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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-22184
FIRST INDEPENDENCE CORPORATION
(Name of small business issuer as specified in its charter)
Delaware 36-3899950
(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: $9,264,444.
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 4, 1998, was $7.8
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 4, 1998, there were issued and outstanding 963,819 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended September 30, 1998.
Part III of Form 10-KSB - Proxy Statement for 1999 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format: YES ___. NO _X_.
<PAGE>
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, 1998, the Company had total assets of $124.3 million,
and stockholders' equity of $12.1 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.
On February 18, 1998, the Board of Directors of the Company, the
Association and The Neodesha Savings and Loan Association, FSA ("Neodesha"),
respectively, adopted a Plan of Merger Conversion (the
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"Plan"). Pursuant to the Plan, Neodesha will combine with the Association
through the conversion of Neodesha from a mutual savings and loan association to
s stock savings and loan association and the simultaneous merger of Neodesha
into the Association. On December 22, 1998, at a special meeting, the members of
Neodesha approved the merger conversion. Approval from the Office of Thrift
Supervision was recieved November 9, 1998. The transaction is scheduled to close
during January 1999. See Note N of the Notes to Consolidated Financial
Statements.
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-KSB 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 ten financial institutions serving its primary market area. The
Association estimates its share of the savings market in Montgomery County to be
approximately 15%.
First Federal established a loan production office in Lawrence, Kansas
effective October 15, 1997. The office primarily originates construction loans
in Lawrence and the surrounding area. Loan approvals are 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 38,000. 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
3
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cross-reference directories, Emerson Electric Co., a manufacturer of small
electric motors, Hackney & Sons (Midwest) Inc., a manufacturer of beverage
delivery truck bodies, Heartland Cement, a manufacturer of cement and Cessna
Aircraft, a manufacturer of single engine airplanes.
Lending Activities
General. Historically, the Association originated fixed-rate mortgage
loans. Since 1982, however, the Association has emphasized, subject to market
conditions, the origination and holding of adjustable-rate mortgage ("ARM")
loans and loans with shorter terms to maturity than traditional 30-year,
fixed-rate loans. Management's strategy has been to increase the percentage of
assets in its portfolio with more frequent repricing or shorter maturities. In
response to customer demand, however, the Association continues to originate for
its loan portfolio fixed-rate mortgages with terms not greater than 30 years.
The Association's primary focus in lending activities is on the origination
of loans secured by first mortgages on owner-occupied, one- to four-family
residences. Recently, a significant portion of the Associations' lending has
been in the form of construction 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 multi-family real estate loans. See "- Originations,
Purchases and Sales of Loans and Mortgage-Backed Securities." At September 30,
1998, the Association's net loan portfolio totaled $93.7 million.
All loans must be reviewed by a committee comprised of the Association's
President and three other officers of the Association. The committee has
authority to approve loans secured by real estate to any one borrower of up to
$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, 1998, the maximum amount which the
Association could have lent to any one borrower and the borrower's related
entities was approximately $1.6 million. See "Regulation - Federal Regulation of
Savings Associations."
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<PAGE>
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>
September 30,
--------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family .................. $ 71,855 71.06% $ 64,152 84.30% $ 57,353 82.29%
Multi-family ......................... 1,001 .99 1,164 1.53 1,371 1.97
Non-residential ...................... 9,065 8.97 7,479 9.83 7,224 10.36
Construction ......................... 16,050 15.87 764 1.00 1,834 2.63
-------- ---------- -------- ---------- -------- ----------
Total real estate loans ........... 97,971 96.89 73,559 96.66 67,782 97.25
-------- ---------- -------- ---------- -------- ----------
Consumer Loans:
Deposit account ...................... 397 0.39 350 0.46 364 0.52
Automobile ........................... 961 0.95 705 0.93 402 0.58
Home equity .......................... 837 0.83 550 0.72 781 1.12
Home improvement ..................... 234 0.23 274 0.36 183 0.26
Other ................................ 714 0.71 661 0.87 185 0.27
-------- ---------- -------- ---------- -------- ----------
Total consumer loans .............. 3,143 3.11 2,540 3.34 1,915 2.75
-------- ---------- -------- ---------- -------- ----------
Total Loans ...................... 101,114 100.00% 76,099 100.00% 69,697 100.00%
========== ========== ==========
Less:
Loans in process ..................... 6,437 572 1,050
Deferred fees and discounts .......... 337 300 274
Allowance for losses ................. 656 668 690
-------- -------- --------
Total loans receivable, net .......... $ 93,684 $ 74,559 $ 67,683
======== ======== ========
</TABLE>
5
<PAGE>
The following table shows the composition of the Association's loan
portfolio by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Real estate:
One- to four-family ................................... $ 50,637 50.08% $ 37,581 49.38% $ 31,231 44.81%
Multi-family .......................................... 639 0.63 683 0.90 871 1.25
Non-residential ....................................... 6,361 6.29 5,055 6.64 4,835 6.94
Construction .......................................... 16,050 15.87 764 1.00 -- --
-------- ---------- -------- ---------- -------- ----------
Total fixed-rate real estate loans .................. 73,687 72.87 44,083 57.92 36,937 53.00
Consumer ............................................... 837 .83 1,990 2.62 1,437 2.06
-------- ---------- -------- ---------- -------- ----------
Total fixed-rate loans .............................. 74,524 73.70 46,073 60.54 38,374 55.06
-------- ---------- -------- ---------- -------- ==========
Adjustable-Rate Loans
Real estate:
One- to four-family ................................... 21,218 20.98 26,571 34.92 26,122 37.47
Multi-family .......................................... 362 0.36 481 0.63 500 0.72
Non-residential ....................................... 2,704 2.68 2,424 3.19 2,389 3.43
Construction .......................................... -- -- -- -- 1,834 2.63
-------- ---------- -------- ---------- -------- ----------
Total adjustable-rate real estate loans ............ 24,284 24.02 29,476 38.74 30,845 44.25
Consumer ............................................... 2,306 2.28 550 0.72 478 0.69
-------- ---------- -------- ---------- -------- ----------
Total adjustable-rate loans ........................ 26,590 26.30 30,026 39.46 31,323 44.94
-------- ---------- -------- ---------- -------- ----------
Total Loans ........................................ 101,114 100.00% 76,099 100.00% 69,697 100.00%
========== ========== ==========
Less
Loans in process ....................................... 6,437 572 1,050
Deferred fees and discounts ............................ 337 300 274
Allowance for losses ................................... 656 668 690
-------- -------- --------
Total loans receivable, net ............................ $ 93,684 $ 74,559 $ 67,683
======== ======== ========
</TABLE>
6
<PAGE>
The following schedule shows the scheduled contractual maturities of the
Association's loan portfolio at September 30, 1998. 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>
1999(1) .......... $ 137 8.56% $ 898 9.50% $14,085 9.62% $ 1,342 8.44% $ 16,462 9.51%
2000 ............. 80 7.93 114 9.70 957 9.50 284 8.98 1,435 9.33
2001 ............. 297 7.65 52 7.56 -- -- 506 9.23 855 8.58
2002 and 2003 .... 1,298 7.76 413 8.12 -- -- 402 8.96 2,113 8.06
2004 to 2008 ..... 7,977 7.66 932 8.73 906 7.60 321 8.67 10,136 7.79
2009 to 2023 ..... 34,083 7.59 7,511 8.28 -- -- 151 8.65 41,745 7.72
2024 and following 27,983 7.37 146 8.25 102 7.50 137 8.73 28,368 7.38
------- ------- ------- -------- --------
Total ..... $71,855 $10,066 $16,050 $ 3,143 $101,114
======= ======= ======= ======== ========
</TABLE>
- ----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after September 30, 1999, which have
predetermined interest rates is $58.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $26.1
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, 1998, the Association's one- to
four-family residential mortgage loans, totaled $71.9 million, or 71.1% 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, 1998, the Association had 570 loans totaling
$31.3 million with a loan-to-value ratio of greater than 80% but less than 90%
and 365 loans totaling $18.1 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
28.6% of the loans secured by one- to four-family real estate originated by the
Association during fiscal 1998 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 $1.7 million, or 2.4% 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. However, in connection with the opening of a loan production
office in Lawrence, Kansas during fiscal 1998, the Association purchased
approximately $5.0 million construction real estate loans. These loans are
secured by one- to four-family real estate located in the Lawrence market area.
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.
Construction Lending. The Association also makes construction loans to
builders and individuals for the construction of residences. There were $16.1
million of construction loans outstanding at September 30, 1998.
Although the Association has offered construction loans for years, it
recently expanded its efforts for this type of lending with the opening of its
Lawrence, Kansas production office. The majority of the construction loans were
originated at the Lawrence, Kansas loan production office. This office is
staffed with an originator and two processors, each of whom has substantial
experience in construction lending. Construction loans are made to both builders
and individuals and generally have terms of nine months of less and interest
rates tied to the prime rate plus a margin. Once the loan rate is determined,
however, it remains fixed for the term of the loan. The borrower pays interest
only during the construction period. Residential construction loans are
generally underwritten pursuant to the same guidelines used for originating
permanent residential loans, and are approved at the Association's headquarters
in Independence. The amount loaned to any one builder is subject to pre-approved
guidance lines with the maximum amount not to exceed the Association's
loans-to-one-borrower limit.
Construction loans are generally considered to involve a greater degree of
risk than permanent one-to four- family residential mortgage loans. Risk of loss
on a construction loan depends largely upon the concurrence of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) of construction, as well as the availability of
permanent take-out financing. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of
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<PAGE>
value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project which, when completed, has a value which is
insufficient to ensure full repayment. Because of these 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, 1998, the Association had $10.1 million in
non-residential/ multi-family real estate loans, representing 10.0% of the
Association's loan portfolio.
Approximately 10.3% 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, 1998.
<TABLE>
<CAPTION>
Number Outstanding Amount
of Principal Non-Performing
Loans Balance or of Concern
------- ------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family .......................................................... 5 $ 1,001 $ --
Small business facilities and office buildings ........................ 43 3,413 21
Health care facility .................................................. 12 2,112 --
Churches .............................................................. 3 174 --
Warehouse/mini-storage ................................................ 3 313 --
Hotel/motel ........................................................... 3 1,233 --
Land .................................................................. 33 1,820 --
------- ------- -------
Total multi-family residential and non-residential real
estate loans .................................................. 102 $10,066 $ 21
======= ======= =======
</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.
