SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
-------------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _____________.
Commission File No. 0-24037
First Kansas Financial Corporation
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(Name of Small Business Issuer in Its Charter)
Kansas 48-1198888
- ---------------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Main Street, Osawatomie, Kansas 66064
- ---------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (913) 755-3033
--------------
Securities registered under Section 12(b) of the Exchange Act: None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO .
- -
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $7.6 million.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the average bid and asked price of the registrant's
Common Stock on March 8, 1999, was $13.6 million.
As of March 8, 1999, there were issued and outstanding $1,553,938
shares of the registrant's Common Stock.
Transitional Small Business Disclosure Format (check one): YES NO X
-- --
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1998. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended December 31, 1998. (Part III)
<PAGE>
PART I
Forward-Looking Statements
First Kansas Financial Corporation (the "Company") may from time to
time make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-KSB and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Description of Business
- --------------------------------
General
The Company is a Kansas corporation organized in February of 1998 at
the direction of First Kansas Federal Savings Association (the "Association") to
acquire all of the capital stock that the Association issued in its conversion
from the mutual to stock form of ownership (the "Conversion"). On June 25, 1998,
the Association completed the Conversion and became a wholly owned subsidiary of
the Company. Pursuant to the Conversion, First Kansas Federal Savings
Association changed its name to First Kansas Federal Savings Bank (the "Bank").
The Company is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage, provided that the Bank retains a specified amount of its assets
in housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion.
2
<PAGE>
The Bank was originally chartered in 1899 as "The Consolidated Building
and Loan Association" and commenced operations that same year. In 1938, the Bank
became a member of the Federal Home Loan Bank System, obtained a federal charter
and changed its name to "First Federal Savings and Loan Association of
Osawatomie." In 1983, the Bank changed its name to "First Kansas Federal Savings
Association."
The Bank is a federally chartered stock savings bank headquartered in
Osawatomie, Kansas, with six branch offices located in the Kansas counties of
Miami, Bourbon, Mitchell and Phillips. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). The Bank is a member of and owns capital stock in the FHLB of Topeka,
which is one of the 12 regional banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
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 the Bank's 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.
Lending Activities
The following table sets forth information concerning the types of
loans held by the Bank.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Mortgage loans:
One- to four-family.................. 37,884 91.47% $42,853 91.29%
Multi-family......................... 0 0.00 1,045 2.23
Commercial........................... 471 1.13 535 1.14
Land................................. 264 .64 141 0.30
Construction......................... 151 .36 126 0.27
------ ----- ------ ------
Total mortgage loans............... 38,770 93.60 44,700 95.23
------ ----- ------ ------
Consumer loans......................... 2,115 5.10 1,728 3.68
Commercial loans....................... 537 1.30 513 1.09
------ ----- ------ ------
Total loan portfolio............... 41,422 100.00% 46,941 100.00%
------ ====== ------ ======
Less:
Loans in process..................... 31 81
Deferred fees and discounts.......... 116 118
Allowance for loan losses............ 206 179
------ ------
Total loans receivable, net........ 41,069 $46,563
====== ======
</TABLE>
3
<PAGE>
The following table sets forth the estimated maturity of the Bank's
loan portfolio at December 31, 1998. 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. All commercial and consumer loans shown in the table below have fixed
interest rates. The mortgage portfolio is comprised of $13,695,000 in fixed rate
loans and $25,075,000 in variable rate loans.
<TABLE>
<CAPTION>
Mortgage Commercial Consumer Total
Loans(1) Loans Loans Loans
-------- ---------- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
Within 1 year................... $ 220 $ 79 $ 471 $ 770
Over 1 to 5 years............... 1,249 401 1,555 3,205
Over 5 years.................... 37,301 57 89 37,447
------ ----- ----- ------
Total amount due.............. $38,770 $ 537 $2,115 $41,442
====== ===== ===== ======
</TABLE>
- ------------------------
(1) Includes construction loans.
Mortgage Loans:
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of originating and purchasing one- to four-family residential
mortgage loans secured by property located in the Bank's market areas. About
two-thirds of the Bank's loan portfolio is comprised of adjustable-rate mortgage
("ARM") loans which the Bank retains for its portfolio. The remainder consists
of fixed-rate loans which the Bank originates either to resell in the secondary
market or to retain in its portfolio, depending on the yield on the loan and on
its 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 the Bank's ARM loans is based on an index plus a
stated margin. The Bank usually offers 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. The
Bank's 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 the Bank's market area for ARM loans has recently been
weak.
The Bank's 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 nonowner occupied properties generally is limited to 80%. The Bank
conforms its loans to the standards that are used in the mortgage industry
allowing its loans to be readily sold in the secondary market. The Bank does 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
4
<PAGE>
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 the Bank generally include
due-on-sale clauses. This gives the Bank 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 the Bank's 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. The Bank's 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, the Bank generally limits this type of lending to its market area
and to borrowers who are otherwise well known to the Bank. Most construction
loans convert to permanent loans with the Bank after 6 months.
Residential Construction Loans. The Bank makes 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. The Bank also makes land loans which are secured by raw
land in its market area, to be used for agriculture or residential construction.
At December 31, 1998, land loans totalled $264,000 or .64% of the Bank's total
loan portfolio.
Consumer Loans:
The Bank offers consumer loans in order to provide a wider range of
financial services to its customers and because these loans provide higher
interest rates and shorter terms than many of the Bank's other loans. Consumer
loans totalled $2.1 million or 5.10% of the Bank's total loans at December 31,
1998. The Bank's consumer loans consist primarily of direct automobile loans.
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:
The Bank's commercial loan portfolio is comprised of loans to several
local businesses, and at December 31, 1998 represented $537,000, or 1.30% of the
Bank's total loan portfolio.
5
<PAGE>
Loan Approval Authority and Underwriting. The Bank's 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 the Bank to adjust the interest rate on the
loan. As of December 31, 1998, there were no outstanding mortgage commitments.
Loans to One Borrower. The maximum amount of loans which the Bank may
make to any one borrower may not exceed the greater of $500,000 or 15% of its
unimpaired capital and unimpaired surplus. The Bank may lend an additional 10%
of its unimpaired capital and unimpaired surplus if the loan is fully secured by
readily marketable collateral. The Bank's maximum loan to one borrower limit was
$3.2 million at December 31, 1998. At December 31, 1998, the aggregate loans of
the Bank's five largest borrowers have outstanding balances of between $266,000
and $414,000. All of these loans were performing in accordance with their terms.
Non-performing 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 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 management's 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.
6
<PAGE>
Non-performing 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, 1998, interest income that would have been recorded
on loans accounted for on a nonaccrual basis under the original terms of such
loans was immaterial.
At December 31,
---------------
1998 1997
---- ----
(In thousands)
Loans accounted for on a non-accrual basis:
One- to four-family.............................. $ -- $ 75
Consumer......................................... 5 4
----- -----
Total ......................................... 5 79
----- -----
Accruing loans delinquent 90 days or more:
One- to four-family.............................. --
Consumer......................................... -- --
----- -----
Total.......................................... -- --
----- -----
Total non-performing loans................... 5 79
----- -----
Foreclosed assets:
One- to four-family.............................. --
Consumer......................................... -- --
----- -----
Total.......................................... -- --
----- -----
Total non-performing assets........................ $ 5 $ 79
===== =====
Total non-performing loans as a
percentage of net loans.......................... 0.01% 0.17%
==== ====
Total non-performing assets as a
percentage of total assets....................... 0.01% 0.08%
==== ====
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
the Bank 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
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
7
<PAGE>
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, 1998, the Bank had loans classified as special mention,
substandard, doubtful and loss as follows:
At
December 31,
1998
----
(In thousands)
Special mention............................. $ 0
Substandard................................. 19
Doubtful assets............................. 4
Loss assets................................. 0
-----
Total.................................. $ 23
=====
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 the Bank's 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) the Bank's past loan loss experience, (ii) known and
inherent risks in the Bank's 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.
The Bank monitors its allowance for loan losses and makes additions to
the allowance as economic conditions dictate. Although the Bank maintains its
allowance for loan losses at a level that management considers adequate for the
inherent risk of loss in the Bank's loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, management's 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.
8
<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 the Bank's use of the allowance to absorb losses in other
loan categories.
<TABLE>
<CAPTION>
At December 31,
-------------
1998 1997
---- ----
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...................... $ 155 91.47% $137 91.29%
Multi-family............................. -- -- -- 2.23
Commercial............................... -- 1.13 -- 1.14
Land..................................... -- .64 -- 0.30
Construction............................. -- .36 -- 0.27
Consumer loans............................. 51 5.10 42 3.68
Commercial loans........................... -- 1.30 -- 1.09
----- ------ --- ------
Total allowance....................... $ 206 100.00% $179 100.00%
===== ====== === ======
</TABLE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:
At December 31,
---------------
1998 1997
---- ----
(Dollars in thousands)
Balance at beginning of period............... $ 179 $ 146
------- -------
Charge-offs:
One- to four-family........................ --
Consumer................................... (5) (5)
------- -------
(5) (5)
------- -------
Recoveries:
One- to four-family........................ --
Consumer .................................. 2 3
------- -------
2 3
------- -------
Net charge-offs.............................. (3) (2)
Provision for loan losses.................... 30 35
------- -------
Balance at end of period..................... $ 206 $ 179
======= =======
Allowance for loan losses to total non-
performing loans at end of period.......... 4,120.0% 226.58%
======= =======
Allowance for loan losses to net
loans at end of period..................... .50% 0.38%
======= =======
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<PAGE>
Investment Activities
Investment Securities. The Bank is 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 -- Liquidity and Capital Resources." The level of liquid
assets varies depending upon several factors, including: (i) the yields on
investment alternatives, (ii) management's 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) the Bank's
projections as to the short-term demand for funds to be used in loan origination
and other activities. The Bank classifies its investment securities as
"available-for-sale" or "held-to-maturity" in accordance with SFAS No. 115. At
December 31, 1998, the Bank's 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.
