<PAGE>
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 For the fiscal year ended September 30, 1997
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 _____________________
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
incorporation or organization) Identification No.)
Myrtle and Sixth Streets, Independence, Kansas 67301
- ---------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 331-1660
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and
(2) has been subject to such requirements for the past 90 days.
YES __X__. NO___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained 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:
$8,315,300.
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 5, 1997, was
$10.6 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 16, 1997, there were issued and outstanding 978,333
shares of the Registrant's Common Stock (including 8,734 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, 1997.
Part III of Form 10-KSB - Proxy Statement for 1998 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, 1997, the Company had
total assets of $112.5 million, and stockholders' equity of $11.5 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 and loan origination income.
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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 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 offices in Independence and Coffeyville, 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 14%.
First Federal established a loan production office in Lawrence,
Kansas effective October 15, 1997. The office will primarily originate
construction loans in Lawrence and the surrounding area. Loan approvals will
be made at the Association's main office with disbursements and collections
handled at the loan production office. The office is currently staffed with a
loan originator and two processors.
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.
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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 multi-family real estate loans. See "- Originations,
Purchases and Sales of Loans and Mortgage-Backed Securities." At September 30,
1997, the Association's net loan portfolio totaled $74.6 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 $500,000. The executive committee has authority to approve
loans up to $750,000 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, 1997, the maximum amount
which the Association could have lent to any one borrower and the borrower's
related entities was approximately $1.4 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,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- -------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family..................... $64,152 84.30% $57,353 82.29% $50,747 82.34%
Multi-family............................ 1,164 1.53 1,371 1.97 1,420 2.30
Non-residential......................... 7,479 9.83 7,224 10.36 7,454 12.10
Construction............................ 764 1.00 1,834 2.63 526 0.85
-------- ------ ------ ---- --------- -------
Total real estate loans.............. 73,559 96.66 67,782 97.25 60,147 97.59
-------- ------ ------ ----- -------- ------
Consumer Loans:
Deposit account......................... 350 0.46 364 0.52 314 0.50
Automobile.............................. 705 0.93 402 0.58 269 0.44
Home equity............................. 550 0.72 781 1.12 641 1.04
Home improvement........................ 274 0.36 183 0.26 102 0.17
Other................................... 661 0.87 185 0.27 159 0.26
-------- ------ ------ ------- --------- -------
Total consumer loans................. 2,540 3.34 1,915 2.75 1,485 2.41
-------- ------ ------ ------- -------- -------
Total Loans......................... 76,099 100.00% 69,697 100.00% 61,632 100.00%
====== ====== ======
Less:
Loans in process........................ 572 1,050 372
Deferred fees and discounts............. 300 274 200
Allowance for losses.................... 668 690 690
-------- ------- -------
Total loans receivable, net............. $74,559 $ 67,683 $60,370
======= ======== =======
</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>
At September 30,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- -------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
Real estate:
One- to four-family....................... $37,581 49.38% $31,231 44.81% $23,163 37.59%
Multi-family.............................. 683 0.90 871 1.25 821 1.33
Non-residential........................... 5,055 6.64 4,835 6.94 5,304 8.61
Construction.............................. 764 1.00 --- --- 526 0.85
------- ------ ------- ----- ------- ------
Total fixed-rate real estate loans...... 44,083 57.92 36,937 53.00 29,814 48.38
Consumer................................... 1,990 2.62 1,437 2.06 1,123 1.82
------- ----- ------ ----- ------ -----
Total fixed-rate loans.................. 46,073 60.54 38,374 55.06 30,937 50.20
------ ----- ------ ===== ------ -----
Adjustable-Rate Loans
Real estate:
One- to four-family....................... 26,571 34.92 26,122 37.47 27,584 44.75
Multi-family.............................. 481 0.63 500 0.72 599 0.97
Non-residential........................... 2,424 3.19 2,389 3.43 2,150 3.49
Construction.............................. --- --- 1,834 2.63 --- ---
-------- ------ ------- ----- -------- ------
Total adjustable-rate real estate loans 29,476 38.74 30,845 44.25 30,333 49.21
Consumer................................... 550 0.72 478 0.69 362 0.59
-------- ------ ------- ----- -------- ------
Total adjustable-rate loans............ 30,026 39.46 31,323 44.94 30,695 49.80
-------- ------ ------ ----- ------- ------
Total Loans............................ 76,099 100.00% 69,697 100.00% 61,632 100.00%
====== ====== ======
Less
Loans in process........................... 572 1,050 372
Deferred fees and discounts................ 300 274 200
Allowance for losses....................... 668 690 690
-------- ------ --------
Total loans receivable, net................ $74,559 $67,683 $60,370
======= ======= =======
</TABLE>
6
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The following schedule shows the scheduled contractual maturities of
the Association's loan portfolio at September 30, 1997. 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
-----------------------------------------
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,
--------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1) ................. $ 213 8.49% $ 18 6.50% $ 144 7.50% $ 1,159 8.94% $ 1,534 8.71%
1999 .................... 99 9.10 221 8.49 -- -- 182 9.11 502 8.84
2000 .................... 123 8.16 22 9.43 -- -- 300 9.31 445 9.00
2001 and 2002 ........... 1,441 7.76 1,083 8.85 -- -- 661 8.96 3,185 8.38
2003 to 2007 ............ 6,729 7.88 1,616 8.36 96 8.75 238 8.63 8,583 7.99
2008 to 2022 ............ 34,832 7.74 5,535 8.42 -- -- -- -- 40,463 7.84
2023 and following ...... 20,715 7.52 148 8.25 524 7.74 -- -- 21,387 7.53
-------
Total ............ $76,099
=======
</TABLE>
- ---------
(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 $45.2 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $29.4
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, 1997, the
Association's one- to four-family residential mortgage loans, totaled $64.2
million, or 84.3% 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, 1997, the
Association had 474 loans totaling $25.5 million with a loan-to-value ratio of
greater than 80% but less than 90% and 307 loans totaling $14.7 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 1% 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 38.8% of the loans secured by one- to
four-family real estate originated by the Association during fiscal 1997 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
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future payments in the event the interest rate adjusts upward. Since the size
of the Association's average new loan originated is approximately $50,000,
management believes increases in interest rates 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 $2.5 million, or 3.9% 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 attached as Exhibit 13 hereto. 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 $764,000 of
construction loans outstanding at September 30, 1997.
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.
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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.
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, 1997, the Association had $8.6 million in
non-residential/multi-family real estate loans, representing 11.4% of the
Association's loan portfolio.
Approximately 12.7% 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,
1997.
<TABLE>
<CAPTION>
Number Outstanding Amount
of Principal Non-Performing
Loans Balance or of Concern
----- ------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family................................................ 6 $1,164 $ --
Small business facilities and office buildings.............. 43 3,470 98
Health care facility........................................ 9 1,207 --
Churches.................................................... 5 215 --
Warehouse/mini-storage...................................... 3 338 --
Shopping centers............................................ 1 73 --
Hotel/motel................................................. 3 1,284 --
Land........................................................ 25 892 --
--- ------- ------
Total multi-family residential and non-residential real
estate loans........................................ 95 $8,643 $ 98
=== ===== =====
</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
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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 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, 1997, 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, 1997 of $707,000. 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,
1997, included a loan to one borrower totaling $615,000 secured by an
apartment building located in Rogers, Arkansas; a loan with an outstanding
balance of $533,000 secured by a motel in Independence, Kansas; and a loan
with an outstanding balance of $728,000 secured by an apartment building
located in Gladstone, Missouri. All of these loans were current at September
30, 1997. 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, 1997, the
Association's consumer loan portfolio totaled $2.5 million, or 3.3% 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
11
<PAGE>
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
32.4% 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.
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, 1997, $43,000, or
approximately 1.7% 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, 1997, approximately $4.3
million of First Federal's loan portfolio was serviced by others. During the
year ended September 30, 1997, the Association purchased loans totaling
$546,000 secured by non-residential real estate.
12
<PAGE>
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 $2.2 million in loans serviced for others as of
September 30, 1997.
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,
--------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
Originations by type
Adjustable-rate:
<S> <C> <C> <C>
Real estate - one- to four-family.................................... $ 6,437 $4,465 $ 6,144
- multi-family......................................... --- --- 173
- non-residential...................................... 633 614 921
Consumer - home equity............................................... 673 314 469
-------- ------ --------
Total adjustable-rate......................................... 7,743 5,393 7,707
------- ------ -------
Fixed-rate:
Real estate - one- to four-family.................................... 10,167 14,879 5,886
- non-residential...................................... 1,492 320 219
Consumer - non-real estate........................................... 1,965 1,429 1,234
-------- ------ -------
Total fixed-rate.............................................. 13,624 16,628 7,339
------- ------ -------
Total loans originated........................................ 21,367 22,021 15,046
------- ------ -------
Purchases
Real estate - non-residential........................................ 546 --- ---
Mortgage-backed securities (excluding
REMICs and CMOs)................................................... --- 4,660 2,982
--------- ------ ---------
Total purchased............................................... 546 4,660 2,982
-------- ----- -------
Sales and Repayments
Mortgage-backed securities........................................... 4,412 5,237 3,041
Transfer of mortgage-backed securities to mortgage-backed
securities available for sale.................................... --- --- 968
Principal repayments(1).............................................. 15,512 13,956 11,854
------- ------ ------
Total reductions............................................... 19,924 19,193 15,863
Increase (decrease) in other items, net(2)............................. 375 (730) 287
-------- ------- -------
Net increase (decrease)....................................... $ 2,364 $6,758 $ 2,452
======= ====== =======
</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.
