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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number 0-22184
FIRST INDEPENDENCE CORPORATION
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(Name of small business issuer as specified in its charter)
Delaware 36-3899950
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Myrtle and Sixth Streets, Independence, Kansas 67301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 331-1660
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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 issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. YES X . NO ___.
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, 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 the issuer's revenues for its most recent fiscal year:
$8,261,288.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the NASDAQ Stock Market as of December 19, 1996, was
$8.2 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of December 19, 1996, there were issued and outstanding 528,897
shares of the Registrant's Common Stock (including 8,731 shares of restricted
stock issued pursuant to the Registrant's Recognition and Retention Plan).
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended September 30, 1996.
Part III of Form 10-KSB - Proxy Statement for 1997 Annual
Meeting of Stockholders.
Transitional Small Business Disclosure Format: YES __ NO X.
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PART I
Item 1. Description of Business
General
First Independence Corporation (the "Company") is a Delaware
corporation which was formed at the direction of First Federal Savings and Loan
Association of Independence ("First Federal" or the "Association") in June 1993
for the purpose of becoming the savings and loan holding company of First
Federal. The Company owns all of the outstanding stock of First Federal issued
on October 5, 1993 in connection with the completion of First Federal's
conversion from the mutual to the stock form of organization (the "Conversion").
The Company issued 727,375 shares of common stock at a price of $10.00 per share
in the Conversion. All references to the Company at or before October 5, 1993
refer to First Federal. At September 30, 1996, the Company had total assets of
$108.5 million, and stockholders' equity of $13.0 million.
First Federal is a federally chartered stock savings and loan
association headquartered in Independence, Kansas. First Federal was originally
organized in 1905 as a state-chartered savings and loan association and later
converted to a federally chartered institution.
First Federal has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Association
attracts deposits from the general public and uses such deposits, together with
borrowings and other funds, to originate one- to four-family residential
mortgage loans. To a much lesser extent, the Association also originates loans
secured by non-residential real estate and consumer loans and a limited amount
of loans secured by multi-family real estate. Subject to market conditions and
loan demand in its market area, the Association expects to continue to originate
the same types of loans it currently offers, which include the origination of a
limited number of commercial and multi-family real estate loans secured by
property located in its market area. The Association does not intend to
originate or purchase interests in commercial or multi-family real estate loans
secured by properties located outside of its market area.
The Association also invests in mortgage-backed securities which are
insured by or guaranteed by federal agencies and other investment securities.
See "Lending Activities - Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities."
Like all federally chartered savings associations, First Federal's
operations are regulated by the Office of Thrift Supervision (the "OTS"). First
Federal is a member of the Federal Home Loan Bank System ("FHLB System") and a
stockholder in the Federal Home Loan Bank ("FHLB") of Topeka. The Association is
also a member of the Savings Association Insurance Fund ("SAIF") and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC").
The principle sources of funds for the Association's lending activities
include deposits, amortization and prepayment of loan principal (including
mortgage-backed securities), sales or maturities of investment securities,
mortgage-backed securities and short-term investments, borrowings and funds
provided from operations.
The Association's revenues are derived principally from interest on
mortgage loans and mortgage-backed securities, interest on investment
securities, dividends on FHLB stock, loan origination income and servicing fee
income.
The executive offices of the Company are located at Myrtle and Sixth
Streets in Independence, Kansas 67301 and its telephone number is (316)
331-1660. Unless the context otherwise requires, all
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references herein to the Association or the Company include the Company and the
Association on a consolidated basis.
Forward-Looking Statements
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Market Area
Through its office in Independence, Kansas, First Federal currently
serves primarily Montgomery County, Kansas and, to a lesser extent, Wilson
County and the eastern part of Chautauqua County in Kansas. The Association
competes in loan originations and in attracting deposits with approximately nine
financial institutions serving its primary market area. The Association
estimates its share of the savings market in Montgomery County to be
approximately 17%.
Independence, Kansas, located in southeastern Kansas, is approximately
110 miles from Wichita, Kansas. Independence is the County Seat of Montgomery
County and the location of Independence Community College.
Montgomery County has a population of approximately 37,000. Although
the economy of southeast Kansas is closely tied to the gas, oil and agricultural
industries, Montgomery County has attracted a variety of other industries. Major
employers in Montgomery County include Automotive Controls Corp., Inc., a
manufacturer of electronic and electrical parts, City Publishing Company, a
publisher of cross-reference directories, Emerson Electric Co., a manufacturer
of small electric motors, Hackney & Sons (Midwest) Inc., a manufacturer of
beverage delivery truck bodies, Heartland Cement, a manufacturer of cement and
Cessna Aircraft, a manufacturer of single engine airplanes.
Lending Activities
General. Historically, the Association originated fixed-rate mortgage
loans. Since 1982, however, the Association has emphasized, subject to market
conditions, the origination and holding of adjustable-rate mortgage ("ARM")
loans and loans with shorter terms to maturity than traditional 30-year,
fixed-rate loans. Management's strategy has been to increase the percentage of
assets in its portfolio with more frequent repricing or shorter maturities. In
response to customer demand, however, the Association continues to originate for
its loan portfolio fixed-rate mortgages with terms not greater than 30 years.
The Association's primary focus in lending activities is on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. To a much lesser extent, the Association also originates
loans secured by non-residential real estate and consumer loans and a limited
amount of
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multi-family real estate loans. See "- Originations, Purchases and Sales of
Loans and Mortgage-Backed Securities." At September 30, 1996, the Association's
net loan portfolio totaled $67.7 million.
All loans must be reviewed by a committee comprised of the
Association's President and three other officers of the Association. The
committee has authority to approve loans secured by real estate to any one
borrower of up to $175,000. The executive committee has authority to approve
loans up to $250,000 which provide for a personal guarantee from the borrower.
Loans in excess of this limit require approval of the Board of Directors. All
loan approvals made by the loan committee are ratified by the Board of
Directors.
The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, is generally equal to the greater of 15% of unimpaired capital and
surplus or $500,000. At September 30, 1996, the maximum amount which the
Association could have lent to any one borrower and the borrower's related
entities was approximately $1.6 million. See "Regulation - Federal Regulation of
Savings Associations."
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Loan Portfolio Composition. The following information sets forth the
composition of the Association's loan portfolio in dollar amounts and in
percentages (before deductions (or additions) for loans in process, deferred
fees and discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
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1996 1995 1994
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Amount Percent Amount Percent Amount Percent
----------- ----------- ---------- ----------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family..................... $57,353 82.29% $50,747 82.34% $48,459 82.92%
Multi-family............................ 1,371 1.97 1,420 2.30 1,471 2.52
Non-residential......................... 7,224 10.36 7,454 12.10 6,937 11.87
Construction............................ 1,834 2.63 526 0.85 742 1.27
------ ---- --------- ------- --------- ------
Total real estate loans.............. 67,782 97.25 60,147 97.59 57,609 98.58
------ ----- -------- ------ -------- ------
Consumer Loans:
Deposit account......................... 364 0.52 314 0.50 328 .55
Automobile.............................. 402 0.58 269 0.44 144 .25
Home equity............................. 781 1.12 641 1.04 210 .36
Home improvement........................ 183 0.26 102 0.17 80 .14
Other................................... 185 0.27 159 0.26 69 .12
------ ------- --------- ------- --------- ------
Total consumer loans................. 1,915 2.75 1,485 2.41 831 1.42
------ ------- -------- ------- --------- ------
Total Loans......................... 69,697 100.00% 61,632 100.00% 58,440 100.00%
====== ====== ======
Less:
Loans in process........................ 1,050 372 710
Deferred fees and discounts............. 274 200 168
Allowance for losses.................... 690 690 667
------- ------- -------
Total loans receivable, net............. $ 67,683 $60,370 $56,895
======== ======= =======
</TABLE>
5
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The following table shows the composition of the Association's loan
portfolio by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
September 30,
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1996 1995 1994
------------------------------ ---------------------------------- -----------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Real estate:
One- to four-family........................ $31,231 44.81% $23,163 37.59% $21,549 36.87%
Multi-family............................... 871 1.25 821 1.33 1,027 1.76
Non-residential............................ 4,835 6.94 5,304 8.61 5,427 9.29
Construction............................... --- --- 526 0.85 742 1.27
-------- ------- ------- ------ ------- ------
Total fixed-rate real estate loans....... 36,937 53.00 29,814 48.38 28,745 49.19
Consumer.................................... 1,437 2.06 1,123 1.82 805 1.38
------ ----- ------ ----- ------- -----
Total fixed-rate loans................... 38,374 55.06 30,937 50.20 29,550 50.57
------ ===== ------ ----- ------ -----
Adjustable-Rate Loans
Real estate:
One- to four-family........................ 26,122 37.47 27,584 44.75 26,910 46.05
Multi-family............................... 500 0.72 599 0.97 444 0.76
Non-residential............................ 2,389 3.43 2,150 3.49 1,510 2.58
Construction............................... 1,834 2.63 --- --- --- ---
------ ----- -------- ------ -------- -------
Total adjustable-rate real estate loans. 30,845 44.25 30,333 49.21 28,864 49.39
Consumer.................................... 478 0.69 362 0.59 26 0.04
------- ----- -------- ------ --------- ------
Total adjustable-rate loans............. 31,323 44.94 30,695 49.80 28,890 49.43
------ ----- ------- ------ -------- ------
Total Loans............................. 69,697 100.00% 61,632 100.00% 58,440 100.00%
====== ====== ======
Less
Loans in process............................ 1,050 372 710
Deferred fees and discounts................. 274 200 168
Allowance for losses........................ 690 690 667
------ -------- --------
Total loans receivable, net................. $67,683 $60,370 $56,895
======= ======= =======
</TABLE>
6
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The following schedule shows the scheduled contractual maturities of
the Association's loan portfolio at September 30, 1996. Mortgages which have
adjustable or renegotiable interest rates are shown as repaying in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
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One- to Multi-family, and
Four-Family Non-Residential Construction Consumer Total
----------------------- ------------------------ ------------------- ---------------- ---------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------- ------------- ------ ------------ ------ ----------- ------ --------- ------ ---------
(Dollars in Thousands)
Due During Periods
Ending September 30,
- ------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1).................... $ 66 8.25% $ 1 8.50% $721 6.74% $955 9.35% $ 1,743 8.23%
1998....................... 39 8.62 --- --- 144 7.50 221 8.77 404 8.30
1999....................... 196 8.55 291 8.44 --- --- 209 9.36 696 8.75
2000 and 2001.............. 948 7.89 1,372 10.01 --- --- 365 10.10 2,685 9.27
2002 to 2006 .............. 6,375 7.84 1,983 8.63 --- --- 165 8.56 8,523 8.04
2007 to 2021............... 36,539 7.73 4,799 7.53 479 7.47 --- --- 41,817 7.70
2022 and following......... 13,190 7.59 149 8.25 490 7.52 --- --- 13,829 7.59
-------
$69,697
=======
</TABLE>
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(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after September 30, 1997, which have
predetermined interest rates is $37.1 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $30.8
million.
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One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Association's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders. The Association has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, single-family
residences in its market area. At September 30, 1996, the Association's one- to
four-family residential mortgage loans, totaled $57.4 million, or 82.3% of the
Association's loan portfolio.
The Association currently makes adjustable-rate, one- to four-family
residential mortgage loans in amounts up to 95% of the appraised value, or
selling price, of the security property, whichever is less. For loans with a
loan-to-value ratio of 90% or greater, the Association requires private mortgage
insurance equal to 20% of the loan value in order to reduce the Association's
exposure level. For loans with loan-to-value ratios of greater than 80% but less
than 90%, the Association typically requires private mortgage insurance to
reduce the Association's exposure. The determination as to whether to obtain
such insurance is made on a case-by-case basis, based on a variety of factors
including the borrower's payment history, the borrower's length of employment,
the quality of the property, the term of the loan and the debt to income ratio
of the borrower. At September 30, 1996, the Association had 400 loans totalling
$20.5 million with a loan-to-value ratio of greater than 80% but less than 90%
and 223 loans totalling $10.7 million with a loan-to-value ratio of 90% or
greater.
The Association currently offers one-year ARM loans at rates determined
in accordance with market and competitive factors for a term of up to 30 years.
The interest rate charged on ARM loans currently originated by the Association
is based upon the one year Constant Maturity Treasury Index. The adjustable-rate
loans currently originated by the Association provide for a 2% annual cap and
floor, and a 5% lifetime cap on the interest rate adjustment over the rate in
effect on the date of origination. The actual interest rate on these
adjustable-rate loans may not be reduced below 5% over the life of the loan. The
annual and lifetime caps on interest rate increases reduce the extent to which
these loans can help protect the Association against interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Company's Annual Report to
Stockholders attached hereto as Exhibit 13 (the "Annual Report"). Approximately
23.1% of the loans secured by one- to four-family real estate originated by the
Association during fiscal 1996 were originated with adjustable rates of
interest. See "- Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities."
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Association believes that these risks, which have not had a
material adverse effect on the Association to date, are more than outweighed by
the benefits received by the Association in offering ARM loans.
The Association also originates fixed-rate mortgage loans. Fixed-rate
loans currently originated by the Association have terms of up to 30 years.
Interest rates charged on these fixed-rate loans are competitively priced
according to local market conditions.
In underwriting residential real estate loans, the Association
evaluates the borrower's ability to make monthly payments, employment history,
credit history and the value of the property securing the loan. Potential
borrowers are typically qualified for both adjustable- and fixed-rate loans
based upon the initial or stated rate of the loan. Adjustable rate loans
increase the risk of default to the extent the interest rate adjusts upward and
the borrower is unable to make the payments at the increased rate. Although
borrowers on adjustable-rate loans are qualified based upon the initial rate of
the loan, if a borrower's debt to income ratios are marginal, the Association
will take into consideration the borrower's ability to make future payments in
the event the interest rate adjusts upward. Since the size of the Association's
average new loan originated is approximately $48,200, management believes
increases in interest rates
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do not generally increase payment amounts to levels that would significantly
impair the borrower's ability to make monthly payments.
An appraisal of the security property is obtained on all loan
applications from Board-approved independent fee appraisers. In connection with
the origination of residential real estate loans, the Association generally
requires that the borrower obtain an opinion from an attorney regarding the
title to the property or title insurance and fire and casualty insurance, as
well as flood insurance, where applicable, to protect the Association's
interest.
Approximately $2.7 million, or 4.6% of the Association's one- to
four-family residential mortgage loan portfolio, was purchased by the
Association. These loans are primarily secured by property located in Texas and
have been in the Association's portfolio for several years. The Association has
purchased only a limited amount of one- to four-family residential mortgage
loans since 1989. The level of delinquencies in the Association's portfolio of
purchased loans secured by one- to four-family residential real estate is
consistent with that of the loans originated and retained by the Association.
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise disposes of the property subject to the mortgage and the loan is
not repaid. The Association has enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield. The yield
increase is obtained through the authorization of assumptions of existing loans
at higher rates of interest and the imposition of assumption fees. One- to
four-family real estate loans may be assumed provided home buyers meet the
Association's underwriting standards and the loan terms are modified, to the
extent necessary, to conform with present yield and maturity requirements.
As a result, in part, of the decrease in loan demand for residential
loans in the Association's principal market area during recent periods and the
Association's asset/liability management objectives, First Federal has increased
its investments in mortgage-backed securities. Although such securities are held
for investment, they can serve as collateral for borrowings and, through
repayments, as a source of liquidity. For information regarding the carrying and
market values of First Federal's mortgage-backed securities portfolio, see Note
C of the Notes to Consolidated Financial Statements in the Annual Report. The
Association has also, from time to time, purchased single-family loans from
other financial institutions. See "- Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition" in the
Annual Report.
The Association also makes a limited number of construction loans to
individuals for the construction of their residences. There were $1,834,000 of
construction loans outstanding at September 30, 1996.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs up to 12 months. These construction loans have rates and terms
which match any one- to four-family loans then offered by the Association,
except that during the construction phase, the borrower pays interest only.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans.
Because of the uncertainties inherent in estimating development and
construction costs, it is relatively difficult to evaluate accurately the total
loan funds required to complete a project. Also, the funding of loan fees and
interest during the construction phase makes the monitoring of the progress of
the project particularly important, as customary early warning signals of
project difficulties may not be present.
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Non-Residential/Multi-Family Real Estate Lending. In order to enhance
the yield on and decrease the average term to maturity of its assets, the
Association has originated and purchased permanent loans and participation
interests in loans originated by other lenders secured by non-residential and
multi-family real estate. The Association also has a limited amount of loans
secured by land. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management" in the Annual
Report. At September 30, 1996, the Association had $8.6 million in
non-residential/ multi-family real estate loans, representing 12.3% of the
Association's loan portfolio.
Approximately 19.5% of the property securing the Association's
non-residential/multi-family (including land) real estate loan portfolio is
located outside the Association's primary market area. Many of the properties
securing these purchased loans or participations are located in Texas and
neighboring states. Some of these areas have experienced adverse economic
conditions including a general softening in real estate markets and the local
economy, which may result in increased loan delinquencies and loan losses.
However, most of the Association's non-residential/multi-family real estate loan
portfolio is seasoned and, during the past five years, the Association has had
no significant purchases or participations in such loans.
The table below sets forth, by type of security property, the
Association's non-residential/ multi-family real estate loans at September 30,
1996.
<TABLE>
<CAPTION>
Number Outstanding Amount
of Principal Non-Performing
Loans Balance or of Concern
----------- --------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family................................................ 8 $ 1,372 $---
Small business facilities and office buildings.............. 45 4,052 99
Health care facility........................................ 6 1,281 ---
Churches.................................................... 5 285 ---
Warehouse/mini-storage...................................... 3 358 ---
Shopping centers............................................ 1 76 ---
Hotel/motel................................................. 2 778 ---
Land........................................................ 11 393 ---
-- ------ ---
Total multi-family residential and non-residential real
estate loans........................................ 81 $8,595 $99
== ===== ==
</TABLE>
Permanent non-residential and multi-family real estate loans originated
by the Association generally have terms ranging from 5 to 20 years and up to a
30-year amortization schedule. Rates on permanent loans either (i) adjust
(subject, in some cases, to specified interest rate caps) at one year intervals
to specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates. Under the Association's current loan policy,
multi-family/non-residential real estate loans (other than loans to facilitate)
are written in amounts of up to 80% of the appraised value of the properties.
Appraisals on properties securing non-residential and multi-family real
estate property loans originated by the Association are performed by an
independent appraiser designated by the Association at the time the loan is
made. All appraisals on multi-family and non-residential real estate loans are
reviewed by the Association's management. In addition, the Association's
underwriting procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships, references and
income projections for the property. Personal guarantees are generally obtained
for all or a portion of the Association's multi-family/non-residential real
estate loans. While the Association continues to monitor
multi-family/non-residential real estate loans on a regular basis after
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origination, updated appraisals are not normally obtained after closing unless
the Association believes that there are questions regarding the progress of the
loan or the value of the collateral.