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<PAGE>
Appraisals on properties securing non-residential and multi-family real
estate property loans originated by the Association are performed by an
independent appraiser designated by the Association at the time the loan is
made. All appraisals on multi-family and non-residential real estate loans are
reviewed by the Association's management. In addition, the Association's
underwriting procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships, references and
income projections for the property. Personal guarantees are generally obtained
for all or a portion of the Association's multi-family/non-residential real
estate loans. While the Association continues to monitor
multi-family/non-residential real estate loans on a regular basis after
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, 1998, 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
residential care facility located in Caney, Kansas and had an outstanding
balance at September 30, 1998 of $840,000. The other loans in excess of $500,000
at September 30, 1998, included a loan to one borrower totaling $680,000 secured
by a hotel located in Columbia, Missouri; a loan with an outstanding balance of
$592,000 secured by an apartment building located in Rogers, Arkansas; and a
loan with an outstanding balance of $531,000 secured by a guest home located in
Caney, Kansas. All of these loans were current at September 30, 1998. 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, 1998, the Association's consumer loan portfolio
totaled $3.1 million, or 3.1% 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
34.1% 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 100% 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, 1998, $50,000, or approximately 1.6% 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, 1998, approximately $3.4 million of
First Federal's loan portfolio was serviced by others. During the year ended
September 30, 1998, the Association purchased loans totaling $5.0 million
secured by construction 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 $1.7 million in loans serviced for others as of
September 30, 1998.
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,
-----------------------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type
Adjustable-rate:
Real estate - one- to four-family ......................... $ 5,984 $ 6,437 $ 4,465
- non-residential ........................... 250 633 614
Consumer - home equity .................................... 117 673 314
-------- -------- --------
Total adjustable-rate .............................. 6,351 7,743 5,393
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family ......................... 14,968 10,167 14,879
- non-residential ......................... 3,028 1,492 320
Construction .............................................. 23,621 -- --
Consumer - non-residential ................................ 2,294 1,965 1,429
-------- -------- --------
Total fixed-rate ................................... 43,911 13,624 16,628
-------- -------- --------
Total loans originated ............................. 50,262 21,367 22,021
-------- -------- --------
Purchases
Real estate - non-residential ............................. -- 546 --
Construction .............................................. 4,984 -- --
Mortgage-backed securities (excluding
REMICs and CMOs) ........................................ -- -- 4,660
-------- -------- --------
Total purchased .................................... 4,984 546 4,660
-------- -------- --------
Sales and Repayments
Mortgage-backed securities ................................ 6,164 4,412 5,237
Principal repayments(1) ................................... 30,231 15,512 13,956
-------- -------- --------
Total reductions .................................... 36,395 19,924 19,193
Increase (decrease) in other items, net(2) ................ (5,979) 375 (730)
-------- -------- --------
Net increase (decrease) ............................ $ 12,872 $ 2,364 $ 6,758
======== ======== ========
</TABLE>
- ----------
(1) Includes transfers to real estate acquired through foreclosure.
(2) Consists of loans in process, net deferred origination costs, unamortized
discounts and allowance for loan losses.
Asset Quality
When a borrower fails to make a required payment on a loan, the Association
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of loans secured by real estate, a computer generated late notice is sent
15 days after the due date. If the delinquency is not cured between the 30th and
60th day, a personal letter is sent to the borrower and if the delinquency is
not cured by the 75th day, contact with the borrower is made by phone.
Additional written and verbal contacts are made
13
<PAGE>
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, 1998, 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 ..... 11 $ 421 0.41% 18 $ 907 0.90% 29 $1,328 1.31%
Non-residential ......... -- -- -- 1 21 0.02 1 21 0.02
Construction .............. 3 223 0.22 1 62 0.06 4 285 0.28
Consumer .................. 1 10 0.01 6 40 0.04 7 50 0.05
------ ------ ---- ------ ------ ---- ------ ------ ----
Total ................ 15 $ 654 0.64% 26 $1,030 1.02% 41 $1,684 1.66%
====== ====== ==== ====== ====== ==== ====== ====== ====
</TABLE>
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>
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 becomes
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,
--------------------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family .............................. $ 217 $ 919 $ 148
Non-residential real estate ...................... 21 98 99
Construction ..................................... 62 -- 94
Consumer ......................................... 35 32 26
------ ------ ------
Total non-accruing loans ...................... 335 1,049 367
------ ------ ------
Accruing loans delinquent 90 days or more:
One- to four-family ............................. 690 292 183
Construction .................................... 223 -- --
Consumer ........................................ 5 -- --
------ ------ ------
Total accruing loans delinquent 90 days or more 918 292 183
------ ------ ------
Troubled debt restructurings:
One- to four-family ............................. -- 50 52
------ ------ ------
Total non-performing loans .................... 1,253 1,391 602
------ ------ ------
Real estate acquired through foreclosure:
One- to four-family .............................. 72 12 12
------ ------ ------
Total non-performing assets ........................ $1,325 $1,403 $ 614
====== ====== ======
Total as a percentage of total assets .............. 1.07% 1.25% 0.57%
====== ====== ======
</TABLE>
For the year ended September 30, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $14,871. The amount included in interest income
on such loans was $15,720 for the year ended September 30, 1998.
Included in non-accruing loans at September 30, 1998, were nine loans
totaling $279,000 secured by one- to four-family real estate, one loan totaling
$21,000 secured by non-residential real estate, and eight consumer loans
totaling $35,000. All non-accruing loans at September 30, 1998, were located in
the Association's primary market area. At September 30, 1998, accruing loans
delinquent 90 days or more included 13 loans totaling $913,000 secured by one-
to four-family real estate and one consumer loan totaling $5,000. At September
30, 1998, all of the Association's accruing loans delinquent 90 days or more
secured by real estate were located in the Association's primary market area,
except for one loan totaling $336,000 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, 1998, the
Association's real estate acquired through foreclosure consisted of two single
family residences located in the Association's market area. The properties have
a carrying value of $72,000 and are 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, 1998, are included in
the table of non-performing assets on the previous page, were as follows:
September 30,
------------------------------------
1998 1997 1996
------ ------ ------
(In Thousands)
Substandard ....................... $1,320 $1,261 $ 676
Doubtful .......................... 5 92 95
Loss .............................. -- -- --
------ ------ ------
Total classified assets ........... $1,325 $1,353 $ 771
====== ====== ======
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
17
<PAGE>
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance. Although management believes it uses
the best information available to make such determinations, future adjustments
to the allowance may be necessary, and net income could be significantly
affected if circumstances differ substantially from the assumptions used in
making the initial determinations. At September 30, 1998, the Association had an
allowance for loan losses of $656,000.
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,
------------------------------
1998 1997 1996
---- ---- -------
(Dollars In Thousands)
<S> <C> <C> <C>
Balance at beginning of period .......................... $668 $690 $ 690
Charge-offs:
One- to four-family ................................... 12 22 --
Recoveries .............................................. -- -- --
---- ---- -------
Net charge-offs ....................................... 12 22 --
---- ---- -------
Balance at end of period ................................ $656 $668 $ 690
==== ==== =======
Ratio of net charge-offs during the period
to total loans at end of period ......................... .01% 0.03% 0.00%
==== ==== =======
Allowance for loan losses to total loans at end of period .70% 0.90% 1.02%
==== ==== =======
Allowance for loan losses to non-performing
loans at end of period .................................. 52.30% 48.05% 114.62%
==== ==== =======
</TABLE>
18
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
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 ........... $286 71.06% $391 84.30% $357 82.29%
Multi-family .................. -- .99 -- 1.53 -- 1.97
Non-residential ............... 103 8.97 92 9.83 87 10.36
Construction .................. 214 15.87 -- 1.00 11 2.63
Consumer ........................ 20 3.11 35 3.34 30 2.75
Unallocated ..................... 33 -- 150 -- 205 --
---- ------ ---- ------ ---- ------
Total ....................... $656 100.00% $668 100.00% $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, 1998, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 7.0%. 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, 1998, investment securities totaled
$8.4 million, or 6.8% of total assets. As of such date, the Association also had
a $1.6 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, 1998, the average term to maturity or repricing
of the investment portfolio was 3.3 years.
19
<PAGE>
The following table sets forth the composition of the Company's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
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 .............................. $5,000 50.04% $3,000 34.56% $2,000 23.60%
Securities available for sale:
U.S. Government securities .............................. -- -- 999 11.51 1,993 23.52
Federal agency obligations .............................. 3,065 30.68 2,985 34.39 2,934 34.62
Other marketable equity securities(1) ................... 353 3.53 327 3.77 308 3.63
------ ------ ------ ------ ------ ------
Total securities available for sale .................. 3,418 34.21 4,311 49.67 5,235 61.77
------ ------ ------ ------ ------ ------
FHLB stock .............................................. 1,574 15.75 1,369 15.77 1,240 14.63
------ ------ ------ ------ ------ ------
Total securities and FHLB stock ...................... $9,992 100.00% $8,680 100.00% $8,475 100.00%
====== ====== ====== ====== ====== ======
Average remaining life or term to repricing of securities
(excluding FHLB stock and other marketable
equity securities) ...................................... 3.51 yrs. 4.61 yrs. 5.04 yrs.
Other Interest-Earning Assets:
Short-term money market investments ..................... $ 439 100.00% $2,190 100.00% $1,010 100.00%
====== ====== ====== ====== ====== ======
Average remaining life or term to repricing of
securities and other interest-earning assets
(excluding FHLB stock and other marketable
equity securities) ........................................ 3.33 yrs. 3.51 yrs. 4.40 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, 1998
-----------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Total Investment
1 Year Years Years Securities
-------------- -------------- -------------- ---------------------------
Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value
-------------- -------------- -------------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Held to Maturity:
Federal agency obligations .......... $ -- $5,000 $ -- $5,000 $5,005
-------- ------ -------- ------ ------
Weighted average yield ........... --% 6.30% --% 6.30%
======== ====== -------- ======
Available for Sale:
Federal agency obligations .......... $ 994 $1,993 $ -- $2,987 $3,066
Other marketable equity securities(1) 347 -- -- 347 352
-------- ------ -------- ------ ------
Total investment securities ...... $ 1,341 $1,993 $ -- $3,334 $3,418
======== ====== ======== ====== ======
Weighted average yield ........... 5.50% 5.86% --% 5.71%
======== ====== ======== ======
</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, 1998, 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, 1998, 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 $3.3 million and $3.4 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, 1998, the Association's
mortgage-backed securities totaled $17.3 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, 1998, $10.4 million, or 60.4%, 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, 1998.
<TABLE>
<CAPTION>
September 30,
Due in 1998
---------------------------------------------------------------------------------- -------
6 months 6 months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Book
or Less to 1 Year 3 Years Years Years Years Years 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 ................. $ -- $ -- $ -- $ -- $ -- $ 131 $ 4,993 $ 5,124
Federal National Mortgage
Association ................. -- -- -- -- -- 1,462 3,853 5,315
-------- -------- -------- -------- ------- ------- ------- -------
Total adjustable-rate ....... -- -- -- -- -- 1,593 8,846 10,439
-------- -------- -------- -------- ------- ------- ------- -------
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation ................... -- -- -- -- 2,806 1,283 -- 4,089
Federal National Mortgage
Association ................... -- -- -- -- 1,806 901 -- 2,707
Government National Mortgage
Association ................... -- -- -- -- -- -- 39 39
-------- -------- -------- -------- ------- ------- ------- -------
Total fixed-rate ............... -- -- -- -- 4,612 2,184 39 6,835
-------- -------- -------- -------- ------- ------- ------- -------
Total mortgage-backed
securities held to maturity .. $ -- $ -- $ -- $ -- $ 4,612 $ 3,777 $ 8,885 $17,274
======== ======== ======== ======== ======= ======= ======= =======
</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 $30.1 million in FHLB advances outstanding at September 30,
1998.
