As filed with the Securities and Exchange Commission on October 30, 1998
Registration No. 333-58423
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
FIRST INDEPENDENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 6035 36-3899950
-------- ---- ----------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer)
incorporation or organization) Classification Code Number) Identification No.
Myrtle & Sixth
Independence, Kansas 67301
(316) 331-1660
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
----------
Larry G. Spencer, President and Chief Executive Officer
First Independence Corporation
Myrtle & Sixth
Independence, Kansas 67301
(316) 331-1660
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
----------
Please send copies of all communications to:
Martin L. Meyrowitz, P.C.
Beth A. Freedman
SILVER, FREEDMAN & TAFF, L.L.P.
(a limited liability partnership including professional corporations)
1100 New York Avenue, NW
Washington, DC 20005-3934
(202) 414-6100
----------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share (1) Offering Price(1) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 190,577 shares(2) NA (2) $2,381,000 (2) (3)
===========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The number of shares to be issued by the Registrant is based upon an
independent appraisal of The Neodesha Savings & Loan Association, F.S.A.
(the company being acquired). Based upon such appraisal, the Registrant
will issue a number of shares equal to $2,381,000, based on the average of
the closing bid and ask quotation on the NASDAQ market for the ten trading
days ending on the expiration date of the offering.
(3) Registration fee previously paid with Form SB-2 filed on July 2, 1998.
<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
FIRST INDEPENDENCE CORPORATION
169,879 Shares of Common Stock
(Anticipated Maximum)
First Independence Corporation (the "Company") is offering its common
stock to the depositors of The Neodesha Savings and Loan Association, FSA
("Neodesha") (through subscription rights) and the public pursuant to a plan by
which Neodesha is combining with First Federal Savings and Loan Association of
Independence ("First Federal" or the "Association") through the conversion of
Neodesha from the mutual to the stock form of organization and the simultaneous
merger of Neodesha with and into the Association (the "Merger Conversion"). The
Merger Conversion must be approved by the Office of Thrift Supervision and by a
majority of the votes eligible to be cast by members of Neodesha. No common
stock will be sold if Neodesha does not receive these approvals, or if First
Independence Corporation does not receive orders for at least the minimum number
of shares. Pursuant to Neodesha's plan of merger conversion ("Plan of Merger
Conversion"), non-transferable rights to subscribe for the Company's common
stock ("Subscription Rights") have been given, in order of priority, to: (1)
Eligible Account Holders (deposit account holders of Neodesha as of December 31,
1996); (2) Tax-Qualified Employee Plans; (3) Supplemental Eligible Account
Holders (deposit account holders of Neodesha as of June 30, 1998); (4) members
of Neodesha, other than Eligible Account Holders and Supplemental Eligible
Account Holders, as of ________ ___, 1998, the voting record date for the
Special Meeting ("Other Members"); and (5) officers, directors and employees of
Neodesha (the "Subscription Offering"). Concurrently, and subject to the prior
rights of holders of Subscription Rights, the Company is offering its common
stock for sale in a community offering to members of the general public, with a
first preference to natural persons residing in Wilson County, Kansas (the
"Community Offering"). It is anticipated that shares not subscribed for in the
Subscription and Community Offering will be offered to certain members of the
general public on a best efforts basis through a selected dealers arrangement
(the "Syndicated Community Offering") (the Subscription Offering, the Community
Offering and the Syndicated Community Offering are referred to collectively as
the "Subscription and Community Offering"). All purchases will be subject to the
maximum and minimum purchase limitations and other terms and conditions
described in the Prospectus including Neodesha's and the Company's right, in
their sole discretion, to reject orders received in the Community and the
Syndicated Community Offering in whole or in part.
---------------------
An independent appraiser has estimated the pro forma market value of
Neodesha, as a stock institution, to be between $1,020,000 and $1,380,000.
Subject to regulatory approval, First Independence Corporation may sell up to
$1,587,000 of its common stock. The actual purchase price per share cannot
currently be determined because it will be equal to 95% of the average closing
bid price of First Independence Corporation common stock (based on the average
of the closing bid quotations on the Nasdaq SmallCap Market) for the ten trading
days ending the day before the closing of this offering. For the ten trading
days ending on October 8, 1998, the average of the closing bid quotations for a
share of Company common stock on the Nasdaq SmallCap Market was $10.06. If that
price was the average market price for the ten trading days ending on the day
before the closing of this offering, the actual purchase price per share would
be $9.56. As a result, subscribers must order, and submit payments or authorize
withdrawals for a specific dollar amount of First Independence Corporation
common stock. No fractional shares of common stock will be issued. Based on
these estimates, First Independence is making the following offering of shares
of common stock:
o Price per share
Minimum/Maximum: $ 8.12 to $10.99
o Estimated Expenses: $450,000
o Net Proceeds to First Independence Corporation
Minimum/Maximum/Maximum,
as adjusted: $570,000 to $930,000 to $1,137,000
o Net Proceeds per Share (based on midpoint price per share)
Minimum/Maximum/Maximum,
as adjusted: $5.34 to $6.44 to $6.85
-------------------
Please refer to Risk Factors beginning on page 9 of this Prospectus.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any state securities
regulator has approved or disapproved these securities or determined if this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Trident Securities, Inc. will use its best efforts to assist First Independence
Corporation in selling at least the minimum number of shares but does not
guarantee that this number will be sold. All funds received from subscribers
will be held in an interest bearing savings account at the Association until the
completion or termination of the Merger Conversion. First Independence
Corporation's common stock is listed on the Nasdaq SmallCap Market under the
symbol "FFSL".
For information on how to subscribe, call the Stock Information Center at (316)
325-2268.
--------------------
Trident Securities, Inc.
The date of this Prospectus is _________ __, 1998
<PAGE>
[MAP TO COME]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND.
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements appearing
elsewhere herein.
First Independence Corporation
The Company, a Delaware corporation, was organized by the Association
for the purpose of becoming a thrift institution holding company for the
Association. The Company is authorized to engage in any activity permitted by
Delaware law.
The principal asset of the Company is the outstanding stock of the
Association, its wholly owned subsidiary. The Company presently has no separate
operations, and its business consists only of the business of the Association,
although it does hold some investment securities and the loan on the ESOP. All
references to the Company, unless otherwise indicated, refer to the Company and
the Association on a consolidated basis, as the context requires.
The Company's sources of funds are primarily dividends from the
Association, borrowings and the issuance of shares of capital stock. For a
description of certain restrictions on the Association's ability to pay
dividends to the Company, see "Common Stock Prices and Dividends."
The Company and the Association are subject to examination and
comprehensive regulation and oversight by the OTS and by the Federal Deposit
Insurance Corporation ("FDIC"). The Association is further subject to
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") governing reserves required to be maintained against
transaction accounts and non-personal time deposits. The Association is a member
of the Federal Home Loan Bank ("FHLB") of Topeka, which is one of the 12
regional banks constituting the FHLB System and its savings deposits are backed
by the full faith and credit of the United States Government and are insured by
the Savings Association Insurance Fund ("SAIF") to the maximum extent permitted
by law.
As of June 30, 1998, the Company had total assets of $123.4 million,
deposits of $81.3 million and stockholders' equity of $11.8 million. For the
nine months ended June 30, 1998, the Company recorded net earnings of $644,000.
The Company's executive offices are located at Myrtle & Sixth,
Independence, Kansas 67301 and its telephone number at that location is (316)
331-1660.
The Neodesha Savings and Loan Association, FSA
Neodesha began operation in 1887 as a state-chartered mutual savings
institution. In June, 1993, Neodesha converted to a federally chartered mutual
savings and loan association. Its savings accounts have been insured since 1939
and Neodesha has been a member of the FHLB System since 1939. Neodesha's
operations are conducted through its home office in Neodesha, Kansas.
As of June 30, 1998, Neodesha had total assets of $13.5 million,
deposits of $11.7 million and retained earnings of $1.1 million. For the nine
months ended June 30, 1998, Neodesha recorded net earnings of $49,000.
The business of Neodesha consists primarily of attracting deposits from
the general public and using those deposits to originate one- to four-family
residential mortgage and consumer loans, to purchase investment securities and
to make other investments.
1
<PAGE>
The Merger Conversion
The Subscription Offering and Direct Community Offering are being made
in connection with the conversion of Neodesha from a mutual to a stock savings
and loan association and the simultaneous merger of Neodesha with and into the
Association. Net conversion proceeds are expected to increase the net worth of
the Company, which may support future deposit growth and expanded operations and
permit expansion of the Company's lending and investment activities and other
financial services to the public. The Merger Conversion is subject to certain
conditions, including the prior approval of the Plan of Merger Conversion (the
"Plan") by certain of Neodesha's members at a Special Meeting to be held on
____________, 1998. After the Merger Conversion, members of Neodesha will have
no voting rights in the Company unless they become Company stockholders.
Depositors as of December 31, 1996 ("Eligible Account Holders") and depositors
as of June 30, 1998 ("Supplemental Eligible Account Holders), however, will have
certain liquidation rights in Neodesha. See "The Merger Conversion - Effects on
Depositors and Borrowers of Neodesha Liquidation Rights."
Subscription Offering and Direct Community Offering. The Company is
offering up to 169,879 newly issued shares of Common Stock in the Subscription
Offering. Certain depositors of Neodesha, the ESOP of the Company, and
directors, officers, and employees of Neodesha will receive subscription rights
to purchase the Common Stock. No person may sell, assign or transfer their
subscription rights. Persons found to be selling or otherwise transferring their
rights to purchase Common Stock in the Subscription Offering, or purchasing
Common Stock on behalf of another person will be subject to forfeiture of such
rights and possible federal penalties and sanctions. See "The Merger Conversion
- - Restriction on Transfer of Subscription Rights and Shares."
The Plan of Merger Conversion places limitations on the amount of
Common Stock which may be purchased in the Merger Conversion by various
categories of persons, including an overall limitation of $100,000 of Company
Common Stock which may be purchased in the Merger Conversion by any one person
or group of persons acting in concert (other than the Tax-Qualified Employee
Plan). The minimum purchase limitation is $250 of Common Stock. In addition, no
fractional shares of Common Stock will be issued. See "The Merger Conversion -
Purchase Limitations." If the Merger Conversion is not approved by the members
of Neodesha at the Special Meeting, or if all of the shares offered in the
Merger Conversion are not sold, no shares will be issued, the Merger Conversion
will not take place, all subscription funds received will be returned promptly
with interest at the Association's passbook rate and all withdrawal
authorizations will be terminated.
Concurrently with the Subscription Offering, the Company is offering
all unsubscribed shares, if any, to members of the general public to whom this
Prospectus is delivered, with a preference to natural persons residing in Wilson
County, Kansas. The Direct Community Offering may be extended by the Company up
to 45 days beyond the date of the completion of the Subscription Offering or, in
the event that the Company resolicits stock purchase orders, for such longer
period as the OTS may approve.
Stock Pricing and Number of Shares of Common Stock to be Issued in the
Conversion. The actual per share purchase price for the Conversion Stock will be
equal to 95% of the average closing bid price of the Company's Common Stock
(which is the average of the closing bid quotations on the Nasdaq SmallCap
Market) for the ten trading days ending on the day before the closing of this
offering (the "Pricing Date"). The total number of shares of Conversion Stock to
be issued will be determined by dividing the Aggregate Purchase Price by the per
share purchase price. The total number of shares to be issued may be
significantly increased or decreased without a resolicitation of subscriptions,
unless such an increase or decrease results in an Aggregate Purchase Price which
is outside the Valuation Range (without giving effect to any shares which may be
issued pursuant to the Aggregate Purchase Price being within 15% above the high
end of the Valuation Range), a price per share below $8.12 or above $10.99, or
is otherwise determined by the Company and Neodesha to be material.
The Company has established a Stock Information Center, managed by
Trident Securities, to coordinate the Subscription and Community Offering,
including tabulating orders and answering questions about the Subscription and
Community Offering received by telephone and in person. All subscribers will be
instructed to mail a completed order form and certification along with payment
to the Stock Information Center or deliver payment directly to the Company's
main office. Payment for shares of Common Stock may be made by cash (if
delivered in person), check or money order or by authorization of withdrawal
from deposit accounts maintained with Neodesha. Such funds will not be available
for withdrawal and will not be released until the Merger Conversion is completed
or terminated. The Company will not accept wire transfers for the payment of
stock for any reason. See "The Merger Conversion - Method of Payment for
Subscriptions."
2
<PAGE>
The aggregate pro forma market value of Neodesha, as converted, was
estimated by Ferguson & Company ("Ferguson"), which is experienced in appraising
converting thrift institutions, to be the Valuation Range. The Board of
Directors of Neodesha has reviewed the Valuation Range as stated in the
appraisal and compared it with recent stock trading prices as well as recent pro
forma market value estimates for other financial institutions. The Board of
Directors has also reviewed the appraisal report, including the assumptions and
methodology utilized therein, and determined that it was not unreasonable. The
appraisal is not intended to be, and must not be interpreted as, a
recommendation of any kind as to the advisability of voting to approve the
Merger Conversion or of purchasing shares of Common Stock. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
See "Pro Forma Data" and "The Merger Conversion - Stock Pricing and Number of
Shares to be Issued" for a description of the manner in which such valuation was
made and the limitations on its use.
Use of Proceeds
The net proceeds from the sale of Conversion Stock in the Merger
Conversion will increase the net worth of the Company, which may support future
deposit growth and expanded lending and investment activities. On an interim
basis the proceeds may be invested in short-term securities.
Interests of Certain Persons in the Merger Conversion
Certain members of Neodesha's management and Board of Directors have
interests in the Merger Conversion in addition to their interests as members of
Neodesha generally. These interests relate to (i) the formation and maintenance
of a Neodesha, Kansas Advisory Board which will initially consist of the
non-employee directors of Neodesha; (ii) the Company has agreed to grant to
President Miller, Vice President Holmquist and each non-employee director of
Neodesha options to purchase, upon consummation of the Merger Conversion, 3,000,
1,500, and 1,000 shares, respectively, of Common Stock (all with an exercise
price equal to the fair market value on the date of grant and subject to vesting
over five years); (iii) the Company has agreed to enter into a three-year
employment agreement with Franklin Miller, president of Neodesha, upon
consummation of the Merger Conversion, which provides for the payment of salary
equal to his current compensation, the payment of 299% of his "base amount"
(five-year average) compensation under certain circumstances in connection with
a change of control of the Company and the use of a company car; and (iv) the
eligibility of former employees of Neodesha who become employees of the Company
for certain employee benefits. See "The Merger Conversion - Interests of Certain
Persons in the Merger Conversion."
Dividends
The Company has paid a cash dividend on its Common Stock in each
quarter since the Association's conversion to stock form in October 1993. The
most recent quarterly dividend declared by the Company was for $.075 per share
and was paid on August 21, 1998. The Company anticipates that it will continue
to pay quarterly cash dividends on the Common Stock, although there can be no
assurance as to the amount or timing of future dividends. The payment of
dividends in the future is at the discretion of the Company's Board of Directors
and will depend on the Company's operating results and financial condition,
availability of funds, regulatory limitations, tax considerations and other
factors. See "Common Stock Prices and Dividends."
Market for Common Stock
The Company's Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol "FFSL." See "Common Stock Prices and Dividends."
3
<PAGE>
Forward-Looking Statements
In connection with this offering, when used in this Prospectus, in the
Company's press releases or other public or shareholder communications, and 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" or similar expressions are intended to
identify "forward-looking statements." Such statements are subject to risks and
uncertainties, including but not limited to changes in economic conditions in
the Company's and Neodesha's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's and
Neodesha's market area and competition, all or some of which could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. 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 are subject to the above-stated qualifications in any event.
The Company wishes to advise readers that the factors listed above could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Company does not undertake -- and specifically declines any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF
FIRST INDEPENDENCE CORPORATION
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended September 30 is derived from the Company's audited financial
statements. The selected data presented below as of June 30, 1998, and for the
nine months ended June 30, 1998 and 1997 is derived from the Company's unaudited
financial statements. The following information is only a summary and you should
read it in conjunction with our financial statements and notes beginning on page
F-2.
<TABLE>
<CAPTION>
September 30,
June 30, ---------------------------------------------------------------
1998 1997 1996 1995 1994 1993(1)
---- ---- ---- ---- ---- -------
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets ................................... $123,366 $112,523 $108,539 $101,904 $ 94,593 $ 96,166
Cash, cash equivalents and interest-
bearing deposits .............................. 1,008 3,151 1,763 2,115 1,415 20,146
Loans receivable, net .......................... 90,614 74,559 67,683 60,370 56,895 58,089
Mortgage-backed securities - at cost ........... 19,518 23,528 28,039 28,594 29,617 13,963
Investment securities - at cost ................ 5,000 3,000 2,000 1,000 4,245 271
Securities available for sale .................. 3,357 4,783 5,894 7,358 12 --
Real estate acquired through
foreclosure, net .............................. 36 12 12 62 234 1,409
Deposits ....................................... 81,327 76,229 69,356 67,927 64,384 84,941
Borrowings ..................................... 28,400 23,700 24,300 18,800 15,400 3,000
Stockholders' equity ........................... 11,815 11,529 13,003 13,600 13,351 6,103
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended June 30, Year Ended September 30,
-------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993(1)
---- ---- ---- ---- ---- ---- -------
(In Thousands)
Selected Operations Data:
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income ................... $ 6,725 $ 6,007 $ 8,069 $ 7,773 $ 7,186 $ 6,296 $ 6,570
Total interest expense .................. 4,107 3,752 5,059 4,669 3,852 2,857 3,490
------- ------- ------- ------- ------- ------- -------
Net interest income ................... 2,618 2,255 3,010 3,104 3,334 3,439 3,080
Provision for losses on loans ........... -- -- -- -- -- 45 332
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses .............. 2,618 2,255 3,010 3,104 3,334 3,394 2,748
Other income ............................ 132 83 159 214 214 216 217
Gain on sale of investments ............. -- -- -- 251 -- -- 326
General, administrative and
other expense .......................... (1,634) (1,497) (1,989) (2,267) (1,820) (1,653) (1,506)
------- ------- ------- ------- ------- ------- -------
Earnings before income tax
expense and cumulative
effect of change in
accounting principle ................ 1,116 841 1,180 1,302 1,781 1,957 1,785
Income tax expense ...................... 472 332 468 487 694 750 465
------- ------- ------- ------- ------- ------- -------
Earnings before cumulative
effect of change in
accounting principle ................ 644 509 712 815 1,087 1,207 1,320
Cumulative effect of change
in accounting principle ............... -- -- -- -- -- 241 --
------- ------- ------- ------- ------- ------- -------
Net earnings ............................ $ 644 $ 509 $ 712 $ 815 $ 1,087 $ 1,448 $ 1,320
------- ======= ======= ======= ======= ======= =======
Basic earnings per share ................ $ .70 $ .51 $ .73 $ .72 $ .87 $ .99 N/A
======= ======= ======= ======= ======= ======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended June 30, Year Ended September 30,
---------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993(1)
---- ---- ---- ---- ---- ---- -------
Selected Financial Ratios and Other Data:
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net earnings
to average total assets) .......................... 0.72% 0.62% 0.65% 0.78% 1.12% 1.61% 1.50%
Interest rate spread information:
Average during period ............................ 2.52 2.29 2.31 2.36 2.87 3.38 3.45
End of period .................................... 2.31 2.23 2.19 2.17 2.36 3.34 2.94
Net interest margin(2) ........................... 3.00 2.81 2.81 3.02 3.52 3.91 3.64
Ratio of operating expense to average
total assets ...................................... 1.83 1.82 1.81 2.17 1.88 1.82 1.61
Return on equity (ratio of net earnings
to average equity) ................................ 7.42 5.78 6.09 6.21 8.16 11.21 24.63
Quality Ratios:
Non-performing assets to total assets at
end of period(3) .................................. .56 .87 1.25 0.57 0.77 1.27 2.81
Allowance for loan losses to non-performing
assets at end of period(3) ........................ 95.15 69.38 47.64 112.36 87.45 55.31 24.72
Allowance for loan losses to non-performing
loans at end of period ............................ 100.34 73.84 48.05 114.62 94.91 68.62 51.66
Capital Ratios:
Equity to total assets, at end of period ........... 9.58 10.43 10.25 11.98 13.35 14.11 6.35
Average equity to average assets ................... 9.72 10.73 10.62 12.57 13.78 14.38 6.08
Ratio of average interest-earning assets
to average interest-bearing liabilities ........... 110.20 111.08 110.64 114.50 115.83 116.42 104.66
Dividend payout ratio(4) ........................... 32.69 36.46 34.93 27.37 16.47 7.73 N/A
Number of full service offices ..................... 2 2 2 1 1 1 1
</TABLE>
- -------------
(1) Does not reflect proceeds from the Association's conversion to stock form
and stock issuance by First Independence Corporation which was completed on
October 5, 1993.
(2) Net interest income divided by average interest-earning assets.
(3) Includes non-accruing loans, accruing loans delinquent 90 days or more and
assets acquired though foreclosure.
(4) Dividends paid per share divided by earnings per share. The ratio for 1994
does not give pro forma effect for annualizing dividends paid.
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF
THE NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A.
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended September 30 is derived from Neodesha's audited financial
statements. The selected data presented below as of June 30, 1998, and for the
nine months ended June 30, 1998 and 1997 is derived from Neodesha's unaudited
financial statements. The following information is only a summary and you should
read it in conjunction with our financial statements and notes beginning on page
F-36.
<TABLE>
<CAPTION>
September 30,
June 30, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets ......................................... $13,523 $14,155 $14,411 $13,799 $14,477 $13,943
Cash, cash equivalents and interest-bearing
deposits ......................................... 583 635 772 559 796 1,319
Loans receivable, net ................................ 9,364 9,468 9,489 9,049 8,940 9,116
Mortgage-backed securities -- at cost: ............... 159 253 253 253 253 627
Investment securities -- at cost:
U.S. Treasury .................................... 799 897 1,097 1,098 1,099 806
Agency ........................................... 1,316 1,617 1,516 1,516 1,817 1,105
Municipal ......................................... 604 603 602 602 602 --
Deposits ............................................. 11,730 12,854 12,698 11,673 12,742 12,904
Borrowings ........................................... 600 100 500 950 650 --
Retained earnings - substantially restricted ......... 1,141 1,092 1,015 1,012 941 854
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended June 30, Year Ended September 30,
------------------ --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income .......................... $ 750 $ 782 $ 1,046 $ 1,045 $ 1,009 $ 1,013 $ 1,122
Total interest expense ......................... 404 418 560 571 496 461 548
------- ------- ------- ------- ------- ------- -------
Net interest income ......................... 346 364 486 474 513 552 573
Provision for losses on loans .................. 5 4 6 6 6 36 24
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses ................................. 341 360 480 468 507 516 549
Other income ................................... 94 101 135 140 124 104 112
General, administrative and
other expense ............................... (371) (385) (510) (604) (538) (538) (520)
------- ------- ------- ------- ------- ------- -------
Earnings before income tax expense
and cumulative effect of change
in accounting principle ..................... 64 76 105 4 91 82 141
Income tax expense ............................. 15 20 28 1 20 18 46
------- ------- ------- ------- ------- ------- -------
Earnings before cumulative effect of
change in accounting principle .............. 49 56 77 3 71 64 95
Cumulative effect of change in
accounting principle ........................ -- -- -- -- -- 23 --
------- ------- ------- ------- ------- ------- -------
Net earnings ................................... $ 49 $ 56 $ 77 $ 3 $ 71 $ 87 $ 95
======= ======= ======= ======= ======= ======= =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended June 30, Year Ended September 30,
---------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net earnings to average total
assets) .................................................. 0.47% 0.52% 0.54% 0.02% 0.51% 0.60% 0.66%
Interest rate spread information:
Average during period ..................................... 3.42 3.49 3.48 3.39 3.86 4.16 4.27
End of period ............................................. 3.25 3.40 3.49 3.49 3.61 4.32 4.46
Net interest margin(1) .................................... 3.57 3.61 3.61 3.51 3.94 4.15 4.26
Ratio of operating expense to average total assets .......... 3.61 3.60 3.58 4.22 3.88 3.73 3.59
Return on equity (ratio of net earnings to average equity) .. 5.77 7.11 7.25 .29 7.30 9.67 11.54
Quality Ratios:
Non-performing assets to total assets at end of period(2) ... 1.92 1.69 1.29 0.91 1.59 4.41 5.06
Allowance for loan losses to non-performing assets
at end of period(2) .................................... 30.92 37.78 48.90 77.10 48.64 23.66 21.82
Allowance for loan losses to non-performing loans
at end of period ....................................... 35.33 34.67 56.69 77.10 57.53 30.92 31.14
Capital Ratios:
Equity to total assets, at end of period .................... 8.44 7.35 7.71 7.04 7.34 6.50 6.12
Average equity to average assets ............................ 8.20 7.37 7.45 7.26 7.00 6.25 5.69
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................... 103.58 102.94 103.12 102.88 102.13 99.90 99.84
Other data:
Number of full service offices .............................. 1 1 1 1 1 1 1
</TABLE>
- -------------
(1) Net interest income divided by average interest-earning assets.
(2) Includes non-accruing loans, accruing loans delinquent 90 days or more and
assets acquired through foreclosure.
8
<PAGE>
RECENT FINANCIAL DATA OF
FIRST INDEPENDENCE CORPORATION
The summary information presented below as of and for the year ended
September 30, 1997 is derived from the audited financial statements of the
Company. The summary information presented below as of September 30, 1998 and
June 30, 1998, and for the three and twelve months ended September 30, 1998 and
three months ended September 30, 1997 is derived from the Company's unaudited
financial statements. In the opinion of management of the Company, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of results of or as of the periods indicated have been included.
The results of operations and other data for the three month periods are not
necessarily indicative of the results of operations for the fiscal year end. The
following information is only a summary and you should read it in conjunction
with our financial statements and notes beginning on page F-2.