13
<PAGE>
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 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, 1997, 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 $235 0.31% 27 $1,211 1.59% 35 $1,446 1.90%
Non-residential.......................... 2 264 0.35 1 98 0.13 3 362 0.48
Consumer. . . . . ......................... 3 11 0.01 4 32 0.04 7 43 0.05
--- ---- ---- -- -------- ---- -- --- ----
Total................................. 13 $510 0.67% 32 $1,341 1.76% 45 $1,851 2.43%
==== ==== ==== == ====== ==== == ====== ====
</TABLE>
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>
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,
-------------------------------------------
1997 1996 1995
------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family......................................... $ 919 $148 $ 444
Non-residential real estate................................. 98 99 100
Construction................................................ --- 94 ---
Consumer.................................................... 32 26 11
------- --- -------
Total non-accruing loans................................. 1,049 367 555
------- --- -------
Accruing loans delinquent 90 days or more:
One- to four-family......................................... 292 183 116
Troubled debt restructurings:
One- to four-family......................................... 50 52 56
Total non-performing loans.................................... 1,391 602 727
----- --- -------
Real estate acquired through foreclosure:
One- to four-family......................................... 12 12 ---
Non-residential real estate................................. --- --- 62
------- ---- -------
Total real estate acquired through foreclosure........... 12 12 62
------ --- -------
Total non-performing assets................................... $1,403 $614 $ 789
====== ==== ======
Total as a percentage of total assets........................ 1.25% 0.57% 0.77%
==== ==== ====
</TABLE>
For the year ended September 30, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $82,720. The amount included in interest
income on such loans was $40,011 for the year ended September 30, 1997.
Included in non-accruing loans at September 30, 1997, were seventeen
loans totaling $919,000 secured by one- to four-family real estate, one loan
totaling $98,000 secured by non-residential real estate, and four consumer
loans totaling $32,000. All non-accruing loans at September 30, 1997, were
located in the Association's primary market except for one low totaling
$344,000, secured by a single family residence located in Texas. At September
30, 1997, accruing loans delinquent in excess of 90 days included ten loans
totaling $292,000 secured by one- to four-family real estate. At September 30,
1997, 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,
except for one loan totaling 139,000 secured by a single family residence
located in Texas.
16
<PAGE>
Management has considered loans of concern in establishing the
Association's allowance for loan losses.
Real Estate Acquired through Foreclosure. At September 30, 1997, 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, 1997, 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,
-----------------------------------------
1997 1996 1995
------ ---- ------
(In Thousands)
<S> <C> <C> <C>
Substandard................................................... $1,261 $676 $1,003
Doubtful...................................................... 92 95 89
Loss.......................................................... --- --- ---
------ ---- ------
Total classified assets....................................... $1,353 $771 $1,092
====== ==== ======
</TABLE>
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
17
<PAGE>
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, 1997,
the Association had an allowance for loan losses of $668,185.
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,
---------------------------------
1997 1996 1995
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
Balance at beginning of period........................................... $690 $690 $667
Charge-offs:
One- to four-family.................................................... 22 --- 15
------ ------ -------
Total Charge-offs................................................... 22 --- 15
----- ------ ------
Recoveries:
Non-residential real estate............................................ --- --- 38
------ ------ ------
Total recoveries.................................................... --- --- 38
------ ------ ------
Net charge-offs........................................................ 22 --- (23)
----- ------ ------
Additions charged to operations.......................................... --- --- ---
------ ------ ------
Balance at end of period................................................. $668 $690 $690
==== ==== ====
Ratio of net charge-offs during the period to total loans at end of
period................................................................... 0.03% 0.00% (0.04)%
===== ==== =====
Allowance for loan losses to total loans at end of period................ 0.90% 1.02% 1.14%
===== ==== =====
Allowance for loan losses to non-performing loans at end of period....... 48.05% 114.62% 94.91%
===== ====== =====
</TABLE>
18
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- --------------------
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..................... $ 391 84.30% $357 82.29% $ 343 82.34%
Multi-family............................ --- 1.53 --- 1.97 17 2.30
Non-residential......................... 92 9.83 87 10.36 87 12.10
Construction.............................. --- 1.00 11 2.63 --- .85
Consumer.................................. 35 3.34 30 2.75 7 2.41
Unallocated............................... 150 --- 205 --- 236 ---
----- ------ ---- ------ ----- ------
Total................................. $ 668 100.00% $690 100.00% $ 690 100.00%
===== ====== ==== ====== ===== ======
</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,
1997, the Association's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 7.2%. 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, 1997, investment securities
totaled $7.3 million, or 6.5% of total assets. As of such date, the
Association also had a $1.4 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, 1997, the average term to
maturity or repricing of the investment portfolio was 3.5 years.
19
<PAGE>
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------------- ------------------------
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:
Federal agency obligations ...................... $3,000 34.56% $2,000 23.60& $1,000 11.68%
------ ------ ------ ------ ------ ------
Total securities held to maturity ............ 3,000 34.56 2,000 23.60 1,000 11.68
------ ------ ------ ------ ------ ------
Securities available for sale:
U.S. Government securities ...................... $ 999 11.51 1,993 23.52 1,997 23.32
Federal agency obligations ...................... 2,985 34.39 2,934 34.62 3,981 46.48
FHLMC preferred stock ........................... -- -- -- -- 253 2.95
Other marketable equity securities(1) ........... 327 3.77 308 3.63 294 3.43
------ ------ ------ ------ ------ ------
Total securities available for sale .......... 4,311 49.67 5,235 61.77 6,525 76.18
------ ------ ------ ------ ------ ------
FHLB stock ...................................... 1,369 15.77 1,240 14.63 1,040 12.14
------ ------ ------ ------ ------ ------
Total securities and FHLB stock .............. $8,680 100.00% $8,475 100.00% $8,565 100.00%
====== ====== ====== ====== ====== ======
Average remaining life or term to repricing
of securities (excluding FHLMC preferred
stock, FHLB stock and other marketable equity
securities)....................................... 4.61 yrs. 5.04 yrs. 4.49 yrs.
Other Interest-Earning Assets:
Short-term money market investments............... $2,190 100.00% $1,010 100.00% $1,745 100.00%
------ ------ ------ ------ ------- ------
Total.......................................... $2,190 100.00% $1,010 100.00% $1,745 100.00%
====== ====== ====== ====== ======= ======
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)....... 3.51 yrs. 4.40 yrs. 3.59 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, 1997
-----------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
-------------- -------------- -------------- -------------- -----------------------------
Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value
-------------- -------------- -------------- -------------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Federal agency obligations .......... $ -- $1,000 $ 2,000 $ -- $3,000 $2,996
--------- ------ --------- --------- ------ ------
Total investment securities ...... $ -- $1,000 $ 2,000 $ -- $3,000 $2,996
========= ====== ========= ========= ====== ======
Weighted average yield ........... ---% 7.00% 7.59% ---% 7.39%
====== ======= ========= ========= ======
Available for Sale:
U.S. Government securities .......... $ 994 $ -- $ -- $ 994 999
Federal agency obligations .......... -- 2,968 -- -- 2,968 2,985
Other marketable equity securities(1) 327 -- -- -- 327 327
--------- ------ --------- --------- ------ ------
Total investment securities ...... $ 1,321 $2,968 $ -- $ -- $4,289 $4,311
========= ====== ========= ========= ====== ======
Weighted average yield ........... 5.33% 5.72% --% --% 5.60%
====== ======= ========= ========= ======
</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, 1997, 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, 1997, 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
$4.8 million and $4.8 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, 1997, the Association's
mortgage-backed securities totaled $24.0 million. For information regarding
the carrying and fair 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, 1997, $14.0 million, or 56.6%, 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, 1997.
<TABLE>
<CAPTION>
September 30,
Due in 1997
------------------------------------------------------------------------------------ -------------
6 months 6 months 1 to 3 to 5 5 to 10 10 to 20 Over 20
or Less to 1 Year 3 Years Years Years Years Years Book Value
----------- ------------------------------------ ------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
Adjustable-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation................ $ -- $ -- $ -- $ -- $ -- $ -- $ 6,644 $ 6,644
Federal National Mortgage
Association................ -- -- -- -- -- 797 6,152 6,949
----- ------ ------ ------ ------- ------ -------- ------
Total adjustable-rate...... -- -- -- -- -- 797 12,796 13,593
----- ------ ------ ------ ------- ------ ------- ------
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation.................. -- -- -- -- 2,014 3,824 -- 5,838
Federal National Mortgage
Association.................. -- -- -- -- 1,406 2,602 -- 4,008
Government National Mortgage
Association.................. -- -- -- -- -- -- 89 89
----- ------ ------ ------ -------- ------- -------- ----------
Total fixed-rate.............. -- -- -- -- 3,420 6,426 89 9,935
----- ------ ------ ------ ----- ----- -------- --------
Total mortgage-backed securities
held to maturity............ $ -- $ -- $ -- $ -- $3,420 $7,223 $12,885 $23,528
====== ======= ======= ======= ====== ====== ======= =======
Available for Sale
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation.................. $472 $ -- $ -- $ -- $ -- $ -- $ -- $ 472
==== ======= ====== ======= ======== ======== ======== ========
</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 $23.7 million in FHLB advances
outstanding at September 30, 1997.
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
program.