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.
% of Total
At September 30, 1998 Certificates
--------------------- ---------------
(Dollars in Thousands)
Four-Year Certificate.......... $1,279 2.46%
Five-Year Certificate.......... 6,297 12.12
23
<PAGE>
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,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
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%) ................. $ 2,745 3.40% $ 2,703 3.54% $ 2,649 3.82%
NOW Accounts (2.00-2.50%) ............... 3,939 4.88 3,763 4.93 3,232 4.66
Money Market Accounts (2.50-5.25%) ...... 21,952 27.22 20,702 27.13 15,553 22.40
------- ------ ------- ------ ------- ------
Total Transactions and Savings Deposits 28,636 35.50 27,168 35.60 21,434 30.88
------- ------ ------- ------ ------- ------
Certificates:
0.00 - 3.99% ............................ 3 .01 5 0.01 9 0.01
4.00 - 4.99% ............................ 1,792 2.22 2,189 2.87 4,216 6.07
5.00 - 5.99% ............................ 45,364 56.24 39,911 52.30 30,296 43.64
6.00 - 6.99% ............................ 4,751 5.89 6,930 9.08 13,367 19.25
7.00% and over .......................... 27 .03 26 0.03 34 0.05
------- ------ ------- ------ ------- ------
Total Certificates ....................... 51,937 64.39 49,061 64.29 47,922 69.02
------- ------ ------- ------ ------- ------
Accrued Interest ......................... 85 .11 82 0.11 70 0.10
------- ------ ------- ------ ------- ------
Total Deposits ........................... $80,658 100.00% $76,311 100.00% $69,426 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
24
<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.
Year Ended September 30,
-----------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars In Thousands)
Opening balance ....... $ 76,229 $ 69,356 $ 67,927
Deposits .............. 101,678 86,304 65,771
Withdrawals ........... (100,512) (82,247) (67,067)
Interest credited ..... 3,178 2,816 2,725
--------- --------- ---------
Ending balance ........ $ 80,573 $ 76,229 $ 69,356
========= ========= =========
Net increase .......... $ 4,344 $ 6,873 $ 1,429
========= ========= =========
Percent increase ...... 5.70% 9.91% 2.10%
========= ========= =========
The following table shows rate and maturity information for the
Association's certificates of deposit as of September 30, 1998.
<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, 1998 ........... $ 3 $ 1,033 $ 6,361 $ 187 -- $ 7,584 14.60%
March 31, 1999 .............. -- 759 9,322 37 -- 10,118 19.48
June 30, 1999 ............... -- -- 8,248 67 -- 8,315 16.01
September 30, 1999 .......... -- -- 12,538 680 -- 13,218 25.45
December 31, 1999 ........... -- -- 2,469 427 -- 2,896 5.58
March 31, 2000 .............. -- -- 2,223 739 $ 27 2,989 5.76
June 30, 2000 ............... -- -- 760 156 -- 916 1.76
September 30, 2000 .......... -- -- 677 198 -- 875 1.68
December 31, 2000 ........... -- -- 777 580 -- 1,357 2.61
March 31, 2001 .............. -- -- 833 -- -- 833 1.60
June 30, 2001 ............... -- -- 110 75 -- 185 0.36
September 30, 2001 .......... -- -- 7 422 -- 429 0.83
December 31, 2001 ........... -- -- 85 682 -- 767 1.48
Thereafter .................. -- 954 501 -- 1,455 2.80
------- ------- ------- ------- ------- ------- ------
TOTAL ..................... $ 3 $ 1,792 $45,364 $ 4,751 $ 27 $51,937 100.00%
======= ======= ======= ======= ======= ======= ======
Percent of Total ............ 0.01% 3.45% 87.34% 9.15% 0.05%
======= ======= ======= ======= ======
</TABLE>
25
<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, 1998.
<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 ......... $ 6,637 $ 8,776 $20,253 $11,650 $47,316
Certificates of deposit of $100,00 or more ......... 246 514 821 1,052 2,633
Public funds(1) .................................... 701 828 459 -- 1,988
------- ------- ------- ------- -------
Total certificates of deposit ...................... $ 7,584 $10,118 $21,533 $12,702 $51,937
======= ======= ======= ======= =======
</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, 1998, the Association had $30.1 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.
At and for the Year Ended September 30,
-----------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Maximum Balance:
FHLB advances .............. $30,100 $25,000 $24,400
Average Balance:
FHLB advances .............. $26,492 $23,583 $19,133
The following table sets forth certain information as to the Association's
FHLB advances at the dates indicated.
September 30,
-------------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
FHLB advances ............ $30,100 $23,700 $24,300
Weighted average interest
rate of FHLB advances .... 5.684% 5.930% 5.682%
26
<PAGE>
Regulation
General. First Federal is a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, First Federal is
subject to broad federal regulation and oversight extending to all its
operations. First Federal is a member of the FHLB of Topeka and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
First Federal, the Company also is subject to federal regulation and oversight.
The purpose of the regulation of the Company and other holding companies is to
protect subsidiary savings associations. First Federal is a member of the
Savings Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund ("BIF") are the two deposit insurance funds administered by the
FDIC, and the deposits of First Federal are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over First Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority
over the operations of savings associations. As part of this authority, First
Federal is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS and the FDIC. The last regular OTS and FDIC
examinations of First Federal were commenced as of July 1998 and October 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, 1998, was $35,577.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998, First Federal's lending limit under this restriction was
approximately $1.6 million. At September 30, 1998, 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
27
<PAGE>
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.
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, 1998, 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
28
<PAGE>
subsidiaries are deducted from assets and capital. At September 30, 1998, the
Association had no subsidiaries.
At September 30, 1998, First Federal had tangible capital of $10.5 million,
or 8.54% of adjusted total assets, which is approximately $8.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1998,
First Federal had no intangibles which were subject to these tests.
At September 30, 1998, First Federal had core capital equal to $10.5
million, or 8.54% of adjusted total assets, which is $6.8 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, 1998, First Federal
had no capital instruments that qualify as supplementary capital and $656,000 of
general loss reserves, none of which was 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, 1998.
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
29
<PAGE>
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, 1998, First Federal had total risk-based capital of $11.2
million (including $10.5 million in core capital and $656,000 in qualifying
supplementary capital) and risk-weighted assets of $62.6 million; or total
capital of 17.82% of risk-weighted assets. This amount was $6.1 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
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.
30
<PAGE>
Generally, savings associations, such as First Federal, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Company may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
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 4%. At September 30, 1998, First Federal was in compliance
with this requirement, with a liquid asset ratio of 7.0%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and reemphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with generally
accepted accounting principles ("GAAP"). Under the policy statement, management
must support its classification of and accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
documentation. First Federal is in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by
the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
31
<PAGE>
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. At September 30, 1998,
First Federal met the test and has always met the test since its effectiveness.
At September 30, 1998, First Federal's QTL percentage was 92.4%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new 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 March 1998 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
32
<PAGE>
impose restrictions on loans to such persons and their related interests. Among
other things, such loans must be made on terms substantially the same as for
loans to unaffiliated individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would 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, 1998, 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.
33
<PAGE>
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, 1998, First Federal had $1.6 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 6.67% and were 7.66% for fiscal year
1998.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the fiscal year ended September 30, 1998, dividends paid by the FHLB of
Topeka to First Federal totaled $109,591, which constitute a $20,410 increase
over the amount of dividends received in fiscal year 1997.
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
34
<PAGE>
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equaled 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, 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, 1998, 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 1995 through 1997. 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.
35
<PAGE>
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 for tax years commencing prior to January 1, 1998. For years commencing
on or after January 1, 1998 the Kansas privilege tax is computed on the basis of
2.5% 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 1995 through 1997. 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.
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 15%.
Executive Officers of the Company
The following table sets forth certain information with respect to each of
the executive officers of the Company.
NAME AGE(1) POSITION(S) HELD
---- ------ ----------------
Larry G. Spencer 50 President and Chief Executive Officer
Gary L. Overfield 46 Senior Vice President and Secretary
James B. Mitchell 43 Vice President and Chief Financial Officer
- ----------
(1) At September 30, 1998.
36
<PAGE>
Executive Officers of the Association
The following table sets forth certain information with respect to each of
the executive officers of the Association.
NAME AGE(1) POSITION(S) HELD
---- ------ ----------------
Larry G. Spencer 50 President and Chief Executive Officer
and Director
Gary L. Overfield 46 Senior Vice President, and Secretary
and Chief Loan Officer
Jim L. Clubine 45 Vice President and Asset Manager
James B. Mitchell 43 Vice President and Chief Financial Officer
- ----------
(1) At September 30, 1998.
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, Community
Chest and Junior Achievement. He is presently a member of the board of 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.
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. He was a previous Chairman of the March of Dimes and
former board member for Chamber of Commerce, Community Chest and Junior
Achievement. 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. He is presently a member
of the board of Junior Achievement. Mr. Mitchell has an accounting degree from
Pittsburg State University.
37
<PAGE>
Employees
At September 30, 1998, the Association had a total of 27 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, 1998, was
$1,300,400. Subsequent to the Merger/Conversion with The Neodesha Savings and
Loan Association, FSA, the Company will own a branch office located at 801 Main
Street, Neodesha, Kansas.
First Federal established a loan production office in Lawrence, Kansas
effective October 15, 1997. The office primarily originates construction loans
in Lawrence and the surrounding area. Loan approvals are 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, 1998, was approximately $122,760.
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, 1998.
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,
1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 34 and the inside back cover of the attached 1998 Annual Report to
Stockholders is herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 14 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
38
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1998, 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................. 15
Consolidated Balance Sheets (September 30, 1998 and 1997).......... 16
Consolidated Statements of Earnings (For the Years Ended
September 30, 1998 and 1997)....................................... 17
Consolidated Statements of Stockholders' Equity (For the
Years Ended September 30, 1998 and 1997)........................... 18
Consolidated Statements of Cash Flows (For the Years Ended
September 30, 1998 and 1997)....................................... 19
Notes to Consolidated Financial Statements......................... 20 to 33
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, 1998 is not deemed filed as part of this Annual Report on Form
10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning Directors of the Company is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of fiscal year.
Executive Officers
Information regarding the business experience of the executive officers of
the Company and the Association contained in Part I of this Form 10-KSB is
incorporated herein by reference.
39
<PAGE>
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, 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 1999, 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 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
40
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Number
Regulation S-B Attached
Exhibit Number Document Hereto
- -------------- -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation, or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements
(a) 1994 Stock Option and Incentive Plan **
(b) Recognition and Retention Plan *
(c) Employment Agreements *
11 Statement re: computation of per share earnings ***
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter on change in certifying accountants None
18 Letter on change in accounting principles None
21 Subsidiaries of the Registrant 21
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
</TABLE>
- ----------
* Filed as exhibits to the Company's Form S-1 registration statement filed on
June 22, 1994 (File No. 33-64812) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB filed on
December 29, 1994 (File No. 0-22184) pursuant to the Securities Exchange
Act of 1934.