The Bank's investment securities "available-for-sale" and
"held-to-maturity" portfolios at December 31, 1998, did not contain securities
of any issuer with an aggregate book value in excess of 10% of the Bank's
equity, excluding those issued by the United States government agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities and collateralized
mortgage obligations ("CMOs"). Mortgage-backed securities can serve as
collateral for borrowings and, through sale, maturity or 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 the
Bank. 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 the
Federal National Mortgage Association ("FNMA").
At December 31, 1998, the Bank's mortgage-backed securities portfolio
classified as "available- for-sale" totalled $10.6 million, and the Bank's
mortgage-backed securities portfolio classified as "held-to- maturity" totalled
$3.5 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.
10
<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 the Bank 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, 1998, the Bank's CMO portfolio classified as
"available-for-sale" had a carrying value of $16.7 million, and the Bank's CMO
portfolio classified as "held-to-maturity" had a carrying value of $19.0
million.
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investments. See Notes 3, 4 and 5 to the Bank's Financial
Statements.
At December 31,
---------------
1998 1997
---- ----
(In thousands)
Investments:
U.S. agency securities............................... $ 3,139 $ 3,852
Mortgage-backed securities held-to-maturity.......... 22,521 20,937
Mortgage-backed securities available-for-sale........ 27,282 16,833
State and municipal obligations held-to-maturity..... 624 -
Other - held-to-maturity............................. 949 -
Interest-bearing deposits............................ 7,000 3,400
FHLB stock........................................... 509 661
------ -------
Total investments ................................ $62,024 $45,683
====== ======
11
<PAGE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's investments at December 31, 1998 by contractual maturity.
The following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
One Year One to Five to More than Total
or Less Five Years Ten Years Ten Years Investment Securities
---------------- ---------------- ----------------- ---------------- -------------------------
Carry- Weighted Carry- Weighted Carry- Weighted Carry- Weighted Carry- Weighted
ing Average ing Average ing Average ing Average ing 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....... $ -- --% $1,000 6.34% $1,000 6.30% $ 1,139 8.05% $ 3,139 6.95% $ 3,148
Mortgage-backed securities... -- -- -- -- 6,021 6.45 43,781 5.71 49,802 5.80 49,926
Interest-bearing deposits.... 7,000 4.75 -- -- -- -- -- -- 7,000 4.75 7,000
FHLB stock................... -- -- -- -- -- -- 509 6.75 509 6.75 509
State municipal obligations.. -- -- -- -- -- -- 624 4.59 624 4.59 632
Other debt securities........ -- -- -- -- -- -- 949 6.60 949 6.60 949
----- ---- ----- ----- ----- ---- ------ ---- ------ ---- ------
Total investments......... $7,000 4.75% $1,000 6.34% $7,021 6.43% $47,002 5.78% $62,023 5.75% $62,164
===== ==== ===== ==== ===== ==== ====== ==== ====== ==== ======
</TABLE>
12
<PAGE>
Sources of Funds
Deposits are the Bank's 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 the Bank's 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 the Bank on deposits are set weekly at the
direction of the Bank's senior management. Interest rates are determined based
on the Bank's liquidity requirements, interest rates paid by the Bank's
competitors, and the Bank's growth goals and applicable regulatory restrictions
and requirements.
Non-interest bearing demand, regular savings, money market demand and
NOW accounts constituted $30.8 million, or 36.5%, of the Bank's deposit
portfolio at December 31, 1998 and the average interest rate paid on such
interest-bearing accounts at that date was 2.50%. Certificates of deposit
constituted $53.6 million, or 63.5%, of the deposit portfolio, of which $3.3
million, or 3.9%, of the deposit portfolio were certificates of deposit with
balances of $100,000 or more. Such deposits are offered at negotiated rates. The
average interest rates paid on certificates of deposits with deposit balances
under $100,000 and over $100,000 were 5.47% and 5.48%, respectively, at December
31, 1998. As of December 31, 1998, the Bank had no brokered deposits.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
Certificates
Maturity Period of Deposits
--------------- ------------
(In thousands)
Within three months $ 300
Three through six months 600
Six through twelve months 1,400
Over twelve months 1,000
-----
$3,300
=====
Borrowings. Advances (borrowings) may be obtained from the FHLB of
Topeka to supplement the Bank's supply of lendable funds. Advances from the FHLB
of Topeka are typically secured by a pledge of the Bank's stock in the FHLB of
Topeka, a portion of the Bank's 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. The Bank may borrow up to $69.6 million from the FHLB of
Topeka. If the need arises, the Bank may also access the Federal Reserve Bank
discount window to supplement its supply of lendable
13
<PAGE>
funds and to meet deposit withdrawal requirements. At December 31, 1998,
borrowings from the FHLB of Topeka totalled $0.7 million. The Bank had no other
borrowings outstanding.
The following table sets forth the terms of the Bank's short-term FHLB
advances.
At or for the period ended
--------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
(Dollars in thousands)
Balance at year end................. $ 650 $ 2,550
Average balance outstanding
during the period................. 808 7,748
Maximum amount outstanding
at any month-end during
the period........................ 2,550 10,350
Weighted average interest rate
during the period................. 5.73% 6.71%
Personnel
At December 31, 1998, the Bank had 29 full-time employees and 12
part-time employees. None of the Bank's employees are represented by a
collective bargaining group. Management believes that its relationship with the
employees is good.
Subsidiary Activity
The Bank 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, 1998, the Bank was authorized to invest up to approximately $2.1 million in
the stock of, or loans to, service corporations (based upon the 2% limitation).
The Bank 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, the Bank 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 is the site of our new office
building. The Bank's investment in this real estate development project will
continue to decline as the remaining lots are sold. At December 31, 1998, the
total investment in this real estate was $361,000.
Legal Proceedings
The Bank is, from time to time, a party to legal proceedings arising in
the ordinary course of its business, including legal proceedings to enforce its
rights against borrowers. The Bank is not a party to any legal proceedings which
are expected to have a material adverse effect on its financial statements.
14
<PAGE>
Regulation
Set forth below is a brief description of certain laws which are
related to the regulation of the Company and the Bank. The following description
does not purport to be complete and is qualified in its entirety by reference to
all applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. The Company files reports with the
OTS and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over the Company and its non- savings association
subsidiaries, should such subsidiaries be formed, which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
savings association insured by the Savings Association Insurance Fund (SAIF"))
would become subject to restrictions applicable to bank holding companies unless
such other associations each also qualify as a QTL and were acquired in a
supervisory acquisition.
Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). Lending activities and other investments
must comply with various federal statutory and regulatory requirements. The Bank
is also subject to certain reserve requirements promulgated by the FRB.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings 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 such regulations, whether by the OTS, the FDIC, or the
U.S. Congress could have a material adverse impact on the Company, the Bank, and
their operations.
15
<PAGE>
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of .061% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. Effective September 30, 1995, the FDIC lowered the
insurance premium of BIF insured deposits to a range of between 0.04% and 0.31%
of deposits with the result that most commercial banks would pay the lowest rate
of 0.04%. Effective January 1, 1996, the annual insurance premium for most BIF
members was lowered to $2,000. These reductions in insurance premiums for BIF
members placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Savings Bank recorded a $355,000
pre-tax expense for this assessment at September 30, 1996. Beginning January 1,
1997, the deposit insurance assessment for most SAIF members was reduced to
approximately .065% of deposits on an annual basis through the end of 1999.
During this same period, BIF members will be assessed approximately .013% of
deposits. After 1999, assessments for BIF and SAIF members should be the same.
It is expected that these continuing assessments for both SAIF and BIF members
will be used to repay outstanding Financing Corporation bond obligations. As a
result of these changes, beginning January 1, 1997, the rate of deposit
insurance assessed the Bank declined by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet two capital standards: (1) a leverage ratio (core
capital) equal to at least 4% of total adjusted assets, and (2) a risk-based
capital requirement equal to 8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank 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 to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect of the dividend would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account established in
connection with the Conversion.
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 shareholders 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 approval. As of
December 31, 1998, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully
16
<PAGE>
phased-in requirement or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. 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.
Additionally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
undercapitalized (not meet either of its minimum regulatory capital
requirements).
In January 1999, the OTS issued an amendment to its current regulations
with respect to capital distributions by savings associations. The amended
regulations will be effective April 1, 1999. Under the new 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 new 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 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 new 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. A savings association that is a subsidiary of a
savings and loan holding company, and under certain other circumstances, will be
required to file a notice with OTS prior to making the capital distribution. The
new OTS limitations on capital distributions are similar to the limitations
imposed upon national banks.