<TABLE>
<CAPTION>
At September 30, 1997 % of Total Certificates
--------------------- -----------------------
(Dollars in Thousands)
<S> <C> <C>
Four-Year Certificate..................................... $1,695 3.45%
Five-Year Certificate..................................... 6,382 13.01
</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,
----------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- -----------------------
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%).................. $2,703 3.54% $ 2,649 3.82% $ 2,752 4.05%
NOW Accounts (2.00-2.50%)................ 3,763 4.93 3,232 4.66 2,899 4.26
Money Market Accounts (2.50-5.75%)....... 20,702 27.13 15,553 22.40 11,694 17.20
------ ----- ------ ----- ------ ------
Total Transactions and Savings Deposits 27,168 35.60 21,434 30.88 17,345 25.51%
------ ----- ====== ----- ------ ------
Certificates:
0.00 - 3.99%........................... 5 0.01 9 0.01 804 1.18
4.00 - 4.99%........................... 2,189 2.87 4,216 6.07 10,498 15.44
5.00 - 5.99%........................... 39,911 52.30 30,296 43.64 16,882 24.83
6.00 - 6.99%........................... 6,930 9.08 13,367 19.25 22,351 32.87
7.00% and over.......................... 26 0.03 34 0.05 47 0.07
-------- ---- ------- ----- -------- -------
Total Certificates........................ 49,061 64.29 47,922 69.02 50,582 74.39
------ ----- ------ ----- ------ ------
Accrued Interest.......................... 82 0.11 70 0.10 70 0.10
--------- ---- -------- ----- -------- -------
Total Deposits............................ $76,311 100.00% $69,426 100.00% $67,997 100.00%
======= ====== ======= ====== ======= ======
</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,
----------------------------------------------
1997 1996 1995
-------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Opening balance............................................... $ 69,356 $67,927 $ 64,384
Deposits...................................................... 86,304 65,771 61,024
Withdrawals................................................... (82,247) (67,067) (59,578)
Interest credited............................................. 2,816 2,725 2,097
-------- ------- --------
Ending balance................................................ $ 76,229 $69,356 $ 67,927
======== ======= ========
Net increase ................................................. $ 6,873 $ 1,429 $ 3,543
========= ======= ========
Percent increase ............................................. 9.91% 2.10% 5.50%
========= ====== ======
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of September 30, 1997.
<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, 1997............... $ 5 $ 966 $ 3,957 $1,017 $--- $ 5,945 12.12%
March 31, 1998.................. --- 754 7,183 1,230 --- 9,167 18.69
June 30, 1998................... --- 14 5,032 --- --- 5,046 10.29
September 30, 1998.............. --- --- 7,747 105 --- 7,852 16.00
December 31, 1998............... --- 309 4,848 172 --- 5,329 10.86
March 31, 1999.................. --- 146 5,701 36 --- 5,883 11.99
June 30, 1999................... --- --- 1,356 63 --- 1,419 2.89
September 30, 1999.............. --- --- 1,707 660 --- 2,367 4.82
December 31, 1999............... --- --- 449 427 --- 876 1.79
March 31, 2000.................. --- --- 1,152 711 26 1,889 3.85
June 30, 2000................... --- --- 281 146 --- 427 0.87
September 30, 2000.............. --- --- --- 196 --- 196 0.40
December 31, 2000............... --- --- 95 558 --- 653 1.33
Thereafter...................... --- --- 403 1,609 --- 2,012 4.10
---- -------- -------- -------- ---- -------- ----
TOTAL......................... $ 5 $2,189 $39,911 $6,930 $26 $49,061 100.00%
==== ====== ======= ====== === ======= ======
Percent of Total................ 0.01% 4.46% 81.35% 14.13% 0.05%
==== ==== ===== ===== ====
</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, 1997.
<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..... $5,436 $ 8,460 $11,574 $19,746 $45,216
Certificates of deposit of $100,00 or more..... --- 211 600 1,070 1,881
Public funds(1)................................ 509 495 723 237 1,964
------- ------- ------- -------- -------
Total certificates of deposit.................. $5,945 $ 9,166 $12,897 $21,053 $49,061
====== ======= ======= ------- =======
</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, 1997, the Association
had $23.7 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,
--------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances................................... $25,000 $24,400 $19,900
Average Balance:
FHLB advances................................... $23,583 $19,133 $17,275
</TABLE>
25
<PAGE>
The following table sets forth certain information as to the
Association's FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.................................................... $23,700 $24,300 $18,800
Weighted average interest rate of FHLB advances.................. 5.930% 5.682% 5.933%
</TABLE>
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, 1997, was $33,415.
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
26
<PAGE>
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, 1997, First Federal's
lending limit under this restriction was approximately $1.4 million. At
September 30, 1997, 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 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
27
<PAGE>
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 provided 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 provided for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special
assessment rate was 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 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 .0632% 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, 1997, 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, 1997, the
Association had no subsidiaries.
At September 30, 1997, First Federal had tangible capital of $9.3
million, or 8.42% of adjusted total assets, which is approximately $7.7
million above the minimum requirement of 1.5% of adjusted total assets in
effect on that date.
28
<PAGE>
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, 1997, First Federal had no intangibles which were subject to these tests.
At September 30, 1997, First Federal had core capital equal to $9.3
million, or 8.42% of adjusted total assets, which is $6.0 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,
1997, First Federal had no capital instruments that qualify as supplementary
capital and $668,000 of general loss reserves, which was $28,000 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, 1997.
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, 1997, First Federal had total risk-based capital of
$10.0 million (including $9.3 million in core capital and $640,000 in
qualifying supplementary capital) and risk-weighted assets of $51.2 million;
or total capital of 19.53% of risk-weighted assets. This amount was $5.9
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
29
<PAGE>
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.
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."
30
<PAGE>
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 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, 1997, First Federal
was in compliance with both requirements, with an overall liquid asset ratio
of 7.20% and a short-term liquid asset ratio of 3.23%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes 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, 1997, First Federal met the test and has always
met the test since its effectiveness. At September 30, 1997, First Federal's
QTL percentage was 88.8%.
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
31
<PAGE>
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 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
32
<PAGE>
(other than the Association or any other SAIF-insured savings association)
would 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, 1997, 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, 1997, First Federal had $1.4 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 6.56% and were 6.84% for
fiscal year 1997.
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
33
<PAGE>
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, 1997, dividends paid by the
FHLB of Topeka to First Federal totaled $89,181, which constitute an $18,783
increase over the amount of dividends received in fiscal year 1996.
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, 1997. 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, commencing with the year ended September 30, 1997. The
legislation also requires thrift institutions 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.
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 1997, corporations,
34
<PAGE>
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, 1997, 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 1994 through 1996. 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 1994 through 1996. 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.
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.
35
<PAGE>
The Association attracts all of its deposits, primarily from
Montgomery County where the Association's offices are located; therefore,
competition for those deposits is principally from commercial banks and credit
unions located in the same communities. 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 14%.
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 49 President and Chief Executive Officer
Gary L. Overfield 45 Senior Vice President and Secretary
James B. Mitchell 42 Vice President and Chief Financial Officer
</TABLE>
- ----------------
(1)At September 30, 1997.
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 49 President and Chief Executive Officer and Director
Gary L. Overfield 45 Senior Vice President, and Secretary and Chief Loan Officer
Jim L. Clubine 44 Vice President and Asset Manager
James B. Mitchell 42 Vice President and Chief Financial Officer
</TABLE>
- ----------------
(1)At September 30, 1997.
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, Heartland Community Bankers, USD
#446 Endowment Association, Independence Food Bank, and Independence
Industries. He is also a member of the Rotary Club.
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.
36
<PAGE>
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,
Eisenhower Site Council team, Chairman of the Airport Advisory Board, Carnival
Chairman for Neewolah, and a member of the Rotary Club and served on the board
of the Chamber of Commerce, Community Chest and Junior Achievement. He 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, 1997, the Association had a total of 25 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 offices located at Myrtle and Sixth in
Independence, Kansas and McArthur and Eleventh in Coffeyville, Kansas. The
total net book value of the Company's premises and equipment at September 30,
1997, was $1,297,500.
First Federal established a loan production office in Lawrence,
Kansas effective October 15, 1997. The office will primarily originate
construction loans in Lawrence and the surrounding area. Loan approvals will
be made at the Associations main office with disbursements and collections
handled at the loan production office. The office is currently staffed with a
loan originator and two processors.
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, 1997, was approximately $103,434.
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, 1997.
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,
1997.
37
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 32 and the inside back cover of the attached 1997 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 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1997, is incorporated by
reference in this Annual Report on Form 10-KSB as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Report of Independent Certified Public Accountants............. 14
Consolidated Balance Sheets (September 30, 1997 and 1996)...... 15
Consolidated Statements of Earnings (For the Years Ended
September 30, 1997 and 1996)................................... 16
Consolidated Statements of Stockholders' Equity (For the
Years Ended September 30, 1997 and 1996)....................... 17
Consolidated Statements of Cash Flows (For the Years Ended
September 30, 1997 and 1996)................................... 18
Notes to Consolidated Financial Statements..................... 19 to 31
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, 1997 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.
38
<PAGE>
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 1998, 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.
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 1998, 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 1998, 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 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
39
<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 A 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, 1997, the Company did not file
any Current Reports on Form 8-K.
40
<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
Date: December 29 By: /s/Larry G. Spencer
- ----------------- ----------------------------------------------
Larry G. Spencer, President, Chief Executive
Officer and Director (Duly Authorized
Representative)
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.