*** See Note 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, 1998, the Company did not file any
Current Reports on Form 8-K.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST INDEPENDENCE CORPORATION
Date: December 29, 1998 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>
<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, 1998 Date: December 29, 1998
/s/ Donald E. Aitken /s/ William T. NewKirk II
- ---------------------------------------------- --------------------------------------------
Donald E. Aitken, Chairman of the Board William T. NewKirk II, Director
Date: December 29, 1998 Date: December 29, 1998
/s/ Harold L. Swearingen /s/ John T. Updegraff
- ---------------------------------------------- --------------------------------------------
Harold L. Swearingen, Director John T. Updegraff, Director
Date: December 29, 1998 Date: December 29, 1998
/s/ Lavern W. Strecker /s/ Joseph M. Smith
- ---------------------------------------------- --------------------------------------------
Lavern W. Strecker, Director Joseph M. Smith, Director
Date: December 29, 1998 Date: December 29, 1998
</TABLE>
42
<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
43
Exhibit 13
Annual Report to Security Holders
<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. Operating expenses
consist primarily of employee compensation and benefits, occupancy and equipment
expenses, federal deposit insurance premiums and other general and
administrative expenses.
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. The primary
sources of funds for lending activities include deposits, loan repayments,
borrowings, sales and maturities of securities available for sale and funds
provided from operations.
On February 18, 1998, the Boards of Directors of the Company, the
Association and The Neodesha Savings and Loan Association, FSA, respectively,
adopted a Plan of Merger Conversion. Pursuant to the Plan, Neodesha will combine
with the Association through the conversion of Neodesha from a mutual savings
and loan association to a stock savings and loan association and the
simultaneous merger of Neodesha into the Association. The Merger Conversion is
subject to certain conditions, including the prior approval of the Plan of
Merger Conversion by certain of Neodesha's members at a Special Meeting to be
held on December 22, 1998. The transaction is scheduled to close during January
1999. See Note N of the Notes to Consolidated Financial Statements.
Forward-Looking Statements
Certain statements in this report that relate to the Company'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 the Company's business and prospects is contained in the Company's
periodic filings with the Securities and Exchange Commission.
Asset/Liability Management and Market Risk
Qualitative Aspects of Market Risk. The Company derives its income
primarily from the excess of interest collected over interest paid. The rates of
interest the Company earns on assets and pays on liabilities generally are
established contractually for a period of time. Market interest rates change
over time. Accordingly, the Company's results of operations, like those of many
financial institutions, are impacted by changes in interest rates and the
Company's ability to adapt to changes in interest rates is known as interest
rate risk and is the Company's most significant market risk.
Quantitative Aspects of Market Risk. In an attempt to manage our exposure
to changes in interest rates and comply with applicable regulations, the Company
monitors its interest rate risk. In monitoring interest rate risk, the Company
continually analyzes and manages assets and liabilities based on their payment
streams and interest rates, the timing of their maturities, and their
sensitivity to actual or potential changes in market interest rates.
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.
4
<PAGE>
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, 1998, approximately $24.3 million,
or 24.0% of the Company's total loans secured by real estate, were ARMs. On the
same date, the Company also had $10.4 million in adjustable-rate mortgage-backed
securities.
The Company's ARMs and adjustable-rate mortgage-backed securities adjust to
various indices. The Company monitors the mix of indices on its adjustable rate
assets and seeks, consistent with market conditions, to achieve a close match in
the repricing characteristics of its assets and liabilities.
To increase the interest rate sensitivity of its assets, the Company has
also maintained a relatively high level of short and intermediate-term
investment securities and other assets. At September 30, 1998, the Company had
$2.8 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 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, 1998, the Company had
approximately $7.6 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, 1998, 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 OTS. Assumptions used in
calculating the amounts in this table were determined by the OTS (dollars in
thousands):
Net Portfolio Value
Change in At September 30, 1998
interest rate Board Limit -----------------------------------
(Basis Points) % Change $ Amount $ Change % Change
----------------- ----------- -------- -------- --------
+200 -40% $ 9,861 $(3,213) -25%
+100 -25 11,769 (1,305) -10
0 -- 13,074 -- --
-100 -25 13,780 706 +5
-200 -40 14,569 1,495 +11
As illustrated in the table, management has structured its assets and
liabilities to minimize its exposure to interest rate risk. In the event of a
200 basis point change in interest rates, the Association would experience an
11% increase in NPV in a declining rate environment and a 25% decrease in a
rising rate environment. During periods of rising interest rates, the value of
monetary assets and liabilities generally decline. Conversely, during periods of
falling interest rates, the value of monetary assets and liabilities generally
increase. However, the amount of change in value of specific assets and
liabilities due to changes in interest rates is not the same in a rising
interest rate environment as in a falling interest rate environment (i.e., as
indicated above, the amount of value increase under a specific rate decline may
not equal the amount of value decrease under an identical upward rate movement).
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARMs, have features which
restrict changes in
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
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
The ratio of non-performing assets to total assets is one indicator of the
Company's exposure to credit risk. Non-performing assets of the Company consist
of non-accruing loans, accruing loans delinquent 90 days or more, troubled debt
restructurings, and foreclosed assets, which have been acquired as a result of
foreclosure or deed-in-lieu of foreclosure. At September 30, 1998,
non-performing assets were approximately $1,325,000, which represents a decrease
of $78,000, or 5.6% as compared to September 30, 1997. The ratio of
non-performing assets to total assets at September 30, 1998 was 1.07% compared
to 1.25% at September 30, 1997. Included in non-accruing loans at September 30,
1998 were nine loans totaling $279,000 secured by one- to four-family real
estate, one loan totaling $21,000 secured by non-residential real estate and
eight consumer loans totaling $35,000. All non-accruing loans at September 30,
1998, were located in the Company's primary market area. At September 30, 1998,
accruing loans delinquent 90 days or more included thirteen loans totaling
$913,000 secured by one- to four-family real estate and one consumer loan
totaling $5,000. At September 30, 1998, all of the Company's accruing loans
delinquent 90 days or more were secured by real estate located in the Company's
primary market area except for one loan totaling $336,000, secured by a single
family residence located in Texas. At September 30, 1998, the Company's real
estate acquired through foreclosure consisted of two single family residences
located in the Company's market area. The properties have a carrying value of
$72,000 and are currently offered for sale.
[GRAPH]
[THE FOLLOWING TABLE IS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
NON-PERFORMING ASSETS TO TOTAL ASSETS
1994 1.27%
1995 0.77%
1996 0.57%
1997 1.25%
1998 1.07%
Management has taken into account its non-performing assets and the
composition of the loan portfolio in establishing its allowance for loan losses.
The allowance for loan losses totaled $656,000 at September 30, 1998, which
represented a $12,000 decrease from the allowance for loan losses at September
30, 1997. The ratio of the allowance for loan losses as a percent of total loans
decreased from .90% at September 30, 1997 to .70% at September 30, 1998,
primarily due to the increase in total loans receivable at September 30, 1998.
The allowance for loan losses as a percent of non-performing loans increased
from 48.05% at September 30, 1997 to 52.3% at September 30, 1998, due to the
decrease in non-performing loans at September 30, 1998. At September 30, 1998,
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.
6
<PAGE>
- --------------------------------------------------------------------------------
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. The use of monthly averages rather than daily averages does
not have a significant effect upon the Company's results. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 85,966 $ 7,032 8.18% $ 71,188 $ 5,684 7.98% $ 63,152 $ 5,190 8.22%
Mortgage-backed securities 20,596 1,354 6.57 26,137 1,727 6.61 29,510 1,930 6.54
Investment securities 7,315 462 6.32 7,598 513 6.75 7,233 479 6.62
FHLB stock 1,443 110 7.60 1,314 89 6.79 1,103 70 6.38
Federal funds sold 1,679 90 5.37 567 34 6.02 1,434 79 5.53
Other 435 27 6.23 318 22 6.83 445 25 5.64
-------- -------- -------- -------- -------- --------
Total interest-earning
assets 117,434 9,075 7.72 107,122 8,069 7.53 102,877 7,773 7.56
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand and NOW deposits 26,079 1,083 4.15 22,019 914 4.15 18,765 762 4.06
Savings deposits and
certificates 54,209 2,928 5.40 51,219 2,745 5.36 51,950 2,820 5.43
FHLB advances 26,492 1,545 5.83 23,583 1,400 5.93 19,133 1,087 5.68
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 106,780 5,556 5.20 96,821 5,059 5.22 89,848 4,669 5.20
-------- -------- -------- -------- -------- --------
Net interest income $ 3,519 $ 3,010 $ 3,104
======== ======== ========
Net interest rate spread 2.52% 2.31% 2.36%
======== ======== ==========
Net earning assets $ 10,654 $ 10,301 $ 13,029
======== ======== ========
Net yield on average interest-
earning assets 2.99% 2.81% 3.02%
======== ======== ==========
Average interest-earning assets
to average interest-bearing
liabilities 109.98% 110.64% 114.50%
======== ======== ========
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
7
<PAGE>
Management's Disussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
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,
----------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------- --------------------------------
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 $ 1,206 $ 142 $ 1,348 $ 645 $ (151) $ 494
Mortgage-backed securities (363) (10) (373) (223) 20 (203)
Investment securities (19) (32) (51) 24 10 34
FHLB stock 9 12 21 14 5 19
Federal funds sold 60 (4) 56 (52) 7 (45)
Other 7 (2) 5 (8) 5 (3)
------- ------- ------- ------- ------- -------
Total interest-earning assets 900 106 1,006 400 (104) 296
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Demand and NOW deposits 169 -- 169 135 17 152
Savings deposits and certificates 162 21 183 (39) (36) (75)
FHLB advances 169 (24) 145 262 51 313
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 500 $ (3) 497 $ 358 $ 32 390
======= ======= ======= ======= ======= =======
Net interest income $ 509 $ (94)
======= =======
</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.
At September 30,
---------------------
1998 1997 1996
----- ----- -----
Weighted average yield on:
Loans receivable 7.80% 7.74% 7.78%
Mortgage-backed securities 6.34 6.66 6.53
Investment securities 6.38 6.97 6.68
Federal funds sold 5.36 5.28 5.48
Other interest-earning assets 5.51 5.22 4.93
Combined weighted average yield on interest-earning
assets 7.48 7.40 7.34
Weighted average rate paid on:
Savings deposits and certificates 5.44 5.38 5.38
Demand and NOW deposits 4.04 4.06 4.03
FHLB advances 5.74 6.11 5.65
Combined weighted average rate paid on interest-
bearing liabilities 5.19 5.21 5.17
Spread 2.29 2.19 2.17
8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
The Company's total assets increased $11.8 million, or 10.5%, from $112.5
million at September 30, 1997 to $124.3 million at September 30, 1998. This
increase was primarily due to increases in net loans receivable of $19.1
million, investment securities of $1.1 million, Federal Home Loan Bank stock of
$200,000 and other assets of $200,000. These increases in assets were funded by
increases in advances from the Federal Home Loan Bank of Topeka of $6.4 million,
savings deposits of $4.4 million, and decreases in mortgage-backed securities of
$6.7 million and cash and cash equivalents of $2.3 million.