Qualified Thrift Lender Test. Savings institutions must meet a QTL test
or the definition of a domestic building and loan association under Section 7701
of the Internal Revenue Code (the "Code"). If the Bank maintains an appropriate
level of qualified thrift investments (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualifies as a QTL or a domestic building and loan association, it
will continue to enjoy full borrowing privileges from the FHLB of Atlanta. The
required percentage of qualified thrift investments is 65% of assets while the
Code requires investments of 60% of assets.
Federal Reserve System. The FRB 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.
Year 2000 Readiness. 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 as January 1, 1900 potentially
causing major problems calculating interest, payment, delinquency or maturity
dates.
17
<PAGE>
In 1997, the Company initiated a review and assessment of all hardware
and software to determine its Year 2000 readiness. The Company utilizes and is
dependent upon data processing systems and software to conduct its business. The
data processing systems and software include those developed and maintained by
the Company's data processing provider and other commercial software. The
Company's data processing provider and many other mission critical vendors have
indicated their hardware and/or software is now Year 2000 compliant. The Company
has now completed the installation of its renovated hardware and software
applications and has completed the first stage of testing. A second test is
planned early in the second quarter of 1999. While there will be expenses
incurred during the next two years, the Company has not identified any
situations at this time that will require material cost expenditures to become
fully compliant. Total costs to become Year 2000 compliant are estimated to be
less than $100,000. Year 2000 expenditures through December 31, 1998 aggregated
approximately $12,000. A worst case Year 2000 scenario for the Company would be
the absence of electrical power and/or communications to the data processing
center which supports the majority of the mission critical systems to the
Company . The Company has considered this and other scenarios in plans for Year
2000 readiness. The Company has developed a Contingency Plan to address mission
critical systems failures caused by the Year 2000. The plan provides for
procedures and resources necessary for the Company to provide continued services
to its customers for a period of time under a worst case scenario.
Item 2. Description of Property
- -------------------------------
(a) Properties.
The Bank owns 4 of its 6 offices and leases 2 of them. The net book
value of this real property at December 31, 1998, was $1,331,000. The Bank's
total investment in office equipment had a net book value of $467,000 at
December 31, 1998.
Leased Year Year Net Book Value Of
or Leased or Lease Real Property at
Location Owned Acquired Expires December 31, 1998
--------------- ------ --------- ------- -----------------
MAIN OFFICE:
600 Main Street Owned 1974 N/A $ 210,000
Osawatomie, Kansas 66064
2205 South Main Owned 1981 N/A $ 152,000
Fort Scott, Kansas 66701
100 West Amity Owned 1974 N/A $ 52,000
Louisburg, Kansas 66053
125 North Mill Leased 1984 2002 $ 2,000
Beloit, Kansas 67420
762 4th Street Leased 1984 2004 $ --
Phillipsburg, Kansas 67661
1310 Baptiste Drive Owned 1998 N/A $ 915,000
Paola, Kansas 66071
18
<PAGE>
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See
"Item 1. Business - Lending Activities and - Regulation of the Bank," and "Item
2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business
- - Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Market Price of
the Common Stock" of the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1998 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
19
<PAGE>
Item 8. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the Proxy Statement
is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
20
<PAGE>
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
1. The consolidated balance sheets of First Kansas
Financial Corporation as of December 31, 1998 and
1997 and the related consolidated statements of
earnings, changes in stockholders' equity and cash
flows for each of the years in the two year period
ended December 31, 1998, together with the related
notes and the independent auditors' report of KPMG
LLP independent certified public accountants.
2. Schedules omitted as they are not applicable.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of First Kansas
Financial Corporation *
3(ii) Bylaws of First Kansas Financial Corporation *
10 Employment Agreement with Larry V. Bailey
13 Annual Report to Stockholders for the fiscal
year ended December 31, 1998
21 Subsidiaries of the Registrant
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333- 48093) declared effective by the SEC on May
8, 1998.
(b) Not applicable
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
March 25, 1999.
FIRST KANSAS FINANCIAL CORPORATION
By: /s/Larry V. Bailey
-------------------------------------
Larry V. Bailey
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of March 25, 1999.
/s/J. Darcy Domoney /s/James E. Breckenridge
- ---------------------------------- -----------------------------------
J. Darcy Domoney James E. Breckenridge
Chairman Director
/s/William R. Butler, Jr. /s/Roger L. Coltrin
- ---------------------------------- -----------------------------------
William R. Butler, Jr Roger L. Coltrin
Director Director
/s/Donald V. Meyer /s/Larry V. Bailey
- ---------------------------------- -----------------------------------
Donald V. Meyer Larry V. Bailey
Director Director, President, CEO and CFO
EXHIBIT 13
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION
1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION
ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Letter to Stockholders......................................................1
Corporate Profile...........................................................2
Stock Price Information.....................................................3
Selected Financial Ratios and Other Data....................................3
Management's Discussion and Analysis........................................4
Report of Independent Auditors............................................F-1
Consolidated Financial Statements........................................ F-2
Notes to Consolidated Financial Statements................................F-7
Corporate Information..............................................Back Cover
i
<PAGE>
[LOGO] FIRST KANSAS 600 Main Street
FINANCIAL CORPORATION P.O.Box 9
Osawatomie, KS 66064-0009
(913) 755-3033
FAX (913) 755-2795
To Our Stockholders:
On behalf of our Board of Directors and employees, we are pleased to
present the first Annual Report to Stockholders of First Kansas Financial
Corporation (the "Company"). As you will see from the Annual Report, 1998 was an
eventful year for the Company and its wholly-owned subsidiary, First Kansas
Federal Savings Bank (the "Bank").
On June 25, 1998, the Bank successfully completed its conversion from
the mutual to stock form of organization and the concurrent public offering of
1,553,938 shares of the Company's common stock (the "Conversion"). Net proceeds
to the Company and the Bank from the Conversion were approximately $14 million.
While the Company is in the early stages of investing the net proceeds from the
Conversion, we expect that the investment of these proceeds will generate
increased core earnings in future periods.
For the fiscal year ended December 31, 1998, the Company earned
$720,000 or $.50 per share, as compared to net income of $672,000, or $.47 per
share, for the fiscal year ended December 31, 1997. Earnings per share for the
twelve months ended December 31, 1998 and 1997 are pro forma as if the
Conversion occurred on January 1, 1997.
At December 31, 1998, the Company's assets totalled $107.2 million, as
compared to $95.6 million at December 31, 1997. Stockholders' equity was $21.4
million or $13.80 per share at December 31, 1998, as compared to retained
earnings of $6.6 million at December 31, 1997. The increase in assets and
stockholders' equity was primarily attributable to the net proceeds received
from the Conversion.
We sincerely appreciate the confidence shown by our customers and local
community during the Conversion. The goal of your Board of Directors and
Management is to continuously strive to enhance your investment in the Company.
Sincerely,
/s/ Larry V. Bailey
--------------------------------------
Larry V. Bailey
President and Chief Executive Officer
1
<PAGE>
Corporate Profile
The Company is a Kansas corporation organized in February of 1998 at
the direction of First Kansas Federal Savings Association (the "Association") to
acquire all of the capital stock that the Association issued in its conversion
from the mutual to stock form of ownership (the "Conversion"). On June 25, 1998,
the Association completed the Conversion and became a wholly owned subsidiary of
the Company. Pursuant to the Conversion, First Kansas Federal Savings
Association changed its name to First Kansas Federal Savings Bank (the "Bank").
The Company is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage, provided that the Bank retains a specified amount of its assets
in housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion.
The Bank was originally chartered in 1899 as "The Consolidated Building
and Loan Association" and commenced operations that same year. In 1938, the Bank
became a member of the Federal Home Loan Bank System, obtained a federal charter
and changed its name to "First Federal Savings and Loan Association of
Osawatomie." In 1983, the Bank changed its name to "First Kansas Federal Savings
Association."
The Bank is a federally chartered stock savings bank headquartered in
Osawatomie, Kansas, with six branch offices located in the Kansas counties of
Miami, Bourbon, Mitchell and Phillips. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
member of and owns capital stock in the Federal Home Loan Bank ("FHLB") of
Topeka, which is one of the 12 regional banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate and investment securities, including mortgage-backed
securities.
2
<PAGE>
Stock Price Information
The Company's common stock has been traded on the Nasdaq National
Market under the trading symbol of "FKAN" since it commenced trading on June 25,
1998. The following table reflects high and low sale closing prices as published
by the Nasdaq National Market for the calendar quarters indicated. The prices
reflect inter-dealer prices, without retail mark-up, markdown, or commission,
and may not represent actual transactions.
High Low
---- ---
1998
Second quarter (from June 25, 1998)............... $13 $10
Third quarter..................................... $13 $10
Fourth quarter.................................... $11 $ 9
The number of shareholders of record of common stock as of March 8,
1999, was approximately 325. This does not reflect the number of persons or
entities who held stock in nominee or "street" name through various brokerage
firms. At March 8, 1999, there were 1,553,938 shares of the Company's common
stock outstanding.