At September 30, 1996, the Association had no
non-residential/multi-family real estate loans to one borrower, or group of
borrowers, which had an existing carrying value in excess of $500,000, except
for the loans to four unrelated borrowers or groups of borrowers described
below. The first loan is secured by a hotel located in Columbia, Missouri and
had an outstanding balance at September 30, 1996 of $732,000. This loan was
reviewed by the OTS prior to origination and has been current since its
inception in June 1991. The other loans in excess of $500,000 at September 30,
1996, included a loan to one borrower totalling $636,000 secured by an apartment
building located in Rogers, Arkansas; a loan with an outstanding balance of
$527,000 secured by a shopping center in Dallas, Texas; and a loan with an
outstanding balance of $738,000 secured by an apartment building located in
Gladstone, Missouri. All of these loans were current at September 30, 1996. See
"Regulation - Federal Regulation of Savings Associations."
Non-residential/multi-family real estate lending affords the
Association an opportunity to receive interest at rates higher than that
generally available from one- to four-family residential lending. Nevertheless,
loans secured by such properties are generally larger and involve a greater
degree of risk than one- to four-family residential mortgage loans. Because
payments on loans secured by non- residential/multi-family real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. The Association has attempted to minimize these
risks through its underwriting standards and by lending primarily on existing
income-producing properties.
The Association also generally maintains an escrow account for most of
its loans secured by real estate, in order to ensure that the borrower provides
funds to cover property taxes in advance of the required payment. These accounts
are analyzed annually to confirm that adequate funds are available. For loans
which do not include an escrow requirement, an annual review of tax payments is
performed by the Association in order to confirm payment. In order to monitor
the adequacy of cash flows on income-producing properties, the borrower or lead
lender is notified annually, requesting financial information including rental
rates and income, maintenance costs and an update of real estate property tax
payments.
Consumer Lending. Consumer loans generally have shorter terms to
maturity (thus reducing First Federal's exposure to changes in interest rates)
and carry higher rates of interest than do one- to four-family residential
mortgage loans. In addition, management believes that the offering of consumer
loan products helps to expand and create stronger ties to its existing customer
base, by increasing the number of customer relationships and providing
cross-marketing opportunities. At September 30, 1996, the Association's consumer
loan portfolio totaled $1.9 million, or 2.8% of its loan portfolio. Under
applicable federal law, the Association is authorized to invest up to 35% of its
assets in consumer loans.
First Federal offers a variety of secured consumer loans, including
home equity loans, home improvement loans, auto loans, and loans secured by
savings deposits and other consumer collateral. The Association also offers a
limited amount of unsecured loans. The Association currently originates all of
its consumer loans in its market area. The Association's home equity and home
improvement loans comprised approximately 50.3% of the Association's total
consumer loan portfolio. These loans are generally originated in amounts,
together with the amount of the existing first mortgage, of up to 90% of the
appraised value of the property securing the loan. The term to maturity on such
loans may be up to seven years. Other consumer loan terms vary according to the
type of collateral, length of contract and credit worthiness of the borrower.
The Association's consumer loans generally have a fixed rate of interest, except
for the home equity lines of credit which adjust based upon changes in the prime
rate.
11
<PAGE>
The Association does not originate any consumer loans on an indirect
basis (i.e., where loan contracts are purchased from retailers of goods or
services which have extended credit to their customers).
The underwriting standards employed by the Association for consumer
loans include a determination of the applicant's payment history on other debts
and an assessment of the ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Although the level of delinquencies in the Association's consumer loan portfolio
has generally been low (at September 30, 1996, $29,000, or approximately 1.5% of
the consumer loan portfolio, was 60 days or more delinquent), there can be no
assurance that delinquencies will not increase in the future.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
The Association originates real estate loans through marketing efforts,
the Association's customer base, walk-in customers, and referrals from real
estate brokers. The Association originates both adjustable-rate and fixed-rate
loans. Its ability to originate loans is dependent upon the relative demand for
fixed-rate or ARM loans in the origination market, which is affected by the term
structure (short-term compared to long-term) of interest rates as well as the
current and expected future level of interest rates.
Historically, the Association has also purchased loans and loan
participations, predominantly for non-residential real estate and one- to
four-family residential loans. Such purchases have enabled First Federal to
offset the relatively low level of loan demand in the Association's principal
market areas, to take advantage of favorable lending opportunities in other
markets, to diversify its portfolio and to limit origination expenses while
generally providing the Association with a higher yield than was available on
mortgage-backed securities.
The Association has underwritten its loan purchases using the same
criteria it uses in originating loans. Servicing of purchased loans is generally
performed by the seller. At September 30, 1996, approximately $4.7 million of
First Federal's loan portfolio was serviced by others. During the year ended
September 30, 1996, the Association did not purchase any loans secured by
non-residential real estate or any unsecured loans.
During recent years, most of the Association's loan purchase
opportunities have been at yields that management believed were not sufficiently
higher than the yields of comparable mortgage-backed securities that were
guaranteed by a Federal agency as to principal and interest (or derived from
certificates that were so guaranteed) to offset such credit protection.
Accordingly, the Association has recently increased its mortgage-backed
securities portfolio rather than loan purchases. See "Investment Activities -
Mortgage-Backed Securities."
The Association had $2.5 million in loans serviced for others as of
September 30, 1996.
12
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1996 1995 1994
-------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type
Adjustable-rate:
Real estate - one- to four-family.................................... $4,465 $ 6,144 $ 3,302
- multi-family......................................... --- 173 ---
- non-residential...................................... 614 921 104
Consumer - home equity............................................... 314 469 ---
------ -------- ---------
Total adjustable-rate......................................... 5,393 7,707 3,406
------ ------- -------
Fixed-rate:
Real estate - one- to four-family.................................... 14,879 5,886 8,940
- multi-family......................................... --- --- ---
- non-residential...................................... 320 219 2,072
Consumer - non-real estate........................................... 1,429 1,234 833
------ ------- --------
Total fixed-rate.............................................. 16,628 7,339 11,845
------ ------- -------
Total loans originated........................................ 22,021 15,046 15,251
------ ------- -------
Purchases
Mortgage-backed securities (excluding
REMICs and CMOs)................................................... 4,660 2,982 10,093
REMICs and CMOs...................................................... --- --- 10,157
------ --------- -------
Total purchased............................................... 4,660 2,982 20,250
----- ------- -------
Sales and Repayments
Mortgage-backed securities........................................... 5,237 3,041 4,533
Transfer of mortgage-backed securities to mortgage-backed
securities available for sale.................................... --- 968 ---
Principal repayments(1).............................................. 13,956 11,854 16,059
------ ------ -------
Total reductions............................................... 19,193 15,863 20,592
Increase (decrease) in other items, net(2)............................. (730) 287 (449)
------- ------- --------
Net increase (decrease)....................................... $6,758 $ 2,452 $14,460
====== ======= =======
</TABLE>
- -------------
(1) Includes transfers to real estate acquired through foreclosure.
(2) Consists of loans in process, net deferred origination costs, unamortized
discounts and allowance for loan losses.
Asset Quality
When a borrower fails to make a required payment on a loan, the
Association attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, a computer generated late
notice is sent 15 days after the due date. If the delinquency is not cured
between the 30th and 60th day, a personal letter is sent to the borrower and if
the delinquency is not cured by the 75th day, contact with the borrower is made
by phone. Additional written and verbal contacts are made with the borrower to
the extent the borrower appears to be cooperative. If the delinquency is not
cured or a payment plan arranged by the 90th day, the Association sends a 30-day
default letter and, once that period elapses, usually institutes appropriate
action to foreclose on the property. Interest income on loans at this point is
reduced by the full amount of accrued and uncollected interest. If foreclosed,
the property is sold at a sheriff's sale and may be purchased by the
Association. Delinquent consumer loans are handled in a similar manner. If these
efforts fail to bring the loan current, appropriate action may be
13
<PAGE>
taken to collect any loan payment that remains delinquent. The Association's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Kansas consumer protection laws.
Real estate acquired by First Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate acquired through
foreclosure until it is sold. When property is acquired, it is recorded at the
lower of the loan's unpaid principal balance (cost) or fair value less estimated
selling expenses at the date of acquisition and any write-down resulting
therefrom is charged to the allowance for losses on loans. See Note A of the
Notes to Consolidated Financial Statements in the Annual Report. Upon
acquisition, all costs incurred in maintaining the property are expensed.
However, costs relating to the development and improvement of the property are
capitalized to the extent of net realizable value.
14
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at September 30, 1996, in dollar amounts and as a percentage of
the Association's loan portfolio. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent for:
----------------------------------------------------------------- Total Loans Delinquent
60-90 Days Over 90 Days 60 Days or more
----------------------------------------------------------------- ---------------------------
Percent of Percent of Percent of
Total Loan Total Loan Total Loan
Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio
------ ------ ---------- ------ ------ ---------- ------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........... 8 $168 0.24% 15 $331 0.48% 23 $499 0.72%
Non-residential............... --- --- --- 1 99 0.14 1 99 0.14
Construction.................. --- --- --- 1 94 0.13 1 94 0.13
Consumer. . . . . .............. 1 3 --- 4 26 0.04 5 29 0.04
--- ---- ----- -- --- ---- -- --- ----
Total...................... 9 $171 0.24% 21 $550 0.79% 30 $721 1.03%
=== ==== ==== == ==== ==== == ==== ====
</TABLE>
The following table sets forth information concerning delinquent loans
at September 30, 1995, in dollar amounts and as a percentage of the
Association's loan portfolio. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent for:
---------------------------------------------------------------- Total Loans Delinquent
60-90 Days Over 90 Days 60 Days or more
---------------------------------------------------------------- ---------------------------
Percent of Percent of Percent of
Total Loan Total Loan Total Loan
Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio
------ ------ ---------- ------ ------ ---------- ------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family............ 6 $ 111 0.18% 10 $ 560 0.91% 16 $ 671 1.09%
Non-residential................ --- --- --- 1 100 0.16 1 100 0.16
Consumer. . . . . ............... --- --- --- 1 11 0.02 1 11 0.02
---- ------- ----- --- ------- ---- --- ------- ----
Total....................... 6 $ 111 0.18% 12 $ 671 1.09% 18 $782 1.27%
=== ====== ==== === ====== ==== === ==== ====
</TABLE>
15
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of the Association's non-performing assets. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful. As a matter of policy, the Association does not generally accrue
interest on loans past due more than 90 days. For all periods presented,
troubled debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates) are included in the following table. Real estate acquired through
foreclosure includes assets acquired in settlement of loans and reflects the
lower of cost or fair value less selling expense.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1996 1995 1994
------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family......................................... $148 $ 444 $ 573
Non-residential real estate................................. 99 100 40
Construction................................................ 94 --- ---
Consumer.................................................... 26 11 14
--- ------- -------
Total non-accruing loans................................. 367 555 627
--- ------- -------
Accruing loans delinquent 90 days or more:
One- to four-family......................................... 183 116 185
Non-residential real estate................................. --- --- 101
---- -------- ------
Total accruing loans delinquent 90 days or more.......... 183 116 286
--- ------- ------
Troubled debt restructurings:
One- to four-family......................................... 52 56 59
Total troubled debt restructurings....................... 52 56 59
--- ------- -------
Total non-performing loans.................................... 602 727 972
--- ------- -------
Real estate acquired through foreclosure:
One- to four-family......................................... 12 --- 30
Non-residential real estate................................. --- 62 204
---- ------- -------
Total real estate acquired through foreclosure........... 12 62 234
--- ------- -------
Total non-performing assets................................... $614 $ 789 $1,206
==== ====== ======
Total as a percentage of total assets........................ 0.57% 0.77% 1.27%
==== ==== ====
</TABLE>
For the year ended September 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $30,707. The amount included in interest
income on such loans was $11,262 for the year ended September 30, 1996.
Included in non-accruing loans at September 30, 1996, were nine loans
totalling $242,000 secured by one- to four-family real estate, one loan
totalling $99,000 secured by non-residential real estate, and four consumer
loans totalling $26,000. All non-accruing loans at September 30, 1996, were
located in the Association's primary market. At September 30, 1996, accruing
loans delinquent in excess of 90 days included six loans totaling $183,000
secured by one- to four-family real estate. At September 30, 1996, all of the
Association's accruing loans delinquent in excess of 90 days secured by real
estate were located in the Association's primary market area.
16
<PAGE>
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of September 30, 1996, there was also one loan with
a net book value of $210,000 with respect to which known information about the
possible credit problems of the borrower have caused management to have doubts
as to the ability of the borrower to comply with present loan repayment terms
and which may result in the future inclusion of such item in the non-performing
asset categories.
Management has considered loans of concern in establishing the
Association's allowance for loan losses.
Real Estate Acquired through Foreclosure. At September 30, 1996, the
Association's real estate acquired through foreclosure consisted of one single
family residence located in the Association's market area with a carrying value
of $12,000, which is currently offered for sale.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." 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 which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are placed on a "watch list" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
Classified assets of the Association all of which, at September 30, 1996, are
included in the table of non-performing assets above or are described under the
caption "- Other Loans of Concern" above, were as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Substandard................................................... $676 $1,003 $1,429
Doubtful...................................................... 95 89 93
Loss.......................................................... --- --- ---
------ -------- --------
Total classified assets....................................... $771 $1,092 $1,522
==== ====== ======
</TABLE>
17
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance. Although management believes it uses
the best information available to make such determinations, future adjustments
to the allowance may be necessary, and net income could be significantly
affected if circumstances differ substantially from the assumptions used in
making the initial determinations. At September 30, 1996, the Association had an
allowance for loan losses of $690,009.
The following table sets forth an analysis of the Association's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1996 1995 1994
-----------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Balance at beginning of period........................................... $690 $667 $668
Charge-offs:
One- to four-family.................................................... --- 15 7
Non-residential real estate............................................ --- --- 47
------ ------- -----
Total Charge-offs................................................... --- 15 54
------ ------ -----
Recoveries:
One- to four-family.................................................... --- --- ---
Multi-family........................................................... --- --- ---
Non-residential real estate............................................ --- 38 8
------ ------ -----
Total recoveries.................................................... --- 38 8
------ ------ -----
Net charge-offs........................................................ --- (23) 46
------ ------ -----
Additions charged to operations.......................................... --- --- 45
------ ------ -----
Balance at end of period................................................. $690 $690 $667
==== ==== ====
Ratio of net charge-offs during the period to total loans at end of
period................................................................... 0.00% (0.04)% 0.08%
==== ===== =====
Allowance for loan losses to total loans at end of period................ 1.02% 1.14% 1.17%
==== ===== =====
Allowance for loan losses to non-performing loans at end of period....... 114.62% 94.91% 68.62%
====== ===== =====
</TABLE>
18
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate
One- to four-family........................ $357 82.29% $ 343 82.34% $ 336 82.92%
Multi-family............................... --- 1.97 17 2.30 18 2.52
Non-residential............................ 87 10.36 87 12.10 84 11.87
Construction................................. 11 2.63 ----- .85 ----- 1.27
Consumer..................................... 30 2.75 7 2.41 4 1.42
Unallocated.................................. 205 ------ 236 ------ 225 ---
---- ------ ----- ------ ----- ------
Total.................................... $690 100.00% $ 690 100.00% $ 667 100.00%
==== ====== ===== ====== ===== ======
</TABLE>
Investment Activities
General. First Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Association
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At September 30, 1996, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 8.01%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
Investment Securities. At September 30, 1996, investment securities
totaled $7.2 million, or 6.7% of total assets. As of such date, the Association
also had a $1.2 million investment in FHLB stock, satisfying its requirement for
membership in the FHLB of Topeka. It is the Company's general policy to purchase
investment securities which are U.S. Government securities or federal agency
obligations or other issues that are rated investment grade or have credit
enhancements. At September 30, 1996, the average term to maturity or repricing
of the investment portfolio was 4.4 years.
19
<PAGE>
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
-------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
-------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Government securities................................... $ --- ---% $ --- ---% $1,969 37.30%
Federal agency obligations................................... 2,000 23.60 1,000 11.68 2,004 37.96
Other marketable equity securities(1)........................ --- --- --- --- 272 5.15
------- ------- -------- ------- ------- ------
Total securities held to maturity......................... 2,000 23.60 1,000 11.68 4,245 80.41
----- ----- ------ ----- ------ ------
Securities available for sale:
U.S. Government securities................................... 1,993 23.52 1,997 23.32 $ --- ---
Federal agency obligations................................... 2,934 34.62 3,981 46.48 --- ---
FHLMC preferred stock........................................ --- --- 253 2.95 12 .23
Other marketable equity securities(1)........................ 308 3.63 294 3.43 --- ---
------ ------ ------ ------ -------- -------
Total securities available for sale....................... 5,235 61.77 6,525 76.18 12 .23
----- ----- ------ ----- ------- -------
FHLB stock................................................... 1,240 14.63 1,040 12.14 1,022 19.36
------- ------ ------ ------ ------ ------
Total securities and FHLB stock........................... $8,475 100.00% $8,565 100.00% $5,279 100.00%
====== ====== ====== ====== ====== ======
Average remaining life or term to repricing of securities
(excluding FHLMC preferred stock, FHLB stock and other
marketable equity securities)............................... 5.04 yrs. 4.49 yrs. 1.90 yrs.
Other Interest-Earning Assets:
Short-term money market investments.......................... $1,010 100.00% $ 1,745 100.00% $1,044 100.00%
------ ------ ------- ------ ----- ------
Total..................................................... $1,010 100.00% $ 1,745 100.00% $1,044 100.00%
====== ====== ======= ====== ====== ======
Average remaining life or term to repricing of securities and
other interest-earning assets (excluding FHLB stock, FHLMC
preferred stock and other marketable equity securities)...... 4.40 yrs. 3.59 yrs. 1.50 yrs.
</TABLE>
- --------------
(1) Represents primarily investments in mutual funds investing in U.S.
Government securities and federal agency obligations.
20
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB of Topeka stock, are indicated in the following table.
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
--------- --------- --------- --------- -------------------------
Amortized Amortized Amortized Amortized Amortized Market
Cost Cost Cost Cost Cost Value
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Federal agency obligations..... $ --- $ --- $1,000 $1,000 $2,000 $1,971
-------- -------- ------ ------ ------ ------
Total investment securities. $ --- $ --- $1,000 $1,000 $2,000 $1,971
======== ======== ====== ====== ====== ======
Weighted average yield...... ---% ---% 7.18% 8.00% 7.59%
=== === ==== ==== ====
Available for Sale:
U.S. Government securities..... $1,003 $979 $ --- $ --- $1,982 1,993
Federal agency obligations..... --- 2,953 --- --- 2,953 2,934
Other marketable equity securities(1) 308 --- --- --- 308 308
------- -------- -------- -------- ------- -------
Total investment securities. $1,311 $3,932 $ --- $ --- $5,243 $5,235
====== ====== ======== ======== ====== ======
Weighted average yield...... 6.58% 5.83% ---% ---% 6.02%
==== ==== === === ====
</TABLE>
- --------------
(1) Represents primarily investments in mutual funds investing in U.S.
Government securities and federal agency obligations.
The Company's securities portfolio at September 30, 1996, did not
contain securities of any issuer with an aggregate book value in excess of 10%
of the Company's stockholders' equity, excluding securities issued by the United
States Government, or its agencies.