[THE FOLLOWING TABLE IS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
TOTAL ASSETS
(In thousands)
1994 $ 94,593
1995 $101,904
1996 $108,539
1997 $112,523
1998 $124,337
Total loans receivable increased $19.1 million from $74.6 million at
September 30, 1997, to $93.7 million at September 30, 1998. The increase was
primarily due to construction loan originations at the Company's new loan
production office in Lawrence, Kansas. These construction loans generally have
terms of nine months or less and interest rates tied to the prime rate plus a
margin. The increase in construction loans also contributed to an increase in
loans in process due to the disbursement of funds throughout the construction
period. To a lesser extent, the increase was due to originations in the
Company's market area consisting primarily of 15- and 30-year fixed-rate loans,
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
of the loan term, and to a lesser extent, one-year adjustable rate mortgages.
[THE FOLLOWING TABLE IS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Multi-family .99%
Non-residential 8.9%
Construction 15.87%
Home Equity .83%
Other Consumer 2.28%
1-4 Family 71.06%
Total deposits increased $4.4 million from $76.2 million at September 30,
1997, to $80.6 million at September 30, 1998. Deposits increased primarily as a
result of public units depositing short-term funds into the "Platinum" money
fund account and new accounts opened at the Coffeyville, Kansas branch office.
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 "Platinum" money fund provides a lower risk, insured alternative for
deposit customers considering higher risk investments in order to get higher
yields than money market accounts.
Total borrowed funds increased $6.4 million from $23.7 million at September
30, 1997 to $30.1 million at September 30, 1998. The increase was from advances
obtained from the Federal Home Loan Bank of Topeka. The FHLB advances allowed
the Association to invest the funds borrowed in loans receivable at a positive
spread.
Total stockholders' equity increased $570,000 from $11.5 million at
September 30, 1997 to $12.1 million at September 30, 1998. The increase was
primarily due to the Company's net earnings from operations of $901,000, fair
value adjustment of $125,000 on ESOP shares committed for release, the repayment
of employee stock ownership debt of $73,000, the amortization of unearned stock
compensation of $44,000, unrealized gains on securities available for sale of
$37,000, and common stock options exercised of $31,000. These increases were
partially offset by the Company's use of $377,000 to repurchase 25,298 shares of
common stock and dividends of $265,000 paid to stockholders.
[THE FOLLOWING TABLE IS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
STOCKHOLDERS' EQUITY TO TOTAL ASSETS
1994 14.11%
1995 13.35%
1996 11.98%
1997 10.25%
1998 9.73%
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results fo
Operations
- --------------------------------------------------------------------------------
Comparison of Fiscal Years Ended September 30, 1998 and September 30, 1997
General. Net earnings for the fiscal year ended September 30, 1998 were
$901,000 as compared to $712,000 for the fiscal year ended September 30, 1997,
an increase of $189,000, or 26.7%. The increase in net earnings was primarily
due to increases in net interest income of $509,000 and non-interest income of
$33,000. These increases were partially offset by increases in income tax
expense of $181,000 and non-interest expense of $171,000.
[THE FOLLOWING TABLE IS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
NET EARNINGS
(In thousands)
1994 $1,448
1995 $1,087
1996 $ 815
1997 $ 712
1998 $ 901
Net Interest Income. Net interest income increased $509,000, or 16.9%, for
the fiscal year ended September 30, 1998 as compared to the fiscal year ended
September 30, 1997. This increase was due primarily to an increase in interest
income of $1.0 million, or 12.5%; offset partially by an increase in interest
expense of $497,000, or 9.8%. Interest income increased primarily due to a $10.3
million increase in the average balance of interest-earning assets, and a 19
basis point increase in the average yield on interest-earning assets. The
average yield on interest-earning assets increased primarily due to construction
loan originations at the Lawrence loan production office. These construction
loans generally have terms of nine months or less and carry higher rates of
interest than loans originated for the purchase of single-family residences.
Interest expense increased primarily due to a $10.0 million increase in the
average balance of interest-bearing liabilities, offset partially by a 2 basis
point decrease in the average rate paid on interest-bearing liabilities. The
average rate paid on interest-bearing liabilities decreased primarily due to a
$4.1 million increase in the average balance of low cost demand and NOW deposits
(resulting in a larger percentage of interest-bearing liabilities) and, to a
lesser extent, a decrease in interest rates on Federal Home Loan Bank of Topeka
advances.
Interest Income. Interest income for the fiscal year ended September 30,
1998, increased to $9.1 million from $8.1 million for the fiscal year ended
September 30, 1997. This increase was caused primarily by a $10.3 million
increase in the average outstanding balance of interest-earning assets during
the fiscal year ended September 30, 1998, as compared to the fiscal year ended
September 30, 1997; due to the increase in the average balance of loans. To a
lesser extent, the increase in interest income was due to an increase in the
average yield on interest-earning assets. The average yield on interest-earning
assets increased 19 basis points to 7.72% for the fiscal year ended September
30, 1998, from 7.53% for the fiscal year ended September 30, 1997. This increase
was caused primarily by increases in yield on the Association's Federal Home
Loan Bank stock from 6.79% to 7.60% and on its loan portfolio from 7.98% to
8.18% for the fiscal year ended September 30, 1998, as compared to the fiscal
year ended September 30, 1997. These increases were partially offset by a
decrease in the investment securities portfolio yield from 6.75% to 6.32% and
mortgage-backed securities from 6.61% to 6.57% for the fiscal year ended
September 30, 1998, as compared to the fiscal year ended September 30, 1997. The
increase in yield on the loan portfolio was primarily due to construction loan
originations at the Company's new loan production office in Lawrence, Kansas.
These construction loans generally have terms of nine months or less and
interest rates tied to the prime rate plus a margin. The decrease in yield on
investment securities was primarily due to the reinvestment of proceeds from
called securities into lower yielding investments.
Interest Expense. Interest expense for the fiscal year ended September 30,
1998, increased by $497,000 to $5.6 million as compared to $5.1 million for the
fiscal year ended September 30, 1997. This increase was primarily the result of
a $10.0 million increase in the average outstanding balance of interest-bearing
liabilities during the fiscal year ended September 30, 1998 as compared to the
fiscal year ended September 30, 1997. This increase was partially offset by a 2
basis point decrease in the average interest rate paid on interest-bearing
liabilities, caused by an increase in the average balance of low cost demand and
NOW deposits (resulting in a larger percentage of interest-bearing liabilities)
and, to a lesser extent, a decrease in interest rates on Federal Home Loan Bank
advances. The increase in interest-bearing liabilities was primarily due to a
$7.1 million increase in the average outstanding balance of deposits due
primarily to new accounts opened at the Coffeyville, Kansas branch office and
seasonal deposits from public units.
Provision for Loan Losses. There was no provision for losses on loans for
the fiscal years ended September 30, 1998 and September 30, 1997. Management
determined that additional provisions were not necessary based upon its analysis
of the established allowance and review of the composition of the loan
portfolio. The Company will continue to monitor its allowance for loan losses
and make future additions to the allowance through the provision for loan losses
as economic and regulatory conditions dictate. However, there can be no
assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determinations as to the amount of the allowance for
loan losses are subject to review by the regulatory agencies which can order the
establishment of additional general or specific allowances.
Non-interest Income. Non-interest income increased $33,000 to $192,000
during the fiscal year ended September 30, 1998 as compared to $159,000 for the
fiscal year ended September 30, 1997. The increase was primarily due to
increased checking and deposit account fees as a result of new accounts in the
Coffeyville branch. To a lesser extent, the increase was due to increased fees
associated with mortgage loans. 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.
10
<PAGE>
- --------------------------------------------------------------------------------
Non-interest Expense. Total non-interest expense increased to $2.2 million
for the fiscal year ended September 30, 1998 from $2.0 million for the fiscal
year ended September 30, 1997, an increase of $171,000, or 8.6%. The increase
was primarily due to increases in compensation and employee benefits of
$117,000, occupancy and equipment of $67,000, and data processing fees of
$46,000. These increases were primarily due to the opening of a new loan
production office in Lawrence, Kansas, resulting in additional staff, occupancy
and equipment, stationery, printing and office supplies expense. Data processing
expenses also increased due to increased account volumes at the Coffeyville
branch and processing price increases. To a lesser extent, the increase in
compensation expense was the result of normal, annual cost of living increases
in salaries and bonuses, and increased compensation expense associated with the
Company's ESOP plan due to the Company's higher stock price during a portion of
the year. These increases were partially offset by decreases in other expenses
of $43,000 and federal deposit insurance premiums of $17,000.
Income Tax Expense. Income tax expense was $649,000 for the fiscal year
ended September 30, 1998 compared to $468,000 for the fiscal year ended
September 30, 1997, an increase of $181,000. This increase was primarily due to
an increase in pre-tax earnings during the 1998 period as compared to the 1997
period. The Company's effective tax rates were 41.9% and 39.7% for the fiscal
years ended September 30, 1998 and September 30, 1997, respectively. Rates
exceed effective combined federal and state statutory rates of 38% due primarily
to compensation expense associated with the ESOP, of which a portion is not
deductible for income tax purposes.
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
fiscal year ended September 30, 1997. To a lesser extent, the decrease in net
earnings was due to decreases in net interest income of $94,000 and income from
real estate operations of $60,000. These decreases to net earnings were
partially offset by decreases in non-interest expenses of $278,000 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.
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.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Non-interest Income. Non-interest income decreased $306,000 to $159,000
during the fiscal year ended September 30, 1997 as compared to $465,000 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 $1,989,000
for the fiscal year ended September 30, 1997 from $2,267,000 for the fiscal year
ended September 30, 1996, a decrease of $278,000, or 12.3%. 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, 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 $142,000, 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.
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. At September 30, 1998,
OTS regulations required First Federal to maintain an average daily balance of
investments in an amount equal to at least 4.0% 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 the 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, 1998 was 7.01%, as compared to 7.20% at
September 30, 1997. First Federal normally attempts to maintain liquidity
between 7% and 9%.
The Company's primary sources of funds consist of deposits and loan and
mortgage-backed securities repayments. Other potential sources of funds
available include borrowings from the Federal Home Loan Bank ("FHLB") of Topeka.
The Company uses its liquid resources principally to meet on-going commitments,
to fund maturing certificates of deposit and deposit withdrawals, to invest, to
fund existing and future loan commitments, to maintain liquidity, and to meet
operating expenses. Management believes that loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.
The Company's primary investing activity is the origination of mortgage
loans and the purchase of mortgage-backed and other securities. At September 30,
1998, mortgage loans and mortgage-backed securities accounted for 89.2% 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 $1.7 million at September 30, 1998. The line of
credit is scheduled to mature on February 5, 1999, 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 pledge 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, 1998, the Company had
outstanding commitments to extend credit which amounted to $2.4 million,
including commitments on construction loans. The Company is not aware of any
trends, events or uncertainties which will have or that are reasonably likely to
have a material effect on the Company's liquidity, capital resources or
operations.
