.
Following the Conversion, voting rights in Stock Bank will rest
exclusively in the Holding Company. Voting rights in the Holding Company will
rest exclusively in the stockholders of the Holding Company. The Conversion will
not interrupt the business of the Association, and its business will continue as
usual under the Stock Bank. Each depositor will retain a withdrawable savings
account or accounts equal in amount to the withdrawable account or accounts at
the time of the Conversion. Mortgage loans of the Association will remain
unchanged and retain their same characteristics in the Stock Bank after the
Conversion. The Stock Bank will continue membership in the Federal Home Loan
Bank System, and will remain subject to the regulatory authority of the OTS.
Deposits in Stock Bank will continue to be insured by the Savings Association
Insurance Fund administered by the Federal Deposit Insurance Corporation up to
applicable limits of insurance coverage.
Immediately prior to the Conversion, the Association will have a
positive net worth in accordance with generally accepted accounting principles.
The savings account holders of the Association will pay expenses of the
Conversion solely attributable to them, if any. Further, the Association will
pay its own expenses of the Conversion and will not pay any expenses solely
attributable to the Association's savings account holders or to the purchasers
of Holding Company Stock.
REPRESENTATIONS BY MANAGEMENT
-----------------------------
In connection with the Conversion, the following statements,
representations and declarations have been made to us by management of the
Association:
1. The Conversion will be implemented in accordance with the terms of
the Plan of Conversion and all conditions precedent contained in the Plan of
Conversion shall be performed prior to the consummation of the Conversion.
2. The fair market value of the withdrawable savings accounts plus
interests in the Liquidation Account to be constructively received under the
Plan of Conversion will in each instance be equal to the fair market value of
each savings account of the Association plus the interest in the residual equity
of the Association surrendered in exchange therefor. All
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 8
proprietary rights in the Association form an integral part of the withdrawable
savings accounts being surrendered in the Conversion.
3. The Holding Company and the Stock Bank each have no plan or
intention to redeem or otherwise acquire any of the Holding Company Stock issued
in the proposed transaction.
4. To the best of the knowledge of the management of the Association,
there is not now nor will there be at the time of the Conversion, any plan or
intention, on the part of the depositors in the Association to withdraw their
deposits following the Conversion. Deposits withdrawn immediately prior to or
immediately subsequent to the Conversion (other than maturing deposits) are
considered in making these assumptions.
5. Immediately following the consummation of the proposed transaction,
the Stock Association will possess the same assets and liabilities as the
Association held immediately prior to the proposed transaction, plus
substantially all of the net proceeds from the sale of its stock to the Holding
Company (except for assets used to pay expenses in the Conversion). Assets used
to pay expenses of the Conversion (without reference to the expenses of the
Subscription Offering and the Public Offering) and all distributions (except for
regular normal interest payments made by the Association immediately preceding
the transaction) will in the aggregate constitute less than one percent (1%) of
the assets of the Association, net of liabilities associated with such assets,
and will be paid by the Association and the Holding Company from the proceeds of
the Subscription Offering and Public Offering.
6. Following the Conversion, Stock Bank will continue to engage in its
business in substantially the same manner as engaged in by the Association prior
to the Conversion. The Stock Bank has no plan or intention to sell or otherwise
dispose of any of its assets, except in the ordinary course of business.
7. No cash or property will be given to any member of the Association
in lieu of subscription rights or an interest in the Liquidation Account of the
Stock Bank.
8. None of the compensation to be received by any deposit account
holder-employees of the Association or the Holding Company will be separate
consideration for, or allocable to, any of their deposits in the Association. No
interest in the Liquidation Account of the Stock Bank will be received by any
deposit account holder-employees as separate consideration for, or will
otherwise be allocable to, any employment agreement, and the compensation paid
to each deposit account holder-employee, during the twelve month period
preceding or subsequent to the Conversion, will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services. No shares of Holding Company
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 9
Stock will be issued to or purchased by any deposit account holder-employee of
the Association or the Holding Company at a discount or as compensation in the
Conversion.
9. The aggregate fair market value of the Qualifying Deposits held by
Eligible Account Holders or Supplemental Eligible Account Holders (if
applicable) as of the close of business on the Eligibility Record Date or
Supplemental Eligibility Record Date (if applicable) entitled to interests in
the Liquidation Account to be established by Stock Bank equalled or exceeded 99%
of the aggregate fair market value of all savings accounts (including those
accounts of less than $50.00) in the Association as of the close of business on
such date.
10. There is no plan or intention for the Stock Bank to be liquidated
or merged with another corporation following the consummation of the Conversion.
11. For taxable years prior to January 1, 1996, the Association
utilized the reserve method of accounting for bad debts in accordance with
Section 593 of the Code. Pursuant to the Small Business Job Protection Act of
1996, which was signed by the President on August 20, 1996, the Stock Bank will
utilize a reserve for bad debts in accordance with Section 585 of the Code
(following the Conversion).
12. The Association and the Stock Bank are corporations within the
meaning of Section 7701(a)(3) of the Code.
13. The Holding Company has no plan or intention to sell or otherwise
dispose of the stock of the Stock Bank received by it in the proposed
transaction.
14. Both the Stock Bank and the Holding Company have no plan or
intention, either currently or at the time of the Conversion, to issue
additional shares of common stock following the proposed transaction, other than
shares that may be issued to employees or directors pursuant to certain stock
option and stock incentive plans or that may be issued to employee benefit
plans.
15. If all of the net proceeds from the sale of Holding Company Stock
had been contributed by the Holding Company to the Stock Bank in exchange for
common stock of the Stock Bank in the Conversion, as opposed to the Holding
Company retaining a portion of such net proceeds ("retained proceeds"), and if
the Stock Bank immediately thereafter made a distribution of the retained
proceeds to the Holding Company, the Stock Bank would have sufficient current
and accumulated earnings and profits for tax purposes such that the distribution
would not result in the recapture of any portion of the bad debt reserves of the
Stock Bank under Section 593(e) of the Code.
16. At the time of the proposed transaction, the fair market value of
the assets of the Association on a going concern basis (including intangibles)
will equal or exceed the amount of
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 10
its liabilities plus the amount of liability to which such assets are subject.
The Association will have a positive regulatory net worth at the time of the
Conversion.
17. The Association is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. The
proposed transaction does not involve a receivership, foreclosure, or similar
proceeding before a federal or state agency involving a financial institution to
which Section 585 or 593 of the Code applies.
18. The Association's savings depositors will pay expenses of the
Conversion solely attributable to them, if any. The Holding Company, the Stock
Bank, and the Association will pay their own expenses of the Conversion and will
not pay any expenses solely attributable to the savings depositors or to the
Holding Company stockholders.
19. The liabilities of the Association assumed by the Stock Bank plus
the liabilities, if any, to which the transferred assets are subject were
incurred by the Association in the ordinary course of its business and are
associated with the assets transferred.
20. There will be no purchase price advantage for the Association's
deposit account holders who purchase Holding Company Stock in the Conversion.
21. Neither the Association nor the Stock Bank is an investment company
as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
22. No creditors of the Association have taken any steps to enforce
their claims against the Association by instituting bankruptcy or other legal
proceedings, in either a court or appropriate regulatory agency, that would
eliminate the proprietary interests of the members of the Association prior to
the Conversion.
23. The proposed transaction does not involve the payment to the Stock
Bank or the Association of financial assistance from federal agencies within the
meaning of Notice 89-102, 1989-40 C.B. 1.
24. The Eligible Account Holders' and Supplemental Eligible Account
Holders' proprietary interest in the Association arise solely by virtue of the
fact that they are account holders in the Association.
25. At the time of the Conversion, the Association will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire an equity interest in the
Holding Company or the Stock Bank.
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 11
26. The Stock Bank has no plan or intention to sell or otherwise
dispose of any of the assets of the Association acquired in the transaction
(except for dispositions, including deposit withdrawals, made in the ordinary
course of business).
27. On a per share basis, the purchase price of the Holding Company
Stock in the Conversion will be equal to the fair market value of such stock at
the time of the completion of the proposed transaction.
28. The Association has received or will receive an opinion from
Capital Resources Group, Inc. ("Appraiser's Opinion"), which concludes that
subscription rights to be received by Eligible Account Holders, Supplemental
Eligible Account Holders, and other eligible subscribers do not have any
ascertainable fair market value, because they are acquired by the recipients
without cost, are non-transferable, exist for such a short duration, and merely
afford the recipients a right only to purchase Holding Company Stock at a price
equal to its estimated fair market value, which will be the same price used in
the Public Offering for unsubscribed shares of Holding Company Stock.
29. The Association will not have any net operating losses, capital
loss carryovers, or built-in losses at the time of the Conversion.
OPINION OF COUNSEL
Based solely upon the foregoing information and our analysis and
examination of current applicable federal income tax laws, rulings, regulations,
judicial precedents, and the Appraiser's Opinion, and provided the Conversion is
undertaken in accordance with the above assumptions, we render the following
opinion of counsel:
1. The change in the form of operation of the Association from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank, as described above, will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized to
either the Association or to the Stock Bank as a result of such Conversion. (See
Rev. Rul. 80-105, 1980-1 C.B. 78). The Association and the Stock Bank will each
be a party to a reorganization within the meaning of Section 368(b) of the Code.
(Rev. Rul. 72-206, 1972-1 C.B. 104).
2. No gain or loss will be recognized by the Stock Bank on the receipt of
money in exchange for shares of Stock Bank stock. (Section 1032(a) of the Code).
3. The Holding Company will recognize no gain or loss upon its receipt of
money in exchange for shares of Holding Company Stock. (Section 1032(a) of the
Code).
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 12
4. The assets of the Association will have the same basis in the hands of
the Stock Association as in the hands of the Association immediately prior to
the Conversion. (Section 362(b) of the Code).
5. The holding period of the assets of the Association to be received by
the Stock Association will include the period during which the assets were held
by the Association prior to the Conversion. (Section 1223(2) of the Code).
6. Depositors will realize gain, if any, upon the issuance to them of (i)
withdrawable deposit accounts of the Stock Bank, (ii) subscription rights in
connection with the Conversion, and/or (iii) interests in the Liquidation
Account of the Stock Bank. Any gain resulting therefrom will be recognized, but
only in an amount not in excess of the fair market value of the Liquidation
Accounts and/or subscription rights received. The Liquidation Accounts will have
nominal, if any, fair market value. Based solely on the accuracy of the
conclusion reached in the Appraiser's Opinion, and our reliance on such opinion,
that the subscription rights have no value at the time of distribution or
exercise, no gain or loss will be required to be recognized by depositors upon
receipt or distribution of subscription rights. (Section 1001 of the Code). See
Paulsen v. Commissioner, 469 U.S. 131, 139 (1985).
Likewise, based solely on the accuracy of the aforesaid conclusion reached
in the Appraiser's Opinion, and our reliance thereon, we give the following
opinions: (a) no taxable income will be recognized by the borrowers, directors,
officers, and employees of the Association upon distribution to them of
subscription rights or upon the exercise or lapse of the subscription rights to
acquire Holding Company Stock at fair market value; (b) no taxable income will
be realized by the depositors of the Association as a result of the exercise or
lapse of the subscription rights to purchase Holding Company Stock at fair
market value (Rev. Rul. 56-572, 1956-2 C.B. 182); and (c) no taxable income will
be realized by the Association, the Stock Bank, or the Holding Company on the
issuance or distribution of subscription rights to depositors of the Association
to purchase shares of Holding Company Stock at fair market value (Section 311 of
the Code).
Notwithstanding the Appraiser's Opinion, if the subscription rights are
subsequently found to have a fair market value greater than zero, income may be
recognized by various recipients of the subscription rights (in certain cases,
whether or not the rights are exercised) and the Holding Company and/or the
Stock Bank may be taxable on the distribution of the subscription rights.
(Section 311 of the Code). In this regard, the subscription rights may be taxed
partially or entirely at ordinary income tax rates.
7. The basis of the savings accounts in the Stock Bank received by the
account holders of the Association will be the same as the basis of their
savings accounts in the Association surrendered in exchange therefor (Section
358(a)(1)). The basis of the interests in
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 13
the Liquidation Account of the Stock Bank received by the Eligible Account
Holders and Supplemental Eligible Account Holders will be zero, that being the
cost of such property. (Paulsen v. Commissioner, 469 U.S. 131, 139 (1985)). The
basis of the non-transferable subscription rights will be zero, provided that
such subscription rights are not deemed to have a fair market value and that the
subscription price of such stock issuable upon exercise of such rights is equal
to the fair market value of such stock. The basis of the Holding Company Stock
to its stockholders will be purchase price thereof, increased by the basis, if
any, of the subscription rights exercised (Section 1012 of the Code). The
holding period of Holding Company Stock will commence upon the effective date of
exercise of the subscription rights (Section 1223(6) of the Code). The holding
period for the Holding Company Stock purchased pursuant to the direct community
offering, public offering or under other purchase arrangements will commence on
the date following the date on which such stock is purchased. (Rev. Rul. 70-
598, 1970-2 C.B. 168).
8. The part of the taxable year of the Association before the
Conversion and the part of the taxable year of the Stock Bank after the
Conversion will constitute a single taxable year of the Stock Bank. (See Rev.
Rul. 57-276, 1957-1 C.B. 126). Consequently, the Association will not be
required to file a federal income tax return for any portion of such taxable
year (Section 1.381(b)-1(a)(2) of the Treasury Regulations).
9. As provided by Section 381(c)(2) of the Code and Section
1.381(c)(2)-1 of the Treasury Regulations, the Stock Bank will succeed to and
take into account the earnings and profits or deficit in earnings and profits of
the Association as of the date or dates of transfer.
10. Pursuant to the provisions of Section 381(c)(4) of the Code and
Section 1.381(c)(4)-1(a)(1)(ii) of the Treasury Regulations, the Stock Bank will
succeed to and take into account, immediately after the reorganization, those
accounts of the Association which represent bad debt reserves in respect of
which the Association has taken a bad debt deduction for taxable years ending on
or before the date of the reorganization. The bad debt reserves will not be
required to be restored to the gross income of either the Association or the
Stock Bank for the taxable year of the reorganization, and such bad debt
reserves will have the same character in the hands of the Stock Association as
they would have had in the hands of the Association if no distribution or
transfer had occurred. No opinion is being expressed as to whether the bad debt
reserves will be required to be restored to the gross income of either the
Association or the Stock Bank for the taxable year of the reorganization.
11. Regardless of book entries made for the creation of the Liquidation
Account, the Conversion, as described above, will not diminish the accumulated
earnings and profits of the Stock Bank available for the subsequent distribution
of dividends within the meaning of Section 316 of the Code. (Section 1.312-11(b)
and (c) of the Treasury Regulations).
<PAGE>
Board of Directors
First Kansas Federal Savings Association
April 27, 1998
Page 14
12. For purposes of Section 381 of the Code, the Stock Bank will be
treated the same as the Association would have been had there been no
reorganization. Accordingly, the taxable year of the Association will not end on
the effective date of the proposed transaction merely because of the transfer of
assets of the Association to the Stock Bank and the tax attributes of the
Association enumerated in Section 381(c) will be taken into account by the Stock
Bank as if there had been no reorganization (Section 1.381(b)-1(a)(2)) of the
Treasury Regulations).
No opinion is expressed as to the tax treatment of the Conversion under
the provisions of any of the other sections of the Code and Treasury Regulations
which may also be applicable thereto, or under federal law, or to the tax
treatment of any conditions existing at the time of, or effects resulting from,
the transactions which are not specifically covered by the items set forth
above. Notwithstanding any reference to Section 381 above, no opinion is
expressed or intended to be expressed herein as to the effect, if any, of this
transaction on the continued existence of, the carryover or carryback of, or the
limitation on, any net operating losses of the Association or its successor, the
Stock Bank, under the Code.
We hereby consent to the filing of this opinion as an exhibit to the
Application for Conversion on Form AC of the Association filed with the OTS, the
Application H-(e)(1)-S of the Holding Company filed with the OTS, and the
Registration Statement on Form SB-2 of the Holding Company filed under the
Securities Act of 1933, as amended, and to the reference of our firm in the
prospectus related to this opinion.
Very truly yours,
/s/Malizia, Spidi, Sloane & Fisch
-----------------------------------
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
EXHIBIT 8.2
<PAGE>
LAW OFFICES OF
WINKLER, LEE, TETWILER, DOMONEY & SCHULTZ]
133 SOUTH PEARL
P.O. BOX 333
PAOLA, KANSAS 66071-0333
913-294-2339
FAX 913-294-5702
WENDELL D. WINKLER EMAIL:[email protected] GARRETT WINKLER
EDWIN A. LEE (RETIRED) (1891-1970)
LEE H. TETWILER L. PERRY BISHOP
J. DARCY DOMONEY (1907-1984)
SHEILA M. SCHULTZ
April 27, 1998
Board of Directors
First Kansas Federal Savings Association
600 Main Street
Osawatomie, Kansas 66064
Board Members:
You have requested our opinion regarding material Kansas tax
consequences to First Kansas Federal Savings Association (the "Association") and
its depositors under the laws of the State of Kansas of the proposed conversion
(the "Conversion"), under which the Association will be changed from a
federally-chartered mutual savings association to a federally-chartered capital
stock savings bank (the "Stock Bank"), a parent holding company will be formed
and incorporated in Kansas (the "Holding Company") to acquire all of the
outstanding stock of the Stock Bank (the "Acquisition"), and the stock of the
Holding Company will be offered to the public (the "Offering"), pursuant to a
Plan of Conversion adopted by the Board of Directors of the Bank on December 16,
1997, as amended (the "Plan").
The Association's special counsel, Malizia, Spidi, Sloane & Fisch,
P.C., has previously provided the Association an opinion regarding certain
federal income tax consequences of the Conversion, the Acquisition, and the
Offering (the "Federal Tax Opinion"). Based upon the facts stated in the Federal
Tax Opinion, including certain representations of the Association, the Federal
Tax Opinion concludes, among other things, that the Conversion qualifies as a
tax-free reorganization under ss. 368(a)(1)(F) of the Internal Revenue Code of
1986, as amended ("Code"), and that the Association, the Stock Bank, and the
Holding Company and the depositors of the Association will not recognize income,
gain, or loss for federal income tax purposes upon the implementation of the
Conversion, the Acquisition, and the Offering.
Based upon the facts and circumstances attendant to the Conversion as
detailed in the Plan, and the provisions of the Code and the Federal Tax Opinion
rendered, it is our opinion that the laws of the State of Kansas will, for
income tax purposes, treat the Conversion transaction as detailed in the Plan in
an identical manner as it is treated by the Internal Revenue Service for income
tax purposes, and that under such state law no adverse income tax consequences
will be incurred by either the Association or its account holders as a result of
the implementation of the Plan.
<PAGE>
Board of Directors
First Kansas Federal Savings Association
Page 2
The opinion herein expressed specifically does not include, without
limitation by the specification thereof, an opinion with respect to any
franchise tax or capital stock taxes which might result from the implementation
of the Plan.
Our opinion is based on the facts and conditions as stated herein,
whether directly or by reference to the Federal Tax Opinion. If any of the facts
and conditions are not entirely complete or accurate, it is imperative that we
be informed immediately, as the inaccuracy or incompleteness could have a
material effect on our conclusions. In rendering our opinion, we are relying
upon the relevant provisions of the Code, the laws of the State of Kansas, as
amended, the regulations and rules thereunder and judicial and administrative
interpretations thereof, which are subject to change or modification by
subsequent legislative, regulatory, administrative, or judicial decisions. Any
such changes could also have an effect on the validity of our opinion. We
undertake no responsibility to update or supplement our opinion. Our opinion is
not binding on the Internal Revenue Service or the State of Kansas, nor can any
assurance be given that any of the foregoing parties will not take a contrary
position or that our opinion will be upheld if challenged by such parties.
Finally, we hereby consent to the filing of this opinion as an exhibit
to the Application for Conversion on Form AC ("Form AC") or similar filings of
the Association filed with the Office of Thrift Supervision, the filing of this
opinion as an exhibit to the Application H-(e)(1)S of the Holding Company to be
filed with the Office of Thrift Supervision, and the filing of this opinion as
an exhibit to the Holding Company's Registration Statement on Form SB-2 ("Form
SB-2") to be filed with the Securities and Exchange Commission, and to reference
to our firm in the offering circular contained in the Form AC, Form SB-2 and
related documents related to this opinion.
Very truly yours,
WINKLER, LEE, TETWILER,
DOMONEY & SHCULTZ
/s/J. Darcy Domoney
-------------------------------------------
By: J. Darcy Domoney
EXHIBIT 8.3
<PAGE>
Capital Resources Group, Inc.
1211 Connecticut Ave., N.W. - Suite 200 - Washington, DC 20036
- Tel(202) 466-5685 - Fax(202) 466-5695
April 27, 1998
Board of Directors
First Kansas Federal Savings Association
600 Main Street
Osawatomie, Kansas 66064
Dear Board Members:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion adopted by the Board of
Directors of First Kansas Federal Savings Association ("Association") on
December 16, 1997.
It is our understanding that, pursuant to Office of Thrift Supervision
regulations, subscription rights are non-transferable. Persons violating such
prohibition may lose their right to purchase stock in the Conversion and be
subject to other possible sanctions.