<TABLE>
<CAPTION>
<S> <C>
/s/ Larry G. Spencer /s/ James B. Mitchell
- --------------------------------------------- ---------------------------------------------
Larry G. Spencer, President, Chief Executive James B. Mitchell, Vice President and Chief
Officer, Officer and Director (Principal Financial Officer (Principal Financial and
Executive and Operating Officer) Accounting Officer)
Date: December 29 Date: December 29
/s/ Donald E. Aitken /s/ William T. NewKirk II
- --------------------------------------------- ---------------------------------------------
Donald E. Aitken, Chairman of the Board William T. NewKirk II, Director
Date: December 29 Date: December 29
/s/ Harold L. Swearingen /s/ John T. Updegraff
- --------------------------------------------- ---------------------------------------------
Harold L. Swearingen, Director John T. Updegraff, Director
Date: December 29 Date: December 29
/s/ Lavern W. Strecker /s/ Joseph M. Smith
- --------------------------------------------- ---------------------------------------------
Lavern W. Strecker, Director Joseph M. Smith, Director
Date: December 29 Date: December 29
</TABLE>
41
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
------
11 Statement Regarding Computation of Per Share Earnings
(included under Note A 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
42
<PAGE>
Exhibit 13
Annual Report to Security Holders
<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 28, 1998.
<PAGE>
[GRAPHIC OMITTED]
To Our Stockholders, Depositors and Friends:
The Board of Directors, Officers, and Staff of First Independence
Corporation and its wholly-owned subsidiary, First Federal Savings and Loan
Association, are pleased to provide you with the 1997 Annual Report.
Several significant developments distinguish the 1997 fiscal year of First
Independence Corporation. In January of 1997, the Board of Directors approved a
100% of stock dividend to our stockholders as of January 24, 1997. This action
created more liquidity in our stock which will make it more affordable to a
greater number of people. Also in January, our new branch in Coffeyville
opened, and its success has far exceeded our expectations. We closed over $4.4
million in loans through the Coffeyville Branch and brought in an excess of
$6.0 million in deposits. In August of 1997 we started issuing a debit card to
complement our checking accounts; for the first two months we had a 10.6%
market penetration to our account base.
In fiscal year 1998 we will see a new loan office open in Lawrence. Our
strategy will be to originate prime plus construction loans funded by prime
minus FHLB advances. Our new personnel have been working in the Lawrence area
for over three years and have been very successful. We are excited about this
venture and foresee that it will have a positive impact on our bottom line.
We believe that our efforts to expand into new markets and to augment our
services will be positive for future growth. We will continue to service the
needs of our customers and to explore new products and services to better meet
their complete financial needs.
As we focus on building upon the successes of this past year, I would
especially like to recognize all the hard work, dedication and personal
commitment put forth by our directors, officers and staff, each of whom can
take personal pride in the achievements of the past year. As we look forward to
another challenging year with your confidence and support, we pledge our
continued promise to build upon the achievements of this past year with strong
management, competitive products and quality customer service.
Sincerely,
[GRAPHIC OMITTED]
/s/ Larry G. Spencer
President & CEO
[GRAPHIC OMITTED]
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993 (1)
----------- ----------- ----------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 112,523 $ 108,539 $ 101,904 $ 94,593 $ 96,166
Cash, cash equivalents and interest-bearing
deposits 3,151 1,763 2,115 1,415 20,146
Loans receivable, net 74,559 67,683 60,370 56,895 58,089
Mortgage-backed securities - at cost 23,528 28,039 28,594 29,617 13,963
Investment securities - at cost 3,000 2,000 1,000 4,245 271
Securities available for sale 4,783 5,894 7,358 12 --
Real estate acquired through foreclosure, net 12 12 62 234 1,409
Deposits 76,229 69,356 67,927 64,384 84,941
Borrowings 23,700 24,300 18,800 15,400 3,000
Stockholders' equity 11,529 13,003 13,600 13,351 6,103
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993 (1)
----------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $ 8,069 $ 7,773 $ 7,186 $ 6,296 $ 6,570
Total interest expense 5,059 4,669 3,852 2,857 3,490
-------- -------- -------- -------- --------
Net interest income 3,010 3,104 3,334 3,439 3,080
Provision for losses on loans -- -- -- 45 332
-------- -------- -------- -------- --------
Net interest income after provision for losses on
loans 3,010 3,104 3,334 3,394 2,748
Other income 281 331 267 216 217
Gain on sale of investments -- 251 -- -- 326
General, administrative and other expense (2,111) (2,384) (1,820) (1,653) (1,506)
-------- -------- -------- -------- --------
Earnings before income tax expense and
cumulative effect of change in accounting
principle 1,180 1,302 1,781 1,957 1,785
Income tax expense 468 487 694 750 465
-------- -------- -------- -------- --------
Earnings before cumulative effect of change
in accounting principle 712 815 1,087 1,207 1,320
Cumulative effect of change in
accounting principle -- -- -- 241 --
-------- -------- -------- -------- --------
Net earnings $ 712 $ 815 $ 1,087 $ 1,448 $ 1,320
======== ======== ======== ======== ========
Earnings per share $ .68 $ .69 $ .84 $ .97 N/A
======== ======== ======== ========
</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,
-------------------------------------------------------------
1997 1996 1995 1994 1993 (1)
---------- ---------- ---------- ---------- ---------
<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) 0.65% 0.78% 1.12% 1.61% 1.50%
Interest rate spread information:
Average during period 2.31 2.36 2.87 3.38 3.45
End of period 2.19 2.17 2.36 3.34 2.94
Net interest margin (2) 2.81 3.02 3.52 3.91 3.64
Ratio of operating expense to average total assets 1.92 2.28 1.88 1.82 1.61
Return on equity (ratio of net earnings to average
equity) 6.09 6.21 8.16 11.21 24.63
Quality Ratios:
Non-performing assets to total assets, at end of
period (3) 1.25 0.57 0.78 1.27 2.81
Allowance for loan losses to non-performing
assets, at end of period (3) 47.64 112.36 87.45 55.31 24.72
Capital Ratios:
Equity to total assets, at end of period 10.25 11.98 13.35 14.11 6.35
Average equity to average assets 10.62 12.57 13.78 14.38 6.08
Ratio of average interest-earning assets to average
interest-bearing liabilities 110.64 114.50 115.83 116.42 104.66
Dividend payout ratio (4) 34.93 27.37 16.47 7.73 N/A
Number of full service offices 2 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 of the
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 certificate 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.
<PAGE>
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, 1997, approximately $29.5 million,
or 38.7% of the Company's total loans secured by real estate, were ARMs. On the
same date, the Company also had $13.6 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, 1997, the Company had
$4.1 million of investment securities and interest-bearing deposits maturing or
repricing within three years. Finally, the Company has undertaken various
marketing programs from time to
4
<PAGE>
- --------------------------------------------------------------------------------
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, 1997, the Company had approximately $8.1
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 change 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, 1997, 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):
Change in Net Portfolio Value
At September 30, 1997
interest rate Board Limit -------------------------------------
(Basis Points) % Change $ Amount $ Change % Change
- ---------------- ------------- ---------- ------------ ---------
+200 -40% $ 8,212 $ (3,415) -29%
+100 -25 10,090 (1,537) -13
0 -- 11,627 -- --
-100 -25 12,526 899 +8
-200 -40 12,820 1,193 +10
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 a
10% increase in NPV in a declining rate environment and a 29% 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).
<PAGE>
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 increased to $1,403,000 at September 30, 1997
as compared to $614,000 at September 30, 1996. The increase in non-performing
assets was due primarily to two loans totaling $483,000 secured by single
family residences located in Texas and one loan totaling $207,000 secured by
fifteen single family residences located in the Company's primary market area.
The ratio of non-performing assets to total assets at September 30, 1997 was
1.25% compared to .57% at September 30, 1996. Included in non-performing assets
at September 30, 1997 were thirty mortgage loans and four consumer loans
totaling $1,359,000 and $32,000, respectively. Foreclosed real estate totaled
$12,000 at September 30, 1997.