There were no dividends paid by the Company during the fiscal year
ended December 31, 1998. The Company's ability to pay dividends to stockholders
is largely dependent upon the dividends it receives from the Bank. The Bank may
not declare or pay a cash dividend on any of its stock if the effect thereof
would cause the Bank's regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the
Conversion, or (2) the regulatory requirements imposed by the OTS.
Selected Financial Ratios and Other Data
At or For the Years Ended
December 31,
-------------------------
1998 1997
---------- ----------
Return on average assets..................... 0.71% 0.67%
Return on average equity..................... 4.93 10.78
Average equity to average assets ratios...... 14.33 6.21
Equity to assets at period end............... 20.00 6.91
Net interest rate spread..................... 2.55 2.53
Net yield on average interest-earning
assets....................................... 7.00 7.15
Non-performing loans to total assets......... .01 .08
Allowance for loan loss to total loans....... .50 .38
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company and the Bank, and should be read in conjunction with
the accompanying Consolidated Financial Statements.
General
The Company was recently formed and, therefore, its results from
operations consist primarily of interest income from the investing of funds from
the proceeds generated by the sale of common stock and expense incurred in the
maintaining of the investment portfolio.
The Bank's results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest the
Bank earns on its interest-earning assets and the rates the Bank pays on
interest-bearing liabilities (interest rate spread), and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
results of operations are also affected by noninterest income, including,
primarily, income from customer deposit account service charges, 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. The Bank's 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 the Bank's control.
Market Risk Analysis
Qualitative Analysis. The Bank's 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 the Bank's 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 the Bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank's 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 the Bank's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Bank's 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. The Bank's
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 and by originating loans with shorter terms to
maturity such as construction, commercial and consumer loans. In addition, the
Bank has invested in adjustable-rate mortgage-backed securities as an interest
rate risk management strategy.
Quantitative Analysis. 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
4
<PAGE>
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
the Bank's asset size and risk-based capital, the Bank has been informed by the
OTS that it is exempt from this rule. Nevertheless, the following table presents
the Bank's NPV at December 31, 1998, as calculated by the OTS, based on
quarterly information voluntarily provided to the OTS.
Changes
in Market Net Portfolio Value
-----------------------------------
Interest Rates $ Amount $ Change % Change NPV Ratio(1)
-------------- -------- -------- -------- ------------
(basis points) (Dollars in Thousands)
+400 $ 9,894,000 $(5,749,000) -37% 9.80%
+300 $11,921,000 $(3,722,000) -24% 11.51%
+200 $13,498,000 $(2,145,000) -14% 12.76%
+100 $14,766,000 $( 877,000) - 6% 13.70%
0 $15,643,000 $ - - 14.31%
-100 $16,062,000 $ 419,000 3% 14.54%
-200 $16,514,000 $ 871,000 6% 14.79%
-300 $17,255,000 $ 1,612,000 10% 15.25%
-400 $17,908,000 $ 2,265,000 14% 15.62%
(1) Calculated as the estimated NPV divided by present value of total assets.
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 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
5
<PAGE>
result as many borrowers may be unable to service their debt in the event of an
interest rate increase.
The Bank's board of directors reviews the Bank's 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 the Bank's asset and liability goals and
strategies. The Bank expects that its 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 increased $11.5 million or 12.1% to $107.2 million at
December 31, 1998 from $95.7 million at December 31, 1997. The increase was
primarily attributable to an increase of $3.5 million in cash and cash
equivalents, a $10.5 million increase in the Bank's mortgage-backed securities
available-for-sale and a $1.6 million increase in the Bank's mortgage-backed
securities held-to-maturity, partially offset by a $5.5 million decrease in the
Bank's loan portfolio. Total liabilities decreased $3.2 million or 3.7% to $85.8
million at December 31, 1998 from $89.0 million at December 31, 1997. The
decrease was primarily attributable to a $1.2 million decrease in deposits and a
decrease of $1.9 million in borrowings from the FHLB. The growth in
mortgage-backed securities resulted from the investment of proceeds received
from the Bank's conversion from a mutual savings association to a federal stock
savings bank. The decrease in the Bank's loan portfolio occurred despite
management's efforts to grow the portfolio and was primarily the result of
market competition and the declining interest rate environment.
6
<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,
------------------- -------------------------------------------------------------------
1998 1998 1997
------------------- --------------------------------- -------------------------------
Average Average
Outstanding Outstanding Interest Outstanding Interest
Balance Yield/Rate Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------- ---------- ------- ----------- ---------- ------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)....................... $ 43,978 $3,528 8.02% $ 45,491 $3,604 7.92%
Investment securities..................... 3,979 259 6.51% 3,147 163 5.19
Mortgage-backed securities................ 42,240 2,570 6.08% 43,554 2,866 6.58
Interest-bearing deposits................. 6,200 389 6.27% 3,586 216 6.01
FHLB stock................................ 650 48 7.38% 635 46 7.25
------- ------ ----- ------- ------ -----
Total interest-earning assets(1)....... 97,047 6,794 7.00% 96,413 6,895 7.15
Noninterest-earning assets.................. 4,513 ------ ----- 4,024 ------ -----
------- -------
Total assets........................... $101,560 $100,437
Interest-bearing liabilities: ======= =======
NOW and investment deposits............... $ 23,593 561 2.38% $ 22,324 564 2.53
Savings and certificate accounts.......... 60,901 3,185 5.23% 61,589 3,214 5.22
-----
FHLB borrowings........................... 808 52 6.44% 7,748 461 5.95
-------- ------ ------ ------- ------ -----
Total interest-bearing liabilities..... 85,302 3,798 4.45% 91,660 4,239 4.62
Noninterest-bearing liabilities:............ 1,708 ------ ----- 2,542 ------ -----
-------- -------
Total liabilities......................... 87,010 94,202
-------- -------
Equity...................................... 14,550 6,235
-------- -------
Total liabilities and equity........... $101,560 $100,437
======= =======
Net interest income......................... $2,996 $2,656
===== =====
Net interest rate spread(2)................. 2.55% 2.53%
===== =====
Net earning assets.......................... $ 11,745 $ 4,752
======= =======
Net yield on interest-earning assets(3)..... 3.09% 2.75%
===== =====
Average interest-earning assets to average
interest-bearing liabilities.............. 113.77% 105.18%
====== ======
</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.
7
<PAGE>
The table below sets forth certain information regarding changes in
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).
Year Ended December 31,
--------------------------------
1998 vs. 1997
--------------------------------
Increase/(Decrease)
Due to
--------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)....................... $(119) $ 45 $(2) $(76)
Investment securities..................... 43 42 11 96
Mortgage-backed securities................ (87) (216) 7 (296)
Interest-bearing deposits................. 157 9 7 173
FHLB stock................................ 1 1 0 2
---- ---- ---- ----
Total interest-earning assets.......... (5) (119) 23 (101)
---- ---- ---- ----
Interest-bearing liabilities:
NOW and money market deposits............. 32 (33) (2) (3)
Savings and certificate accounts.......... (36) 7 (0) (29)
FHLB borrowings........................... (413) 38 (34) (409)
---- ---- ---- ----
Total interest-bearing liabilities..... (417) 11 (36) (441)
---- ---- ---- ----
Increase (decrease) in net interest income.. $412 $(130) $58 $340
==== ==== ==== ====
8
<PAGE>
Results of Operations for the Years Ended December 31, 1998 and 1997
Net Income. Net income increased $48,000 for the year ended December
31, 1998, to $720,000 as compared to $672,000 for the year ended December 31,
1997. This increase was primarily attributable to a $340,000 increase in net
interest income, partially offset by a $41,000 decrease in noninterest income
and a $233,000 increase in noninterest expense.
Net Interest Income. Net interest income is the most significant
component of the Bank's income from operations. Net interest income is the
difference between interest we receive on interest-earning assets, primarily
loans, investment and mortgage-backed securities and interest we pay on
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.
The Bank's net interest income increased $340,000 or 12.8% to
$2,996,000 for the year ended December 31, 1998, as compared to $2,656,000 for
the same period in 1997. The increase was primarily due to the decline in
average interest-bearing liabilities to $85.3 million in 1998 from $91.7 million
in 1997 and a growth in interest rate spread of 2.55% in 1998 from 2.53% in
1997.
The decrease in average interest-bearing liabilities of $6.4 million
primarily reflects the decrease of $6.9 million in balance of average FHLB
borrowings.
The Bank's net interest rate spread increased slightly for the year
ended December 31, 1998 compared to the same period in 1997 primarily due to a
decrease in average cost on interest-bearing liabilities of 4.45% in 1998
compared to 4.62% in 1997, partially offset by a decrease in average yield on
interest-earning assets of 7.00% in 1998 compared to 7.15% in 1997.
Provision for Loan Losses. The provision for loan losses was $30,000
for the year ended December 31, 1998 compared to $35,000 for the same period in
1997. The allowance for loan losses was $206,000 or .50% of net loans
outstanding at December 31, 1998 compared to $179,000 or .38% of gross loans
outstanding at December 31, 1997.