Certificates of deposit scheduled to mature in one year or less at
September 30, 1998 totaled approximately $39.2 million. Management believes that
a significant portion of such deposits will remain with the Company. There can
be no assurance, however, that the Company
12
<PAGE>
- --------------------------------------------------------------------------------
can retain all such deposits. At September 30, 1998, the Company had $30.1
million in advances from the FHLB of Topeka with $8.6 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, 1998, the Association's
tangible capital, core capital, and risk-based capital of $10.5 million, $10.5
million, and $11.2 million exceeded the applicable minimum requirements by $8.7
million, $6.8 million, and $6.1 million, respectively.
The following table sets forth the Association's compliance with such
requirements at September 30, 1998.
Association capital level
OTS requirement at September 30, 1998
---------------- ---------------------------
% of % of Amount
Capital standard Assets Amount Assets Amount of Excess
------- ------- ------- ------- ---------
(Dollars in Thousands)
Tangible capital 1.50% $ 1,846 8.54% $10,505 $ 8,659
Core capital (1) 3.00 3,691 8.54 10,505 6,814
Risk-based capital 8.00 5,012 17.82 11,161 6,149
- ----------
(1) Based on current core capital requirement of 3%.
See Note L of Notes to Consolidated Financial Statements for additional
information.
Management has reviewed the restriction in FIRREA relating to loans to one
borrower, qualification as a qualified thrift lender, and other restrictions on
lending and investment, and has determined that, based on the Association's
capital position and lending and investment policies, these restrictions have
not had a material impact on the Association's operations.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars without considering changes in the relative purchasing
power of money over time because of inflation. 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.
Year 2000 Compliance Issues
The year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000.
The Board of Directors and management view the year 2000-date (Y2K) issue
as a potentially serious interruption to the conduct of our day to day
operations. To alleviate this potential interruption, the Company has
established a year 2000 Committee to assess the risk of potential problems that
might arise from the failures of computer programming to recognize the year 2000
and to develop a plan to mitigate any such risk. This committee reports to the
Board at least quarterly about the status and progress of our Y2K plan.
Our Y2K action plan covers five areas; awareness of the problem, inventory
& assessment of hardware and software for Y2K problems, renovation of necessary
systems, validation of testing plans and implementation of system changes. At
the time of this report we have completed the first three steps of the plan and
are working on the next two steps. We anticipate that we will be through the
testing phase by the first quarter of 1999 and will have implementation
completed by the middle of 1999. Our major Y2K system critical function lies
with our third party data processing service bureau, Fi-Serv. Fi-Serv is working
closely with their clients and we believe that they will be Y2K compliant before
the middle of the 1999 deadline.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
The Company is expensing all costs associated with training and software as
those costs are incurred, and such costs are being funded through operating cash
flows. Hardware cost will be capitalized and expensed under our fixed asset
guidelines. The total cost of the Y2K conversion project for the Company is
estimated to be $110,000. Expenses of approximately $65,000 were incurred and
expensed by the Company through September 30, 1998. The Company does not expect
significant increases in future data processing costs relating to Y2K
compliance. While we believe this amount will be sufficient to complete the
requirements of becoming Y2K compliant, it is an estimate. As such, we will
review our budget monthly to help ensure that we have allocated sufficient
resources to this project. Any deviations to the preliminary budget will be
reported to the Board of Directors.
During the assessment phase, the Company began to develop back-up or
contingency plans for each of its mission critical systems. Virtually all of the
Company's mission critical systems are dependent upon third party vendors or
service providers, therefore, contingency plans include selecting a new vendor
or service provider and converting to their system. In the event a current
vendor's system fails during the validation phase and it is determined that the
vendor is unable or unwilling to correct the failure, the Company will convert
to a new system from a pre-selected list of prospective vendors. In each case,
realistic trigger dates have been established to allow for orderly and
successful conversions. For some systems, contingency plans consist of using
spreadsheet software or reverting to manual systems until system problems can be
corrected.
The impact on the Company for Y2K risk are many and include, but are not
limited to, the risk of insufficient liquidity, communication loss, power loss
and the inability to process customer data. The potential impact to the
profitability of the Company related to these risks and those not yet identified
cannot be measured or known at this time.
Effect of New Accounting Standards
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It required
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently has no plans to adopt SFAS No. 133
early or to reclassify securities from held to maturity upon adoption.
Management believes adoption of SFAS No. 133 will not have a material effect on
the Company's financial position or results of operations, nor will adoption
require additional capital resources.
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
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, 1998 and 1997, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Wichita, Kansas
October 23, 1998
15
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
September 30,
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 474,406 $ 961,350
Federal funds sold -- 1,600,000
Other interest-bearing deposits 439,174 589,877
------------- -------------
Cash and cash equivalents 913,580 3,151,227
Investment securities held to maturity (estimated fair value of $5,004,700 in 1998 and
$2,996,300 in 1997) 5,000,000 3,000,000
Investment securities available for sale 3,418,311 4,311,406
Mortgage-backed securities held to maturity (estimated fair value of $17,403,143 in 1998 and
$23,748,569 in 1997) 17,274,238 23,527,689
Mortgage-backed securities available for sale -- 471,618
Loans receivable, net 93,684,258 74,558,783
Premises and equipment, net 1,309,633 1,297,500
Federal Home Loan Bank stock, at cost 1,574,000 1,368,900
Accrued interest receivable 753,970 712,298
Real estate acquired through foreclosure 71,596 12,131
Other 337,008 111,107
------------- -------------
Total assets $ 124,336,594 $ 112,522,659
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 80,573,077 $ 76,229,176
Advances from borrowers for taxes and insurance 745,520 693,069
Deferred income taxes 126,889 34,048
Advances from Federal Home Loan Bank 30,100,000 23,700,000
Accrued expenses and other 692,067 337,085
------------- -------------
Total liabilities 112,237,553 100,993,378
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 14,984 14,984
Additional paid-in capital 7,239,207 7,122,744
Retained earnings - substantially restricted 10,077,091 9,441,054
Unrealized gain on securities available for sale, net of related taxes 52,497 15,112
Required contributions for shares acquired by Employee Stock Ownership Plan (ESOP) (145,475) (218,212)
Unearned stock compensation - recognition and retention plan (RRP) -- (43,634)
Treasury stock, 539,073 shares in 1998 and 520,059 shares in 1997 - at cost (5,139,263) (4,802,767)
------------- -------------
Total stockholders' equity 12,099,041 11,529,281
------------- -------------
Total liabilities and stockholders' equity $ 124,336,594 $ 112,522,659
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
Year ended September 30,
1998 1997
---------- ----------
Interest income
Loans $7,032,289 $5,684,053
Mortgage-backed securities 1,353,937 1,726,754
Investment securities 462,407 513,223
Interest-bearing deposits and other 226,914 145,016
---------- ----------
Total interest income 9,075,547 8,069,046
Interest expense
Deposits 4,010,717 3,659,320
Borrowed funds 1,545,727 1,399,263
---------- ----------
Total interest expense 5,556,444 5,058,583
---------- ----------
Net interest income 3,519,103 3,010,463
Noninterest income
Service charges 105,277 77,929
Real estate operations 3,177 34,179
Other 83,620 46,795
---------- ----------
192,074 158,903
Noninterest expense
Employee compensation and benefits 1,235,386 1,117,986
Occupancy and equipment 235,043 167,944
Data processing fees 197,134 150,896
Federal deposit insurance premiums 48,550 65,626
Other operating 444,557 487,516
---------- ----------
2,160,670 1,989,968
---------- ----------
Earnings before income taxes 1,550,507 1,179,398
Income tax expense 649,087 467,718
---------- ----------
NET EARNINGS $ 901,420 $ 711,680
========== ==========
Earnings per share
Basic $ .98 $ .73
Diluted $ .92 $ .68
The accompanying notes are an integral part of these statements.
17
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Unrealized
gain Required
(loss) on contri-
securities butions Unearned
Additional available for shares stock
Common paid-in Retained for sale, acquired compen- Treasury
stock capital earnings net by ESOP sation RRP stock Total
------- ---------- ----------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $ 7,492 $7,053,143 $ 8,960,098 $(11,293) $(290,949) $(87,278) $(2,628,704) $13,002,509
Net earnings for the year -- -- 711,680 -- -- -- -- 711,680
Cash dividends of $.238 per share -- -- (230,724) -- -- -- -- (230,724)
Common stock options exercised -- (12,499) -- -- -- -- 59,769 47,270
Appreciation of securities available
for sale -- -- -- 26,405 -- -- -- 26,405
ESOP loan repayments -- -- -- -- 72,737 -- -- 72,737
Fair value adjustment on ESOP
shares committed for release -- 89,592 -- -- -- -- -- 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 7,492 (7,492) -- -- -- -- -- --
------- ---------- ----------- -------- --------- -------- ----------- -----------
Balance at September 30, 1997 14,984 7,122,744 9,441,054 15,112 (218,212) (43,634) (4,802,767) 11,529,281
Net earnings for the year -- -- 901,420 -- -- -- -- 901,420
Cash dividends of $.2875 per share -- -- (265,383) -- -- -- -- (265,383)
Common stock options exercised -- (8,641) -- -- -- -- 40,061 31,420
Appreciation of securities available
for sale -- -- -- 37,385 -- -- -- 37,385
ESOP loan repayments -- -- -- -- 72,737 -- -- 72,737
Fair value adjustment on ESOP
shares committed for release -- 125,104 -- -- -- -- -- 125,104
Amortization of unearned stock
compensation -- -- -- -- -- 43,634 -- 43,634
Purchase of 25,298 shares of
treasury stock -- -- -- -- -- -- (376,557) (376,557)
------- ---------- ----------- -------- --------- -------- ----------- -----------
Balance at September 30, 1998 $14,984 $7,239,207 $10,077,091 $ 52,497 $(145,475) $ -- $(5,139,263) $12,099,041
======= ========== =========== ======== ========= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended September 30,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 901,420 $ 711,680
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation 102,889 84,077
Amortization of premiums and discounts on investments and mortgage-backed
securities 67,751 88,993
Amortization of deferred loan origination fees (164,663) (60,988)
Amortization of expense related to employee benefit plans 241,475 205,973
Gain on sale of real estate acquired through foreclosure (6,515) (41,216)
Deferred income taxes 69,928 191,768
Other -- 229
Increase (decrease) in cash due to changes in
Accrued interest receivable (41,672) (44,378)
Other assets 13,157 22,957
Accrued expenses and other liabilities 250,495 (862,622)
Income taxes payable 148,643 50,864
------------ ------------
Net cash provided by operating activities 1,582,908 347,337
Cash flows from investing activities
Proceeds from maturities and repayment of securities
Available for sale 1,466,372 2,188,741
Held to maturity 9,164,071 6,412,465
Purchase of securities
Available for sale (224,832) (1,154,129)
Held to maturity (5,000,000) (3,000,000)
Purchase of loans (3,691,591) (546,000)
Net increase in loans (15,341,907) (6,284,223)
Capital expenditures (115,022) (470,993)
Proceeds from sale of real estate acquired through foreclosure 11,147 24,136
------------ ------------
Net cash used in investing activities (13,731,762) (2,830,003)
Cash flows from financing activities
Net increase in deposits $ 4,343,901 $ 6,872,754
Net increase in advances from borrowers for taxes and insurance 52,451 14,996
Advances from Federal Home Loan Bank 27,700,000 17,500,000
Repayment of Federal Home Loan Bank advances (21,300,000) (18,100,000)
Cash dividends paid (265,383) (230,724)
Purchase of treasury stock (376,557) (2,233,832)
Stock issuance costs (274,625) --
Stock options exercised 31,420 47,270
------------ ------------
Net cash provided by financing activities 9,911,207 3,870,464
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,237,647) 1,387,798
Cash and cash equivalents at beginning of year 3,151,227 1,763,429
------------ ------------
Cash and cash equivalents at end of year $ 913,580 $ 3,151,227
============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Income taxes $ 430,516 $ 225,086
Interest 5,532,187 4,935,024
Noncash investing and financing activities
Transfer from loans to real estate acquired through foreclosure 138,236 88,772
Issuance of loans receivable in connection with the sale of real estate acquired
through foreclosure 65,550 51,600
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 1998 and 1997
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.