Because the Subscription Rights to purchase shares of common stock in
the Association to be issued to the Association's employee stock benefit plans,
depositors of the Association, and to other members of the Association will be
acquired by such recipients without cost, will be non-transferable and of short
duration, and will afford the recipients the right only to purchase shares of
common stock at the same price as will be paid by members of the general public
in a Community Offering, we are of the opinion that:
(1) the Subscription Rights will have no ascertainable fair market
value and,
(2) the price at which the Subscription Rights are exercisable will
not be more or less than the fair market value of the shares on
the date of the exercise.
Very truly yours,
CAPITAL RESOURCES GROUP, INC.
/s/Capital Resources Group, Inc.
--------------------------------
EXHIBIT 23.2
<PAGE>
ACCOUNTANTS' CONSENT
Board of Directors
First Kansas Federal Savings Association:
We consent to the use in Amendment No. 1 of the Registration Statement of First
Kansas Financial Corporation on Form SB-2 and the Application for Conversion on
Form AC of our report dated February 18, 1998, on the consolidated financial
statements of First Kansas Federal Savings Association and Subsidiary as of
December 31, 1997 and 1996, and for the fiscal years ended December 31, 1997 and
1996, and to the reference to our firm under the heading "Experts" in the
related prospectus.
/s/KPMG Peat Marwick LLP
- ------------------------
Kansas City, Missouri
April 27, 1998
EXHIBIT 23.3
<PAGE>
Capital Resources Group, Inc.
1211 Connecticut Ave., N.W. - Suite 200 - Washington, DC 20036
- Tel(202) 466-5685 - Fax(202) 466-5695
April 27, 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") in the Application for Approval of Conversion filed by First
Kansas Federal Savings Association for permission to convert to a capital stock
savings bank and references to the Conversion Valuation Appraisal Report
("Report") and the valuation of First Kansas Federal Savings Association
provided by CRG. We also consent to the use of our firm's name and references to
our Report in the Form SB-2 Registration Statement filed by First Kansas
Financial Corporation. We also consent to the filing of our opinion regarding
the value of subscription rights as an exhibit to such Registration Statement.
Very truly yours,
/s/Michael B. Seiler
-----------------------------------
Michael B. Seiler
Senior Vice President
EXHIBIT 99.2
<PAGE>
QUESTIONS AND ANSWERS BROCHURE
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Answers to Frequently Asked Questions
About Our Stock Conversion and
Your Opportunity to Invest in
First Kansas Financial Corporation
the Proposed holding company of
First Kansas Federal Savings Association
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 2
You can be one of the initial stockholders of First Kansas Financial
Corporation , the proposed holding company of First Kansas Federal Savings
Association. First Kansas Financial Corporation is "going public" as part of
First Kansas Federal Savings Association' conversion from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank
to be known as First Kansas Federal Savings Bank. Now you have the opportunity
to invest in First Kansas Federal Savings Association by purchasing stock in the
initial offering of the First Kansas Financial Corporation. This brochure
answers some of the most frequently asked questions about the conversion to
stock ownership and about your opportunity to invest in First Kansas Financial
Corporation
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 3
ABOUT THE TRANSACTION
- ---------------------
1. WHAT IS A CONVERSION?
First Kansas Federal Savings Association is now a federally chartered
mutual savings and loan association with directors being elected by our
members. After the Conversion, we will be a stock savings bank owned by
a holding company. The holding company, First Kansas Financial
Corporation, will be owned by stockholders who will have voting rights
with respect to certain key business matters. The holding company is
offering shares of common stock to certain depositors, borrowers,
tax-qualified employee plans, of First Kansas Federal Savings
Association and depending upon market conditions and the availability
of shares, may offer shares to selected persons in a public offering.
2. WHAT IS First Kansas Financial Corporation AND WHY WAS IT FORMED?
First Kansas Financial Corporation is a newly organized holding company
created by First Kansas Federal Savings Association specifically to
purchase 100% ownership in First Kansas Federal Savings Bank. The
holding company currently has no stockholders, but is offering shares
of its common stock to certain depositors, borrowers, tax-qualified
employee plans of First Kansas Federal Savings Association and
depending upon market conditions and the availability of shares, may
offer shares to selected persons in a public offering. The additional
capital provided through the offering of First Kansas Financial
Corporation stock will support future banking activities and local
expansion of the financial services currently offered through First
Kansas Federal Savings Association.
3. WHAT ARE THE BENEFITS AND RISKS OF CONVERSION?
The Conversion and sale of stock will increase First Kansas Federal
Savings Association's capital, enabling it to do many things, including
possibly the following:
- support expansion of financial services - enhance ability to
expand through acquisitions
- better compete with other financial institutions - facilitate
future access to the capital markets
Please review "Use of Proceeds" in the Prospectus for First Kansas
Financial Corporation and the holding company's initial plans with
respect to the capital to be raised in the Conversion.
There are certain risks in investing in First Kansas Financial
Corporation common stock. An offer is made only by a prospectus
accompanied by a stock order form and certification. Please review the
prospectus prior to making an investment decision, particularly the
section entitled "Risk Factors".
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 4
4. WILL THE CONVERSION HAVE ANY EFFECT ON MY SAVINGS OR LOAN ACCOUNT?
No. The Conversion will not affect the general terms of your savings
account which will continue to be insured by the Federal Deposit
Insurance Corporation (FDIC) to the maximum legal limit. Your savings
account is not being converted to stock. The obligations of borrowers
under their loan agreements will not be affected.
5. HOW DO I BENEFIT FROM THE CONVERSION?
Eligible depositors and borrowers will be given the opportunity to
subscribe or place an order to purchase stock in First Kansas Financial
Corporation and thereby participate in any gain in the value of the
shares and future dividend payments, if any. Furthermore, the
additional capital will enable First Kansas Federal Savings Association
to provide expanded services to its customers and the community.
ABOUT PURCHASING STOCK
- ----------------------
6. WHO MAY PURCHASE STOCK?
First Kansas Financial Corporation is currently conducting a
Subscription Offering. Persons listed below may have the opportunity to
subscribe to purchase First Kansas Financial Corporation 's common
stock during the Subscription Offering.
- Eligible Account Holders. Persons who had a savings deposit of at
least $50 at First Kansas Federal Savings Association on the
Eligibility Record Date, September 30, 1996.
- Tax Qualified Employee Plans of First Kansas Federal Savings
Association.
- Supplemental Eligible Account Holders. Persons who had a savings
deposit of at least $50 on the Supplemental Eligibility Record
Date, March 31, 1998.
- Other Members. Depositors and borrowers as of the Voting Record
Date, April 30, 1998.
First Kansas Financial Corporation may, depending upon market
conditions and the availability of shares, offer stock to certain
persons in a public offering.
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 5
7. WHAT IS THE PRICE PER SHARE AND HOW MANY SHARES ARE BEING OFFERED?
The aggregate value of First Kansas Financial Corporation stock has
been determined by an independent, nationally recognized appraisal
firm. The purchase price per share is $10.00. Up to 1,351,250 shares
are being offered for sale (or up to 1,553,938 shares under certain
conditions such as a change in market and financial conditions
following commencement of the Offering).
8. WILL EVERYONE PAY THE SAME PRICE FOR THE STOCK?
Yes. All subscribers, including First Kansas Federal Savings
Association' Board of Directors and management, will pay the same price
during the Offering.
9. ARE DEPOSITORS OBLIGATED TO BUY STOCK?
No. But our depositors have a priority subscription right.
10. HOW MUCH STOCK MAY I BUY IN THE SUBSCRIPTION OFFERING?
The individual purchase limit is 15,000 shares. Individuals acting in
concert or groups of persons may purchase up to 20,000 shares. The
actual number of shares to be issued is expected to be between 998,750
and 1,351,250 (or up to 1,553,938 shares under certain conditions such
as a change in market and financial conditions following commencement
of the Offering).
11. WHAT IS THE MINIMUM AMOUNT OF STOCK I MAY BUY?
The minimum purchase limit is 25 shares.
12. IS THE STOCK INSURED BY THE FDIC?
No. Like any other common stock, First Kansas Financial Corporation
stock will not be insured by the FDIC or any governmental agency.
13. IN THE FUTURE, HOW MAY I PURCHASE MORE SHARES OR SELL MY
SHARES?
First Kansas Financial Corporation has applied to have the common stock
quoted on the Nasdaq National Market System. No assurance can be given,
however, that the First Kansas Financial Corporation's stock will be
quoted on the Nasdaq or that an active and liquid market for the common
stock will develop or that an investor will be able to resell the
common stock at or above the purchase price after Conversion.
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 6
14. WILL THERE BE ANY DIVIDENDS?
First Kansas Financial Corporation does not currently intend to pay
dividends on its common stock. The declaration and payment of dividends
are subject to, among other things, the financial conditions and
results of operations of First Kansas Financial Corporation, First
Kansas Federal Savings Association' compliance with its capital
requirements, tax considerations, industry standards and other factors.
15. HOW DO I ORDER STOCK AND WHAT METHODS CAN BE USED FOR PAYMENT OF MY
STOCK PURCHASES?
Complete the stock order form and certification as instructed. Be sure
to indicate the number of shares you wish to purchase and the total
amount remitted (multiply the number of shares subscribed for by $10.00
per share.) Total payment for purchases in the Subscription Offering
must accompany the order form and be received by First Kansas Federal
Savings Association prior to 12:00 noon, Osawatomie, Kansas time,
on________, 1998. The payment options for stock purchases are as
follows:
- Check or money order sent or delivered to any First Kansas Federal
Savings Association branch or the Stock Information Center. If
payment is made by check or money order, interest will be earned
at the passbook rate until the Conversion is completed.
- Withdrawal of funds from any existing account of First Kansas
Federal Savings Association in an amount equal to the Purchase
Price (which is $10.00 per share) times the number of shares
ordered. Penalties for early withdrawal from an First Kansas
Federal Savings Association account will be waived when purchasing
stock in the Subscription Offering. Once authorization for
withdrawal of funds has been made, the subscriber may not withdraw
the designated amount unless the Plan of Conversion is terminated
or as otherwise required by regulatory authorities. All funds
maintained in savings accounts are insured by the FDIC up to
legally applicable limits and will earn interest until completion
of the Conversion.
- Orders of $25,000 or more must be paid by First Kansas Federal
Savings Association account withdrawals, certified funds,
cashier's check, or money orders.
- IRA purchases. If you wish to purchase shares of First Kansas
Financial Corporation stock for an IRA account, either at First
Kansas Federal Savings Association or elsewhere, we may be able to
accommodate you. Please contact the Stock Information Center as
soon as possible at (913) 755-3350 so that we may assist you with
the appropriate procedures for such a purchase. It is important
that you contact us soon because making the IRA arrangements takes
time.
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 7
16. MAY I CHANGE MY MIND?
The stock order form you executed cannot be canceled or withdrawn.
However, you may order additional shares by completing another stock
order form, subject to the maximum purchase limitations.
17. ARE MY SUBSCRIPTION RIGHTS TRANSFERABLE?
No. No person may transfer or enter into any agreement to transfer his
or her subscription rights issued under the Plan of Conversion, or the
shares to be issued upon the exercise of such rights. Persons violating
such prohibition will lose their right to purchase stock in the
Conversion and may be subject to further government sanctions.
ABOUT MEMBERS' VOTING RIGHTS
- ----------------------------
18. WHO IS ELIGIBLE TO VOTE ON THE PLAN OF CONVERSION?
Depositors at the Voting Record Date of April 30, 1998 who continue to
be depositors at the date of the Special Meeting are eligible to vote.
Borrowers with loans outstanding through the Voting Record Date are
also eligible to vote.
19. HOW IS THE NUMBER OF VOTES DETERMINED?
Each deposit account holder is entitled to cast one vote for each $100,
or fraction thereof, of the aggregate withdrawal value of all such
account holder's deposit accounts on the Voting Record Date. The
maximum number of votes per person is 1,000. Each borrower who has
voting rights is entitled to cast one vote, in addition to any votes a
borrower has as a depositor.
20. IF I VOTE FOR THE PLAN OF CONVERSION ON THE PROXY CARD, WILL I BE
OBLIGATED TO PURCHASE First Kansas Financial Corporation STOCK?
No. Signing the proxy card and voting for the Conversion in no way
obligates you to purchase First Kansas Financial Corporation stock. All
members are urged to vote for the Conversion. THE BOARD OF DIRECTORS
HAS UNANIMOUSLY APPROVED THE PLAN OF CONVERSION AND RECOMMENDS MEMBERS
VOTE "FOR" APPROVAL OF THE PLAN OF CONVERSION.
21. WHAT HAPPENS IF I DON'T VOTE?
Failing to vote could be equivalent to voting against the Plan of
Conversion. YOUR VOTE IS EXTREMELY IMPORTANT! Please sign and mail your
proxy card(s) now.
<PAGE>
Questions and Answers Brochure
- --------------------------------------------------------------------------------
Page 8
22. MAY I COME TO THE SPECIAL MEETING AND VOTE?
Yes. However, every member is encouraged to send a proxy card(s) to
First Kansas Federal Savings Association prior to the meeting even if
the member plans to attend the special meeting. The proxy is revocable
and can be changed by submitting a later dated proxy or by casting a
ballot at the meeting.
23. I RECEIVED MORE THAN ONE PROXY CARD. CAN I VOTE THEM ALL?
Yes. Please vote ALL the proxy cards you receive. You may have more
than one account in different registrations. While some accounts have
been consolidated, it is not permissible to consolidate all accounts.
24. IF A SAVINGS ACCOUNT IS IN JOINT NAME, MUST BOTH NAMES BE SIGNED ON THE
PROXY CARD?
No. Two or more signatures are required only when two or more
signatures are needed to withdraw funds from the account.
25. IF I DON'T BUY STOCK WILL I HAVE A VOTE AT FUTURE ANNUAL MEETINGS?
No. After the Conversion, only stockholders will have voting rights.
However, the operations of First Kansas Federal Savings Association and
the general terms and balances of your deposit accounts and loans will
remain unchanged.
26. HOW MAY I GET MORE INFORMATION?
We hope that these questions and answers, combined with the Prospectus
and the Proxy Statement, will help you better understand the Conversion
and the stock offering. You are urged to carefully review the
Prospectus and Proxy Statement before making an investment or voting
decision. If you desire further information, please contact the Stock
Information Center at:
Telephone: (913) 755-3350
<PAGE>
Questions and Answeres Brochure
- --------------------------------------------------------------------------------
I M P O R T A N T
P R O X Y R E M I N D E R
[GRAPHIC OMITTED]
First Kansas Financial Corporation
YOUR VOTE ON First Kansas Federal Savings Association's STOCK CONVERSION IS VERY
IMPORTANT.
VOTING FOR THE CONVERSION WILL NOT AFFECT THE INSURANCE OF YOUR DEPOSIT ACCOUNT.
YOUR ACCOUNT WILL CONTINUE TO BE INSURED UP TO THE MAXIMUM LEGAL LIMIT BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, AN AGENCY OF THE U.S. GOVERNMENT.
REMEMBER, VOTING FOR THE CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY STOCK.
PLEASE ACT PROMPTLY! SIGN YOUR PROXY CARD(S) AND MAIL OR DELIVER THEM TO First
Kansas Federal Savings Association TODAY. WE RECOMMEND THAT YOU VOTE FOR THE
PLAN OF CONVERSION.
THE BOARD OF DIRECTORS
FIRST KANSAS FEDERAL
SAVINGS ASSOCIATION
================================================================================
If you have already mailed your proxy card(s), please
accept our thanks and disregard this request.
For Further Information, Please Call
The Stock Information Center
at (913) 755-3350
- --------------------------------------------------------------------------------
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A
STOCK ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY
CONTACTING THE STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A
DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
- --------------------------------------------------------------------------------
<PAGE>
PLACARD/LOBBY POSTER FOR EACH BRANCH OFFICE - Approx. 2 1/2' X 4'
[GRAPHIC OMITTED]
First Kansas Federal Savings Association is Going Public!
You may now own a part of First Kansas Federal Savings Association
by purchasing shares of stock
in the holding company, First Kansas Financial Corporation
Please take a prospectus, and
for further information about the stock offering
call the Stock Information Center at
(913) 755-3350
- --------------------------------------------------------------------------------
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A
STOCK ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY
CONTACTING THE STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A
DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
- --------------------------------------------------------------------------------
<PAGE>
NEWSPAPER ADVERTISEMENT
-----------------------
NEW ISSUE
[GRAPHIC OMITTED]
First Kansas Financial Corporation
the proposed holding company for
First Kansas Federal Savings Association
is going public!
Up to 1,351,250 shares of Common Stock are being
offered at a Subscription Price of $10.00 per
share.
For Information Call:
Stock Information Center
Telephone (913) 755-3350
or stop by the Stock Center located at
600 Main Street
Osawatomie, Kansas 66064
The Subscription Offering period deadline is 12:00 Noon, Osawatomie, KS Time
March ___, 1998.
- --------------------------------------------------------------------------------
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A STOCK
ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY CONTACTING THE
STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR
ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
- --------------------------------------------------------------------------------
<PAGE>
YOU'RE INVITED
You are cordially invited to attend our Community Meeting where you will find
out more about First Kansas Federal Savings Association and our stock offering
including...
o A presentation by senior management discussing First Kansas Federal
Savings Association strategy and performance.
o An explanation of First Kansas Federal Savings Association plan for
converting to a stock form of ownership.
o A question and answer period, followed by a reception where you can
personally meet and talk with the officers and directors of First
Kansas Savings.
There will be no sales pressure. You will receive First Kansas Financial
Corporation stock offering materials, including a prospectus. It is up to you to
decide if a stock purchase matches your investment objectives.
For more details on First Kansas Financial Association stock offering, attend
this informative and convenient Community Meeting:
Location:
Date:
Time:
Seating is limited, so please call and reserve your seat. To make a reservation
or to receive a prospectus, call (913) 755-3350.
Share Our Future.
- --------------------------------------------------------------------------------
THIS ANNOUNCEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A STOCK
ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY CONTACTING THE
STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A DEPOSIT OR
ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
- --------------------------------------------------------------------------------
<PAGE>
1. Letter to Members and Friends (Closed Accounts)
May ___, 1998
Dear Members and Friends:
The Board of Directors of First Kansas Federal Savings Association
("First Kansas, FSA") has adopted a plan to convert from a federally chartered
mutual savings and loan association to a federally chartered stock savings Bank
(the "Conversion"). As a stock company, First Kansas FSA will be structured
under the same form of ownership used by most businesses and banks. This
Conversion to stock ownership means First Kansas FSA will increase its capital
and will enable First Kansas FSA to support future banking activities. The
Conversion will not affect your deposit accounts or loans with First Kansas FSA
or existing FDIC insurance coverage for your deposit accounts.
As part of the Conversion, First Kansas FSA has formed a holding company,
First Kansas Financial Corporation will own all of the common stock of First
Kansas FSA. First Kansas Financial Corporation is offering up to 1,351,250
shares of its common stock to customers of First Kansas FSA at a subscription
price of $10.00 per share. As a depositor on either September 30, 1996, March
30, 1998, or April 30, 1998, or, as a borrower, you have a preferential right to
subscribe to purchase the stock of First Kansas Financial Corporation during the
Subscription Offering without paying a fee or commission. For your convenience
this packet includes the following material:
o PROSPECTUS containing detailed information about First Kansas FSA and
the stock offering. Please read the Prospectus carefully before
making your investment decision.
o BROCHURE which answers questions about the Conversion and stock
offering.
o STOCK ORDER FORM and CERTIFICATION to be completed in order to
purchase shares of First Kansas Financial Corporation stock. Payment
by check or written authorization to withdraw from a specified First
Kansas FSA account must accompany each order form and certification.
Orders of $25,000 or more must be paid by Amsterdam Federal account
withdrawals, certified funds, cashier's check, or money order. Order
forms must be received by First Kansas FSA no later than 12:00 noon,
Osawatomie, Kansas time on _________, 1998.
If you would like to purchase First Kansas Financial Corporation stock in
your IRA account, using IRA funds, we may be able to accommodate you. Please
contact the Stock Center as soon as possible at (913) 755-3350.
<PAGE>
Letter to Members and Friends
Page 2
If you are a current member of First Kansas FSA, you will also find
enclosed a proxy statement and proxy card(s). On behalf of the Board, we ask
that you help First Kansas FSA take this important step by signing the enclosed
proxy card(s), casting your vote in favor of the Plan of Conversion. Your vote
is very important! Please mail your proxy card(s) today in the enclosed postage
paid return envelope.
We believe it is in the best interest of First Kansas FSA to have our
customers and members of the communities we serve as our stockholders. We
encourage you to review this investment opportunity carefully. If you have any
questions, please call the Stock Center at (913) 755-3350.
Sincerely,
Larry V. Bailey
President and Chief
Executive Officer
Enclosures
- --------------------------------------------------------------------------------
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A
STOCK ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY
CONTACTING THE STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A
DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
- --------------------------------------------------------------------------------
<PAGE>
2. Letter for branch packages, Stock Center, non-members.
May ___, 1998
Dear Prospective Investor:
First Kansas Federal Savings Association ("First Kansas FSA") is
converting from a federal mutual savings and loan association to a federal stock
savings bank (the "Conversion").
As part of the Conversion, First Kansas FSA has formed a holding company,
First Kansas Financial Corporation which will own all of the common stock of
First Kansas FSA. First Kansas Financial Corporation is offering to customers of
First Kansas FSA up to 1,351,250 shares of its common stock at a purchase price
of $10.00 per share. Even if you are not currently a member of First Kansas FSA,
you may have the opportunity to purchase shares without paying a fee or
commission. Members have priority rights to purchase shares in the Subscription
Offering and no assurance can be given that your order will be filled.