<TABLE>
<CAPTION>
September 30, June 30, September 30,
1998 1998 1997
---- ---- ----
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C>
Total assets....................................... $124,337 $123,366 $112,523
Cash, cash equivalents and interest-bearing
deposits........................................ 914 1,008 3,151
Loans receivable, net.............................. 93,684 90,614 74,559
Mortgage-backed securities - at cost............... 17,274 19,518 23,528
Investment securities - at cost.................... 5,000 5,000 3,000
Securities available for sale...................... 3,418 3,357 4,783
Real estate acquired through foreclosure, net...... 72 36 12
Deposits........................................... 80,573 81,327 76,229
Borrowings......................................... 30,100 28,400 23,700
Stockholders' equity............................... 12,099 11,815 11,529
</TABLE>
<TABLE>
<CAPTION>
Three Months Year Ended
Ended September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Selected Operations Data:
<S> <C> <C> <C> <C>
Total interest income ................... $ 2,350 $ 2,062 $ 9,075 $ 8,069
Total interest expense .................. 1,449 1,307 5,556 5,059
------- ------- ------- -------
Net interest income ................... 901 755 3,519 3,010
Provision for losses on loans ........... -- -- -- --
------- ------- ------- -------
Net interest income after provision for
loan losses .......................... 901 755 3,519 3,010
Other income ............................ 60 76 192 159
Gain on sale of investments ............. -- -- -- --
General, administrative and other expense (527) (492) (2,161) (1,989)
------- ------- ------- -------
Earnings before income tax expense.... 434 339 1,550 1,180
Income tax expense ...................... 177 136 649 468
------- ------- ------- -------
Net earnings ............................ $ 257 $ 203 $ 901 $ 712
------- ======= ------- =======
Basic earnings per share ................ $ .28 $ .22 $ .98 $ .73
======= ======= ======= =======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
At or For the Three At or For the Year
Months Ended September 30, Ended September 30,
------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets)..................... 0.83% 0.72% .75% 0.65%
Interest rate spread information:
Average during period................... 2.53 2.29 2.52 2.31
End of period........................... 2.29 2.19 2.29 2.19
Net interest margin (1)................. 2.98 2.77 2.99 2.81
Ratio of operating expense to average
total assets.............................. 1.69 1.76 1.80 1.81
Return on equity (ratio of net earnings to
average equity)........................... 8.61 7.01 7.72 6.09
Quality Ratios:
Non-performing assets to total assets at
end of period (2)......................... 1.07 1.25 1.07 1.25
Allowance for loan losses to non-
performing assets at end of period (2).... 49.48 47.64 49.48 47.64
Allowance for loan losses to non-
performing loans at end of period ........ 52.30 48.05 52.30 48.05
Capital Ratios:
Equity to total assets, at end of period.. 9.73 10.25 9.73 10.25
Average equity to average assets.......... 9.62 10.31 9.70 10.62
Ratio of average interest-earning assets to
average interest-bearing liabilities...... 109.30 109.97 109.98 110.64
Dividend payout ratio (3)................. 28.85 31.25 31.25 34.93
Number of full service offices............ 2 2 2 2
</TABLE>
- ------------
(1) Net interest income divided by average interest-earning assets.
(2) Includes non-accruing loans, accruing loans delinquent 90 days or more and
assets acquired though foreclosure.
(3) Dividends paid per share divided by earnings per share.
10
<PAGE>
MANAGEMENT'S DISCUSSION OF RECENT RESULTS
OF FIRST INDEPENDENCE CORPORATION
Financial Condition. At September 30, 1998, First Independence's total
assets amounted to $124.3 million as compared to $123.4 million at June 30,
1998. The $900,000 or .79% increase in total assets was primarily due to a $3.1
million or 3.39% increase in net loans receivable (primarily due to the increase
in the origination of construction loans), partially offset by a $2.2 million or
11.50% decrease in mortgage-backed securities. The increase in assets, along
with a reduction of $700,000 in savings deposits, was funded by an increase of
$1.7 million in advances from the Federal Home Loan Bank of Topeka.
Total stockholders' equity increased $284,000 or 2.40% from $11.8
million at June 30, 1998 to $12.1 million at September 30, 1998. The increase
was primarily due to the Company's net earnings from operations of $257,000,
unrealized gains on securities available for sale of $32,000, fair value
adjustment of $24,000 on ESOP shares committed for release, the repayment of
employee stock ownership debt of $18,000, the amortization of unearned stock
compensation of $11,000, and common stock options exercised of $10,000. These
increases were partially offset by the payment during the period of dividends
totaling $69,000.
General. Net earnings amounted to $257,000 and $901,000 for the three
and twelve months ended September 30, 1998, as compared to $203,000 and $712,000
for the same periods in the previous fiscal year. The increase in net earnings
for the three months ended September 30, 1998 was primarily the result of an
increase of $146,000 in net interest income, partially offset by increases in
income tax expense of $41,000 and non-interest expense of $35,000 and a decrease
in non-interest income of $16,000.
The increase in net earnings for the fiscal year ended September 30,
1998 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
$172,000.
Net Interest Income. Net interest income increased by $146,000 and
$509,000 to $901,000 and $3.5 million for the three and twelve months ended
September 30, 1998, respectively, as compared to the three and twelve months
ended September 30, 1997. The Company's average spread increased to 2.53% and
2.52% for the three and twelve months ended September 30, 1998, respectively,
from 2.29% and 2.31% for the three and twelve months ended September 30, 1997,
respectively. The Company's net interest margin increased to 2.98% and 2.99% for
the three and twelve months ended September 30, 1998, respectively, from 2.77%
and 2.81% for the three and twelve months ended September 30, 1997,
respectively.
Interest Income. Total interest income increased by $288,000 and $1.0
million to $2.4 million and $9.1 million for the three and twelve months ended
September 30, 1998, respectively, as compared to the same periods in the
previous fiscal year. These increases were caused primarily by an increase in
the average outstanding amount of interest-earning assets and, to a lesser
extent, an increase in the average yield on interest-earning assets. The
increases in average interest-earning assets and average yield were due
primarily 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,
which is a shorter term to maturity and higher rate when compared to permanent
one- to four-family loans. As a result of this increase in construction loan
originations, we have been able to reduce the interest rate risk of the Company
and improve its earnings.
Interest Expense. Interest expense increased by $142,000 and $497,000 to
$1.4 million and $5.6 million for the three and twelve months ended September
30, 1998, respectively, as compared to the same periods in the previous fiscal
year. These increases were primarily due to an increase in the average
outstanding amount of interest-bearing liabilities due primarily to new accounts
opened at the Coffeyville, Kansas branch office, seasonal deposits from public
units and advances obtained from the Federal Home Loan Bank of Topeka. This
growth in liabilities is being fueled by loan origination opportunities. The
increase in the average outstanding amount of interest-bearing liabilities was
partially offset by a decrease in the average interest rates paid on
interest-bearing liabilities, caused by a reduction in market interest rates.
Provision for Loan Losses. Based upon management's analysis of
established reserves and its ongoing review of the composition of the loan
portfolio, including non-performing assets and other loans of concern, there was
no
11
<PAGE>
provision for losses on loans for the three and twelve months ended September
30, 1998 and September 30, 1997. 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 determination as to the amount of the
allowance for loan losses is subject to review by the regulatory agencies which
can order the establishment of additional general or specific allowances.
Non-Interest Income. Non-interest income decreased $16,000 to $60,000
for the three months ended September 30, 1998 and increased $33,000 to $192,000
for the twelve months ended September 30, 1998, as compared to the same periods
in the previous fiscal year. The decrease in non-interest income for the three
months ended September 30, 1998 was due primarily to a $31,000 decrease in
income from real estate operations. A deferred gain of $29,000 was recognized
during the 1997 three month period, while the remaining $8,000 of the deferred
gain was recognized during the 1998 three month period. The deferred gain
originated from real estate owned that was sold during fiscal 1995. Recurring
non-interest income generally consists of servicing fees as well as deposit and
other types of fees.
Non-interest Expense. Total non-interest expense increased by $35,000
and $172,000 to $527,000 and $2.2 million for the three and twelve months ended
September 30, 1998, respectively, as compared to the same periods in the
previous fiscal year. 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
increases during the year were 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.
Income Tax Expense. Income tax expense increased $41,000 and $181,000 to
$177,000 and $649,000 for the three and twelve months ended September 30, 1998,
respectively, as compared to the same periods in the previous fiscal year. These
increases were primarily due to an increase in pre-tax earnings during the 1998
periods as compared to the 1997 periods.
12
<PAGE>
RECENT FINANCIAL DATA OF THE
NEODESHA SAVINGS AND LOAN ASSOCIATION, FSA
The summary information presented below as of and for the year ended
September 30, 1997 is derived from the audited financial statements of Neodesha.
The summary information presented below as of September 30, 1998 and June 30,
1998, and for the three and twelve months ended September 30, 1998 and three
months ended September 30, 1997 is derived from Neodesha's unaudited financial
statements. In the opinion of management of Neodesha, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of results of or as of the periods indicated have been included. The results of
operations and other data for the three month periods are not necessarily
indicative of the results of operations for the fiscal year end. The following
information is only a summary and you should read it in conjunction with our
financial statements and notes beginning on page F-36.
<TABLE>
<CAPTION>
September 30, June 30, September 30,
1998 1998 1997
---- ---- ----
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C>
Total assets....................................... $13,036 $13,523 $14,155
Cash, cash equivalents and interest-bearing
deposits....................................... 390 583 635
Loans receivable, net.............................. 9,263 9,364 9,468
Mortgage-backed securities -- at cost: ............ 70 159 253
Investment securities -- at cost:
U.S. Treasury.................................. 699 799 897
Agency......................................... 1,316 1,316 1,617
Municipal....................................... 604 604 603
Deposits........................................... 11,185 11,730 12,854
Borrowings......................................... 600 600 100
Retained earnings - substantially restricted....... 1,157 1,141 1,092
</TABLE>
<TABLE>
<CAPTION>
Three Months Year Ended
Ended September 30, September 30,
----------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Selected Operations Data:
<S> <C> <C> <C> <C>
Total interest income ................. $ 249 $ 264 $ 999 $ 1,046
Total interest expense ................ 130 143 534 560
------- ------- ------- -------
Net interest income ................ 119 121 465 486
Provision for losses on loans ......... 7 2 11 6
------- ------- ------- -------
Net interest income after provision for
loan losses ........................ 112 119 454 480
Other income .......................... 30 34 124 135
General, administrative and
other expense ...................... (121) (124) (491) (510)
------- ------- ------- -------
Earnings before income tax expense.. 21 29 87 105
Income tax expense .................... 5 8 22 28
------- ------- ------- -------
Net earnings .......................... $ 16 $ 21 $ 65 $ 77
======= ======= ======= =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months At or For the
Ended September 30, Year Ended September 30,
---------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets) ...................................... 0.50% 0.59% 0.48% 0.54%
Interest rate spread information:
Average during period ..................................... 3.65 3.46 3.48 3.48
End of period ............................................. 3.37 3.49 3.37 3.49
Net interest margin(1) .................................... 3.81 3.60 3.63 3.61
Ratio of operating expense to average
total assets ............................................... 3.64 3.50 3.62 3.58
Return on equity (ratio of net earnings to
average equity) ............................................. 5.78 7.67 5.78 7.25
Quality Ratios:
Non-performing assets to total assets at .................... 1.37 1.29 1.37 1.29
end of period(2)
Allowance for loan losses to non-
performing assets at end of period(2) ...................... 46.07 48.90 46.07 48.90
Allowance for loan losses to non-
performing loans at end of period .......................... 52.90 56.69 52.90 56.69
Capital Ratios:
Equity to total assets, at end of period .................... 8.88 7.71 8.88 7.71
Average equity to average assets ............................ 8.70 7.67 8.32 7.45
Ratio of average interest-earning assets to
average interest-bearing liabilities ....................... 104.01 103.35 103.68 103.12
Other data:
Number of full service offices .............................. 1 1 1 1
</TABLE>
- ------------
(1) Net interest income divided by average interest-earning assets.
(2) Includes non-accruing loans, accruing loans delinquent 90 days or more and
assets acquired through foreclosure.
14
<PAGE>
MANAGEMENT'S DISCUSSION OF RECENT RESULTS
OF THE NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A.
Financial Condition. At September 30, 1998, Neodesha's total assets
amounted to $13.0 million as compared to $13.5 million at June 30, 1998. The
$500,000 or 3.60% decrease in total assets was primarily due to decreases in
cash and cash equivalents of $193,000, net loans receivable of $101,000,
investment securities of $100,000 and mortgage-backed securities of $89,000.
These decreases in assets were used to fund a reduction in savings deposits of
$545,000. Retained earnings increased $16,000 or 1.40% as a result of net
earnings earned during the three months ended September 30, 1998.
General. Net earnings amounted to $16,000 and $65,000 for the three and
twelve months ended September 30, 1998, as compared to $21,000 and $77,000 for
the same periods in the previous fiscal year. The decrease in net earnings for
the three months ended September 30, 1998 was primarily the result of an
increase in the provision for losses on loans of $5,000 and reductions in
noninterest income of $4,000 and net interest income of $2,000. These changes
were partially offset by decreases in non-interest expense of $3,000 and income
tax expense of $3,000.
The decrease in net earnings for the fiscal year ended September 30,
1998 was primarily due to decreases in net interest income of $21,000 and
non-interest income of $11,000 and an increase in provision for losses on loans
of $5,000. These decreases were partially offset by decreases in non-interest
expense of $19,000 and income tax expense of $6,000.
Net Interest Income. Net interest income decreased by $2,000 and
$21,000 to $119,000 and $465,000 for the three and twelve months ended September
30, 1998, respectively, as compared to the three and twelve months ended
September 30, 1997. This decrease was due primarily to a reduction in the
average balance of interest-earning assets during the three and twelve months
ended September 30, 1998.
Interest Income. Total interest income decreased by $15,000 and $47,000
to $249,000 and $999,000 for the three and twelve months ended September 30,
1998, respectively, as compared to the same periods in the previous fiscal year.
These decreases were due primarily to a $996,000 and $654,000 reduction in the
average balance of interest-earning assets and, to a lesser extent, a 3 and 1
basis point decrease in the weighted average yield on interest-earning assets
for the three and twelve months ended September 30, 1998. The decrease in
average interest-earning assets was due primarily to a decrease in investment
securities due to maturities and, to a lesser extent, a decrease in net loans
receivable due to repayments (primarily due to refinancings), exceeding new
originations.
Interest Expense. Interest expense decreased by $13,000 and $26,000 to
$130,000 and $534,000 for the three and twelve months ended September 30, 1998,
respectively, as compared to the same periods in the previous fiscal year. The
decrease for the three months ended September 30, 1998 was primarily due to a
$1.0 million decrease in the average balance of interest-bearing liabilities
and, to a lesser extent, a 5 basis point decrease in the weighted average rate
paid on such liabilities. The decrease for the twelve months ended September 30,
1998 was primarily due to a $696,000 decrease in the average balance of
interest-bearing liabilities, partially offset by a 3 basis point increase in
the weighted average rate paid on interest-bearing liabilities. The decrease in
interest-bearing liabilities was due primarily to an outflow of deposits as a
result of competition from local financial institutions which are aggressively
seeking deposits by offering relatively high interest rates.
Provision for Loan Losses. The provision for loan losses increased
$5,000 for both the three and twelve months ended September 30, 1998 to $7,000
and $11,000, respectively, as compared to the same periods in the previous
fiscal year. Management determined that additional provisions were necessary
based upon their quarterly analysis of the established allowance and review of
the composition of the loan portfolio.
Non-interest Income. Non-interest income decreased $4,000 and $11,000
to $30,000 and $124,000 for the three and twelve months ended September 30,
1998, as compared to the same periods in the previous fiscal year.
Non-interest Expense. Total non-interest expense decreased by $3,000
and $19,000 to $121,000 and $491,000 for the three and twelve months ended
September 30, 1998, respectively, as compared to the same periods in the
previous fiscal year. These decreases were due primarily to a reduction in
compensation and other operating expense.
15
<PAGE>
Income Tax Expense. Income tax expense decreased $3,000 and $6,000 to
$5,000 and $22,000 for the three and twelve months ended September 30, 1998,
respectively, as compared to the same periods in the previous fiscal year. These
decreases were primarily due to a decrease in pre-tax earnings during the 1998
periods as compared to the 1997 periods.
16
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offering.
Interest Rate Risk Exposure
The Company's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When interest
rates rise, the Company's net interest income tends to be adversely impacted
since its liabilities tend to reprice more quickly than its assets. Conversely,
in a declining rate environment the Company's net interest income is generally
positively impacted since its assets tend to reprice more slowly than its
liabilities. Changes in the level of interest rates also affect the amount of
loans originated by the Company and, thus, the amount of loan and commitment
fees, as well as the market value of the Company's interest-earning assets.
Moreover, increases in interest rates also can result in disintermediation,
which is the flow of funds away from savings institutions into direct
investments, such as corporate securities and other investment vehicles, which
generally pay higher rates of return than savings institutions. Finally, a
flattening of the "yield curve" (i.e., a decline in the difference between long
and short-term interest rates), could adversely impact net interest income to
the extent that the Company's assets have a longer average term than its
liabilities.
In managing its asset/liability mix, the Company has, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, placed more emphasis on managing net interest margin than
on better matching the interest rate sensitivity of its assets and liabilities
in an effort to enhance net interest income. In particular, because of customer
demand, a large majority of the Company's residential loans carry fixed interest
rates. As a result, the Company will continue to be significantly vulnerable to
changes in interest rates and to decreases in the difference between long- and
short-term interest rates.
The Company is also subject to reinvestment risk relating to interest
rate movements. Changes in interest rates can affect the average life of loans
and mortgage related securities. Decreases in interest rates can result in
increased prepayments of loans and mortgage related securities, as borrowers
refinance to reduce borrowing costs. Under these circumstances, the Company is
subject to reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.
Despite the Company's efforts to limit its sensitivity to interest rate
changes, at June 30, 1998, the Association's net portfolio value would have
declined by 32% in the event of an instantaneous 200 basis point increase in
general interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company - Asset/Liability
Management."
Diversified Lending Risks
The Company's current operating strategy includes an increased emphasis
on originating real estate construction loans. This lending category is
generally considered to involve a higher degree of risk than that for
traditional single-family residential lending, because, among other factors,
such loans involve larger loan balances to a single borrower or groups of
related borrowers. In addition some loans may default despite the Company's
policies and procedures for loan underwriting. At June 30, 1998, the Company had
a balance of $16.4 million in residential construction loans (16.7% of the total
loan portfolio). 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 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. See
"Business of the Company -- Lending Activities - Construction Lending."
17
<PAGE>
Competition
Both the Association and Neodesha experience significant competition in
their local market areas in both originating real estate and other loans and
attracting deposits. This competition arises from other savings institutions as
well as credit unions, mortgage banks, commercial banks, mutual funds and
national and local securities firms. Due to their size, many competitors can
achieve certain economies of scale and as a result offer a broader range of
products and services than the Association and Neodesha. The Association and
Neodesha attempt to mitigate the effect of such factors by emphasizing customer
service and community outreach. Such competition may limit the Company's growth
in the future.
Geographic Concentration of Business Activities
The Association's and Neodesha's lending and deposit gathering
activities are focused primarily on the local communities of Independence and
Neodesha, Kansas, respectively (although the Association has recently expanded
its lending activities through its new loan production office in Lawrence,
Kansas). In the event that such communities experienced an economic slow down or
a decline in real estate values, the results of operations of the Company could
be materially adversely affected. See "Business of the Company -- Market Area."
Market For Common Stock
Although the Company's Common Stock has been quoted on the Nasdaq
"Small Cap" Market under the symbol "FFSL" for several years, there can be no
assurance that an active or liquid trading market will continue. A public market
having the desirable characteristics of depth, liquidity and orderliness depends
upon the presence in the marketplace of both willing buyers and sellers of the
Common Stock at any given time, which is not within the control of the Company
or any market maker. Accordingly, there can be no assurance that purchasers will
be able to sell their shares at or above the Purchase Price. See "Market for
Common Stock."
Takeover Defensive Provisions
Certain provisions included in the Company's certificate of
incorporation and bylaws are designed to encourage potential acquirors to
negotiate directly with the Board of Directors of the Company. By discouraging
non-negotiated takeover attempts, these provisions may have the effect of
delaying or preventing attempts to change the control of the Company, including
attempts which might result in the payment to stockholders of a premium over the
market price for the Company's shares. These provisions include a classified
board of directors, lack of cumulative voting and authority for stockholders to
call a special meeting, authority for the Company to issue preferred stock and
additional common stock, certain restrictions on acquisitions of or offers to
acquire 10% or more of the outstanding voting stock of the Company,
supermajority vote requirements for amendments to certain provisions of the
certificate of incorporation and to the bylaws, and the requirement that certain
business combinations be approved by either at least 80% of the Company's
outstanding voting stock or by a two-thirds vote of the Board of Directors or
satisfy certain minimum price requirements. In addition, a federal regulation
prohibits transfers of, or agreements to transfer, the legal or beneficial
ownership of subscription rights or the stock issued upon their exercise prior
to completion of a conversion. This regulation also prohibits direct or indirect
acquisitions of (or offers to acquire) the beneficial ownership of more than 10%
of the stock of a converted savings institution without prior OTS approval. The
Change in Savings and Loan Control Act and the Savings and Loan Holding Company
Act, as amended (as well as regulations promulgated pursuant to both of these
Acts) also require OTS approval prior to the acquisition of "control" (as
defined in the regulations) of an insured institution, including a holding
company thereof. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions."
Regulatory Oversight
The Association and Neodesha are subject to extensive regulation,
supervision and examination by the OTS as their chartering authority and primary
federal regulator, and by the FDIC, which insures their deposits up to
applicable limits. The Association and Neodesha are members of the FHLB of
Topeka and are subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Association, the Company
is subject to regulation and oversight by the OTS. See "Regulation." Such
regulation and supervision governs the
18
<PAGE>
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. Regulatory authorities have
been granted extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution,
the adequacy of an institution's capital and allowance for loan losses and the
assessment of fees to protect the insurance funds. See "Regulation - Federal
Regulation of Savings Associations" and "- Regulatory Capital Requirements." Any
change in such regulation and oversight, whether by the OTS, the Federal Reserve
Board, the FDIC or Congress, could have a material impact on the Company, the
Association and their respective operations.
Risk of Delay in Completion of the Offering
The Subscription and Community Offering will expire at ____,
Independence, Kansas time, on _____ __, 1998 unless extended by Neodesha and the
Company. If the offering is extended beyond _______ _, 1998, all subscribers
will have the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest. There can be no assurance that the
Subscription and Community Offering will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares in the Subscription and Community Offering or otherwise may result in a
significant increase in the costs in completing the Merger Conversion.
Significant changes in the Company's or Neodesha's operations and financial
condition, the aggregate market value of the shares to be issued in the Merger
Conversion and general market conditions may occur during such material delay.
See "The Merger Conversion - Risk of Delay in Completion of the Offering."
Capability of the Company's Data Information System to Accommodate the Year 2000
Like many financial institutions, the Association and Neodesha rely
upon computers for the daily conduct of their business and for information
systems processing. There is concern among industry experts that on January 1,
2000 computers will be unable to "read" the new year and there may be widespread
computer malfunctions. The Company and Neodesha generally rely on software and
hardware developed by independent third parties to provide the information
systems they use and management has been advised by the Company's and Neodesha's
information systems providers that the issue is being addressed. The Company and
Neodesha are also in the process of reviewing internally developed programs to
assure year 2000 compliance. Based on information currently available,
management of the Company and Neodesha do not believe that significant
additional costs will be incurred in connection with the year 2000 issue.
FIRST INDEPENDENCE CORPORATION
The Company, a Delaware corporation, was organized by the Association
for the purpose of becoming a thrift institution holding company for the
Association. The Company is authorized to engage in any activity permitted by
Delaware law.
The principal asset of the Company is the outstanding stock of the
Association, its wholly-owned subsidiary. The Company presently has no separate
operations, and its business consists only of the business of the Association.
All references to the Company, unless otherwise indicated, refer to the Company
and the Association on a consolidated basis, as the context requires.
The Company's sources of funds are primarily dividends from the
Association, borrowings and the issuance of shares of capital stock. For a
description of certain restrictions on the Association's ability to pay
dividends to the Company, see "Common Stock Prices and Dividends."
The Company and the Association are subject to examination and
comprehensive regulation and oversight by the OTS and by the FDIC. The
Association is further subject to regulations of Federal Reserve Board governing
reserves required to be maintained against transaction accounts and non-personal
time deposits. The Association is a member of the FHLB of Topeka, which is one
of the 12 regional banks constituting the FHLB System and its savings deposits
are backed by the full faith and credit of the United States Government and are
insured by the SAIF to the maximum extent permitted by law.
19
<PAGE>
The Company's executive offices are located at Myrtle & Sixth,
Independence, Kansas 67301 and its telephone number at that location is (316)
331-1660.
THE NEODESHA SAVINGS AND LOAN ASSOCIATION, FSA
Neodesha began operations in 1887 as a state-chartered mutual savings
institution. In June, 1993, Neodesha converted to a federally chartered mutual
savings and loan association. Its savings accounts have been insured since 1939
and Neodesha has been a member of the FHLB System since 1939. Neodesha's
operations are conducted through its home office in Neodesha, Kansas.
As of June 30, 1998, Neodesha had total assets of $13.5 million,
deposits of $11.7 million and retained earnings of $1.1 million.
The business of Neodesha consists primarily of attracting deposits from
the general public and using those deposits to originate one- to four-family
residential mortgage and consumer loans, to purchase investment securities and
to make other investments.
Neodesha's deposits are backed by the full faith and credit of the
United States Government and are insured to the maximum extent permitted by law
by the SAIF. Neodesha is subject to examination and comprehensive regulation by
the OTS and the FDIC. Neodesha is also a member of the FHLB of Topeka.
The home office of Neodesha is located at 801 Main Street, Neodesha,
Kansas 66757. Its telephone number at that address is (316) 325-3033.
PRO FORMA DATA
Selected Pro Forma Combined Financial Information
The following selected pro forma combined financial information has
been prepared based on the purchase method of accounting. This method of
accounting for business combinations requires that all assets and liabilities of
Neodesha be adjusted to their fair market value as of the date of acquisition.
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Merger Conversion is completed. However, net proceeds are
currently estimated to be between $570,000 and $930,000. Such estimate and the
pro forma information which follows are computed based on an Aggregate Purchase
Price at the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Range on the assumptions that (i) the number of shares of Conversion
Stock at the indicated points within the Valuation Range were sold at the
indicated prices per share (which ranges between 15% above and 15% below the
average of the closing bid quotations of the Company's Common Stock on the
Nasdaq SmallCap Market on October 8, 1998) at the beginning of the appropriate
periods and resulted in net proceeds as indicated; (ii) the net proceeds were
invested at the beginning of the appropriate periods to yield an annualized
return of 4.11%, the one-year treasury bill rate on October 8, 1998 less
applicable federal and state taxes at 38.0% of such return resulting in a pro
forma after tax return of 2.55%; and (iii) other expenses of the Merger
Conversion (including a fee of $85,000 to Trident for its services in connection
with the Merger Conversion) will aggregate $450,000. The use of the current
one-year treasury bill rate is viewed to be more relevant in the current
interest rate environment than the use of an arithmetic average of the weighted
average yield earned by the Company on its interest-earning assets and the
weighted average rate paid on its deposits during such period. The net earnings
for the periods have been adjusted for the pro forma effect of the resulting
assumed increase in Neodesha's and the Company's interest income. No effect has
been given to (i) the withdrawals from savings and deposit accounts for the
purpose of subscribing for shares of the Conversion Stock to be offered in the
Subscription and Community Offering or (ii) the liquidation account to be
established for the benefit of depositors of Neodesha. See "The Merger
Conversion - Effects on Depositors and Borrowers of Neodesha." The pro forma
information may be materially affected by the actual Aggregate Purchase Price
and the number of shares of Conversion Stock issued in the Merger Conversion.
20
<PAGE>
This information should be read in conjunction with the other pro forma
financial information, the accompanying pro forma notes and the consolidated
financial statements for the respective institutions and the related notes
thereto included elsewhere in this Prospectus. The per share prices shown are
for illustrative purposes only, and reflect the minimum, midpoint and maximum of
the per share price range within which shares may be issued in the Merger
Conversion without a resolicitation of subscriptions. The pro forma net earnings
derived from the assumptions set forth above should not be considered indicative
of the actual results of operations of Neodesha or of the Company for any
period, and the assumptions regarding investment yield should not be considered
indicative of the actual yields expected during this and any future period. The
book value data should not be regarded as indicative of the fair market value of
the Conversion Stock, nor does it represent amounts that would be available in
the event of liquidation.