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 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 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.
20
<PAGE>
- --------------------------------------------------------------------------------
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 over the
contractual life of the loan 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.
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. Stock-based compensation
The Company uses the intrinsic value based method of accounting for stock
options. Under the intrinsic method, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock over the exercise price at the measurement date.
10. 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.
11. Earnings per share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the year.
21
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
- --------------------------------------------------------------------------------
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the year plus the
common share equivalents related to outstanding stock options. Weighted average
common shares outstanding and diluted shares deemed outstanding were as follows:
<TABLE>
<CAPTION>
Year ended
September 30,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding 924,091 980,858
Common share equivalents related to outstanding stock options 53,403 70,658
--------- ---------
Adjusted weighted average common shares deemed to be outstanding 977,494 1,051,516
========= =========
</TABLE>
Common shares outstanding exclude unallocated and committed shares held by
the ESOP trust.
12. Common stock split
On December 18, 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, 1998
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government agency obligations $5,000,000 $ 4,700 $ -- $5,004,700
========== ========== ========== ==========
Available for sale
------------------
----------
Intermediate term liquidity portfolio $ 346,749 $ 5,862 $ -- $ 352,611
U.S. Government and agency obligations 2,986,888 78,812 -- 3,065,700
---------- ---------- ---------- ----------
$3,333,637 $ 84,674 $ -- $3 ,418,311
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ---------- ---------- ----------
<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>
The amortized cost and estimated fair value of U.S. Government
and agency obligations at September 30, 1998, by term to maturity are
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
Held to maturity cost value
---------------- --------- ----------
<S> <C> <C>
Due in two to five years $5,000,000 $5,004,700
========== ==========
Available for sale
------------------
Due in one year or less $ 993,726 $1,001,000
Due in two to five years 1,993,162 2,064,700
---------- ----------
$2,986,888 $3,065,700
========== ==========
</TABLE>
The intermediate term liquidity portfolio does not have a contractual due
date.
Investment securities with a fair value of $3,065,700 and $993,440 at
September 30, 1998 and 1997, respectively, are pledged to secure government
deposits.
22
<PAGE>
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, 1998
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
GNMA certificates $ 39,291 $ 3,673 $ -- $ 42,964
FHLMC certificates 6,188,601 82,373 6,104 6,264,870
FNMA certificates 4,361,636 101,460 25,069 4,438,027
Collateralized mortgage obligations
FHLMC 3,661,107 9,022 9,764 3,660,365
FNMA 3,023,603 5,750 32,436 2,996,917
----------- ----------- ----------- -----------
$17,274,238 $ 202,278 $ 73,373 $17,403,143
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ----------- ----------- -----------
<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
FHLMC 4,799,170 2,250 44,099 4,757,321
FNMA 3,800,011 23,289 28,895 3,794,405
----------- ----------- ----------- -----------
$23,527,689 $ 333,436 $ 112,556 $23,748,569
=========== =========== =========== ===========
Available for sale
------------------
FHLMC certificates $ 469,874 $ 1,744 $ -- $ 471,618
=========== =========== =========== ===========
</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 $10,637,352 and $13,295,170
at September 30, 1998 and 1997, respectively, are pledged to secure government
and other deposits.
23
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
- --------------------------------------------------------------------------------
NOTE D -- LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
1998 1997
------------ ------------
First mortgage loans
One-to-four family residences $ 71,854,962 $ 64,152,604
Multi-family residences 1,001,302 1,164,442
Nonresidential 9,065,316 7,478,908
Construction 16,049,334 763,712
------------ ------------
Total first mortgage loans 97,970,914 73,559,666
Consumer and other loans
Savings 396,736 349,531
Automobile 961,613 704,519
Home equity and second mortgages 837,396 550,008
Unsecured home improvement 233,947 274,267
Other 713,796 661,209
------------ ------------
Total consumer and other loans 3,143,488 2,539,534
Less
Allowance for loan losses (655,745) (668,185)
Loans in process (6,437,204) (571,808)
Unearned discounts (2,483) (2,726)
Deferred loan origination fees (334,712) (297,698)
------------ ------------
(7,430,144) (1,540,417)
------------ ------------
Net loans receivable $ 93,684,258 $ 74,558,783
============ ============
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
1998 1997
--------- ---------
Balance at beginning of year $ 668,185 $ 690,009
Loans charged off (12,440) (21,824)
--------- ---------
Balance at end of year $ 655,745 $ 668,185
========= =========
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 71% (1998)
and 84% (1997) of the total loan portfolio. Approximately 2% (1998) and 4%
(1997) of the Association's one-to-four family residential real estate loans are
collateralized 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 10% (1998) and 11% (1997) of the loan portfolio is comprised
of nonresidential and multi-family real estate loans with approximately 10%
(1998) and 13% (1997) of this total collateralized by properties located outside
the Association's primary lending area. During the year ended September 30, 1998
the Association began originating construction loans at its new loan production
office in Lawrence, Kansas. These construction loans generally have terms of
nine months or less with permanent financing provided by other lenders.
Serviced loans, primarily under a County Mortgage Revenue Bond, were
$1,734,818 and $2,199,519 at September 30, 1998 and 1997, respectively.
24
<PAGE>
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, 1997 $ 527,884
New loans 59,260
Repayments (82,093)
---------
Loans outstanding at September 30, 1998 $ 505,051
=========
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
--------
Principal amount of impaired loans $206,691
Less valuation allowance 69,691
--------
$137,000
========
The Association has provided an allowance for loan losses on all impaired
loans. Interest income of $16,023 and $9,537 was recognized and collected on
impaired loans during the years ended September 30, 1998 and 1997, respectively.
The Association has no impaired loans which are not included in smaller balance
homogeneous home equity, consumer and 1-4 family residential real estate loans
at September 30, 1998.
Nonaccrual loans totaled $335,554 and $1,049,367 at September 30, 1998 and
1997, respectively. Interest income that would have been recorded under the
original terms of such loans approximated $15,000 and $40,000 for the years
ended September 30, 1998 and 1997, respectively. Interest income that was
recorded was insignificant for the years ended September 30, 1998 and 1997. 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:
1998 1997
-------- --------
Loans receivable $576,798 $450,257
Mortgage-backed securities 119,858 171,729
Investment securities 57,314 90,312
-------- --------
$753,970 $712,298
======== ========
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
1998 1997
---------- ----------
Land $ 74,958 $ 74,958
Building 1,319,309 1,281,916
Furniture, fixtures and equipment 458,636 383,148
Automobiles 43,579 43,579
---------- ----------
1,896,482 1,783,601
Less accumulated depreciation 586,849 486,101
---------- ----------
$1,309,633 $1,297,500
========== ==========
25
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
- --------------------------------------------------------------------------------
September 30, 1998 and 1997
NOTE G -- REAL ESTATE OPERATIONS
A summary of real estate operations is as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Gain on sale of real estate acquired through foreclosure, net $ 6,515 $ 41,216
Net operating loss (3,338) (7,037)
-------- --------
Income from real estate operations $ 3,177 $ 34,179
======== --------
</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, 1998 1997
--------------- ----------------------- -------------------------
1998 1997 Amount Percent Amount Percent
---- ---- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts ........................... 2.05% 2.05% $ 2,507,101 3.11% $ 2,058,500 2.70%
First Super NOW accounts ............... 2.30 2.30 1,431,706 1.78 1,704,678 2.24
First Money Fund accounts .............. 4.47 4.51 21,952,555 27.24 20,702,177 27.15
----------- ------ ----------- ------
Total demand deposits ............. 4.15 4.16 25,891,362 32.13 24,465,355 32.09
Passbook savings accounts .............. 2.89 2.89 2,744,506 3.41 2,702,740 3.55
Certificates of deposit
3.00% to 3.99% ...................... 3.80 3.75 3,310 .01 4,539 .01
4.00% to 4.99% ...................... 4.77 4.77 1,792,483 2.22 2,189,277 2.87
5.00% to 5.99% ...................... 5.64 5.55 45,363,830 56.30 39,910,696 52.36
6.00% to 6.99% ...................... 6.28 6.30 4,750,692 5.90 6,930,530 9.09
7.00% to 7.99% ...................... 7.00 7.00 26,894 .03 26,039 .03
----------- ------ ----------- ------
Total savings certificates ............. 5.67 5.62 51,937,209 64.46 49,061,081 64.36
----------- ------ ----------- ------
Total savings .......................... 5.53 5.48 54,681,715 67.87 51,763,821 67.91
----------- ------ ----------- ------
Total deposits ......................... 5.09 5.06 $80,573,077 100.00% $76,229,176 100.00%
=========== ====== =========== ======
</TABLE>
26
<PAGE>
- --------------------------------------------------------------------------------
The aggregate amount of certificates of deposit and savings with a minimum
denomination of $100,000 was $4,621,272 and $3,844,877 at September 30, 1998 and
1997, respectively.
Scheduled maturities of certificates of deposit are as follows:
September 30, 1998
<TABLE>
<CAPTION>
Less than One to Three to
one year three years five years Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
3.00% to 3.99% $ 3,310 $ -- $ -- $ 3,310
4.00% to 4.99% 1,792,483 -- -- 1,792,483
5.00% to 5.99% 36,468,747 7,854,690 1,040,393 45,363,830
6.00% to 6.99% 970,954 2,597,477 1,182,261 4,750,692
7.00% to 7.99% -- 26,894 -- 26,894
----------- ----------- ----------- -----------
$39,235,494 $10,479,061 $ 2,222,654 $51,937,209
=========== =========== =========== ===========
</TABLE>
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>
Interest expense on deposits for the years ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Certificates of deposit $ 2,927,897 $ 2,745,188
NOW accounts 1,040,855 878,302
Demand deposits 41,965 35,830
----------- -----------
$ 4,010,717 $ 3,659,320
=========== ===========
</TABLE>
NOTE I -- ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank at September 30 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Rates Amount Rates Amount
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Variable rates ..................... 5.72% - 6.00% $ 8,600,000 5.67% - 6.00% $ 8,400,000
Fixed rates ........................ 5.65 - 7.06 9,000,000 4.92 - 7.06 15,300,000
Fixed rate convertible* ............ 4.87 - 5.08 12,500,000 -- --
----------- -----------
$30,100,000 $23,700,000
=========== ===========
</TABLE>
*Due in 2008 unless converted.