The Association's securities portfolio is managed in accordance with a
written investment policy adopted by the Board of Directors. Investments may be
made by the Association's officers within specified limits and must be approved
in advance by the Board of Directors for transactions over certain limits.
Effective October 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). SFAS No. 115 requires that securities and
mortgage-backed securities be classified as held to maturity, available for sale
or trading purposes. Under SFAS No. 115, securities that the Company has the
positive intent and ability to hold until maturity are classified as held to
maturity and are reported at amortized cost. Securities classified as available
for sale are those the Company may sell in response to liquidity needs, for
asset/liability management purposes and other reasons and are reported at fair
value. Unrealized gains and losses on securities available for sale are reported
as a separate component of equity. Trading securities are those which are
purchased for sale in the near future and are reported at fair value. Unrealized
gains and losses on trading securities are included in income. Transfers between
categories are accounted for as sales and repurchases at fair value. For any
sales or transfers of securities classified as held to maturity, the cost basis,
the realized gain or loss, and the circumstances lending to the decision to sell
are required to be disclosed. At the time of purchase of new securities,
management of the Company makes a determination as to the appropriate
classification of securities as available for sale or held to maturity. At
September 30, 1996, the Company held no investments for trading purposes, but
did hold securities and mortgage-backed securities as available for sale with an
amortized cost and market value of $5.9 million and $5.9 million, respectively.
Mortgage-Backed Securities. The Association has a portfolio of
mortgage-backed securities and has utilized such investments to complement its
mortgage lending activities. At September 30, 1996, the Association's
mortgage-backed securities totaled $28.7 million. For information regarding the
carrying and market values of First Federal's mortgage-backed securities
portfolio, see Note C of the Notes to Consolidated Financial Statements in the
Annual Report.
21
<PAGE>
At September 30, 1996, $16.4 million, or 57.0%, of the Association's
mortgage-backed securities carried adjustable-rates of interest. Under the OTS's
risk-based capital requirements, Government National Mortgage Association
("GNMA") mortgage-backed securities have a zero percent risk weighting and
Federal National Mortgage Association ("FNMA"), FHLMC and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
The following table sets forth the contractual maturities of the
mortgage-backed securities at September 30, 1996.
<TABLE>
<CAPTION>
Due in
------------------------------------------------------ September 30,
1 to 3 to 5 5 to 10 10 to 20 Over 20 1996
3 Years Years Years Years Years Book Value
----------- ------- -------- -------- ---------- ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
Adjustable-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation...................... $ --- $ --- $ --- $ --- $ 7,521 $ 7,521
Federal National Mortgage
Association...................... --- --- --- --- 8,848 8,848
------- ------- ------- ------- -------- ------
Total adjustable-rate............ --- --- --- --- 16,369 16,369
------- ------- ------- ------- ------- ------
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation........................ --- --- 2,460 4,444 775 7,679
Federal National Mortgage
Association........................ --- --- 1,386 2,482 --- 3,868
Government National Mortgage
Association........................ --- --- --- --- 123 123
------- ------- ------- ------- -------- --------
Total fixed-rate.................... --- --- 3,846 6,926 898 11,670
------- ------- ----- ----- -------- -------
Total mortgage-backed securities held
to maturity....................... $ --- $ --- $3,846 $6,926 $17,267 $28,039
======== ======== ====== ====== ======= =======
Available for Sale
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation........................ $ 659 $ --- $ --- $ --- $ --- $ 659
======= ======== ======== ======== ======== ========
</TABLE>
Sources of Funds
General. The Company's primary sources of funds are deposits,
amortization and repayment of loan principal (including mortgage-backed
securities), sales or maturities of investment securities, mortgage-backed
securities and short-term investments, borrowings, and funds provided from
operations.
Borrowings may be used on a short-term basis to compensate for seasonal
reductions in deposits or deposit inflows at less than projected levels, and
have been used in the past on a longer-term basis to support lending activities.
The Association had $24.3 million in FHLB advances outstanding at September 30,
1996.
Deposits. First Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Association's deposits consist of
passbook accounts, NOW accounts, and money market and certificate accounts. The
Association relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. First Federal solicits
deposits from its market area only and does not use brokers to obtain deposits.
22
<PAGE>
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Association has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. The Association has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. The Association manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, the Association believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of the Association to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
Effective April 1, 1993, the Association introduced a new certificate
of deposit program in an attempt to reduce deposit outflows and attract longer
term deposits which were lost as a result of the general decline in market rates
of interest. This program offers two new certificate products which have four-
and five-year terms. The following table sets forth information regarding the
dollar amount and percent of certificates of deposit of this new program.
<TABLE>
<CAPTION>
At September 30, 1996 % of Total Certificates
------------------------- ------------------------
(Dollars in Thousands)
<S> <C> <C>
Four-Year Certificate..................................... $2,298 4.80%
Five-Year Certificate..................................... 5,424 11.32
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association for the dates
indicated and the rates offered. See Note H of the Notes to the Consolidated
Financial Statements in the Annual Report for weighted average nominal rates.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- ------ ---------- ------ ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook Demand (2.85%).................. $ 2,649 3.82% $ 2,752 4.05% $ 3,036 4.71%
NOW Accounts (2.25-2.50%)................ 3,232 4.66 2,899 4.26 3,150 4.89
Money Market Accounts (2.75-5.75%)....... 15,553 22.40 11,694 17.20 12,673 19.66
------ ----- ------ ------ ------ ------
Total Transactions and Savings Deposits 21,434 30.88 17,345 25.51% 18,859 29.26%
====== ----- ------ ------ ------ ------
Certificates:
0.00 - 3.99%........................... 9 0.01 804 1.18 15,800 24.51
4.00 - 4.99%........................... 4,216 6.07 10,498 15.44 21,465 33.30
5.00 - 5.99%........................... 30,296 43.64 16,882 24.83 7,166 11.12
6.00 - 6.99%........................... 13,367 19.25 22,351 32.87 839 1.30
7.00% and over.......................... 34 0.05 47 0.07 255 0.40
------- ----- -------- ------- ------- -------
Total Certificates........................ 47,922 69.02 50,582 74.39 45,525 70.63
------ ----- ------ ------ ------ ------
Accrued Interest.......................... 70 0.10 70 0.10 68 0.11
-------- ----- -------- ------- -------- -------
Total Deposits............................ $69,426 100.00% $67,997 100.00% $64,452 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
23
<PAGE>
The following table sets forth the savings flows at the Association
during the periods indicated. Net increase refers to the amount of deposits
during a period less the amount of withdrawals during the period.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1996 1995 1994
---------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Opening balance............................................... $67,927 $ 64,384 $ 84,941
Deposits...................................................... 65,771 61,024 48,981
Withdrawals................................................... (67,067) (59,578) (71,444)
Interest credited............................................. 2,725 2,097 1,906
------- -------- --------
Ending balance................................................ $69,356 $ 67,927 $ 64,384
======= ======== ========
Net increase (decrease)....................................... $ 1,429 $ 3,543 $(20,557)
======= ======== =========
Percent increase (decrease).................................. 2.10% 5.50% (24.20)%
====== ====== ======
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of September 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 5.00- 6.00- 7.00% or Percent
3.99% 4.99% 5.99% 6.99% greater Total of Total
---------------------------------- ---------------------- --------------------
Certificate accounts maturing
in quarter ending:
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996............... $ 9 $ 2,171 $ 1,432 $1,680 $--- $ 5,292 11.04%
March 31, 1997.................. --- 1,114 7,581 4,604 9 13,308 27.77
June 30, 1997................... --- --- 6,303 47 --- 6,350 13.25
September 30, 1997.............. --- 136 4,320 1,572 --- 6,028 12.58
December 31, 1997............... --- 162 1,921 972 --- 3,055 6.38
March 31, 1998.................. --- 128 1,752 1,197 --- 3,077 6.42
June 30, 1998................... --- 13 1,874 --- --- 1,887 3.94
September 30, 1998.............. --- --- 2,086 105 --- 2,191 4.57
December 31, 1998............... --- 333 712 33 --- 1,078 2.25
March 31, 1999.................. --- 159 1,039 35 --- 1,233 2.57
June 30, 1999................... --- --- 387 59 --- 446 0.93
September 30, 1999.............. --- --- 26 668 --- 694 1.45
December 31, 1999............... --- --- --- 416 --- 416 0.87
Thereafter...................... --- --- 863 1,979 25 2,867 5.98
---- -------- -------- -------- ---- -------- ----
TOTAL......................... $ 9 $4,216 $30,296 $13,367 $34 $47,922 100.00%
==== ====== ======= ======= === ======= ======
Percent of Total................ 0.02% 8.80% 63.22% 27.89% 0.07%
==== ==== ===== ===== ====
</TABLE>
24
<PAGE>
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of September 30, 1996.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000..... $5,192 $12,631 $11,381 $16,228 $45,432
Certificates of deposit of $100,00 or more..... 100 365 574 715 1,754
Public funds(1)................................ --- 313 423 --- 736
------- ------- ------- -------- -------
Total certificates of deposit.................. $5,292 $13,309 $12,378 $16,943 $47,922
====== ======= ======= ------- =======
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds or can be invested at a positive rate of return. In
addition, the Association has relied upon borrowings for short-term liquidity
needs.
First Federal may obtain advances from the FHLB of Topeka upon the
security of its capital stock in the FHLB of Topeka and certain of its mortgage
loans and mortgage-backed securities. Such advances may be made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. At September 30, 1996, the Association had $24.3 million in
FHLB advances outstanding.
The following table sets forth the maximum month-end balance and
average balance of the Association's FHLB advances and other borrowings at and
for the dates indicated.
<TABLE>
<CAPTION>
At and for the Year Ended September 30,
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances................................... $24,400 $19,900 $15,400
Other borrowings................................ --- --- ---
---------- ---------- ----------
Total borrowings............................. $24,400 $19,900 $15,400
======= ======= =======
Average Balance:
FHLB advances................................... $19,133 $17,275 $ 7,142
Other borrowings................................ --- --- ---
---------- ---------- ----------
Total average balance........................ $19,133 $17,275 $ 7,142
======= ======= =======
</TABLE>
The following table sets forth certain information as to the
Association's FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1996 1995 1994
------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.................................................... $24,300 $18,800 $15,400
Weighted average interest rate of FHLB advances.................. 5.682% 5.933% 5.017%
</TABLE>
25
<PAGE>
Regulation
General. First Federal is a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, First Federal is
subject to broad federal regulation and oversight extending to all its
operations. First Federal is a member of the FHLB of Topeka and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
First Federal, the Company also is subject to federal regulation and oversight.
The purpose of the regulation of the Company and other holding companies is to
protect subsidiary savings associations. First Federal is a member of the
Savings Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund ("BIF") are the two deposit insurance funds administered by the
FDIC, and the deposits of First Federal are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over First Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, First Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. The last regular
OTS and FDIC examinations of First Federal were commenced as of July 8, 1996 and
October 5, 1992, respectively. Under agency scheduling guidelines, it is likely
that another examination will be initiated in the near future. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. First
Federal's OTS assessment for the fiscal year ended September 30, 1996, was
$31,541.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 1996, First Federal's lending
limit under this restriction was approximately $1.6 million. At September 30,
1996, the Association had no loans in excess of its loans-to-one borrower limit.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings
26
<PAGE>
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan. A failure to submit a plan
or to comply with an approved plan will subject the institution to further
enforcement action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF and
SAIF members ranged from .23% to .31% of deposits. As is the case with the SAIF,
the FDIC is authorized to adjust the insurance premium rates for banks that are
insured by the BIF of the FDIC in order to maintain the reserve ratio of the BIF
at 1.25% of BIF-insured deposits. As a result of the BIF reaching its statutory
reserve ratio, the FDIC revised the premium schedule for BIF-insured
institutions to provide a range of .04% to .31% of deposits. The revisions
became effective in the third quarter of 1995. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$431,625 was paid in November 1996. This special assessment significantly
increased
27
<PAGE>
noninterest expense and adversely affected the Company's results of operations
for the year ended September 30, 1996. As a result of the special assessment,
First Federal's deposit insurance premiums were reduced to .0648% based upon its
current risk classification and the new assessment schedule for SAIF insured
institutions. These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as First Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
Regulatory Capital Requirements. Federally insured savings
associations, such as First Federal, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a case
by case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At September 30, 1996, the
Association did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. At September 30, 1996, the Association had no
subsidiaries.
At September 30, 1996, First Federal had tangible capital of $10.5
million, or 9.87% of adjusted total assets, which is approximately $8.9 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1996,
First Federal had no intangibles which were subject to these tests.
28
<PAGE>
At September 30, 1996, First Federal had core capital equal to $10.5
million, or 9.87% of adjusted total assets, which is $7.3 million above the
minimum leverage ratio requirement of 3% in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1996, First Federal
had no capital instruments that qualify as supplementary capital and $690,000 of
general loss reserves, which was $103,000 in excess of 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
non-residential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at September 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12%, such as the Association, is exempt from
this requirement unless the OTS determines otherwise.
On September 30, 1996, First Federal had total risk-based capital of
$11.1 million (including $10.5 million in core capital and $587,000 in
qualifying supplementary capital) and risk-weighted assets of $46.8 million; or
total capital of 23.77% of risk-weighted assets. This amount was $7.4 million
above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
29
<PAGE>
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on First
Federal may have a substantial adverse effect on First Federal's operations and
profitability and the value of the Company's common stock. Company shareholders
do not have preemptive rights, and therefore, if the Company is directed by the
OTS or the FDIC to issue additional shares of common stock, such issuance may
result in the dilution in the percentage of ownership of the Company's
shareholders.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as First Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Company may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30- day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
30
<PAGE>
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Association includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Liquidity and Capital
Resources" in the Annual Report. This liquid asset ratio requirement may vary
from time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At September 30, 1996, First Federal was in compliance with
both requirements, with an overall liquid asset ratio of 8.01% and a short-term
liquid asset ratio of 2.7%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and reemphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
generally accepted accounting principles ("GAAP"). Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with appropriate
documentation. First Federal is in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. Such assets primarily
consist of residential housing related loans and investments. At September 30,
1996, First Federal met the test and has always met the test since its
effectiveness. At September 30, 1996, First Federal's QTL percentage was 90.4%.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new
31
<PAGE>
investments and activities are limited to those permissible for both a savings
association and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the association is immediately ineligible
to receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of First Federal, to assess
the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such as
a merger or the establishment of a branch, by First Federal. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in September 1995 and received a rating of
satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Company and any company which is under common control with
First Federal. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. First Federal's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file 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 which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. 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 Association or any other SAIF-insured savings
association) would
32
<PAGE>
become subject to such restrictions, unless such other associations each qualify
as a QTL and were acquired in a supervisory acquisition.
If First Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 1996, First Federal was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal is a member of the FHLB of
Topeka, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures, established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
As a member, First Federal is required to purchase and maintain stock
in the FHLB of Topeka. At September 30, 1996, First Federal had $1.2 million in
FHLB stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 7.04% and were 6.44% for fiscal year
1996.
33
<PAGE>
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the fiscal year ended September 30, 1996, dividends paid by the
FHLB of Topeka to First Federal totaled $70,398, which constitute a $9,746
increase over the amount of dividends received in fiscal year 1995.
Federal Taxation. Savings associations such as the Association that met
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), were permitted to establish reserves for bad debts and to make annual
additions thereto which could, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes for
taxable years beginning prior to January 1, 1996. The amount of the bad debt
reserve deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) could be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equalled the amount
by which 12% of the amount comprising savings accounts at year end exceeded the
sum of surplus, undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the
above-described reserve method of accounting (including the percentage of
taxable income method) used by many thrift institutions to calculate their bad
debt reserve for federal income tax purposes. Thrift institutions with $500
million or less in assets may, however, continue to use the experience method.
As a result, First Federal must recapture that portion of the reserve that
exceeds the amount that could have been taken under the experience method for
post-1987 tax years. The legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. The legislation also requires thrift
institutions to account for bad
34
<PAGE>
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
First Federal, are also subject to an environmental tax equal to .12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1996, the Association's Excess for tax purposes
totaled approximately $2.5 million.
The Company and Association file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Thrift
institutions, such as the Association, that file federal income tax returns as
part of a consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
The Company has not been audited by the Internal Revenue Service for
the last 10 years and has federal income tax returns which are open and subject
to audit for the years 1992 through 1995. In the opinion of management, any
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Association.
Kansas Taxation. The Company and Association file separate Kansas
income and Kansas privilege tax returns on a fiscal year basis using the accrual
method of accounting.
Kansas law permits savings and loan associations to deduct from net
income, a reserve established for the sole purpose of meeting or absorbing
losses, in the amount of five percent of such net income determined without the
benefit of such deduction, or, in the alternative, a reasonable addition to a
reserve for losses based on past experiences. The Kansas privilege tax is
computed on the basis of 4.5% of taxable income, plus 2.25% of taxable income in
excess of $25,000.
The Company has not been audited by the Kansas Department of Revenue
for the last ten years and has Kansas privilege tax returns which are open and
subject to audit for the years 1992 through 1995. In the opinion of management,
any examination of such open returns would not result in a deficiency which
could have a material adverse effect on the financial condition of the Company.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
35
<PAGE>
For additional information regarding taxation, see Note K of the Notes
to the Consolidated Financial Statements in the Annual Report.
Competition
First Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from commercial banks and credit unions.
The Association attracts all of its deposits, primarily from Montgomery
County where the Association's office is located; therefore, competition for
those deposits is principally from commercial banks and credit unions located in
the same community. The Association competes for these deposits by offering a
variety of deposit accounts at competitive rates and convenient business hours.
The Association estimates its share of the savings market in its primary market
area to be approximately 17%.
Executive Officers of the Company
The following table sets forth certain information with respect to each
of the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD
-------------- ------- ------------------------------
<S> <C> <C>
Larry G. Spencer 48 President and Chief Executive Officer
Gary L. Overfield 44 Senior Vice President and Secretary
James B. Mitchell 41 Vice President and Chief Financial Officer
</TABLE>
- ----------------
(1) At September 30, 1996.
Executive Officers of the Association
The following table sets forth certain information with respect to each
of the executive officers of the Association.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD
---------- ------- -------------------------
<S> <C> <C>
Larry G. Spencer 48 President and Chief Executive Officer and Director
Gary L. Overfield 44 Senior Vice President, and Secretary and Chief Loan Officer
Jim L. Clubine 43 Vice President and Asset Manager
James B. Mitchell 41 Vice President and Chief Financial Officer
</TABLE>
- ----------------
(1) At September 30, 1996.
Larry G. Spencer. Mr. Spencer is President and Chief Executive Officer
of the Association. Mr. Spencer has been employed by First Federal since 1974
and has held a variety of positions including Executive Vice President. Mr.
Spencer was promoted to his present position in 1990. Mr. Spencer received a
degree in Business Administration from Pittsburg State University and served in
the U.S. Army for three years. He has served on the board of the Chamber of
Commerce, Main Street, the Independence Community College Endowment Association
and the Community Chest and is presently a member of the board of Junior
Achievement and Independence Industries. He is also a member of the Rotary Club.
36
<PAGE>
Gary L. Overfield. Mr. Overfield is Senior Vice President, Secretary
and Chief Loan Officer of the Association, a position he has held since 1990.