Historically, the Bank has emphasized loss experience over other
factors in establishing the provision for loan losses. Management of the Bank
review's the allowance for loan losses in relation to (i) past loan loss
experience, (ii) known and inherent risks in the Bank's 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.
Noninterest income. Noninterest income decreased $41,000 or 4.81% from
$852,000 in 1997 to $811,000 in 1998. This decrease in noninterest income was
due to decreases of $54,000 in gain on sale of loans, $52,000 in gain on sales
of mortgage-backed securities and $19,000 in other noninterest income accounts,
partially offset by an increase of $84,000 in deposit account service fees. Gain
on the sale of loans decreased as the result of less originations in the Bank's
mortgage banking operation. Deposit account service fees increased due to a
higher number of accounts and the continued growth of fee income generated by
the totally free checking program.
Noninterest expense. Noninterest expense increased $233,000 or 9.91%
from $2,352,000 in 1997 to $2,585,000 in 1998. The increase in noninterest
expense was due primarily to a $111,000 increase in compensation and benefits
and $49,000 increase in occupancy and equipment. Costs
9
<PAGE>
associated with the Company's employee stock ownership plan was the primarily
component of the increase in compensation and benefits. Occupancy and equipment
increased due to expenses associated with the addition of a new branch facility.
Income Tax Expense. Income tax expense increased $23,000 from $449,000
in 1997 to $472,000 in 1998. Income tax expense increased due to the $71,000
increase in pretax income to $1,192,000 for the year ended December 31, 1998
compared to $1,121,000 for the same period in 1997. The Company's effective tax
rate was 39.60% and 40.50% for the years ended December 31, 1998 and 1997,
respectively.
Liquidity and Capital Resources
The Bank is 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 deposits and short-term borrowings. The required ratio currently is 4% and
the Bank's regulatory liquidity ratio average was 26.67% and 5.68% at December
31, 1998 and 1997, respectively.
The Bank's 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 by 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. The Bank uses 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 to meet operating expenses.
Net cash provided by 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, 1998 was $757,000 as compared to $1.1 million for the year
ended December 31, 1997.
Net cash used in investing activities (i.e., cash payments and cash
receipts, primarily from investment securities and mortgage-backed securities
portfolios and loan portfolio) for the year ended December 31, 1998 totaled $7.9
million, a change of $14.0 million from December 31, 1997. The change was
primarily attributable to purchases of investment and mortgage-backed securities
of $28.7 million in 1998 as compared to $1 million in 1997 and a decrease in
proceeds from sales of mortgage-backed securities from $4.7 million in 1997 to
$1.4 million in 1998. The change was partially offset by a $5.7 million net
decrease in loans as compared to a $900,000 net increase in 1997. In addition,
paydowns, maturities, and calls of investment securities and mortgage-backed
securities were $14.6 million in 1998 as compared to $6.4 million in 1997 and
loans purchased decreased $2.7 million from $2.9 million in 1997 to $200,000 in
1998. The large amount of investment purchases during 1998 was the result of the
deployment of proceeds received from the stock conversion and the reinvestment
of paydowns from the Bank's loan and investment portfolio.
Net cash provided by financing activities for 1998 totaled $10.7
million, an increase of $17.6 million from December 31, 1997. The increase was
primarily attributable to $13.8 million in proceeds received from the issuance
of common stock in the conversion, net of costs and a $6.9 million decrease in
the repayment of borrowings from the FHLB from $8.8 million of repayments in
1997 to $1.9 million in 1998. The increase in cash provided by financing
activities was partially offset by a $1.2 million net
10
<PAGE>
decrease in deposits for the year ended December 31, 1998 as compared to a $1.9
million net increase for the same period in 1997.
Year 2000 Readiness. 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 as January 1, 1900 potentially
causing major problems calculating interest, payment, delinquency or maturity
dates.
In 1997, the Company initiated a review and assessment of all hardware
and software to determine its Year 2000 readiness. The Company utilizes and is
dependent upon data processing systems and software to conduct its business. The
data processing systems and software include those developed and maintained by
the Company's data processing provider and other commercial software. The
Company's data processing provider and many other mission critical vendors have
indicated their hardware and/or software is now Year 2000 compliant. The Company
has now completed the installation of its renovated hardware and software
applications and has completed the first stage of testing. A second test is
planned early in the second quarter of 1999. While there will be expenses
incurred during the next two years, the Company has not identified any
situations at this time that will require material cost expenditures to become
fully compliant. Total costs to become Year 2000 compliant are estimated to be
less than $100,000. Year 2000 expenditures through December 31, 1998 aggregated
approximately $12,000. A worst case Year 2000 scenario for the Company would be
the absence of electrical power and/or communications to the data processing
center which supports the majority of the mission critical systems to the
Company . The Company has considered this and other scenarios in plans for Year
2000 readiness. The Company has developed a Contingency Plan to address mission
critical systems failures caused by the Year 2000. The plan provides for
procedures and resources necessary for the Company to provide continued services
to its customers for a period of time under a worst case scenario.
11
<PAGE>
Independent Auditors' Report
The Board of Directors
First Kansas Financial Corporation:
We have audited the accompanying consolidated balance sheets of First
Kansas Financial Corporation and subsidiary (the Company) as of December
31, 1998 and 1997 and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company'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
consolidated 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 Financial Corporation and subsidiary as of December 31, 1998 and
1997 and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
-------------------------------
Kansas City, Missouri
March 5, 1999
F-1
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
----------- ---------
<S> <C> <C>
Cash and cash equivalents (note 3) $ 8,143 4,600
Investment securities held-to-maturity (note 4) 4,712 3,852
Mortgage-backed securities available-for-sale (note 5) 27,282 16,833
Mortgage-backed securities held-to-maturity (note 5) 22,521 20,937
Loans receivable, net (note 6) 41,069 46,563
Stock in Federal Home Loan Bank (FHLB) of Topeka, at cost 509 661
Premises and equipment, net (note 7) 1,775 990
Real estate held for development (note 8) 361 355
Accrued interest receivable:
Investment and mortgage-backed securities 295 244
Loans receivable 190 246
Prepaid expenses and other assets 359 374
---------- ---------
Total assets $ 107,216 95,655
========== =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 10) $ 84,436 85,651
Advances from borrowers for property taxes and insurance 134 128
Borrowings from FHLB of Topeka (note 11) 650 2,550
Accrued interest payable and other liabilities (note 12) 556 716
---------- ---------
Total liabilities 85,776 89,045
---------- ---------
Stockholders' equity (note 13):
Common stock, $.10 par value; 8,000,000 shares
authorized, 1,553,938 shares issued and outstanding
at December 31, 1998 155 --
Additional paid-in capital 14,834 --
Retained earnings 7,655 6,935
Unearned compensation (1,181) --
Accumulated other comprehensive income (23) (325)
---------- ---------
Total stockholders' equity 21,440 6,610
Commitments (note 6)
---------- ---------
Total liabilities and stockholders' equity $ 107,216 95,655
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Statements of Earnings
Years ended December 31, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Interest income:
Loans $ 3,528 3,604
Investment securities 259 163
Mortgage-backed securities 2,570 2,866
Interest-bearing deposits 389 216
Dividends on FHLB stock 48 46
------- -------
Total interest income 6,794 6,895
------- -------
Interest expense:
Deposits (note 10) 3,746 3,778
Borrowings 52 461
------- -------
Total interest expense 3,798 4,239
------- -------
Net interest income 2,996 2,656
Provision for loan losses (note 6) 30 35
------- -------
Net interest income after provision for loan losses 2,966 2,621
------- -------
Noninterest income:
Deposit account service fees 671 587
Gain on sales of loans 13 67
Gain on sales of available-for-sale mortgage-backed securities 55
Other 124 143
------- -------
(note 5)
Total noninterest income 811 852
------- -------
Noninterest expense:
Compensation and benefits (note 13) 1,304 1,193
Occupancy and equipment 301 252
Federal deposit insurance premiums and assessments 85 75
Data processing 188 167
Deposit account processing fees 196 175
Amortization of premium on deposits assumed 61 61
Supplies expense 76 82
Advertising 160 154
Other 214 193
------- -------
Total noninterest expense 2,585 2,352
------- -------
Earnings before income tax expense 1,192 1,121
Income tax expense (note 12) 472 449
------- -------
Net earnings $ 720 672
======= =======
Net earnings per share - basic and diluted $ 0.50 0.47
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Accumu-
lated
other
Additional Unearned compre-
Common paid-in Retained compen- hensive
stock capital earnings sation income Total
----------- ------------ ------------------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ -- -- 6,263 -- (468) 5,795
----------- ------------ ----------- ------------ ----------- ----------
Net earnings 672 672
Change in unrealized gain on available-
for-sale securities, net of taxes 143 143
----------
Total comprehensive income 815
----------
Balance, December 31, 1997 -- -- 6,935 -- (325) 6,610
----------- ------------ ----------- ------------ ----------- ----------
Proceeds from issuance of common
stock 155 14,833 (1,243) 13,745
Net earnings 720 720
Change in unrealized gain on available-
for-sale securities, net of tax 302 302
----------
Total comprehensive income 1,022
----------
Reduction of unearned compensation 1 62 63
----------- ------------ ----------- ------------ ----------- ----------
Balance, December 31, 1998 $ 155 14,834 7,655 (1,181) (23) 21,440
=========== ============ =========== ============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 720 672
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Provision for loan losses 30 35
Depreciation 139 110
Amortization of premium on deposits assumed 61 61
FHLB stock dividends (48) (46)
Amortization of loan fees (56) (35)
Accretion of discounts and amortization of premiums on
investment and mortgage-backed securities, net 207 (37)
Gain on sales of loans, net (13) (67)
Gain on sales of mortgage-backed securities available-for-sale (3) (55)