<TABLE>
<CAPTION>
Pro Forma Information - Aggregate Purchase Price
--------------------------------------------------------------------------
15% Above
Minimum of Midpoint of Maximum of Maximum of
Valuation Valuation Valuation Valuation
Range Range Range Range
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Number of shares of the
Company Common Stock to
be issued at the following
prices:
$ 8.12 per share ............. 125,562 147,726 169,879 195,360
$ 9.56 per share ............. 106,728 125,582 144,397 166,056
$10.99 per share ............. 92,807 109,185 125,562 144,397
Gross proceeds ......................... $1,020 $1,200 $1,380 $1,587
Less offering expenses.................. 450 450 450 450
-------- -------- -------- --------
Estimated net proceeds............. $ 570 $ 750 $ 930 $1,137
====== ====== ====== ======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended At or For the Year Ended
June 30, 1998 September 30, 1997
------------------------------------------------ ---------------------------------------------
15% 15%
Above Above
Minimum Midpoint Maximum Maximum Minimum Midpoint Maximum Maximum
of of of of of of of of
Valuation Valuation Valuation Valuation Valuation Valuation Valuation Valuation
Range Range Range Range Range Range Range Range
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands, except per share data)
Net earnings:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Historical-- Company ............ $ 644 $ 644 $ 644 $ 644 $ 712 $ 712 $ 712 $ 712
Historical-- Neodesha ........... 48 48 48 48 77 77 77 77
----- ----- ----- ----- ----- ----- ----- -----
Historical -- Combined .......... 692 692 692 692 789 789 789 789
Pro forma earnings from
proceeds ...................... 11 14 18 22 15 19 24 29
ESOP ............................ (10) (12) (14) (16) (14) (16) (19) (22)
Purchase accounting
effect on earnings ............ 82 82 82 82 109 109 109 109
----- ----- ----- ----- ----- ----- ----- -----
Pro forma combined net
earnings ................. $ 775 $ 776 $ 778 $ 780 $ 899 $ 901 $ 903 $ 905
===== ===== ===== ===== ===== ===== ===== =====
Per Share:
Historical-- Company ....... $0.70 $0.70 $0.70 $0.70 $0.73 $0.73 $0.73 $0.73
Pro forma combined basic
net earnings per
share at the following
assumed prices:
$8.12 per share .......... $0.75 $0.73 $0.72 $0.71 $0.82 $0.81 $0.79 $0.78
$9.56 per share .......... $0.76 $0.75 $0.74 $0.73 $0.83 $0.82 $0.81 $0.80
$10.99 per share ......... $0.77 $0.76 $0.75 $0.74 $0.84 $0.84 $0.83 $0.82
Total stockholders'
equity (net worth):
Historical-- Company ......... $11,815 $11,815 $11,815 $11,815 $11,529 $11,529 $11,529 $11,529
Historical-- Neodesha ........ 1,141 1,141 1,141 1,141 1,092 1,092 1,092 1,092
------- ------- ------- ------- ------- ------- ------- -------
Historical-- Combined ........ 12,956 12,956 12,956 12,956 12,621 12,621 12,621 12,621
Estimated net offering
proceeds ................ 570 750 930 1,137 570 750 930 1,137
Common stock acquired
by ESOP ................. (102) (120) (138) (159) (102) (120) (138) (159)
Purchase accounting
effect on equity ........ (1,141)(1) (1,141)(1) (1,141)(1) (1,141)(1) (1,092)(2) (1,092)(2) (1,092)(2) (1,092)(2)
------ ------ ------ ----- ----- ----- ----- -----
Pro forma combined
stockholders' equity .... $12,283 $12,445 $12,607 $12,793 $11,997 $12,159 $12,321 $12,507
======= ======= ======= ======= ======= ======= ======= =======
Per share:
Historical-- Company .... $12.34 $12.34 $12.34 $12.34 $11.78 $11.78 $11.78 $11.78
Pro forma combined net
stockholders' equity per
share at the following
assumed prices:
$8.12 per share ........ $11.34 $11.26 $11.18 $11.10 $10.87 $10.80 $10.73 $10.66
$9.56 per share ........ 11.54 11.49 11.44 11.39 11.06 11.01 10.97 10.93
$10.99 per share........ 11.70 11.67 11.64 11.61 11.20 11.18 11.16 11.14
</TABLE>
- ---------------
(1) Comprised of write-off of Neodesha property and equipment of $386, net of
deferred tax of $147, with remaining Neodesha equity recorded as negative
goodwill of $902.
(2) Comprised of write-off of Neodesha property and equipment of $384, net of
deferred tax of $146, with remaining Neodesha equity recorded as negative
goodwill of $854.
22
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma combined condensed balance sheets as
of June 30, 1998 and the unaudited combined condensed statements of earnings for
the nine months ended June 30, 1998 and for the year ended September 30, 1997
combine the historical financial statements of the Company and Neodesha. The pro
forma combined condensed statements are presented under the purchase method of
accounting for business combinations. The purchase method of accounting requires
that all assets and liabilities be adjusted to their estimated fair market value
as of the date of acquisition.
The pro forma statements are provided for informational purposes only.
The pro forma combined condensed statements of earnings are not necessarily
indicative of actual results that would have been achieved had the acquisition
been consummated at the beginning of the periods presented, and is not
indicative of future results. The pro forma financial statements should be read
in conjunction with the audited financial statements and the notes thereto of
Neodesha and the Company, and their unaudited interim financial statements
included elsewhere herein.
23
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Purchase
Conversion Accounting Pro Forma
Company Neodesha Adjustments Adjustments Combined
------- -------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash, cash equivalents and interest-
bearing deposits ................................. $ 1,007 $ 583 $ 630(a) $ -- $ 2,220
Investment securities held to maturity ............ 5,000 2,719 -- -- 7,719
Investment securities available for sale .......... 3,357 -- -- -- 3,357
Mortgage-backed securities held to
maturity ..................................... 19,518 159 -- -- 19,677
Loans receivable .................................. 90,614 9,364 -- -- 99,978
Premises and equipment ............................ 1,283 386 -- (386)(b) 1,283
Federal Home Loan Bank stock ...................... 1,449 142 -- -- 1,591
Real estate acquired through foreclosure .......... 36 32 -- -- 68
Negative goodwill.................................. -- -- -- (902)(d) (902)
Other assets ...................................... 1,102 138 -- -- 1,240
--------- --------- --------- --------- ---------
Total assets ............................ $ 123,366 $ 13,523 $ 630 $ (1,288) $ 136,231
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .......................................... $ 81,327 $ 11,730 $ -- $ -- $ 93,057
Advances from Federal Home Loan Bank .............. 28,400 600 -- -- 29,000
Other liabilities ................................. 1,824 52 -- (147)(c) 1,729
--------- --------- --------- --------- ---------
Total liabilities ....................... 111,551 12,382 -- (147)(b) 123,786
Stockholders' equity .............................. 11,815 1,141 630(a) (1,141)(c)(d) 12,445
--------- --------- --------- --------- ---------
$ 123,366 $ 13,523 $ 630 $ (1,288) $ 136,231
========= ========= ========= ========= =========
</TABLE>
See Notes to Pro Forma Unaudited Combined Condensed Financial Statements.
24
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
STATEMENT OF EARNINGS
Nine months ended June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Purchase
Conversion Accounting Pro Forma
Company Neodesha Adjustments Adjustments Combined
------- -------- ----------- ----------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income............... $ 6,725 $ 750 $ 23 (e) $ -- $ 7,498
Total interest expense.............. 4,107 404 -- -- 4,511
------------ ------------- ------------- ------------- -----------
Net interest income............ 2,618 346 23 (e) -- 2,987
Provision for losses on loans....... -- 5 -- -- 5
------------ ------------ ------------ ------------- -----------
Net interest income after provision for
losses on loans................ 2,618 341 23 (e) -- 2,982
Other income........................ 159 94 -- 68 (f) 321
Other expenses...................... (1,661) (371) (20)(g) 23 (h) (2,029)
------------ ------------ ------------ ------------- -----------
Earnings before income taxes........ 1,116 64 5 91 1,274
Income tax expense.................. (472) (16) (1)(i) (9)(j) (498)
------------ ------------ ----------- ------------- -----------
Net earnings........................ $ 644 $ 48 $ 2 $ 82 $ 776
============ ============ =========== ============= ===========
Earnings per share
Basic.......................... $ .70 $ .75
Diluted........................ .65 .70
Average common shares
Basic........................... 923,320 1,036,999
Diluted........................ 987,338 1,101,017
</TABLE>
See Notes to Pro Forma Unaudited Combined Condensed Financial Statements.
25
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
STATEMENT OF EARNINGS
Year ended September 30, 1997
<TABLE>
<CAPTION>
Pro Forma Purchase
Conversion Accounting Pro Forma
Company Neodesha Adjustments Adjustments Combined
------- -------- ----------- ----------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income............... $ 8,069 $ 1,046 $ 31 (e) $ -- $ 9,146
Total interest expense.............. 5,059 560 -- -- 5,619
------------ ------------ --------- ----------- -----------
Net interest income............ 3,010 486 31 (e) -- 3,527
Provision for losses on loans....... -- 6 -- -- 6
------------ ------------ --------- ----------- -----------
Net interest income after provision
for losses on loans............ 3,010 480 31 (e) -- 3,521
Other income........................ 281 135 -- 90 (f) 506
Other expense....................... (2,111) (510) (26)(g) 31 (h) (2,616)
------------ ------------ --------- ----------- -----------
Earnings before income taxes........ 1,180 105 5 121 1,411
Income tax expense.................. (468) (28) (2)(i) (12)(j) (510)
------------ ------------ --------- ----------- -----------
Net earnings........................ $ 712 $ 77 $ 3 $ 109 $ 901
============ ============ ========= =========== ===========
Earnings per share
Basic............................ $ .73 $ .82
Diluted.......................... .68 .77
Average common shares
Basic............................ 980,858 1,094,761
Diluted.......................... 1,051,516 1,165,419
</TABLE>
See Notes to Pro Forma Unaudited Combined Condensed Financial Statements.
26
<PAGE>
NOTES TO PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
General
The pro forma unaudited combined condensed balance sheet as of June 30,
1998 gives effect to the Merger Conversion between the Holding Company and
Neodesha as if the business combination had occurred as of that date. The pro
forma combined condensed balance sheet reflects the business combination using
the purchase method of accounting. The pro forma unaudited combined condensed
statements of earnings for the year ended September 30, 1997 and the nine-month
period ended June 30, 1998 reflect the historical results of operations of the
respective institutions for the periods presented. Pro forma adjustments have
been made to reflect the Merger Conversion and purchase accounting adjustments
as if the Merger Conversion had occurred at the beginning of the earliest period
presented.
Pro Forma Adjustments
(a) Net proceeds of offering ($750,000 at midpoint of the Valuation Range),
after deducting amount of stock purchased by ESOP ($120,000).
(b) Write-off of property and equipment.
(c) Adjustment to deferred tax due to write-off of property and equipment.
(d) Negative goodwill.
(e) Earnings on net proceeds.
(f) Amortization of negative goodwill on a ten-year straight-line basis. The
amortization period approximates the average life of the acquired long-term
interest-bearing assets.
(g) ESOP expense.
(h) Remove depreciation expense (due to write-off of property and equipment).
(i) Tax effect of (e) and (g).
(j) Tax effect of (h).
No additional fair value accounting adjustments are necessary as the
fair value of Neodesha assets and liabilities approximate their carrying value.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization, including deposit
accounts, of the Company and Neodesha as of June 30, 1998, and the pro forma
capitalization on a combined basis giving effect to the merger and the proposed
sale of the Conversion Stock in the Merger Conversion, which is to be accounted
for under the purchase method of accounting for business combinations. Any
changes in the number of shares of Common Stock to be issued and the actual per
share purchase price from those assumed for purposes of this table may
materially affect such pro forma capitalization.
<TABLE>
<CAPTION>
June 30, 1998 Pro Forma Combined Capitalization Based Upon
----------------------- --------------------------------------------------------
15% Above
Minimum of Midpoint of Maximum of Maximum of
Valuation Valuation Valuation Valuation
Company Neodesha Range Range Range Range
------- -------- ----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits .......................... $ 81,327 $ 11,730 $ 93,057 $ 93,057 $ 93,057 $ 93,057
======== ======== ======== ======== ======== ========
Borrowings:
FHLB advances .......................... $ 28,400 $ 600 $ 29,000 $ 29,000 $ 29,000 $ 29,000
======== ======== ======== ======== ======== ========
Stockholders' equity
Preferred stock ........................ $ -- $ -- $ -- $ -- $ -- $ --
Common stock ........................... 15 -- 16 16 16 17
Additional paid-in capital ............. 7,218 -- 7,787 7,967 8,146 8,353
Retained earnings ...................... 9,889 1,141 9,889 9,889 9,889 9,889
Unrealized gain on securities
available for sale, net ............ 20 -- 20 20 20 20
Treasury stock at cost
(542,699 shares) ................... (5,152) -- (5,152) (5,152) (5,152) (5,152)
Required ESOP contribution ............. (164) -- (266) (284) (301) (323)
Unearned stock compensation ............ (11) -- (11) (11) (11) (11)
-------- -------- -------- -------- -------- --------
Total stockholders' equity ............. $ 11,815 $ 1,141 $ 12,283 $ 12,445 $ 12,607 $ 12,793
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) See "The Merger Conversion -- Effects on Depositors and Borrowers of
Neodesha" for information concerning the liquidation account to be
established as a result of the Merger Conversion as well as the liquidation
account established pursuant to the Association's 1993 conversion from
mutual to stock form. See also "Common Stock Prices and Dividends,"
"Regulation" and Note L of the Notes to the Company's Consolidated
Financial Statements regarding restrictions on future dividend payments.
USE OF PROCEEDS
The net Merger Conversion proceeds from the sale of the Common Stock
will increase the net worth of the Company and may support future deposit growth
and expanded lending and investment activities. The Company may retain up to 50%
of such proceeds, and the balance will become part of the Association's general
funds. On an interim basis, the proceeds may be invested in short term
securities. The Company has considered and may continue to consider certain
acquisition possibilities, but has no agreement or understanding at the present
time with respect to any acquisition other than Neodesha. There can be no
assurance that the Company will effect any acquisition. The Company reserves the
right to use the proceeds in any manner authorized by law.
The final appraisal of Neodesha may reflect a significantly different
Valuation Range and the Aggregate Purchase Price may be different than any of
the numbers set forth herein. The Aggregate Purchase Price for the Conversion
Stock will not be determined until after the termination of the Subscription and
Direct Community Offerings. Accordingly, the net proceeds to the Company may
vary from the estimate set forth herein. See "Pro Forma Data." The net proceeds
to the Company will also vary if the Aggregate Purchase Price is adjusted to
reflect a change in the estimated pro forma market value of Neodesha, and will
reflect the actual expenses incurred in the Merger Conversion.
28
<PAGE>
COMMON STOCK PRICES AND DIVIDENDS
The Company's Common Stock has been traded on the Nasdaq SmallCap
Market under the symbol "FFSL" since the consummation of the Association's
conversion to stock form in October 1993. Presented below are the high and low
bid prices for the Common Stock as reported on the Nasdaq SmallCap Market, as
well as the amount of dividends paid on the Common Stock, for each quarter since
the Association's October 7, 1993 conversion to stock form. Amounts have been
adjusted to reflect a two-for-one stock split (in the form of a 100% stock
dividend paid January 24, 1997) in fiscal 1997.
Price Range
-------------------------- Dividends
Quarter Ended High Low Declared
- ------------- ---- --- --------
December 31, 1993 $ 6.375 $ 5.750 $ --
March 31, 1994 6.250 5.813 .0250
June 30, 1994 6.125 5.500 .0250
September 30, 1994 6.875 6.125 .0250
December 31, 1994 6.750 6.125 .0250
March 31, 1995 7.625 6.375 .0375
June 30, 1995 7.875 7.500 .0375
September 30, 1995 9.250 7.750 .0375
December 31, 1995 9.375 9.250 .0375
March 31, 1996 9.375 9.250 .0500
June 30, 1996 9.250 8.875 .0500
September 30, 1996 9.375 8.875 .0500
December 31, 1996 10.250 9.375 .0500
March 31, 1997 11.750 10.250 .0625
June 30, 1997 11.750 10.750 .0625
September 30, 1997 14.000 11.375 .0625
December 31, 1997 14.625 13.625 .0625
March 31, 1998 15.000 13.500 .0750
June 30, 1998 14.625 12.750 .0750
September 30, 1998 13.250 10.000 .0750
For the ten trading days ending on October 8, 1998, the average of the
closing bid quotations of the Common Stock as reported on the Nasdaq SmallCap
Market was $10.06. On February 25, 1998, the last trading day before
announcement of the Merger Conversion, the average of the closing bid and ask
quotations of the Common Stock was $14.8125. As of June 30, 1998, the Company
had 957,319 outstanding shares of Common Stock, held by approximately 207
stockholders of record. This number of stockholders does not reflect the number
of persons or entities who may hold their stock in nominee or "street" name
through brokerage firms or others.
The Company anticipates that it will continue to pay quarterly cash
dividends on the Common Stock, although there can be no assurance as to the
amount or timing of future dividends. The payment of dividends in the future is
at the discretion of the Company's Board of Directors and will depend on the
Company's operating results and financial condition, availability of funds,
regulatory limitations, tax considerations and other factors. The Company has no
current intention to consider making a one time only special dividend or
distribution (including a tax-free return of capital) and will take no steps
toward making such a distribution for at least one year following the completion
of the Merger Conversion.
The Company is a legal entity separate and distinct from the
Association. The principal source of the Company's funds on an unconsolidated
basis is expected to be dividends from the Association. There are various
statutory and regulatory limitations on the extent to which the Association can
pay dividends to the Company. See Note L of the Notes to the Company's
Consolidated Financial Statements. In addition to dividends from the
Association, the Company may obtain funds through borrowings and through the
sale of additional equity securities. See "Regulation."
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THE MERGER CONVERSION
The OTS has approved the Plan of Merger Conversion, subject to the
approval of the Plan by the members of Neodesha and to the satisfaction of
certain other conditions imposed by the OTS. Such approval, however, does not
constitute a recommendation or endorsement of the Plan by the OTS.
General
On February 18, 1998 the Boards of Directors of the Company, the
Association and Neodesha, respectively, unanimously adopted the Plan subject to
approval by the OTS and the members of Neodesha. 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 with and into the Association. The OTS has
approved the Plan, subject to its approval by the affirmative vote of the
members of Neodesha holding not less than a majority of the total number of
votes eligible to be cast at a special meeting (the "Special Meeting") called
for that purpose to be held on __________, 1998.
Subscription Rights are being offered in a Subscription Offering to
deposit account holders as of December 31, 1996, Tax-Qualified Employee Plans,
deposit account holders as of June 30, 1998, voting members of Neodesha as of
__________, 1998, and officers, directors and employees of Neodesha.
Additionally, certain members of the general public are being afforded the
opportunity to subscribe for Company Common Stock in the Direct Community
Offering. See " - Subscription Offering" and " - Direct Community Offering."
Subscriptions for shares will be subject to the maximum and minimum purchase
limitations set forth in the Plan of Conversion.
Business Purposes
Under federal regulations the merger of a mutual institution, such as
Neodesha, with and into a stock institution, such as the Association, requires
the issuance of equity securities of the surviving institution, in this case the
Company. The Board of Directors of Neodesha has approved the Merger Conversion
in the belief that the Merger Conversion is in the best interests of Neodesha,
the depositors and borrowers of Neodesha, and the communities served by
Neodesha. The Merger Conversion will enhance Neodesha's competitive position and
further the interests of the depositors and borrowers of Neodesha and the
communities served by Neodesha by promoting a program of sound growth,
increasing funds and capital available for lending, and providing additional
resources for expansion of services, as well as by providing an enhanced
opportunity for attracting and retaining qualified personnel.
In considering its alternatives, the Board of Directors of Neodesha
determined that conversion to stock form on a stand-alone basis would be
impractical. The Board of Directors of Neodesha believed that it would do
nothing to help Neodesha from the standpoint of its limited operational
resources. With eight full-time employees, Neodesha runs a lean operation
currently. To add the additional pressures and responsibilities attendant with
being a public company would be extremely burdensome (and to hire additional
employees would significantly reduce profitability, assuming quality people
could be found at a reasonable price). Due to the size of the offering, the
Board of Directors of Neodesha further believed that coverting on a stand-alone
basis would result in a publicly held company with limited, if any, liqudity in
the market for its stock. Moreover, the Board of Directors of Neodesha believed
that converting on a stand-alone basis would cause Neodesha to be
over-capitalized, without the resources necessary to expand the range of its
financial products and utilize its additional capital. In addition, it was
believed that an unsuccessful conversion attempt would result in a significant
and perhaps crippling charge to earnings. As such, the Board of Directors of
Neodesha believed that a stand-alone conversion would not address all of
Neodesha's concerns, and would actually create some new concerns.
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The combination of being highly capitalized without the ability to
utilize this capital, an inability to significantly increase earnings and an
illiquid market for the stock would put added pressure on the Board and
management. Based on the foregoing, the Board of Directors of Neodesha
determined that conversion on a stand-alone basis was not a viable alternative.
Certain members of Neodesha's management and Board of Directors have
interests in the Merger Conversion in addition to their interests as members of
Neodesha generally. These interests include (i) the formation and maintenance of
a Neodesha, Kansas Advisory Board (which will initially include all non-employee
directors of Neodesha); (ii) the agreement by the Company to grant to President
Miller, Vice President Holmquist and each non-employee director of Neodesha
options to purchase, upon consummation of the Merger Conversion, 3,000, 1,500,
and 1,000 shares, respectively, of Common Stock (all with an exercise price
equal to the fair market value on the date of grant and subject to vesting over
five years); (iii) the agreement by the Company to enter into a three year
employment agreement with Franklin Miller, president of Neodesha, upon
consummation of the Merger Conversion, which provides for the payment of salary
equal to his current compensation, the payment of 299% of his "base amount"
(five-year average) compensation under certain circumstances in connection with
a change of control of the Company and the use of a company car; and (iv) the
eligibility of former employees of Neodesha who become employees of the Company
for certain employee benefits.
Effects on Depositors and Borrowers of Neodesha
Voting Rights. Deposit account holders of Neodesha will have no voting
rights in the resulting institution ("Resulting Institution") or the Company and
will therefore not be able to elect directors of either entity or to control
their affairs. Voting rights as to the Company will be held exclusively by its
stockholders. Each purchaser of Company Common Stock shall be entitled to vote
on any matters to be considered by the Company stockholders. A stockholder will
be entitled to one vote for each share of Common Stock owned. See "Description
of Capital Stock." The Company intends to supply each stockholder with quarterly
and annual reports and proxy statements.
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Deposit Accounts and Loans. Upon consummation of the Merger Conversion,
each deposit account holder in Neodesha will have a deposit account in the
Resulting Institution equivalent in withdrawable amount to the withdrawal value
and upon substantially the same terms and conditions (other than voting and
liquidation rights) as existed prior to such consummation. The existence of
Neodesha as a financial institution will be terminated by the Merger Conversion
and the Resulting Institution will assume all of the rights, franchises,
interests, obligations and liabilities of Neodesha. The Resulting Institution
will continue to be a member of the FHLB System. Furthermore, the Merger
Conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with Neodesha.
Liquidation Rights. The Association and Neodesha have no plans
whatsoever to liquidate in the foreseeable future, whether or not the Merger
Conversion is completed. However, if there should ever be a complete
liquidation, either before or after Merger Conversion, deposit account holders
of both institutions would receive the protection of insurance by the SAIF up to
applicable limits. Subject thereto, liquidation rights before and after the
Merger Conversion would be as follows:
Liquidation Rights in Present Mutual Association. In addition to the
protection of SAIF insurance up to applicable limits, in the event of a complete
liquidation each holder of a deposit account in Neodesha in its present mutual
form would receive his or her pro rata share of any assets of Neodesha remaining
after payment of claims of all creditors (including the claims of all depositors
in the amount of the withdrawal value of their accounts). Such holder's pro rata
share of such remaining assets, if any, would be in the same proportion of such
assets as the balance in his or her deposit account was to the aggregate balance
in all deposit accounts in Neodesha at the time of liquidation.
Liquidation Rights in Proposed Resulting Institution. After the Merger
Conversion, each deposit account holder, in the event of a complete liquidation,
would have a claim of the same general priority as the claims of all other
general creditors of the Resulting Institution in addition to the protection of
SAIF insurance up to applicable limits. Therefore, except as described below,
the deposit account holder's claim would be solely in the amount of the balance
in his or her deposit account plus accrued interest. The holder would have no
interest in the value of the Resulting Institution above that amount.
The Plan of Merger Conversion provides that there shall be established,
upon the completion of the Merger Conversion, a special "liquidation account"
for the benefit of Eligible Account Holders of Neodesha (i.e., depositors at
December 31, 1996) and Supplemental Eligible Account Holders (i.e., depositors
at June 30, 1998), who continue to maintain their deposit accounts, in an amount
equal to the regulatory capital of Neodesha as of the date of its latest
statement of financial condition contained in the final prospectus relating to
the sales of shares of Company Common Stock in the Merger Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account held in
Neodesha on their respective qualifying dates. A deposit account holder's
interest as to each deposit account would be in the same proportion of the total
liquidation account as the balance in his or her account on December 31, 1996
and June 30, 1998 was to the aggregate balance in all deposit accounts of
Eligible Account Holders and Supplemental Eligible Account Holders,
respectively, on such date. However, if the amount in the deposit account of an
Eligible Account Holder or Supplemental Eligible Account Holder on any annual
closing date of the Resulting Institution is less than the lowest amount in such
account on December 31, 1996 or June 30, 1998, as applicable, and on any
subsequent closing date, then the deposit account holder's interest in this
special liquidation account would be reduced by an amount proportionate to any
such reduction, and the deposit account holder's interest would cease to exist
if such deposit account were closed.
In addition, the interest in the special liquidation account would
never be increased despite any increase in the balance of the deposit account
holder's related account after Merger Conversion, and would only decrease. Any
assets remaining after the above liquidation rights of Eligible Account Holders
and Supplemental Eligible Account Holders and other creditors were satisfied
would be distributed to the Company as the sole stockholder of the Resulting
Institution.
No merger, consolidation, bulk purchase of assets with assumptions of
deposit accounts and other liabilities, or similar transactions, with a
SAIF-insured institution in which Neodesha is not the surviving institution,
shall be considered to be a complete liquidation for purposes of distribution of
the liquidation account and, in any such transaction, the liquidation account
would be assumed to the full extent authorized by regulations of the OTS as then
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in effect. The OTS has stated that the consummation of a transaction of the type
described in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then remaining balance in the liquidation account. While the
Company believes that such a transaction should not constitute a complete
liquidation, there can be no assurance that the OTS will not adopt a contrary
position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Merger Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Merger
Conversion cannot, and will not, be insured by the SAIF.