For your convenience, enclosed are the following materials:
o PROSPECTUS containing detailed information about First Kansas FSA
and the stock offering. Please read the prospectus carefully
before making your investment decision.
o STOCK ORDER FORM and CERTIFICATION to be completed in order to
purchase shares of First Kansas Financial Corporation stock.
Payment by check or written authorization to withdraw from a
specified First Kansas FSA account must accompany each order form
and certification. Orders of $25,000 or more must be paid by
First Kansas FSA account withdrawals, certified funds, cashier's
check or money orders. If you are interested in purchasing shares
of First Kansas Financial Corporation stock, your completed stock
order form and certification along with payment must be received
by First Kansas FSA by no later than 12:00 noon, Osawatomie,
Kansas time on ________, 1998.
We encourage you to review this investment opportunity carefully. If you
have any questions, please call our Stock Center at (913) 755-3350.
<PAGE>
Letter for Branch Packages, Stock Center, non-members
Page 2
We are pleased to offer you this opportunity to invest in First Kansas
Financial Corporation
Sincerely,
Larry V. Bailey
President and Chief
Executive Officer
Enclosures
- --------------------------------------------------------------------------------
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A
STOCK ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY
CONTACTING THE STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A
DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED
- --------------------------------------------------------------------------------
<PAGE>
3. Capital Resources Cover Letter to Blue Sky States
May __, 1998
To Depositors and Friends of First Kansas Federal Savings Association:
Capital Resources, Inc. is an NASD member broker/dealer assisting First
Kansas FSA Savings and Loan Association ("First Kansas FSA") in its conversion
from a mutual to a stock organization.
At the request of First Kansas FSA and First Kansas Financial
Corporation, the proposed parent holding company of First Kansas FSA, we enclose
certain materials regarding the sale and issuance of common stock in connection
with the conversion of First Kansas FSA. These materials include a prospectus
which offers you the opportunity to subscribe to purchase shares of common stock
of First Kansas Financial Corporation
We have been asked to forward these documents to you in view of certain
requirements of the securities laws of your state. We should not be understood
as recommending or soliciting in any way any action by you with regard to the
enclosed materials. If you have any questions, please contact us at the Stock
Center at (913) 755-3350.
Very truly yours,
Capital Resources, Inc.
Enclosures
BD
- --------------------------------------------------------------------------------
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
THESE SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS ACCOMPANIED BY A
STOCK ORDER FORM AND CERTIFICATION, COPIES OF WHICH MAY BE OBTAINED BY
CONTACTING THE STOCK CENTER. THE COMMON STOCK OFFERED IN THE CONVERSION IS NOT A
DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
- --------------------------------------------------------------------------------
================================================================================
FIRST KANSAS FEDERAL
SAVINGS ASSOCIATION
(To be renamed First Kansas Federal Savings Bank)
Osawatomie, Kansas
CONVERSION VALUATION
APPRAISAL REPORT
As Of:
March 6, 1998
Prepared By:
CAPITAL RESOURCES GROUP, INC.
1211 Connecticut Avenue, NW
Suite 200
Washington, D.C. 20036
================================================================================
<PAGE>
[LOGO] Capital Resources Group, Inc.
1211 Connecticut Ave., N.W. - Suite 200 - Washington, DC 20036 -
Tel (202) 466-5685 - Fax (202) 466-5695
March 6, 1998
Board of Directors
First Kansas Federal Savings Association
600 Main Street
Osawatomie, Kansas 66064
Dear Board Members:
At your request, we hereby provide an independent appraisal of the
estimated pro forma market value of the common stock of First Kansas Financial
corporation ("Holding Company") to be issued upon conversion of First Kansas
Federal Savings Association ("First Kansas" or the "Association") from a mutual
to stock form and upon the issuance of the Association's common stock to the
Holding Company, a newly formed corporation which is a unitary savings and loan
holding company. It is anticipated that, initially, the sole subsidiary of the
Holding Company will be the Association. As part of the conversion, the
Association will change its name to "First Kansas Federal Savings Bank". This
appraisal is furnished pursuant to the requirements of Regulation 563b.7 and the
"Guidelines for Appraisal Reports for the Valuation of Savings Institutions
Converting from Mutual to Stock Form of Organization" of the Office of Thrift
Supervision ("OTS").
Capital Resources Group, Inc. ("CRG") is an investment banking and
financial consulting firm that specializes in financial valuations and analyses
of business enterprises and securities. The background and experience of CRG is
detailed in Exhibit V-1. We believe that, except for the fee we will receive for
our appraisal, we are independent of the Association.
In preparing our appraisal, we have reviewed First Kansas' Application for
Approval of Conversion, including the Proxy Statement, as filed with the OTS. We
have conducted an analysis of the Association that has included discussions with
the Association's management, with KPMG Peat Marwick LLP., the Association's
independent auditor, and with the firm of Malizia, Spidi, Sloane & Fisch, P.C.,
the Association's conversion counsel. In addition, where appropriate, we have
considered information based on other available published sources that we
believe are reliable; however, we cannot guarantee the accuracy and completeness
of such information.
We investigated the competitive environment within which First Kansas
operates and have assessed the Association's relative strengths and weaknesses.
Our analysis included an examination of the potential effects of conversion on
First Kansas' operating characteristics and financial performance as they
related to the pro forma market value of the Holding Company. We also have
reviewed, among other things, the economy in First Kansas' primary market area
and have compared the Association's financial performance and condition with
that of companies in Kansas, nationally and with that of a selected group of
publicly-traded companies. We have reviewed conditions in the
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
March 6, 1998
Page 2
securities markets in general and in the market for thrift stock in particular.
We also have considered the expected market for the Holding Company's common
stock after conversion.
In preparing our appraisal, we have relied upon and assumed the accuracy
and completeness of financial and statistical information provided by the
Association and the Association's independent auditors. We did not independently
verify the financial statements or other information provided by the
Association. Our appraisal is based on the Association's representation that the
information contained in the Prospectus and Proxy Statement and additional
evidence furnished to us by the Association are truthful, accurate and complete.
It is our opinion that, as of March 6, 1998, the estimated pro forma market
value of the Holding Company's (and, therefore, the Association's)
to-be-outstanding common stock was $11,750,000, or 1,175,000 shares at $10.00
per share. The resultant range of value was $9,987,500, or 998,750 shares at
$10.00 per share, to $13,512,500, or 1,351,250 shares at $10.00 per share.
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections to a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to sell such
shares at prices related to the foregoing valuation of the pro forma market
value thereof.
The valuation will be updated as provided for in the OTS conversion
regulations and guidelines. Any updates will consider, among other things, any
developments or changes in the Association's financial performance and
condition, management policies and current conditions in the equity markets for
thrift shares. Should any such new developments or changes be material, in our
opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in detail at that time.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
/s/Michael B. Seiler
--------------------------------------------------
Michael B. Seiler
Enclosure
<PAGE>
CAPITAL RESOURCES GROUP, INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
CHAPTER DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <C>
I. DESCRIPTION OF FIRST KANSAS 1.1
Overview of First Kansas Federal Savings Association 1.1
Balance Sheet Trends 1.3
Loan Portfolio 1.6
One-to-Four Family Residential Real Estate Lending 1.7
Second Mortgage/Home Improvement Loans 1.8
Residential Construction and Land Loans 1.8
Multifamily and Commercial Real Estate Loans 1.9
Consumer Loans 1.10
Commercial Business Loans 1.10
Asset Quality 1.10
Investment Securities and Cash Equivalents 1.12
Mortgage-Backed Securities 1.12
Deposits 1.14
Asset/Liability Management 1.15
Income and Expense Trends 1.16
Properties 1.19
Service Corporation 1.20
Personnel and Miscellaneous 1.20
II. MARKET AREA ANALYSIS 2.1
III. COMPARISONS WITH PUBLICLY-HELD THRIFTS 3.1
Chapter Overview 3.1
Introduction 3.2
Selection Criteria 3.2
Selection Procedure 3.6
Review of Comparative Group Thrifts 3.6
Financial Comparisons 3.10
IV. MARKET VALUE DETERMINATION 4.1
Introduction 4.1
Quality and Predictability of Earnings/Earnings Growth Potential 4.1
Financial Strength 4.4
Capital Levels 4.4
Asset/Liability Position 4.4
Asset Quality 4.5
Market Area 4.6
Dividend Payments 4.8
Management and Employee Staffing 4.9
Liquidity of the Issue 4.10
Subscription/Community Interest and Historical Overview 4.10
Stock Market Environment 4.13
Valuation Approach 4.17
Valuation Conclusion 4.20
</TABLE>
<PAGE>
CAPITAL RESOURCES GROUP, INC.
LIST OF TABLES
<TABLE>
<CAPTION>
TABLE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
Chapter I
1.1 Selected Balance Sheet Items 1.4
1.2 Non-Performing Assets 1.11
1.3 Investment and Mortgage-Backed Securities Portfolio 1.14
1.4 Income and Expense Trends 1.17
Chapter III
3.1 Comparative Group Selection Criteria 3.5
3.2 Earning Asset Composition 3.7
3.3 Key Financial Indicators 3.12
Chapter IV
4.1 Thrift Stock Index 4.14
4.2 Comparative Pricing Analysis 4.20
4.3 Recent Standard Conversions 4.21
4.4 Pro Forma Comparison 4.23
</TABLE>
<PAGE>
1.1
CAPITAL RESOURCES GROUP, INC.
I. DESCRIPTION OF FIRST KANSAS FEDERAL SAVINGS ASSOCIATION
Overview of First Kansas Federal Savings Association
- ----------------------------------------------------
First Kansas Federal Savings Association ("First Kansas" or the
"Association") is a federally chartered savings and loan association
headquartered in Osawatomie, Kansas. The Association was originally established
in 1899 as a Kansas mutual savings and loan association. The Association has
operated under a federal charter since 1938. First Kansas is a member of the
Federal Home Loan Bank ("FHLB") System and its deposits are insured up to the
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). At December 31, 1997, the
Association had total assets of $95.7 million, deposits of $85.9 million and
total equity, as calculated under generally accepted accounting principles
("GAAP"), of $6.6 million or 6.9 percent of total assets.
In 1964, the Association opened its first branch in Paola, Kansas and
opened a second branch in 1974 in Louisburg, Kansas. These two branches, like
the Association's main office, are located in Miami County. In 1981, the
Association opened a branch at Fort Scott, Kansas in Bourbon County attempting
to diversify geographically. This office proved very successful in generating
deposits and by 1982 the Association's asset size stood at $54 million.
In November of 1982, the Association continued its expansion plans by
acquiring the liabilities of North Kansas Savings Association, an insolvent
institution which was in receivership with the FSLIC. With this acquisition, the
Association added offices in Beloit, Kansas and Phillipsburg, Kansas in the
counties of Mitchell and Phillips, respectively. The Association also changed
its name from First Federal Savings and Loan Association of Osawatomie to First
Kansas Federal Savings Association at that time and its asset size grew to $85
million.
<PAGE>
1.2
Two of the counties, where four of the Association's six offices are
located, are situated in east central Kansas, south of Kansas City. The
Association's two other offices, in Beloit and Phillipsburg, are situated in
north central Kansas and are between 250 and 300 miles away from the main
office. While all the economies in First Kansas' market areas are largely driven
by agriculture, the east central locations are becoming more and more influenced
by the urban sprawl to the north. The two north central offices are located in
more rural areas which have experienced population declines and very limited
economic growth over the last decade.
Like many other thrift institutions, First Kansas has experienced
interest rate spread erosion during the two last years. Narrower interest rate
spreads are at least partially due to the intense rate competition in the Kansas
City area, including Miami County, which is reflected by high deposit rates and
low lending rates. Management believes that this rate competition will continue
to limit interest rate spread growth potential.
First Kansas is committed to meeting the residential mortgage and deposit
needs of its customers in the Association's local market areas, emphasizing the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one-to-four family residential properties. In recent
years the Association has become more active in the origination of automobile,
deposit account and home improvement loans as well as other types of consumer
loans. To a lesser extent, First Kansas originates multi-family and commercial
real estate mortgage loans in its local market areas. At December 31, 1997,
First Kansas net loans receivable totaled $46.6 million (48.7 percent of total
assets), of which 42.9 million or 91.6 percent consisted of permanent
one-to-four family residential mortgage loans. Consumer loans, the second
largest loan-category, amounted to $1.7 million or 3.7 percent of gross loans.
The Association has augmented its loan portfolio investments with interest
earning deposits and purchases of U.S. Government and agency
<PAGE>
1.3
securities, collateralized mortgage obligations ("CMOs") and mortgage-backed
securities. At December 31, 1997 interest earning deposits totaled $3.4 million
(3.6 percent of assets), investment securities totaled $3.9 million (4.0 percent
of assets), collateralized mortgage obligations "CMOs" totaled $31.7 million
(33.1 percent of assets) and mortgage-backed securities totaled $6.1 million
(6.4 percent of total assets).
Balance Sheet Trends
- --------------------
As shown in Table 1.1, First Kansas' total assets have increased overall
from $93.2 million at December 31, 1993 to $95.7 million at December 31, 1997,
although growth has been erratic. The Association's asset base actually
increased to $101.2 million at December 31, 1996, before declining in fiscal
1997. First Kansas' level of net loans receivable increased from $34.4 million
(36.9 percent of assets) at December 31, 1993 to $46.6 million (48.7 percent of
assets) at December 31, 1997. One-to-four family mortgage loans represent the
greatest proportion of First Kansas' loans (91.6 percent of total loans at
December 31, 1997). The majority of the Association's loans ($33.3 million or
70.9 percent of total loans) carry adjustable rates of interest. The
Association's level of investment securities (including FHLB stock) declined
over the past five fiscal years, from $6.1 million (6.6 percent of assets) at
December 31, 1993 to $4.5 million at December 31, 1997 (4.7 percent of assets)
while cash and cash equivalents increased from $1.0 million (1.1 percent of
assets) to $4.6 million (4.8 percent of assets) over the same time period.
Overall, the Association's level of cash, cash equivalents and investment
securities increased by $2.0 million between December 31, 1993 and December 31,
1997. At December 31, 1997, First Kansas' investment securities portfolio
consisted of U.S. Government and agency obligations and FHLB stock.
<PAGE>
1.4
Table 1.1
Table 1.1
First Kansas Federal Savings
Selected Balance Sheet Items
(Dollars in Thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
At December 31,
---------------------------------------------------------------------------------------------
1993 % Assets 1994 % Assets 1995 % Assets 1996 % Assets 1997 % Assets
=============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Assets $ 93,192 100.00% $ 90,325 100.00% $ 91,192 100.00% $101,245 100.00% $ 95,655 100.00%
Cash and Cash Equivalents (1) 1,037 1.11% 2,395 2.65% 2,305 2.53% 4,222 4.17% 4,600 4.81%
Investment Securities 5,548 5.95% 5,409 5.99% 4,341 4.76% 2,800 2.77% 3,852 4.03%
FHLB Stock 568 0.61% 568 0.63% 577 0.63% 615 0.61% 661 0.69%
MBS, Held to Maturity 49,775 53.41% 47,436 52.52% 26,059 28.58% 24,861 24.56% 20,937 21.89%
MBS, Available for Sale 0 0.00% 2,748 3.04% 25,315 27.76% 23,723 23.43% 16,833 17.60%
Loans Receivable, net (2) 33,651 36.11% 29,705 32.89% 30,755 33.73% 42,827 42.30% 46,563 48.68%
Loans Held for Sale 699 0.75% 90 0.10% 76 0.08% 0 0.00% 0 0.00%
Real Estate Held for Development (3) 0 0.00% 0 0.00% 0 0.00% 554 0.55% 355 0.37%
Premium on Deposits Assumed 543 0.58% 482 0.53% 421 0.46% 361 0.36% 300 0.31%
Deposits 87,389 93.77% 84,098 93.11% 82,489 90.46% 83,723 82.69% 85,651 89.54%
Borrowings 0 0.00% 0 0.00% 1,900 2.08% 11,350 11.21% 2,550 2.67%
Total Equity 5,155 5.53% 5,655 6.26% 5,952 6.53% 5,795 5.72% 6,610 6.91%
--------------------------------------------------------------------------------------------
</TABLE>
(1) Includes cash, deposits in other financial institutions, and overnight FHLB
deposits.
(2) Loans receivable, net is comprised of total loans less allowances for loan
losses, deferred loan fees and the undisbursed portion of loans in process.
(3) The Association's subsidiary acquired a parcel of land 1995 in Paola,
Kansas for the purpose of development and sale. A portion of the parcel of
land will be used for an additional branch office.
Source: First Kansas Federal Savings's audited financial statements and internal
reports.
<PAGE>
1.5
The increase in loans and cash, cash equivalents and investment
securities over the past five years was partially offset by an decrease in the
Association's level of investment in mortgage-backed securities (including
CMOs). Between December 1993 and December 1997, First Kansas' portfolio of
mortgage-backed securities decreased from $49.8 million (53.4 percent of assets)
to $37.8 million (39.5 percent of assets), including $31.7 million of CMOs. The
Association's portfolio of mortgage-backed securities and CMOs consists
primarily of early and PAC tranche securities with average expected lives of
three to five years and adjustable rate mortgage pools. All of the Association's
pass-through certificates were insured or guaranteed by FHLMC, FNMA and GNMA,
while the CMOs were also insured or guaranteed by those agencies or rated triple
A if the CMOs were private label securities. At December 31, 1997, the
Association classified $20.9 million mortgage-backed securities and CMOs as held
to maturity and $16.8 million as available for sale.
The increase in First Kansas' asset base over the past five fiscal years
reflected the utilization of FHLB borrowings and a growth in retained earnings.
Total deposits decreased from $87.4 million (93.8 percent of assets) at December
31, 1993 to $85.7 million (89.5 percent of assets) at December 31, 1997. First
Kansas had outstanding balances of FHLB borrowings of $1.9 million, $11.4
million and $2.6 million at December 31, 1995, 1996 and 1997, respectively.
Reflecting a positive earnings stream between fiscal 1993 and 1997, First
Kansas' retained earnings or equity position has increased from $5.2 million or
5.5 percent of assets at December 31, 1993, to $6.6 million or 6.9 percent of
assets at December 31, 1997. First Kansas held capital in excess of all
regulatory capital requirements at December 31, 1997.
The Association's intangible asset account relating to premium on
deposits assumed decreased from $543,000 at December 31, 1993 to $300,000 at
December 31, 1997. 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
<PAGE>
1.6
$1,211,863. The Association is amortizing the premium over twenty years on the
straight-line method.
In 1995, the Association's service corporation, First Enterprises, Inc.,
acquired an eight acre parcel of land in Paola, Kansas for the purpose of
development and sale of seven commercial building lots, with one of the lots
being developed into a new branch office for First Kansas. The balance of real
estate held for development totaled $554,000 and $355,000 at December 31, 1996
and 1997, respectively. The Association is hopeful of selling all remaining lots
within the next two years.
Loan Portfolio
- --------------
The principal lending activity of First Kansas is the origination and
purchase of one-to-four family residential mortgage loans secured by first liens
on properties located within the Association's primary market areas. At December
31, 1997, the Association's net loan portfolio totaled $46.6 million,
representing 48.7 percent of the Association's total assets. The Association
primarily originates fixed and adjustable rate one-to-four family loans with
terms to maturity of up to 30 years. In addition to one-to-four family mortgage
loans, the Association originates second mortgage/home improvement loans also
secured by residential real estate, multi-family/commercial real estate loans,
land and construction loans, and various types of consumer loans. At December
31, 1997, the majority of the Association's gross loan portfolio was comprised
of adjustable rate loans.
Total loan originations in the fiscal years ended December 31, 1997 and
1996 were $12.4 million and $12.3 million, respectively, while total loan
purchases (all one-to-four family residential loans) were $2.9 million and $11.7
million in the same years. Originations of permanent and construction
one-to-four family residential mortgages represented approximately 81 percent
and 86 percent in fiscal 1997 and 1996, respectively. The Association sold $3.4
million and $5.6 million
<PAGE>
1.7
loans in fiscal 1997 and 1996, respectively. The Association currently sells all
FHA and VA residential mortgage loans and most longer term residential mortgage
loans into the secondary market and does not retain servicing rights to those
loans sold. At December 31, 1997, the Association's portfolio of loans serviced
for others totaled $1.4 million.
At December 31, 1997, the Association's loans-to-one borrower limit was
approximately $900,000. At the same date, the largest aggregate loan
relationship with one borrower was $1.0 million. This amount is made up of three
loans, each of which was in existence before the loan to one borrower limits
were imposed in 1989. None of these loans were past due 90 days or more on
December 31, 1997 or otherwise classified as non-performing.
One-to-Four Family Residential Real Estate Lending
The Association's primary lending focus is the origination and purchase
of loans secured by mortgages on one-to-four family residences. At December 31,
1997, $42.9 million or 91.6 percent of the Association's gross loan portfolio
consisted of permanent mortgage loans secured by owner-occupied one-to-four
family residences. Substantially all of the residential mortgage loans
originated by First Kansas are secured by properties located in the
Association's primary lending areas. From time to time, the Association
purchases or sells one-to-four family residential mortgage loans. These
purchases are generally from mortgage bankers in the Kansas City area.