Release of unallocated of ESOP shares 63 --
Proceeds from sales of loans 798 3,451
Origination of loans for sale (785) (3,384)
Change in accrued interest receivable, prepaids,
and other assets (41) 31
Change in accrued interest payable and
other liabilities (315) 371
---------- ----------
Net cash provided by operating activities 757 1,107
---------- ----------
Cash flows from investing activities:
Decrease (increase) in loans, net 5,733 (858)
Loans purchased (213) (2,878)
Maturities/calls of investment securities held-to-maturity 3,800 --
Paydowns and maturities of mortgage-backed securities available-for-sale 3,991 2,503
Paydowns and maturities of mortgage-backed securities held-to-maturity 6,817 3,933
Proceeds from sales of mortgage-backed securities available-for-sale 1,430 4,668
Purchases of investment securities held-to-maturity (4,587) (1,031)
Purchases of mortgage-backed securities available-for-sale (15,571) --
Purchases of mortgage-backed securities held-to-maturity (8,519) --
Redemption of FHLB stock 200 --
Increase in real estate held for development (6) (99)
Proceeds from sale of real estate held for development -- 214
Additions of premises and equipment, net (925) (295)
---------- ----------
Net cash (used in) provided by investing activities $ (7,850) 6,157
---------- ----------
</TABLE>
(Continued)
F-5
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDARY
OSAWATOMIE, KANSAS
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $ (1,215) 1,928
Repayment of borrowings from FHLB (1,900) (8,800)
Proceeds from issuance of common stock, net of costs 13,745 --
Net decrease (increase) in advances from borrowers
for taxes and insurance 6 (14)
---------- ----------
Net cash provided by (used in) financing activities 10,636 (6,886)
---------- ----------
Net increase in cash and cash equivalents 3,543 378
Cash and cash equivalents at beginning of year 4,600 4,222
---------- ----------
Cash and cash equivalents at end of year $ 8,143 4,600
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 854 116
========== ==========
Cash paid during the year for interest $ 3,846 4,218
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of
First Kansas Financial Corporation (the Company) and its
wholly-owned subsidiary, First Kansas Federal Savings Bank (the
Bank). Intercompany balances and transactions have been
eliminated. The Company is principally engaged in single family
home lending in the State of Kansas. The Company 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 Company 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
stockholders' 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 until maturity or pay off 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 Company determines at the time of origination whether mortgage
loans will be held for the Company'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 Company'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.
(Continued)
F-7
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(e) Mortgage Banking Activities
At December 31, 1998 and 1997, the Company was servicing loans for
others amounting to $663,000 and $1,435,000, 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, 1998 and 1997 was insignificant.
Originated servicing rights are not recorded as assets of the
Company. Statement of Financial Accounting Standards (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. Because the
Company did not retain any servicing rights on loans originated
and sold during 1998 and 1997, SFAS No. 122 and SFAS No. 125 had
no effect on the Company'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.
(Continued)
F-8
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
A loan is considered impaired when it is probable the Company 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 Company 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 Company 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.
(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 development 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 FHLB of Topeka
The Company is a member of the FHLB system. As a member, the
Company 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.
(Continued)
F-9
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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 Company 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) Accounting Changes
The Company adopted Financial Accounting Standards Board (FASB)
No. 130, Reporting Comprehensive Income, (SFAS No. 130) effective
January 1, 1998. SFAS No. 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses,
gains, and losses). Components of comprehensive income are net
income and all other nonowner changes in equity. The statement
requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement, and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The only component
of comprehensive income consists of unrealized holding gains and
losses on available-for-sale investment securities.
The Company adopted FASB Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, (SFAS No. 131)
effective January 1, 1998. This statement establishes standards
for reporting information about segments in annual and interim
financial statements. SFAS No. 131 introduces a new model for
segment reporting called the "management approach." The management
approach is based on the way the chief operating decision-maker
organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based
on products and services, geography, legal structure, management
structure, and any other in which management disaggregates a
company. Based on the "management approach" model, the Company has
determined that its business is comprised of a single operating
segment and that SFAS No. 131, therefore, has no impact on its
consolidated financial statements.
(Continued)
F-10
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(m) New Accounting Pronouncements
The FASB issued SFAS No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities, in June 1998. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning June
15, 1999, may be adopted early for periods beginning after
issuance of the statement, and may not be applied retroactively.
The Company does not expect to adopt SFAS No. 133 early. The FASB
issued SFAS No. 134, Accounting for Mortgage-backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise, in October 1998. This statement
amends SFAS No. 65 and requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS No. 134 is
effective for the first fiscal quarter beginning after December
15, 1998. The adoption of SFAS No. 133 and SFAS No. 134 is not
expected to have a material impact on the Company's consolidated
financial statements.
(n) Earnings Per Common Share
Basic earnings per share is based upon the weighted average number
of common shares outstanding during the periods presented.
Earnings per share for the twelve months ended December 31, 1998
and 1997 are pro forma as if the conversion and acquisition
occurred on January 1, 1997. Unallocated shares of common stock
held by the employee stock ownership plan are not included in the
weighted average shares outstanding computation. For the years
ended December 31, 1998 and 1997, there were no dilutive potential
common shares outstanding. Average shares outstanding used in the
computation of earnings per share for 1998 and 1997 were 1,429,640
and 1,429,623, respectively.
(2) Initial Public Offering
On June 25, 1998, the Company completed an initial public offering
selling 1,553,938 shares of its common stock at $10.00 per share. Total
expenses of the offering approximated $548,000.
(3) Cash and Cash Equivalents
A summary of cash and cash equivalents follows (in thousands):
1998 1997
-------- ---------
Cash on hand $ 644 651
Deposits at other financial institutions 499 549
Overnight FHLB deposits 7,000 3,400
-------- ---------
$ 8,143 4,600
======== =========
(Continued)
F-11
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(4) 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, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1998 cost gains losses value
- ------------------------------------------------ ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
U.S. government and agency obligations
maturing after one year but within five years $ 1,000 4 -- 1,004
U.S. government and agency obligations
maturing after five years but within ten years 1,000 -- -- 1,000
U.S. government and agency obligations
maturing after ten years 1,139 5 -- 1,144
State and municipal obligations maturing
after ten years 624 8 -- 632
Other debt securities maturing after
ten years 949 -- -- 949
----------- ----------- ------------ ---------
$ 4,712 17 -- 4,729
=========== =========== ============ =========
1997
- ------------------------------------------------
U.S. government and agency obligations
maturing within one year $ 800 -- (1) 799
U.S. government and agency obligations
maturing after one year but within five years 2,000 -- (4) 1,996
U.S. government and agency obligations
maturing after ten years 1,052 105 -- 1,157
----------- ----------- ------------ ---------
$ 3,852 105 (5) 3,952
=========== =========== ============ =========
</TABLE>
(Continued)
F-12
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) 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, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1998 cost gains losses value
- ---------------------------------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Government agency mortgage-
backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 2,121 21 (2) 2,140
Federal National Mortgage
Association (FNMA) 4,303 11 (15) 4,299
Government National Mortgage
Association (GNMA) 4,128 27 -- 4,155
Collateralized mortgage obligations 16,765 33 (110) 16,688
---------- ------------ ------------ -----------
$ 27,317 92 (127) 27,282
========== ============ ============ ===========
Held-to-maturity:
Government agency mortgage-
backed securities:
FHLMC $ 90 2 -- 92
FNMA 3,092 43 (1) 3,134
GNMA 339 25 -- 364
Collateralized mortgage obligations 19,000 95 (41) 19,054
---------- ------------ ------------ -----------
$ 22,521 165 (42) 22,644
========== ============ ============ ===========
</TABLE>
(Continued)
F-13
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1997 cost gains losses value
- ---------------------------------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Government agency mortgage-
backed securities:
FHLMC $ 331 -- -- 331
FNMA 552 23 -- 575
GNMA 1,927 60 -- 1,987
Collateralized mortgage obligations 14,515 35 (610) 13,940
---------- ------------ ------------ -----------
$ 17,325 118 (610) 16,833
========== ============ ============ ===========
Held-to-maturity:
Government agency mortgage-
backed securities:
FHLMC $ 162 5 -- 167
FNMA 2,543 39 (2) 2,580
GNMA 500 43 -- 543
Collateralized mortgage obligations 17,732 23 (150) 17,605
---------- ------------ ------------ -----------
$ 20,937 110 (152) 20,895
========== ============ ============ ===========
</TABLE>
The Company'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, 1998, the government
agency mortgage-backed securities had a carrying value of $14,115,000
and consisted of approximately $2,410,000 of fixed rate securities and
$11,705,000 of variable rate securities. The collateralized mortgage
obligations had a carrying value of $35,688,000 and consisted of
approximately $21,458,000 of fixed rate securities and $14,230,000 of
variable rate securities. Collateralized mortgage obligations of the
Company are generally government agency guaranteed.