Management has taken into account its non-performing assets and the
composition of the loan portfolio in establishing its allowance for loan
losses, which totaled $668,000 at September 30, 1997.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
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,
----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------- ------------ -------- ------------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 71,188 $ 5,684 7.98% $ 63,152 $ 5,190 8.22%
Mortgage-backed securities 26,137 1,727 6.61 29,510 1,930 6.54
Investment securities 7,598 513 6.75 7,233 479 6.62
FHLB stock 1,314 89 6.79 1,103 70 6.38
Federal funds sold 567 34 6.02 1,434 79 5.53
Other 318 22 6.83 445 25 5.64
-------- --------- -------- ---------
Total interest-earning
assets 107,122 8,069 7.53 102,877 7,773 7.56
-------- --------- -------- ---------
Interest-bearing liabilities:
Demand and NOW deposits 22,019 914 4.15 18,765 762 4.06
Savings deposits and
certificates 51,219 2,745 5.36 51,950 2,820 5.43
FHLB advances 23,583 1,400 5.93 19,133 1,087 5.68
-------- --------- -------- ---------
Total interest-bearing
liabilities 96,821 5,059 5.22 89,848 4,669 5.20
-------- --------- -------- ---------
Net interest income $ 3,010 $ 3,104
========= =========
Net interest rate spread 2.31% 2.36%
==== ====
Net earning assets $ 10,301 $ 13,029
======== ========
Net yield on average interest-
earning assets 2.81% 3.02%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 110.64% 114.50%
========= =========
<PAGE>
<CAPTION>
1995
------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------------- ------------ -------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $58,628 $ 4,804 8.19%
Mortgage-backed securities 29,191 1,939 6.64
Investment securities 4,977 321 6.45
FHLB stock 1,028 61 5.93
Federal funds sold 650 44 6.77
Other 275 17 6.18
------- ---------
Total interest-earning
assets 94,749 7,186 7.58
------- ---------
Interest-bearing liabilities:
Demand and NOW deposits 13,508 408 3.02
Savings deposits and
certificates 51,019 2,441 4.78
FHLB advances 17,275 1,003 5.81
------- ---------
Total interest-bearing
liabilities 81,802 3,852 4.71
------- ---------
Net interest income $ 3,334
=========
Net interest rate spread 2.87%
====
Net earning assets $12,947
=======
Net yield on average interest-
earning assets 3.52%
====
Average interest-earning assets
to average interest-bearing
liabilities 115.83%
=========
</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,
-----------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------------- -----------------------------------
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 $ 645 $ (151) $ 494 $372 $ 14 $ 386
Mortgage-backed securities (223) 20 (203) 21 (30) (9)
Investment securities 24 10 34 149 9 158
FHLB stock 14 5 19 4 5 9
Federal funds sold (52) 7 (45) 44 (9) 35
Other (8) 5 (3) 10 (2) 8
-------- ------ -------- ---- ------- -------
Total interest-earning assets 400 (104) 296 600 (13) 587
------- ------ ------- ---- ------ -------
Interest-bearing liabilities:
Demand and NOW deposits 135 17 152 188 166 354
Savings deposits and certificates (39) (36) (75) 45 334 379
FHLB advances 262 51 313 106 (22) 84
------- ------ ------- ---- ------ -------
Total interest-bearing liabilities $ 358 $ 32 390 $339 $478 817
======= ====== ------- ==== ====== -------
Net interest income $ (94) $(230)
======= =======
</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,
--------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 7.74% 7.78% 8.13%
Mortgage-backed securities 6.66 6.53 6.97
Investment securities 6.97 6.68 7.61
Federal funds sold 5.28 5.48 5.57
Other interest-earning assets 5.22 4.93 5.35
Combined weighted average yield on interest-earning 7.40 7.34 7.59
assets
Weighted average rate paid on:
Savings deposits and certificates 5.38 5.38 5.38
Demand and NOW deposits 4.06 4.03 3.78
FHLB advances 6.11 5.65 5.94
Combined weighted average rate paid on interest- 5.21 5.17 5.23
bearing liabilities
Spread 2.19 2.17 2.36
</TABLE>
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
The Company's total assets increased $4.0 million, or 3.7%, from $108.5
million at September 30, 1996 to $112.5 million at September 30, 1997. This
increase was primarily due to increases in net loans receivable of $6.9
million, cash and cash equivalents of $1.4 million, prem-ises and equipment of
$400,000, investment securities of $100,000 and Federal Home Loan Bank stock of
$100,000. These increases in assets, along with reductions in advances from the
Federal Home Loan Bank of Topeka of $600,000, checks issued in excess of cash
items of $500,000 and other accrued expenses and liabilities of $400,000 were
funded by increases in deposits of $6.8 million and decreases in
mortgage-backed securities of $4.7 million.
Total loans receivable increased $6.9 million from $67.7 million at
September 30, 1996, to $74.6 million at September 30, 1997. 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 $668,000 at September 30, 1997 which
represented a $22,000 decrease from the allowance for loan losses at September
30, 1996. The ratio of the allowance for loan losses as a percent of total
loans decreased from 1.02% at September 30, 1996 to .90% at September 30, 1997,
primarily due to the increase in total loans receivable at September 30, 1997.
The allowance for loan losses as a percent of non-performing loans decreased
from 114.62% at September 30, 1996 to 48.05% at September 30, 1997, due to the
increase in non-performing loans at September 30, 1997. At September 30, 1997,
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 $6.8 million from $69.4 million at September 30,
1996, to $76.2 million at September 30, 1997. Deposits increased in fiscal 1997
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 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 decreased $600,000 from $24.3 million at September
30, 1996 to $23.7 million at September 30, 1997 although the average balance of
FHLB advances during fiscal 1997 was $4.5 million higher than in fiscal 1996.
The decrease was due to the principal repayment of advances obtained from the
Federal Home Loan Bank of Topeka. The increase in deposits provided the Company
with the opportunity to reduce the amount of its outstanding advances. Most of
the advances obtained from the Federal Home Loan Bank of Topeka were originally
used by the Company to invest in loans receivable at a positive spread over the
term of the advances.
Total stockholders' equity decreased approximately $1.5 million from $13.0
million at September 30, 1996 to $11.5 million at September 30, 1997. The
decrease was primarily the result of the Company's use of $2.2 million to
repurchase 197,963 shares of common stock and dividends of $231,000 paid to
stockholders. These decreases were partially offset by the Company's net
earnings from operations of $712,000, a fair value adjustment of $90,000 on
ESOP shares committed for release, the repayment of employee stock ownership
plan ("ESOP") debt of $73,000, common stock options exercised of $47,000, the
amortization of unearned stock compensation of $44,000 and unrealized gains on
securities available for sale of $26,000, net of deferred taxes.
8
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Fiscal Years Ended September 30, 1997 and September 30, 1996
General. Net earnings for the fiscal year ended September 30, 1997 were
$712,000 as compared to $815,000 for the fiscal year ended September 30, 1996,
a decrease of $103,000, or 12.6%. The decrease in net earnings 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 similar
activity in the fiscalyear ended September 30, 1997. To a lesser extent, the
decrease in net earnings was due to decreases in net interest income of $94,00
and income from real estate operations of $60,000. These decreases to net
earnings were partially offset by decreases in non-interest expenses of
$273,000 and income tax expense of $19,000.
Net Interest Income. Net interest income decreased $94,000, or 3.02%, for
the fiscal year ended September 30, 1997 as compared to the fiscal year ended
September 30, 1996. This decrease was due primarily to an increase in interest
expense of $390,000, or 8.34%, offset partially by an increase in interest
income of $296,000, or 3.81%. Interest expense increased primarily due to a
$7.0 million increase in the average balance of interest-bearing liabilities
and, to a lesser extent, a 2 basis point increase in the average rate paid on
interest-bearing liabilities. Interest income increased primarily due to a $4.2
million increase in the average balance of interest-earning assets, partially
offset by a 3 basis point decrease in yield on interest-earning assets.
Interest Income. Interest income for the fiscal year ended September 30,
1997, increased to $8.1 million from $7.8 million for the fiscal year ended
September 30, 1996. This increase resulted primarily from a $4.2 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,
1997, as compared to the fiscal year ended September 30, 1996. These increases
were partially offset by a decrease in the average yield on interest-earning
assets. The average yield on interest-earning assets decreased 3 basis points
to 7.53% during fiscal 1997, from 7.56% during fiscal 1996. This decrease was
caused primarily by a decrease in yield on the Company's loans receivable from
8.22% to 7.98% due to new loans being originated at interest rates lower than
those currently in the loan portfolio. This decrease was partially offset by an
increase in yield on mortgage-backed securities from 6.54% to 6.61% and
investment securities from 6.62% to 6.75%.
Interest Expense. Interest expense for the fiscal year ended September 30,
1997, increased by $400,000 to $5.1 million as compared to $4.7 million for the
fiscal year ended September 30, 1996. This increase was primarily the result of
a $7.0 million increase in the average outstanding balance of interest-bearing
liabilities during the fiscal year ended September 30, 1997 as compared to the
fiscal year ended September 30, 1996. To a lesser extent, the increase in
interest expense was due to a 2 basis point increase in average interest rates
paid on interest-bearing liabilities. The increase in interest-bearing
liabilities was primarily due to a $4.5 million increase in the average
outstanding amount of advances obtained from the Federal Home Loan Bank of
Topeka and a $3.3 million increase in demand and Now deposits. The advances
were used by the Company to invest in loans receivable at a positive spread
over the term of the advances.
<PAGE>
Provision for Loan Losses. There was no provision for losses on loans for
the fiscal years ended September 30, 1997 and September 30, 1996. 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 decreased $302,000 to $280,000
during the fiscal year ended September 30, 1997 as compared to $582,000 for the
fiscal year ended September 30, 1996. The decrease 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, 1997. To a lesser
extent, the decrease was due to a decrease of $60,000 in income from real
estate operations for the fiscal year ended September 30, 1997 as compared to
the fiscal year ended September 30, 1996. 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 decreased to $2,111,000
for the fiscal year ended September 30, 1997 from $2,384,000 for the fiscal
year ended September 30, 1996, a decrease of $273,000, or 11.4%. The decrease
was primarily due to a one-time pre-tax charge of $432,000 during the fiscal
year ended September 30, 1996, with no similar charge during the fiscal year
ended September 30, 1997. The charge was related to a special assessment of
65.7 basis points on deposits of SAIF-insured institutions as of March 31,
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
1995, in order to recapitalize the Savings Association Insurance Fund. To a
lesser extent, the decrease was due to a reduction in the Company's ongoing
deposit insurance premium of $94,000, as a result of the recapitalization of
the Savings Association Insurance Fund. These decreases were partially offset
by increases in compensation and employee benefits of $146,000, other expenses
of $58,000, occupancy and equipment of $37,000, and data processing fees of
$12,000. 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. In addition, the opening
of a new branch office in Coffeyville, Kansas resulted in additional staff,
advertising, stationery, printing and office supplies expense.
Income Tax Expense. Income tax expense was $468,000 for the fiscal year
ended September 30, 1997 compared to $487,000 for the fiscal year ended
September 30, 1996, a decrease of $19,000. The decrease was primarily the
result of a decrease in pre-tax income. The Company's effective tax rates were
39.7% and 37.4% for the fiscal years ended September 30, 1997 and September 30,
1996, respectively.
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 $230,000, or 6.9%, 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 $817,000, 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.
<PAGE>
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.
10
<PAGE>
- --------------------------------------------------------------------------------
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 pre-tax 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.
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. During fiscal 1997, OTS
regulations required 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, 1997 was 7.20%.