Tax Consequences of Merger Conversion
The Company has received an opinion from its legal counsel Silver,
Freedman & Taff, L.L.P. to the effect that, based in part on certain
representations made by the Company and Neodesha, for federal income tax
purposes: (i) the Merger Conversion will be a non-taxable reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986 ("Code"); (ii) no gain
or loss will be recognized by Neodesha or the Association as a result of the
Merger Conversion; (iii) the basis of Neodesha's assets in the hands of the
Association will be the same as the basis of those assets in the hands of
Neodesha immediately prior to the transaction; (iv) the holding period of the
Neodesha assets in the hands of the Association will include the period during
which such assets were held by Neodesha; (v) the Association will succeed to and
take into account the earnings and profits, or deficit in earnings and profits,
of Neodesha as of the date of the Merger Conversion; (vi) the Association will
succeed to and take into account immediately after the Merger Conversion the
dollar amounts of Neodesha's bad debt reserve accounts of which Neodesha has
taken a bad debt deduction for taxable years ending on or before the date of the
Merger Conversion and the bad debt reserves will not be required to be restored
to gross earnings of either Neodesha or the Association for the taxable year of
Merger Conversion; (vii) no gain or loss will be recognized by the Association
upon receipt of money for Conversion Stock of the Company; (viii) gain, if any,
will be recognized by savings depositors of Neodesha upon the issuance to them
of withdrawable savings deposits in the Association in the same dollar amount as
their savings deposits in Neodesha, interests in the liquidation account of the
Association, and non-transferable Subscription Rights to purchase Conversion
Stock, in exchange for their Neodesha savings deposits, to the extent of the
fair market value of the Subscription Rights; (ix) no earnings, gain, or loss
will be recognized by savings depositors, employees or officers of Neodesha as a
result of the exercise of non-transferable Subscription Rights; (x) the basis of
the savings deposits in the Association received by the savings depositors of
Neodesha will, in each instance, be the same as the basis of their savings
deposits in Neodesha which are surrendered in exchange therefor, decreased by
the fair market value of the subscription rights received and increased by the
amount of gain recognized on the exchange; (xi) the basis of the
non-transferable subscription rights will be their fair market value; (xii) the
basis of the Company Common Stock to its shareholders will be the purchase price
thereof plus, in the case of Conversion Stock acquired by depositors of
Neodesha, the basis, if any, in the subscription rights; and (xiii) a
shareholder's holding period for Conversion Stock acquired through the exercise
of the non-transferable subscription rights shall begin on the date on which the
subscription rights are exercised.
A number of the opinions described above are premised upon a letter of
Ferguson which, based on certain assumptions, states that the subscription
rights to be received by Eligible Account Holders, Supplemental Eligible Account
Holders and other eligible subscribers do not have any economic value at the
time of distribution or at the time the subscription rights are exercised,
whether or not a public offering takes place.
The Company has also received an opinion of Grant Thornton, LLP that
the Merger Conversion will not be a taxable transaction for Kansas income tax
purposes.
The opinions of Silver, Freedman & Taff, L.L.P., Grant Thornton and
Ferguson have no binding effect on the IRS or the Kansas tax authorities, and
there is no assurance that the conclusions in any of those opinions would be
sustained by a court if contested by such authorities.
Subscription Offering
In accordance with federal regulations, nontransferable Subscription
Rights have been granted under the Plan of Merger Conversion to the following
persons in the following order of priority: (1) Eligible Account Holders
(deposit
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account holders of Neodesha as of December 31, 1996); (2) Tax-Qualified Employee
Plans (defined benefit and contribution plans of the Company, the Association or
Neodesha, qualified under Section 401 of the Internal Revenue Code); (3)
Supplemental Eligible Account Holders (deposit account holders of Neodesha as of
June 30, 1998); (4) members of Neodesha, other than Eligible Account Holders and
Supplemental Eligible Account Holders, at the close of business on _________,
1998, the voting record date for the Special Meeting ("Other Members"); and (5)
officers, directors and employees of Neodesha. All subscriptions received will
be subject to the availability of Company Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering,
and to the maximum and minimum purchase limitations set forth in the Plan of
Merger Conversion (and described below). The beneficiaries of IRA and Keogh
accounts are deemed to have the same subscription rights as other depositors.
However, the IRA and Keogh accounts maintained in Neodesha do not permit
investment in the Common Stock. Preference categories are more fully described
below.
Category No. 1 is reserved for Neodesha's Eligible Account
Holders. Subscription Rights to purchase shares under this category
will be allocated among Eligible Account Holders to permit each such
depositor to purchase shares in this Category in an amount equal to the
greater of $100,000 of Common Stock, one-tenth of one percent (.10%) of
the total shares offered in the Merger Conversion, or 15 times the
product (rounded down to the next whole number) obtained by multiplying
the total number of shares of Common Stock to be issued by a fraction
of which the numerator is the amount of the qualifying deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposits of the Eligible Account Holders in Neodesha, in
each case on the Eligibility Record Date. To the extent shares are
oversubscribed in this category, shares shall be allocated first to
permit each subscribing Eligible Account Holder to purchase, to the
extent possible, 100 shares and thereafter among each subscribing
Eligible Account Holder pro rata in the same proportion that his
Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain
unsatisfied.
Category No. 2 provides for the issuance of Subscription
Rights to Tax-Qualified Employee Plans to purchase up to 10% of the
total amount of shares of Common Stock issued in the Subscription
Offering on a second priority basis. However, such plans shall not, in
the aggregate, purchase more than 10% of the Conversion Stock issued.
The Company's ESOP intends to purchase a total of 10% of the Company's
Common Stock sold in the Merger Conversion under this category.
Subscription Rights received pursuant to this category shall be
subordinated to all rights received by Eligible Account Holders to
purchase shares pursuant to Category No. 1; provided, however, that
notwithstanding any provision of the Plan of Merger Conversion to the
contrary, the Tax-Qualified Employee Plans shall have first priority
Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Merger Conversion exceeds the maximum of the
Valuation Range.
Category No. 3 is reserved for Neodesha's Supplemental
Eligible Account Holders. Subscription Rights to purchase shares under
this category will be allocated among Supplemental Eligible Account
Holders to permit each such depositor to purchase shares in this
Category in an amount equal to the greater of $100,000 of Common Stock,
one-tenth of one percent (.10%) of the total shares of Common Stock
offered in the Merger Conversion, or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of the
qualifying deposits of the Supplemental Eligible Account Holders in
Neodesha in each case on ______ __, 1998 (the "Supplemental Eligibility
Record Date"), subject to the overall purchase limitation after
satisfying the subscriptions of Eligible Account Holders and Tax
Qualified Employee Plans. Any non-transferable Subscription Rights
received by an Eligible Account Holder shall reduce, to the extent
thereof, the subscription rights to be distributed to such person as a
Supplemental Eligible Account Holder. In the event of an
oversubscription for shares, the shares available shall be allocated
first to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to
make his total allocation (including the number of shares, if any,
allocated in accordance with Category No. 1) equal to 100 shares, and
thereafter among each
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subscribing Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying Deposit bears to the total Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then
available after satisfying the subscriptions of Eligible Account
Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account
Holders, for the issuance of Subscription Rights to Other Members to
purchase in this Category up to the greater of $100,000 of Common
Stock, or one-tenth of one percent (.10%) of the Common Stock offered
in the Merger Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members
pro rata in the same proportion that his number of votes on the Voting
Record Date bears to the total number of votes on the Voting Record
Date of all subscribing Other Members on such date. Such number of
votes shall be determined based on Neodesha's mutual charter and bylaws
in effect on the date of approval by members of this Plan of Merger
Conversion.
Category No. 5 provides for the issuance of Subscription
Rights to officers, directors and employees of Neodesha, to purchase in
this Category up to $100,000 of the Common Stock to the extent that
shares are available after satisfying the subscriptions of eligible
subscribers in preference Categories 1, 2, 3 and 4. The total number of
shares which may be purchased under this Category may not exceed 25% of
the number of shares of Conversion Stock. In the event of an
oversubscription, the available shares will be allocated pro rata among
all subscribers in this category based on the number of shares ordered
by each subscriber.
Direct Community Offering
Any shares not subscribed for in the Subscription Offering will be
available for purchase in a Direct Community Offering to the general public,
with a preference to natural persons residing in Wilson County, Kansas. The
Direct Community Offering is being made concurrently with the Subscription
Offering, and may continue after the end of the Subscription Offering for a
period of up to 45 days or for such longer period as the OTS may approve.
Purchase orders received during the Direct Community Offering shall be filled on
a when received basis up to a maximum of $100,000 per purchaser. The Conversion
Stock will be offered and sold in a manner to achieve the widest practicable
distribution of the Conversion Stock. In the event of an extension for longer
than such 45-day period, purchasers will be notified and may increase, decrease
or cancel their purchase orders under conditions prescribed by the Director in
approving the extension. Purchase orders may not otherwise be decreased or
changed by the purchaser without the approval of the Company. The Company has
the right, in its sole discretion, to reject orders, in whole or in part, in the
Direct Community Offering.
Syndicated Community Offering
The Plan of Merger Conversion provides that, if necessary, all shares
of Common Stock not purchased in the Subscription and Community Offering, if
any, may be offered for sale to the general public in a Syndicated Community
Offering through Selected Dealers managed by Trident Securities acting as agent
of the company in the sale of the Common Stock. The Company has the right to
reject orders, in whole or in part, in its sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering; however, Trident Securities has agreed to use its
best efforts in the sale of shares in the Syndicated Community Offering. Common
Stock sold in the Syndicated Community Offering will be sold at a purchase price
per share which is the same price as all others shares being offered in the
Merger Conversion. No person will be permitted to subscribe in the Syndicated
Community Offering for shares of Common Stock with an aggregate purchase price
of more than $100,000.
It is estimated that the Selected Dealers will receive a negotiated
commission based on the amount of Common Stock sold by the Selected Dealer,
payable by the Company. During the Syndicated Community Offering, Selected
Dealers may only solicit indications of interest from their customers to place
orders with the Company as of a certain date (the "Order Date") for the purchase
of shares of Common Stock. When and if Trident Securities and the Company
believe that enough indications and orders have been received in the Offering
to consummate the conversion, Trident Securities will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on a date which will be three business days from the Order Date
("Debit Date"). Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Debit Date. On the next business day following the Debit
Date, Select Dealers will remit funds to the account that the Company
established for each Selected Dealers. After payment has been received by the
Company from Selected Dealers, funds will earn interest at the Bank's passbook
savings rate until the consummation of the Conversion. In the event the
Conversion is not consummated as described above, funds will be returned
promptly with interest to the Selected Dealers, who, in turn, will promptly
credit their customers' brokerage account.
The Syndicated Community Offering may close at any time after the
Expiration Date at the discretion of the Bank and the Company, but in no case
later than ______________________, unless further extended with the consent of
the OTS. The Offering may not be extended beyond _________________, 2000.
Purchase Limitations
The following purchase limitations apply to all purchases of the
Conversion Stock.
(1) No less than $250 worth of the Conversion Stock may be purchased by
any person purchasing Conversion Stock offered in the Merger Conversion.
(2) No person, by himself or herself or with an Associate or with a
group of persons acting in concert (other than a Tax-Qualified Employee Plan),
including individuals on joint accounts or having the same address on Neodesha's
records, may subscribe for or purchase more than $100,000 of the Conversion
Stock offered in the Merger Conversion.
(3) Directors and Officers of Neodesha and their associates may not
purchase an aggregate of more than 35% of the Conversion Stock.
Depending upon market and financial conditions, the Boards of Directors
of the Company and Neodesha, with the approval of the OTS, may increase the
purchase limitations set forth in categories (1) and (2) above. Under such
circumstances, either written or oral notification of the increase will be
provided, to the extent possible, to those persons
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who subscribed for the maximum purchase limitation. Subscribers would then have
the opportunity to subscribe for additional shares of Conversion Stock up to the
new maximum purchase limitation.
Each person purchasing Conversion Stock will be deemed to confirm that
such purchase does not conflict with the above purchase limitations. Directors
of the Company or Neodesha will not be deemed to be Associates or a group acting
in concert in purchasing Conversion Stock solely as a result of their being
directors of the Company or Neodesha.
Independent Valuation
Federal regulations require that the aggregate purchase price of shares
of stock of a thrift institution sold in connection with the conversion of the
thrift institution, must be based on an appraised aggregate pro forma market
value of the converting institution as determined on the basis of an independent
valuation. The Company has retained the appraisal firm of Ferguson to make such
a valuation of the aggregate pro forma market value of Neodesha to the Company
and, accordingly, the Conversion Stock to be offered and sold. For its appraisal
services, Ferguson will receive a fee of approximately $25,000 plus
reimbursement of ordinary and customary out-of-pocket expenses required in
connection with the appraisal and any updates.
The appraisal was prepared in reliance upon the information contained
in this prospectus including Neodesha's and the Company's consolidated financial
statements. The appraiser also considered the following factors among others:
the present and projected operating results and financial condition of Neodesha
and the Company, the economic and demographic conditions in Kansas, the quality
and depth of Neodesha's and the Company's management and personnel, certain
historical, financial and other information relating to Neodesha and the
Company, a comparative evaluation of the operating and financial statistics of
Neodesha and the Company with those of other comparable financial institutions,
the aggregate size of the offering of the Conversion Stock, the impact of the
Merger Conversion on Neodesha's and the Company's net worth and earnings
potential, the trading market for comparable financial institutions' stocks, and
general conditions in the markets for such common stocks. However, Ferguson does
not guarantee the accuracy or completeness of such information. No detailed
individual analysis of the separate components of Neodesha's assets and
liabilities was performed, nor was the accuracy of the information provided by
Neodesha and the Company verified in connection with this evaluation. The Boards
of Directors reviewed the appraisal, including the methodology and the
appropriateness of the assumptions utilized by Ferguson and determined that in
their opinions the appraisal was not unreasonable. The Valuation Range may be
amended with the approval of the OTS in connection with changes in the financial
condition or operating results of Neodesha or market conditions generally. As
described below, an amendment to the Valuation Range above $1,587,0000 would not
be made without a resolicitation of subscriptions and/or proxies except in
limited circumstances.
On the basis of the foregoing, the appraiser has advised the Company
and Neodesha that in its opinion at September 11, 1998, the date as of which
such valuation was made, the aggregate estimated pro forma market value of
Neodesha upon Merger Conversion would have been within the range of $1,020,000
to $1,380,000 or 15% above and below the $1,200,000 midpoint of the range in
accordance with federal regulations.
Depending upon market and financial conditions subsequent to the date
of this prospectus and the length of time needed for the sale of the Conversion
Stock, the independent valuation may be updated as required by federal
regulations. Subscribers and other purchasers will be notified of any material
change in the valuation that would cause the Aggregate Purchase Price to be
outside of the valuation range.
Immediately prior to completion of the Merger Conversion, the appraiser
will provide Neodesha and the Company with an updated valuation reflecting
current financial and market conditions. The Aggregate Purchase Price at which
the Conversion Stock is to be sold must be consistent with this updated final
valuation. If the Aggregate Purchase Price is not within the final valuation
range approved by the OTS, completion of the Merger Conversion will be delayed
until the updated final valuation has received approval from the Director.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE CONVERSION
STOCK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND
PROJECTIONS OF A NUMBER OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE
AMOUNT
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OF NET PROCEEDS AND THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE
FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN
THE MERGER CONVERSION WILL THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES
RELATED TO THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE.
Purchase Price and Number of Shares
The Aggregate Purchase Price for all shares of Conversion Stock to be
issued will be consistent with an independent valuation of the pro forma market
value of Neodesha, as converted.
Based on the Valuation Range as of October 8, 1998, the aggregate pro
forma market value of Neodesha upon Merger Conversion would be within the
Valuation Range of $1,020,000 to $1,380,000 with a midpoint of $1,200,000. The
Aggregate Purchase Price at which the Conversion Stock is sold will be
consistent with the Valuation Range, unless market and financial conditions at
the time of the final updated valuation cause a change in this Valuation Range.
In such event, a revised Valuation Range would be subject to further OTS
approval. If the estimated pro forma market value of Neodesha as so determined
is not within the Valuation Range, a resolicitation of subscriptions may be
made, the Plan of Merger Conversion may be terminated or such other action as
the OTS may permit may be taken; provided that if the pro forma market value of
Neodesha upon Merger Conversion has increased to an amount which does not exceed
$1,587,000 (15% above the high end of the Valuation Range), the Company and
Neodesha do not intend to resolicit subscriptions unless it is determined after
consultation with the OTS that a resolicitation is required.
All shares to be issued in the Merger Conversion will be sold at the
same actual purchase price per share, which shall be equal to 95% of the average
of the market price of the Company's Common Stock (which is the average of the
closing bid quotations on the Nasdaq SmallCap Market) for the ten trading days
ending on the Pricing Date. Assuming a price per share of $9.56, which is 95% of
the average of the closing bid quotations for the Company's Common Stock as of
October 8, 1998, a minimum of 106,728 shares and a maximum of 144,397 shares (or
166,056 shares if the Valuation Range is increased by 15%) of Conversion Stock
will be issued.
Depending upon market and financial conditions, the number of shares of
Conversion Stock issued may be more or less than the range in number of shares
shown above. The total number of shares to be issued in the Merger Conversion
will be determined by dividing the actual purchase price into the appropriate
aggregate price for the shares within the current Valuation Range as determined
by Ferguson. However, no fractional shares of Common Stock will be issued. The
total number of shares of the Conversion Stock to be issued and sold to each
purchaser will be determined promptly after the Pricing Date by dividing the
Aggregate Purchase Price by the actual purchase price per share, with a refund
for the differences between (i) such amount paid and (ii) the portion of such
amount representing the actual purchase price multiplied by the highest possible
number of whole shares.
Marketing Arrangements
The Company has retained Trident, a broker-dealer registered with the
Securities and Exchange Commission (the "SEC") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), to consult with and advise
the Company and Neodesha and to assist in the distribution of shares in the
offering on a best-efforts basis. Among the services Trident will perform are
(i) training and educating Company and Neodesha employees, who will be
performing certain ministerial functions in the offering, regarding the
mechanics and regulatory requirements of the stock sale process, (ii) keeping
records of orders for shares of Common Stock, (iii) targeting sales efforts
including preparation of marketing materials, (iv) assisting in the collection
of proxies from members of Neodesha for use at the Special Meeting, and (v)
providing its registered stock representatives to staff the Stock Center and
meeting with and assisting potential subscribers. For its services, Trident will
receive a success fee of $85,000. If the offering is terminated before
completion, Trident will be entitled to retain any fee or expense payments
already accrued or received.
To the extent registered broker-dealers are utilized ("Selected
Dealers"), the Company will pay a fee (to be negotiated, but not to exceed 5.5%
of the aggregate Purchase Price of shares of Common Stock sold in the Direct
Community Offering, including the Syndicated Community Offering) to such
dealers, including any sponsoring dealer fees. Fees paid to Trident and to any
other broker-dealer may be deemed to be underwriting fees, and Trident and such
other broker-dealers may be deemed to be underwriters. The Company has agreed to
reimburse Trident for its reasonable out-of-pocket expenses (not to exceed
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$12,500), and its legal fees and expenses (not to exceed $35,000) and to
indemnify Trident against certain claims or liabilities, including certain
liabilities under the Securities Act.
Directors and executive officers of the Company and Neodesha may, to a
limited extent, participate in the solicitation of offers to purchase Common
Stock. Sales will be made from a Stock Center located away from the publicly
accessible areas (including teller windows) of Neodesha's offices. Other
employees of Neodesha may participate in the offering in administrative
capacities, providing clerical work in effecting a sales transaction or
answering questions of a potential purchaser provided that the content of the
employee's responses is limited to information contained in this Prospectus or
other offering document. Other questions of prospective purchasers will be
directed to executive officers or registered representatives of Trident. Such
other employees have been instructed not to solicit offers to purchase Common
Stock or provide advice regarding the purchase of Common Stock. To the extent
permitted under applicable law, directors and executive officers of the Company
and Neodesha may participate in the solicitation of offers to purchase Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange Act and sales of
Common Stock will be conducted within the requirements of Rule 3a4-1, so as to
permit officers, directors and employees to participate in the sale of Common
Stock. No officer, director or employee of the Company or Neodesha will be
compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
A Stock Center will be established at Neodesha's office, in an area
separated from Neodesha's banking operations. No sales activities will be
conducted in the public areas of Neodesha's offices, but persons will be able to
obtain a Prospectus and sales information at such places, and employees will
inform prospective purchasers to direct their questions to the Stock Center and
will provide such persons with the telephone number of the Stock Center.
Completed stock orders will be accepted at such places, and will be promptly
forwarded to the Stock Center for processing.
Neodesha and the Company will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for shares, pursuant to the Plan of Merger Conversion, reside.
However, no shares will be offered or sold under the Plan of Merger Conversion
to any such person who (1) resides in a foreign country or (2) resides in a
state of the United States in which a small number of persons otherwise eligible
to subscribe for shares under the Plan of Merger Conversion reside or as to
which Neodesha and the Company determine that compliance with the securities law
of such state would be impracticable for reasons of cost or otherwise,
including, but not limited to, a requirement that Neodesha or the Company or any
of their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesmen or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
Method of Payment for Subscriptions
For Subscription Rights to be exercised, a completed Order Form and
form of certification with the required payment must be received by the Company
or Neodesha by ____ p.m., Independence, Kansas time, on ___________, 1998,
unless the period of the Subscription Offering and Direct Community Offering is
extended. Any Order Forms not received during the Subscription Offering and
Direct Community Offering period, or any executed defectively, or any received
without full payment, will not be accepted and the Subscription Rights will
expire. The Company may seek correction of defectively executed forms, or may
waive an immaterial irregularity but does not represent that it will do so.
After receipt by the Company or Neodesha, subscriptions may not be modified,
withdrawn or canceled without the consent of the Company, except in the event of
an extension of the 45-day period after the termination of the Subscription
Offering for completion of the sale of all unsubscribed shares. In such event,
subscribers will be entitled to increase, decrease or cancel their subscriptions
under conditions set by the Director.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Stock Information Center, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with Neodesha. Appropriate means by which such withdrawals may be authorized are
provided on the Order Form. However, neither the Company nor Neodesha may
knowingly lend money to any person for the purpose of purchasing shares in the
Merger Conversion. Payments from private third parties or payments through
electronic transfer of funds will not be accepted. No wire transfers will be
accepted. Interest will be paid on payments made by cash, check, bank draft or
money order at the Association's passbook rate from the date payment is received
until the completion or
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termination of the Merger Conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates until
completion or termination of the Merger Conversion (unless the certificate
matures after the date of receipt of the Order Form but prior to closing, in
which case funds will earn interest at the passbook rate from the date of
maturity until consummation of the Merger Conversion ), but a hold will be
placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Merger Conversion. At the completion of the
Merger Conversion, the funds received in the Subscription and Community Offering
will be used to subscribe for the shares of Common Stock ordered. The shares of
Common Stock issued in the Merger Conversion cannot and will not be insured by
the FDIC or any other government agency. In the event that the Merger Conversion
is not consummated for any reason, all funds submitted will be promptly refunded
with interest as described above.
Interest penalties for early withdrawal applicable to certificate
accounts will not apply to withdrawals authorized for the purchase of Conversion
Stock. However, if the remaining balances in certificate accounts are less than
the minimum qualifying balance, the certificates evidencing such accounts will
be canceled upon consummation of the offering, and the remaining balances will
thereafter earn interest at the passbook rate. Interest will be paid on all
amounts authorized for withdrawal from savings accounts until the date of the
completion or termination of the Subscription Offering and Direct Community
Offering.
A depositor interested in using his or her Neodesha IRA funds to
purchase Common Stock must do so through a self-directed IRA. Since neither
Neodesha nor the Company offers such accounts, a depositor will be allowed to
make a trustee-to-trustee transfer of the IRA funds to a trustee offering a
self-directed IRA program with the agreement that such funds will be used to
purchase the Company's Common Stock in the offering. There will be no early
withdrawal or IRS interest penalties for such transfers. The new trustee would
hold the Common Stock in a self-directed account in the same manner as Neodesha
now holds the depositor's IRA funds. An annual administrative fee may be payable
to the new trustee. Depositors interested in using funds in a Neodesha IRA to
purchase Common Stock should contact the Stock Center at Neodesha as soon as
possible so that the necessary forms may be forwarded for execution and returned
prior to the day before the Expiration Date.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather, may pay for such shares of Common Stock
subscribed for upon consummation of the Merger Conversion, provided that there
is in force from the time of its subscription until such time, a loan commitment
to lend to the ESOP, at such time, the aggregate purchase price of the shares
for which it subscribed.
Cash, checks, bank drafts and money orders received in anticipation of
stock purchases by subscribers will be placed in a savings account established
specifically for this purpose. Interest will be paid on subscriptions made by
check or in cash at the Association's passbook rate from the date payment is
received until consummation or termination of the Merger Conversion.
All refunds and any interest due will be paid after completion of the
Merger Conversion. Certificates representing shares of Common Stock purchased
will be mailed to purchasers at the last address of such persons appearing on
the records of Neodesha, or to such other address as may be specified in
properly completed Order Forms, as soon as practicable following consummation of
the sale of all shares of Conversion Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order Forms will only be distributed with a prospectus. The Company will accept
for processing only orders submitted on original Order Forms. Photocopies or
facsimile copies of Order Forms will not be accepted. Payment by cash, check,
money order, bank draft or debit authorization to an existing account at
Neodesha must accompany the Order Form. No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1996), Supplemental Eligibility Record Date (September 30, 1998) and/or the
Voting Record Date (_____
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__, 1998) must list all accounts on the Order Form giving all names on each
account and the account number as of the applicable record date.
In the event that the Merger Conversion is not consummated for any
reason, all funds submitted in the Subscription Offering and Direct Community
Offering will be promptly refunded after termination of the offering.
Subscription Rights are non-transferable and non-negotiable, and may only be
exercised by the holder on his or her own behalf.
Risk of Delayed Offering
In the event that all shares of the Conversion Stock are not sold in
the Subscription Offering and concurrent Direct Community Offering, the Company
may extend the Direct Community Offering for a period of 45 days from the
Subscription Expiration Date. Further extensions are subject to OTS approval.
Some converting financial institutions and their holding companies have had to
obtain extensions from the OTS for the consummation of their offerings. An
extension may be necessitated by volatility of the market for the stock of
thrift institutions or by periods of widespread operating losses in the
industry. If the offering is extended beyond _____, 1998, all subscribers will
have the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest. There can be no assurance that the
offering will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed
shares of Conversion Stock may result in a significant increase in the costs in
completing the Merger Conversion. Significant changes in Neodesha's operations
and financial condition, the aggregate market value of the shares to be issued
in the Merger Conversion and general market conditions may occur during such
material delay. In the event the Merger Conversion is not consummated within 24
months after the date of the Special Meeting of Members, Neodesha would charge
accrued Merger Conversion costs to then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Merger Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by Neodesha and the Company and will be final,
subject to the authority of the OTS and the requirements of applicable law. The
Plan of Merger Conversion provides that, if deemed necessary or desirable by the
Boards of Directors of Neodesha and the Company, the Plan of Merger Conversion
may be substantively amended by the Boards of Directors of Neodesha and the
Company, as a result of comments from regulatory authorities or otherwise, at
any time with the concurrence of the OTS and the SEC. In the event the Plan of
Merger Conversion is substantially amended, other than a change in the maximum
purchase limits set forth herein, the Company intends to notify subscribers of
the change and to refund subscription funds with interest unless subscribers
affirmatively elect to increase, decrease or maintain their subscriptions. The
Plan of Merger Conversion will terminate if the sale of all shares is not
completed within 24 months after the date of the Special Meeting of Members. The
Plan of Merger Conversion may be terminated by the Boards of Directors of the
Company and Neodesha with the concurrence of the OTS, at any time. A specific
resolution approved by a two-thirds vote of the Boards of Directors of the
Company and Neodesha would be required to terminate the Plan of Merger
Conversion prior to the end of such 24-month period.