The Association currently offers conventional fixed-rate loans, generally
with terms of 15 or 30 years, and adjustable rate mortgage ("ARM") loans which
are priced based on an index plus a stated margin. The volume of fixed-rate
versus ARM loans originated by the Association depends principally upon current
customer preference, which is generally driven by general economic and interest
rate conditions and the pricing offered by the Association's competitors. At
December 31, 1997, the majority of the Association's residential one-to-four
family first mortgage portfolio were ARMs. ARM loans originated typically
reprice annually, after the initial adjustment period of one
<PAGE>
1.8
year, three years or five years, with most having terms to maturity of 30 years.
These loans generally have a maximum interest rate adjustment of 1 percent per
year, with a lifetime maximum interest rate adjustment, measured from the
initial interest rate, of 5 percent.
First Kansas underwrites its one-to-four family residential first
mortgage loans to conform to the standards that are used in the mortgage
industry allowing the loans to be readily sold in the secondary market. First
Kansas holds in its portfolio all adjustable rate one-to-four family residential
first mortgage loans it originates. In addition to verifying income and assets
of borrowers, the Association obtains independent appraisals on residential
first mortgage loans with loan balances above a certain level and title
insurance is required at closing. Private mortgage insurance is generally
required on all loans with a loan to value ratio in excess of 80 percent.
Second Mortgage/Home Improvement Loans
First Kansas originates second mortgage loans for terms of up to 15 years
in amounts which, when added to any first lien on the property, does not exceed
$400,000. The Association also offers home improvement loans in amounts up to
$15,000 for terms up to 15 years, secured by a second lien on the residence.
Residential Construction and Land Loans
The Association offers residential single family construction
loans/permanent loans to persons who intend to occupy the property upon
completion of construction. Upon completion of construction, these loans are
automatically converted into permanent residential mortgage loans and classified
as such. The proceeds of the construction loan are advanced in stages on a
percentage of completion basis as construction progresses. The loans generally
provide for a construction period of not more than six months during which the
borrower pays interest only. In recognition of the risks involved in such loans,
the Association carefully monitors construction through regular inspections
<PAGE>
1.9
and the borrower must qualify for the permanent mortgage loan before the
construction loan is made. The Association's construction loans are underwritten
using the same criteria in the underwriting of one-to-four family mortgage
loans. At December 31, 1997, the Association had construction loans with an
outstanding principal balance of $126,000, or 0.3 percent of its gross loan
portfolio.
The Association also originates land loans which are secured by raw land
in its market area, to be used for agriculture or residential construction. At
December 31, 1997, land loans totaled $141,000 or 0.3 percent of the gross loan
portfolio.
Multifamily and Commercial Real Estate Loans
At December 31, 1997, the Association's multifamily and commercial real
estate loans totaled $1.6 million, which represented 3.3 percent of the
Association's gross loan portfolio. The Association's multifamily loans are
secured by multiple six-plex and four-plex units and its commercial real estate
loans are secured by office buildings, churches and other types of commercial
property.
The Association makes multifamily and commercial mortgage loans with loan
to value ratios up to 80 percent with terms of up to 30 years. With respect to
loans due after December 31, 1998, all of the Association's multifamily mortgage
loans and $390,000 of its commercial real estate loans had adjustable interest
rates and $144,000 of its commercial real estate loans had fixed interest rates.
The Association analyzes the qualifications and financial condition of the
borrower, including credit history, profitability and expertise, as well as the
value and condition of the underlying property. The factors considered by the
Association include the net operating income of the mortgaged premises before
debt service and depreciation; the debt coverage ratio (the ratio of net
earnings to debt service); and the ratio of loan amount to appraised value. The
Association generally requires a debt service coverage ratio of a minimum of 120
percent and the personal guarantee of the borrower. The Association also
requires an appraisal on the property conducted by an independent appraiser and
<PAGE>
1.10
title insurance. The Association's underwriting policies require that the
borrower be able to demonstrate management skills and the ability to maintain
the property from current rental income.
Consumer Loans
The Association offers consumer loans in order to provide a wider range
of financial services to its customers. The Association originates loans on
deposits accounts, automobile loans, secured or unsecured personal loans, and
personal term loans. Consumer totaled $1.7 million, or 3.6 percent of total
loans, at December 31, 1997. Direct automobile loans constitute the largest
portion of the consumer loan portfolio (approximately 56 percent). The
Association's consumer loans generally have an average term of not more than
five years and have interest rates higher than mortgage loans. These loans are
generally underwritten based upon the borrower's ability to repay and the value
of the collateral for the loan. Collateral value, except for loans secured by
Association deposits or marketable securities, is a secondary consideration
because personal property collateral generally rapidly depreciates in value, is
difficult to repossess, and rarely generates close to full value at a forced
sale.
Commercial Business Loans
The Association's commercial business loan portfolio is comprised of loans
to several local businesses, and at December 31, 1997 totaled $513,000 or 1.1
percent of the total loan portfolio.
Asset Quality
- -------------
Reflecting First Kansas' emphasis on one-to-four family residential
lending, the Association has maintained low levels of non-performing assets in
recent years. Non-performing assets totaled $79,000 or 0.08 percent of assets at
December 31, 1997 and $17,000 or 0.02 percent of assets at December 31, 1996. At
December 31, 1997, the Association's non-performing assets consisted of
<PAGE>
1.11
$75,000 of non-accruing one-to-four family mortgage loans and $4,000 of
non-accruing consumer loans.
Table 1.2
First Kansas Federal Savings Association
Non-Performing Assets
At December 31,
----------------------
1996 1997
---- ----
(dollars in thousands)
Non-accruing loans:
Residential 1-4 family real estate ................. $ 6 $75
Consumer loans: .................................... 11 4
--- ---
Total non-accrual loans ......................... 17 79
=== ===
Accruing loans past due 90 days or more:
Residential 1-4 family: ............................ -- --
Consumer ........................................... -- --
--- ---
Total loans past due 90 days
or more and still accruing ...................... -- --
--- ---
Total non-performing loans ...................... 17 79
Real estate owned .................................... -- --
Other non-performing assets .......................... -- --
--- ---
Total non-performing assets .......................... 17 79
=== ===
Non-performing loans
as a percent of total loans ..................... 0.04% 0.17%
Non-performing assets
as a percentage of total assets..................... 0.02% 0.08%
Source: First Kansas' Offering Prospectus
At December 31, 1997, the Association had $134,000 of classified assets
with $123,000 classified as "Substandard", $6,000 classified as "Doubtful
asset", $5,000 classified as "Loss asset" and no loans categorized by management
as "Special Mention". As of such date, First Kansas' allowances for loan losses
equaled $179,000 or 0.38 percent of total loans receivable.
<PAGE>
1.12
Investment Securities and Cash Equivalents
- ------------------------------------------
First Kansas' investment securities portfolio (including FHLB stock)and
cash equivalents totaled $8.5 million or 8.3 percent of total assets at December
31, 1997. At December 31, 1997, the Association's securities portfolios
consisted of $3.9 million of U.S. agency securities, $3.9 million of interest
bearing deposits in other financial institutions and $661,000 of FHLB stock. All
of the Association's investment securities were classified as held to maturity
at December 31, 1997. Approximately $800,000 of the Association's U.S. agency
securities portfolio had maturities of less than one year, $2.0 million had
maturities of between one and five years and $1.1 million had maturities of more
than ten years. At December 31, 1997, the Association did not own any securities
of a single issuer which exceeded 10 percent of the Association's retained
income, excluding those issued by the U.S. Government or its agencies.
Mortgage-Backed Securities
- --------------------------
In order to supplement loan production and achieve its asset/liability
management goals, the Association invests in mortgage-backed securities. At
December 31, 1997, the Association's mortgage-backed securities portfolio
including CMOs totaled $37.8 million or 39.5 percent of assets, $20.9 million of
which was classified as held to maturity and $16.8 million was classified as
available for sale. At December 31, 1997, all of the Association's pass-through
certificates were issued or guaranteed by FNMA, FHLMC or GNMA. With respect to
the remaining mortgage-backed securities, approximately $31.7 million or 83.9
percent of the Association's portfolio consists of collateralized mortgage
obligation ("CMOs").
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 mortgage-backed securities
<PAGE>
1.13
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 the 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 First
Kansas 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, the Association's CMO portfolio
classified as "available-for-sale" had a carrying value of $13.9 million, and
the Association's CMO portfolio classified as "held-to-maturity" had a carrying
value of $17.7 million.
A break down of First Kansas' investment and mortgage-backed securities
portfolios (including interest bearing deposits) is shown in Table 1.3.
<PAGE>
1.14
Table 1.3
First Kansas Federal Savings Association
Investment and Mortgage-Backed Securities Portfolio
December 31, 1997
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1997 1996
----------- --------
(In thousands)
<S> <C> <C>
Investments:
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................................... 3,949 3,811
FHLB stock ................................................... 661 615
------ ------
Total investments........................................... $46,232 $55,810
------- -------
</TABLE>
Source: First Kansas' Offering Prospectus and audited financial statements.
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 account, 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 on deposits are set weekly at the direction of
senior management. Interest rates are determined based on our liquidity
requirements, interest rates paid by the Association's competitors, and growth
goals and applicable regulatory restrictions and requirements.
Regular savings, money market demand and NOW accounts constituted $29.4
million, or 34.3 percent, or the deposit portfolio at December 31, 1997.
Certificates of deposit constituted $56.3 million or 65.7 percent of the deposit
portfolio of which $3.1 million or 3.6 percent of the deposit
<PAGE>
1.15
portfolio were certificates of deposit with balances of $100,000 or more. Such
deposits are offered at negotiated rates. As of December 31, 1997, First Kansas
had no brokered deposits.
Asset/Liability Management
- ---------------------------
Since the advent of deregulation and the adjustable rate mortgage, First
Kansas had acknowledged the importance of restructuring its loan portfolio in an
effort to reduce interest rate risk. Through a combination of fixed rate loan
originations and a concentrated effort to generate adjustable mortgage loans,
the Association now feels very comfortable about the mix of assets which allows
it to balance its interest rate risk profile with its projected profitability.
It is recognized by management that the Association cannot be perfectly
insulated from interest rate fluctuations if it is to maintain a profitable and
quality loan portfolio, so it has structured a program of lending that it deems
most appropriate for the long term viability of the Association. Where the
Association once avoided fixed rate loans for its portfolio, it now is in a
position to retain more fixed rate loans because of its more favorable
risk-based capital position.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the
Association has instituted certain other asset and liability management
measures, including the following measures:
o Purchase a significant amount of mortgage backed and related
securities with adjustable rates or estimated lives of five to ten
years or less.
o Sell into the secondary market approximately 50 percent of fixed rate
one-to-four family residential mortgage loan originations and hold in
portfolio all adjustable rate mortgage loan originations.
o Maintain moderate levels of interest bearing deposits and U.S.
Government securities with short to intermediate maturities.
o Maintain a high proportion of lower-costing, non-CD accounts in the
deposit portfolio. At December 31, 1997, such deposits totaled $29.4
million or 34.3 percent of total deposits.
<PAGE>
1.16
Income and Expense Trends
- -------------------------
As shown in Table 1.4, the Association's net income level decreased from
$878,000 or a 94 basis point return on average assets ("ROA") to $171,000 or an
ROA of 18 basis points between the fiscal year ended December 31, 1993 and 1996.
In the 1997 fiscal year, the Association's net income increased to $672,000 or
an ROA of 68 basis points primarily due to a wider net interest margin, an
increase in non-interest income, a decrease in non-interest operating expenses,
and a decrease in SAIF premiums. In fiscal 1996, the Association's net income
was significantly reduced due to the special SAIF assessment of $545,000 or 57
basis points.
Between the fiscal years ended December 31, 1993 and 1996, First Kansas'
net interest income decreased from 3.12 percent to 2.63 percent of average
assets. During this period, the Association's decreasing net interest margin
level reflected a modest increase in interest income that was more than offset
by a larger increase in interest expense. First Kansas' net interest income
increased to 2.70 percent of average assets in fiscal 1997 due primarily to an
increase in interest income that was partially offset by a smaller increase in
interest expense. Between fiscal 1993 and 1994, the Association's interest
income decreased from 7.02 percent of average assets to 6.41 percent before
increasing to 7.00 percent in fiscal 1997. First Kansas' interest expense
decreased from 3.90 percent of average assets to 3.56 percent between fiscal
1993 and 1994 before increasing to 4.31 percent in fiscal 1997. The
Association's decreasing net interest margin through fiscal 1996 reflected
narrowing net interest rate spreads, which moderately increased in fiscal 1997.
The generally increasing rate environment during 1997 increased the
Association's average cost of funds from 4.56 percent for fiscal 1996 to 4.63
percent for fiscal 1997. During the same time period, the Association's yield on
earning assets increased from 7.00 percent to 7.15 percent, resulting in an
<PAGE>
1.17
Table 1.4
First Kansas Federal Savings
Income and Expense Trends
(Dollars in Thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
For the Fiscal Year Ended December 31,
--------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
($000) (%) ($000) (%) ($000) (%) ($000) (%) ($000) (%)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets (1) 93,192 91,759 90,759 96,219 98,450
Interest Income 6,541 7.02% 5,886 6.41% 6,106 6.73% 6,544 6.80% 6,895 7.00%
Interest Expense (3,629) 3.90% (3,267) 3.56% (3,668) 4.04% (4,016) 4.17% (4,239) 4.30%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Net Interest Income 2,912 3.12% 2,619 2.85% 2,438 2.69% 2,528 2.63% 2,656 2.70%
Loan Loss Provision 23 0.02% 2 0.00% 1 0.00% 0 0.00% 35 0.04%
-- ---- - ---- - ---- - ---- -- ----
Net Interest Inc. after Prov 2,889 3.10% 2,617 2.85% 2,437 2.69% 2,528 2.63% 2,621 2.66%
Gain on Sale of Loans 263 0.28% 186 0.20% 91 0.10% 133 0.14% 67 0.07%
Gain (Loss) on Sale of Securities 82 0.09% 2 0.00% 0 0.00% (4) 0.00% 55 0.06%
Gain on Sale of Real Estate
Held for Development 0 0.00% 0 0.00% 0 0.00% 0 0.00% 35 0.04%
Loan Fees and Service Charges 154 0.17% 160 0.17% 305 0.34% 489 0.51% 587 0.60%
Other Non-Interest Income 43 0.05% 39 0.04% 66 0.07% 92 0.10% 107 0.11%
-- ---- -- ---- -- ---- -- ---- --- ----
Total Non-Interest Income 542 0.58% 387 0.42% 462 0.51% 710 0.74% 851 0.86%
Special SAIF Assessment 0 0.00% 0 0.00% 0 0.00% 545 0.57% 0 0.00%
Other Non-interest Operating Expenses 2,023 2.17% 2,084 2.27% 2,294 2.53% 2,407 2.50% 2,351 2.39%
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total Non-Interest Operating Expenses 2,023 2.17% 2,084 2.27% 2,294 2.53% 2,952 3.07% 2,351 2.39%
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Income before Income Taxes 1,408 1.51% 920 1.00% 605 0.67% 286 0.30% 1,121 1.14%
Provision for Income Taxes 530 0.57% 346 0.37% 242 0.27% 115 0.12% 449 0.46%
--- ---- --- ---- --- ---- --- ---- --- ----
Net Income 878 0.94% 574 0.63% 363 0.40% 171 0.18% 672 0.68%
------------------------------------------------------------------------------------------
</TABLE>
(1) Ending assets at December 31, 1993.
Source: First Kansas Federal Savings's audited financial statements and internal
reports.
<PAGE>
1.18
overall increase in the yield/cost spread to 2.52 percent for fiscal 1997 versus
2.44 percent for fiscal 1996.
First Kansas' earnings have not been materially impacted by loan loss
provisions over the past five fiscal years due to the Association's high asset
quality and low charge-off experience. First Kansas' loan loss provisions have
fluctuated between 0 and 4 basis points between fiscal 1993 and 1997. For the
fiscal year ended December 31, 1997, the Association recorded a loan loss
provision of $35,000 or 4 basis points while the Association did not record any
loan loss provisions in fiscal 1996. The increase in provisions reflects the
increase in the size of the loan portfolio during the last three years. The
Association's non-performing assets at December 31, 1997 consisted of
one-to-four family residential mortgage loans ($75,000) and consumer loans
($4,000) which were accounted for on a non-accrual basis.
First Kansas has generated increasing levels of non-interest operating
income in recent years. Non-interest income, exclusive of gains on sale of loans
and securities, increased from $197,000 or 21 basis points in fiscal 1993 to
$729,000 or 74 basis points in fiscal 1997. Such income is comprised of loan and
deposit fees and service charges, insurance commissions and other miscellaneous
income. The growth in deposit fees largely reflects the Association's heavy
promotion of checking accounts during the last three years.
First Kansas' earnings stream between fiscal 1993 and 1997 was positively
impacted by gains on the sale of loans and securities. Such gains ranged from
$91,000 (10 basis points) in fiscal 1995 to $345,000 (37 basis points) in fiscal
1993. For the fiscal year ended December 31, 1997, the Association recorded
gains on the sale of loans and securities of $122,000 or 13 basis points. The
majority of gains recorded in the past five fiscal years were gains on the sale
of loans relating to the Association's mortgage banking operation which was
temporarily halted at the end of 1997.
<PAGE>
1.19
First Kansas' operating expense ratio increased from 2.17 percent of
average assets for fiscal 1993 to 3.07 percent in fiscal 1996 before decreasing
to 2.39 percent in fiscal 1997. Operating expenses in fiscal 1996, which totaled
$3.0 million or 3.07 percent of average assets, included a special SAIF
assessment of $545,000 or 57 basis points. Reflecting the implementation and
growth of its checking account program, First Kansas' expense ratio is slightly
higher relative to peer group levels. However, the Association has implemented
an austere approach to expense containment which it believes has resulted in
very efficient use of existing personnel.
Properties
- ----------
The following table sets forth information relating to each of the
Association's offices. The net book value of the Association's premises at
December 31, 1997 was $476,000.
<TABLE>
<CAPTION>
Leased/ Year
Location Owned Acquired Net Book Value
-------- ----- -------- --------------
<S> <C> <C> <C>
Main office:
600 Main Street
Osawatomie, Kansas 66064 Owned 1974 $ 198,000
Branch Offices:
125 North Mill Street
Beloit, Kansas 67420 Leased 1984 2,200
2205 South Main Street
Fort Scott, Kansas 66701 Owned 1981 161,000
100 West Amity Street
Louisburg, Kansas 66053 Owned 1974 55,000
29 West Wea Street
Paola, Kansas 66071 Owned 1964 60,000
762 4th Street
Phillipsburg, Kansas 67661 Leased 1984 ----
</TABLE>
<PAGE>
1.20
The Association is in the process of building a new office in Paola, Kansas.
It is to be located at 1310 Baptiste Drive, Paola, Kansas 66071. This office,
which is expected to be completed in June 1998, will, including the land, cost
approximately $1.1 million. At December 31, 1997, capitalized construction and
land costs totaled $355,000. After the Association takes occupation of the new
facility, the existing Paola office will be sold.
Service Corporation
- -------------------
The Association had one wholly-owned service corporation at December 31,
1997, First Enterprises, Inc. (FEI). In recent years, it 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 of
1995, the board of directors of First Kansas agreed to purchase and develop
through FEI an 8.3 acres tract of land in Paola as seven commercial sites to be
known as Baptiste Commons, one of which would be a proposed site for a new
office building replacing the Association's existing Paola facility. The
Association's investment in this real estate development project will continue
to decline as all of the remaining lots are eventually sold. At December 31,
1997, the total investment in real estate held was $355,000.
Personnel and Miscellaneous
- ---------------------------
At December 31, 1997, the Association had 31 full-time employees and 7
part-time employee.
From time to time, the Association is involved as plaintiff or defendant
in various legal proceedings arising in the normal course of its business.
Currently, there were no legal proceedings to which First Kansas was a party
which were expected by management to result in a material loss to the
Association or have a material effect on its financial position.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
II. MARKET AREA REVIEW
First Kansas conducts business from its main office in Osawatomie
(population of approximately 5,000) and five branch offices in Paola (population
of approximately 6,500), Louisburg (population of approximately 3,100), Fort
Scott (population of approximately 8,100), Beloit (population of approximately
4,100), and Phillipsburg (population of approximately 2,600), Kansas. The
Association's main office in Osawatomie and branch offices in Paola and
Louisburg are located in Miami County (population of approximately 26,300) while
the Fort Scott office is located in Bourbon County (population of approximately
15,200), the Beloit office is located in Mitchell County (population of
approximately 7,100), and the Phillipsburg office is located in Phillips County
(population of approximately 6,100).
Osawatomie is located approximately 50 miles south of downtown Kansas
City. Four of the Association's offices (Osawatomie, Paola, Louisburg and Fort
Scott) are located in east central Kansas along the Missouri border and
immediately south of the Kansas City metropolitan area, and two offices (Beloit
and Phillipsburg) are located in north central Kansas. The Association considers
Linn and Johnson Counties, Kansas to be part of its primary market area for
attracting deposits and lending in addition to the counties in which the
Association has office locations. Linn and Johnson Counties are contiguous to
Miami and Bourbon Counties. Also, Miami and Johnson Counties are included in the
Kansas City Metropolitan Statistical Area and as a result are experiencing more
rapid growth than other surrounding counties. The majority of the First Kansas'
lending activity occurs in Miami County where the Association has its main
office and two branch offices.
<PAGE>
2.2
The local markets that surround the Association's retail offices are
characterized as mature areas of low unemployment with stable and healthy
economies, however, with limited economic and demographic growth. The
Association's Beloit and Phillipsburg offices located in north central Kansas,
in particular, are supported by an older population base with limited borrowing
needs. The economy surrounding First Kansas' office locations is rural and
agricultural in nature, but Miami County is influenced by the Kansas City MSA.