The proceeds from sales of government agency mortgage-backed securities
during 1998 were $1,430,000. Gross gains of $3,000 were realized on
those sales. The proceeds from sales of investment securities during
1997 were $4,668,000. Gross gains of $55,000 were realized on those
sales.
At December 31, 1998 and 1997, government agency mortgage-backed
securities with a carrying value of approximately $1,850,000 and
$2,550,000, respectively, were pledged to secure public funds on
deposit.
(Continued)
F-14
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(6) Loans Receivable
Loans receivable consist of the following at December 31, 1998 and 1997
(in thousands):
1998 1997
--------- ----------
Mortgage loans:
One-to-four-family $ 37,884 42,853
Multifamily -- 1,045
Commercial 471 535
Land 264 141
Construction 151 126
--------- ----------
Total mortgage loans 38,770 44,700
Consumer loans 2,115 1,728
Commercial loans 537 513
--------- ----------
Total 41,422 46,941
Less:
Unearned discounts and deferred fees 116 118
Allowance for loan losses 206 179
Undisbursed portion of loans in process 31 81
--------- ----------
Total, net $ 41,069 46,563
========= ==========
The Company 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 Company's primary
lending area is in the State of Kansas.
The weighted average annual interest rates on mortgage loans
approximated 7.51% and 7.69% at December 31, 1998 and 1997. 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 Company pays on the short-term deposits that have been primarily
utilized to fund these loans.
At December 31, 1998, the Company did not have any outstanding
commitments to originate mortgage loans or to purchase loans.
(Continued)
F-15
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Loans made to directors and executive officers of the Company
approximated $579,000 and $375,000 at December 31, 1998 and 1997,
respectively. Such loans were made in the ordinary course of business.
Changes in such loans for 1998 are as follows (in thousands):
Balance at January 1, 1998 $ 375
Additions 391
Amounts collected (187)
--------
Balance at December 31, 1998 $ 579
========
A summary of the activity in the allowance for loan losses follows (in
thousands):
1998 1997
-------- --------
Balance at beginning of year $ 179 146
Provision 30 35
Charge-offs (5) (5)
Recoveries 2 3
-------- --------
Balance at end of year $ 206 179
======== ========
Loans delinquent ninety days or more at December 31, 1998 and 1997
aggregated $5,000 and $80,000, respectively. Impaired loans, exclusive
of delinquent loans, were insignificant at December 31, 1998 and 1997.
(7) Premises and Equipment
Premises and equipment consist of the following (in thousands):
1998 1997
-------- --------
Land $ 217 217
Buildings and improvements 1,688 1,077
Construction in progress 38 241
Furniture and equipment 1,114 766
-------- --------
Total 3,057 2,301
Less accumulated depreciation 1,282 1,311
-------- --------
Total $ 1,775 990
======== ========
(Continued)
F-16
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(8) Real Estate Held for Development
The Company'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, 1998, including capitalized interest of $37,000,
aggregated $658,000. There were no sales or transfers associated with
the parcel of land during 1998. During 1997, one lot with an allocated
cost of $118,000 was transferred to the Company for the purpose of
building a new branch facility. Additionally, two lots with allocated
cost aggregating $179,000 were sold during 1997, resulting in gains on
those sales totaling $35,000.
(9) Premium on Deposits Assumed
In accordance with the FSLIC Transfer Agreement dated November 19, 1982,
the Company assumed certain deposits of the former North Kansas Savings
Company, paying a premium on deposits assumed of $1,212,000. The Company
is amortizing the premium over twenty years on the straight-line method.
Accumulated depreciation on such premium was $973,000 and $912,000,
respectively, at December 31, 1998 and 1997.
(10) Deposits
Deposits are summarized as follows (dollars in thousands):
1998 1997
---------- ----------
Noninterest bearing demand $ 2,477 1,927
Savings and interest-bearing demand 28,312 27,461
Time 53,647 56,263
---------- ----------
$ 84,436 85,651
========== ==========
The weighted average interest rates on deposits approximated 4.68% and
4.66% at December 31, 1998 and 1997, respectively.
Scheduled maturities of time deposits at December 31, 1998 are as
follows (in thousands):
1999 $ 36,631
2000 9,159
2001 4,903
2002 1,090
2003 1,338
Thereafter 526
----------
Total $ 53,647
==========
(Continued)
F-17
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
A summary of interest expense is as follows (in thousands):
1998 1997
-------- ---------
Passbook and certificate accounts $ 3,185 3,214
NOW 561 564
-------- ---------
$ 3,746 3,778
======== =========
Certificates of deposit in amounts greater than or equal to $100,000
amounted to $3,300,000 and $3,100,000 at December 31, 1998 and 1997,
respectively. Individual deposit amounts in excess of $100,000 are not
federally insured.
(11) Borrowings from FHLB of Topeka
Borrowings outstanding from the FHLB of Topeka at December 31, 1998
totaled $650,000, with an adjustable interest rate based on the
one-month LIBOR rate and maturing in 2002. Borrowings at December 31,
1997 totaled $2,550,000, including individual advances and $1,900,000
borrowed under an $8,000,000 line of credit with an adjustable interest
rate based on the fed funds rate and maturing in 1999. Weighted average
interest rates for the years ended December 31, 1998 and 1997 were 5.73%
and 6.71%, respectively, on such borrowings.
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.
In January 1999, the Company purchased $20,000,000 of mortgage-backed
securities with proceeds received from two $10,000,000 advances from the
FHLB. The assets purchased and their underlying liabilities are fixed
rated through five years.
(12) Income Taxes
The components of income tax expense from operations are as follows (in
thousands):
Federal State Total
----------- ----------- -----------
Year ended December 31, 1998:
Current $ 452 67 519
Deferred (34) (13) (47)
----------- ----------- -----------
$ 418 54 472
=========== =========== ===========
Year ended December 31, 1997:
Current $ 385 65 450
Deferred (1) -- (1)
----------- ----------- -----------
$ 384 65 449
=========== =========== ===========
(Continued)
F-18
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The reasons for the differences between the effective tax rates and
the expected federal income tax rate of 34% are as follows:
Percentage
of earnings
before
income taxes
------------------------
1998 1997
-------- --------
Expected federal income tax rate 34.0 % 34.0
State taxes, net of federal tax benefit 3.0 3.8
Other, net 2.6 2.3
-------- --------
Effective income tax rate 39.6 % 40.1
======== ========
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 1998 and 1997 are as
follows (in thousands):
1998 1997
-------- -------
Unrealized loss on available-for-sale securities $ 12 167
Loan origination fees 7 12
Other, net 14 --
-------- -------
Deferred tax asset 33 179
-------- -------
Premises and equipment (85) (88)
FHLB dividends (125) (109)
Allowance for loan losses (70) (108)
State taxes (21) (34)
-------- -------
Deferred tax liability (301) (339)
-------- -------
Net deferred tax liability, included
in other liabilities $ (268) (160)
======== =======
There was no valuation allowance required for deferred tax assets at
December 31, 1998 or 1997. 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.
(Continued)
F-19
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Prior to 1996, the Company 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 Company used
the experience methods in 1997 and 1998. 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 Company 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, 1998
and 1997 is $140,000 and $168,000, respectively, for this recapture.
Retained earnings at December 31, 1998 and 1997 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.
(13) Benefit Plans
The Company 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 Company 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 $2,000 and $3,000 for the years
ended December 31, 1998 and 1997, respectively.
The Company 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 Company
matches 50% of the employee's contribution up to 6% of compensation. The
Company's expense under the plan for 1998 and 1997 was $22,000 and
$23,000, respectively. In addition, the Company made discretionary
contributions to the plan of $21,000 and $55,000 for the years ended
December 31, 1998 and 1997, respectively.
In December 1997, the Company implemented a supplemental executive
retirement plan ("SERP") for the benefit of the Company's president
which will provide enhanced benefits at retirement. Accruals under the
SERP commenced during 1998, resulting in an expense of $29,000 for the
year ended December 31, 1998.
In connection with the offering described in note 2, the Company
established an employee stock ownership plan (ESOP). Through a loan from
the Company, the ESOP acquired 124,315 shares of the Company's common
stock. Employees age twenty-one or older who have completed one year of
service with the Company are eligible to participate in the ESOP.
Participants become 100% vested after five years. Contributions made by
the Company to the ESOP will be used to repay the loan, and shares are
allocated to participants by a formula based on total compensation. The
cost of unallocated shares is presented as unearned compensation in the
accompanying December 31, 1998 consolidated balance sheet. The Company
recognizes additional compensation expense equal to the fair value of
shares allocated. During 1998, in connection with a principal reduction
on the ESOP loan, 6,200 shares were released and the Company recognized
$63,000 of compensation expense.
(Continued)
F-20
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In February 1999, the Company instituted a stock option plan and a
restricted stock plan. Pursuant to the stock option plan, the Company
granted options to acquire 132,079 shares of common stock to certain key
officers and directors. The options are exercisable at $10.75 per share,
vest over five years, and expire 2008. Pursuant to the restricted stock
plan, 52,826 shares will be awarded to certain key officers and
directors. The fair value of such shares will be recorded as unearned
compensation and subsequently expensed over the five-year vesting
period.