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, 1997 was 3.23%.
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.
<PAGE>
The Company's primary investing activity is the origination of mortgage
loans and the purchase of mortgage-backed and other securities. At September
30, 1997, mortgage loans and mortgage-backed securities accounted for 87.6% 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 with an outstanding balance of $4.0 million at September 30,
1997. The line of credit is scheduled to mature on February 6, 1998, and will
most likely be renewed for another one year term at that time. 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.
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, 1997, the Company had
outstanding commitments to extend credit which amounted to $379,000. 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.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Certificates of deposit scheduled to mature in one year or less at
September 30, 1997 totaled approximately $28.0 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, 1997, the Company had $23.7 million in advances from the FHLB of
Topeka with $12.8 million maturing in one year or less.
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, 1997, the
Association's tangible capital, core capital, and risk-based capital of $9.3
million, $9.3 million, and $10.0 million exceeded the applicable minimum
requirements by $7.7 million, $6.0 million, and $5.9 million, respectively.
The following table sets forth the Association's compliance with such
requirements at September 30, 1997.
<TABLE>
<CAPTION>
Association capital level
OTS requirement at September 30, 1997
-------------------- ----------------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
Capital standard -------- --------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.50% $ 1,666 8.42% $9,349 $ 7,683
Core capital (1) 3.00 3,333 8.42 9,349 6,016
Risk-based capital 8.00 4,093 19.53 9,989 5,896
</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.
<PAGE>
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.
Effect of New Accounting Standards
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was issued in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It became effective
for some transactions occurring after December 31, 1996, and will be effective
for others in 1998. The adoption of SFAS No. 125 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
Also, in March 1997, the accounting requirements for calculating earnings
per share were revised by SFAS No. 128, "Earnings Per Share." Basic earnings
per share for the quarter ending December 31, 1997 and later will be calculated
solely on average common shares
12
<PAGE>
- --------------------------------------------------------------------------------
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. All prior calculations will
be restated to be comparable to the new methods. As the Company has dilution
from stock options, the new calculation methods will increase basic earnings
per share over what otherwise would have been reported as primary earnings per
share, while there will be little effect on fully diluted earnings per share.
In June 1997, the Financial Accounting Standards Board "FASB" issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 relates solely to disclosure provisions and therefore
will not have a material impact on the results of operations or financial
condition of the Company.
In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning
after December 15, 1997. The adoption of SFAS No. 131 relates solely to
disclosure provisions and therefore will not have a material impact on the
results of operations or financial condition of the Company.
13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
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, 1997 and 1996,
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, 1997 and 1996,
and the consolidated results of their operations and their consolidated
cash flows for the years then ended in conformity with generally accepted
accounting principles.
[GRAPHIC OMITTED]
Wichita, Kansas
October 24, 1997
14
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30,
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Cash and due from banks $ 961,350 $ 753,134
Federal funds sold 1,600,000 400,000
Other interest-bearing deposits 589,877 610,295
------------- -------------
Cash and cash equivalents 3,151,227 1,763,429
Investment securities held to maturity (estimated fair value of $2,996,300 in 1997 and
$1,970,980 in 1996) 3,000,000 2,000,000
Investment securities available for sale 4,311,406 5,235,073
Mortgage-backed securities held to maturity (estimated fair value of $23,748,569 in 1997
and
$27,873,630 in 1996) 23,527,689 28,039,314
Mortgage-backed securities available for sale 471,618 659,207
Loans receivable, net 74,558,783 67,682,920
Premises and equipment, net 1,297,500 910,813
Federal Home Loan Bank stock, at cost 1,368,900 1,239,500
Accrued interest receivable 712,298 667,920
Real estate acquired through foreclosure 12,131 11,845
Deferred income taxes -- 173,904
Other 111,107 155,304
$ 112,522,659 $ 108,539,229
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 76,229,176 $ 69,356,422
Advances from borrowers for taxes and insurance 693,069 678,072
Checks issued in excess of cash items -- 492,627
Deferred income taxes 34,048 --
Advances from Federal Home Loan Bank 23,700,000 24,300,000
Accrued expenses and other 337,085 709,599
------------- -------------
Total liabilities 100,993,378 95,536,720
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares authorized; none issued -- --
Common stock, $.01 par value, 2,500,000 shares authorized; 1,498,392 shares issued in
1997 and 749,196 shares issued in 1996 14,984 7,492
Additional paid-in capital 7,122,744 7,053,143
Retained earnings - substantially restricted 9,441,054 8,960,098
Unrealized gain (loss) on securities available for sale, net of related taxes 15,112 (11,293)
Required contributions for shares acquired by Employee Stock Ownership Plan (ESOP) (218,212) (290,949)
Unearned stock compensation - recognition and retention plan (RRP) (43,634) (87,278)
Treasury stock, 520,059 shares in 1997 and 331,550 shares in 1996 - at cost (4,802,767) (2,628,704)
------------- -------------
Total stockholders' equity 11,529,281 13,002,509
------------- -------------
$ 112,522,659 $ 108,539,229
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Year ended September 30,
1997 1996
------------- ------------
Interest income
Loans $ 5,684,053 $ 5,189,361
Mortgage-backed securities 1,726,754 1,929,927
Investment securities 513,223 478,990
Interest-bearing deposits and other 145,016 174,825
----------- -----------
Total interest income 8,069,046 7,773,103
Interest expense
Deposits 3,659,320 3,581,799
Borrowed funds 1,399,263 1,087,249
----------- -----------
Total interest expense 5,058,583 4,669,048
----------- -----------
Net interest income 3,010,463 3,104,055
Other income
Gain on sale of investment securities -- 250,945
Service charges 199,459 178,949
Real estate operations 34,179 94,199
Other 46,795 58,292
----------- -----------
280,433 582,385
General, administrative and other expense
Employee compensation and benefits 1,239,516 1,093,509
Occupancy and equipment 167,944 131,172
Data processing fees 150,896 138,659
Federal deposit insurance premiums 65,626 591,677
Other operating 487,516 429,304
----------- -----------
2,111,498 2,384,321
----------- -----------
Earnings before income taxes 1,179,398 1,302,119
Income tax expense 467,718 486,826
----------- -----------
NET EARNINGS $ 711,680 $ 815,293
=========== ===========
Earnings per share $ .68 $ .69
The accompanying notes are an integral part of these statements.
16
<PAGE>
First Independence 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, 1995 $ 7,492 $ 6,998,314 $ 8,358,681 $ 176,580
Net earnings for the year -- -- 815,293 --
Cash dividends of $.188 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 125,846 shares of
treasury stock -- -- -- --
-------- ----------- ----------- ---------
Balance at September 30, 1996 7,492 7,053,143 8,960,098 (11,293)
Net earnings for the year -- -- 711,680 --
Cash dividends of $.238 per share -- -- (230,724) --
Common stock options exercised -- (12,499) -- --
Appreciation of securities available
for sale -- -- -- 26,405
ESOP loan repayments -- -- -- --
Fair value adjustment on ESOP
shares committed for release -- 89,592 -- --
Amortization of unearned stock
compensation -- -- -- --
Purchase of 197,963 shares of
treasury stock -- -- -- --
Two-for-one stock split 7,492 (7,492) -- --
-------- ----------- ----------- ---------
Balance at September 30, 1997 $ 14,984 $ 7,122,744 $ 9,441,054 $ 15,112
======== =========== =========== =========
<PAGE>
<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, 1995 $ (363,686) $ (130,922) $ (1,446,524) $ 13,599,935
Net earnings for the year -- -- -- 815,293
Cash dividends of $.188 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 125,846 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
Net earnings for the year -- -- -- 711,680
Cash dividends of $.238 per share -- -- -- (230,724)
Common stock options exercised -- -- 59,769 47,270
Appreciation of securities available
for sale -- -- -- 26,405
ESOP loan repayments 72,737 -- -- 72,737
Fair value adjustment on ESOP
shares committed for release -- -- -- 89,592
Amortization of unearned stock
compensation -- 43,644 -- 43,644
Purchase of 197,963 shares of
treasury stock -- -- (2,233,832) (2,233,832)
Two-for-one stock split -- -- -- --
----------- ----------- ------------- ------------
Balance at September 30, 1997 $ (218,212) $ (43,634) $ (4,802,767) $ 11,529,281
=========== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended September 30,
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 711,680 $ 815,293
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation 84,077 55,895
Amortization of premiums and discounts on investments and mortgage-backed 88,993 106,967
securities
Gain on sale of investment securities -- (250,945)
Amortization of deferred loan origination fees (60,988) (64,119)
Amortization of expense related to employee benefit plans 205,973 176,460
Gain on sale of real estate acquired through foreclosure (41,216) (111,956)
Deferred income taxes 191,768 (38,769)
Other 229 3,402
Increase (decrease) in cash due to changes in
Accrued interest receivable (44,378) (49,482)
Other assets 22,957 (4,829)
Accrued expenses and other liabilities (369,995) 503,251
Income taxes payable 50,864 (123,286)
------------ ------------
Net cash provided by operating activities 839,964 1,017,882
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 2,188,741 3,167,307
Held to maturity 6,412,465 5,236,916
Purchase of securities
Available for sale (1,154,129) (2,217,489)
Held to maturity (3,000,000) (5,790,535)
Net increase in loans (6,830,223) (7,215,690)
Capital expenditures (470,993) (308,867)
Proceeds from sale of real estate acquired through foreclosure 24,136 37,669
Other -- 2,219
------------ ------------
Net cash used in investing activities (2,830,003) (6,825,325)
Cash flows from financing activities
Net increase in deposits 6,872,754 1,429,794
Net increase (decrease) in advances from borrowers for taxes and insurance 14,996 (564,868)
Net increase (decrease) in checks issued in excess of cash items (492,627) 492,627
Advances from Federal Home Loan Bank 17,500,000 20,900,000
Repayment of Federal Home Loan Bank advances (18,100,000) (15,400,000)
Cash dividends paid (230,724) (213,876)
Purchase of treasury stock (2,233,832) (1,207,430)
Stock options exercised 47,270 20,000
------------ ------------
Net cash provided by financing activities 3,377,837 5,456,247
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,387,798 (351,196)
Cash and cash equivalents at beginning of year 1,763,429 2,114,625
------------ ------------
Cash and cash equivalents at end of year $ 3,151,227 $ 1,763,429
============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Income taxes $ 225,086 $ 648,881
Interest 4,935,024 4,669,113
Noncash investing and financing activities
Transfer from loans to real estate acquired through foreclosure 88,772 11,845
Issuance of loans receivable in connection with the sale of real estate acquired 51,600 45,000
through foreclosure
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
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 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.