The Fort Scott, Beloit and Phillipsburg offices are located in the largest
cities and county seats of their respective counties. Fort Scott is the largest
local city and has a broader base of industry.
The local communities in and around Osawatomie do not contain major
employers. A significant percentage of the local area residents commute north to
Kansas City to work. However, the existence of a very large base of employment
opportunities in the Kansas City metropolitan area serves to maintain the
economic stability of the Association's local market areas.
Since the Association's customer base for loans and deposits are
primarily drawn from Miami, Bourbon, Mitchell and Phillips Counties, the
counties in which First Kansas' six offices are located, this section provides
economic and demographic data on these four counties.
The population of Miami County significantly increased between 1985 and
1997 while Bourbon, Mitchell and Phillips Counties' populations declined. In
1997, Miami County registered a 26,300 population count, which was a 19.5
percent increase from the population level in 1985. Over the same period of
time, Bourbon, Mitchell and Phillips Counties experienced a 3.2 percent, 9.0
percent and 12.9 percent population decrease, respectively. At June 30, 1997,
Bourbon, Mitchell and Phillips Counties' population count was 15,200, 7,100 and
6,100, respectively. Projections for the five year period between 1997 and 2002
indicate that Miami County's populations are expected
<PAGE>
2.3
to continue growing at a notable rate (8.5 percent) and Mitchell and Phillips
Counties' population are expected to moderately decline while Bourbon Counties'
population is expected to modestly increase.
The per capita income level in Mitchell and Phillips Counties is
significantly higher than in Miami and Bourbon Counties, and moderately lower
than the state and national averages. Mitchell and Phillips Counties' per capita
income was $20,007 and $20,021 in 1994, respectively, compared to $17,983 and
$16,605 for Miami and Bourbon Counties, respectively, and $20,760 and $21,696
for the State of Kansas and the U.S., respectively. The increase in Mitchell and
Phillips Counties' per capita incomes between 1985 and 1994 out paced the state
and national increases while the increase in Miami and Bourbon Counties' per
capita incomes trailed both averages over the same period.
In 1994, industries which accounted for the largest percentage of
earnings in Miami County were the government industry (30.1 percent) followed by
the service industry (19.5 percent). Construction, manufacturing, and the
wholesale and retail trade industries also accounted for a noteworthy percentage
of earnings in Miami County. The industries which accounted for the largest
percentage of earnings in Bourbon County were the manufacturing industry (24.7
percent) followed by the service industry (24.4 percent). Government and the
wholesale and retail trade industries also accounted for a noteworthy percentage
of earnings in Bourbon County. The industries which accounted for the largest
percentage of earnings in Mitchell County were the government industry (20.5
percent) followed by the wholesale and retail trade industry (19.5 percent).
Service, farming and manufacturing industries also accounted for a noteworthy
percentage of earnings in Mitchell County. The industries which accounted for
the largest percentage of earnings in Phillips County
<PAGE>
2.4
were the government industry (20.2 percent) followed by the manufacturing
industry (16.4 percent). Service, transportation and public utilities, wholesale
and retail trade, and the farming industries also accounted for a noteworthy
percentage of earnings in Phillips County.
Set forth below is a list of the five largest employers in Miami County
(the Osawatomie, Paola and Louisburg area):
<TABLE>
<CAPTION>
Number of
Company Product Employees
------- ------- ---------
<S> <C> <C>
Osawatomie State Hospital Mental Hospital 534
Unified School District #368 Public Schools 440
Taylor Forge Steel Fabrication 250
Unified School District #367 Public Schools 175
Miami County Government Local Government 170
</TABLE>
Set forth below is a list of the five largest employers in Bourbon County
(the Fort Scott area):
<TABLE>
<CAPTION>
Number of
Company Product Employees
------- ------- ---------
<S> <C> <C>
Mercy Hospital Medical 450
Ward/Kraft Inc. Printing forms & Labels 340
Peerless Products Aluminum Products Mfg. 246
Great West Managed Health Care 214
Key Industries Overalls & Work Clothes 200
</TABLE>
Set forth below is a list of the five largest employers in Mitchell
County (the Beloit area):
<TABLE>
<CAPTION>
Number of
Company Product Employees
------- ------- ---------
<S> <C> <C>
Mitchell County Hospital Health Care 209
Sunflower Manufacturing Farm Equipment 175
USD #273 Education 168
Hilltop Lodge Health Care 150
Kansas Youth Center Juvenile Detention Facility 98
</TABLE>
<PAGE>
2.5
Set forth below is a list of the five largest employers in Phillips
County (the Phillipsburg area):
<TABLE>
<CAPTION>
Number of
Company Product Employees
------- ------- ---------
<S> <C> <C>
Tamko Asphalt Products Roofing 277
USD #325 Education 265
Phillips County Hospital Health Care 150
Kyle Railroad Transportation 120
Phillips County Government Local Government 120
</TABLE>
The unemployment rates for Miami, Bourbon, Mitchell and Phillips Counties
at December 1997 (most recent available data) were 5.2, 5.6, 2.2 and 2.5
percent, respectively. These figures compare the state and U.S. unemployment
rates of 3.4 and 4.7 percent at December 1997, respectively.
First Kansas competes with many large and small financial institutions
for originating loans and attracting deposits in its market area. The
Association's north central Kansas branches compete with small locally owned
banks who are highly visible and active in there local communities. These banks
have the ability to concentrate all their resources and advertising budgets
directly in a small geographic area containing all their core customers. The
Association's eastern Kansas branches, which are located near the Kansas City
MSA, face substantial competition from mortgage bankers, securities firms,
credit unions, and larger regional and multi-regional commercial banks and
thrifts.
There were nine other thrift, commercial bank and credit union offices in
Miami County at June 30, 1997 and six, nine and seven in Bourbon, Mitchell and
Phillips Counties, respectively. First Kansas is the only thrift institution in
each of the four counties where it has office locations with the exception of
Bourbon County (Fort Scott office) where a smaller thrift competes. In Miami
County, First Kansas has held a notable but much smaller percentage of deposits
than commercial banks. However, there is only one commercial bank that is larger
than the Association. The Association's
<PAGE>
2.6
percentage of deposits in Miami County where three of its offices are located
declined from 15.2 percent to 13.0 percent between June 30, 1993 and June 30,
1997. At June 30, 1997, First Kansas held 9.1 percent, 8.8 percent and 5.3
percent of total deposits in Bourbon, Mitchell and Phillips Counties,
respectively. Although First Kansas holds a notable percentage of total deposits
in each of the counties in which it has an office, the Association faces
significant competition from financial institutions in the Kansas City MSA and
the counties surrounding its market area in addition to the financial
institutions within its market area. Technology has intensified competition in
recent years. In the past, competition in the Association's market area had been
less aggressive because people were not exposed to nor did they demand the more
innovative and sophisticated products required to compete in the metropolitan
areas. It is not unusual for as many as 10 or 15 different lenders to file
mortgages in Miami County in any given week. This competition and the quality of
the loans being produced keeps loan rates low compared to many areas of the
United States. Also, deposit rate competition has been and will continue to be
one of the highest in the United States.
Additionally, management has found the average First Kansas deposit
customer to be aging and diminishing as the small communities where the branches
are located continue to shrink in population. In light of this knowledge,
management has made a concerted effort to attract younger core customers who
have a greater need for loan products and who will be able to maintain a longer
term relationship with the Association. Management believes that the new branch
office facility in Paola, due to open in June of 1998, will help greatly in
attracting new customers and accommodating existing ones. The Association
anticipates most of its growth to come from its three Miami County office
locations.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
III. COMPARISONS WITH PUBLICLY-HELD THRIFTS
Chapter Overview
- ----------------
An important aspect in our fair market valuation of First Kansas involves
a financial comparison of the Association with a selected group of
publicly-traded peer thrifts. Significant differences between First Kansas and a
selected comparative group of ten thrift institutions (the selection process is
detailed in the following sections) are summarized below:
o First Kansas reported a lower net income level over the most recent
twelve month period (ROA of 68 basis points) versus the comparative
group (ROA of 93 basis points) and the all publicly traded
SAIF-insured group (ROA of 94 basis points). First Kansas' lower
earnings relative to the comparative group reflects a lower net
interest margin and a higher non-interest operating expense level
which were only partially offset by a lower level of loan loss
provisions and a higher level of non-interest operating income.
o For the most recent twelve month period, First Kansas' net interest
margin was 2.70 percent of average assets versus 3.12 percent for the
comparative group and 3.28 percent for the all publicly traded
SAIF-insured group. The Association's lower net interest margin versus
the comparative group reflects a substantially lower net earning asset
position (4.59 percent of assets for the Association versus 15.20
percent of assets for the peer group) which was partially offset by a
higher yield/cost spread (2.52 percent for the Association versus 2.38
percent for the peer group). The Association's net earning asset
position on a post- conversion basis will be approximately equal to
that of the peer group.
o First Kansas' non-interest operating income of 74 basis points was
significantly higher than that of the peer group (20 basis points) and
the all publicly-traded SAIF-insured group (45 basis points). The
Association's non-interest income consists of service charges on
deposit accounts, loans fees, insurance commissions, gain of sale of
real estate and other miscellaneous income.
o The Association recorded a significantly higher level of overhead
expenses compared to the peer group which is partially due to First
Kansas' relatively large and sprawling branch office network. For the
most recent twelve months, the Association's non-interest expenses to
average assets was 2.39 percent compared to 1.77 percent for the peer
group and 2.23 percent for the all publicly traded group.
o First Kansas' net worth (equity) ratio of 6.9 percent was well below
the peer group's tangible capital ratio of 15.5 percent. After
conversion, First Kansas will (on a consolidated
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.2
basis) have a net worth ratio which will be likely modestly higher
than that of the comparative group.
o In recent years, First Kansas has experienced low levels of
non-performing assets ("NPA"). The Association's NPAs to assets ratio
of 0.08 percent was significantly lower than the peer group's ratio of
0.65 percent and the all publicly traded SAIF-insured group's ratio of
0.73 percent.
Introduction
- ------------
The ideal approach to estimating the fair market value of First Kansas
entails a comparison of the Association's operating characteristics to those of
actively-traded stock thrifts possessing similar characteristics, to the extent
that such can be identified. While we feel that prices of a properly selected
peer group are useful in determining the pro forma market value, considerable
adjustments will still be required in pricing First Kansas' common stock in
terms of its fair market value, owing to differences in asset size, market area,
financial strength, earnings potential, operating strategies, the anticipated
offering size, the market for conversion offerings and secondary market
liquidity of the issue.
The remainder of this chapter will consist of the selection of an
appropriate group of similar thrift institutions and a comparative financial
analysis of this peer group with the Association. The following chapter will
then detail the process by which the Association's appropriate fair market value
has been determined and will demonstrate the estimated pro forma effects of the
conversion on First Kansas and its related pricing ratios at the determined
market price.
Selection Criteria
- ------------------
We have limited our analysis to thrift companies listed on the major
stock exchanges (New York and American) and those companies listed on NASDAQ
(National Association of Securities
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.3
Dealers Automated Quotation System) due to the relative liquidity of their
common stock. This limitation is necessary, in our opinion, since published
market data for companies not qualifying for such listing may not accurately
reflect their true market values due to their limited trading volume, often
coupled with considerable time elapsing between trades (which may be executed at
widely varying prices) and the correspondingly large bid-ask spreads often
associated with such issues. Comparison to thinly-traded stocks could thus be
especially misleading with regard to current market conditions. We have,
therefore, excluded these companies from comparative group consideration. The
Association has applied to have its common stock approved for quotation on the
NASDAQ SmallCap Market. Therefore, it is very useful to compare the Association
to publicly-traded thrifts in order to determine its market value relative to
prevailing market conditions.
An important factor bearing on the likely reception of First Kansas's
initial stock offering is the initial pricing and market price performance of
recently converted thrifts, especially if these companies possess similar
characteristics as First Kansas. Hence, we have examined other recently
completed conversion offerings for other thrift institutions in order to assess
the general market reception of new thrift offerings. Based on these findings,
we can make any adjustments deemed necessary to First Kansas' estimated pro
forma fair market value.
We have excluded from consideration companies whose prices appear to be
materially influenced by announced or rumored acquisitions. In order to avoid
potential distortion to market pricing data, we have also eliminated from the
comparative group companies that are experiencing unusual market and/or
operating conditions.
Recognizing that operating environments for thrifts vary greatly from
state to state, as well as from region to region, due to different economic,
legal, regulatory and investment characteristics,
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.4
we have attempted to select comparative companies operating in regions similar
to that in which First Kansas is located. We have, therefore, selected a group
of thrifts located within the Midwest region which we believe are comparable to
the Association and which have experienced similar economic conditions in their
market areas.
Institution size and operating strategy are also major factors in
assessing institution comparability since they both affect expected rates of
return and investors' general perception of the quality, risk and attractiveness
of a given institution. Due to significantly increased interest rate volatility
and expanded asset and liability powers for thrift institutions, operating
strategies have become increasingly diverse and this may dramatically impact a
company's profitability and market value. Five distinct operating strategies
have been identified from the data base we maintain on approximately 355
publicly-traded thrifts: mortgage banker, diversified thrift, real estate
orientation (construction lending and development), retail banker (commercial
banking services, heavy consumer and commercial business lending) and
traditional thrift (traditional role without specializing in non-traditional
activities). We were sensitive to the operating strategy of First Kansas, which
we identified as a traditional thrift and have given this factor considerable
weight in selecting an appropriate comparative group. Furthermore, to the extent
feasible, we have attempted to select companies with small to moderate asset
sizes (subject to market area and financial characteristic considerations),
generally moderate earnings levels and, for the most part, high capital levels
in order to encompass companies which have a similar amount of resources and
available opportunities.
While it is not possible to select a public company group exactly
comparable to First Kansas, we believe that the group selected is comprised of a
representative group of companies which
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.5
Table 3.1
First Kansas Federal Savings Association
Comparative Group Selection Criteria
<TABLE>
<CAPTION>
Date Total Market Primary Number Operating Ticker
Institution Converted Assets Value(1) Market Area of Offices Strategy(2) Exchange Symbol
----------- --------- ------ -------- ----------- ---------- ----------- -------- ------
($Mil) ($Mil)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Kansas - KS -- 95 -- Kansas 6 Traditional -- --
Cameron Finl Corp - MO 04/03/95 211 51.2 Missouri 4 Traditional OTC CMRN
Citizens First - IL 05/01/96 274 48.5 Illinois 6 Traditional OTC CBK
First Independence - KS 10/08/93 114 14.3 Kansas 2 Traditional OTC FFSL
Hardin Bancorp - MO 09/29/95 115 15.5 Missouri 3 Traditional OTC HFSA
Hemlock Federal Finl - IL 04/02/97 177 38.9 Illinois 3 Traditional OTC HMLK
Landmark Bancshares - KS 03/28/94 234 38.3 Kansas 5 Traditional OTC LARK
Lexington B&L - MO 06/06/96 93 18.5 Missouri 4 Traditional OTC LXMO
MBLA Financial - MO 06/24/93 224 35.3 Missouri 2 Traditional OTC MBLF
Perry County Finl - MO 02/13/95 85 19.8 Missouri 1 Traditional OTC PCBC
State Federal Finl - IA 01/05/94 89 22.2 Iowa 2 Traditional OTC SFFC
</TABLE>
(1) Market Value as of March 6, 1998.
(2) From CRG's database maintained on 355 publicly-traded thrifts which has
identified five distinct operating strategies.
Source: First Kansas' financial statements, SNL Securities, corporate reports
and offering circulars for publicly-traded companies.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.6
provides a good illustration of current industry market values based on three
measures: price/book value, price/earnings and price/assets. We will discuss
these valuation approaches in considerable detail in Chapter IV. Individually
and in the aggregate, the comparative group of thrifts share common
characteristics to First Kansas.
Selection Procedure
- -------------------
Using the criteria discussed above, we have identified ten companies from
Exhibit III-1 ("General Characteristics -- Publicly-Traded Thrifts")
demonstrating characteristics similar to those of First Kansas. In Table 3.1, we
have listed the comparative group companies. In terms of location, all ten
comparative group companies are located in the Midwest region. Subject to
certain asset size restrictions, we attempted to identify thrifts which share
similar financial characteristics and operate in markets demonstrating similar
characteristics as that in which First Kansas operates.
Given limitations of including institutions with similar financial
characteristics, market areas, comparable business strategies and sufficient
trading volumes, the overall mean and median asset size of the ten thrifts in
the comparative group is $161 million and $146 million, respectively. The ten
comparative institutions all pursue a traditional operating strategy and most
have moderate to moderately high earnings levels.
Review of Comparative Group Thrifts
- -----------------------------------
Exhibits III-2 through III-4 highlight the key financial ratios for each
of the ten comparative group thrifts. Also, Table 3.2 highlights each
institution's relative earning asset composition. The following provides a
description of each member of the comparative group:
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Table 3.2
Earning Asset Composition*
<TABLE>
<CAPTION>
--- Construction --- -------- Permanent --------
greater greater
Cash & Total than than - Non Mortgage -
Ticker Name Invest MBS Mortgages 1-4mtg 5mtg NonRes 1-4mtg 5mtg NonRes Land Commcl Consumer
- ------ ---- ------ --- --------- ------ ---- ------ ------ ---- ------ ---- ------ --------
(%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
o First Kansas Federal 9.5 39.5 46.7 0.1 0.0 0.0 44.8 1.1 0.6 0.1 0.5 1.8
--------------------
o Comparative Group (10) 17.4 17.5 61.1 3.4 0.2 0.5 50.6 2.1 3.4 0.9 0.5 3.0
----------------------
o All Saif-Insured (292) 13.7 15.4 63.6 3.3 0.3 0.4 49.9 3.9 5.1 0.9 1.3 4.8
----------------------
CMRN CameronFinlCorp-MO 7.3 0.0 97.3 23.1 0.8 0.0 63.6 1.7 2.5 5.5 0.3 3.6
CBK CitizensFirst-IL 5.3 9.2 76.1 3.6 0.6 0.1 62.6 4.9 3.4 1.0 2.8 4.3
FFSL FirstIndepce-KS 8.1 25.8 63.4 1.7 0.0 0.0 53.7 1.2 6.5 0.4 0.0 1.8
HFSA HardinBancorp-MO 13.1 24.6 54.6 1.3 0.0 0.0 51.9 0.0 1.1 0.2 0.0 5.9
HMLK HemlockFedFinl-IL 33.7 21.2 41.0 0.0 0.0 0.0 38.4 2.3 0.3 0.0 0.0 2.1
LARK LandmarkBcshs-KS 14.6 21.8 55.6 1.0 0.0 0.0 51.9 1.8 0.7 0.2 1.6 5.2
LXMO LexingtonB&L-MO 17.7 3.5 71.6 1.0 0.0 0.0 67.9 0.2 1.7 0.8 0.0 5.1
MBLF MBLAFinancial-MO 16.9 31.1 48.9 0.0 0.0 0.0 45.6 0.0 3.4 0.0 0.2 0.1
PCBC PerryCountyFinl-MO 44.8 38.3 14.8 0.5 0.0 0.5 13.4 0.1 0.3 0.0 0.5 0.5
SFFC StateFedFinl-IA 10.9 0.0 86.7 1.9 0.7 4.0 56.4 8.8 14.0 0.9 0.0 1.3
</TABLE>
* Per Regulatory Call Report detail as of 12/31/97.
(Call Report source data may have timing and classification differences and
and may exclude certain consolidating entries. Loan percentages are based
on gross loan balances.)
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.8
o Cameron Financial Corp is located in Cameron, Missouri and operates
two offices in De Kalb, one office in Nodaway County and one office in
Holt County. Cameron Financial was included in the peer group due to
its below average asset size ($211 million), its proximity to First
Kansas, its above average equity to assets ratio, its above average
net earning asset position, and its similar level of cash and
investments (10.4 percent of assets versus 9.5 percent for First
Kansas).
o Citizens First Corporation is located in Bloomington, Illinois and
operates through four offices located in Mclean County, one office
located in Livingston County and one office located Woodford County.
Citizens was included in the peer group due to its moderately low
asset size ($274 million), its similar branch office network (6
offices), its above average equity to assets ratio, its below average
level of cash and investments (5.8 percent of assets), its below
average level of non-performing assets (0.47 percent of assets), its
similar yield/cost spread (254 basis points versus 252 basis points
for First Kansas), and its similar net earnings level (71 basis points
versus 68 basis points for First Kansas) and earnings composition.
Citizens' earnings composition reflected a below average net interest
margin and above average levels of non-interest income and overhead
expenses. Citizens also had an above average level of deposits and a
below average level of borrowings.
o First Independence Corporation is located in Independence, Kansas
which is approximately 125 miles south of First Kansas' main office.