Mr. Overfield has been employed by First Federal since 1976 and has held a
variety of positions including Vice President and Loan Officer from 1985 to
1990. Mr. Overfield is a graduate of Pittsburg State University. He is currently
licensed by the State of Kansas as a Life and Accident and Health Insurance
agent. He was a member of the Board of Directors and previous Secretary of the
Independence Rotary Club, a youth coach for the Independence Recreation
Commission, previous Treasurer for the local chapter of Duck's Unlimited, and
previous Director and Treasurer for the Independence Chamber of Commerce.
Jim L. Clubine. Mr. Clubine is Vice President and Asset Manager, a
position he has held since 1990. Prior to joining First Federal, he was employed
as Branch Manager by MidAmerica Federal of Parsons, Kansas from 1979 to 1990.
Mr. Clubine is a member of Independence Chamber of Commerce (Ambassador Club),
Mercy Hospital Foundation Fund Raising Committee, and a member of the Rotary
Club. He has served on the board of the Chamber of Commerce, Community Chest,
and was a Previous Chairman of the March of Dimes. Mr. Clubine is a graduate of
Kansas State University.
James B. Mitchell. Mr. Mitchell is Vice President and Chief Financial
Officer of the Association, a position he has held since March 1992. Prior to
joining First Federal, he was employed by Eureka Savings Bank, Eureka, Kansas,
in the capacity of Strategic Asset Manager from 1988 to 1991 and Chief Financial
Officer from 1991 to 1992. From 1976 to 1988, Mr. Mitchell was Chief Financial
Officer for Peoples Savings and Loan, Parsons, Kansas. Mr. Mitchell has an
accounting degree from Pittsburg State University.
Employees
At September 30, 1996, the Association had a total of 22 employees. The
Association's employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Item 2. Description of Property
The Company owns its office located at Myrtle and Sixth in
Independence, Kansas. The total net book value of the Company's premises and
equipment at September 30, 1996, was $910,813.
First Federal has received approval from the OTS to establish a branch
office in Coffeyville, Kansas. The establishment of this branch will increase
the Association's ability to serve the needs of the communities served by First
Federal by providing an additional location at which deposits can be received
and loan applications taken from existing First Federal customers currently
living in Coffeyville. In addition, the Coffeyville location will increase the
Association's ability to serve Montgomery County's anticipated economic growth
due to the relocation of Cessna Aircraft and American Insulated Wire to this
area. The Association anticipates this office will open in mid-December.
The Company maintains depositor and borrower customer files on an
on-line basis with the FiServ Data Processing System, Milwaukee, Wisconsin. The
net book value of the data processing and computer equipment utilized by the
Company at September 30, 1996, was approximately $66,166.
37
<PAGE>
Item 3. Legal Proceedings
First Federal is involved as plaintiff or defendant in various legal
actions arising in the normal course of their business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel representing First
Federal in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's results of operations. The Company was
not involved in any legal proceedings at September 30, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 32 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 13 of the attached 1996 Annual Report to Stockholders
are herein incorporated by reference.
38
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- ---------------------------------------------------------------------------------------------------- ------
<S> <C>
Report of Independent Certified Public Accountants................................................... 14
Consolidated Balance Sheets (September 30, 1996 and 1995)............................................ 15
Consolidated Statements of Earnings (For the Years Ended
September 30, 1996 and 1995)......................................................................... 16
Consolidated Statements of Stockholders' Equity (For the
Years Ended September 30, 1996 and 1995)............................................................. 17
Consolidated Statements of Cash Flows (For the Years Ended
September 30, 1996 and 1995)......................................................................... 18
Notes to Consolidated Financial Statements........................................................... 19-31
</TABLE>
With the exception of the aforementioned information in Part II of the
Form 10-KSB, the Corporation's Annual Report to Stockholders for the year ended
September 30, 1996 is not deemed filed as part of this Annual Report on Form
10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of fiscal year.
Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Association contained in Part I of this Form 10-KSB is
incorporated herein by reference.
39
<PAGE>
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
40
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Number
Regulation S-B Attached
Exhibit Number Document Hereto
- -------------- -------------------------------------------------------------- ----------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation, or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements
(a) 1994 Stock Option and Incentive Plan **
(b) Recognition and Retention Plan *
(c) Employment Agreements *
11 Statement re: computation of per share earnings ***
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter on change in certifying accountants None
18 Letter on change in accounting principles None
21 Subsidiaries of the Registrant 21
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
</TABLE>
- --------------------
* Filed as exhibits to the Company's Form S-1 registration statement filed on
June 22, 1994 (File No. 33-64812) pursuant to Section 5 of the Securities Act
of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB filed on
December 29, 1994 (File No. 0-22184) pursuant to the Securities Exchange
Act of 1934.
***See Note 1 of Notes to Consolidated Financial Statements in the Annual Report
to Shareholders' attached hereto as Exhibit 13.
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, the Company did not file
any Current Reports on Form 8-K.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST INDEPENDENCE CORPORATION
<TABLE>
<CAPTION>
<S> <C> <C>
Date: _______________________ By: /s/ Larry G. Spencer
-------------------------------------------
Larry G. Spencer, President, Chief Executive
Officer and Director (Duly Authorized
Representative)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Larry G. Spencer
- --------------------------------------------
Larry G. Spencer, President, Chief Executive
Officer, Officer and Director (Principal
Executive and Operating Officer)
Date: 12/30/96
/s/ Donald E. Aitken
- --------------------------------------------
Donald E. Aitken, Chairman of the Board
Date: 12/30/96
/s/ Harold L. Swearingen
- --------------------------------------------
Harold L. Swearingen, Director
Date: 12/30/96
/s/ Lavern W. Strecker
- --------------------------------------------
Lavern W. Strecker, Director
Date: 12/30/96
<PAGE>
/s/ James B. Mitchell
- --------------------------------------------
James B. Mitchell, Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Date: 12/30/96
/s/ William T. NewKirk II
- -------------------------------------------
William T. NewKirk II, Director
Date: 12/30/96
/s/ John T. Updegraff
- ------------------------------------------
John T. Updegraff, Director
Date: 12/30/96
/s/ Joseph M. Smith
- ------------------------------------------
Joseph M. Smith, Director
Date: 12/30/96
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
- ---------
<S> <C>
11 Statement Regarding Computation of Per Share Earnings (included under Note 1 of Notes
to Consolidated Financial Statements in the Annual Report to Stockholders' attached hereto
as Exhibit 13)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule
</TABLE>
<PAGE>
TABLE OF CONTENTS
Page
President's Message to Stockholders 1
Selected Consolidated Financial Information 2
Management's Discussion and Analysis 4
Report of Independent Auditors 14
Consolidated Balance Sheets 15
Consolidated Statements of Earnings 16
Consolidated Statements of Stockholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to Consolidated Financial Statements 19
Stockholder Information 32
Officers and Directors Inside Back Cover
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at the office of
the Company located at Myrtle and Sixth Streets, Independence,
Kansas at 2:00 p.m. Independence, Kansas time, on January 22,
1997.
<PAGE>
[LOGO]
First Independence Corporation
TO OUR STOCKHOLDERS, DEPOSITORS AND FRIENDS:
It is my pleasure to present to you the 1996 Annual Report of First
Independence Corporation, parent of First Federal Savings and Loan
Association of Independence, which reflects results from our third complete
year as a stock company. As you will see by reading the accompanying
financial statements, First Independence had another excellent year with
$815,000 in net earnings. Earnings per share for the 1996 fiscal year were
$1.37 based upon 595,686 weighted average common shares outstanding during
the year ended September 30, 1996.
In 1996 we continued to see the quality of our assets improve.
Non-performing assets decreased to $614,000 at September 30, 1996, or .57% of
total assets, from $789,000 at September 30, 1995, or .78% of total assets.
Non-performing assets have been reduced from 6% of capital at September 30,
1995, to less than 5% of capital at fiscal year-end 1996.
An additional way to judge the strength of a company is by its capital.
First Independence Corporation's stockholders' equity at September 30, 1996,
was $13.0 million. This represents an equity-to-asset ratio of 11.98% and a
book value per share of $22.29. This financial position has allowed First
Independence Corporation to distribute to stockholders a portion of its net
earnings in the form of a dividend. During fiscal 1996, a total dividend of
$.375 per share was authorized by the Board of Directors, which resulted in a
payment to stockholders of an aggregate dividend of approximately $214,000.
The current $.10 quarterly dividend per share represents a 33% increase over
the fiscal 1995 quarterly dividend per share. As with every decision we make,
our dividend policy is designed to take into consideration our responsibility
to and interest in our stockholders.
First Independence continues to be committed to our market. This is
evidenced by the $22.0 million in loans originated by the company during the
fiscal year. These loans provide funds for many people in our community to
build, buy, remodel, or consolidate other financial obligations.
Additionally, we strive to provide our savings customers a safe, secure bank
where they can deposit their funds and earn a fair rate of return, as well as
chose from the variety of accounts we offer. The success of this commitment
is evidenced by the increase in deposits of $1.5 million, which translates to
a 2.1% increase over last year.
The next fiscal year we will see our new branch in Coffeyville opened. We
are looking forward to providing new and better service for our friends in
Coffeyville and its surrounding communities. Our major emphasis in our
operations in the coming year will be to increase our market share in our
existing market area. Growth and profitability can be achieved at the least
cost by taking advantage of cross sell opportunities with our existing
customer base.
On a sad note, former Director A. French DeFever passed away in May 1996.
French retired from the Board in 1993 after serving more than 23 years.
French will be missed, and he will always be remembered as a gentleman and a
friend.
On behalf of the directors, officers and staff of First Federal and First
Independence Corporation, we thank you for your continued support and
confidence.
Sincerely,
/s/ Larry G. Spencer
-----------------------
Larry G. Spencer
President & CEO
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1996 1995 1994 1993(1) 1992
----------- ----------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $108,539 $101,904 $94,593 $96,166 $90,863
Cash, cash equivalents and interest-
bearing deposits 1,763 2,115 1,415 20,146 6,552
Loans receivable, net 67,683 60,370 56,895 58,089 66,024
Mortgage-backed securities - at cost 28,039 28,594 29,617 13,963 11,606
Investment securities - at cost 2,000 1,000 4,245 271 2,329
Securities available for sale 5,894 7,358 12 -- --
Real estate acquired through foreclosure, net 12 62 234 1,409 2,084
Deposits 69,356 67,927 64,384 84,941 84,081
Borrowings 24,300 18,800 15,400 3,000 209
Stockholders' equity 13,003 13,600 13,351 6,103 4,783
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1996 1995 1994 1993 (1) 1992
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $ 7,773 $ 7,186 $ 6,296 $ 6,570 $ 8,201
Total interest expense 4,669 3,852 2,857 3,490 5,465
--------- --------- --------- --------- ---------
Net interest income 3,104 3,334 3,439 3,080 2,736
Provision for losses on loans -- -- 45 332 61
--------- --------- --------- --------- ---------
Net interest income after provision for
losses on loans 3,104 3,334 3,394 2,748 2,675
Other income 331 267 216 217 187
Gain (loss) on sale of investments 251 -- -- 326 (56)
Provision for loss on real estate acquired through
foreclosure -- -- -- -- (319)
General, administrative and other
expense (2,384) (1,820) (1,653) (1,506) (1,388)
--------- --------- --------- --------- ---------
Earnings before income tax expense and
cumulative effect of change in accounting
principle 1,302 1,781 1,957 1,785 1,099
Income tax expense 487 694 750 465 180
--------- --------- --------- --------- ---------
Earnings before cumulative effect of change
in accounting principle 815 1,087 1,207 1,320 919
Cumulative effect of change in
accounting principle -- -- 241 -- --
--------- --------- --------- --------- ---------
Net earnings $ 815 $ 1,087 $ 1,448 $ 1,320 $ 919
========= ========= ========= ========= =========
</TABLE>
(1) Does not reflect proceeds from the Association's conversion to stock form
and stock issuance by First Independence Corporation which was completed
on October 5, 1993.
2
<PAGE>
FINANCIAL RATIOS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------
1996 1995 1994 1993 (1) 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets) 0.78% 1.12% 1.61% 1.50% 0.95%
Interest rate spread information:
Average during period 2.36 2.87 3.38 3.45 2.69
End of period 2.17 2.36 3.34 2.94 3.37
Net interest margin (2) 3.02 3.52 3.91 3.64 2.91
Ratio of operating expense to average
total assets 2.28 1.88 1.82 1.61 1.26
Return on equity (ratio of net earnings to
average equity) 6.21 8.16 11.21 24.63 20.16
Quality Ratios:
Non-performing assets to total assets,
at end of period (3) 0.57 0.78 1.27 2.81 4.21
Allowance for loan losses to non-performing
assets, at end of period (3) 112.36 87.45 55.31 24.72 23.80
Capital Ratios:
Equity to total assets, at end of period 11.98 13.35 14.11 6.35 5.26
Average equity to average assets 12.57 13.78 14.38 6.08 4.69
Ratio of average interest-earning assets to
average interest-bearing liabilities 114.50 115.83 116.42 104.66 103.70
Dividend payout ratio (4) 27.37 16.47 7.73 N/A N/A
Number of full service offices 1 1 1 1 1
</TABLE>
(1) Does not reflect proceeds from the Association's conversion to stock form
and stock issuance by First Independence Corporation which was completed
on October 5, 1993.
(2) Net interest income divided by average interest-earning assets.
(3) Includes non-accruing loans, accruing loans delinquent 90 days or more
and assets acquired through foreclosure.
(4) Dividends paid per share divided by earnings per share. The ratio for
1994 does not give pro forma effect for annualizing dividends paid.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ----------------------------------------------------------------------------
GENERAL
Effective October 5, 1993, First Federal Savings and Loan Association of
Independence, Kansas ("First Federal" or the "Association") converted from a
federally chartered mutual savings association to a federally chartered stock
savings association and concurrently became a subsidiary of a holding
company, First Independence Corporation (the "Company"). The Company owns all
outstanding stock of First Federal and the Company's earnings are primarily
dependent on the operations of First Federal. Currently, the Company has no
other business activity other than acting as the holding company for First
Federal. As a result, the following discussion relates primarily to the
activities of First Federal. This discussion should be read in conjunction
with the consolidated Financial Statements and accompanying Notes included
elsewhere in this report.
The Company's business consists of attracting deposits from the general
public and using such deposits primarily to make residential mortgage and
other loans. The Company's revenues are derived principally from interest
charges on mortgage loans and mortgage- backed securities and, to a lesser
extent, from interest earned on investment securities and interest-bearing
deposits. In addition, the Company receives fees from loan originations, late
payments and for various services related to transaction and other deposit
accounts, and dividends on its Federal Home Loan Bank ("FHLB") stock.
The operations of the Company, and savings institutions and their holding
companies in general, are significantly affected by general economic
conditions and the related monetary and fiscal policies of regulatory
agencies. Deposit flows and cost of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending
activities are affected by the demand for financing of real estate and other
types of assets, which in turn is affected by the interest rates at which
such financing may be offered and other factors including the availability of
funds.
Historically, the Company's principal business was the origination for its
portfolio of long-term, fixed rate mortgage loans, using funds provided by
passbook and short-term certificates of deposit accounts. During the early
1980's, the Board commenced the development and implementation of a strategy
designed to reduce vulnerability to interest rate fluctuations by increasing
the Company's adjustable rate assets. As a result of the implementation of
this strategy, management believes that the Company has reduced its
vulnerability to changes in interest rates.
FORWARD-LOOKING STATEMENTS
Certain statements in this report that relate to First Independence
Corporation's plans, objectives or future performance may be deemed to be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based on Management's
current expectations. Actual strategies and results in future periods may
differ materially from those currently expected because of various risks and
uncertainties. Additional discussion of factors affecting First
Independence's business and prospects is contained in the Company's periodic
filings with the Securities and Exchange Commission.
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which they are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
same time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect operations while a positive gap would tend to benefit
operations.
A primary objective of asset/liability management is to manage interest
rate risk. First Federal monitors its asset/liability mix on an ongoing basis
and, from time to time, may institute certain changes in its product mix and
asset and liability maturities.
Since the early 1980's, the Company has stressed the origination of
adjustable rate residential mortgage loans ("ARMs"), subject to market
conditions. In recent periods, the Company has also purchased adjustable-rate
mortgage-backed securities. At September 30, 1996, approximately $30.8
million, or 44.3% of the Company's total loans secured by real estate, were
ARMs. On the same date, the Company also had $16.4 million in adjustable-rate
mortgage-backed securities.
The Company's ARMs and adjustable-rate mortgage-backed securities adjust
to various indices. The Company monitors the mix of indices on its adjustable
rate assets and seeks, consistent with market conditions, to achieve a close
match in the repricing characteristics of its assets and liabilities.
To increase the interest rate sensitivity of its assets, the Company has
also maintained a relatively high level of short and intermediate- term
investment securities and other assets. At September 30, 1996, the Company
had $4.0 million of investment securities and interest-
4
<PAGE>
- ------------------------------------------------------------------------------
bearing deposits maturing or repricing within three years. Finally, the
Company has undertaken various marketing programs from time to time over the
last decade in order to extend the term of its deposit liabilities. In 1993,
the Company introduced a new certificate of deposit program in an attempt to
reduce deposit outflows and attract longer term deposits which were being
lost as a result of the general decline in market rates of interest. This
program offers two certificate products which have 4- and 5-year terms. At
September 30, 1996, the Company had approximately $7.7 million in these two
certificates.
In the future, in managing its interest rate sensitivity, the Company
intends to continue to stress the origination of ARMs, subject to market
conditions, the purchase of adjustable-rate mortgage-backed securities and
the maintenance of a relatively high level of short- term securities and
other assets.
Office of Thrift Supervision ("OTS") regulations provide a Net Portfolio
Value ("NPV") approach to the quantification of interest rate risk. In
essence, this approach calculates the difference between the present value of
expected cash flows from assets and the present value of expected cash flows
from liabilities, as well as cash flows from off-balance-sheet contracts
arising from an assumed 200 basis point increase or decrease in interest
rates (whichever results in the greater pro forma decrease in NPV). Under OTS
regulations, an institution's "normal" level of interest rate risk in the
event of this assumed change in interest rates is a decrease in the
institution's NPV in an amount not to exceed 2% of the present value of its
assets. Thrift institutions with greater than "normal" interest rate exposure
must take a deduction from their total capital available to determine if they
meet their risk-based capital requirement. The amount of that deduction is
one- half of the difference between (a) the institution's actual calculated
exposure to the 200 basis point interest rate increase or decrease (whichever
results in the greater pro forma decrease in NPV) and (b) its "normal" level
of exposure which is 2% of the present value of its assets. Savings
associations, such as First Federal, with less than $300 million in assets
and a risk-based capital ratio in excess of 12% are exempt from this
requirement unless the OTS determines otherwise. The OTS has postponed the
implementation of the capital deduction component of this regulation until it
completes its analysis of the methods of interest rate risk measurements
proposed by the other banking regulators.