Restrictions on Transferability
Prior to the completion of the Merger Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Merger Conversion.
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Neodesha and the Company may pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Except as to directors, executive officers of Neodesha and the Company
and their associates, the shares of Common Stock sold pursuant to the Merger
Conversion will be freely transferable. Shares purchased by directors, executive
officers or their associates in the Merger Conversion shall be subject to the
restrictions that said shares shall not be sold during the period of one year
following the date of purchase, except in the event of the death of the
stockholder, in which event such restriction shall be released. Accordingly,
stock certificates issued by the Company to directors, executive officers and
associates shall bear a legend giving appropriate notice of such restriction
and, in addition, Neodesha and the Company will give appropriate instructions to
the transfer agent for the Company's Common Stock with respect to the applicable
restriction upon transfer of any restricted shares. Any shares issued at a later
date as a stock dividend, stock split or otherwise, to holders of restricted
stock, shall be subject to the same restrictions that may apply to such
restricted stock. Company Common Stock (like the stock of most companies) is
subject to the requirements of the Securities Act. Accordingly, Company Common
Stock may be offered and sold only in compliance with registration requirements
or pursuant to an applicable exemption from registration.
Company Common Stock received in the Merger Conversion by persons who
are not "affiliates" of the Company may be resold without registration. Shares
received by affiliates of the Company (primarily the directors, officers and
principal stockholders of the Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Company, and that sales thereunder be made in routine
brokerage transactions or through a market maker. If the conditions of Rule 144
are satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of shares which does not exceed the greater
of (i) 1% of the number of outstanding shares of Company Common Stock, or (ii)
if the stock is admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities
association, the average weekly reported volume of trading during the four weeks
preceding the sale.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
General
Effective October 5, 1993, First Federal converted from a federally
chartered mutual savings association to a federally chartered stock savings
association and concurrently became a subsidiary of 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.
The Company's business consists of attracting deposits from the general
public and using such deposits primarily to make residential mortgage and other
loans. The Company's revenues are derived principally from interest charges on
mortgage loans and mortgage-backed securities and, to a lesser extent, from
interest earned on investment securities and interest-bearing deposits. In
addition, the Company receives fees from loan originations, late payments and
for various services related to transaction and other deposit accounts, and
dividends on its Federal Home Loan Bank ("FHLB") stock.
The operations of the Company, and savings institutions and their
holding companies in general, are significantly affected by general economic
conditions and the related monetary and fiscal policies of regulatory agencies.
Deposit flows and cost of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of assets,
which in turn is affected by the interest rates at which such financing may be
offered and other factors including the availability of funds.
Historically, the Company's principal business was the origination for
its portfolio of long-term, fixed rate mortgage loans, using funds provided by
passbook and short-term certificate of deposit accounts. During the early
1980's, the Board commenced the development and implementation of a strategy
designed to reduce vulnerability to interest rate fluctuations by increasing the
Company's adjustable rate assets. As a result of the implementation of this
strategy, management believes that the Company has reduced its vulnerability to
changes in interest rates.
Comparison of Financial Condition at June 30, 1998 and September 30, 1997 for
the Company
The Company's total assets increased $10.9 million, or 9.64%, from
$112.5 million at September 30, 1997 to $123.4 million at June 30, 1998. This
increase was primarily a result of increases of $16.0 million in net loans
receivable and $1.1 million in investment securities. These increases in assets
were funded by increases in savings deposits of $5.1 million, advances from the
Federal Home Loan Bank of Topeka of $4.7 million, checks issued in excess of
cash items of $930,000, and decreases in mortgage-backed securities of $4.5
million and cash and cash equivalents of $2.2 million.
Loans receivable increased $16.0 million from $74.6 million at
September 30, 1997, to $90.6 million at June 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 over the construction period.
See "Business of the Company - Lending Activities Construction Lending." 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 allowance for loan losses totaled $656,000, or .72% of total loans
at June 30, 1998, which represented a $12,000 decrease from $668,000, or .90% of
total loans, at September 30, 1997. The ratio of the allowance for loan losses
as a percent of non-performing loans increased from 48.05% at September 30, 1997
to 100.34% at June 30, 1998. At June 30, 1998, the Company's non-performing
loans were comprised primarily of one- to four-family residential loans. See
"Non-performing Assets."
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The allowance for loan losses is determined based upon an evaluation of
pertinent factors underlying the types and qualities of the Company's loans.
Management considers such factors as the repayment status of a loan, the
estimated net realizable value of the underlying collateral, the borrower's
ability to repay the loan, current and anticipated economic conditions which
might affect the borrower's ability to repay the loan and the Company's past
statistical history concerning charge-offs.
Total deposits increased $5.1 million from $76.2 million at September
30, 1997, to $81.3 million at June 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 $4.7 million from $23.7 million at
September 30, 1997 to $28.4 million at June 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 $286,000 from $11,529,000 at
September 30, 1997 to $11.8 million at June 30, 1998. The increase was primarily
due to the Company's net earnings from operations of $644,000, fair value
adjustment of $101,000 on ESOP shares committed for release, the repayment of
employee stock ownership debt of $55,000, the amortization of unearned stock
compensation of $33,000, common stock options exercised of $21,000, and
unrealized gains on securities available for sale of $5,000. These increases
were partially offset by the Company's use of $377,000 to repurchase 25,298
shares of common stock and dividends of $196,000 paid to stockholders.
Comparison of Financial Condition at September 30, 1997 and September 30, 1996
for the Company
The Company's total assets increased $4.0 million, or 3.7%, from $108.5
million at September 30, 1996 to $112.5 million at September 30, 1997. This
increase was primarily due to increases in net loans receivable of $6.9 million,
cash and cash equivalents of $1.4 million, premises and equipment of $400,000,
investment securities of $100,000 and Federal Home Loan Bank stock of $100,000.
The increase in premises and equipment was primarily due to the construction of
a branch office in Coffeyville, Kansas. These increases in assets, along with
reductions in advances from the Federal Home Loan Bank of Topeka of $600,000,
checks issued in excess of cash items of $500,000 and other accrued expenses and
liabilities of $400,000 were funded by increases in deposits of $6.8 million and
decreases in mortgage-backed securities of $4.7 million.
Total loans receivable increased $6.9 million from $67.7 million at
September 30, 1996, to $74.6 million at September 30, 1997. Increased economic
activity in the Company's lending area resulted in loan originations exceeding
loan repayments. The loan portfolio is comprised primarily of first mortgage
loans secured by one- to four-family residential real estate located in the
Company's market area. The increase in one- to four-family mortgage loans
consisted primarily of 15- and 30-year fixed-rate loans and, to a lesser extent,
one-year adjustable rate mortgages and mortgage loans with a fixed rate for the
first three years of the loan term that automatically convert to one- year
adjustable rate loans during the fourth year. Auto loans also increased due to
originations to existing customers in the Company's local markets. The offering
of consumer loan products helps to expand and create stronger ties to the
Company's existing customer base by increasing the number of customer
relationships and providing cross-marketing opportunities.
The allowance for loan losses totaled $668,000 at September 30, 1997
which represented a $22,000 decrease from the allowance for loan losses at
September 30, 1996. The ratio of the allowance for loan losses as a percent of
total loans decreased from 1.02% at September 30, 1996 to .90% at September 30,
1997, primarily due to the increase in total loans receivable at September 30,
1997. The allowance for loan losses as a percent of non-performing loans
decreased from 114.62% at September 30, 1996 to 48.05% at September 30, 1997,
due to the increase in non-performing loans at September 30, 1997. At September
30, 1997, the Company's non-performing loans were comprised primarily of one- to
four-family residential loans.
The allowance for loan losses is determined based upon an evaluation of
pertinent factors underlying the types and qualities of the Company's loans.
Management considers such factors as the repayment status of a loan, the
estimated net realizable value of the underlying collateral, the borrower's
ability to repay the loan, current and anticipated economic conditions which
might affect the borrower's ability to repay the loan and the Company's past
statistical history concerning charge-offs.
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Total deposits increased $6.8 million from $69.4 million at September
30, 1996, to $76.2 million at September 30, 1997. Deposits increased in fiscal
1997 primarily as a result of the "Bulldog" certificate account developed in
January 1995 and the "Platinum" money fund account introduced in May 1995. The
"Bulldog" account offers interest rates from 25 to 50 basis points above the
local market for a term of eighteen months. The "Platinum" money fund account
offers tiered rates on a limited transaction account with the highest rate paid
on balances of $50,000 and above. Management feels the "Bulldog" certificate and
"Platinum" money fund provide an alternative to deposit customers looking to
higher risk investments with higher yields than certificates of deposit and
money market accounts.
Total borrowed funds decreased $600,000 from $24.3 million at September
30, 1996 to $23.7 million at September 30, 1997 although the average balance of
FHLB advances during fiscal 1997 was $4.5 million higher than in fiscal 1996.
The decrease was due to the principal repayment of advances obtained from the
Federal Home Loan Bank of Topeka. The increase in deposits provided the Company
with the opportunity to reduce the amount of its outstanding advances. Most of
the advances obtained from the Federal Home Loan Bank of Topeka were originally
used by the Company to invest in loans receivable at a positive spread over the
term of the advances.
Total stockholders' equity decreased approximately $1.5 million from
$13.0 million at September 30, 1996 to $11.5 million at September 30, 1997. The
decrease was primarily the result of the Company's use of $2.2 million to
repurchase 197,963 shares of common stock and dividends of $231,000 paid to
stockholders. These decreases were partially offset by the Company's net
earnings from operations of $712,000, a fair value adjustment of $90,000 on ESOP
shares committed for release, the repayment of employee stock ownership plan
("ESOP") debt of $73,000, common stock options exercised of $47,000, the
amortization of unearned stock compensation of $44,000 and unrealized gains on
securities available for sale of $26,000, net of deferred taxes.
Non-performing Assets of the Company
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 June 30, 1998,
non-performing assets were approximately $689,000, which represents a decrease
of $714,000, or 50.9%, as compared to September 30, 1997. This decrease was due
primarily to one loan totaling $344,000 secured by a single family residence in
Texas, which had been classified as non-accruing at September 30, 1997, but was
less than 90 days delinquent at June 30, 1998. In February 1991, the borrowers
experienced financial difficulties and filed for protection under the bankruptcy
statutes. Pursuant to the plan of reorganization approved by the Bankruptcy
Court, the borrowers are required to make additional payments each month to make
up the delinquent payments and interest. Although there are still certain
payments which are delinquent, at June 30, 1998, the borrowers were complying
with the terms of the repayment plan. The decrease was also due to one loan
totaling $139,000 secured by a single family residence in Texas, which had been
classified as accruing delinquent 90 days or more at September 30, 1997, but was
less than 90 days delinquent at June 30, 1998.
Included in non-accruing loans at June 30, 1998, were eleven loans
totaling $521,000 secured by one- to four-family real estate and five consumer
loans totaling $22,000. All non-accruing loans at June 30, 1998, were located in
the Company's primary market area. At June 30, 1998, accruing loans delinquent
90 days or more included two loans totaling $65,000 secured by one- to
four-family real estate and one loan totaling $21,000 secured by non-residential
real estate. At June 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.
A summary of non-performing assets by category is set forth in the
following table:
June 30, September 30,
1998 1997
---- ----
(Dollars in Thousands)
Non-Accruing Loans ............................. $ 543 $1,049
Accruing Loans Delinquent
90 Days or More ............................... 86 292
Trouble Debt Restructurings .................... 24 50
Foreclosed Assets .............................. 36 12
------ ------
Total Non-Performing Assets .................... $ 689 $1,403
====== ======
Total Non-Performing Assets
as a Percentage of Total Assets ............... 0.56% 1.25%
====== ======
44
<PAGE>
Foreclosed Assets. At June 30, 1998, the Company's real estate acquired
through foreclosure included one single family residence located in the
Company's primary market area with a carrying value of $36,000.
Results of Operations of the Company
Comparison of Three and Nine Months Ended June 30, 1998 and June 30,
1997 for the Company
General. Net earnings for the nine months ended June 30, 1998 were
$644,000 as compared to $509,000 for the nine months ended June 30, 1997,
resulting in an increase of $135,000 or 26.4%. The increase in net earnings was
primarily due to increases in net interest income of $363,000 and non-interest
income of $48,000. These increases were partially offset by increases in income
tax expense of $140,000 and non-interest expense of $137,000.
Net earnings for the three months ended June 30, 1998 were $286,000 as
compared to $177,000 for the three months ended June 30, 1997, resulting in an
increase of $91,000 or 51.9%. The increase in net earnings was primarily due to
increases in net interest income of $148,000 and non-interest income of $23,000,
partially offset by increases in income tax expense of $57,000 and non-interest
expense of $22,000.
Net Interest Income. Net interest income increased $363,000, or 16.12%,
for the nine months ended June 30, 1998 as compared to the nine months ended
June 30, 1997. This increase was due primarily to an increase in interest income
of $718,000, or 11.95%; offset partially by an increase in interest expense of
$355,000, or 9.45%. Interest income increased primarily due to a $9.5 million
increase in the average balance of interest-earning assets, and a 21 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 $9.4 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 $4.8
million increase in the average balance of low cost demand and NOW deposits and,
to a lesser extent, a decrease in market interest rates.
Net interest income increased $148,000, or 19.17%, for the three months
ended June 30, 1998, as compared to the three months ended June 30, 1997. This
increase was due primarily to an increase in interest income of $311,000, or
15.27%, offset partially by an increase in interest expense of $163,000 or
12.89%. The increase was due to the same reasons as stated above for the nine
months ended June 30, 1998, as compared to the nine months ended June 30, 1997.
The ratio of average interest-earning assets to average interest-bearing
liabilities decreased from 110.5% for the three months ended June 30, 1997 to
110.0% for the three months ended June 30, 1998.
Interest Income. Interest income for the nine months ended June 30,
1998, increased to $6,725,000 from $6,007,000 for the nine months ended June 30,
1997. This increase was caused primarily by a $9.5 million increase in the
average outstanding amount of interest-earning assets during the nine months
ended June 30, 1998, as compared to the nine months ended June 30, 1997; due to
the increase in the average balance of loans receivable financed by the
increased average balance of savings deposits. The average balance of savings
deposits during the nine months ended June 30, 1998 was $7.5 million higher than
during the nine months ended June 30, 1997. 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 21 basis points
to 7.71% for the nine months ended June 30, 1998, from 7.50% for the nine months
ended June 30, 1997. This increase was caused primarily by increases in yield on
the Association's Federal Home Loan Bank stock from 6.62% to 7.64%, loan
portfolio from 8.02% to 8.19%, and mortgage-backed securities portfolio from
6.51% to 6.57% for the nine months ended June 30, 1998, as compared to the nine
months ended June 30, 1997. These increases were partially offset by a decrease
in the investment securities portfolio yield from 6.62% to 6.33% for the nine
months ended June 30, 1998, as compared to the nine months ended June 30, 1997.
The decrease in yield on investment securities was primarily due to the
reinvestment of proceeds from called securities into lower yielding investments.
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.
45
<PAGE>
Interest income for the quarter ended June 30, 1998, increased to
$2,348,000 from $2,037,000 for the quarter ended June 30, 1997. This increase
was caused primarily by a $13.2 million increase in the average outstanding
amount of interest-earning assets during the three months ended June 30, 1998,
as compared to the three months ended June 30, 1997 due to the increase in the
average balance of loans receivable financed by advances obtained from the
Federal Home Loan Bank of Topeka and increased savings deposits. To a lesser
extent, the increase was due to an increase in the average yield on
interest-earning assets. The average yield on interest-earning assets increased
20 basis points to 7.78% at June 30, 1998, from 7.58% at June 30, 1997. This
increase was caused primarily by increases in yield on the Association's Federal
Home Loan Bank stock from 6.89% to 7.43%, loan portfolio from 8.05% to 8.18%,
and mortgage-backed securities portfolio from 6.56% to 6.57% for the three
months ended June 30, 1998, as compared to the three months ended June 30, 1997.
The increase in yield on the loan portfolio was due to the same reason as stated
above. These increases were partially offset by a decrease in the investment
portfolio yield from 6.50% to 6.31% for the three months ended June 30, 1998, as
compared to the three months ended June 30, 1997.
Interest Expense. Interest expense for the nine months ended June 30,
1998, increased by $355,000 to $4,107,000 as compared to $3,752,000 for the nine
months ended June 30, 1997. This increase in interest expense was due primarily
to a $9.4 million increase in the average outstanding amount of interest-bearing
liabilities during the nine months ended June 30, 1998 as compared to the nine
months ended June 30, 1997. This increase was partially offset by a 2 basis
point decrease in average interest rates paid on interest-bearing liabilities,
caused by decreases in market interest rates. The increase in interest-bearing
liabilities was primarily due to a $7.5 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.
Interest expense for the quarter ended June 30, 1998, increased by
$163,000 to $1,427,000 as compared to $1,264,000 for the quarter ended June 30,
1997. This increase in interest expense was due primarily to a $12.4 million
increase in the average outstanding amount of interest-bearing liabilities
during the three months ended June 30, 1998, as compared to the three months
ended June 30, 1997. The average interest rates paid on interest-bearing
liabilities remained the same for the two periods. The increase in
interest-bearing liabilities was due primarily to the same reasons as stated
above.
Provision for Loan Losses. Based upon management's analysis of
established reserves and its ongoing review of the composition of the loan
portfolio, including non-performing assets and other loans of concern, there was
no provision for losses on loans for the three and nine months ended June 30,
1998 and June 30, 1997. 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 is 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 $48,000 to $131,000
during the nine months ended June 30, 1998 as compared to $83,000 for the nine
months ended June 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.
Non-interest income increased $23,000 to $46,000 during the three
months ended June 30, 1998 as compared to $23,000 for the three months ended
June 30, 1997. Recurring non-interest income generally consists of servicing
fees as well as deposit and other types of fees.
Non-interest Expense. Total non-interest expense increased to
$1,634,000 for the nine months ended June 30, 1998 from $1,497,000 for the nine
months ended June 30, 1997, an increase of $137,000, or 9.18%. The increase was
primarily due to increases in compensation and employee benefits of $110,000,
occupancy and equipment of $52,000, and data processing fees of $26,000. 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 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 increase in the Company's stock price. These increases were partially offset
by decreases in other expenses of $32,000 and federal deposit insurance premiums
of $18,000.
46
<PAGE>
Total non-interest expense increased by $22,000 for the three months
ended June 30, 1998, as compared to the three months ended June 30, 1997. The
increase was due primarily to increases in compensation and employee benefits of
$33,000, data processing fees of $11,000, and occupancy and equipment of $8,000.
These increases were partially offset by a decrease in other expense of $30,000.
The increase in noninterest expense for the three months ended June 30, 1998 was
due to the same reasons as stated above.
Income Tax Expense. Income tax expense was $472,000 for the nine months
ended June 30, 1998 compared to $332,000 for the nine months ended June 30,
1997, an increase of $140,000. 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 42.3% and 39.5% for the nine months ended
June 30, 1998 and June 30, 1997, respectively. Rates exceed expected rates due
primarily to compensation expense associated with the ESOP, of which a portion
is not deductible for income tax purposes.
Income tax expense was $184,000 for the quarter ended June 30, 1998
compared to $127,000 for the quarter ended June 30, 1997, an increase of
$57,000. This increase was primarily due to an increase in pre-tax earnings
during the 1998 period as compared tot he 1997 period. The Company's effective
tax rates were 40.6% and 41.7% for the three months ended June 30, 1998 and June
30, 1997, respectively. Rates exceed expected rates due primarily to
compensation expense associated with the ESOP, of which a portion is not
deductible for income tax purposes.
47
<PAGE>
Comparison of Fiscal Years Ended September 30, 1997 and September 30, 1996 for
the Company
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 due to
decreases in net interest income of $94,000 and income from real estate
operations of $60,000. The decrease was also 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. These decreases to net earnings were partially offset by decreases in
non-interest expenses of $273,000 and income tax expense of $19,000.
Net Interest Income. Net interest income decreased $94,000, or 3.02%,
for the fiscal year ended September 30, 1997 as compared to the fiscal year
ended September 30, 1996. This decrease was due primarily to an increase in
interest expense of $390,000, or 8.34%, offset partially by an increase in
interest income of $296,000, or 3.81%. Interest expense increased primarily due
to a $7.0 million increase in the average balance of interest-bearing
liabilities and, to a lesser extent, a 2 basis point increase in the average
rate paid on interest-bearing liabilities. Interest income increased primarily
due to a $4.2 million increase in the average balance of interest-earning
assets, partially offset by a 3 basis point decrease in yield on
interest-earning assets.
Interest Income. Interest income for the fiscal year ended September
30, 1997, increased to $8.1 million from $7.8 million for the fiscal year ended
September 30, 1996. This increase resulted primarily from a $4.2 million
increase in the average outstanding balance of interest-earning assets (due to
the increase in the average balance of loans receivable and investment
securities financed with borrowings from the Federal Home Loan Bank of Topeka
and increased savings deposits) during the fiscal year ended September 30, 1997,
as compared to the fiscal year ended September 30, 1996. These increases were
partially offset by a decrease in the average yield on interest-earning assets.
The average yield on interest-earning assets decreased 3 basis points to 7.53%
during fiscal 1997, from 7.56% during fiscal 1996. This decrease was caused
primarily by a decrease in yield on the Company's loans receivable from 8.22% to
7.98% due to new loans being originated at interest rates lower than those
currently in the loan portfolio. This decrease was partially offset by an
increase in yield on mortgage-backed securities from 6.54% to 6.61% and
investment securities from 6.62% to 6.75%.
Interest Expense. Interest expense for the fiscal year ended September
30, 1997, increased by $400,000 to $5.1 million as compared to $4.7 million for
the fiscal year ended September 30, 1996. This increase was primarily the result
of a $7.0 million increase in the average outstanding balance of
interest-bearing liabilities during the fiscal year ended September 30, 1997 as
compared to the fiscal year ended September 30, 1996. To a lesser extent, the
increase in interest expense was due to a 2 basis point increase in average
interest rates paid on interest-bearing liabilities. The increase in
48
<PAGE>
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.
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 earnings 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 $431,000 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.
Average Balances, Interest Rates and Yields of the Company
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.
49
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30,
--------------------------------------------------------- ------------------------------
1998 1997 1997
---------------------------- -------------------------- ------------------------------
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)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)......... $ 83,816 $5,151 8.19% $70,225 $4,225 8.02% $ 71,188 $ 5,684 7.98%
Mortgage-backed securities.. 21,440 1,057 6.57 26,732 1,305 6.51 26,137 1,727 6.61
Investment securities....... 6,976 331 6.33 7,481 372 6.62 7,598 513 6.75
FHLB stock.................. 1,405 82 7.64 1,301 66 6.62 1,314 89 6.79
Federal funds sold.......... 2,106 85 5.36 669 27 5.26 567 34 6.02
Other earning assets........ 454 19 5.20 251 11 5.10 318 22 6.83
-------- ------ --------- ------ ------- -------
Total earning assets....... 116,197 6,725 7.71 106,659 6,006 7.50 107,122 8,069 7.53
Non-interest earning assets. 2,807 2,698 2,928
-------- -------- --------
Total assets................ $119,004 $109,357 $110,050
======== ======== ========
Interest-bearing liabilities:
Savings deposits and
certificates.............. $ 53,908 2,171 5.37 $ 51,111 2,049 5.35 $ 51,219 2,745 5.36
Demand and NOW.............. 25,942 814 4.18 21,191 662 4.17 22,019 914 4.15
FHLB advances............... 25,589 1,122 5.84 23,722 1,041 5.85 23,583 1,400 5.93
--------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities.............. 105,439 4,107 5.19 96,024 3,752 5.21 96,821 5,059 5.22
------ ------ ------
Non-interest-bearing
liabilities ................ 1,994 1,599 1,538
--------- -------- --------
Total liabilities......... 107,433 97,623 98,359
Equity....................... 11,571 11,734 11,691
--------- -------- --------
Total liabilities and
equity................... $119,004 $109,357 $110,050
======== ======== ========
Net interest/spread.......... $ 2,618 2.52% $ 2,254 2.29% $3,010 2.31%
======= ==== ======= ==== ====== ====
Margin....................... 3.00% 2.81% 2.81%
==== ==== ====
Assets to liabilities........ 110.20% 111.08% 110.64%
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)......... $ 63,152 $ 5,190 8.22% $ 58,628 $ 4,804 8.19%
Mortgage-backed securities.. 29,510 1,930 6.54 29,191 1,939 6.64
Investment securities....... 7,233 479 6.62 4,977 321 6.45
FHLB stock.................. 1,103 70 6.38 1,028 61 5.93
Federal funds sold.......... 1,434 79 5.53 650 44 6.77
Other earning assets........ 445 25 5.64 275 17 6.18
-------- -------- -------
Total earning assets....... 102,877 7,773 7.56 94,749 7,186 7.58
Non-interest earning assets. 1,606 1,883
-------- --------
Total assets................ $104,483 $ 96,632
======== ========
Interest-bearing liabilities:
Savings deposits and
certificates.............. $ 51,950 2,820 5.43 $ 51,019 2,441 4.78
Demand and NOW.............. 18,765 762 4.06 13,508 408 3.02
FHLB advances............... 19,133 1,087 5.68 17,275 1,003 5.81
-------- ----- -------- -------
Total interest-bearing
liabilities.............. 89,848 4,669 5.20 81,802 3,852 4.71
----- -------
Non-interest-bearing
liabilities ................ 1,497 1,512
-------- --------
Total liabilities......... 91,345 83,314
Equity....................... 13,138 13,318
-------- --------
Total liabilities and
equity................... $104,483 $ 96,632
======== ========
Net interest/spread.......... $3,104 2.36% $3,334 2.87%
====== ==== ====== ====
Margin....................... 3.02% 3.52%
==== ====
Assets to liabilities........ 114.50% 115.83%
======= ========
</TABLE>
- ------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
50
<PAGE>
Rate/Volume Analysis of Net Interest Income of the Company
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>
Nine Months Ended
June 30, Year Ended September 30 Year Ended September 30,
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
-------------------------- ----------------------- ------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
-------------- Increase ------------ Increase ------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ---------- ------ ---- ---------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable .................................. $ 835 $ 91 $ 926 $ 645 $(151) $ 494 $ 372 $ 14 $ 386
Mortgage-backed securities ........................ (260) 12 (248) (223) 20 (203) 21 (30) (9)
Securities ........................................ (25) (16) (41) 24 10 34 149 9 158
FHLB stock ........................................ 5 11 16 14 5 19 4 5 9
Federal funds sold ................................ 57 1 58 (52) 7 (45) 44 (9) 35
Other earning assets .............................. 8 -- 8 (8) 5 (3) 10 (2) 8
----- ------ ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets ................... $ 620 $ 99 719 $ 400 $(104) 296 $ 600 $ (13) 587
===== ===== ----- ===== ===== ----- ===== ===== -----
Interest-bearing liabilities:
Passbook savings and certificates ................. $ 114 $ 8 122 $ (39) $ (36) (75) $ 45 $ 334 379
NOW and Demand .................................... 150 2 152 135 17 152 188 166 354
FHLB Advances ..................................... 83 (2) 81 262 51 313 106 (22) 84
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing liabilities .............. $ 347 $ 8 355 $ 358 $ 32 390 $ 339 $ 478 817
===== ===== ----- ===== ===== ----- ===== ===== -----
Net interest income................................. $ 364 $(94) $(230)
===== ===== ======
</TABLE>
51
<PAGE>
The following table sets forth the weighted average yields on the
Company's interest-earning assets, the weighted average interest rates on
interest-bearing liabilities and the interest rate spread between the weighted
average yields and rates for the Company at the dates indicated. Non-accruing
loans have been included in the table as carrying a zero yield.