First Independence operates out of one office in Montgomery County and
one branch office in Wilson County. First Independence was included in
the peer group due to its similar asset size ($114 million), its
proximity to First Kansas, its below average level of cash and
investments (14.1 percent of assets versus 9.5 percent for First
Kansas), its above average level of mortgage-backed securities, its
below average yield/cost spread, its similar net interest margin (278
basis points versus 270 basis points for First Kansas), and its
similar level of net earnings (65 basis points versus 68 basis points
for First Kansas).
o Hardin Bancorp, is located in Hardin, Missouri and operates out of two
offices in Ray County and one office in Clay County. Hardin Bancorp
was included in the peer group due to its similar asset size ($115
million), its above average level of mortgage-backed securities, its
below average level of net loans (52.0 percent of assets versus 48.7
percent for First Kansas), its similar net interest margin (274 basis
points versus 270 basis points for First Kansas), its below average
level of net earnings (76 basis points), its below average net
interest rate spread, its above average net earning asset position,
and its low level of non-performing assets (0.19 percent of assets
versus 0.08 percent for First Kansas).
o Hemlock Federal Financial is located in Oak Forest, Illinois and
operates out of three offices in Cook County. Hemlock Federal recently
converted from mutual to stock in April 1997. Hemlock Federal was
included in the peer group due to its relatively small asset size
($177 million), its above average capital ratio, its above average
level of mortgage-backed
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.9
securities, its below average level of net loans (43.1 percent of
assets versus 48.7 percent for First Kansas), its above average level
of deposits, its below average level of borrowings, its above average
net earning asset position, its similarly low level of non-performing
assets (0.15 percent of assets versus 0.08 percent for First Kansas),
and its below average level of net earnings (58 basis points versus 68
basis points for First Kansas).
o Landmark Bancshares is located in Dodge City, which is located in
southwest Kansas, and operates out of two offices in Barton County,
one office in Ford County, one office in Rush County and one office in
Finney County. Landmark Bancshares was included in the peer group due
to its below average asset size ($234 million), its similar branch
office network size, moderately high equity ratio, its above average
net earning asset position, its below average net interest margin (309
basis points versus 271 basis points for First Kansas), its below
average yield/cost spread (244 percent versus 252 percent for First
Kansas), and its low level of non-performing assets (0.30 percent of
assets versus 0.08 percent for First Kansas). Landmark's market area
is heavily impacted by the agriculture and meat packing industries.
o Lexington Building and Loan is located in Lexington, Missouri and
operates out of three offices in Lafayette County and one office in
Macon County. Lexington Building and Loan was included in the
comparative group due to its proximity to First Kansas, its similarly
small asset size ($93 million), its above average equity to asset
ratio, its similar branch office network size, its above average level
of deposits, its below average level of borrowings, its similar
earnings composition, its above average level of overhead expenses
(2.49 percent of average assets versus 2.39 percent for First Kansas),
its below average yield/cost spread (2.66 percent versus 2.52 percent
for First Kansas), its above average net earning asset position, and
its below average level of non-performing assets (0.54 percent of
assets).
o MBLA Financial is located in Macon, Missouri and operates out of one
office located in Macon County and one office in Randolph County. MBLA
Financial was included in the peer group due to its below average
asset size ($224 million), its proximity to First Kansas, its level of
net loans (58.1 percent of assets), its below average net interest
margin, its below average net earnings level (81 basis points), its
below average yield/cost spread, its above average net earning asset
position, and its below average level of non-performing assets (0.48
percent of assets).
o Perry County Financial is headquartered in Perryville, Missouri and
conducts its business through its one office in Perry County. Perry
County Financial was included in the peer group due to its proximity
to First Kansas, its similar asset size ($85 million), its above
average level of capital, its similar level of mortgage-backed
securities (35.0 percent of assets versus 39.1 percent for First
Kansas), its below average level of net loans, its above average level
of deposits, it below average level of borrowings, its below average
net
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.10
interest margin (2.81 percent of average assets versus 2.70 percent
for First Kansas), its below average yield/cost spread, its above
average net earning asset position, and its similarly low level of
non-performing assets (0.01 percent of assets versus 0.08 percent for
First Kansas).
o StateFed Financial is located in Des Moines, Iowa and operates out of
two offices located in Polk County. StateFed Financial was included in
the peer group due to its similarly small asset size ($89 million),
its above average capital level, its below average level of cash and
investments, its below average net interest rate spread (2.69 percent
versus 2.52 percent for First Kansas), and its above average net
earning asset position.
We also reviewed the characteristics of other thrifts for inclusion in
the peer group. The company shown below is a company that has some close
similarities to First Kansas but was excluded from the comparative group for the
reasons noted.
o Jefferson Savings is located in Ballwin, Missouri, also located on the
fringes of a metropolitan area. The company operates a network of 31
branch offices, has total assets of approximately $1.3 billion, and
generated an ROA of 79 basis points. Although the company is
geographically close to First Kansas, we excluded it from the
comparative group based on its significantly greater asset size and
branch office network.
Financial Comparisons
- ---------------------
Table 3.3 presents a comparison of First Kansas' recent operating results
and current financial condition to those of the comparative group and the
universe of all publicly-traded SAIF-insured thrifts for the most recent
twelve-month period. A detailed comparison can be found in Exhibits III-2
through III-4. Differences between First Kansas and the comparative aggregates
can be observed through an analysis of the figures presented in the table.
(1) First Kansas' reported earnings over the most recent twelve month
period were lower than that of the comparative group and the all publicly traded
SAIF-insured group. The Association's
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.11
reported ROA of 68 basis points compared to 93 basis points for the comparative
group and 94 basis points for the all publicly traded SAIF-insured group. First
Kansas' lower earnings relative to the comparative group reflected a lower net
interest margin and a higher level of non-interest operating expenses, only
partially offset by a lower level of loan loss provisions and a higher level of
non-interest operating income. The Association's narrower net interest margin
reflects a lower net earning asset position (4.59 percent for the Association
versus 15.20 percent for the peer group) which was partially offset by a higher
yield/cost spread. The Association's lower net earning asset position will
improve significantly after conversion and should approximate the level of the
comparative group.
(2) First Kansas' "adjusted net income," which for purposes of this
analysis includes net interest income plus other non-interest operating income
minus non-interest operating expenses, on a pre-tax basis, was significantly
lower than that of the comparative peer group and the all publicly traded thrift
SAIF-insured group. The Association's adjusted net income of 105 basis points
compared to 155 basis points for the comparative group and 150 basis points for
the all publicly traded SAIF-insured group.
(3) First Kansas' net interest margin was 270 basis points versus 312
basis points for the comparative group and 328 basis points for the all publicly
traded SAIF-insured group. The Association's lower net interest margin reflected
a significantly lower net earning asset position which was partially offset by a
higher yield/cost spread (252 basis points for the fiscal year ended December
31, 1997) versus the comparative group (238 basis points). First Kansas' higher
yield/cost spread reflects a lower yield on interest earning assets which was
more than offset by an even lower cost of interest bearing liabilities. The
Association's yield/cost spread was 245 basis points at
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.12
Table 3.3
First Kansas Federal Savings Association
Key Financial Indicators
For the Most Recent Twelve Months (1)
<TABLE>
<CAPTION>
All
First Comparative SAIF-Insured
Profitability: Kansas Group Thrifts
- -------------- ------ ----- -------
(% of Average Assets)
<S> <C> <C> <C>
Net Income 0.68 0.93 0.94
Interest Income 7.00 7.46 7.46
Interest Expense 4.31 4.33 4.17
---- ---- ----
Net Interest Margin 2.70 3.12 3.28
Other Operating Income 0.74 0.20 0.45
Non-Interest Operating Expense 2.39 1.77 2.23
Net Non-Operating Income(Loss)(2) 0.09 -0.07 -0.04
Extraordinary Items 0.00 0.00 0.00
Adjusted Net Income(3) 1.05 1.55 1.50
Selected Spreads and Margins:
- -----------------------------
Yield on Earning Assets 7.15 7.66 7.78
Cost of Funds 4.63 5.28 4.96
---- ---- ----
Yield-Cost Spread 2.52 2.38 2.83
Net Earning Asset Position (4) 4.59 15.20 11.89
NIM/G&A Expenses 113.0 190.3 156.8
Financial Condition:
- --------------------
(% of Assets)
Cash and Investments 9.5 23.6 18.9
Loans and MBS 88.2 73.5 79.0
Deposits 89.8 66.6 69.5
Borrowings 2.7 16.7 15.5
Net Worth 6.9 15.6 13.5
Tangible Net Worth 6.9 15.5 13.3
Risk Measurements:
- ------------------
NPA/Assets 0.08 0.65 0.73
NPA/Equity 1.20 4.51 7.57
Reserves/Loans 0.38 0.61 0.78
</TABLE>
(1) Comparative Group figures represent the most recently reported trailing
twelve month results; First Kansas' figures cover the fiscal year ended
December 31, 1997.
(2) Includes net gains (losses) on sale of loans and other assets plus loss
provisions on loans and other assets plus non-recurring items, on a pre-tax
basis.
(3) Includes net interest margin plus other operating income less operating
expenses, on a pre-tax basis.
(4) Total interest-earning assets less total interest-bearing liabilities, as a
percent of assets.
Source: Audited and unaudited financial statements. SNL Securities, corporate
reports and offering circulars for publicly-traded companies.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.13
December 31, 1997. The comparative group's higher cost of funds reflects a
significantly higher utilization of non-deposit borrowings (16.7 percent of
assets). While the Association's net interest margin should improve after
conversion, growth in the yield/cost spread may at least initially be limited as
most of the conversion proceeds are placed in lower yielding investment and
mortgage-backed securities over the short term.
(4) First Kansas generated 74 basis points of non-interest operating
income compared to 20 and 45 basis points of non-interest operating income for
the comparative group and all publicly traded SAIF-insured group, respectively.
The Association has been more successful in diversifying and expanding its
revenue stream compared to the peer and all publicly traded SAIF-insured groups,
particularly due to the growth of its checking account program. The Association
generates non-interest income from service charges, loan fees, insurance
commissions and other miscellaneous revenue sources. The Association also
generates limited revenue from service corporation operations.
(5) First Kansas' operating expense ratio which was significantly above
that of the comparative group and moderately above the industry average reflects
a relatively large branch office network for the Association's asset size, as
well as additional expenses related to the Association's checking account
program. The Association's non-interest expense ratio of 239 basis points
compared to the comparative group's ratio of 177 basis points and the all
publicly traded SAIF-insured group's ratio of 223 basis points. After
conversion, with the establishment of the proposed ESOP and RSP, additional
expenses incident to being a public company, and the expected expansion of loan
originations, the Association's overhead expense ratio will likely moderately
increase further.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.14
(6) Besides "adjusted net income" (see (2) above), another measure of
core profitability is the Net Interest Margin ("NIM") to G&A Expenses ratio.
First Kansas' ratio of 113.0 percent compared to a ratio of 190.3 percent for
the comparative group and 156.8 percent for the all publicly traded SAIF-insured
group.
(7) First Kansas maintained a moderately low level of liquidity at
December 31, 1997 relative to its comparative peer group and the all publicly
traded SAIF-insured group. Cash, cash equivalents and investments (not including
mortgage-backed securities) equaled 9.5 percent of assets for First Kansas
versus 23.6 percent for the comparative group and 18.9 percent for the all
publicly traded SAIF-insured group. At December 31, 1997, the Association had a
higher level of loans and mortgage-backed securities compared to the peer and
industry groups (88.2 percent of assets for the Association versus 73.5 and 79.0
percent for the comparative group and the all publicly traded SAIF- insured
group, respectively). The Association's mortgage loans as a percent of assets
(46.7 percent) was lower than that of the comparative group (61.1 percent) and
the all publicly traded SAIF-insured group (63.6 percent). First Kansas' MBS
portfolio equaled 39.5 percent of assets versus 17.5 percent for the comparative
group and 15.4 percent for the industry group. This lower concentration of loans
partially explains the Association's lower yield on earning assets.
(8) First Kansas' tangible equity ratio of 6.9 percent of assets was well
below the 15.5 percent tangible equity ratio of the comparative group and the
13.3 percent ratio for the all publicly traded SAIF-insured group. After
conversion, First Kansas' net worth ratio will be moderately higher than the
comparative group's ratio and the industry average. However, the Association's
modestly lower
<PAGE>
CAPITAL RESOURCES GROUP, INC.
3.15
earnings stream expected after conversion is expected to result in a lower
return on equity ("ROE") compared to the comparative peer group and all publicly
traded groups.
(9) In recent years, First Kansas has experienced low levels of
non-performing assets ("NPA"). The Association's ratio of non-performing assets
("NPA") as a percentage of assets and equity at December 31, 1997, was 0.08 and
1.20 percent, respectively, while the comparative group's NPAs as a percent of
assets and equity were 0.65 and 4.51 percent, respectively. First Kansas
maintained a reserves-to-loans ratio (0.38 percent) which was below that of the
comparative and all publicly traded SAIF-insured groups (0.61 and 0.78 percent,
respectively). However, management of First Kansas believes the Association's
loan loss allowance levels are adequate on the size and composition of the
Association's loan portfolio.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
IV. MARKET VALUE DETERMINATION
Introduction
- ------------
As discussed earlier, certain adjustments might be required to First
Kansas' estimated market value relative to the comparative group to reflect the
differences between the Association and the members of the comparative group.
The market value adjustments made are based upon certain financial and other
criteria, including: quality and predictability of earnings, earnings growth
potential, financial strength, market area, management, dividend payments, stock
liquidity, thrift equity market conditions, and the actual marketing of the
issue.
The final section of this chapter identifies the estimated pro forma
market value of the to-be- issued common shares and compares the resulting
market value of the Association with members of the comparative group and all
publicly traded SAIF-insured companies as of the pricing date.
The pro forma market value determined herein is a preliminary value for
the Association's common stock. Throughout the conversion process, any changes
in First Kansas' financial performance will be reviewed. Also, any changes in
the Association's fundamental financial characteristics relative to the
comparative group will be analyzed. Future updates, if deemed necessary before
or at the time of the offering, will also consider current developments in the
market for thrift stocks. In addition, the results of the Association's
conversion offering plus the results of pending conversion offerings in First
Kansas' general region of the U.S. will be closely monitored.
Quality and Predictability of Earnings/Earnings Growth Potential
- ----------------------------------------------------------------
Market value adjustments to First Kansas' estimated pro forma market
value must reflect both the sustainability of the Association's earnings stream
and earnings growth potential relative to the
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.2
comparative group. We believe that investors look at both factors in determining
an appropriate valuation of a company's stock.
First Kansas has recorded positive net earnings levels in recent years.
Between fiscal 1993 and 1995, the Association's profitability levels decreased
due to declining levels of net-interest income and increasing levels of
non-interest operating expenses. The Association's reported net income further
declined in fiscal 1996 primarily as a result of the one-time special SAIF
assessment which totaled $545,000 or 57 basis points. During the most recent
fiscal year ended December 31, 1997, the Association's ROA increased to 68 basis
points as a result of an improved net interest margin and an increase in
non-interest income. However, the Association's moderately low "core"
profitability level reflects only a modest net interest margin to operating
expense ratio. First Federal's net interest margin totaled 2.70 percent of
average assets for the fiscal year ended December 31, 1997. It can be expected
that the Association's net interest margin will improve as a result of the
conversion. However, First Kansas' operating expense ratio can be expected to
increase, at least modestly, as a stock company.
First Kansas' moderately low net interest margin level and limited
earnings growth potential reflects a relatively modest level of loans. At
December 31, 1997, the Association's loan portfolio equaled only 48.7 percent of
total assets, while lower yielding investment and mortgage-backed securities
totaled 49.0 percent of assets. Limited residential lending opportunities in a
large part of the Association's primary market area outside of Miami County and
intense competition for loans from much larger regional and multi-regional banks
and mortgage banking companies, particularly around the Kansas City metropolitan
area, accounts for the modest loan portfolio level. These factors have also
limited the Association's ability to expand profitability in its local market
areas.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.3
This is reflected in the Association's lower yield on earning assets relative to
the comparative group which was offset by a lower cost of funds resulting in a
moderately higher yield/cost spread. The Association's lower cost of funds
reflects a lower reliance on higher costing borrowings relative to the
comparative group. However, growth in the Association's deposits will continue
to be limited by strong rate competition in its market area which may result in
increases to the Association's cost of funds. Therefore intense rate
competition, both on loans and deposits, will continue to limit the potential
growth in the Association's yield-cost spread.
First Kansas reported lower profitability relative to that of the
comparative group. The Association's latest twelve month ROA of 68 basis points
compared to the comparative group's average ROA of 93 basis points. As discussed
in Chapter 3, the Association's adjusted income, on a pre-tax basis, of 105
basis points compared to a 155 basis point figure for the comparative group.
First Kansas' lower core profitability relative to the comparative group
reflects a lower net interest margin and higher operating expense ratio, which
are only partially offset by a higher non-interest income level and lower loan
loss provisions. The Association's lower net interest margin is partly due to a
lower net earning asset position which will improve significantly after
conversion.
In summary, given the existing balance sheet structure of First Kansas
and the combination of limited growth opportunities in certain of the
Association's primary market areas and intense competition in other areas, net
interest rate spread, net interest margin, and overall earnings growth potential
will remain limited, at least over the short-term. Therefore, based on the
factors noted above, we believe a moderate discount to First Kansas' estimated
pro forma market value relative to the comparative group is appropriate.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.4
Financial Strength
- ------------------
Capital Levels
First Kansas' pre-conversion equity to assets ratio of 6.9 percent is
below that of the comparative group and all publicly traded SAIF-insured
thrifts. The additional capital raised through conversion is expected to
increase the Association's ratio (on a consolidated basis) to moderately above
the industry average and that of the comparative group. With a post-conversion
equity ratio of between 15 and 17 percent, this will result in a company with a
substantial capital cushion and financial flexibility. However, as previously
noted, it is uncertain whether First Kansas will be able to effectively leverage
its capital position to enhance investor (shareholder) returns. Management
believes that, over the intermediate to long-term, the Association will be able
to effectively leverage its capital position.
Asset/Liability Position
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the
Association has instituted certain asset and liability management measures,
including the following measures:
o Purchase a significant amount of mortgage backed and related
securities with adjustable rates or estimated lives of five to ten
years or less.
o Sell into the secondary market approximately 50 percent of fixed rate
one-to-four family residential mortgage loan originations and hold in
portfolio all adjustable rate mortgage loan originations.
o Maintain moderate levels of interest bearing deposits and U.S.
Government securities with short to intermediate maturities.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.5
o Maintain a high proportion of lower-costing, non-CD accounts in the
deposit portfolio. At December 31, 1997, such deposits totaled $29.4
million or 34.3 percent of total deposits.
The comparative group thrifts, on the whole, have pursued similar
asset/liability approaches as First Kansas. The comparative group also maintains
a heavy base of investment and mortgage-backed securities (34.3 percent of
assets) although the Association has placed a greater emphasis on such
investments (49.0 percent of assets). The comparative group has relied on
non-deposit borrowings to a greater degree than First Kansas. However, four of
the comparative group thrifts also benefit from a large base of lower costing
deposit accounts relative to the industry average. Also, like First Kansas, the
comparative group thrifts efforts to improve asset/liability mismatches have
also been limited due to the generally short-term nature of their deposit and
borrowing bases.
Asset Quality
First Kansas has achieved low non-performing asset levels over recent
years. The Association's high asset quality is due to conservative loan
underwriting policies which is reflected by a loan portfolio dominated by local,
one-to-four family mortgage loans. At December 31, 1997, the Association's
non-performing assets equaled 0.08 percent of total assets. This compared to a
non-performing asset ratio of 0.65 percent for the comparative group. At
December 31, 1997, First Kansas' allowance for loan losses equaled 0.38 percent
of loans, which percentage is below both the thrift industry average of 0.78
percent and the comparative group average of 0.61 percent. However, management
believes First Kansas' low ratio reflects the Association's strong asset
quality.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.6
On balance, based on all the factors discussed in this section, we
believe that no specific adjustment to First Kansas' estimated pro forma market
value relative to the comparative group is warranted.
Market Area
- -----------
First Kansas conducts business from its main office in Osawatomie
(population of approximately 5,000) and five branch offices in Paola (population
of approximately 6,500), Louisburg (population of approximately 3,100), Fort
Scott (population of approximately 8,100), Beloit (population of approximately
4,100), and Phillipsburg (population of approximately 2,600), Kansas. The
Association's main office in Osawatomie and branch offices in Paola and
Louisburg are located in Miami County (population of approximately 26,300) while
the Fort Scott office is located in Bourbon County (population of approximately
15,200), the Beloit office is located in Mitchell County (population of
approximately 7,100), and the Phillipsburg office is located in Phillips County
(population of approximately 6,100).
Osawatomie is located approximately 50 miles south of downtown Kansas
City. Four of the Association's offices (Osawatomie, Paola, Louisburg and Fort
Scott) are located in east central Kansas along the Missouri border and
immediately south of the Kansas City metropolitan area, and two offices (Beloit
and Phillipsburg) are located in north central Kansas. The Association considers
Linn and Johnson Counties, Kansas to be part of its primary market area for
attracting deposits and lending in addition to the counties in which the
Association has office locations. Linn and Johnson Counties are contiguous to
Miami and Bourbon Counties. Also, Miami and Johnson Counties are included in the
Kansas City Metropolitan Statistical Area and as a result are experiencing more
rapid
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.7
growth than other surrounding counties. The majority of the First Kansas'
lending activity occurs in Miami County where the Association has its main
office and two branch offices.
The local markets that surround the Association's retail offices are
characterized as mature areas of low unemployment with stable and healthy
economies, however, with limited economic and demographic growth in three of the
four counties where First Kansas has offices. The Association's Beloit and
Phillipsburg offices located in north central Kansas, in particular, are
supported by an older population base. The economy surrounding First Kansas'
office locations is rural and agricultural in nature, but Miami County is
influenced by the Kansas City MSA. The Fort Scott, Beloit and Phillipsburg
offices are located in the largest cities and county seats of their respective
counties. Fort Scott is the largest local city and has a broader base of
industry.