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.
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
19
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
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:
Years
------
Building 8-50
Furniture, fixtures and equipment 5-20
Automobiles 5
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.
<PAGE>
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 1,041,034 and
1,189,586 for the years ended September 30, 1997 and 1996, 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, 1997 and 1996 are based on 1,051,516 and 1,191,372
weighted-average shares outstanding, respectively. Computed primary and fully-
diluted earnings per share were the same in both 1997 and 1996.
Common shares outstanding exclude unallocated and uncommitted shares held
by the ESOP trust.
20
<PAGE>
- --------------------------------------------------------------------------------
11. Common stock split
On December 8, 1996, the Corporation's Board of Directors announced a
two-for-one stock split effected in the form of a stock dividend to
stockholders of record as of January 10, 1997. All references in the financial
statements to number of shares, per share amounts and market prices of the
Corporation's common stock have been retroactively restated to reflect the
increased number of common shares outstanding.
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, 1997
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Held to maturity ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 3,000,000 $ 2,860 $ 6,560 $ 2,996,300
=========== ======== ======= ===========
Available for sale
Intermediate term liquidity portfolio $ 327,017 $ 639 $ -- $ 327,656
U.S. Government and agency obligations 3,961,757 29,213 7,220 3,983,750
----------- -------- ------- -----------
$ 4,288,774 $ 29,852 $ 7,220 $ 4,311,406
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Held to maturity ------------- ------------ ------------ ------------
<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>
The amortized cost and estimated fair value of U.S. Government and agency
obligations at September 30, 1997, by term to maturity are as follows:
Estimated
Amortized fair
cost value
Held to maturity ------------- ------------
Due in two to five years $ 1,000,000 $ 1,001,250
Due five to ten years 2,000,000 1,995,050
----------- -----------
$ 3,000,000 $ 2,996,300
=========== ===========
Available for sale
Due in one year or less $ 993,777 $ 998,750
Due in one to two years 978,149 995,000
Due in two to five years 1,989,831 1,990,000
----------- -----------
$ 3,961,757 $ 3,983,750
=========== ===========
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 $993,440 at September 30, 1997
were pledged to secure government deposits.
21
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
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, 1997
------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Held to maturity -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
GNMA certificates $ 88,687 $ 8,094 $ -- $ 96,781
FHLMC certificates 8,304,231 145,519 10,514 8,439,236
FNMA certificates 6,535,590 154,284 29,048 6,660,826
Collateralized mortgage obligations 8,599,181 64,924 112,379 8,551,726
------------ ---------- ---------- ------------
$ 23,527,689 $ 372,821 $ 151,941 $ 23,748,569
============ ========== ========== ============
Available for sale
FHLMC certificates $ 469,874 $ 1,744 $ -- $ 471,618
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Held to maturity -------------- ------------ ------------ -------------
<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>
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 $13,295,170 and
$11,005,909 at September 30, 1997 and 1996, 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>
1997 1996
---------------- ----------------
<S> <C> <C>
First mortgage loans
Secured by one-to-four family residences $ 64,152,604 $ 57,352,844
Secured by multi-family residences 1,164,442 1,370,715
Nonresidential 7,478,908 7,223,602
Construction 763,712 1,833,750
------------ ------------
Total first mortgage loans 73,559,666 67,780,911
Consumer and other loans
Savings 349,531 364,011
Automobile 704,519 402,592
Home equity and second mortgages 550,008 781,199
Unsecured home improvement 274,267 183,630
Other 661,209 184,723
------------ ------------
Total consumer and other loans 2,539,534 1,916,155
Less
Allowance for loan losses (668,185) (690,009)
Loans in process (571,808) (1,050,012)
Unearned discounts (2,726) (2,929)
Deferred loan origination fees (297,698) (271,196)
------------ ------------
(1,540,417) (2,014,146)
Net loans receivable $ 74,558,783 $ 67,682,920
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1997 1996
------------- ----------
Balance at beginning of year $ 690,009 $ 690,009
Loans charged off (21,824) --
--------- ---------
Balance at end of year $ 668,185 $ 690,009
========= =========
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 84% (1997)
and 82% (1996) of the total loan portfolio. Approximately 4% (1997) and 5%
(1996) of the Association's one-to-four family residential real estate loans
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 11% (1997) and 12% (1996) of the loan portfolio is comprised
of nonresidential and multi-family real estate loans with approximately 13%
(1997) and 20% (1996) of this total collateralized by properties located
outside the Association's primary lending area.
Loans serviced under a County Mortgage Revenue Bond totaled $1,471,229 and
$1,606,982 at September 30, 1997 and 1996, respectively.
23
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
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:
Loans outstanding at October 1, 1996 $ 563,082
New loans 37,528
Repayments (72,726)
---------
Loans outstanding at September 30, 1997 $ 527,884
=========
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 are
as follows:
1997 1996
----------- ----------
Principal amount of impaired loans $ 206,691 $ 210,309
Less valuation allowance 69,691 73,309
--------- ---------
$ 137,000 $ 137,000
========= =========
The Association has no impaired loans for which there is no related
allowance for losses. Interest income of $9,537 and $17,267 was recognized and
collected on impaired loans during the year ended September 30, 1997 and 1996,
respectively.
Nonaccrual loans totaled $1,017,367 and $366,832 at September 30, 1997 and
1996, respectively. Interest income that would have been recorded under the
original terms of such loans approximated $40,000 and $20,000 for the years
ended September 30, 1997 and 1996, respectively. Interest income that was
recorded was insignificant for the years ended September 30, 1997 and 1996. The
Association is not committed to make additional loans to borrowers whose loans
have been modified.
NOTE E -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
1997 1996
----------- ----------
Loans receivable $ 450,257 $ 404,266
Mortgage-backed securities 171,729 205,389
Investment securities 90,312 58,265
--------- ---------
$ 712,298 $ 667,920
========= =========
NOTE F -- PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
1997 1996
------------- -----------
Land $ 74,958 $ 74,958
Building 1,281,916 923,518
Furniture, fixtures and equipment 383,148 307,821
Automobiles 43,579 38,729
----------- ---------
1,783,601 1,345,026
Less accumulated depreciation 486,101 434,213
----------- ---------
$ 1,297,500 $ 910,813
=========== =========
24
<PAGE>
- --------------------------------------------------------------------------------
NOTE G -- REAL ESTATE OPERATIONS
A summary of real estate operations is as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Gain on sale of real estate acquired through foreclosure, net $ 41,216 $ 111,956
Net operating expense (7,037) (17,757)
-------- ---------
Income from real estate operations $ 34,179 $ 94,199
======== =========
</TABLE>
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, 1997 1996
----------------- ---------------------------- ---------------------------
1997 1 996 Amount Percent Amount Percent
------- ------- -------------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts .................. 2.05% 2.31% $ 2,058,500 2.70% $ 1,631,512 2.35%
First Super NOW accounts ...... 2.30 2.56 1,704,678 2.24 1,600,400 2.31
First Money Fund accounts ...... 4.51 4.48 20,702,177 27.15 15,552,973 22.43
------ ------------ ------
Total demand deposits ...... 4.16 4.15 24,465,355 32.09 18,784,885 27.09
Passbook savings accounts ...... 2.89 2.89 2,702,740 3.55 2,649,720 3.82
Certificates of deposit
3.00% to 3.99% ............... 3.75 3.81 4,539 .01 8,565 .01
4.00% to 4.99% ............... 4.77 4.58 2,189,277 2.87 4,216,378 6.08
5.00% to 5.99% ............... 5.55 5.46 39,910,696 52.36 30,296,166 43.68
6.00% to 6.99% ............... 6.30 6.37 6,930,530 9.09 13,366,636 19.27
7.00% to 7.99% ............... 7.00 7.02 26,039 .03 25,241 .04
8.00% to 8.99% ............... -- 8.35 -- -- 8,831 .01
------ ------------ ------
Total savings certificates ... 5.62 5.64 49,061,081 64.36 47,921,817 69.09
------ ------------ ------
Total savings .................. 5.48 5.48 51,763,821 67.91 50,571,537 72.91
------ ------------ ------
Total deposits ............... 5.06 5.12 $ 76,229,176 100.00% $ 69,356,422 100.00%
====== ============ ======
</TABLE>
25
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
The aggregate amount of certificates of deposit and savings with a minimum
denomination of $100,000 was $3,844,877 and $2,489,514 at September 30, 1997
and 1996, respectively.