<TABLE>
<CAPTION>
At September 30,
June 30, ------------------------------
1998 1997 1996 1995
---- ---- ---- ----
Weighted average yield on:
<S> <C> <C> <C> <C>
Loans receivable.......................................... 7.82% 7.74% 7.78% 8.13%
Mortgage-backed securities................................ 6.48 6.66 6.53 6.97
Securities................................................ 6.39 6.97 6.68 7.61
Federal funds sold........................................ 5.35 5.28 5.48 5.57
Other interest-earning assets............................. 5.14 5.22 4.93 5.35
Combined weighted average yield on interest-earning
assets................................................. 7.49 7.40 7.34 7.59
Weighted average rate paid on:
Passbook Savings and certificates......................... 5.44 5.38 5.38 5.38
NOW....................................................... 4.04 4.06 4.03 3.78
FHLB advances............................................. 5.77 6.11 5.65 5.94
Combined weighted average rate paid on interest-
bearing liabilities.................................... 5.18 5.21 5.17 5.23
Spread..................................................... 2.31 2.19 2.17 2.36
</TABLE>
Asset/Liability Management of the Company 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.
52
<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 June 30, 1998, approximately $29.3 million, or
29.8% of the Company's total loans secured by real estate, were ARMs. On the
same date, the Company also had $11.8 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 June 30, 1998, the Company had $2.7
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 June 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 June 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,
53
<PAGE>
up and down 200 basis points and compared to Board policy limits. The table was
prepared and furnished to the Association by the Office of Thrift Supervision.
Assumptions used in calculating the amounts in this table were determined by the
OTS (dollars in thousands):
<TABLE>
<CAPTION>
Net Portfolio Value
Change in At June 30, 1998
Interest Rate Board Limit ------------------------------------------
(Basis Points) % Change $ Amount $ Change % Change
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
+200 -40% $ 9,037 $(4,259) (32)%
+100 -25 11,391 (1,905) (14)
0 -- 13,296 -- --
-100 -25 14,433 1,137 9
-200 -40 15,283 1,987 15
</TABLE>
As indicated in the table above, management has structured its assets
and liabilities to minimize its exposure to interest rate risk. In the event of
a 200 basis point change in interest rates, the Association would experience a
15% increase in NPV in a declining rate environment and a 32% decrease in a
rising rate environment. During periods of rising interest rates, the value of
monetary assets and liabilities generally decline. Conversely, during periods of
falling interest rates, the value of monetary assets and liabilities generally
increase. However, the amount of change in value of specific assets and
liabilities due to changes in interest rates is not the same in a rising
interest rate environment as in a falling interest rate environment (i.e., as
indicated above, the amount of value increase under a specific rate decline may
not equal the amount of value decrease under an identical upward rate movement).
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARMs, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
Liquidity and Capital Resources of the Company
The Office of Thrift Supervision ("OTS") requires minimum levels of
liquid assets. At June 30, 1998, OTS regulations required First Federal to
maintain an average daily balance of liquid assets (United States Treasury,
federal agency, and other investments having maturities of five years or less)
equal to at least 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 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 June 30, 1998 was 9.71%, as compared to 7.20% at
September 30, 1997. This increase was primarily due to an increase in short-term
investments funded with public unit deposits. 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.
54
<PAGE>
The Company's primary investing activity is the origination of mortgage
loans and the purchase of mortgage-backed and other securities. At June 30,
1998, mortgage loans and mortgage-backed securities accounted for 89.3% 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 $500,000 at June 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 pledging of acceptable collateral. The primary purpose
of the line of credit is to serve as a back-up liquidity facility for the
Company, however, the Company may from time to time utilize the line of credit
to purchase investment securities and fund other commitments.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits, and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires additional funds,
beyond its internal ability to generate, it has additional borrowing capacity
with the FHLB of Topeka.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 1998, the Company had outstanding
commitments to extend credit which amounted to $1,440,000, 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 June
30, 1998 totaled approximately $33.9 million. Management believes that a
significant portion of such deposits will remain with the Company. There can be
no assurance, however, that the Company can retain all such deposits. At June
30, 1998, the Company had $28.4 million in advances from the FHLB of Topeka with
$8.9 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 June 30, 1998, the Association's
tangible capital, core capital, and risk-based capital of $10.2 million, $10.2
million, and $10.9 million exceeded the applicable minimum requirements by $8.4
million, $6.6 million, and $6.0 million, respectively.
55
<PAGE>
The following table sets forth the Association's compliance with such
requirements at June 30, 1998.
<TABLE>
<CAPTION>
Association capital level
OTS requirement at June 30, 1998
------------------ ---------------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
------ ------ ------ ------ ---------
Capital standard (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.50% $1,834 8.38% $10,239 $ 8,405
Core capital (1) 3.00 3,667 8.38 10,239 6,572
Risk-based capital 8.00 4,895 17.80 10,895 6,000
</TABLE>
- -------------
(1) Based on current core capital requirement of 3%.
See Note L of Notes to Consolidated Financial Statements of the Company
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.
Year 2000 Compliance Issues
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. The
committee has determined that the greatest potential impact upon the Company is
the risk related to vendors used by the Company, particularly First
Independence's data processing service bureau. Quarterly progress reports from
the service bureau indicate levels of manpower and expertise sufficient to amend
and test the adequacy of their computer programming and systems prior to the
arrival of the year 2000. All other vendors used by the Company have been
identified and requests for year 2000 certifications have been forwarded.
The year 2000 compliance program established by the committee includes
quarterly progress reports submitted to the Board of Directors and a target date
of December 31, 1998 for required internal testing. Contingency plans have also
been developed in the event the Company's service bureau or vendors are not year
2000 certified. The committee estimates that the impact upon the Company's
results of operations, liquidity and capital resources will be immaterial.
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.
56
<PAGE>
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 requires
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.
57
<PAGE>
BUSINESS OF THE COMPANY
General
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. On January 24, 1997, the
Common Stock was split two-for-one through the issuance of a 100% stock
dividend. At June 30, 1998, the Company had total assets of $123.4 million, and
stockholders' equity of $11.8 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.
Like all federally chartered savings associations, First Federal's
operations are regulated by the OTS. First Federal is a member of the FHLB
System and a stockholder in the FHLB of Topeka. The Association is also a member
of the SAIF and its deposit accounts are insured up to applicable limits by the
FDIC.
The business of the Association consists primarily of attracting
deposits from the general public and using these deposits to originate one- to
four-family and multi-family residential mortgage, non-residential mortgage and
consumer loans. 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."
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 earnings.
Community Orientation
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.
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 10 financial institutions serving its primary market area. The
Association estimates its share of the savings market in Montgomery County to be
approximately 15%.
58
<PAGE>
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 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 Association's
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
June 30, 1998, the Association's net loan portfolio totaled $90.6 million.
All loans must be reviewed by a committee comprised of the
Association's President and three other officers of the Association. The
committee has authority to approve loans secured by real estate to any one
borrower of up to $500,000. The executive committee has authority to approve
loans up to $750,000 which provide for a personal guarantee from the borrower.
Loans in excess of this limit require approval of the Board of Directors. All
loan approvals made by the loan committee are ratified by the Board of
Directors.
The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, is generally equal to the greater of 15% of unimpaired capital and
surplus or $500,000. At June 30, 1998, the maximum amount which the Association
could have lent to any one borrower and the borrower's related entities was
approximately $1.5 million. See " - Regulation - Federal Regulation of Savings
Associations."
59
<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>
At September 30,
June 30, -------------------------------------------------------------------
1998 1997 1996 1995
---------------------- -------------------- --------------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... $70,075 71.36% $64,152 84.30% $57,353 82.29% $50,747 82.34%
Multi-family................. 1,116 1.14 1,164 1.53 1,371 1.97 1,420 2.30
Non-residential.............. 7,674 7.81 7,479 9.83 7,224 10.36 7,454 12.10
Construction................. 16,391 16.69 764 1.00 1,834 2.63 526 0.85
-------- ------- ---------- -------- --------- -------- --------- -------
Total real estate loans... 95,256 97.00 73,559 96.66 67,782 97.25 60,147 97.59
-------- ------- -------- ------- -------- ------- -------- -------
Consumer Loans:
- ---------------
Deposit account.............. 414 0.42 350 0.46 364 0.52 314 0.50
Automobile................... 880 0.90 705 0.93 402 0.58 269 0.44
Home equity.................. 723 0.74 550 0.72 781 1.12 641 1.04
Home improvement............. 271 0.28 274 0.36 183 0.26 102 0.17
Other........................ 654 0.66 661 0.87 185 0.27 159 0.26
---------- -------- ---------- -------- ---------- -------- --------- -------
Total consumer loans...... 2,942 3.00 2,540 3.34 1,915 2.75 1,485 2.41
--------- -------- --------- -------- --------- -------- -------- -------
Total Loans.............. 98,198 100.00% 76,099 100.00% 69,697 100.00% 61,632 100.00%
====== ====== ====== ======
Less:
- -----
Loans in process............. 6,603 572 1,050 372
Deferred fees and discounts.. 325 300 274 200
Allowance for losses......... 656 668 690 690
---------- ---------- ---------- ----------
Total loans receivable, net.. $90,614 $74,559 $67,683 $60,370
======= ======= ======= =======
</TABLE>
60
<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>
At September 30,
June 30, --------------------------------------------------------------
1998 1997 1996 1995
--------------------- ------------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Real estate:
One- to four-family................... $43,685 44.49 $37,581 49.38% $31,231 44.81% $23,163 37.59%
Multi-family.......................... 651 0.66 683 0.90 871 1.25 821 1.33
Non-residential....................... 5,221 5.32 5,055 6.64 4,835 6.94 5,304 8.61
Construction.......................... 16,391 16.69 764 1.00 -- -- 526 0.85
--------- ------- -------- -------- ------- ------- ------- ------
Total fixed-rate real estate loans.. 65,948 67.16 44,083 57.92 36,937 53.00 29,814 48.38
Consumer............................... 2,219 2.26 1,990 2.62 1,437 2.06 1,123 1.82
--------- -------- --------- -------- ------- ------- ------- ------
Total fixed-rate loans.............. 68,167 69.42 46,073 60.54 38,374 55.06 30,937 50.20
--------- ------- -------- ------- ------- ======= ------- ------
Adjustable-Rate Loans
Real estate:
One- to four-family................... 26,390 26.87 26,571 34.92 26,122 37.47 27,584 44.75
Multi-family.......................... 465 0.47 481 0.63 500 0.72 599 0.97
Non-residential....................... 2,453 2.50 2,424 3.19 2,389 3.43 2,150 3.49
Construction.......................... -- -- -- -- 1,834 2.63 -- --
--------- -------- ---------- ------ ------- ------- ------ ------
Total adjustable-rate real
estate loans...................... 29,308 29.84 29,476 38.74 30,845 44.25 30,333 49.21
Consumer............................... 723 0.74 550 0.72 478 0.69 362 0.59
--------- -------- -------- -------- ------- -------- ------ ------
Total adjustable-rate loans........ 30,031 30.58 30,026 39.46 31,323 44.94 30,695 49.80
--------- ------- -------- ------- -------- ------- ------ ------
Total Loans........................ 98,198 100.00% 76,099 100.00% 69,697 100.00% 61,632 100.00%
====== ====== ====== ======
Less
Loans in process....................... 6,603 572 1,050 372
Deferred fees and discounts............ 325 300 274 200
Allowance for losses................... 656 668 690 690
--------- -------- ------ ------
Total loans receivable, net............ $90,614 $74,559 $67,683 $60,370
======= ======= ======= =======
</TABLE>
61
<PAGE>
The following schedule shows the scheduled contractual maturities of
the Association's loan portfolio at June 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 Period
Ending June 30,
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1).................... $ 308 8.42% $ 114 8.84% $14,516 9.78% $1,047 9.15% $15,985 9.71%
2000....................... 119 8.29 245 8.74 1,045 9.38 359 9.09 1,768 9.16
2001....................... 362 7.71 607 8.88 -- -- 414 9.29 1,383 8.70
2002 and 2003.............. 1,487 7.84 202 8.70 -- -- 820 8.99 2,509 8.29
2004 to 2008............... 7,362 7.81 1,659 8.61 -- -- 302 8.79 9,323 7.98
2009 to 2023............... 37,036 7.63 5,821 8.40 543 8.62 -- -- 43,400 7.75
2024 and following......... 23,401 7.50 142 8.24 287 8.19 -- -- 23,830 7.51
------- ------- ------- ------ -------
Total $70,075 $8,790 $16,391 $2,942 $98,198
======= ====== ======= ====== =======
</TABLE>
- ---------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999, which have a
predetermined interest rate is $52.3 million, while the total amount of loans
due after such date which have a floating or adjustable interest rate is $29.9
million.
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<PAGE>
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 June 30, 1998, the Association's one- to
four-family residential mortgage loans, totaled $70.1 million, or 71.4% 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 June 30, 1998, the Association had 540 loans totaling $29.3
million with a loan-to-value ratio of greater than 80% but less than 90% and 342
loans totaling $16.9 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 of the Company - Asset/Liability Management." Approximately 38.8% of
the loans secured by one- to four-family real estate originated by the
Association during fiscal 1997 were originated with adjustable rates of
interest. Approximately 29.8% of the loans secured by one- to four-family real
estate originated by the Association during the nine months ended June 30, 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 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
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<PAGE>
the borrower obtain an opinion from an attorney regarding the title to the
property or title insurance and fire and casualty insurance, as well as flood
insurance, where applicable, to protect the Association's interest.
Approximately $2.1 million, or 3.0% of the Association's one- to
four-family residential mortgage loan portfolio, was purchased by the
Association. These loans are primarily secured by property located in Texas and
have been in the Association's portfolio for several years. The Association has
purchased only a limited amount of one- to four-family residential mortgage
loans since 1989. The level of delinquencies in the Association's portfolio of
purchased loans secured by one- to four-family residential real estate is
consistent with that of the loans originated and retained by the Association.
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise disposes of the property subject to the mortgage and the loan is
not repaid. The Association has enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield. The yield
increase is obtained through the authorization of assumptions of existing loans
at higher rates of interest and the imposition of assumption fees. One- to
four-family real estate loans may be assumed provided home buyers meet the
Association's underwriting standards and the loan terms are modified, to the
extent necessary, to conform with present yield and maturity requirements.
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 of the Company - Asset/Liability
Management." At June 30, 1998, the Association had $8.8 million in
non-residential/ multi-family real estate loans, representing 9.0% of the
Association's loan portfolio.
Approximately 12.0% 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.
64
<PAGE>
The table below sets forth, by type of security property, the
Association's non-residential/ multi-family real estate loans at June 30, 1998.
Number Outstanding Amount
of Principal Non-Performing
Loans Balance or of Concern
----- ------- -------------
(Dollars in Thousands)
Multi-family ........................ 6 $1,115 $ --
Small business facilities
and office buildings ............... 39 2,857 21
Health care facility ................ 12 2,139 --
Churches ............................ 4 197 --
Warehouse/mini-storage .............. 3 319 --
Shopping centers .................... -- -- --
Hotel/motel ......................... 3 1,246 --
Land ................................ 24 917 --
------ ------ ------
Total multi-family
residential and non-
residential real
estate loans ..................... 91 $8,790 $ 21
====== ====== ======
Permanent non-residential and multi-family real estate loans originated
by the Association generally have terms ranging from 5 to 20 years and up to a
30-year amortization schedule. Rates on permanent loans either (i) adjust
(subject, in some cases, to specified interest rate caps) at one year intervals
to specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates. Under the Association's current loan policy,
multi-family/non-residential real estate loans (other than loans to facilitate)
are written in amounts of up to 80% of the appraised value of the properties.
Appraisals on properties securing non-residential and multi-family real
estate property loans originated by the Association are performed by an
independent appraiser designated by the Association at the time the loan is
made. All appraisals on multi-family and non-residential real estate loans are
reviewed by the Association's management. In addition, the Association's
underwriting procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships, references and
income projections for the property. Personal guarantees are generally obtained
for all or a portion of the Association's multi-family/non-residential real
estate loans. While the Association continues to monitor
multi-family/non-residential real estate loans on a regular basis after
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 June 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 five unrelated
borrowers or groups of borrowers described below. The first loan is secured by a
hotel located in Columbia, Missouri and had an outstanding balance at June 30,
1998 of $687,000. This loan has been current since its inception in June 1991.
The other loans in excess of $500,000 at June 30, 1998, included a loan to one
borrower totaling $598,000 secured by an apartment building located in Rogers,
Arkansas; a loan with an outstanding balance of $518,000 secured by a motel in
Independence, Kansas; a loan with an outstanding balance of $537,000 secured by
a guest home located in Caney, Kansas; and a loan with an outstanding balance of
$848,000 secured by a residential care facility located in Caney, Kansas. All of
these loans were current at June 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
65
<PAGE>
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.
Construction Lending. The Association also makes a number of
construction loans to builders and individuals for the construction of
residences. There were $16.4 million of construction loans outstanding at June
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 six months or less and interest
rates tied to the prime rate plus a margin. 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.
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 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.
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 June 30, 1998, the Association's consumer loan
portfolio totaled $2.9 million, or 3.0% of its loan portfolio. Under applicable
federal law, the Association is authorized to invest up to 35% of its assets in
consumer loans.
First Federal offers a variety of secured consumer loans, including
home equity loans, home improvement loans, auto loans, and loans secured by
savings deposits and other consumer collateral. The Association also offers a
limited amount of unsecured loans. The Association currently originates all of
its consumer loans in its market area. The Association's home equity and home
improvement loans comprised approximately 33.8% of the Association's total
consumer loan portfolio. These loans are generally originated in amounts,
together with the amount of the existing first mortgage, of up to 90% of the
appraised value of the property securing the loan. The term to maturity on such
loans may be up to seven years. Other consumer loan terms vary according to the
type of collateral, length of contract and creditworthiness 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.
At June 30, 1998, the Association had $880,000 of automobile loans. The
Association's automobile loans are originated as installment loans with a fixed
interest rate and terms of up to 60 months. The Association originates
66
<PAGE>
automobile loans directly from its existing customers, for both new and used
automobiles, and will lend up to 80% of the value of the automobile.
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 June 30, 1998, $31,000, or approximately 1.1% 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 June 30, 1998, approximately $3.9 million of First
Federal's loan portfolio was serviced by others. During the year ended September
30, 1997, the Association purchased loans totaling $546,000 secured by
non-residential real estate, and $5.0 million secured by construction real
estate during the nine months ended June 30, 1998.
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 $1.9 million in loans serviced for others as of
June 30, 1998.
67
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended September 30,
June 30, ------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
Originations by type
- --------------------
<S> <C> <C> <C> <C>
Adjustable-rate:
Real estate - one- to four-family .............................. $ 4,365 $ 6,437 $ 4,465 $ 6,144
- multi-family ................................... -- -- -- 173
- non-residential ................................ -- 633 614 921
Consumer - home equity ......................................... 37 673 314 469
-------- -------- -------- --------
Total adjustable-rate ................................... 4,402 7,743 5,393 7,707
-------- -------- -------- --------
Fixed-rate:
Real estate - one- to four-family .............................. 10,290 10,167 14,879 5,886
- non-residential and land ....................... 1,813 1,492 320 219
- construction ................................... 18,319 -- -- --
Consumer - non-real estate ..................................... 1,738 1,965 1,429 1,234
-------- -------- -------- --------
Total fixed-rate ........................................ 32,160 13,624 16,628 7,339
-------- -------- -------- --------
Total loans originated .................................. 36,562 21,367 22,021 15,046
-------- -------- -------- --------
Purchases
Real estate - non-residential .................................. -- 546 -- --
- construction .................................. 4,984 -- -- --
Mortgage-backed securities (excluding
REMICs and CMOs) ............................................. -- -- 4,660 2,982
-------- -------- -------- --------
Total purchased ......................................... 4,984 546 4,660 2,982
-------- -------- -------- --------
Sales and Repayments
Mortgage-backed securities ..................................... 3,938 4,412 5,237 3,041
Transfer of mortgage-backed securities to
mortgage-backed securities available for sale ................ -- -- -- 968
Principal repayments(1) ........................................ 19,447 15,512 13,956 11,854
-------- -------- -------- --------
Total reductions ......................................... 23,385 19,924 19,193 15,863
Increase (decrease) in other items, net(2) ....................... (6,116) 375 (730) 287
-------- -------- -------- --------
Net increase ............................................ $ 12,045 $ 2,364 $ 6,758 $ 2,452
======== ======== ======== ========
</TABLE>
- ------------
(1) Includes transfers to real estate acquired through foreclosure.
(2) Consists of loans in process, net deferred origination costs, unamortized
discounts and allowance for loan losses.
68
<PAGE>
Asset Quality
When a borrower fails to make a required payment on a loan, the Association
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of loans secured by real estate, a computer generated late notice is sent
15 days after the due date. If the delinquency is not cured between the 30th and
60th day, a personal letter is sent to the borrower and if the delinquency is
not cured by the 75th day, contact with the borrower is made by phone.
Additional written and verbal contacts are made with the borrower to the extent
the borrower appears to be cooperative. If the delinquency is not cured or a
payment plan arranged by the 90th day, the Association sends a 30-day default
letter and, once that period elapses, usually institutes appropriate action to
foreclose on the property. Interest income on loans at this point is reduced by
the full amount of accrued and uncollected interest. If foreclosed, the property
is sold at a sheriff's sale and may be purchased by the Association. Delinquent
consumer loans are handled in a similar manner. If these efforts fail to bring
the loan current, appropriate action may be taken to collect any loan payment
that remains delinquent. The Association's procedures for repossession and sale
of consumer collateral are subject to various requirements under Kansas consumer
protection laws.
Real estate acquired by First Federal as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate acquired through foreclosure
until it is sold. When property is acquired, it is recorded at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition and any write-down resulting therefrom is
charged to the allowance for losses on loans. See Note A of the Notes to
Consolidated Financial Statements of the Company. 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.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... 4 $424 .43% 13 $ 586 .60% 17 $1,010 1.03%
Non-residential.......... -- -- -- 1 21 .02 1 21 .02
Consumer................... 2 9 .01 5 22 .02 7 31 .03
---- ----- ----- ---- ----- ----- ---- ------ ----
Total................. 6 $433 .44% 19 $ 629 .64% 25 $1,062 1.08%
=== ==== ===== ==== ===== ===== ==== ====== ====
</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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
69
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and categories
of the Association's non-performing assets. Loans are placed on non-accrual
status when the collection of principal and/or interest become doubtful. As a
matter of policy, the Association does not generally accrue interest on loans
past due more than 90 days. For all periods presented, troubled debt
restructurings (which involve forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates)
are included in the following table. Real estate acquired through foreclosure
includes assets acquired in settlement of loans and reflects the lower of cost
or fair value less selling expense.
<TABLE>
<CAPTION>
September 30,
June 30, ---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C>
One- to four-family ................................... $ 521 $ 919 $ 148 $ 444
Non-residential real estate ........................... -- 98 99 100
Construction .......................................... -- -- 94 --
Consumer .............................................. 22 32 26 11
------ ------ ------ ------
Total non-accruing loans ........................... 543 1,049 367 555
Accruing loans delinquent 90 days or more:
One- to four-family ................................... 65 292 183 116
Non-residential........................................ 21 -- -- --
------ ------ ------ ------
86 292 183 116
Troubled debt restructurings:
One- to four-family ................................... 24 50 52 56
------ ------ ------ ------
Total non-performing loans .............................. 653 1,391 602 727
------ ------ ------ ------
Real estate acquired through foreclosure:
One- to four-family ................................... 36 12 12 --
Non-residential real estate ........................... -- -- -- 62
------ ------ ------ ------
Total real estate acquired through foreclosure ..... 36 12 12 62
------ ------ ------ ------
Total non-performing assets ............................. $ 689 $1,403 $ 614 $ 789
====== ====== ====== ======
Total as a percentage of total assets ................... .56% 1.25% 0.57% 0.77%
====== ====== ====== ======
</TABLE>
For the nine months ended June 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 $18,982. The amount included in interest
income on such loans was $17,876 for the nine months ended June 30, 1998.
Included in non-accruing loans at June 30, 1998, were eleven loans
totaling $521,000 secured by one- to four-family real estate, and five consumer
loans totaling $22,000. All non-accruing loans at June 30, 1998 were located in
the Company's primary market area. At June 30, 1998, accruing loans delinquent
90 days or more included two loans totaling $65,000 secured by one- to
four-family real estate and one loan totaling $21,000 secured by non-residential
real estate. At June 30, 1998, all of the Association's accruing loans
delinquent 90 days or more were secured by real estate located in the
Association's primary market area.
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<PAGE>
Management has considered loans of concern in establishing the
Association's allowance for loan losses.
Real Estate Acquired Through Foreclosure. At June 30, 1998, the
Association's real estate acquired through foreclosure consisted of one single
family residence located in the Association's market area with a carrying value
of $36,000, which is currently offered for sale.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are placed on a "watch list" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
Classified assets of the Association all of which, at June 30, 1998, are
included in the table of non-performing assets above or are described under the
caption "- Other Loans of Concern" above, were as follows:
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Substandard .................... $ 645 $1,261 $ 676 $1,003
Doubtful ....................... 20 92 95 89
Loss ........................... -- -- -- --
------ ------ ------ ------
Total classified assets ........ $ 665 $1,353 $ 771 $1,092
====== ====== ====== ======
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant 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 earnings could be significantly
affected if circumstances differ substantially from the assumptions used in
making the initial determinations. At June 30, 1998, the Association had an
allowance for loan losses of $656,000.