First Kansas competes with many large and small financial institutions
for originating loans and attracting deposits in its market area. The
Association's north central Kansas branches compete with small locally owned
banks who are highly visible and active in there local communities. These banks
have the ability to concentrate all their resources and advertising budgets
directly in a small geographic area containing all their core customers. The
Association's eastern Kansas branches, which are located near the Kansas City
MSA, face substantial competition from mortgage bankers, securities firms,
credit unions, and larger regional and multi-regional commercial banks and
thrifts. The Association's percentage of deposits in Miami County where three of
its offices are located declined from 15.2 percent to 13.0 percent between June
30, 1993 and June 30, 1997. At June 30, 1997, First Kansas held 9.1 percent, 8.8
percent and 5.3 percent of total deposits in Bourbon, Mitchell and Phillips
Counties, respectively. Although First Kansas holds a notable percentage of
total deposits in each of the counties in which it has an office, the
Association faces significant
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.8
competition from financial institutions in the Kansas City MSA and the counties
surrounding its market area in addition to the financial institutions within its
market area. This competition and the quality of the loans being produced keeps
loan rates low compared to many areas of the United States. Also, deposit rate
competition has been and will continue to be one of the highest in the United
States.
The comparative group thrifts operate within similar market areas with
moderate population bases. Certain of the comparative group thrifts also operate
in largely rural marketplaces but certain others operate closer to the outskirts
or within large metropolitan areas with larger population bases. Two of these
thrifts are also based in Kansas and five are based in neighboring Missouri. The
comparative group thrifts also face strong competition in their local markets.
These thrifts also benefit from strong core deposit bases.
Based on the above, we have made no adjustment to First Kansas' pro forma
market value for the factors discussed in this section.
Dividend Payments
-----------------
While there is no specific plan to pay cash dividends immediately after
conversion, First Kansas may consider a policy of paying cash dividends on the
common stock in the future. However, no determination has been made at this time
as to the amount or timing of such dividends. Any payment of dividends would be
considered relative to management's intention to retain earnings for future
growth and to assure compliance with the existed capital requirements. First
Kansas' post- conversion capital ratio, however, should facilitate the payment
of any future dividends.
Nine of the ten comparative group members are currently paying cash
dividends with dividend yields ranging from 1.4 percent to 2.5 percent.
Approximately 80 percent of all publicly-traded
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.9
thrifts are paying dividends. We believe that investors are more sensitive to
dividend paying capacity and look forward to at least a minimal cash dividend
shortly after conversion, especially given future price increases remains an
unknown and investors are seeking tangible returns on investments. However, it
is also reasonable to expect that investors will look favorably upon earnings
retention policies in light of increased capital requirements and need for
capital to support growth and revenue diversification strategies. Therefore,
given the number of thrifts (including the number of comparative group thrifts)
currently paying cash dividends, we have made a slight downward adjustment to
First Kansas' pro forma market value for this factor.
Management and Employee Staffing
- --------------------------------
First Kansas' executive management team is concentrated in three
individuals who are responsible for the lending, finance and operations areas of
the Association. This management team is supported by a modest base of mid-level
managers. These individuals have had a varying number of years of experience in
the thrift industry. The organization chart and vesting of responsibility is
typical of a moderately small savings institution. However, the relatively small
size of First Kansas requires that multiple line responsibilities be
concentrated in a small handful of people. The executive management team is part
of a total staff of 31 full-time and 7 part-time employees (as of December 31,
1997). First Kansas' management appears to have established a favorable
reputation for the Association in the communities in which it operates. The
Association has no specific plans for staff increases after conversion. However,
any expansion or diversification of operating activities would likely require
that the size and experience of management and staff be expanded.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.10
The comparative savings institutions, to varying degrees, have undertaken
expansion of their management teams and support staff as part of their expansion
and diversification strategies, many of which have had these strategies in place
for some time. Most savings institutions have been confronted with the need to
expand and restructure their management team in response to significant changes
in financial, regulatory and operational challenges.
On balance, we believe that no specific adjustment to First Kansas' pro
forma market value relative to that of the comparative group is warranted for
managerial factors.
Liquidity of the Issue
- ----------------------
The comparative group contains ten companies that trade on the NASDAQ
system. The Holding Company has applied and expects to have the common stock
quoted on the NASDAQ SmallCap Market. Given the size of the offering and the
level of market capitalization of First Kansas' stock after conversion, it can
be expected that the Holding Company's common stock will have a modest degree of
trading activity and liquidity. The comparative group of savings institutions
have experienced varying degrees of activity and, therefore, liquidity in their
stocks. The market capitalization of the comparative group is moderately larger
than First Kansas' expected market capitalization. Therefore, the Holding
Company's stock can be expected to have a lower level of liquidity. Based on the
foregoing, we believe that a modest discount to the pro forma market value of
First Kansas relative to that of the comparative group is warranted.
Subscription/Community Interest and Historical Overview of the Conversion Market
- --------------------------------------------------------------------------------
In accordance with the Association's Plan of Conversion, it is currently
planned that the shares of First Kansas' stock will be offered to certain
priority groups, in a Subscription Offering, in the
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.11
following order: (i) Eligible Account Holders; (ii) Tax-Qualified Employee
Benefit Plans; (iii) Supplemental Eligible Account Holders; and (iv) Other
Members. If any shares are available at the conclusion of the Subscription
Offering, First Kansas may offer shares in a Community Offering. First Kansas
has retained Capital Resources, Inc., to consult with and advise the Association
in the stock offering and assist in the distribution of shares, on a best
efforts basis.
After an extended period of declining numbers of conversions during the
end of 1989 and into 1990, new conversion offerings increased during 1991 and
1992 as interest rates declined and thrift profitability improved, and a core
group of surviving and healthy thrifts emerged from the thrift industry's
unfavorable financial plight. During the 1990s, new thrift equity offerings have
generated mixed results. Investors appear to be most interested in thrifts with:
(1) strong capital positions, (2) strong earnings levels, and (3) good asset
quality. The more marginal thrifts have generally experienced less interest by
investors. New thrift issues have also generated increased interest due to the
stock price performance of recently converted thrifts. These thrift stock prices
have benefited from (1) earnings and earnings per share improvements during
recent years and (2) the repurchase of stock by several of the recently
converted thrifts, which has generally fueled stock price appreciation. Also,
speculative interest, as a result of the high level of merger and acquisition
activities in the banking and thrift industries, has generated renewed demand
for many of the conversion offerings during recent years.
Notwithstanding a slow economic recovery and continued weak real estate
markets, investor demand for thrift conversion offerings remained generally
favorable in 1993 and the first eight months of 1994. In particular, during this
time frame, there was a notable increase in the number of successfully completed
conversion offerings by the better performing thrift institutions. However,
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.12
between November 1994 and January 1995, conversion offerings met considerable
resistance from the investment community as financial institution stocks fell
out of favor with many investors. At least 15 conversion offerings were forced
into resolicitations in late 1994 and early 1995. This trend reversed itself
during the second half of 1995 and first quarter of 1996, as the interest in
thrift conversion offerings increased. However, during the second and part of
the third quarters of 1996, interest rates increased and thrift stock prices
remained essentially flat overall. Thrift prices moved up with the general
market during the fourth quarter of 1996 and through much of the first three
quarters of 1997 as interest rates declined and the strong demand for conversion
offerings continued.
Thrift stock prices declined during part of the fourth quarter of 1997
and in January of 1998 as the general market declined over fears from the Asian
economic and financial problems, and the yield curve continued to narrow as
long-term interest rates declined by a greater amount than short term rates.
Long term interest rates declined as investors reinvested funds out of stocks
and into bonds, sending the yield on the 30-year US treasury bond into
historically low levels. However, in February and early March confidence was
regained in stocks and the stock market resumed its upward movement, reaching
record highs. Thrift stock prices moved up with the general market during this
period and, also, moved up as a result of a moderate widening of the yield curve
as long term interest rates increased. However, it is very uncertain what the
total impact of the "Asian Crisis" will be on U.S. corporations in the months
and years to come. The potential for increased volatility in interest rates and
the stock market remains high. However, investor demand for thrift conversion
offerings has remained strong into early 1998, particularly for the larger
offerings.
The uncertain environment for new thrift offerings based on the factors
just noted has been factored into our determination of the estimated pro forma
market value of First Kansas.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.13
Stock Market Environment
- ------------------------
In an attempt to define and monitor the market for publicly-traded thrift
institutions, we have utilized the SNL Index, which measures the relative price
movements of all publicly-traded thrifts and is compiled by SNL Securities.
Table 4.1 details the performance of the index since 1989, which reflects market
forces such as the supply of and demand for thrift stocks, expected inflation
levels, interest rate changes, thrift industry regulatory changes, and the
overall economic strength in the U.S. With minor exception, for an 18-month
period beginning with the second half of 1989, thrift prices followed a
generally downward trend reflecting investor concerns over the new capital
regulations stemming from FIRREA and the downturn in the real estate markets in
many portions of the country. At the beginning of 1990, thrift prices appeared
to have also been adversely impacted by a rise in long-term interest rates and
uncertainty regarding the continued financial viability of the thrift industry.
As a result, over the first few months of 1990, the number of conversion
offerings remained low. In the wake of continued negative press on the state of
the real estate markets across the country and the financial difficulties of
both commercial Associations and thrifts, financial institution stock prices
suffered significant price erosion through 1990. Also, overall, thrift
conversion activity remained weak through most of 1990.
Beginning in January 1991, stock prices, in general, moved higher
reflecting a sharp rally in the financial markets. Financial institution stocks
led this rally which reflected lowering interest rates and market euphoria over
the successes in the Persian Gulf War. However, the financial markets continued
to experience notable instability reflecting the prevailing recessionary
conditions including depressed real estate markets. This adversely impacted the
operating results of certain
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.14
Table 4.1
Thrift Stock Index
Relative to Long and Short-Term Rates
<TABLE>
<CAPTION>
3-Month 12-Month Long-Term
Prime T-Bill T-Bill T-Secur. Thrift
Week of Rate (1) Rate (1) Rate (1) Rate (1) Index (2)
================================================================================================================
(Last Day of Quarter)
<S> <C> <C> <C> <C> <C> <C>
03/31/89 11.50 9.00 8.94 9.31 170.7
06/29/89 11.00 8.03 7.35 8.23 231.6
09/29/89 10.50 7.84 7.78 8.41 210.0
12/29/89 10.50 7.68 7.30 8.09 162.5
03/30/90 10.00 7.85 7.75 8.68 149.6
06/29/90 10.00 7.77 7.33 8.63 144.4
09/28/90 10.00 7.29 7.25 9.14 96.2
12/28/90 10.00 6.48 6.37 8.35 96.6
03/29/91 9.00 5.82 5.94 8.35 127.6
06/28/91 8.50 5.56 5.96 8.53 130.8
09/27/91 8.00 5.16 5.20 7.86 142.0
12/27/91 9.50 3.81 3.97 7.38 140.0
03/27/92 9.00 4.03 4.40 7.91 155.2
06/26/92 8.50 3.64 3.94 7.65 168.2
09/25/92 8.00 2.69 3.38 7.11 165.3
12/31/92 6.50 3.18 3.49 7.19 201.1
03/26/93 6.50 2.93 3.16 6.60 227.8
06/25/93 6.00 3.09 3.37 6.44 216.7
09/24/93 6.00 2.93 3.26 5.99 252.1
12/31/93 6.00 3.02 3.45 6.22 252.5
03/25/94 6.25 3.31 4.15 6.90 249.4
06/24/94 7.25 4.17 5.00 7.47 267.5
09/30/94 7.68 4.68 5.58 7.58 279.7
12/30/94 8.50 5.52 6.74 7.93 244.7
03/31/95 9.00 5.68 5.94 7.43 278.4
06/30/95 9.00 5.43 5.33 6.53 313.5
09/29/95 8.75 5.26 5.37 6.62 362.3
12/29/95 8.50 4.89 4.94 5.97 376.5
(Last Week of Month)
01/26/96 8.50 4.97 4.79 5.98 365.2
02/23/96 8.25 4.83 4.81 6.35 376.2
03/29/96 8.25 4.99 5.11 6.66 382.1
04/26/96 8.25 4.96 5.21 6.88 379.5
05/31/96 8.25 5.04 5.39 7.02 383.0
06/28/96 8.25 5.09 5.47 7.08 385.5
07/26/96 8.25 5.16 5.53 7.05 385.1
08/30/96 8.25 5.09 5.48 7.03 408.3
09/27/96 8.25 4.98 5.40 6.95 429.7
10/25/96 8.25 5.00 5.26 6.83 449.4
11/29/96 8.25 5.02 5.13 6.41 485.8
12/27/96 8.25 4.97 5.20 6.58 484.3
01/31/97 8.25 5.04 5.30 6.89 520.1
02/28/97 8.25 5.05 5.29 6.75 563.1
03/31/97 8.25 5.25 5.56 6.96 527.7
04/25/97 8.50 5.20 5.63 7.08 520.2
05/30/97 8.50 5.03 5.51 7.03 577.9
06/27/97 8.50 5.00 5.36 6.71 627.0
(Last Day of Week)
07/03/97 8.50 5.05 5.34 6.75 638.9
07/11/97 8.50 4.98 5.24 6.58 642.8
07/18/97 8.50 5.04 5.24 6.53 648.8
07/25/97 8.50 5.08 5.22 6.19 667.0
08/01/97 8.50 5.09 5.19 6.38 682.2
08/08/97 8.50 5.15 5.24 6.48 664.6
08/15/97 8.50 5.17 5.31 6.65 659.4
08/22/97 8.50 5.11 5.21 6.53 663.4
08/29/97 8.50 5.15 5.30 6.66 664.6
09/05/97 8.50 5.04 5.27 6.59 692.6
09/12/97 8.50 5.01 5.30 6.35 698.6
09/19/97 8.50 4.98 5.23 6.46 725.8
09/26/97 8.50 4.87 5.18 6.35 728.3
10/03/97 8.50 4.92 5.16 6.35 746.3
10/10/97 8.50 4.95 5.16 6.34 762.9
10/17/97 8.50 4.94 5.23 6.40 749.3
10/24/97 8.50 4.97 5.23 6.38 768.6
10/31/97 8.50 5.04 5.07 6.22 752.4
11/07/97 8.50 5.14 5.15 6.20 755.1
11/14/97 8.50 5.16 5.15 6.12 738.5
11/21/97 8.50 5.15 5.18 6.05 765.6
11/28/97 8.50 5.13 5.21 6.06 767.4
12/05/97 8.50 5.13 5.25 6.04 776.2
12/12/97 8.50 5.10 5.23 6.07 787.3
12/19/97 8.50 5.12 5.20 5.96 793.0
12/26/97 8.50 5.27 5.26 5.90 786.9
01/02/98 8.50 5.24 5.23 5.93 810.5
01/09/98 8.50 5.04 4.99 5.75 720.2
01/16/98 8.50 5.00 4.92 5.74 760.1
01/23/98 8.50 5.02 4.96 5.87 751.1
01/30/98 8.50 5.06 5.01 5.89 768.4
02/06/98 8.50 5.05 4.99 5.89 798.8
02/13/98 8.50 5.07 5.01 5.89 799.8
02/20/98 8.50 5.06 5.02 5.84 806.9
02/27/98 8.50 5.16 5.14 5.94 818.7
03/06/98 8.50 5.08 5.15 6.05 823.6
</TABLE>
(1) U.S. Financial Data, The Federal Reserve of St. Louis
(2) SNL Securities - Thrift Stock Indexes
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.15
financial institutions and simply served as a destabilizing influence for the
stock market. However, while thrift stock prices experienced a limited level of
variability, such prices generally moved upward during much of 1992. The
declining interest rate environment and improving net interest margins resulted
in generally favorably earnings reports for financial institutions. In
particular, reports of record earnings for the thrift industry for 1992 and 1993
fueled moderate stock price appreciation through much of 1993.
In the early portion of 1994, thrift stock prices remained relatively
flat as the general direction of interest rates was uncertain. However, any
negative impact caused by the rise in interest rates in the spring of 1994 was
offset apparently due to the announcement of interstate Banking legislation.
This legislation created speculation that thrifts would be more easily acquired
and the thrift industry would consolidate. While the market for thrift stocks
faltered in March and April of 1994, stock prices resumed their upward trend
until October 1994, when the rise in interest rates led to speculation that
financial institutions would generate less earnings in future periods. The
decline in thrift stock prices in the last quarter of 1994 was dramatic.
However, overall, thrift prices advanced during most of 1995, 1996 and 1997, as
long-term interest rates declined. Also, heavy merger and acquisition activity
in both the bank and thrift industries fueled speculative trading in many thrift
stocks during 1995, 1996 and 1997. However, as noted previously, in late 1997,
and particularly, in January 1998 the market for thrift stocks declined due to
fears of the Asian economic crisis and a flattening of the yield curve. In
February and March, thrift stocks resumed their upward movement.
Chart 1 reflects the performance of the stock market since the passage of
the FIRREA legislation. As noted, the overall favorable performance of financial
institution stock prices during
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.16
Chart 1
How Financial Service Companies Have Fared
Relative to the Market
[GRAPHIC OMITTED]
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.17
1991 through the third quarter of 1994 reflects the recapture of losses
sustained during 1989 and 1990. However, the chart reflects a significant
downturn in financial related stocks in the last quarter of 1994, followed by a
recovery during most of 1995, 1996 and 1997. These factors, both positive and
negative, have been factored into our valuation considerations.
Valuation Approach
- ------------------
Three approaches have been considered appropriate to determine the pro
forma market value estimate of a converting savings institution: (1)
price/earnings, (2) price/book value, and (3) price/assets. We believe that
investors place their primary emphasis on making purchase decisions based on the
recent earnings results and expected profitability of savings institutions.
Therefore, we believe it is appropriate to place considerable emphasis on the
pro forma price/earnings valuation approach in deriving a fair market value for
a converting savings institution. However, price/ earnings ratios for some
savings institutions are less meaningful as a result of the variability of
reported earnings due to non-operating gains and losses.
Therefore, we also generally give considerable weight to the pro forma
price/book value (or price/tangible book value) approach. This valuation method
also is closely analyzed by investors in making investment decisions,
particularly for a converting thrift institution. However, it is important to
note that the "book value" of a company is an accounting derived concept that
represents the historically accumulated retained earnings of such entity. Such
book value does not necessarily take into consideration the current earnings
power of the company. Obviously, a converting thrift institution has a base of
capital in place prior to the time of conversion. To attempt to value such
converting institution at a pro forma book/value ratio equal to or even close to
the
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.18
price/book value ratios of publicly traded stock institutions will result, in
most instances, in an unrealistic valuation that is unacceptable in the
marketplace. Thus, a disproportionate reliance on a price/book value approach
may result in unrealistic estimated pro forma market value for the Association.
This is particularly true since investors will be seeking a certain minimum, and
thus reasonable, return on equity ("ROE"). Therefore, we believe that in
determining an appropriate value for a converting institution such as First
Kansas, the pro forma price/book value ratio must be balanced against the pro
forma price/earnings ratio and the pro forma price/assets ratio.
One other valuation method, the pro forma price/assets ratio, is most
applicable for valuing savings institutions with low net worth and/or very low
operating income or losses. Since this is not the case for First Kansas, we have
placed less weight on this approach but have considered the reasonableness of
the resulting price/assets ratio in our valuation process.
In analyzing the appropriate pro forma pricing ratios and the resulting
estimated fair market value for the to-be-issued shares of common stock of First
Kansas, we have considered the following strengths and weaknesses of the
Association:
o After declining in fiscal years 1994 through and 1996, First Kansas'
profitability improved during the latest fiscal year ended December
31, 1997. However, the Association's core profitability level remained
below the level generated in fiscal 1993.
o First Kansas reported a lower level of profitability relative to that
of the comparative group. The Association's latest twelve month ROA of
68 basis points compared to an ROA of 93 basis points for the
comparative group. The Association's lower core profitability
primarily reflects a narrower net interest margin, due to a lower
yielding earning asset base as well as a high level of mortgage-backed
securities relative to loans, and a higher operating expense ratio.
The infusion of conversion proceeds will increase First Kansas' net
interest margin levels but operating expense ratios are also expected
to increase.
o The Association has been successful in increasing the levels of
non-interest income over the last three years, as a result of the
expansion of its base of loan fees and service charges. While
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.19
management believes the expansion of checking accounts and other
consumer products and services has enhanced the Association's
competitiveness, First Kansas remains very much impacted by strong
rate competition in the raising of deposits and the offering of loans.
This has limited interest rate spread growth potential for the
Association.
o Intense competition from much larger regional and multi-regional banks
and also mortgage banking companies operating in and around the Kansas
City metropolitan area has limited the Association's ability to expand
profitably in its local market areas. Management is hopeful that, with
a larger capital base after conversion, First Kansas' ability to
expand profitably will be enhanced.
o First Kansas has achieved low non-performing asset levels over recent
years and the Association's asset quality level is favorable relative
to the comparative group.
o The infusion of capital through conversion will result in a strong
equity position for the Association. The Association's post-conversion
consolidated equity ratio of between 15 and 17 percent is expected to
be moderately above the comparative group average. However, the
Association's limited earnings growth potential should result in a
lower return on equity relative to that of the comparative group.
o Finally, First Kansas' common stock will likely trade in the Nasdaq
SmallCap market. However, with a relatively low market capitalization,
the Association's stock can be expected to have at least modestly less
liquidity than the comparative group, as a whole.