Presented below, as of September 30, 1996, is an analysis of the
Association's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 200 basis points and compared to Board policy
limits. The table was prepared and furnished to the Association by the Office
of Thrift Supervision. Assumptions used in calculating the amounts in this
table were determined by the OTS (dollars in thousands):
<TABLE>
<CAPTION>
Net Portfolio Value
Change in At September 30, 1996
interest rate Board Limit ----------------------------------------
(Basis Points) % Change $ Amount $ Change % Change
--------------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
+200 -40% $ 7,774 $ (3,745) -33%
+100 -25 9,785 (1,734) -15
0 --- 11,519 --- ---
- -100 -25 12,851 1,332 +12
- -200 -40 13,575 2,056 +18
</TABLE>
As indicated in the table above, management has structured its assets and
liabilities to minimize its exposure to interest rate risk. In the event of a
200 basis point change in interest rates, the Association would experience an
18% increase in NPV in a declining rate environment and a 33% decrease in a
rising rate environment. During periods of rising interest rates, the value
of monetary assets and liabilities generally decline. Conversely, during
periods of falling interest rates, the value of monetary assets and
liabilities generally increase. However, the amount of change in value of
specific assets and liabilities due to changes in interest rates is not the
same in a rising interest rate environment as in a falling interest rate
environment (i.e., as indicated above, the amount of value increase under a
specific rate decline may not equal the amount of value decrease under an
identical upward rate movement).
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARMs, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of
an interest rate increase. As a result, the actual effect of changing
interest rates may differ from that presented in the foregoing table.
ASSET QUALITY
Total non-performing assets decreased to $614,000 at September 30, 1996 as
compared to $789,000 at September 30, 1995. The ratio of non-performing
assets to total assets at September 30, 1996 was .57% compared to .78% at
September 30, 1995. Included in non-performing assets at September 30, 1996
were eighteen mortgage loans and four consumer loans totaling $576,000 and
$26,000, respectively. Foreclosed real estate totaled $12,000 at September
30, 1996.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ----------------------------------------------------------------------------
In addition to the non-performing assets, as of September 30, 1996,
there was also one $210,000 loan designated by the Company as "of
concern", due to management's concerns regarding the ability of the
borrower to comply with loan repayment terms. Management has taken into
account its non-performing assets and other loans of concern in
establishing its allowance for loan losses, which totaled $690,000 at
September 30, 1996.
RESULTS OF OPERATIONS
Average Balances, Interest Rates and Yields. The following table
presents for the periods indicated the total dollar amount of interest
income from average interest-earning assets and related yields, as well
as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were
made. All average balances are monthly average balances. Non-accruing
loans have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1996 1995
-------------------------------------- -------------
Average Interest Average
Outstanding Earned/ Yield/ Outstanding
Balance Paid Rate Balance
------------- ---------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 63,152 $5,190 8.22% $58,628
Mortgage-backed securities 29,510 1,930 6.54 29,191
Investment securities 7,233 479 6.62 4,977
FHLB stock 1,103 70 6.38 1,028
Interest-bearing deposits
in other financial
institutions -- -- -- --
Federal funds sold 1,434 79 5.53 650
Other 445 25 5.64 275
------------- ---------- -------------
Total interest-earning
assets 102,877 7,773 7.56 94,749
------------- ---------- -------------
Interest-bearing liabilities:
Demand and NOW deposits 18,765 762 4.06 13,508
Savings deposits and
certificates 51,950 2,820 5.43 51,019
FHLB advances 19,133 1,087 5.68 17,275
------------- ---------- -------------
Total interest-bearing
liabilities 89,848 4,669 5.20 81,802
------------- ---------- -------------
Net interest income $3,104
==========
Net interest rate spread 2.36%
========
Net earning assets $ 13,029 $12,947
============= =============
Net yield on average
interest-earning
assets 3.02%
========
Average interest-earning
assets to average
interest-bearing
liabilities 114.50%
==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1994
-------------------------------------------------
Interest Average Interest
Earned/ Yield/ Outstanding Earned/ Yield/
Paid Rate Balance Paid Rate
---------- -------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $4,804 8.19% $57,497 $4,666 8.12%
Mortgage-backed securities 1,939 6.64 22,981 1,272 5.54
Investment securities 321 6.45 2,584 129 4.99
FHLB stock 61 5.93 1,022 66 6.46
Interest-bearing deposits
in other financial
institutions -- -- 103 11 10.68
Federal funds sold 44 6.77 3,142 137 4.36
Other 17 6.18 537 15 2.79
---------- ------------- ----------
Total interest-earning
assets 7,186 7.58 87,866 6,296 7.17
---------- ------------- ----------
Interest-bearing liabilities:
Demand and NOW deposits 408 3.02 17,997 494 2.74
Savings deposits and
certificates 2,441 4.78 50,336 2,054 4.08
FHLB advances 1,004 5.81 7,142 309 4.33
---------- ------------- ----------
Total interest-bearing
liabilities 3,853 4.71 75,475 2,857 3.79
---------- ------------- ----------
Net interest income $3,333 $3,439
========== ==========
Net interest rate spread 2.87% 3.38%
========== ======== ========
Net earning assets $12,391
========== =============
Net yield on average
interest-earning
assets 3.52% 3.91%
========== ======== ========
Average interest-earning
assets to average
interest-bearing
liabilities 115.83% 116.42%
========== ==========
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
6
<PAGE>
- -------------------------------------------------------------------------------
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest- earning assets
and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by
old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old
volume). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to
the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
1996 vs. 1995 1995 vs. 1994
------------------------------- -------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
------------------------------- -------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------ ---------- -------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $372 $ 14 $ 386 $ 92 $ 46 $ 138
Mortgage-backed securities 21 (30) (9) 384 283 667
Investment securities 149 9 158 146 46 192
FHLB stock 4 5 9 -- (5) (5)
Interest-bearing deposits in
other financial institutions 0 (11) -- (11)
Federal funds sold 44 (9) 35 (144) 51 (93)
Other 10 (2) 8 (10) 12 2
-------- ------ ---------- -------- ------ ----------
Total interest-earning assets 600 (13) 587 457 433 890
-------- ------ ---------- -------- ------ ----------
Interest-bearing liabilities:
Demand and NOW deposits 188 166 354 (132) 46 (86)
Savings deposits and
certificates 45 334 379 28 359 387
FHLB advances 106 (23) 83 560 135 695
-------- ------ ---------- -------- ------ ----------
Total interest-bearing
liabilities $339 $477 816 $ 456 $540 996
======== ====== ---------- ======== ====== ----------
Net interest income $ (229) $(106)
========== ======== ====== ==========
</TABLE>
The following table sets forth the weighted average yields on the
Company's interest-earning assets, the weighted average interest rates on
interest-bearing liabilities and the interest rate spread between the
weighted average yields and rates for the Company at the dates indicated.
Non-accruing loans have been included in the table as carrying a zero yield.
<TABLE>
<CAPTION>
At September 30,
---------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 7.78% 8.13% 8.00%
Mortgage-backed securities 6.53 6.97 6.19
Investment securities 6.68 7.61 5.51
Federal funds sold 5.48 5.57 4.23
Other interest-earning assets 4.93 5.35 4.68
Combined weighted average yield on
interest-earning assets 7.34 7.59 7.26
Weighted average rate paid on:
Savings deposits and certificates 5.38 5.38 4.03
Demand and NOW deposits 4.03 3.78 2.70
FHLB advances 5.65 5.94 4.87
Combined weighted average rate paid
on interest-bearing liabilities 5.17 5.23 3.92
Spread 2.17 2.36 3.34
</TABLE>
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ----------------------------------------------------------------------------
FINANCIAL CONDITION
The Company's total assets increased $6.6 million, or 6.5%, from
$101.9 million at September 30, 1995 to $108.5 million at September 30,
1996. This increase was primarily due to increases in net loans
receivable of $7.3 million, premises and equipment of $200,000 and
Federal Home Loan Bank stock of $200,000. These increases in assets,
along with a reduction in advanced payments by borrowers for taxes and
insurance of $600,000 were funded by increases in advances obtained
from the Federal Home Loan Bank of Topeka of $5.5 million, savings
deposits of $1.5 million and checks issued in excess of cash items of
$500,000. Funding was also provided by decreases in mortgage-backed
securities of $700,000, cash and cash equivalents of $400,000 and
investment securities of $300,000.
Total loans receivable increased $7.3 million from $60.4 million at
September 30, 1995, to $67.7 million at September 30, 1996. Increased
economic activity in the Company's lending area resulted in loan
originations exceeding loan repayments. The loan portfolio is comprised
primarily of first mortgage loans secured by one- to four-family
residential real estate located in the Company's market area. The
increase in one- to four-family mortgage loans consisted primarily of
15- and 30-year fixed-rate loans and, to a lesser extent, one-year
adjustable rate mortgages and mortgage loans with a fixed rate for the
first three years of the loan term that automatically convert to one-
year adjustable rate loans during the fourth year.
The allowance for loan losses totaled $690,000 at
September 30, 1996 which was unchanged from the allowance for
loan losses at September 30, 1995. The ratio of the allowance
for loan losses as a percent of total loans decreased from
1.14% at September 30, 1995 to 1.02% at September 30, 1996,
due to the increase in total loans receivable at September 30,
1996. The allowance for loan losses as a percent of non-
performing loans increased, however, from 94.91% at September
30, 1995 to 114.57% at September 30, 1996. At September 30,
1996, the Company's non-performing loans were comprised
primarily of one- to four-family residential loans.
The allowance for loan losses is determined based upon an
evaluation of pertinent factors underlying the types and
qualities of the Company's loans. Management considers such
factors as the repayment status of a loan, the estimated net
realizable value of the underlying collateral, the borrower's
ability to repay the loan, current and anticipated economic
conditions which might affect the borrower's ability to repay
the loan and the Company's past statistical history concerning
charge-offs.
Total deposits increased $1.5 million from $67.9 million at
September 30, 1995, to $69.4 million at September 30, 1996. Deposits
increased in fiscal 1996 primarily as a result of the "Bulldog"
certificate account developed in January 1995 and the "Platinum" money
fund account introduced in May 1995. The "Bulldog" account offers
interest rates from 25 to 50 basis points above the local market for a
term of eighteen to thirty months. The "Platinum" money fund account
offers tiered rates on a limited transaction account with the highest
rate paid on balances of $50,000 and above. Management feels the
"Bulldog" certificate and "Platinum" money fund provide an alternative
to deposit customers looking to higher risk investments with higher
yields than certificates of deposit and money market accounts.
Total borrowed funds increased $5.5 million from $18.8 million at
September 30, 1995 to $24.3 million at September 30, 1996. These
short-term borrowings were utilized primarily to fund an increase in
loan originations, as well as to invest in adjustable rate
mortgage-backed securities. By investing borrowed funds in securities
at a positive spread over the term of the borrowings, the Company is
attempting to enhance its net interest income. Management believes that
the Company, while exposed to an increase in interest rate risk with
increasing rates, has sufficient assets repricing within one year or
less to allow it to take on this additional interest rate risk.
Total stockholders' equity decreased approximately $600,000 from $13.6
million at September 30, 1995 to $13.0 million at September 30, 1996. The
decrease was primarily the result of the company's use of $1,207,000 to
repurchase 62,923 shares of common stock, a decrease in unrealized gains on
securities available for sale of $188,000, net of deferred taxes (primarily
due to the sale of FHLMC stock which had been designated as available for
sale at September 30, 1995, therefore, an unrealized gain of $150,000, net of
applicable income
8
<PAGE>
- -----------------------------------------------------------------------------
taxes, had been recognized as a component of stockholders' equity at that
date) and dividends of $214,000 paid to stockholders. These decreases were
partially offset by the Company's net earnings from operations of $815,000,
the repayment of employee stock ownership plan ("ESOP") debt of $73,000, a
fair value adjustment of $60,000 on ESOP shares committed for release, the
amortization of unearned stock compensation of $44,000 and common stock
options exercised of $20,000.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
General. Net earnings for the fiscal year ended September 30, 1996 were
$815,000 as compared to $1,087,000 for the fiscal year ended September 30,
1995, a decrease of $272,000, or 25.0%. The decrease in net earnings was
primarily due to a one-time pre-tax charge of $432,000, resulting in a net
after tax reduction to earnings of $256,000. This one-time charge was the
result of legislation enacted on September 30, 1996 which mandated a special
assessment of 65.7 basis points on deposits of SAIF-insured institutions as
of March 31, 1995, in order to recapitalize the Savings Association Insurance
Fund. To a lesser extent, the decrease in net earnings was due to a decrease
in net interest income of $229,000 and an increase in non-interest expenses,
exclusive of the SAIF special assessment, of $132,000. These decreases to net
earnings were partially offset by an increase in non-interest income of
$315,000 and a decrease in income tax expense of $207,000.
Net Interest Income. Net interest income decreased $229,000, or
6.87%, for the fiscal year ended September 30, 1996 as compared to the
fiscal year ended September 30, 1995. This decrease was due primarily
to an increase in interest expense of $816,000, or 21.2%, offset
partially by an increase in interest income of $587,000, or 8.2%.
Interest expense increased primarily due to a 49 basis point increase
in the average rate paid on interest-bearing liabilities and, to a
lesser extent, an $8.0 million increase in the average balance of
interest-bearing liabilities. Interest income increased primarily due
to an $8.1 million increase in the average balance of interest-earning
assets, partially offset by a 2 basis point decrease in yield on
interest-earning assets.
Interest Income. Interest income for the fiscal year ended September 30,
1996, increased to $7.8 million from $7.2 million for the fiscal year ended
September 30, 1995. This increase resulted primarily from an $8.1 million
increase in the average outstanding balance of interest-earning assets (due to
the increase in the average balance of loans receivable and investment
securities financed with borrowings from the Federal Home Loan Bank of Topeka
and increased savings deposits) during the fiscal year ended September 30, 1996,
as compared to the fiscal year ended September 30, 1995. These increases were
partially offset by a decrease in the average yield on interest-earning assets.
The average yield on interest-earning assets decreased 2 basis points to 7.56%
during fiscal 1996, from 7.58% during fiscal 1995. This decrease was caused
primarily by a decrease in yield on the Company's mortgage-backed securities
portfolio from 6.64% to 6.54% A portion of the Company's adjustable rate
mortgage-backed securities adjusted downward due to decreases in market rates
and lower yielding current rate mortgage-backed securities were purchased during
the fiscal year.
Interest Expense. Interest expense for the fiscal year ended September 30,
1996, increased by $800,000 to $4.7 million as compared to $3.9 million for
the fiscal year ended September 30, 1995. This increase was primarily the
result of a 49 basis point increase in average interest rates paid on
interest-bearing liabilities, caused by higher rates paid on new deposit
products developed in fiscal 1995 and an increase in rates paid on maturing
certificates, as rates paid on certificates of deposit increased during the
terms of the maturing certificates. To a lesser extent, the increase in
interest expense was due to an $8.0 million increase in the average
outstanding balance of interest-bearing liabilities during the fiscal year
ended September 30, 1996 as compared to the fiscal year ended September 30,
1995. This increase in interest-bearing liabilities was primarily the result
of a $6.2 million increase in the average outstanding balance of deposits due
primarily to the "Platinum" money fund account introduced in May 1995. The
"Platinum" money fund account is a limited transaction account which offers
tiered rates with the highest rate paid on balances of $50,000 and above. To
a lesser extent, the increase was due to a $1.9 million increase in the
average outstanding amount of advances obtained from the Federal Home Loan
Bank of Topeka. The advances were used by the Company to invest in loans
receivable and mortgage-backed securities at a positive spread over the term
of the advances.
Provision for Loan Losses. There was no provision for losses on loans for
the fiscal years ended September 30, 1996 and September 30, 1995. Management
determined that additional provisions were not necessary based upon their
analysis of the established allowance and review of the composition of the
loan portfolio. The Company will continue to monitor its allowance for loan
losses and make future additions to the allowance through the provision for
loan losses as economic and regulatory conditions dictate. However, there can
be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods.
In addition, the Company's determinations as to the amount of the allowance
for loan losses are subject to review by the regulatory agencies which can
order the establishment of additional general or specific allowances.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ----------------------------------------------------------------------------
Non-interest Income. Non-interest income increased $315,000 to $582,000
during the fiscal year ended September 30, 1996 as compared to $267,000 for
the fiscal year ended September 30, 1995. The increase was primarily due to a
non-recurring $251,000 gain on the sale of FHLMC stock which was recognized
in the fiscal year ended September 30, 1996, with no gains on the sale of
securities recognized in the fiscal year ended September 30, 1995. Recurring
non-interest income generally consists of servicing fees as well as deposit
and other types of fees. Non-interest income levels are anticipated to remain
stable in the future due to the small number of checking accounts held by the
Company.
Non-interest Expense. Total non-interest expense increased to $2,384,000
for the fiscal year ended September 30, 1996 from $1,820,000 for the fiscal
year ended September 30, 1995, an increase of $564,000, or 31.0%. The
increase was primarily due to a one- time pre-tax charge of $432,000, related
to a special assessment of 65.7 basis points on deposits of SAIF-insured
institutions as of March 31, 1995, in order to recapitalize the Savings
Association Insurance Fund. As a result of the recapitalization of the
Savings Association Insurance Fund, the Company expects its deposit insurance
premium to be reduced from its current level in future periods. To a lesser
extent, the increase was due to increases in compensation and employee
benefits of $65,000, other expenses of $37,000, occupancy and equipment of
$12,000, and data processing fees of $10,000. The increase in compensation
expense was primarily due to annual increases in salaries and bonuses and
expense associated with the Company's ESOP due to the increase in the
Company's stock price.
Income Tax Expense. Income tax expense was $487,000 for the fiscal year
ended September 30, 1996 compared to $694,000 for the fiscal year ended
September 30, 1995, a decrease of $207,000. The decrease was primarily the
result of a decrease in pretax income. The Company's effective tax rates were
37.4% and 39.0% for the fiscal years ended September 30, 1996 and September
30, 1995, respectively. The decrease in the effective tax rates during fiscal
1996 was due primarily to a state tax credit received by the Company due to a
charitable contribution to a non-profit organization.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
General. Net earnings for the fiscal year ended September 30, 1995 were
$1,087,000 as compared to $1,448,000 for the fiscal year ended September 30,
1994, resulting in a decrease of $361,000, or 24.9%. The decrease in net
earnings was primarily due to the recognition of a $241,000 one-time gain
resulting from the cumulative effect of a change in accounting principle
recognized in the fiscal year ended September 30, 1994, with no similar
activity in the fiscal year ended September 30, 1995. Net earnings before the
cumulative effect of change in accounting principle for the fiscal year ended
September 30, 1995 decreased to $1,087,000 from $1,207,000 for the fiscal
year ended September 30, 1994, a decrease of $120,000, or 9.9%. This decrease
was primarily due to decreases in net interest income of $106,000, a decrease
in non-interest income of $12,000, and an increase in non-interest expenses
of $104,000. These decreases to net earnings were partially offset by a
decrease in provision for loan losses of $45,000 and a decrease in income tax
expense of $56,000.