(14) Regulatory Capital Requirements
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the Office of Thrift Supervision
(OTS) promulgated thereunder require institutions to have a minimum
regulatory tangible capital equal to 1.5% of total assets, a minimum 4%
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.
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 Company, which are defined as well capitalized,
must generally have a leverage (core) capital ratio of at least 5%, a
Tier 1 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 Bank met all regulatory capital requirements at December 31, 1998
and 1997. The Bank's actual and required capital amounts and ratios as
of December 31, 1998 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
To be well
capitalized
under prompt
For capital corrective
adequacy actions
Actual purposes provisions
------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital
(to tangible assets) $ 13,268 12.44 % $ 1,600 1.50 % $ -- -- %
Tier 1 leverage (core) capital
(to adjusted tangible assets) 13,268 12.44 4,266 4.00 5,333 5.00
Risk-based capital
(to risk-weighted assets) 13,470 37.53 2,872 8.00 3,590 10.00
Tier 1 leverage risk-based capital
(to risk-weighted assets) 13,268 36.96 -- -- 2,154 6.00
========== ======= ========= ======= ========= ======
</TABLE>
(Continued)
F-21
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
At the time of conversion, the Bank established a liquidation account in
an amount equal to $7,038,000. The liquidation account will be
maintained for the benefit of eligible account holders who continue to
maintain their deposit accounts in the Bank after conversion. In the
event of a complete liquidation of the Bank, 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 Bank 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.
(15) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, in the
first quarter of 1998. SFAS No. 130 requires the reporting of
comprehensive income and its components. Comprehensive income is defined
as the change in equity from transactions and other events and
circumstances from nonowner sources, and excludes investments by and
distributions to owners. Comprehensive income includes net income and
other items of comprehensive income meeting the above criteria. The
Company's only component of other comprehensive income is the unrealized
holding gains and losses on available-for-sale securities.
For the twelve months
ended December 31,
--------------------------
1998 1997
--------- ---------
(In thousands)
Unrealized holding gains $ 460 272
Less reclassification adjustment for
gains included in net income 3 55
--------- ---------
Net unrealized gains on securities 457 217
Income taxes (155) (74)
--------- ---------
Other comprehensive income $ 302 143
========= =========
(16) Financial Instruments With Off-balance Sheet Risk and Concentrations of
Credit Risk
The Company 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 Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party is represented by the contractual amount of those
instruments. The Company does not generally require collateral or other
security on unfunded loan commitments until such time that loans are
funded.
(Continued)
F-22
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In addition to financial instruments with off-balance sheet risk, the
Company is exposed to varying risks associated with concentrations of
credit relating primarily to lending activities in specific geographic
areas. The Company's primary lending area consists of the State of
Kansas, and substantially all of the Company's loans are to residents of
or secured by properties located in its principal lending area.
Accordingly, the ultimate collectibility of the Company'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 Company grants mortgage and consumer loans to customers primarily
throughout its target market of the State of Kansas. Although the
Company 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.
(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 Company 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.
(Continued)
F-23
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 Company on advances of similar remaining maturities.
The approximate carrying value and estimated fair value of the Company's
financial instruments are as follows (in thousands):
December 31, 1998
---------------------------
Carrying Fair
value value
------------- ------------
Financial assets:
Cash and interest-bearing deposits
in other financial institutions $ 8,143 8,143
Investment securities (see note 4) 4,712 4,729
Mortgage-backed securities (see note 5) 49,803 49,926
Loans receivable 41,069 41,524
Stock in FHLB 509 509
Financial liabilities:
Deposits 84,436 84,858
FHLB borrowings 650 650
============= ============
December 31, 1997
---------------------------
Carrying Fair
value value
------------- ------------
Financial assets:
Cash and interest-bearing deposits
in other financial institutions $ 4,600 4,600
Investment securities (see note 4) 3,852 3,952
Mortgage-backed securities (see note 5) 37,770 37,728
Loans receivable 46,563 47,171
Stock in FHLB 661 661
Financial liabilities:
Deposits 85,651 85,628
FHLB borrowings 2,550 2,550
============= ============
(Continued)
F-24
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company'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.
(18) Parent Company Condensed Financial Statements
Condensed Balance Sheet
December 31, 1998
(In thousands)
Assets
Cash and cash equivalents $ 279
Loan to ESOP 1,181
Investment in and loan to subsidiary 20,044
-----------
Total assets $ 21,504
===========
Liabilities and Stockholders' Equity
Accrued interest payable and other liabilities $ 65
Stockholders' equity 21,439
-----------
Total liabilities and stockholders' equity $ 21,504
===========
(Continued)
F-25
<PAGE>
FIRST KANSAS FINANCIAL CORPORATION AND SUBSIDIARY
OSAWATOMIE, KANSAS
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Condensed Statement of Income
Year ended December 31, 1998
(In thousands)
Income:
Equity in earnings of subsidiary $ 619
Interest on loans 148
Interest on deposits 54
-----------
Total income 821
Expense, including income tax expense 101
-----------
Net income $ 720
===========
Condensed Statement of Cash Flows
Year ended December 31, 1998
(In thousands)
Operating activities:
Net income $ 720
Less equity in earnings of subsidiary (619)
Adjustments to reconcile net income to net cash provided
by operating activities - increase in payables 65
-----------
Net cash provided by operating activities 166
-----------
Investing activities:
Investment in and loan to subsidiary (13,695)
Loan to ESOP, net of repayment (1,181)
-----------
Net cash used in investing activities (14,876)
-----------
Financing activities - proceeds from issuance
of common stock 14,989
-----------
Increase in cash 279
Cash at beginning of year --
-----------
Cash at end of year $ 279
===========
F-26
<PAGE>
Corporate Information
First Kansas Financial Corporation
600 Main Street
Osawatomie, Kansas 66064
(913) 755-3033
First Kansas Federal Savings Bank
Main Office Paola Office
600 Main Street 29 West Wea
Osawatomie, Kansas Paola, Kansas
Fort Scott Office Louisburg Office
2205 South Main 100 West Amity
Fort Scott, Kansas Louisburg, Kansas
Beloit Office Phillipsburg Office
125 North Mill 762 4th Street
Beloit, Kansas Phillipsburg, Kansas
Board of Directors
J. Darcy Domoney Larry V. Bailey
Chairman of the Board President and Chief Executive Officer
Donald V. Meyer James E. Breckendridge
Director Director
William R. Butler, Jr. Roger L. Coltrin
Director Director
Executive Officers
Larry V. Bailey
President and Chief Executive Officer
Daniel G. Droste
Senior Vice President and Treasurer
Galen E. Graham
Senior Vice President and Secretary
------------------------------
Local Counsel Independent Auditor
Winkler, Lee, Tetwiler, Domoney & KPMG LLP
Schultz 1600 Commerce Bank Building
133 South Pearl Street Kansas City, Missouri 64106
Paola, Kansas 66071
Special Counsel Transfer Agent and Registrar
Malizia, Spidi, Sloane & Fisch, P.C. American Securities Transfer & Trust, Inc.
One Franklin Square 1825 Lawrence Street, Suite 444
1301 K Street, N.W., Suite 700 East Denver, Colorado 80201
Washington, D.C. 20005
-------------------------
The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 is available without charge upon written request. For a copy
of the Form 10-KSB, please write or call the Company's Corporate Secretary at
the Company's main office. The Annual Meeting of Stockholders will be held on
April 20, 1999 at 1:00 p.m. at the Company's office.
EXHIBIT 21
Subsidiaries of the Registrant
First Kansas Federal Savings Bank - incorporated under the laws of the United
States
First Enterprises, Inc.* - incorporated under the laws of the State of Kansas
- ---------------
* a subsidiary of First Kansas Federal Savings Bank
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,143
<INT-BEARING-DEPOSITS> 7,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,282
<INVESTMENTS-CARRYING> 62,024
<INVESTMENTS-MARKET> 62,164
<LOANS> 41,069
<ALLOWANCE> 206
<TOTAL-ASSETS> 107,216
<DEPOSITS> 84,436
<SHORT-TERM> 650
<LIABILITIES-OTHER> 690
<LONG-TERM> 0
0
0
<COMMON> 155
<OTHER-SE> 21,285
<TOTAL-LIABILITIES-AND-EQUITY> 107,216
<INTEREST-LOAN> 3,528
<INTEREST-INVEST> 2,829
<INTEREST-OTHER> 437
<INTEREST-TOTAL> 6,794
<INTEREST-DEPOSIT> 3,746
<INTEREST-EXPENSE> 3,798
<INTEREST-INCOME-NET> 2,996
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 2,585
<INCOME-PRETAX> 1,192
<INCOME-PRE-EXTRAORDINARY> 720
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 720
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 3.09
<LOANS-NON> 5
<LOANS-PAST> 82
<LOANS-TROUBLED> 71
<LOANS-PROBLEM> 23
<ALLOWANCE-OPEN> 179
<CHARGE-OFFS> 5
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 206
<ALLOWANCE-DOMESTIC> 4
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 202
</TABLE>