Scheduled maturities of certificates of deposit are as follows:
September 30, 1997
<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% $ 4,539 $ -- $ -- $ 4,539
4.00% to 4.99% 1,734,025 455,252 -- 2,189,277
5.00% to 5.99% 23,918,436 15,493,876 498,384 39,910,696
6.00% to 6.99% 2,351,745 2,411,600 2,167,185 6,930,530
7.00% to 7.99% -- 26,039 -- 26,039
------------ ------------ ----------- ------------
$ 28,008,745 $ 18,386,767 $ 2,665,569 $ 49,061,081
============ ============ =========== ============
</TABLE>
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>
Interest expense on deposits for the years ended September 30 is
summarized as follows:
1997 1996
------------- ------------
Certificates of deposit $ 2,745,188 $ 2,819,977
NOW accounts 878,302 730,627
Demand deposits 35,830 31,195
----------- -----------
$ 3,659,320 $ 3,581,799
=========== ===========
NOTE I -- ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank at September 30 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
Rates Amount Rates Amount
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Variable rates ...... 5.67% - 6.00% $ 8,400,000 5.40% - 5.75% $ 10,600,000
Fixed rates ......... 4.92 - 7.06 15,300,000 4.92 - 7.06 13,700,000
---------- ------------
$ 23,700,000 $ 24,300,000
============ ============
</TABLE>
26
<PAGE>
- --------------------------------------------------------------------------------
The Company has a line of credit with the Federal Home Loan Bank totaling
$9,000,000 with an outstanding balance of $4,000,000 at September 30, 1997.
Aggregate maturities for the years following September 30, 1997 are as
follows:
1998 .................. $ 12,800,000
1999 .................. 2,900,000
2001 .................. 3,000,000
2002 .................. 5,000,000
------------
$ 23,700,000
============
Assets of the Association are subject to a blanket pledge agreement to
collateralize the advances.
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 $174,215 and $145,360 for
the years ended September 30, 1997 and 1996, respectively.
The ESOP shares as of September 30, 1997 were as follows:
<TABLE>
<S> <C>
Allocated shares 58,190
Unreleased shares 43,642
------
Total ESOP shares 101,832
=======
Fair value of unreleased shares at September 30, 1997 $ 610,988
=========
</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 43,642 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, 1997 and 1996.
The Company has adopted a Stock Option and Incentive Plan (SOP) for
designated participants. The SOP provides for up to 145,474 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
and unless otherwise specified, the options expire ten years from the date of
the grant. A summary of the Company's stock option plan as of September 30,
1997 and 1996 and changes during the years ended as of those dates is presented
below:
Weighted
average
exercise
Shares price
--------- ---------
Outstanding at October 1, 1995 125,276 $ 5.14
Exercised 4,000 5.00
-------
Outstanding at September 30, 1996 121,276 5.14
Exercised 9,454 5.00
-------
Outstanding at September 30, 1997 111,822 5.15
=======
27
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
All options outstanding at September 30, 1997 were exercisable and can be
summarized as follows:
Exercise Remaining
Shares price life
- ---------------------- ---------- ------------------
98,186 $ 5.00 6 years
11,636 6.19 6 years 4 months
2,000 6.69 6 years 10 months
--------------------
111,822
====================
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, 1997 and 1996 due
to the plan's overfunded status. Separate actuarial disclosure information is
not available due to the plan being a multi-employer pension plan.
NOTE K -- INCOME TAXES
Income tax expense for the years ended September 30 consists of the
following:
1997 1996
----------- -------------
Current $ 275,950 $ 525,595
Deferred 191,768 (38,769)
--------- ---------
$ 467,718 $ 486,826
========= =========
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>
1997 1996
------------- -------------
<S> <C> <C>
Income tax expense at statutory rate $ 400,995 $ 442,720
Kansas privilege tax, net of federal tax benefit 52,542 51,434
State contribution credit (28,875) (28,875)
Other 43,056 21,547
--------- ---------
$ 467,718 $ 486,826
========= =========
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at September 30 are as follows:
1997 1996
-------------- ----------
Deferred tax assets
Allowance for loan losses $ 241,667 $ 226,927
SAIF recapitalization assessment -- 171,156
Accrued bonuses 8,327 7,138
State contribution credit 18,924 28,875
Other 5,780 4,710
---------- ---------
Total deferred tax assets 274,698 438,806
---------- ---------
Deferred tax liabilities
Securities available for sale 23,393 20,232
Depreciation of property and equipment 34,622 29,191
Federal Home Loan Bank stock dividends 250,731 215,479
---------- ---------
Total deferred tax liabilities 308,746 264,902
---------- ---------
Net deferred tax asset (liability) $ (34,048) $ 173,904
========== =========
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, 1997. If the
amounts that
28
<PAGE>
- --------------------------------------------------------------------------------
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, 1997. 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 1 capital to risk-weighted assets
and of Tier 1 (core) capital and tangible capital to adjust total assets.
Management believes, as of September 30, 1997, that the Association meets all
capital adequacy requirements to which it is subject.
As of September 30, 1997, 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 1 (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, 1997
Total risk-based capital $ 9,989,000 19.5% $ 4,093,000 -8.0% $ 5,116,000 -10.0%
Tier 1 risk-based capital 9,349,000 18.3 2,046,000 -4.0 3,069,000 - 6.0
Tier 1 (core) capital 9,349,000 8.4 3,333,000 -3.0 5,555,000 - 5.0
Tangible capital 9,349,000 8.4 1,666,000 -1.5 -- --
</TABLE>
<PAGE>
<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
Total risk-based capital $ 11,129,000 23.8% $ 3,746,000 -8.0% $ 4,682,000 -10.0%
Tier 1 risk-based capital 10,542,000 22.5 1,873,000 -4.0 2,809,000 - 6.0
Tier 1 (core) capital 10,542,000 9.9 3,204,000 -3.0 5,339,000 - 5.0
Tangible capital 10,542,000 9.9 1,602,000 -1.5 -- --
</TABLE>
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 $3,200,000 to First Independence Corporation at September 30,
1997.
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
29
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1997 and 1996
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 and 1997, no BIF
assessments were 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
$115,000 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.
NOTE N -- COMMITMENTS
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, 1997 include loans
in process as disclosed in Note D and first mortgage loans with fixed rates
ranging from 7.25% to 8.5% aggregating $329,110 and $50,000 of variable rate
loans at 6.5%. Collateral for loans in process and commitments are the same as
for other Association loans. The commitment period is generally for forty-five
days.
<PAGE>
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at September 30, 1997.
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
30
<PAGE>
- --------------------------------------------------------------------------------
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.
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 Company. 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>
1997
----------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
--------------- ----------------
<S> <C> <C>
Cash and cash equivalents $ 3,151,227 $ 3,151,227
Investment securities available for sale 4,311,406 4,311,406
Investment securities held to maturity 3,000,000 2,996,300
Mortgage-backed securities available for sale 471,618 471,618
Mortgage-backed securities held to maturity 23,527,689 23,748,569
Loans 75,226,968 75,929,533
Federal Home Loan Bank stock 1,368,900 1,368,900
Deposits (76,229,176) (75,926,401)
Advances from Federal Home Loan Bank (23,700,000) (23,736,269)
</TABLE>
<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 5, 1997, there were approximately 207 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.
Amounts have been adjusted to reflect a two-for-one stock split in fiscal 1997.
Dividends
Quarter Ended High Low Declared
- -------------------- --------- --------- ----------
December 31, 1993 $6.375 $5.750 $--
March 31, 1994 6.250 5.813 .0250
June 30, 1994 6.125 5.500 .0250
September 30, 1994 6.875 6.125 .0250
December 31, 1994 6.750 6.125 .0250
March 31, 1995 7.625 6.375 .0375
June 30, 1995 7.875 7.500 .0375
September 30, 1995 9.250 7.750 .0375
December 31, 1995 9.375 9.250 .0375
March 31, 1996 9.375 9.250 .0500
June 30, 1996 9.250 8.875 .0500
September 30, 1996 9.375 8.875 .0500
December 31, 1996 10.250 9.375 .0500
March 31, 1997 11.750 10.250 .0625
June 30, 1997 11.750 10.750 .0625
September 30, 1997 14.000 11.375 .0625
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
100 N. Broadway, Suite 800
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
Retired - 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, 1997, 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, 1997. 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
October 26, 1997
<TABLE> <S> <C>
<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, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 961,350
<INT-BEARING-DEPOSITS> 589,877
<FED-FUNDS-SOLD> 1,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,783,024
<INVESTMENTS-CARRYING> 26,527,689
<INVESTMENTS-MARKET> 26,744,869
<LOANS> 75,226,968
<ALLOWANCE> 668,185
<TOTAL-ASSETS> 112,522,659
<DEPOSITS> 76,229,176
<SHORT-TERM> 12,800,000
<LIABILITIES-OTHER> 1,064,202
<LONG-TERM> 10,900,000
14,984
0
<COMMON> 0
<OTHER-SE> 11,514,297
<TOTAL-LIABILITIES-AND-EQUITY> 112,522,659
<INTEREST-LOAN> 5,684,053
<INTEREST-INVEST> 2,239,977
<INTEREST-OTHER> 145,016
<INTEREST-TOTAL> 8,069,046
<INTEREST-DEPOSIT> 3,659,320
<INTEREST-EXPENSE> 5,058,583
<INTEREST-INCOME-NET> 3,010,463
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,111,498
<INCOME-PRETAX> 1,179,398
<INCOME-PRE-EXTRAORDINARY> 711,680
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 711,680
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<YIELD-ACTUAL> 7.53
<LOANS-NON> 1,049,000
<LOANS-PAST> 292,000
<LOANS-TROUBLED> 50,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 690,009
<CHARGE-OFFS> 21,824
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 668,185
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 668,185
</TABLE>