Net Interest Income. Net interest income decreased $106,000, or 3.08%, for
the fiscal year ended September 30, 1995 as compared to the fiscal year ended
September 30, 1994. This decrease was due primarily to an increase in
interest expense of $996,000, or 34.9%, offset partially by an increase in
interest income of $890,000, or 14.1%. Interest expense increased primarily
due to a 92 basis point increase in the average rate paid on interest-bearing
liabilities and, to a lesser extent, a $6.3 million increase in the average
balance of interest-bearing liabilities. Interest income increased primarily
due to a $6.9 million increase in the average balance of interest-earning
assets and, to a lesser extent, a 41 basis point increase in yield on
interest-earning assets.
Interest Income. Interest income for the fiscal year ended September 30,
1995, increased to $7.2 million from $6.3 million for the fiscal year ended
September 30, 1994. This increase resulted primarily from a $6.9 million
increase in the average outstanding balance of interest-earning assets (due
to the increase in the average balance of mortgage-backed securities financed
with borrowings from the FHLB) during the fiscal year ended September 30,
1995, as compared to the fiscal year ended September 30, 1994. To a lesser
extent, the increase was due to an increase in the average yield on
interest-earning assets. The average yield on interest-earning assets
increased 41 basis points to 7.58% at September 30, 1995, from 7.17% at
September 30, 1994. This increase was caused primarily by an increase in
yield on the Company's mortgage-backed securities portfolio from 5.54% to
6.64% due to a decision made by the Company to purchase $10.0 million in
mortgage-backed securities in an effort to increase net interest income,
increase assets, and better utilize capital. To a lesser extent, the increase
in yield was due to an increase in the loan portfolio yield from 8.12% to
8.19% and the investment securities portfolio yield from 4.99% to 6.45% for
the fiscal year ended September 30, 1995, as compared to the same period in
fiscal 1994. A portion of the Company's adjustable rate loans adjusted upward
in response to increases in market rates and higher yielding investment
securities were purchased during the fiscal year.
Interest Expense. Interest expense for the fiscal year ended September 30,
1995, increased by $1.0 million to $3.9 million as compared to $2.9 million
for the fiscal year ended September 30, 1994. This increase was primarily the
result of a 92 basis point increase in average interest rates paid on
interest-bearing liabilities, caused by increases in market interest rates
and higher rates paid on new deposit products developed in fiscal 1995. To a
lesser extent, the increase in interest expense was due to a $6.3 million
increase in the average outstanding balance of interest-bearing liabilities
during the fiscal year ended September 30, 1995 as compared to the fiscal
year ended
10
<PAGE>
- ------------------------------------------------------------------------------
September 30, 1994. This increase in interest-bearing liabilities was
primarily the result of a $10.1 million increase in the average outstanding
balance of advances obtained from the Federal Home Loan Bank of Topeka. The
advances were used by the Company to invest in mortgage-backed securities at
a positive spread over the term of the advances. The increase in FHLB
advances was partially offset by a $3.8 million decrease in the average
balance of deposits, due to outflow of deposits resulting from depositors
seeking higher risk investments offered by non-financial institutions with
higher yields than certificates of deposit.
Provision for Loan Losses. There was no provision for losses on loans for
the fiscal year ended September 30, 1995, as compared to $45,000 for the
fiscal year ended September 30, 1994, a decrease of $45,000, or 100.0%.
Management determined that additional provisions were not necessary based
upon their analysis of the established allowance and review of the
composition of the loan portfolio. The Company will continue to monitor its
allowance for loan losses and make future additions to the allowance through
the provision for loan losses as economic and regulatory conditions dictate.
However, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods. In addition, the Company's determinations as to
the amount of the allowance for loan losses are subject to review by the
regulatory agencies which can order the establishment of additional general
or specific allowances.
Non-interest Income. Non-interest income increased $70,000 to $267,000
during the fiscal year ended September 30, 1995 as compared to $197,000 for
the fiscal year ended September 30, 1994. The increase was primarily due to
an increase in the income from real estate operations of $82,000 due to gains
on sale of real estate owned. Recurring non-interest income generally
consists of servicing fees as well as deposit and other types of fees.
Non-interest income levels are anticipated to remain stable in the future due
to the small number of checking accounts held by the Company.
Non-interest Expense. Total non-interest expense increased to $1,820,000
for the fiscal year ended September 30, 1995 from $1,634,000 for the fiscal
year ended September 30, 1994, an increase of $186,000, or 11.4%. The
increase was primarily due to an increase in compensation and employee
benefits of $167,000, an increase in other expenses of $50,000 due to an
increase in advertising expense, and an increase in occupancy and equipment
of $5,000. These increases were partially offset by a decrease in federal
deposit insurance premiums of $40,000 due to the reduction in the average
outstanding balance of deposits. The increase in compensation expense was
primar- ily due to the addition of two new employees (one being a loan
officer with expertise in FHA and VA lending), annual increases in salaries
and bonuses, and the adoption of SOP 93-6 on accounting for ESOP shares which
was adopted by the Company on October 1, 1994.
Income Tax Expense. Income tax expense was $694,000 for the fiscal year
ended September 30, 1995 compared to $750,000 for the fiscal year ended
September 30, 1994, a decrease of $56,000. The Company's effective tax rates
were 39.0% and 38.3% for the fiscal years ended September 30, 1995 and
September 30, 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The OTS requires minimum levels of liquid assets. OTS regulations
presently require First Federal to maintain an average daily balance of
liquid assets (United States Treasury, federal agency, and other investments
having maturities of five years or less) equal to at least 5.0% of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. Such requirements may be changed from time to
time by OTS to reflect changing economic conditions. Such investments are
intended to provide a source of relatively liquid funds upon which First
Federal may rely if necessary to fund deposit withdrawals and other
short-term funding needs. First Federal's regulatory liquidity at September
30, 1996 was 8.01%. First Federal normally attempts to maintain liquidity
between 7% and 9%. In addition to the regulatory liquidity requirement, the
Association is required to maintain short-term liquid assets, as defined,
equal to 1.0% of the average sum of net withdrawable deposits and other
liabilities, as defined. First Federal's short-term liquidity ratio at
September 30, 1996 was 2.70%.
The Company's primary sources of funds consist of deposits and loan and
mortgage-backed securities repayments. Other potential sources of funds
available include borrowings from the Federal Home Loan Bank ("FHLB") of
Topeka. The Company uses its liquid resources principally to meet on-going
commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest, to fund existing and future loan commitments, to
maintain liquidity, and to meet operating expenses. Management believes that
loan repayments and other sources of funds will be adequate to meet the
Company's foreseeable liquidity needs.
The Company's primary investing activity is the origination of mortgage
loans and the purchase of mortgage-backed and other securities. At September
30, 1996, mortgage loans and mortgage-backed securities accounted for 88.8%
of the Company's total assets. The Company has been able to generate
sufficient cash through the retail deposit market, its traditional funding
source, and through short- term borrowings, to provide the cash utilized in
investing activities. A $9.0 million line of credit has also been established
with the FHLB of Topeka, which is scheduled to mature on February 7, 1997.
The line of credit is subject to various conditions, including the pledging
of acceptable collateral. The primary purpose of the line of credit is to
serve as a back-up liquidity facility for the Company, however, the Company
may from time to time utilize the line of credit to purchase investment
securities and fund other commitments.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ----------------------------------------------------------------------------
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits, and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other
short-term government and agency obligations. If the Company requires
additional funds, beyond its internal ability to generate, it has additional
borrowing capacity with the FHLB of Topeka.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At September 30, 1996, the Company had
outstanding commitments to extend credit which amounted to $264,000. The
Company is not aware of any trends, events or uncertainties which will have
or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
Certificates of deposit scheduled to mature in one year or less at
September 30, 1996 totaled approximately $31.0 million. Management believes
that a significant portion of such deposits will remain with the Company.
There can be no assurance, however, that the Company can retain all such
deposits. At September 30, 1996, the Company had $24.3 million in advances
from the FHLB of Topeka.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), among other things, mandated the adoption of new minimum capital
requirements that are no less stringent than the minimum capital requirements
for national banks. These minimum capital standards generally require the
maintenance of regulatory capital sufficient to meet each of three tests: the
tangible capital requirement, the core capital requirement, and the
risk-based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as retained earnings less all intangible
assets) equal to 1.5% of adjusted total assets. The core capital requirement
provides for minimum core capital (tangible capital plus supervisory
goodwill) equal to 3.0% of assets. The risk-based capital requirement
provides for the maintenance of core capital plus general loss allowances
(less a specified percentage of certain equity investments) equal to 8.0% of
risk-weighted assets. In computing risk-weighted assets, the Association
multiplies the book value of each asset on its balance sheet by a defined
risk-weighting factor (e.g., one- to four-family residential loans carry a
risk-weighted factor of 50%). Management has reviewed these capital standards
and determined that the Association is in compliance with each of the three
requirements. As of September 30, 1996, the Association's tangible capital,
core capital, and risk-based capital of $10.5 million, $10.5 million, and
$11.1 million exceeded the applicable minimum requirements by $8.9 million,
$7.3 million, and $7.4 million, respectively.
The following table sets forth the Association's compliance with such
requirements at September 30, 1996.
<TABLE>
<CAPTION>
Association capital level
OTS requirement at September 30, 1996
--------------------- -----------------------------------
% of % of Amount
Capital standard Assets Amount Assets Amount of Excess
-------- --------- -------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.50% $1,602 9.87% $10,542 $8,940
Core capital (1) 3.00 3,204 9.87 10,542 7,338
Risk-based capital 8.00 3,746 23.77 11,129 7,383
</TABLE>
(1) Based on current core capital requirement of 3%.
See Note L of Notes to Consolidated Financial Statements for additional
information.
Management has reviewed the restriction in FIRREA relating to loans to one
borrower, qualification as a qualified thrift lender, and other restrictions
on lending and investment, and has determined that, based on the
Association's capital position and lending and investment policies, these
restrictions have not had a material impact on the Association's operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of First Federal are monetary in nature. As a result, interest
rates have a more significant impact on the Association's performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods
and services. In the present interest rate environment, the liquidity,
maturity structure, and quality of First Federal's assets and liabilities are
important factors in the maintenance of acceptable performance levels.
12
<PAGE>
- ------------------------------------------------------------------------------
EFFECT OF NEW ACCOUNTING STANDARDS
Recent pronouncements by the Financial Accounting Standards Board ("FASB")
will have an impact on financial statements issued in subsequent periods. Set
forth below are summaries of such pronouncements.
Several new accounting standards have been issued by the FASB that will
apply for the Company's consolidated financial statements for the year ending
September 30, 1997. SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," requires a
review of long-term assets for impairment of recorded value and resulting
write-downs if the value is impaired. SFAS No. 122, "Accounting for Mortgage
Servicing Rights," requires recognition of an asset when servicing rights are
retained on in-house originated loans that are sold. SFAS No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting is not adopted, entities
must disclose the pro forma effect on net income and on earnings per share
had the accounting been adopted. SFAS No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities," provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities and requires a consistent
application of a financial- components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred and derecognizes liabilities when extinguished. SFAS No. 125
also supersedes SFAS No. 122, and requires that servicing assets and
liabilities be subsequently measured by amortization in proportion to and
over the period of estimated net servicing income or loss and requires
assessment for asset impairment or increases obligation based on their fair
values. SFAS No. 125 applies to transfers and extinguishments occurring after
December 31, 1996, and early or retroactive application is not permitted.
These statements are not expected to have a material effect on the
Company's consolidated financial position or results of operation.
13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -----------------------------------------------------------------------------
[LOGO]
Board of Directors
First Independence Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of First
Independence Corporation and Subsidiary as of September 30, 1996 and 1995, 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 Corporation'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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Independence
Corporation and Subsidiary as of September 30, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
As more fully explained in Note A3 to the consolidated financial statements the
Corporation changed its method of accounting for certain investment and
mortgage-backed securities during the year ended September 30, 1995.
Grant Thornton LLP
Wichita, Kansas
October 24, 1996
14
<PAGE>
First Independent Corporation and Subsidiary
CONSOLIDATED BALANCED SHEETS
- ------------------------------------------------------------------------------
September 30,
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 753,134 $ 369,632
Federal funds sold 400,000 1,300,000
Other interest-bearing deposits 610,295 444,993
--------------- ---------------
Cash and cash equivalents 1,763,429 2,114,625
Investment securities held to maturity (estimated fair value of $1,970,980 in 1996 and
$1,006,840 in 1995) 2,000,000 1,000,000
Investment securities available for sale 5,235,073 6,524,956
Mortgage-backed securities held to maturity (estimated fair value of $27,873,630 in 1996
and $28,416,954 in 1995) 28,039,314 28,593,826
Mortgage-backed securities available for sale 659,207 832,700
Loans receivable, net 67,682,920 60,369,956
Premises and equipment, net 910,813 663,463
Federal Home Loan Bank stock, at cost 1,239,500 1,040,000
Accrued interest receivable 667,920 618,438
Real estate acquired through foreclosure 11,845 62,020
Deferred income taxes 173,904 19,987
Other 155,304 64,044
--------------- ---------------
$108,539,229 $101,904,015
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 69,356,422 $ 67,926,628
Advances from borrowers for taxes and insurance 678,072 1,242,941
Checks issued in excess of cash items 492,627 --
Advances from Federal Home Loan Bank 24,300,000 18,800,000
Income taxes payable -- 36,855
Accrued expenses and other 709,599 297,656
--------------- ---------------
Total liabilities 95,536,720 88,304,080
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 2,500,000 shares authorized; 749,196 shares issued 7,492 7,492
Additional paid-in capital 7,053,143 6,998,314
Retained earnings - substantially restricted 8,960,098 8,358,681
Unrealized gain (loss) on securities available for sale, net of related taxes (11,293) 176,580
Required contributions for shares acquired by Employee Stock Ownership Plan (ESOP) (290,949) (363,686)
Unearned stock compensation - recognition and retention plan (RRP) (87,278) (130,922)
Treasury stock, 165,775 shares in 1996 and 104,852 shares in 1995 - at cost (2,628,704) (1,446,524)
--------------- ---------------
Total stockholders' equity 13,002,509 13,599,935
--------------- ---------------
$108,539,229 $101,904,015
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
First Independent Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Interest income
Loans $5,189,361 $4,804,423
Mortgage-backed securities 1,929,927 1,939,066
Investment securities 478,990 321,230
Interest-bearing deposits and other 174,825 121,409
------------ -------------
Total interest income 7,773,103 7,186,128
Interest expense
Deposits 3,581,799 2,849,036
Borrowed funds 1,087,249 1,003,632
------------ -------------
Total interest expense 4,669,048 3,852,668
------------ -------------
Net interest income 3,104,055 3,333,460
Other income
Gain on sale of investment
securities 250,945 --
Service charges 178,949 140,714
Real estate operations 94,199 62,757
Other 58,292 63,495
------------ -------------
582,385 266,966
General, administrative and other
expense
Employee compensation and benefits 1,093,509 1,028,819
Federal deposit insurance premiums 591,677 151,080
Occupancy and equipment 131,172 119,103
Data processing fees 138,659 129,269
Other operating 429,304 391,664
------------ -------------
2,384,321 1,819,935
------------ -------------
Earnings before income taxes 1,302,119 1,780,491
Income tax expense 486,826 693,825
------------ -------------
NET EARNINGS $ 815,293 $1,086,666
============= =============
Earnings per share
Primary $ 1.37 $ 1.69
Fully diluted $ 1.37 $ 1.67
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
First Independent Corporation and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
gain
(loss) on
securities
Additional available
Common paid-in Retained for sale,
stock capital earnings net
--------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at October 1, 1994 $7,492 $6,967,859 $7,442,782 $ --
Net earnings for the year -- -- 1,086,666 --
Cash dividends of $.275 per share -- -- (170,767) --
Common stock options exercised -- (5,250) -- --
Unrealized gain on securities
available for sale upon adoption of
SFAS No. 115 -- -- -- 41,382
Appreciation of securities available
for sale -- -- -- 135,198
ESOP loan repayments -- -- -- --
Fair value adjustment on ESOP shares
committed for release -- 35,705 -- --
Amortization of unearned stock
compensation -- -- -- --
Purchase of 69,393 shares of
treasury stock -- -- -- --
--------- ------------- ------------- ------------
Balance at September 30, 1995 7,492 6,998,314 8,358,681 176,580
Net earnings for the year -- -- 815,293 --
Cash dividends of $.375 per share -- -- (213,876) --
Common stock options exercised -- (5,250) -- --
Depreciation of securities available
for sale -- -- -- (187,873)
ESOP loan repayments -- -- -- --
Fair value adjustment on ESOP shares
committed for release -- 60,079 -- --
Amortization of unearned stock
compensation -- -- -- --
Purchase of 62,923 shares of
treasury stock -- -- -- --
--------- ------------- ------------- ------------
Balance at September 30, 1996 $7,492 $7,053,143 $8,960,098 $ (11,293)
========= ============= ============= ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Required
contri-
butions Unearned
for shares stock
acquired compen- Treasury
by ESOP sation - RRP stock Total
------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at October 1, 1994 $(436,423) $(174,566) $ (456,518) $13,350,626
Net earnings for the year -- -- -- 1,086,666
Cash dividends of $.275 per share -- -- -- (170,767)
Common stock options exercised -- -- 25,250 20,000
Unrealized gain on securities
available for sale upon adoption of
SFAS No. 115 -- -- -- 41,382
Appreciation of securities available
for sale -- -- -- 135,198
ESOP loan repayments 72,737 -- -- 72,737
Fair value adjustment on ESOP shares
committed for release -- -- -- 35,705
Amortization of unearned stock
compensation -- 43,644 -- 43,644
Purchase of 69,393 shares of
treasury stock -- -- (1,015,256) (1,015,256)
------------ -------------- --------------- --------------
Balance at September 30, 1995 (363,686) (130,922) (1,446,524) 13,599,935
Net earnings for the year -- -- -- 815,293
Cash dividends of $.375 per share -- -- -- (213,876)
Common stock options exercised -- -- 25,250 20,000
Depreciation of securities available
for sale -- -- -- (187,873)
ESOP loan repayments 72,737 -- -- 72,737
Fair value adjustment on ESOP shares
committed for release -- -- -- 60,079
Amortization of unearned stock
compensation -- 43,644 -- 43,644
Purchase of 62,923 shares of
treasury stock -- -- (1,207,430) (1,207,430)
------------ -------------- --------------- --------------
Balance at September 30, 1996 $(290,949) $ (87,278) $ (2,628,704) $13,002,509
============ ============== =============== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
17
<PAGE>
First Independent Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 815,293 $ 1,086,666
Adjustments to reconcile net earnings to net cash provided by operating
activities
Depreciation 55,895 47,218
Amortization of premiums and discounts on investments and
mortgage-backed securities 106,967 20,918
Gain on sale of investment securities (250,945) --
Amortization of deferred loan origination fees (64,119) (48,514)
Amortization of expense related to employee benefit plans 176,460 152,086
Gain on sale of real estate acquired through foreclosure (111,956) (66,014)
Deferred income taxes (38,769) (48,486)
Other 3,402 --
Increase (decrease) in cash due to changes in
Accrued interest receivable (49,482) (68,852)
Other assets (4,829) 2,243
Accrued expenses and other liabilities 503,251 43,100
Income taxes payable (123,286) (28,495)
-------------- -------------
Net cash provided by operating activities 1,017,882 1,091,870
Cash flows from investing activities
Proceeds from sale of available for sale securities 263,145 --
Proceeds from maturities and repayment of securities
Available for sale 3,167,307 2,145,255
Held to maturity 5,236,916 3,040,819
Purchase of securities
Available for sale (2,217,489) (3,958,217)
Held to maturity (5,790,535) (4,059,060)
Net increase in loans (7,215,690) (3,161,504)
Capital expenditures (308,867) (249,418)
Proceeds from sale of real estate acquired through foreclosure 37,669 104,736
Other 2,219 --
-------------- -------------
Net cash used in investing activities (6,825,325) (6,137,389)
Cash flows from financing activities
Net increase in deposits $ 1,429,794 $ 3,542,315
Net decrease in advances from borrowers for taxes and insurance (564,868) (31,068)
Checks issued in excess of cash items 492,627 --
Advances from Federal Home Loan Bank 20,900,000 12,200,000
Repayment of Federal Home Loan Bank advances (15,400,000) (8,800,000)
Cash dividends paid (213,876) (170,767)
Purchase of treasury stock (1,207,430) (1,015,256)
Stock options exercised 20,000 20,000
-------------- -------------
Net cash provided by financing activities 5,456,247 5,745,224
-------------- -------------
Net increase (decrease) in cash and cash equivalents (351,196) 699,705
Cash and cash equivalents at beginning of year 2,114,625 1,414,920
-------------- -------------
Cash and cash equivalents at end of year $ 1,763,429 $ 2,114,625
============== =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Income taxes $ 648,881 $ 770,806
Interest 4,669,113 3,820,508
Noncash investing and financing activities
Transfer from loans to real estate acquired through foreclosure 11,845 58,951
Issuance of loans receivable in connection with the sale of real estate
acquired through foreclosure 45,000 353,802
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
First Independence Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of First Federal Savings and Loan Association of Independence (the
"Association"). Future references to the Corporation or the Association are
utilized herein as the context requires. The Association conducts a general
banking business in southeastern Kansas which consists of attracting deposits
from the general public and applying those funds to the origination of loans
for residential, consumer and nonresidential purposes and the purchase of
investment and mortgage-backed securities. The Association's profitability is
significantly dependent on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans
and investments) and the interest expense paid on interest-bearing
liabilities (i.e., customer deposits and borrowed funds). Net interest income
is affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Association can
be significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles (GAAP) and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of consolidation
The consolidated financial statements include the accounts of First
Independence Corporation and its wholly-owned subsidiary, First Federal
Savings and Loan Association of Independence. All significant intercompany
balances and transactions have been eliminated.
2. Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, federal funds sold and other overnight deposits.
<PAGE>
3. Investment securities and mortgage-backed securities
Investment securities and mortgage-backed securities are accounted for in
accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No.
115). SFAS No. 115 requires such investments to be classified in three
categories and accounted for as follows: (a) debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held to maturity securities and reported at amortized cost, (b)
debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings and (c) debt and equity securities not classified as either held to
maturity securities or trading securities are classified as available for
sale securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity.
The Company adopted the provisions of SFAS No. 115 as of October 1, 1994.
In connection with the adoption of SFAS No. 115, the Company transferred
$4,245,386 of investment securities and $994,083 of mortgage-backed
securities from the held to maturity category to the available for sale
category. Investment securities available for sale were increased by $118,235
and mortgage-backed securities available for sale were decreased by $51,490,
reflecting the unrealized gains and losses on these securities. Such
unrealized gains and losses, net of applicable deferred income taxes of
$25,363, resulted in an increase to stockholders' equity of $41,382. The
Company does not have any securities that are held in a trading portfolio
under SFAS No. 115.
Premiums and discounts on investment securities are amortized to
operations over the term of the security using the level yield method.
Premiums and discounts on mortgage-backed securities are amortized and
accreted to operations using the level yield method over the estimated life
of the underlying loans collateralizing the securities. Gains and losses on
the sale of securities designated as available for sale are recorded using
the specific identification method.
4. Loans receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance
for loan losses, unearned discounts and net deferred loan origination fees.
The allowance for loan losses is increased by charges to operations and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Association's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral and current economic conditions.
19
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
Specific reserves are established for any impaired nonresidential loan for
which the recorded investment in the loan exceeds the measured value of the
loan. Loans subject to impairment valuation are defined as nonaccrual loans
or any other loan where it is probable that all amounts due according to the
contractual terms will not be collected, exclusive of smaller balance
homogenous loans such as home equity, consumer and 1-4 family residential
real estate loans. The values of loans subject to impairment valuation are
determined based on the present value of expected future cash flows, the
market price of the loans, or the fair values of the underlying collateral if
the loan is collateral dependent.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic evaluation.
The allowance is established by a charge to interest income equal to all
interest previously accrued. Income is subsequently recognized only to the
extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back
to normal, in which case the loan is returned to accrual status. If the
collection of principal in whole or in part is in doubt, all payments
received on nonaccrual loans are credited to principal until such doubt is
eliminated.
5. Loan origination fees and related costs
Loan origination fees received, net of certain direct origination costs are
deferred on a loan-by-loan basis and amortized to interest income using the
interest method, giving effect to actual loan prepayments. Loan origination
costs are considered to be direct costs attributable to originating a loan.
6. Real estate acquired through foreclosure
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included
in real estate operations.
7. Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is included in occupancy and equipment expense and is provided
by the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-------
<S> <C>
Building 8-50
Furniture, fixtures and equipment 5-20
Automobiles 5
</TABLE>
<PAGE>
The costs of maintenance and repairs are charged to operations as
incurred. The costs of significant additions, renewals and betterments to
depreciable properties are capitalized and depreciated over the remaining or
extended estimated useful lives of the properties. Gains and losses on
disposition of property and equipment are included in operations.
8. Employee stock ownership plan
The Corporation sponsors a leveraged employee stock ownership plan (ESOP).
The ESOP holds company stock which serves as collateral for the ESOP debt. As
shares are released from collateral, the Corporation reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings-per-share ("EPS") computations. Dividends on
released and allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as compensation
cost.
9. Income taxes
First Independence Corporation and its subsidiary file a consolidated
federal income tax return. Deferred tax assets and liabilities are determined
based on the differences between the financial accounting and tax basis of
assets and liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the currently enacted tax rate expected to apply
to taxable income in the periods in which the deferred tax asset or liability
is expected to be settled or realized.
10. Earnings per share
Primary earnings per share is based upon the weighted average shares
outstanding during the year including those stock options that are dilutive.
Weighted average common shares deemed outstanding totaled 594,793 and 643,579
for the years ended September 30, 1996 and 1995, respectively.
Fully-diluted earnings per share assumes the exercise of all outstanding
stock options at the beginning of the respective fiscal period and subsequent
reinvestment of the cash proceeds in the Company's common shares at either
the closing price or weighted average market price of the common stock for
the fiscal year, whichever is greater. Fully diluted earnings per share for
the years ended September 30, 1996 and 1995 are based on 595,686 and 651,959
weighted-average shares outstanding, respectively.
20
<PAGE>
- ------------------------------------------------------------------------------
Common shares outstanding exclude unallocated and uncommitted shares held
by the ESOP trust.
NOTE B -- INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities are as follows:
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
-------------------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Government agency obligations $2,000,000 $ -- $29,020 $1,970,980
============= ============ ============ =============
Available for sale
Intermediate term liquidity portfolio $ 308,102 $ -- $ 579 $ 307,523
U.S. Government and agency obligations 4,934,938 29,016 36,404 4,927,550
------------- ------------ ------------ -------------
$5,243,040 $ 29,016 $36,983 $5,235,073
============= ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
-------------------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Government agency obligation $1,000,000 $ 6,840 $ -- $1,006,840
============= ============ ============ =============
Available for sale
FHLMC stock $ 12,200 $241,255 $ -- $ 253,455
Intermediate term liquidity portfolio 289,957 4,044 -- 294,001
U.S. Government and agency obligations 5,921,356 59,516 3,372 5,977,500
------------- ------------ ------------ -------------
$6,223,513 $304,815 $ 3,372 $6,524,956
============= ============ ============ =============
</TABLE>
The amortized cost and estimated fair value of U.S. Government and agency
obligations at September 30, 1996, by term to maturity are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
Held to maturity cost value
------------------------ ------------- -------------
<S> <C> <C>
Due in five to ten years $1,000,000 $ 991,190
Due after ten years 1,000,000 979,790
------------- -------------
$2,000,000 $1,970,980
============= =============
Available for sale
Due in one year or less $1,003,369 $1,005,300
Due in one to two years 978,843 988,000
Due in two to five years 2,952,726 2,934,250
------------- -------------
$4,934,938 $4,927,550
============= =============
</TABLE>
During the year ended September 30, 1996 the Association sold FHLMC stock
designated as available for sale for total proceeds of $263,145 realizing a
gain of $250,945.
The intermediate term liquidity portfolio does not have a contractual due
date.
Investment securities with a fair value of $995,625 at September 30, 1995
were pledged to secure government deposits.
21
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
NOTE C -- MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
----------------------------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
GNMA certificates $ 122,921 $ 10,687 $ -- $ 133,608
FHLMC certificates 10,066,669 60,422 62,866 10,064,225
FNMA certificates 8,912,022 118,258 47,439 8,982,841
Collateralized mortgage obligations 8,937,702 -- 244,746 8,692,956
-------------- ------------ ------------ --------------
$28,039,314 $189,367 $355,051 $27,873,630
============== ============ ============ ==============
Available for sale
FHLMC certificates $ 669,454 $ -- $ 10,247 $ 659,207
============== ============ ============ ==============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
----------------------------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
GNMA certificates $ 182,176 $ 15,707 $ -- $ 197,883
FHLMC certificates 9,652,668 65,768 77,269 9,641,167
FNMA certificates 9,186,347 113,983 57,686 9,242,644
Collateralized mortgage obligations 9,572,635 4,071 241,446 9,335,260
-------------- ------------ ------------ --------------
$28,593,826 $199,529 $376,401 $28,416,954
============== ============ ============ ==============
Available for sale
FHLMC certificates $ 849,337 $ -- $ 16,637 $ 832,700
============== ============ ============ ==============
</TABLE>
Mortgage-backed securities generally mature ratably over the 30-year term
of the underlying loans collateralizing the securities. Expected maturities
on mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Mortgage-backed securities with a fair value of $11,005,909 and $5,198,412
at September 30, 1996 and 1995, respectively, are pledged to secure
government and other deposits.
22
<PAGE>
- ------------------------------------------------------------------------------
NOTE D -- LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
First mortgage loans
Secured by one-to-four family residences $57,352,844 $50,747,382
Secured by multi-family residences 1,370,715 1,419,322
Nonresidential 7,223,602 7,454,206
Construction 1,833,750 526,000
-------------- --------------
Total first mortgage loans 67,780,911 60,146,910
Consumer and other loans
Savings 364,011 314,277
Automobile 402,592 269,069
Home equity and second mortgages 781,199 640,241
Unsecured home improvement 183,630 101,769
Other 184,723 159,564
-------------- --------------
Total consumer and other loans 1,916,155 1,484,920
Less
Allowance for loan losses (690,009) (690,009)
Loans in process (1,050,012) (372,017)
Unearned discounts (2,929) (2,569)
Deferred loan origination fees (271,196) (197,279)
-------------- --------------
(2,014,146) (1,261,874)
-------------- --------------
Net loans receivable $67,682,920 $60,369,956
============== ==============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of year $690,009 $667,274
Loans charged off -- (15,619)
Loan recoveries -- 38,354
----------- -----------
Balance at end of year $690,009 $690,009
=========== ===========
</TABLE>
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 82% of the
total loan portfolio. Approximately 5% and 6% of the Association's
one-to-four family residential real estate loans at September 30, 1996 and
1995, respectively, are secured by properties located outside of the primary
lending area of Montgomery and surrounding Kansas counties. Generally, such
loans have been underwritten on the basis of 80% to 90% loan-to-value ratio
or mortgage insurance was required. The Association, as with any lending
institution, is subject to the risk that real estate values could deteriorate
in its primary lending area thereby impairing collateral values. Management
believes, however, that real estate values in the Association's primary
lending area are currently stable or increasing.
Approximately 12% (1996) and 14% (1995) of the loan portfolio is comprised
of nonresidential and multi-family real estate loans with approximately 20%
and 21% of this total at September 30, 1996 and 1995, respectively,
collateralized by properties located outside the Association's primary
lending area.
Loans serviced under a County Mortgage Revenue Bond totaled $1,606,982 and
$1,987,278 at September 30, 1996 and 1995, respectively.
23
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
In the normal course of business, the Association makes loans to
directors, executive officers and related entities. An analysis of aggregate
loan activity with this group is as follows:
<TABLE>
<CAPTION>
<S> <C>
Loans outstanding at October 1, 1995 $521,099
New loans 77,000
Repayments (35,017)
-----------
Loans outstanding at September 30, 1996 $563,082
===========
</TABLE>
SFAS 114, "Accounting by Creditors for Impairment of a Loan," was adopted
on October 1, 1995. The adoption of SFAS 114 had no effect on the
Association's financial statements. The valuation allowance related to
impaired loans is included in the allowance for loan losses.
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing
the underlying collateral. The recorded investment in these loans and the
valuation allowance for losses related to loan impairment at September 30,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Principal amount of impaired loans $210,309
Less valuation allowance 73,309
-----------
$137,000
===========
</TABLE>
The Association has no impaired loans for which there is no related
allowance for losses. Interest income of $17,267 was recognized and collected
on impaired loans during the year ended September 30, 1996.
Nonaccrual loans totaled $366,832 and $554,606 at September 30, 1996 and
1995, respectively. Interest income that would have been recorded under the
original terms of such loans approximated $20,000 and $28,000 for the years
ended September 30, 1996 and 1995, respectively. Interest income that was
recorded was insignificant for the years ended September 30, 1996 and 1995.
The Association is not committed to make additional loans to borrowers whose
loans have been modified.
<PAGE>
NOTE E -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loans receivable $404,266 $369,261
Mortgage-backed securities 205,389 203,657
Investment securities 58,265 45,520
----------- -----------
$667,920 $618,438
=========== ===========
</TABLE>
NOTE F -- PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land $ 74,958 $ 77,958
Building 923,518 741,092
Furniture, fixtures and equipment 307,821 292,538
Automobiles 38,729 38,729
----------- -----------
1,345,026 1,150,317
Less accumulated depreciation 434,213 486,854
----------- -----------
$ 910,813 $ 663,463
=========== ===========
</TABLE>
NOTE G -- REAL ESTATE OPERATIONS
A summary of real estate operations is as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Gain on sale of real estate acquired through foreclosure,
net $ 111,956 $66,014
Net operating expense (17,757) (3,257)
----------- ----------
Income from real estate operations $ 94,199 $62,757
=========== ==========
</TABLE>
24
<PAGE>
- ------------------------------------------------------------------------------
Real estate operations of the Association consist primarily of paying
property taxes and general maintenance expenses on the properties held.
NOTE H -- DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average rate at
September 30, 1996 1995
------------------ --------------------------- ---------------------------
1996 1995 Amount Percent Amount Percent
------- ------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 2.31% 2.31% $ 1,631,512 2.35% $ 1,318,964 1.94%
First Super NOW accounts 2.56 2.56 1,600,400 2.31 1,580,049 2.33
First Money Fund accounts 4.48 4.17 15,552,973 22.43 11,693,691 17.21
-------------- --------- -------------- ---------
Total demand deposits 4.15 3.83 18,784,885 27.09 14,592,704 21.48
Passbook savings accounts 2.89 2.89 2,649,720 3.82 2,751,930 4.05
Certificates of deposit
3.00% to 3.99% 3.81 3.83 8,565 .01 803,922 1.18
4.00% to 4.99% 4.58 4.30 4,216,378 6.08 10,498,010 15.46
5.00% to 5.99% 5.46 5.42 30,296,166 43.68 16,882,250 24.85
6.00% to 6.99% 6.37 6.49 13,366,636 19.27 22,350,742 32.91
7.00% to 7.99% 7.02 7.40 25,241 .04 38,918 .06
8.00% to 8.99% 8.35 8.33 8,831 .01 8,152 .01
-------------- --------- -------------- ---------
Total savings certificates 5.64 5.64 47,921,817 69.09 50,581,994 74.47
-------------- --------- -------------- ---------
Total savings 5.48 5.50 50,571,537 72.91 53,333,924 78.52
-------------- --------- -------------- ---------
Total deposits 5.12 5.13 $69,356,422 100.00% $67,926,628 100.00%
============== ========= ============== =========
</TABLE>
The aggregate amount of certificates of deposit and savings with a minimum
denomination of $100,000 was $2,489,514 and $3,796,240 at September 30, 1996
and 1995, respectively.
Scheduled maturities of certificates of deposit are as follows:
September 30, 1996
<TABLE>
<CAPTION>
Less than One to Three to
one year three years five years Total
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
3.00% to 3.99% $ 8,565 $ -- $ -- $ 8,565
4.00% to 4.99% 3,420,783 795,595 -- 4,216,378
5.00% to 5.99% 19,637,400 9,795,294 863,472 30,296,166
6.00% to 6.99% 7,903,547 3,068,176 2,394,913 13,366,636
7.00% to 7.99% -- -- 25,241 25,241
8.00% to 8.99% 8,831 -- -- 8,831
-------------- -------------- ------------- -------------
$30,979,126 $13,659,065 $3,283,626 $47,921,817
============== ============== ============= =============
</TABLE>
September 30, 1995
<TABLE>
<CAPTION>
Less than One to Three to
one year three years five years Total
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
3.00% to 3.99% $ 803,922 $ -- $ -- $ 803,922
4.00% to 4.99% 7,899,953 2,103,198 494,859 10,498,010
5.00% to 5.99% 11,766,266 4,542,119 573,865 16,882,250
6.00% to 6.99% 9,861,826 10,223,683 2,265,233 22,350,742
7.00% to 7.99% 14,667 -- 24,251 38,918
8.00% to 8.99% -- 8,152 -- 8,152
-------------- -------------- ------------- --------------
$30,346,634 $16,877,152 $3,358,208 $50,581,994
============== ============== ============= ==============
</TABLE>
25
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
Interest expense on deposits for the years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Certificates of deposit $2,819,977 $2,441,327
NOW accounts 730,627 379,175
Demand deposits 31,195 28,534
------------- -------------
$3,581,799 $2,849,036
============= =============
</TABLE>
NOTE I -- ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank at September 30 consist of the
following:
<TABLE>
<CAPTION>
Note Maturity Interest
date date rate Type (1) 1996 1995
-------------- -------------- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
April 1993 April 1998 5.04% F $ 400,000 $ 600,000
April 1993 April 1998 4.92 F 800,000 1,200,000
February 1994 September 1998 5.47 A 1,500,000 1,500,000
April 1994 April 1997 5.48 A 1,500,000 1,500,000
February 1995 February 1996 6.65 A -- 1,500,000*
May 1995 March 1996 6.46 A -- 1,100,000
May 1995 April 1996 6.46 A -- 1,100,000
August 1995 February 1996 6.12 A -- 1,000,000
August 1995 August 1996 6.25 A -- 1,000,000
September 1995 October 1995 5.95 F -- 8,300,000
March 1996 March 1997 5.76 F 1,000,000 --
April 1996 April 1997 5.85 F 800,000 --
April 1996 February 1997 5.40 A 4,700,000* --
April 1996 April 1999 5.75 A 2,900,000 --
July 1996 July 2001 7.06 F 1,000,000 --
August 1996 February 1997 5.66 F 1,000,000 --
August 1996 November 1996 5.47 F 4,500,000 --
August 1996 August 2001 6.70 F 1,000,000 --
September 1996 October 1996 5.52 F 1,133,334 --
September 1996 October 1996 5.52 F 533,333 --
September 1996 October 1996 5.52 F 533,333 --
September 1996 September 2001 6.79 F 1,000,000 --
-------------- -------------
$24,300,000 $18,800,000
============== =============
</TABLE>
(1) F = fixed interest rate
A = adjustable interest rate
*Advance is on a line of credit totaling $9,000,000. Advance is prepayable
without penalty.