Based on First Kansas' fundamental financial and other characteristics
relative to the comparative group as discussed in this chapter, on balance, we
believe that a moderate valuation discount for the Association is appropriate.
Such valuation adjustment reflects the Association's lower core earnings level
and limited earnings growth potential. Also, we believe that, as a converting
institution, a new issue discount is appropriate for First Kansas.
Based on the above factors and the pricing ratios of the ten comparative
group thrifts, we believe that the following pro forma pricing ratios and
discounts are appropriate for First Kansas:
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.20
Table 4.2
Comparative Pricing Analysis
First Kansas Federal Savings Association
<TABLE>
<CAPTION>
Discount to the
Pricing Ratio Comparative Group
- ------------- -----------------
<S> <C> <C> <C>
Price/Tangible book Value 72.64% Mean 40.9%
Median 40.2%
Price/Earnings 12.85x(1) Mean 39.9%
Median 38.3%
Price/Assets 10.99% Mean 42.4%
Median 41.8%
</TABLE>
(1) Based on reported earnings of $672,000 for the fiscal year ended December
31, 1997; assumes 1,175,000 shares outstanding (total shares issued in
the conversion at the midpoint value). Under SOP No. 93-6 there would be
1,085,700 shares outstanding for the earnings per share calculation,
resulting in a pro forma price/earnings ratio of 11.87x.
We believe that First Kansas' pro forma price/book value ratio, when
analyzed in conjunction with the Association's pro forma price/earnings and
price/assets ratios, results in an appropriate estimated pro forma market value.
We believe that First Kansas' pricing ratios are appropriate for a newly
converting thrift institution and particularly is in line with the pro forma
price/tangible book value ratios of recently converted thrifts (please see Table
4.3).
Valuation Conclusion
- --------------------
It is therefore our opinion that, as of March 6, 1998, the estimated pro
forma fair market value of First Kansas was $11,750,000, based on 1,175,000
shares at $10.00 per share. The resulting range of value was $9,987,500 or
998,750 shares, to $13,512,500 or 1,351,250 shares, both based on $10.00 per
share. Pro forma calculations which include the impact of an eight percent
purchase by First Kansas' Employee Stock Ownership Plan ("ESOP") and a four
percent purchase by the
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Table 4.3
Recent Standard Conversions (1)
<TABLE>
<CAPTION>
Price/ Price/ Price/
IPO Gross Pro-Forma Pro-Forma Pro-Forma
Price Proceeds Earnings Book Value Tang. Book
----- -------- -------- ---------- ----------
Ticker Short Name State IPO Date ($) ($000) (x) (%) (%)
- ------ ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SFSH SFSB Holding Company PA 02/27/98 10.00 7,260 N/A 76.00 76.00
RCBK Richmond Cnty Financial Corp NY 02/18/98 10.00 244,663 16.00 83.60 83.60
HFBC HopFed Bancorp Inc. KY 02/09/98 10.00 40,336 13.50 75.40 75.43
TSBK Timberland Bancorp Inc. WA 01/13/98 10.00 66,125 10.50 81.50 81.54
MYST Mystic Financial Inc. MA 01/09/98 10.00 27,111 17.50 77.80 77.75
WPBC Wyman Park Bancorp MD 01/07/98 10.00 10,117 28.40 75.00 75.00
DFFN Delaware First Financial Co. DE 01/05/98 10.00 11,570 20.60 73.70 73.70
UTBI United Tennessee Bankshares TN 01/05/98 10.00 14,548 16.10 78.40 78.40
PEDE Great Pee Dee Bancorp SC 12/31/97 10.00 21,821 15.90 73.90 73.89
UCBC Union Community Bancorp IN 12/29/97 10.00 30,418 13.50 74.10 74.11
WSBI Warwick Community Bancorp NY 12/23/97 10.00 66,065 13.70 78.60 78.58
SIB Staten Island Bancorp Inc. NY 12/22/97 12.00 515,775 14.10 80.60 83.01
HCBC High Country Bancorp Inc. CO 12/10/97 10.00 13,225 30.50 77.70 77.75
FSFF First SecurityFed Financial IL 10/31/97 10.00 64,080 14.90 75.20 75.18
OTFC Oregon Trail Financial Corp. OR 10/06/97 10.00 46,949 18.50 76.60 76.63
SHSB SHS Bancorp Inc. PA 10/01/97 10.00 8,200 13.90 70.70 70.73
GOSB GSB Financial Corp. NY 07/09/97 10.00 22,483 23.20 73.40 73.44
FSPT FirstSpartan Financial Corp. SC 07/09/97 20.00 88,608 26.00 73.00 72.98
FBNW FirstBank Corp. ID 07/02/97 10.00 19,838 19.20 71.90 71.93
CFBC Community First Banking Co. GA 07/01/97 20.00 48,271 36.10 72.70 72.74
Average: 19.06 75.99 76.12
Median: 16.05 75.30 75.30
</TABLE>
(1) Note: All of the above IPOs closed at or near the supermax of the valuation
range.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
4.22
Restricted Stock Plan subsequent to conversion are shown in Table 4.4 and in
Exhibits IV-2 through IV-7. Subject to market conditions at the time of the
offering, an overallotment provision up to 15 percent above the maximum value,
or $15,539,375, could be made available.
<PAGE>
Table 4.4
Pro Forma Comparison
Converting Institution Versus the Comparative Group
(Based on an Reported Net Income of $672,000)
<TABLE>
<CAPTION>
First Kansas Federal
As of March 6, 1998 Mk P/E P/ Ttl Eq/ TgEq/
Ticker Name & State Price(1) Value (3) P/Book P/TBook Assets DivYld Assets Asst A EPS(3) ROAA(3) ROAE(3)
------ ------------ -------------- --- ------ ------- ------ ------ ------ ---- ----- ----- ------- -------
($) ($Mil) (x) (%) (%) (%) (%) ($000) (%) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Kansas Federal (2)
-------------------------
Before Conversion 10.00 N/A N/A N/A N/A N/A N/A 95,655 6.91 6.62 N/A 0.68 10.71
Pro Forma SuperMaximum 10.00 15.54 15.58 78.54 79.75 14.04 0.00 110,694 17.87 17.65 0.64 0.97 5.17
Pro Forma Maximum 10.00 13.51 14.19 75.07 76.34 12.43 0.00 108,668 16.57 16.33 0.70 0.93 5.43
Pro Forma Midpoint 10.00 11.75 12.85 71.32 72.64 10.99 0.00 106,930 15.41 15.17 0.78 0.90 5.71
Pro Forma Minimum 10.00 9.99 11.40 66.81 68.18 9.49 0.00 105,193 14.21 13.97 0.88 0.87 6.04
Comparative Group (10)
-------------------------
Averages 19.83 30.26 21.39 122.22 122.94 19.08 1.55 161,393 15.59 15.49 0.96 0.93 5.81
Medians 19.44 28.75 20.83 121.41 121.41 18.87 1.58 146,059 15.66 15.66 0.88 0.95 5.89
All SAIF-Insured
Thifts (277)
-------------------------
Averages 23.60 200.46 19.82 162.35 168.29 20.40 1.52 1,181,930 13.46 13.28 1.19 0.95 8.43
Medians 20.38 52.20 19.41 146.12 148.66 18.14 1.50 292,022 11.61 11.34 1.05 0.89 8.12
Comparative Group
-------------------------
CMRN CameronFinlCorp-MO 20.00 51.24 20.83 113.25 113.25 24.28 1.40 211,253 21.44 21.44 0.96 1.17 5.30
CBK CitizensFirst-IL 20.25 48.54 27.36 121.99 121.99 17.74 0.00 273,600 13.88 13.88 0.79 0.71 4.82
FFSL FirstIndepdce-KS 15.00 14.31 20.83 125.94 125.94 12.59 2.00 113,669 9.99 9.99 0.73 0.65 6.26
HFSA HardinBancorp-MO 18.88 15.54 18.88 118.79 118.79 13.47 2.54 115,434 11.34 11.34 1.01 0.76 6.06
HMLK HemlockFedFinl-IL 18.75 38.93 24.35 127.99 127.99 22.04 1.49 176,683 17.22 17.22 0.77 0.58 4.44
LARK LandmarkBcshs-KS 22.69 38.31 16.56 116.41 116.41 16.40 1.76 233,640 14.09 14.09 1.43 1.08 7.63
LXMO LexingtonB&L-MO 16.50 18.49 23.57 109.05 116.28 20.00 1.82 92,450 18.34 17.39 0.71 1.14 4.35
MBLF MBLAFinancial-MO 28.13 35.27 21.15 126.01 126.01 15.98 1.42 223,558 12.68 12.68 1.35 0.81 6.31
PCBC PerryCountyFinl-MO 23.88 19.77 20.58 120.82 120.82 23.25 1.68 85,030 19.24 19.24 1.16 1.08 5.72
SFFC StateFedFinl-IA 14.25 22.22 19.79 141.93 141.93 25.05 1.40 88,608 17.66 17.66 0.73 1.27 7.21
</TABLE>
(1) Closing or Last Trade.
(2) Based on $10.00 per share.
Net income, book value and total assets are for the most recent period.
(3) Excludes non-recurring and extraordinary items
Sources:Audited and unaudited financial statements for First Kansas Federal
SNL Securities and the publicly traded companies' reported stock prices.
<PAGE>
EXHIBITS
<PAGE>
CAPITAL RESOURCES GROUP, INC.
LIST OF EXHIBITS
First Kansas Federal Savings Association
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
I-1 Map of Office Locations
I-2 Audited Financial Statement
II-1 Economic and Demographic Data
II-2 Earnings By Industry
II-3 Deposit Summary
III-1 General Characteristics of Publicly-Traded SAIF-Insured Savings Institutions
III-2 Financial Condition
III-3 Income and Expense Trends
III-4 Selected Spreads and Risk Margins
IV-1 Market Value Characteristics of Publicly-Traded Financial Institutions
IV-2 Pro Forma Effect of Conversion Proceeds - At the Minimum
IV-3 Pro Forma Effect of Conversion Proceeds - At the Midpoint
IV-4 Pro Forma Effect of Conversion Proceeds - At the Maximum
IV-5 Pro Forma Effect of Conversion Proceeds - At the Supermax
IV-6 Pro Forma Analysis Sheet
IV-7 Pro Forma Calculation
V-1 Firm Qualifications Statement
</TABLE>
<PAGE>
EXHIBIT I-1
Map of Office Locations
[OMITTED]
<PAGE>
EXHIBIT I-2
First Kansas'Audited Financial Statements
Source: Offering Prospectus
[OMITTED]
<PAGE>
EXHIBITS I-3 THROUGH I-11
Financial Tables
Source: Offering Circular
[OMITTED]
<PAGE>
[EXHIBITS II-1 THROUGH II-4]
[OMITTED]
<PAGE>
EXHIBIT III-1
General Characteristics of All Publicly-Traded
SAIF-Insured Savings Institutions
[OMITTED]
<PAGE>
EXHIBITS III-2 THROUGH III-4
Pro Forma Effect of Conversion Proceeds
(Based on First Kansas' Reported
Net Income of $672,000)
[OMITTED]
<PAGE>
EXHIBIT IV-1
Market Value Characteristics of All Publicly-Traded
Financial Institutions
[OMITTED]
<PAGE>
EXHIBITS IV-2 THROUGH IV-7
Pro Forma Effect of Conversion Proceeds
(Based on First Kansas' Reported
Net Income of $672,000)
[OMITTED]
<PAGE>
EXHIBIT V-1
Firm Qualifications Statement
[OMITTED]
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[LOGO] Capital Resources Group, Inc.
1211 Connecticut Ave., N.W. - Suite 200 - Washington, DC 20036 -
Tel (202) 466-5685 - Fax (202) 466-5695
Firm Qualifications Statement
THE CAPITAL RESOURCES COMPANIES combine investment banking and diversified
financial and management consulting with securities trading and brokerage.
Capital Resources Group provides a wide variety of consulting and investment
banking services to financial institutions throughout the U.S., specializing in
raising capital, profitability strategies and mergers and acquisitions. Capital
Resources, Inc. is an NASD member broker-dealer that specializes in thrift stock
conversions and thrift securities. The firm's office in downtown Washington,
D.C. is only a few blocks from key regulatory agencies, such as the Office of
Thrift Supervision, Securities and Exchange Commission, Federal Deposit
Insurance Corporation, and the Federal Reserve Board. Other offices are located
in New York City and Indiana.
Securities Activities:
Capital Resources, Inc. serves financial institutions in raising capital in
initial public offerings, primarily in stock conversions of mutual institutions,
and secondary offerings. The primary areas in which services are provided are as
follows:
Subscription and Community Stock Offerings
Capital Resources' expertise in subscription and community offerings of
securities provide a cost effective way for financial institutions to raise
capital while promoting future business and cementing customer loyalties. Each
offering is specially designed to spark community interest. All sales efforts
are managed on-site by Capital Resources' registered principals and
representatives. Offerings may include local and regional brokerage firms in a
syndicate as well.
Conversion Management and Staff Training
Capital Resources trains your staff and manages all detailed and technical back
office operations required for a stock offering. The latest technology is
incorporated into our proprietary data processing applications to provide you
complete control and information on the offering. Coupled with our
comprehensive, personalized training techniques with notebooks and visual
presentations, your board of directors, management and employees are fully
prepared to deal with the institution's customers and their questions during the
conversion.
Market-Making
Capital Resources also has an active trading desk that makes markets in NASDAQ
thrift stocks. Capital Resources acts as principal in trading activities, and
clears transactions through National Financial Services Corporation.
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Capital Resources Firm Qualifications Statement Page 2
Corporate Finance Services:
Capital Resources Group, Inc. provides services in a number of major areas
involving financial strategy and evaluation, including:
Strategic and Financial Planning
Our consultants work with your management team to develop, evaluate and assist
in the implementation of strategic plans; analyze new business lines; perform
profitability analysis; prepare financial forecasts for quantitative analysis of
business plans; provide computer analysis of operating strategies with different
economic scenarios; perform "what if" scenarios; provide pre-conversion and
post-conversion planning assistance.
Valuation Appraisals
Serve as qualified appraisers for mutual institutions converting to stock form
of organization; experienced in public underwritings, community offerings and
private placements. Serve as qualified appraisers for financial service
companies, including mortgage banking companies, insurance agencies, title
agencies, real estate brokerage firms, investment advisory firms, commercial
banks, and other business enterprises. Perform core deposit valuations and
servicing rights appraisals for purchased loan servicing. Capital Resources has
performed over 150 appraisals of successful stock conversions.
Mergers and Acquisitions
Provide comprehensive merger and acquisition assistance for voluntary mergers,
merger-conversions, voluntary supervisory conversions and RTC-assisted
mergers/acquisitions; identify and evaluate potential merger/acquisition
candidates; perform computerized financial analysis and make appropriate
strategic recommendations; prepare regulatory applications and business plans;
structure and negotiate bids for financially assisted cases and provide fairness
opinions for stock institutions. We have been involved in over 200 merger and
acquisition cases.
Equity Research
Perform equity research on publicly-traded thrifts and thrift holding companies.
Provide analysis of potential company operating performance and project likely
stock price trend. Identify under- and/or over-valued situations. Research
reports provided to clients on regular basis.
Litigation and Special Studies
Capital Resources' expertise in the field of financial services provides an
experienced resource for developing testimony and serving as expert witness.
Also, Capital Resources' staff is able to draw upon its unique blend of talents
to address broad or narrow issues in the financial services industry in
preparing special studies.
Asset/Liability Management
Perform analysis on market value of portfolio equity and design strategies to
improve interest rate risk posture associated with earning assets and costing
liabilities; develop and implement plans to restructure loan portfolio.
Branch Sale/Purchase Transactions
Perform analysis to identify offices for sale/purchase; structure financial
terms of transaction and perform analysis on impact of sale on both seller and
buyer as required by regulators; prepare materials for regulatory application
and core deposit valuation.
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Capital Resources Firm Qualifications Statement Page 3
Senior Personnel
David P. Rochester is co-founder, Chairman and Managing Director of the Capital
Resources Companies. He leads Capital Resources' strategic planning and
corporate finance activities and is a frequent speaker on industry programs in
these areas. He has been actively involved in several hundred merger and
acquisition situations and initial public offerings. He serves as advisor to
boards of directors and senior management. Prior experience includes private
consulting with financial institutions and other companies, serving as Visiting
Scholar at the Federal Home Loan Bank Board, Senior Economist at the Federal
Savings and Loan Insurance Corporation and serving on the faculties of banking
and finance graduate programs at several major universities. Dr. Rochester holds
a Ph.D. in Banking and Finance from the University of Georgia.
Catherine K. Rochester is co-founder and President of the Capital Resources
Companies. She oversees the securities trading and marketing activities of
Capital Resources, Inc. and holds a principal's designation securities license.
Mrs. Rochester has been actively involved in raising capital for the financial
institutions industry for the past ten years. Prior to founding Capital
Resources, she was Senior Vice President and Chief Financial Officer for a
billion dollar plus interstate institution in New York. Her previous experience
includes serving as a consultant to the thrift industry. She holds a M.S. in
Finance from American University in Washington, D.C.
Edward T. Lutz is Managing Director and heads the firm's activities in the
Northeast in our New York City office. His vast experience includes serving as
financial and regulatory advisor to financial institutions, boards of directors
and senior management in strategic planning, mergers and acquisitions and
capital raising activities, including stock conversions. He was formerly New
York Regional Director of Supervision of the FDIC. Mr. Lutz holds an M.B.A in
Finance from American University in Washington, D.C.
Michael B. Seiler is Senior Vice President and heads the firm's appraisal and
business planning activities. He was formerly employed with Equitable Bank in
Baltimore, Maryland, in the areas of financial planning and analysis. Prior
experience also includes service with the Securities and Exchange Commission
where Mr. Seiler specialized in the areas of thrift and commercial banking. At
the SEC, he had responsibilities for public offering prospectuses and Form 10-K
Reports as well as other periodic reports. Mr. Seiler is a Certified Public
Accountant and holds an M.B.A. in Finance from the State University of New York
at Albany.
Richard C. Wallace, Senior Vice President, is responsible for new business
development in the financial institutions sector, primarily thrift mutual-to-
stock conversions, mergers and acquisitions, public offerings and private
placements. Prior to Capital Resources, Mr. Wallace held executive marketing
positions in the financial industry with Everen Securities and GEAC for over ten
years, with a focus on savings institutions. Mr. Wallace holds a B.A. in
Business Economics from the University of California.
James L. Ford is Senior Vice President and has a broad background with more than
20 years of thrift industry experience including thrift and mortgage banking
operations. He was formerly a senior officer of a large mortgage banking
company, where he oversaw all areas of the company's operations with special
emphasis on finance and loan administration. He also has held senior management
positions at a large savings institution. Mr. Ford holds a B.S. in Mathematics
from Michigan State University.
Charles J. Antonuci, Sr. is a Consultant with Capital Resources and has a broad
background of experience with financial institutions serving in senior
management positions and as a consultant to the industry. He is also President
of Bedford Consulting in New. York which specializes in real estate and loan
consulting services. He holds a B.S. in Business Management from St. John's
University.
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Capital Resources Firm Qualifications Statement Page 4
J. Kevin McAuliffe is Vice President, involved in underwritings, heads
institutional brokerage and equity research. Prior experience includes mergers
and acquisitions, appraisals, and business plans for thrifts, and employment by
a Fortune 500 company as cost analyst for-feasibility studies. Mr. McAuliffe
holds a B.B.A. in Finance from the University of Kentucky and is a registered
general securities principal.
Lois P. Hankins is Vice President responsible for securities compliance. She has
over 14 years experience in the financial industry during which time she served
as a financial consultant for Merrill Lynch, Shearson Lehman Brother's and Dean
Witter Reynolds Inc. Additionally, she has served as the Regional Marketing
Manager for a major California banking institution.
Noel G. Metcalfe is a Senior Associate responsible for stock conversion
operations. His prior experience includes Director of Retail Sales for the
Federal Home Loan Mortgage Corporation, financial consultant with Dean Witter
Reynolds Inc. and mortgage lending with a savings and loan association. Mr.
Metcalfe has a B.S. in Business Administration from Indiana University and is a
registered general securities principal.
Jeffrey G. Gilbert is an Equity Securities Analyst specializing in banks and
thrifts. He was formerly employed as a Consultant for KPMG Peat Marwick in their
Financial Risk Strategy Practice. His experience includes investment portfolio
analysis for banks and thrifts, asset/liability management consulting, and risk
management.. Mr. Gilbert has a B.S. in Business Administration from Bucknell
University.
Roland M. Calvert is a Consulting Associate involved in developing business
plans and valuation appraisals and providing financial analysis with the support
of financial projection models. He graduated from James Madison University with
a B.B.A. degree in Finance and Economics.
Harinder S. Sawhney is Assistant Portfolio Manager involved in thrift equity
research for investment purposes. Prior experience includes work as financial
consultant, international trade consultant and stockbroker. Harry holds an
M.B.A. in Finance from The George Washington University.
Securities Division
J. Kevin McAuliffe Michael H. Currey Michael Godby
Head NASDAQ Trader Vice President Vice President
Lois P. Hankins David P. Rochester, II Jeffrey G.Gilbert
Vice President Assistant Trader Equity Securities Analyst
Noel G. Metcalfe Jacqueline A. Sprague Dante M. Bramblett
Senior Associate Assistant to Traders Associate