71
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended September 30,
June 30, ------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ....................................... $ 668 $ 690 $ 690 $ 667
Charge-offs:
One- to four-family ................................................ 12 22 -- 15
Recoveries:
Non-residential real estate ........................................ -- -- -- 38
----- ----- ------ -----
Net charge-offs (recoveries)........................................ 12 22 -- (23)
----- ----- ------ -----
Balance at end of period ............................................. $ 656 $ 668 $ 690 $ 690
===== ===== ====== =====
Ratio of net charge-offs (recoveries) during the
period to total loans at end of period ............................. 0.01% 0.03% ---% (0.04)%
===== ===== ====== =====
Allowance for loan losses to total loans at end of
period ............................................................. 0.72% 0.90% 1.02% 1.14%
===== ===== ====== =====
Allowance for loan losses to non-performing loans at
end of period ...................................................... 100.34% 48.05% 114.62% 94.91%
===== ===== ====== =====
</TABLE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
June 30, ---------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- ----------------------- --------------------- ----------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ..... $350 71.36% $391 84.30% $357 82.29% $343 82.34%
Multi-family ............ -- 1.14 -- 1.53 -- 1.97 17 2.30
Non-residential ......... 92 7.81 92 9.83 87 10.36 87 12.10
Construction .............. 181 16.69 -- 1.00 11 2.63 -- .85
Consumer .................. 33 3.00 35 3.34 30 2.75 7 2.41
Unallocated ............... -- -- 150 -- 205 -- 236 --
---- ------ ---- ------ ---- ------ ---- ------
Total ................. $656 100.00% $668 100.00% $690 100.00% $690 100.00%
==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
Investment Activities
General. First Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Association
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements
72
<PAGE>
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 June 30, 1998, the
Association's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 9.71%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the Company
Liquidity and Capital Resources" 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 June 30, 1998, investment securities totaled
$8.4 million, or 6.8% of total assets. As of such date, the Association also had
a $1.4 million investment in FHLB stock, satisfying its requirement for
membership in the FHLB of Topeka. It is the Company's general policy to purchase
investment securities which are U.S. Government securities or federal agency
obligations or other issues that are rated investment grade or have credit
enhancements. At June 30, 1998, the average term to maturity or repricing of the
investment portfolio was 3.6 years.
73
<PAGE>
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------------------------------
1998 1997 1996 1995
--------------- ---------------- ------------- ----------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
Federal agency obligations ........................... $5,000 50.99% $3,000 34.56% $2,000 23.60% $1,000 11.68%
------ ----- ------ ------ ------ ------ ------ ------
Securities available for sale:
U.S. Government securities ........................... 0 0.00 999 11.51 1,993 23.52 1,997 23.32
Federal agency obligations ........................... 3,014 30.74 2,985 34.39 2,934 34.62 3,981 46.48
FHLMC preferred stock ................................ -- -- -- -- -- -- 253 2.95
Other marketable equity securities(1) ................ 343 3.49 327 3.77 308 3.63 294 3.43
------ ------ ------ ------ ------ ------ ------ ------
Total securities available for sale ............... 3,357 34.23 4,311 49.67 5,235 61.77 6,525 76.18
------ ------ ------ ------ ------ ------ ------ ------
FHLB stock ........................................... 1,449 14.78 1,369 15.77 1,240 14.63 1,040 12.14
------ ------ ------ ------ ------ ------ ------ ------
Total securities and FHLB stock ................... $9,806 100.00% $8,680 100.00% $8,475 100.00% $8,565 100.00%
====== ====== ====== ====== ====== ====== ====== ======
Average remaining life or term to
repricing of securities (excluding FHLMC
preferred stock, FHLB stock and other
marketable equity securities) ....................... 3.77 yrs. 4.61 yrs. 5.04 yrs. 4.49 yrs.
Other Interest-Earning Assets:
Short-term money market investments .................. $ 332 100.00% $2,190 100.00% $1,010 100.00% $1,745 100.00%
====== ====== ====== ====== ====== ====== ====== ======
Average remaining life or term
to repricing of securities and
other interest-earning assets
(excluding FHLB stock, FHLMC
preferred stock and other
marketable equity securities) ........................ 3.62 yrs. 3.51 yrs. 4.40 yrs. 3.59 yrs.
</TABLE>
- -----------
(1) Represents primarily investments in mutual funds investing in U.S.
Government securities and federal agency obligations.
74
<PAGE>
The composition and maturities of the securities portfolio, excluding FHLB
of Topeka stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------
Less Than 1 to 5 Total Investment
1 Year Years Securities
---------- --------- ---------------
Amortized Amortized Amortized Fair
Cost Cost Cost Value
---- ---- ---- -----
(Dollars in Thousands)
Held to Maturity:
<S> <C> <C> <C>
Federal agency obligations ............ $5,000 $5,000 $4,980
------ ------ ------
Weighted average yield ............. 6.30% 6.30%
====== ======
Available for Sale:
Federal agency obligations ............ $ 990 $1,992 $2,982 $3,014
Other marketable equity securities(1) . 342 -- 342 343
------ ------ ------ ------
Total investment securities ........ $1,332 $1,992 $3,324 $3,357
====== ====== ====== ======
Weighted average yield ............. 5.53% 5.86% 5.73%
====== ====== ======
</TABLE>
- ------------
(1) Represents primarily investments in mutual funds investing in U.S.
Government securities and federal agency obligations.
The Company's securities portfolio at June 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 net of
related taxes 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
earnings. 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 leading 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 June 30, 1998, the Company held no investments
for trading purposes, but did hold securities 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 June 30, 1998, the Association's mortgage-backed
securities totaled $19.5 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 of the Company.
At June 30, 1998, $11.8 million, or 60.3%, 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.
75
<PAGE>
The following table sets forth the contractual maturities of the
mortgage-backed securities at June 30, 1998. The Association had no
mortgage-based securities available for sale at that date.
<TABLE>
<CAPTION>
Due in June 30, 1998
-------------------------------------------------------------------- ------------
6 months 6 months 1 to 3 to 5 5 to 10 10 to 20 Over 20
or Less to 1 Year 3 Years Years Years Years Years Book Value
------- --------- ------- ----- ----- ----- ----- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
Adjustable-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation ................................ $ -- $ -- $ -- $ -- $ -- $ 166 $ 5,703 $ 5,869
Federal National Mortgage
Association ................................ -- -- -- -- -- 1,102 4,805 5,907
------- -------- -------- -------- ------- ------- ------- -------
Total adjustable-rate ...................... -- -- -- -- -- 1,268 10,508 11,776
------- -------- -------- -------- ------- ------- ------- -------
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation .................................. -- -- -- -- 2,570 2,140 -- 4,710
Federal National Mortgage
Association .................................. -- -- -- -- 1,995 997 -- 2,992
Government National Mortgage
Association .................................. -- -- -- -- -- -- 40 40
------- -------- -------- -------- ------- ------- ------- -------
Total fixed-rate .............................. -- -- -- -- 4,565 3,137 40 7,742
------- -------- -------- -------- ------- ------- ------- -------
Total mortgage-backed securities held
to maturity ................................. $ -- $ -- $ -- $ -- $ 4,565 $ 4,405 $10,548 $19,518
======= ======== ======== ======== ======= ======= ======= =======
</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 $28.4 million in FHLB advances outstanding at June 30, 1998.
76
<PAGE>
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.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Association has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. The Association has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. The Association manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, the Association believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of the Association to attract and maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
Effective April 1, 1993, the Association introduced a new certificate
of deposit program in an attempt to reduce deposit outflows and attract longer
term deposits which were lost as a result of the general decline in market rates
of interest. This program offers two new certificate products which have four-
and five-year terms. The following table sets forth information regarding the
dollar amount and percent of certificates of deposit of this program.
<TABLE>
<CAPTION>
At June 30, 1998 % of Total Certificates
----------------- -----------------------
(Dollars in Thousands)
<S> <C> <C>
Four-Year Certificate...... $1,387 2.64%
Five-Year Certificate...... 6,198 11.79
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association for the dates
indicated and the rates offered. See Note H of the Notes to Financial Statements
of the Company for weighted average nominal rates.
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------------------------------------
1998 1997 1996 1995
------------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent
of of of of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars In Thousands)
Transactions and Savings Deposits:
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook Demand (2.85%).................. $ 2,866 3.52% $2,703 3.54% $ 2,649 3.82% $ 2,752 4.05%
NOW Accounts (2.00-2.50%)................ 4,199 5.16 3,763 4.93 3,232 4.66 2,899 4.26
Money Market Accounts (2.50-5.75%)....... 21,684 26.63 20,702 27.13 15,553 22.40 11,694 17.20
------- ------ ------ ------ ------- ----- ------ ------
Total Transactions and Savings Deposits 28,749 35.31 27,168 35.60 21,434 30.88 17,345 25.51
------- ------ ------ ------ ------- ----- ------ ------
Certificates:
- -------------
0.00 - 3.99%........................... -- -- 5 0.01 9 0.01 804 1.18
4.00 - 4.99%........................... 1,726 2.12 2,189 2.87 4,216 6.07 10,498 15.44
5.00 - 5.99%........................... 46,127 56.65 39,911 52.30 30,296 43.64 16,882 24.83
6.00 - 6.99%........................... 4,698 5.77 6,930 9.08 13,367 19.25 22,351 32.87
7.00% and over.......................... 27 0.03 26 0.03 34 0.05 47 0.07
------- ------ ------ ------ ------- ----- -------- -------
Total Certificates........................ 52,578 64.57 49,061 64.29 47,922 69.02 50,582 74.39
------- ------ ------ ------ ------- ----- ------ ------
Accrued Interest.......................... 101 0.12 82 0.11 70 0.10 70 0.10
------- ------ ------ ------ -------
Total Deposits............................ $81,428 100.00% $76,311 100.00% $69,426 100.00% $67,997 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
77
<PAGE>
The following table sets forth the savings flows at the Association
during the periods indicated. Net increase refers to the amount of deposits
during a period less the amount of withdrawals during the period.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended September 30,
June 30, -----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Opening balance ........ $ 76,229 $ 69,356 $ 67,927 $ 64,384
Deposits ............... 75,699 86,304 65,771 61,024
Withdrawals ............ (72,940) (82,247) (67,067) (59,578)
Interest credited ...... 2,339 2,816 2,725 2,097
-------- -------- -------- --------
Ending balance ......... $ 81,327 $ 76,229 $ 69,356 $ 67,927
======== ======== ======== ========
Net increase ........... $ 5,098 $ 6,873 $ 1,429 $ 3,543
======== ======== ======== ========
Percent increase ....... 6.69% 9.91% 2.10% 5.50%
======== ======== ======== ========
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
4.00- 5.00- 6.00- 7.00- Percent
4.99% 5.99% 6.99% 7.99% Total of Total
----- ----- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts
maturing in quarter ending:
- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998 ........ $ 772 $ 9,148 $ 105 $ -- $10,025 19.07%
December 31, 1998 ......... 806 6,009 180 -- 6,995 13.30
March 31, 1999 ............ 148 8,481 36 -- 8,665 16.48
June 30, 1999 ............. -- 5,773 66 -- 8,198 15.59
September 30, 1999 ........ -- 7,589 674 -- 8,323 15.83
December 31, 1999 ......... -- 2,439 431 -- 2,870 5.46
March 31, 2000 ............ -- 1,153 733 26 1,912 3.64
June 30, 2000 ............. -- 761 153 -- 914 1.74
September 30, 2000 ........ -- 669 196 -- 865 1.64
December 31, 2000 ......... -- 848 577 -- 1,425 2.71
March 31, 2001 ............ -- 234 -- -- 234 .45
June 30, 2001 ............. -- 112 75 -- 187 .35
September 30, 2001......... -- 7 418 -- 425 .81
Thereafter ................ -- 485 1,055 -- 1,540 2.93
------- ------- ------- ------- ------- ------
Total .................. $ 1,726 $46,127 $ 4,699 $ 26 $52,578 100.00%
======= ======= ======= ======= ======= ======
Percent of total ....... 3.28% 87.73% 8.94% .05%
======= ======= ======= ======
</TABLE>
78
<PAGE>
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of June 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 ......... $ 7,969 $ 6,054 $15,947 $17,370 $47,340
Certificates of deposit
of $100,00 or more ......... 404 244 916 1,142 2,706
Public funds(1) ............. 1,652 697 -- 183 2,532
------- ------- ------- ------- -------
Total certificates of deposit $10,025 $ 6,995 $16,863 $18,695 $52,578
======= ======= ======= ======= =======
</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 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 June 30, 1998, the
Association had $28.4 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 the
dates and for the periods indicated.
<TABLE>
<CAPTION>
At and for the
Nine Months
Ended At and for the Year Ended September 30,
June 30, ---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
Maximum Balance:
<S> <C> <C> <C> <C>
FHLB advances ..... $28,400 $25,000 $24,400 $19,900
Average Balance:
FHLB advances ..... $25,589 $23,583 $19,133 $17,275
</TABLE>
The following table sets forth certain information as to the
Association's FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
At and for the
Nine Months
Ended At September 30,
June 30, ----------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
FHLB advances ........ $28,400 $23,700 $24,300 $18,800
Weighted average
interest rate of FHLB
advances .......... 5.712% 5.930% 5.682% 5.933%
</TABLE>
79
<PAGE>
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, credit unions, mortgage
bankers and brokers.
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 the 10 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%.
Employees
At June 30, 1998, the Association had a total of 27 full-time employees
and one part-time employee. The Association's employees are not represented by
any collective bargaining group. Management considers its employee relations to
be good.
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 June 30, 1998, was
$1,283,344.
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.
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 June 30, 1998, was approximately $101,000.
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 June 30, 1998.
80
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF NEODESHA
General
Neodesha is a community oriented financial institution engaged
primarily in attracting deposits from the general public and using such deposits
to originate one- to four-family residential mortgage and, to a lesser extent,
non-residential and consumer loans primarily in its market area. Neodesha's
revenues are derived principally from interest earned on loans and, to a lesser
extent, from interest earned on investments securities. The operations of
Neodesha are influenced significantly by general economic conditions and by
policies of financial institution regulatory agencies, including the OTS and the
FDIC. Neodesha's cost of funds is influenced by interest rates on competing
investments and general market interest rates. Lending activities are affected
by the demand for financing of real estate and other types of loans, which in
turn is affected by the interest rates at which such financings may be offered.
Neodesha's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable and
investments and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. Neodesha, like other thrift
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
Financial Condition of Neodesha
Comparison of June 30, 1998 and September 30, 1997
Assets. The Association's total assets decreased $632,000, or 4.47%,
from $14,155,000 at September 30, 1997 to $13,523,000 at June 30, 1998. This
decrease was primarily due to decreases in investment securities of $398,000,
net loans receivable of $104,000, mortgage-backed securities of $94,000, and
cash and cash equivalents of $52,000. These decreases in assets were partially
offset by increases in other assets of $10,000, real estate owned of $8,000, and
Federal Home Loan Bank stock of $8,000.
Liabilities. The Association's total liabilities decreased $681,000, or
5.21%, from $13,063,000 at September 30, 1997 to $12,382,000 at June 30, 1998.
This decrease was primarily a result of a decrease in savings deposits of
$1,124,000, partially offset by an increase in advances from the Federal Home
Bank of Topeka of $500,000. The outflow of deposits was a result of competition
from local financial institutions which are aggressively seeking local deposits
by offering relatively high interest rates and competition from other investment
products that offer the potential of a higher rate of return, but also represent
higher risk investments.
Comparison of September 30, 1997 and September 30, 1996
Assets. As of September 30, 1997, Neodesha's assets totaled $14,155,000
as compared to $14,411,000 as of September 30, 1996. The three largest factors
in this $256,000 decrease were a decrease of cash and cash equivalents of
$137,000, a decrease in securities holdings of $98,000 and a decrease in loans
of $21,000.
Liabilities. The liabilities as of September 30, 1997 totaled
$13,063,000 as compared to $13,396,000 as of September 30,1996. Deposits
increased by $156,000 during the year, but this increase was more than offset by
a decrease in FHLB advances of $400,000.
Results of Operations of Neodesha
Neodesha's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and securities, and the costs of
Neodesha's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of Neodesha's
noninterest income, including fee income and service charges, and affected by
the level of its noninterest expenses, including its general and administrative
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
81
<PAGE>
Comparison of the Nine Months Ended June 30, 1998 and June 30, 1997
General. The net earnings for the nine months ended June 30, 1998 were
$49,000 as compared to net earnings of $56,000 for the nine months ended June
30, 1997. This decrease was due primarily to a decrease in net interest income.
Net Interest Income. Net interest income for the nine months ended June
30, 1998 was $346,000 as compared to $364,000 for the nine months ended June 30,
1997. This decrease was due primarily to a reduction in the average balance of
interest-earning assets in the fiscal 1998 period.
Interest Income. Total interest income for the nine months ended June
30, 1998 was $750,000, as compared to $782,000 for the nine months ended June
30, 1997. This decrease was due to a $540,000 decrease in the average balance of
interest-earning assets during the 1998 period, and, to a lesser extent, a one
basis point decrease in the weighted average yield on interest-earning assets.
Interest Expense. Total interest expense for the nine months ended June
30, 1998 was $404,000 as compared to $418,000 for the nine months ended June 30,
1997. This decrease was primarily due to a $602,000 decrease in the average
balance of interest-bearing liabilities, partially offset by a six basis point
increase in the weighted average rate paid on such liabilities.
Provision of Loan Losses. The loan loss provision was $4,500 for both
nine month periods ended June 30, 1998 and June 30, 1997. Management determined
that additional provisions were necessary based upon their quarterly analysis of
the established allowance and review of the composition of the loan portfolio.
The Association's determination regarding the allowance for loan losses is
subject to review by the regulatory agencies which can order the establishment
of additional general or specific allowances.
Non-Interest Income. The non-interest income for the nine months ended
June 30, 1998 was $94,000 as compared to the non-interest income for the nine
months ended June 30, 1997 of $101,000.
Non-Interest Expense. For the nine months ended June 30, 1998, the
non-interest expense was $371,000 as compared to $385,000 for the nine months
ended June 30, 1997. This decrease was due to a decrease in FDIC insurance
premiums.
Income Tax Expense. The income tax expense for the nine months ended
June 30, 1998 was $15,000 as compared to $20,000 for the nine months ended June
30, 1997.
Comparison of Years Ended September 30, 1997 and September 30, 1996
General. Net earnings for the year ended September 30, 1997 were
$77,000 as compared to net earnings for the year ended September 30, 1996 of
$3,000. This increase was primarily due to a non-recurring expense of $79,000
related to the SAIF assessment at September 30, 1996.
Net Interest Income. Net interest income for fiscal 1997 was $486,000
as compared to $474,000 for fiscal 1996. The increase was primarily due to a
decrease in interest expense on deposits and FHLB advances.
Interest Income. Interest income remained stable during the periods
with interest income of $1,046,000 in both fiscal 1997 and fiscal 1996.
Interest Expense. Interest expense during fiscal 1997 was $560,000
compared to $571,000 for fiscal 1996. The decrease was primarily due to a
reduction in average deposits and FHLB advances during fiscal 1997, partially
offset by a 7 basis point increase in average rates paid on interest-bearing
liabilities for the comparative periods.
Provision for Loan Losses. The provision for loan losses during each of
fiscal 1997 and fiscal 1996 was $6,000. The Association will continue to monitor
its allowance for loan losses quarterly, and make future additions to the
allowance through the provision for loan losses as economic and regulatory
conditions dicate.
Non-Interest Income. Non-interest income during fiscal 1997 was
$135,000 as compared to $140,000 for fiscal 1996. This decrease was partially
due to the sale of Financial Information Trust (FIT), which was a co-op data
<PAGE>
processor of which Neodesha was a member. All members shared in the sale of FIT
to FISERV and Neodesha's share of the proceeds was approximately $10,000, which
was received during fiscal 1996.
Non-Interest Expense. Non-interest expense during fiscal 1997 was
$510,000 as compared to non-interest expense during fiscal 1996 of $605,000. The
two major components of this decrease were the non-recurring SAIF assessment of
$79,000 in fiscal 1996 and the annual FDIC deposit insurance premium decrease of
$16,000 from 1996 to 1997.
Income Tax Expense. Income tax expense during fiscal 1997 was $28,000
as compared to $1,000 for fiscal 1996. This increase was due to an increase in
earnings during 1997, as Neodesha paid the SAIF assessment of $79,000 in 1996.
Analysis of Net Interest Income of Neodesha
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
82
<PAGE>
The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant 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 on the
results of Neodesha. Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30,
--------------------------------------------------------- -----------------------------
1998 1997 1997
--------------------------- ---------------------------- -----------------------------
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)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)............ $ 9,255 $606 8.73% $ 9,538 $632 8.83% $ 9,548 $ 843 8.82
Mortgage-backed securities..... 231 8 4.73 253 11 6.07 253 15 6.07
Investment securities.......... 2,940 123 5.60 3,204 130 5.39 3,199 174 5.45
FHLB stock..................... 138 8 7.64 129 6 6.63 130 9 6.79
Interest-bearing deposits...... 340 5 1.87 320 3 1.25 317 5 1.55
------- ---- ------- ---- ------- -----
Total earning assets.......... 12,904 750 7.75 13,444 782 7.76 13,447 1,046 7.78
---- ---- -----
Non-interest earning assets.... 808 805 806
------- ------- -------
Total assets................... $13,712 $14,249 $14,253
======= ======= =======
Interest-bearing liabilities:
Savings deposits............... $ 1,736 39 3.03 $ 1,816 41 3.01 $ 1,847 56 3.03
Demand and NOW................. 2,230 44 2.61 2,448 43 2.35 2,437 58 2.38
MMDA........................... 1,842 53 3.84 1,743 50 3.86 1,737 68 3.91
Certificates of deposit........ 6,200 251 5.40 6,386 258 5.38 6,381 344 5.38
FHLB advances................. 450 17 5.08 667 26 5.14 633 35 5.48
-------- ---- ------- ---- ------- ----
Total interest-bearing
liabilities ................ 12,458 404 4.33 13,060 418 4.27 13,035 561 4.30
---- ---- ----
Non-interest-bearing liabilities 130 139 156
-------- ------- -------
Total liabilities............ 12,588 13,199 13,191
Equity.......................... 1,124 1,050 1,062
-------- ------- -------
Total liabilities and equity. $13,712 $14,249 $14,253
======== ======= =======
Net interest/spread............. $346 3.42% $364 3.49% $485 3.48%
==== ==== ==== ==== ====
Margin.......................... 3.57% 3.61% 3.61%
==== ==== ====
Assets to liabilities........... 103.58% 102.94% 103.16%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995
---------------------------- ---------------------------
Average Interest Average Interest
Outstanding Earned Yield/ Outstanding Earned Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1)............ $ 9,250 $830 8.98% $ 9,047 $ 803 8.87%
Mortgage-backed securities..... 253 15 6.07 253 15 6.08
Investment securities.......... 3,216 173 5.39 3,308 179 5.40
FHLB stock..................... 122 8 6.40 151 9 6.11
Interest-bearing deposits...... 640 19 2.94 250 3 1.16
------- ----- ------- -----
Total earning assets.......... 13,481 1,045 7.76 13,009 1,009 7.76
----- -----
Non-interest earning assets.... 842 872
------- -------
Total assets................... $14,323 $13,881
======= =======
Interest-bearing liabilities:
Savings deposits............... $ 1,722 53 3.08 $ 1,769 54 3.05
Demand and NOW................. 2,304 57 2.47 2,425 63 2.60
MMDA........................... 1,682 64 3.80 1,832 67 3.66
Certificates of deposit........ 6,651 358 5.38 6,062 275 4.54
FHLB advances................. 742 40 5.33 650 37 5.79
------- ----- ------- -----
Total interest-bearing
liabilities ................ 13,101 572 4.37 12,738 496 3.90
----- -----
Non-interest-bearing liabilities 182 171
------- -------
Total liabilities............ 13,283 12,909
Equity.......................... 1,040 972
------- -------
Total liabilities and equity. $14,323 $13,881
======= =======
Net interest/spread............. $473 3.32% $513 3.86%
===== ==== ===== ====
Margin.......................... 3.51% 3.94%
==== ====
Assets to liabilities........... 102.90% 102.13%
======= =======
</TABLE>
- -------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
83
<PAGE>
The following table presents the weighted average yields earned on
loans, securities and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
dates indicated. Non-accruing loans have been included in the table as carrying
a zero yield.
<TABLE>
<CAPTION>
At September 30,
June 30, ------------------------
1998 1997 1996 1995
------- ---- ---- ----
Weighted average yield on:
<S> <C> <C> <C> <C>
Loans receivable ...................... 8.58% 8.85% 8.87% 9.06%
Mortgage-backed securities ............ 4.66 6.08 6.08 6.09
Investment securities ................. 5.52 5.49 5.44 5.38
Other interest-earning assets ......... 3.87 2.71 4.91 5.34
Combined weighted average
yield on interest-earning
assets .......................... 7.71 7.74 7.82 7.95
Weighted average rate paid on:
Passbook Savings ...................... 3.01 3.01 3.01 3.01
NOW ................................... 2.57 2.39 2.33 2.63
MMDA .................................. 4.04 3.91 3.90 3.85
Certificate accounts .................. 5.41 5.43 5.42 5.17
Borrowings ............................ 6.65 6.56 6.03 6.65
Combined weighted average
rate paid on interest-
bearing liabilities ............... 4.46 4.25 4.33 4.34
Spread ................................. 3.25% 3.49% 3.49% 3.61%
</TABLE>
84
<PAGE>
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. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
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>
Nine Months Ended
June 30, Year Ended September 30,
1998 vs. 1997 1997 vs. 1996
-------------------------------- ----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable................... $ (19) $ (7) $ (26) $ 27 $ (14) $ 13
Mortgage-backed securities......... (1) (2) (3) 0 0 0
Investment securities.............. (12) 5 (7) (1) 2 1
FHLB stock......................... 1 1 2 1 0 1
Interest-bearing deposits.......... 0 2 2 (7) (7) (14)
--------- -------- -------- --------- ---------- ---------
Total interest-earning assets.... $ (31) $ (1) (32) $ 20 $ (19) 1
======== ========= -------- ======= ======== ---------
Interest-bearing liabilities:
Savings deposits................... $ (2) $ 0 (2) $ 4 $ (1) 3
Demand and NOW..................... (4) 5 1 3 (2) 1
MMDA............................... 3 0 3 2 2 4
Certificates of Deposit............ (8) 1 (7) (14) -- (14)
FHLB advances...................... (9) 0 (9) (6) 1 (5)
---------- -------- ---------- ---------- -------- ----------
Total interest-bearing liabilities $ (20) $ 6 (14) $ (11) $ -- (11)
========= ======= ---------- ======== ======= ---------
Net interest/spread................. $ (18) $ 12
========= =======
</TABLE>
85
<PAGE>
Asset/Liability Management of Neodesha and Market Risk
Qualitative Aspects of Market Risk. Neodesha derives its income
primarily from the excess of interest collected over interest paid. The rates of
interest Neodesha earns on assets and pays on liabilities generally are
established contractually for a period of time. Market interest rates change
over time. Accordingly, Neodesha's results of operations, like those of many
financial institutions, are impacted by changes in interest rates and its
ability to adapt to changes in interest rates is known as interest rate risk and
is Neodesha's most significant market risk.