Aggregate maturities for the years following September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 .. $16,300,000
1998 .. 2,100,000
1999 .. 2,900,000
2000 .. --
2001 .. 3,000,000
--------------
$24,300,000
==============
</TABLE>
Assets of the Association are subject to a blanket pledge agreement to
collateralize the advances.
26
<PAGE>
- ------------------------------------------------------------------------------
NOTE J -- EMPLOYEE BENEFITS
The Corporation sponsors a leveraged employee stock ownership plan
("ESOP") that covers all full-time employees. All employees of the
Corporation are eligible to participate in the ESOP after they attain age 21
and complete one year of service during which they work at least 1,000 hours.
The Corporation makes annual contributions to the ESOP equal to the ESOP's
debt service. All dividends received by the ESOP are credited to the
employee's stock ownership account. The unallocated ESOP shares are pledged
as collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year. Accordingly, unpaid ESOP debt is reflected as a
deduction from stockholders' equity. ESOP compensation expense was $145,360
and $119,625 for the years ended September 30, 1996 and 1995, respectively.
The ESOP shares as of September 30, 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 21,821
Unreleased shares 29,095
-----------
Total ESOP shares 50,916
===========
Fair value of unreleased shares at September 30, 1996 $545,531
===========
</TABLE>
Additionally, the Corporation has a Recognition and Retention Plan (RRP)
as a means of providing directors and certain key employees of the
Association with an ownership interest in a manner designed to compensate
such directors and key employees for services to the Corporation. During
fiscal 1994 the RRP purchased 21,821 shares of common stock. Such shares are
earned and allocated ratably to participants over five years. Expense under
the RRP totaled $43,644 for each of the years ended September 30, 1996 and
1995.
The Company has adopted a Stock Option and Incentive Plan (SOP) for
designated participants. The SOP provides for up to 72,737 shares of common
stock to be issued to participants. The option price of any options granted
may not be less than the market value of the common stock on the date of the
grant. Options for 57,820 shares have been granted at $10 per share, 5,818 at
$12.375 per share and 1,000 at $13.375 per share. Options for 2,000 shares
were exercised during each of the years ended September 30, 1996 and 1995 at
$10 per share. Options for 60,638 shares remain outstanding and exercisable
as of September 30, 1996.
The Association participates in a defined benefit multi-employer pension
plan. Substantially all employees are eligible and benefits are based on the
employee's salary and years of service. No contribution was made or required
to be made by the Association for the years ended September 30, 1996 and 1995
due to the plan's overfunded status. Separate actuarial disclosure
information is not available due to the plan being a multi-employer pension
plan.
<PAGE>
NOTE K -- INCOME TAXES
Income tax expense for the years ended September 30 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current
Federal $447,595 $626,944
State 78,000 115,367
----------- -----------
525,595 742,311
Deferred (38,769) (48,486)
----------- -----------
$486,826 $693,825
=========== ===========
</TABLE>
Reconciliation of income tax expense computed at the federal statutory
rate of 34% and income tax expense for the years ended September 30 is as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Income tax expense at statutory rate $442,720 $605,367
Kansas privilege tax, net of federal tax benefit 51,434 70,329
State contribution credit (28,875) --
Other 21,547 18,129
----------- -----------
$486,826 $693,825
=========== ===========
</TABLE>
27
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at September 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $226,927 $222,869
SAIF recapitalization assessment 171,156 --
Deferred gain on real estate acquired through
foreclosure -- 50,775
Accrued bonuses 7,138 6,922
State contribution credit 28,875 --
Other 4,710 10,216
----------- -----------
Total deferred tax assets 438,806 290,782
Deferred tax liabilities
Securities available for sale 20,232 56,684
Depreciation of property and equipment 29,191 26,561
Federal Home Loan Bank stock dividends 215,479 181,969
Management retention program net of book amortization -- 5,581
----------- -----------
Total deferred tax liabilities 264,902 270,795
----------- -----------
Net deferred tax asset $173,904 $ 19,987
=========== ===========
</TABLE>
The Association was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income
and subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. This percentage of earnings bad debt
deduction had accumulated to approximately $2.7 million as of September 30,
1996. If the amounts that qualify as deductions for federal income tax
purposes are later used for purposes other than for bad debt losses,
including distributions in liquidation, such distributions will be subject to
federal income taxes at the then current corporate income tax rate. The
approximate amount of unrecognized deferred tax liability relating to the
cumulative bad debt deduction is $850,000 at September 30, 1996. See Note M
for additional information regarding future percentage of earnings bad debt
deductions.
NOTE L -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Association's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines that
involve quantitative measures of the Association's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of total risk-based and Tier I capital to risk-weighted
assets, and of Tier I (core) capital and tangible capital to adjust total
assets. Management believes, as of September 30, 1996, that the Association
meets all capital adequacy requirements to which it is subject.
28
<PAGE>
- ------------------------------------------------------------------------------
As of September 30, 1996, the most recent notification from the OTS
categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the
Association's category. To be categorized as well capitalized the Association
must maintain minimum total risk-based, Tier 1 risk-based and Tier I (core)
ratios as set forth in the table below.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------- ------------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996
(is (is
greater greater
than or than or
equal equal
Total risk-based capital $11,129,000 23.8% $3,746,000 to)8.0% $4,682,000 to)10.0%
(is (is
greater greater
than or than or
equal equal
Tier I risk-based capital 10,542,000 22.5 1,873,000 to)4.0 2,809,000 to) 6.0
(is (is
greater greater
than or than or
equal equal
Tier I (core) capital 10,542,000 9.9 3,204,000 to)3.0 5,339,000 to) 5.0
(is
greater
than or
equal
Tangible capital 10,542,000 9.9 1,602,000 to)1.5 -- --
</TABLE>
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------- ------------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1995
(is (is
greater greater
than or than or
equal equal
Total risk-based capital $11,186,000 26.1% $3,433,000 to)8.0% $4,291,000 to)10.0%
(is (is
greater greater
than or than or
equal equal
Tier I risk-based capital 10,648,000 24.8 1,717,000 to)4.0 2,575,000 to) 6.0
(is (is
greater greater
than or than or
equal equal
Tier I (core) capital 10,648,000 10.7 2,982,000 to)3.0 4,971,000 to) 5.0
(is
greater
than or
equal
Tangible capital 10,648,000 10.7 1,491,000 to)1.5 -- --
</TABLE>
<PAGE>
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations a
savings association that immediately prior to and on a pro forma basis, after
giving effect to a proposed capital distribution, has total capital (as
defined by OTS regulation) that is equal to or greater than the amount of its
fully phased-in capital requirement is generally permitted without OTS
approval (but subsequent to 30 days prior notice to the OTS of the planned
dividend) to make capital distributions during a calendar year in the amount
of up to the greater of (1) 100% of its net earnings to date during the year
plus an amount equal to one-half of the amount by which its total capital to
assets ratio exceeded its fully phased-in capital to assets ratio at the
beginning of the year or (2) 75% of its net income for the most recent four
quarters. Pursuant to such OTS dividend regulations, the Association had the
ability to pay dividends of approximately $4,000,000 to First Independence
Corporation at September 30, 1996.
NOTE M -- RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective reserve
levels of the funds, deposit insurance assessments paid by healthy savings
associations exceeded those paid by healthy commercial banks by approximately
$.19 per $100 in deposits in 1995. In 1996, no BIF assessments are required
for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a
special assessment totaling $.657 per $100 of SAIF deposits held at March 31,
1995, in order to increase SAIF reserves to the level required by law. The
Association had $65.7 million in deposits at March 31, 1995, resulting in an
assessment of approximately $431,000, or $260,000 after tax, which was
charged to operations in the fourth quarter of fiscal 1996.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999. However, the SAIF recapitalization
legislation currently provides for an elimination of the thrift charter or of
the separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Association would be regulated as a bank
under federal laws which would subject it to the more restrictive activity
limits imposed on national banks. Under separate legislation related to the
recapitalization plan, the Association is required to recapture as taxable
income approximately $137,000 of its bad debt reserve, which represents the
post-1987 additions to the reserve and will be unable to utilize the
percentage of earnings method to compute its reserve in the future. The
Association has provided deferred taxes for this amount and will be permitted
to amortize the recapture of its bad debt reserve over six years.
29
<PAGE>
First Independent Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- ------------------------------------------------------------------------------
September 30, 1996 and 1995
NOTE N -- COMMITMENTS
The Association has contracted with a construction company for the
completion of a branch in Coffeyville, Kansas. The total contract amount is
$422,455. As of September 30, 1996, $115,424 of the contract amount had been
billed and paid leaving a remaining commitment of $307,031.
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated balance sheets. The contract or
notional amounts of the commitments reflect the extent of the Association's
involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making
commitments and conditional obligations as those utilized for on-balance
sheet instruments. The Association's commitments to extend credit at
September 30, 1996 include loans in process as disclosed in Note D and first
mortgage loans with fixed rates ranging from 8.5% to 9% aggregating $150,800
and at variable rates ranging from 6.5% to 7.75% aggregating $113,175.
Collateral for loans in process and commitments are the same as for other
Association loans. The commitment period is generally for forty-five days.
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Association disclose
estimated fair values for its financial instruments. The following methods
and assumptions were used to estimate the fair value of each class of
financial instruments at September 30, 1996.
Cash and cash equivalents: The balance sheet carrying amounts for cash and
short-term instruments approximate the estimated fair values of such assets.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted
market prices, if available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and
which entail no significant change in credit risk, fair values are based on
the carrying values. The estimated fair values of fixed rate loans are
estimated based on discounted cash flow analyses using prepayment assumptions
and interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. Nonperforming loans have not been
discounted. The carrying amount of accrued interest receivable approximates
its fair value.
Commitments to extend credit: No premium or discount was ascribed to loan
commitments because when funded virtually all funding will be at current
market rates.
Federal Home Loan Bank stock: The balance sheet carrying amount
approximates the stocks fair value.
Deposit liabilities: The fair values estimated for demand deposits, NOW
accounts, savings and certain types of money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts of variable rate,
fixed-term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values of fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a schedule
of aggregated expected monthly time deposit maturities. The carrying amount
of accrued interest payable approximates its fair value.
Advances from Federal Home Loan Bank: For variable rate advances fair
values are considered equal to their carrying values. The estimated fair
value of fixed rate advances are estimated based on discounted cash flow
analysis using interest rates currently offered for advances with similar
terms.
30
<PAGE>
- ------------------------------------------------------------------------------
The following table provides summary information on the fair value of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the Association. Further, the fair value
estimates are based on various assumptions, methodologies and subjective
considerations, which vary widely among different financial institutions and
which are subject to change. The carrying amounts are the amounts at which
the financial instruments are reported in the consolidated financial
statements.
<TABLE>
<CAPTION>
1996
---------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
-------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,763,429 $ 1,763,429
Investment securities available for sale 5,235,073 5,235,073
Investment securities held to maturity 2,000,000 1,970,980
Mortgage-backed securities available for sale 659,207 659,207
Mortgage-backed securities held to maturity 28,039,314 27,873,630
Loans 68,372,929 67,768,345
Federal Home Loan Bank stock 1,239,500 1,239,500
Deposits (69,356,422) (68,999,524)
Advances from Federal Home Loan Bank (24,300,000) (24,204,628)
</TABLE>
31
<PAGE>
STOCKHOLDER INFORMATION
- ------------------------------------------------------------------------------
Stock Listing Information
First Federal Savings and Loan Association of Independence converted from a
mutual to a stock savings and loan association effective October 5, 1993, and
formed First Independence Corporation (the "Company") to act as its holding
company. The Company's Common Stock (the "Common Stock") is traded on the
National Association, of Securities Dealers Automated Quotation ("NASDAQ")
Small-Cap Market under the symbol "FFSL."
Stock Price Information and Dividends
As of December 6, 1996, there were approximately 213 shareholders of record
of the Company's Common Stock, not including those shares held in nominee or
street name through various brokerage firms or banks.
The following table sets forth the high and low bid prices of the Common
Stock and dividends declared for each fiscal quarter since it began trading
on October 7, 1993. The stock price information was provided by the NASD,
Inc.
<TABLE>
<CAPTION>
Dividends
Quarter Ended High Low Declared
------------------ -------- -------- -----------
<S> <C> <C> <C>
December 31, 1993 $12.75 $11.50 $--
March 31, 1994 12.50 11.625 .05
June 30, 1994 12.25 11.00 .05
September 30, 1994 13.75 12.25 .05
December 31, 1994 13.50 12.25 .05
March 31, 1995 15.25 12.75 .075
June 30, 1995 15.75 15.00 .075
September 30, 1995 18.50 15.50 .075
December 31, 1995 18.75 18.50 .075
March 31, 1996 18.75 18.50 .100
June 30, 1996 18.50 17.75 .100
September 30, 1996 18.75 17.75 .100
</TABLE>
The Company has paid a cash dividend on its Common Stock for each quarter
since the Association's conversion to stock form. Future dividends, if any,
will be dependent upon the results of operations and financial condition of
the Company, tax considerations, industry standards, economic conditions,
general business practices and other factors. The Company's ability to pay
dividends is dependent on the dividend payments it receives from the
Association, which are subject to regulations and the Association's continued
compliance with all regulatory capital requirements. See Note L of the Notes
to Consolidated Financial Statements for a discussion of regulations
governing the Association's ability to pay dividends.
<PAGE>
Annual Report on Form 10-KSB and Investor Information
A copy of the Company's annual report on Form 10-KSB, filed with the
Securities and Exchange Commission, is available without charge by writing:
Gary L. Overfield
Senior Vice President and Secretary
First Independence Corporation
Myrtle and Sixth
Independence, Kansas 67301
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or
changes in name and address should be directed to the stock transfer agent
and registrar by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Investor Information
Stockholders, investors, and analysts interested in additional information
may contact:
James B. Mitchell,
Vice President and Chief Financial Officer.
Corporate Office
First Independence Corporation
Myrtle and Sixth
Independence, Kansas 67301
(316) 331-1660
Special Counsel
Silver, Freedman & Taff, L.L.P.
7th Floor - East Tower
1100 New York Avenue, NW
Washington, DC 20005
Independent Auditor
Grant Thornton, LLP
800 Fourth Financial Center
Wichita, Kansas 67202
First Federal Savings and Loan Association of Independence
Myrtle and Sixth
Independence, Kansas 67301
(316) 331-1660
32
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
- -----------------------------------------------------------------------------
FIRST INDEPENDENCE CORPORATION
OFFICERS
Donald E. Aitken
Chairman of the Board
Larry G. Spencer
President and Chief Executive Officer
Gary L. Overfield
Senior Vice President and Secretary
James B. Mitchell
Vice President and Chief Financial Officer
BOARD OF DIRECTORS
Donald E. Aitken
Chairman of the Board
First Independence Corporation and
First Federal Savings and Loan Association of Independence
Manager
City Publishing Co., Inc.
Larry G. Spencer
President and Chief Executive Officer
First Independence Corporation
President and Chief Executive Officer
First Federal Savings and Loan Association of Independence
William T. Newkirk II
Agent
Newkirk, Dennis & Buckles Insurance Co.
John T. Updegraff
Retired - Former Vice President and Senior Counsel
Arco Pipe Line Company
Harold L. Swearingen
Retired - Former Telecommunications Manager
Arco Pipe Line Company
Joseph M. Smith
County Extension Agent - Agriculture and Coordinator
Montgomery County Extension Council
Laverne W. Strecker
Retired - Former Manager of Accounting and Control
Arco Pipe Line Company
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF INDEPENDENCE
OFFICERS
Donald E. Aitken
Chairman of the Board
Larry G. Spencer
President and Chief Executive Officer
Gary L. Overfield
Senior Vice President and Secretary
James B. Mitchell
Vice President and Chief Financial Officer
Jim L. Clubine
Vice President and Asset Manager
Gregg S. Webster
Vice President
Lori L. Kelley
Assistant Vice President and Compliance Officer
Betty J. Redman
Treasurer
BOARD OF DIRECTORS
Donald E. Aitken
Larry G. Spencer
William T. Newkirk II
John T. Updegraff
Harold L. Swearingen
Lavern W. Strecker
Joseph M. Smith
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
--------- ---------- ------------ --------------
<S> <C> <C> <C>
First Independence Corporation First Federal Savings and Loan Association of 100% Federal
Independence
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 24, 1996, accompanying the consolidated
financial statements incorporated by reference in the Annual Report of First
Independence Corporation and Subsidiary on Form 10-KSB for the year ended
September 30, 1996. We hereby consent to the incorporation by reference of said
report in the Registration Statement of First Independence Corporation on Form
S-8 (File No. 33-58095, effective March 13, 1995 and File No. 33-75404,
effective February 16, 1994).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
- --------------------------
Wichita, Kansas
December 24, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
annual report on Form 10-KSB for the fiscal year ended September 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> $753,134
<INT-BEARING-DEPOSITS> 610,295
<FED-FUNDS-SOLD> 400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,894,280
<INVESTMENTS-CARRYING> 30,039,314
<INVESTMENTS-MARKET> 29,844,610
<LOANS> 68,372,929
<ALLOWANCE> 690,009
<TOTAL-ASSETS> 108,539,229
<DEPOSITS> 69,356,422
<SHORT-TERM> 16,300,000
<LIABILITIES-OTHER> 1,880,298
<LONG-TERM> 8,000,000
0
0
<COMMON> 7,492
<OTHER-SE> 12,995,017
<TOTAL-LIABILITIES-AND-EQUITY> 108,539,229
<INTEREST-LOAN> 5,189,361
<INTEREST-INVEST> 2,408,917
<INTEREST-OTHER> 174,825
<INTEREST-TOTAL> 7,773,103
<INTEREST-DEPOSIT> 3,581,799
<INTEREST-EXPENSE> 4,669,048
<INTEREST-INCOME-NET> 3,104,055
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 250,945
<EXPENSE-OTHER> 2,384,321
<INCOME-PRETAX> 1,302,119
<INCOME-PRE-EXTRAORDINARY> 815,293
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 815,293
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 7.56
<LOANS-NON> 367,000
<LOANS-PAST> 183,000
<LOANS-TROUBLED> 52,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 690,009
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 690,009
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 690,009
</TABLE>