27
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
The Company has a variable rate line of credit with the Federal Home Loan
Bank totaling $9,000,000 with an outstanding balance of $1,700,000 at September
30, 1998 included above.
Aggregate maturities for the years following September 30, 1998 are as
follows:
1999 ..................................... $ 8,600,000
2001 ..................................... 3,000,000
2002 ..................................... 5,000,000
2003 ..................................... 1,000,000
2008 ..................................... 12,500,000
-----------
........................................ $30,100,000
===========
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 $208,752 and $174,786 for the years ended
September 30, 1998 and 1997, respectively.
The ESOP shares as of September 30, 1998 were as follows:
Allocated shares .......................................... 72,737
Unreleased shares ......................................... 29,095
--------
Total ESOP shares ......................................... 101,832
========
Fair value of unreleased shares at September 30, 1998 ..... $294,587
========
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 $43,634 and $43,644
for the years ended September 30, 1998 and 1997, respectively.
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, 1998
and 1997 and changes during the years ended as of those dates is presented
below:
Weighted
average
exercise
Shares price
------- ---------
Outstanding at October 1, 1996 121,276 $ 5.14
Exercised 9,454 5.00
------
111,822 5.15
Outstanding at September 30, 1997
Issued 1,000 14.63
Exercised 6,284 5.00
------
Outstanding at September 30,1998 106,538 5.25
======
28
<PAGE>
- --------------------------------------------------------------------------------
All options outstanding at September 30, 1998 were exercisable and can be
summarized as follows:
Exercise Remaining
Shares price life
-------- ---------- -----------------
91,902 $5.00 5 years
11,636 6.19 5 years 4 months
2,000 6.69 5 years 10 months
1,000 14.63 9 years 1 month
-------
106,538
=======
The stock option plan is accounted for under APB Opinion 25 and related
interpretations. Accordingly, no compensation cost has been recognized for the
plan. Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the fair value method of
Statement of Financial Accounting Standards 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below for the year ended
September 30, 1998.
Net earnings - as reported $901,420
Net earnings - pro forma 894,270
Earnings per share
Basic - as reported $.98
Basic - pro forma .97
Diluted - as reported .92
Diluted - pro forma .91
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used: dividend yield of .51%, expected volatility of 28.39%,
risk-free interest rate of 5.62% and expected lives of 10 years.
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, 1998 and 1997 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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current $ 579,159 $ 275,950
Deferred 69,928 191,768
--------- ---------
$ 649,087 $ 467,718
========= =========
</TABLE>
Reconciliation of income tax expense computed at the federal statutory rate
of 34% and income tax expense for the years ended September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Income tax expense at statutory rate $ 527,172 $ 400,995
Kansas privilege tax, net of federal tax benefit 69,075 52,542
State contribution credit (26,303) (28,875)
Nondeductible ESOP fair value adjustment 48,109 30,461
Other 31,034 12,595
--------- ---------
$ 649,087 $ 467,718
========= =========
</TABLE>
29
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1998 and 1997
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at September 30 are as follows:
1998 1997
--------- ---------
Deferred tax assets
Allowance for loan losses $ 231,272 $ 241,667
Accrued bonuses 8,775 8,327
State contribution credit -- 18,924
Other -- 5,780
--------- ---------
Total deferred tax assets 240,047 274,698
--------- ---------
Deferred tax liabilities
Securities available for sale 33,022 23,393
Depreciation of property and equipment 37,637 34,622
Federal Home Loan Bank stock dividends 289,302 250,731
Other 6,975 --
--------- ---------
Total deferred tax liabilities 366,936 308,746
--------- ---------
Net deferred tax liability $(126,889) $ (34,048)
========= =========
The Association was allowed a special bad debt deduction, generally limited
to 8% of otherwise taxable income subject to certain limitations based on
aggregate loans and deposit account balances at the end of the year. If the
amounts that qualify as deductions for federal income taxes 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. Retained earnings at September 30, 1998, includes
approximately $2.6 million for which federal income taxes have not been
provided. The amount of unrecognized deferred tax liability relating to the
cumulative bad debt deduction at September 30, 1998, is approximately
$1,000,000.
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 and Tier 1 capital to risk-weighted assets and of Tier 1
(core) capital and tangible capital to adjusted total assets. Management
believes, as of September 30, 1998, that the Association meets all capital
adequacy requirements to which it is subject.
30
<PAGE>
- --------------------------------------------------------------------------------
As of September 30, 1998, 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
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
---------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998
Total risk-based capital $11,161 17.8% $5,012 >=8.0% $6,265 >=10.0%
Tier 1 risk-based capital 10,505 16.8 2,506 >=4.0 3,759 >= 6.0
Core capital 10,505 8.5 3,691 >=3.0 6,152 >= 5.0
Tangible capital 10,505 8.5 1,846 >=1.5 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
----------------- --------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ------- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total risk-based capital $ 9,989 19.5% $4,093 >=8.0% $5,116 >=10.0%
Tier 1 risk-based capital 9,349 18.3 2,046 >=4.0 3,069 >= 6.0
Core capital 9,349 8.4 3,333 >=3.0 5,555 >= 5.0
Tangible capital 9,349 8.4 1,666 >=1.5 N/A N/A
</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 $3,800,000 to First Independence Corporation at September 30,
1998.
NOTE M -- 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, 1998 include loans
in process as disclosed in Note D and first mortgage loans with fixed rates
ranging from 6.5% to 11.0% aggregating $2,231,130 and $131,000 of variable rate
loans at 5.5%. Collateral for loans in process and commitments are the same as
for other Association loans. The commitment period is generally for forty-five
days.
NOTE N -- ACQUISITION
On February 18, 1998, the Boards of Directors of the Corporation and The
Neodesha Savings and Loan Association, FSA (Neodesha) adopted a Plan of Merger
Conversion. Pursuant to the Plan, Neodesha will combine with the Association
through the conversion of Neodesha from a mutual savings and loan association to
a stock savings and loan association and the simultaneous merger of Neodesha
into the Association. The transaction is subject to approval by regulatory
authorities.
Pursuant to the conversion merger transaction the Corporation will issue
new common shares with a fair value equal to the appraised value of Neodesha.
The appraised value of Neodesha is currently anticipated to range from
$1,020,000 to $1,380,000.
31
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
- --------------------------------------------------------------------------------
September 30, 1998 and 1997
The transaction will be accounted for under the purchase method of
accounting for business combinations. Issuance costs will be netted to proceeds
if the merger/conversion is successful. If unsuccessful, costs will be recorded
as expense in the applicable period, two-thirds by the Corporation and
one-third, capped at $150,000, by Neodesha. Total costs incurred and deferred at
September 30, 1998 were $274,625.
At the date of conversion, the merged association will establish a
liquidation account equal to the amount of retained earnings contained in the
offering circular. The liquidation account will be maintained for the benefit of
the merged association's eligible savings account holders who maintain deposit
accounts in the Association after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a pro rata
liquidation distribution from the liquidation account in the amount of the then
current adjusted balance of deposit accounts held, before any liquidation
distribution may be made with respect to common stock. Except for the repurchase
of stock and payment of dividends, the existence of the liquidation account will
not restrict the use or application of such retained earnings by the
Association.
Subsequent to consummation of the transaction, the Association may not
declare or pay a cash dividend on or repurchase any of its common stock, if the
effect thereof would cause stockholders' equity to be reduced below either the
amount required for the combined liquidation accounts or the regulatory capital
requirements for insured institutions.
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, 1998 and 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 stock's fair value.
Deposit liabilities: The fair values estimated for demand deposits, NOW
accounts, savings and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts of variable rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated expected monthly time deposit
maturities. The carrying amount of accrued interest payable approximates its
fair value.
Advances from Federal Home Loan Bank: For variable rate advances fair
values are considered equal to their carrying values. The estimated fair value
of fixed rate advances are estimated based on discounted cash flow analysis
using interest rates currently offered for advances with similar terms.
32
<PAGE>
- --------------------------------------------------------------------------------
The following table provides summary information on the fair value of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the 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.
1998
----------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
Cash and cash equivalents $ 913,580 $ 913,580
Investment securities available for sale 3,418,311 3,418,311
Investment securities held to maturity 5,000,000 5,004,700
Mortgage-backed securities held to maturity 17,274,238 17,403,143
Loans 94,340,003 94,885,003
Federal Home Loan Bank stock 1,574,000 1,574,000
Deposits (80,573,077) (81,128,077)
Advances from Federal Home Loan Bank (30,100,000) (30,769,000)
1997
-----------------------------
Carrying Estimated
amount of fair value
assets and of assets and
liabilities) (liabilities)
------------ ------------
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)
33
<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 4, 1998, there were approximately 193 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 October 1, 1996. 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, 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
December 31, 1997 14.625 13.625 .0625
March 31, 1998 15.000 13.500 .0750
June 30, 1998 14.750 12.750 .0750
September 30, 1998 13.250 10.000 .0750
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.
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
<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
Lavern W. Strecker
Retired - Former Manager of Accounting and Control
Arco Pipe Line Company
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
C. Alan Hoggatt
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
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>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 23, 1998, 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, 1998. We hereby consent to the incorporation by reference of said
report in the Registration Statement of First Independence Corporation on Form
S-8 (File No. 33-58095, effective March 13, 1995 and File No. 33-75404,
effective February 16, 1994).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
Wichita, Kansas
December 29, 1998
<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, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 474,406
<INT-BEARING-DEPOSITS> 439,174
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,418,311
<INVESTMENTS-CARRYING> 22,274,238
<INVESTMENTS-MARKET> 22,407,843
<LOANS> 94,340,003
<ALLOWANCE> 655,745
<TOTAL-ASSETS> 124,336,594
<DEPOSITS> 80,573,077
<SHORT-TERM> 8,600,000
<LIABILITIES-OTHER> 1,564,476
<LONG-TERM> 21,500,000
14,984
0
<COMMON> 0
<OTHER-SE> 12,084,057
<TOTAL-LIABILITIES-AND-EQUITY> 124,336,594
<INTEREST-LOAN> 7,032,289
<INTEREST-INVEST> 1,816,344
<INTEREST-OTHER> 226,914
<INTEREST-TOTAL> 9,075,547
<INTEREST-DEPOSIT> 4,010,717
<INTEREST-EXPENSE> 5,556,444
<INTEREST-INCOME-NET> 3,519,103
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,160,670
<INCOME-PRETAX> 1,550,507
<INCOME-PRE-EXTRAORDINARY> 901,420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 901,420
<EPS-PRIMARY> .98
<EPS-DILUTED> .92
<YIELD-ACTUAL> 7.72
<LOANS-NON> 335,554
<LOANS-PAST> 918,185
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 668,185
<CHARGE-OFFS> 12,440
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 655,745
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 655,745
</TABLE>