Quantitative Aspects of Market Risk. In an attempt to manage Neodesha's
exposure to changes in interest rates and comply with applicable regulations,
Neodesha monitors its interest rate risk. In monitoring interest rate risk,
Neodesha 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 measurement and analysis of the exposure of Neodesha to changes in
the interest rate environment is referred to as asset/liability management. In
an attempt to manage its exposure to changes in interest rates, management
monitors Neodesha's interest rate risk. The Board of Directors meets at least
quarterly to review Neodesha's interest rate risk position and profitability.
The Board of Directors also reviews Neodesha's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of Neodesha's objectives in the most effective manner.
In managing its asset/liability mix, Neodesha, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing net interest margin
than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
Neodesha stresses the origination of ARMs in an effort to manage its
exposure to changes in interest rates. At June 30, 1998, approximately $5.3
million, or 55.6% of Neodesha's total loan portfolio, was ARMs. In addition, the
primary objective of Neodesha's investment strategy is to provide liquidity
necessary to meet funding needs as well as to address daily, cyclical and
long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock and U.S. Government securities.
Generally, the investment policy of Neodesha is to invest funds among
various categories of investments and maturities based upon Neodesha's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill Neodesha's
asset/liability management policies.
Neodesha's cost of funds responds to changes in interest rates due to
the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are heavily influenced by the levels of short-term
interest rates. Neodesha offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
One approach used by management to quantify interest rate risk is the
net portfolio value ("NPV") analysis. In essence, this approach calculates the
difference between the present value of liabilities, expected cash flows from
assets and cash flows from off balance sheet contracts. Under OTS regulations,
an institution's "normal" level of interest rate risk in the event of an
immediate and sustained 200 basis point change in interest rates is a decrease
in the institution's NPV in an amount not exceeding 2% of the present value of
its assets. Pursuant to this regulation, thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, will be exempt from this requirement unless the
OTS determines otherwise. The OTS has postponed the implementation of the rule
until further notice. Based upon its asset size and capital level at June 30,
1998, Neodesha would qualify for an exemption from this rule.
86
<PAGE>
The following table sets forth, at June 30, 1998, an analysis of
Neodesha's interest rate risk as measured by the estimated changes in NPV
resulting from instantaneous and sustained parallel shifts in the yield curve
(+/-200 basis points, measured in 100 basis point increments).
Net Portfolio Value
Change in At June 30, 1998
Interest Rate ------------------------------------------
Basis Points) $ Amount $ Change % Change
--------------- ---------- ---------- ---------
(Dollars in Thousands)
+200 $ 1,328 $ (44) (3)%
+100 1,365 (7) (1)
-- 1,372 -- --
-100 1,407 34 3
-200 1,502 130 9
Certain assumptions utilized in assessing the interest rate risk of
thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that Neodesha's assets and liabilities would perform as set
forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
Liquidity and Capital Resources of Neodesha
Neodesha's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and investment securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition. Neodesha
generally manages the pricing of its deposits to be competitive and increase
core deposit relationships.
Federal regulations require Neodesha to maintain minimum levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. Neodesha has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At June 30, 1998,
Neodesha's liquidity ratio for regulatory purposes was 14.45%.
Neodesha's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $57,000 for the
nine months ended June 30, 1998, and $66,000 for the year ended September 30,
1997. Net cash from investing activities consisted primarily of disbursements
for loan originations and the purchase of investment securities, offset by
principal collections on loans and proceeds from maturation of securities. Net
cash from financing activities consisted primarily of activity in deposit
accounts and borrowings. The net change in deposits was a $1,124,000 decrease
for the nine months ended June 30, 1998 and a $156,000 increase for the year
ended September 30, 1997.
Neodesha's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on Neodesha's operating, financing, lending
and investing activities during any given period. At June 30, 1998, cash and
short-term investments totaled $583,000. Neodesha has other sources of liquidity
if a need for additional funds arises, including securities maturing within one
year and the repayment of loans. Neodesha may also utilize Federal Home Loan
Bank advances as a source of funds.
87
<PAGE>
At June 30, 1998, Neodesha had outstanding commitments to originate
loans of $26,000, all of which had adjustable interest rates. These loans are to
be secured by properties located in its market area. Neodesha anticipates that
it will have sufficient funds available to meet its current loan commitments.
Liquidity management is both a daily and long-term responsibility of
management. Neodesha 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-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short- and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If Neodesha requires funds beyond
its ability to generate them internally, it has additional borrowing capacity
with the FHLB of Topeka.
Neodesha is subject to various regulatory capital requirements imposed
by the OTS. At June 30, 1998, Neodesha was in compliance with all applicable
capital requirements. See "Regulation - Regulatory Capital Requirements."
Neodesha's principal sources of funds are deposits, amortization and
prepayment of loan principal and mortgage-backed securities, maturities of
investment securities and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, floors and caps on loan rates,
general economic conditions and competition. Neodesha generally manages the
pricing of its deposits to be competitive and increase core deposit
relationships, but has from time to time decided not to pay deposit rates that
are as high as those of its competitors.
Year 2000 Compliance Issues
Neodesha 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. The
committee has determined that the greatest potential impact upon Neodesha is the
risk related to vendors used by Neodesha, particularly Neodesha's data
processing service bureau. Quarterly progress reports from the service bureau
indicate levels of manpower and expertise sufficient to amend and test the
adequacy of their computer programming and systems prior to the arrival of the
year 2000. All other vendors used by Neodesha have been identified and requests
for the year 2000 certifications have been forwarded.
The year 2000 compliance program established by the committee includes
quarterly progress reports submitted to the Board of Directors and a target date
of December 31, 1998 for required internal testing. Contingency plans have also
been developed in the event that Neodesha's service bureau or vendors are not
year 2000 certified. The committee estimates that the impact upon Neodesha's
results of operations, liquidity and capital resources will be immaterial.
Impact 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 Neodesha.
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 Neodesha.
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 requires
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. Neodesha 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 Neodesha's
financial position or results of operations, nor will adoption require
additional capital resources.
88
<PAGE>
BUSINESS OF NEODESHA
General
As a community-oriented financial institution, Neodesha seeks to serve
the financial needs of the Neodesha, Kansas community. Neodesha's business
involves attracting deposits from the general public and using such deposits,
together with other funds, to originate primarily one- to four-family
residential mortgage loans and, to a lesser extent, consumer and non-residential
real estate loans in its market area. Neodesha also invests in U.S. Treasury and
other securities.
Neodesha offers a variety of accounts having a range of interest rates
and terms. Neodesha's deposits include passbook savings, NOW, Super NOW and
money market accounts and certificates of deposit with terms of three months to
48 months. Neodesha solicits deposits only in its primary market area and does
not accept brokered deposits.
Market Area
Neodesha's office is located in Neodesha, Kansas in the southeast
corner of Kansas in Wilson County. Agriculture is the primary industry in
Neodesha. In addition, Neodesha is home to an industrial park with such varied
businesses as Cobalt Boats, M-E-C Company, Prestige Cabinets, Neodesha Plastics,
Airosol Company and Berwind Railway Service Co.
Wilson County has a population of approximately 10,500. Neodesha
estimates its share of the savings market in Wilson County to be less than 10%.
Lending Activities
General. The principal lending activity of Neodesha is originating for
its portfolio adjustable rate ("ARM") and, to a lesser extent, fixed rate
mortgage loans secured by one- to four-family residences located primarily in
their market area. To a lesser extent, Neodesha also originates consumer and
commercial real estate loans in its market area. At June 30, 1998, Neodesha's
loans receivable, net totaled $9.4 million. See "- Originations of Loans."
89
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of Neodesha's loan portfolio in dollar amounts and in percentages
(before deductions (or additions) for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
June 30, -----------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............... $7,128 75.44% $7,237 75.70% $7,455 77.18% $7,282 79.43%
Multi-family...................... -- -- -- -- 5 .05 9 .10
Commercial........................ 48 .51 72 .75 105 1.09 196 2.13
Construction or development....... -- -- -- -- 70 .72 -- --
------- ----- ------ ----- ------ ----- ------ -----
Total real estate loans......... 7,176 75.95 7,309 76.45 7,635 79.04 7,487 81.66
------- ----- ------ ----- ------ ----- ------ -----
Consumer loans:
Deposit account................... 131 1.39 123 1.29 142 1.47 153 1.67
Automobile........................ 1,926 20.39 1,872 19.58 1,606 16.63 1,261 13.76
Unsecured......................... 107 1.13 118 1.23 109 1.13 79 .86
Other............................. 108 1.14 139 1.45 167 1.73 188 2.05
-------- ----- ------ ----- ------ ----- ------ -----
Total consumer loans............ 2,272 24.05 2,252 23.55 2,024 20.96 1,681 18.34
------- ----- ------ ----- ------ ----- ------ -----
Total loans..................... 9,448 100.00% 9,561 100.00% 9,659 100.00% 9,168 100.00%
====== ====== ====== ======
Less:
Loans in process.................. -- -- 57 1
Deferred fees and discounts....... 4 4 12 11
Allowance for losses.............. 80 89 101 107
------- ------ ------ ------
Total loans receivable, net..... $9,364 $9,468 $9,489 $9,049
====== ====== ====== ======
</TABLE>
90
<PAGE>
The following table shows the composition of Neodesha's loan portfolio
by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
June 30, ---------------------------------------------------------
1998 1997 1996 1995
------------------- ---------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family................. $1,876 19.85% $2,162 22.61% $2,591 26.82% $2,947 32.14%
Multi-family........................ -- -- -- -- 5 0.05 9 .10
Non-residential..................... 48 .51 72 .76 105 1.09 196 2.14
------ ----- ------ ----- ------ ------ ------ ------
Total fixed -rate
real estate loans............ 1,924 20.36 2,234 23.37 2,701 27.96 3,152 34.38
Consumer............................ 2,272 24.05 2,252 23.55 2,024 20.95 1,681 18.34
------ ----- ------ ----- ------ ------ ------ ------
Total fixed-rate loans............ 4,196 44.41 4,486 46.92 4,725 48.91 4,833 52.72
------ ----- ------ ----- ------ ------ ------ ------
Adjustable-Rate Loans
Real estate:
One-to four-family.................. 5,252 55.59 5,075 53.08 4,864 50.36 4,335 47.28
Construction........................ -- -- -- -- 70 0.73 -- --
Total adjustable-rate loans....... 5,252 55.59 5,075 53.08 4,934 51.09 4,335 47.28
------ ----- ------ ----- ------ ------ ------ ------
Total loans....................... 9,448 100.00% 9,561 100.00% 9,659 100.00% 9,168 100.00%
====== ====== ====== ======
Less:
Loans in process.................... -- -- 57 1
Deferred fees and discounts......... 4 4 12 11
Allowance for losses................ 80 89 101 107
------ ----- ------ ------
Total loans receivable, net....... $9,364 $9,468 $9,489 $9,049
====== ====== ====== ======
</TABLE>
91
<PAGE>
The following schedule shows the scheduled contractual maturities of
Neodesha's loan portfolio at June 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
-----------------------------------------
Multi-family and
One- to four-family Non-Residential Consumer Total
--------------------- ------------------ ------------------ -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Periods Ending
June 30,
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) .............................. $ 2 7.44% $ 7 7.75% $550 10.54% $ 559 10.49%
2000 ................................. 18 9.18 -- -- 258 11.30 276 11.16
2001 ................................. 27 9.05 -- -- 603 10.36 630 10.30
2002 and 2003 ........................ 129 8.13 25 7.75 811 9.32 965 9.12
2004 to 2008 ......................... 665 8.87 16 7.75 33 9.50 714 8.87
2009 to 2023 ......................... 5,066 8.34 -- -- 17 12.50 5,083 8.35
2024 and following ................... 1,221 7.83 -- -- -- -- 1,221 7.83
------ --- ------ ------
Total ............................. $7,128 $48 $2,272 $9,448
====== === ====== ======
</TABLE>
- -----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999 which have
predetermined interest rates is $3.6 million while the total amount of loans due
after such dates which have floating or adjustable interest rates is $5.2
million.
Under federal law, the aggregate amount of loans that Neodesha is
permitted to make to any one borrower or group of related borrowers is generally
limited to the greater of $500,000 or 15% of unimpaired capital and surplus (25%
if the security for such loan has a "readily ascertainable" value). At June 30,
1998, based on the above, Neodesha's regulatory loans-to-one borrower limit was
approximately $500,000. On the same date, Neodesha had no borrowers with
outstanding balances in excess of this amount. As of June 30, 1998, the largest
dollar amount outstanding or committed to be lent to one borrower, or group of
related borrowers, related to a one- to four-family loan totaling $108,000
located in Neodesha. Neodesha's second largest lending relationship was four
loans to one borrower secured by real estate located in Neodesha with an
aggregate carrying value of $100,000. At June 30, 1998, both loans were
performing in accordance with their terms. As of the same date, there were no
other loans or lending relationships with carrying values in excess of $100,000.
All of Neodesha's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with Neodesha's appraisal policy). The loan applications are designed primarily
to determine the borrower's ability to repay and the more significant items on
the application are verified through use of credit reports, financial
statements, tax returns or confirmations. All loans originated by Neodesha are
approved by the loan committee and ratified by the full Board of Directors.
Neodesha requires title insurance or other evidence of title on its
mortgage loans, as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Association
also requires flood insurance to protect the property securing its interest when
the property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
Neodesha's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Approximately 80% of Neodesha's
one- to four-family residential mortgage originations are secured by properties
located in its market area. The remainder are purchased FHA and VA loans located
in the Wichita, Kansas area. All mortgage loans currently originated by Neodesha
are retained and serviced by it.
92
<PAGE>
Historically, Neodesha offered fixed-rate mortgage loans with
maturities up to 30 years. However, in 1991, Neodesha stopped originating fixed
rate loans. As of June 30, 1998, Neodesha had $1.9 million of fixed rate
residential mortgage loans. See "- Originations of Loans."
Neodesha offers ARMs which carry interest rates which adjust annually
based on the Home Mortgage Rate published monthly by the FHLB. Such loans may
carry terms to maturity of up to 30 years. The ARM loans currently offered by
Neodesha provide for an annual interest rate change cap of up to 100 basis point
and a lifetime cap generally of 300 basis points over the initial rate.
Neodesha's ARMs do not permit negative amortization of principal, and do not
contain prepayment penalties. At June 30, 1998, one- to four-family ARMs totaled
$5.3 million or 55.59% of Neodesha's total loan portfolio.
Neodesha will generally lend up to 90% of the lesser of the sales price
or appraised value of the security property on owner occupied one- to
four-family loans. In underwriting one- to four-family residential real estate
loans, Neodesha currently evaluates both the borrower's ability to make
principal, interest and escrow payments, the value of the property that will
secure the loan and debt to income ratios.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Neodesha originates
mortgage loans for its portfolio only.
Neodesha's residential mortgage loans customarily include due-on-sale
clauses giving Neodesha the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Non-Residential Real Estate Lending. Occasionally, in order to increase
the yield of its loan portfolio and to complement residential lending
opportunities, Neodesha originates commercial real estate loans secured by
properties in its primary market area. At June 30, 1998, Neodesha had commercial
real estate loans totaling $48,000, or 0.51% of Neodesha's total loan portfolio.
Commercial real estate loans may present a higher level of risk than
loans secured by one- to four-family residences. This greater risk is due to
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. While Neodesha has experienced losses on commercial real
estate loans in the past, as of June 30, 1998, there were no commercial real
estate loans delinquent 90 days or more.
Consumer Lending. Management believes that offering consumer loan
products helps to expand Neodesha's customer base and to create stronger ties to
its existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management tools. Neodesha
originates a variety of different types of consumer loans, but primarily
automobile and deposit account loans. At June 30, 1998 consumer loans totaled
$2.3 million or 24.05% of total loans.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Neodesha primarily
originates loans secured by certificates of deposit and automobile loans.
Neodesha's automobile loans are originated as installment loans with a fixed
interest rate and terms of up to 60 months for new vehicles and up to 48 months
for used vehicles. Neodesha originates its automobile loans directly from its
existing customers and will loan up to 100% of the value of the automobile.
The underwriting standards employed by Neodesha for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of 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 credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured 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.
93
<PAGE>
Originations of Loans
Real estate loans are originated by Neodesha's staff through referrals
from existing customers or real estate agents.
Neodesha's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts.
Demand is affected by both the local economy and the interest rate environment.
See "- Market Area." Under current policy, all loans originated by Neodesha are
retained in Neodesha's portfolio. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Neodesha - Asset/Liability
Management."
The following table shows the loan origination, purchase, sale and
repayment activities of Neodesha for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
June 30, -----------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
<S> <C> <C> <C> <C>
Real estate - one- to four-family......... $ 652 $ 1,159 $ 1,518 $ 1,106
Fixed rate:
Consumer - non-real estate................ 1,926 2,755 2,361 2,013
-------- -------- -------- --------
Total loans originated.............. 2,578 3,914 3,879 3,119
Repayments
Principal repayments (1).................. 2,691 4,012 3,388 3,053
Increase (decrease) in other items, net (2). 9 77 (51) 43
-------- -------- -------- --------
Net increase (decrease)............ $ (104) $ (21) $ 440 $ 109
======== ======== ======== ========
</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.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, Neodesha attempts to cure the delinquency by contacting the
borrower. Generally, Neodesha personnel work with the delinquent borrower on a
case by case basis to solve the delinquency. Generally, a late notice is sent on
all delinquent loans followed by a phone call after the thirtieth day of
delinquency. Additional written and verbal contacts may be made with the
borrower between 30 and 60 days after the due date. If the loan is contractually
delinquent for 90 days, Neodesha may institute appropriate action to foreclose
on the property. After 120 days, foreclosure procedures are initiated. If
foreclosed, the property is sold at public sale and may be purchased by
Neodesha.
Real estate acquired by Neodesha as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or fair value less estimated selling costs. After
acquisition, all costs incurred in maintaining the property are expensed. Costs
relating to the development and improvement of the property, however, are
capitalized.
94
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at June 30, 1998, in dollar amounts and as a percentage of
Neodesha'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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family... 8 $ 87 .92% 5 $143 1.51% 13 $230 2.43%
Consumer................ 10 25 .27 32 84 .90 42 109 1.17
---- ---- ---- ---- ---- ---- ---- ---- ----
Total.............. 18 $112 1.19% 37 $227 2.41% 55 $339 3.60%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The following table sets forth information concerning delinquent loans
at September 30, 1997, in dollar amounts and as a percentage of Neodesha'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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family. 2 $ 34 .36% 3 $ 85 .89% 5 $ 119 1.25%
Consumer.............. 13 43 .45 30 72 .75 43 115 1.20
----- ----- ---- ----- ----- ---- ---- ----- -----
Total............ 15 $ 77 .81% 33 $ 157 1.64% 48 $234 2.45%
===== ====== ===== ===== ===== ==== ==== ===== =====
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that Neodesha will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS.
At June 30, 1998, Neodesha had $198,000 in loans classified as
substandard, zero classified as doubtful and no loans classified as loss.
95
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of Neodesha'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, Neodesha does not generally accrue interest on loans past due
more than 90 days. For all periods presented, Neodesha had no 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 the market
rates). Repossessed assets includes assets acquired in settlement of loans and
reflects the lower of cost or fair value less selling expense.
<TABLE>
<CAPTION>
September 30,
June 30, -----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C>
One- to four-family..................... $ 143 $ 85 $ 60 $ 89
Non-residential real estate............ -- -- -- 58
Consumer................................ 84 72 71 39
----- ----- ----- -----
Total non-accruing loans............ 227 157 131 186
Real estate acquired through foreclosure...
One- to four-family..................... -- -- -- 22
Non-residential......................... -- -- -- 8
Repossessed assets....................... 32 25 -- 4
----- ----- ----- -----
Total non-performing assets................ $ 259 $ 182 $ 131 $ 220
===== ===== ===== =====
Total as a percentage of total assets...... 1.92% 1.29% .91% 1.59%
===== ===== ===== =====
</TABLE>
For the year ended September 30, 1997 and for the nine months ended
June 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 $10,000 and $5,000, respectively. The amounts that were included in interest
income on such loans were $5,000 and $4,000 for the year ended September 30,
1997, and for the nine months ended June 30, 1998, respectively.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 1998, there were no loans with respect
to which known information about the possible credit problems of the borrowers
or the cash flows of the security properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management considers Neodesha's non-performing and "of concern" assets
in establishing its allowance for loan losses.
96
<PAGE>
The following table sets forth an analysis of Neodesha's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
Nine months ended Year Ended September 30,
June 30, ----------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period................ $ 89 $ 101 $ 107 $ 151
Charge-offs:
One- to four-family......................... -- -- -- (37)
Consumer.................................... (16) (21) (14) (13)
Recoveries:
Consumer.................................... 2 3 2 --
----- ----- ----- -----
Net charge-offs............................. (14) (18) (12) (50)
Provision for the period...................... 5 6 6 6
----- ----- ----- -----
Balance at end of period...................... $ 80 $ 89 $ 101 $ 107
===== ===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period. .15% .19% .13% .55%
===== ===== ===== =====
Allowance for loan losses to total loans at end
of period.................................. .85% .93% 1.05% 1.17%
===== ===== ===== =====
Allowance for loan losses to non-performing loans
at end of period........................... 35.09% 56.69% 77.10% 57.53%
===== ===== ====== =====
</TABLE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
June 30, 1998 1997 1996 1995
------------------- --------------------- -------------------- ---------------------
Percent Percent of Percent of Percent of
of Loans Loans in Loans in Loans in
in Each Each Each Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(In Thousands)
Real Estate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.. $ 36 75.44% $ 32 75.70% $ 33 77.18% $ 35 79.43%
Multi-family......... -- -- -- -- -- .05 -- .10
Non-residential...... -- .51 -- .75 -- 1.09 -- 2.13
Construction......... -- -- -- -- -- .72 -- --
Consumer................ 19 24.05 24 23.55 10 20.96 8 18.34
Unallocated............. 25 -- 33 -- 58 -- 64 --
------ ----- ----- ----- ------ ----- ------- -----
Total.............. $ 80 100.00% $ 89 100.00% $ 101 100.00% $ 107 100.00%
====== ====== ====== ====== ====== ====== ======= ======
</TABLE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio. Such evaluation, which includes a review
of all loans of which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, delinquency trends, adverse situations that may affect
the borrower's ability to repay, prevailing and projected economic conditions
and other factors that warrant recognition in providing for an adequate
allowance for loan losses. In determining the general reserves under these
policies, historical charge-offs and recoveries, changes in the mix and levels
of the various types of loans, net realizable values, the current and
prospective loan portfolio and current economic conditions are considered.
97
<PAGE>
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
Investment Activities
General. Neodesha must maintain minimum levels of investments and other
assets 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, Neodesha
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and above levels believed adequate to meet the requirements
of normal operations, including potential deposit outflows. At June 30, 1998,
Neodesha's liquidity ratio for regulatory purposes was 14.45%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Neodesha - Asset/Liability Management" and "- Liquidity and Capital Resources."
Generally, the investment policy of Neodesha is to invest funds among
categories of investments and maturities based upon the Neodesha's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. As required by SFAS 115,
securities are classified into three categories: trading, held-to-maturity and
available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
trading account activities in the statement of operations. Securities that
Neodesha has the positive intent and ability to hold to maturity are classified
as held-to-maturity and reported at amortized cost. All other securities not
classified as trading or held-to-maturity are classified as available-for-sale.
At June 30, 1998, Neodesha had no securities which were classified as trading
and no securities classified as available-for-sale. At June 30, 1998, all of
Neodesha's securities were classified as held-to-maturity.
Securities. 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.
In order to complement its lending activities and to increase its
holding of short and medium term assets, Neodesha invests in liquidity
investments and in high-quality investments, such as U.S. Treasury and agency
obligations. At June 30, 1998, Neodesha's securities portfolio totaled $2.9
million. At June 30, 1998, Neodesha did not own any investment securities of a
single issuer which exceeded 10% of Neodesha's retained earnings, other than
federal agency obligations. See Notes B and C of the Notes to Financial
Statements of Neodesha for additional information regarding Neodesha's
securities portfolio.
98
<PAGE>
The following table sets forth the composition of the Association's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
June 30, ---------------------------------------------------------
1998 1997 1996 1995
----------------- ----------------- ---------------- ----------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury........................... $ 799 26.46% $ 897 25.60% $1,097 30.52% $1,098 30.61%
Federal agency obligations............ 1,316 43.58 1,617 46.15 1,516 42.18 1,516 42.26
Municipals............................ 604 20.00 603 17.21 602 16.75 602 16.79
Mortgage-backed securities:........... 159 5.26 253 7.22 253 7.04 253 7.05
------ ------- ------ ----- ------ ------ ------ -----
Total securities held to maturity.. 2,878 95.30 3,370 96.18 3,468 96.49 3,469 96.71
FHLB stock............................ 142 4.70 134 3.82 126 3.51 118 3.29
------ ------- ------- ----- ------ ------ ------ -----
Total securities and FHLB stock.... $3,020 100.00% $3,504 100.00% $3,594 100.00% $3,587 100.00%
====== ====== ====== ====== ====== ====== ====== ======
Average remaining life or term to
repricing of securities (excluding
FHLB stock)........................... 1.95 years 2.12 years 2.67 years 3.54 years
Other Interest-Earning Assets:
Interest-bearing deposits:............ $ 391 100.00% $ 423 100.00% $ 519 100.00% $ 382 100.00%
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
The composition and maturities of the securities portfolio, excluding
FHLB of Topeka stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Total Investment
1 Year Years Years Securities
--------- --------- --------- --------------------------
Amortized Amortized Amortized Amortized
Cost Cost Cost Cost Fair Value
---- ---- ---- ---- ----------
(Dollars in Thousands)
Held to Maturity:
<S> <C> <C> <C> <C> <C>
U.S. Treasury.................... $ 599 $ 200 $ -- $ 799 $ 800
Federal agency obligations....... 715 601 -- 1,316 1,325
Municipals....................... -- 410 194 604 603
-------- -------- ------- ------- -------
Total investment securities... $ 1,314 $1,211 $ 194 $ 2,719 $2,728
======== ====== ======== ======= ======
Weighted average yield........ 5.91% 5.32% 4.55% 5.55%
======== ====== ======== =======
</TABLE>
Sources of Funds
General. Neodesha's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. Neodesha offers deposit accounts having a wide range of
interest rates and terms. Neodesha's deposits consist of passbook, NOW, money
market and various certificate accounts. Neodesha relies primarily on
competitive pricing and customer service to attract and retain these deposits.
Neodesha's customers may access their accounts through Neodesha's main office.
Neodesha only solicits deposits in its market area and does not currently use
brokers to obtain deposits.
Neodesha has attempted to be competitive in obtaining funds and to
respond with flexibility to changes in consumer demand. As a result, as
customers have become more interest rate conscious, Neodesha has become more
susceptible to short-term fluctuations in deposit flows.
Neodesha intends to utilize customer service and marketing initiatives
in an effort to maintain the volume of such deposits. However, there can be no
assurance as to whether Neodesha will be able to maintain or increase its core
deposits in the future.
99
<PAGE>
The following table sets forth the savings flows at Neodesha during the
periods indicated. Net increase refers to the amount of deposits during a period
less the amount of withdrawals during the period.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended September 30,
June 30, ----------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance ................................ $ 12,854 $ 12,698 $ 11,673 $ 12,742
Deposits ....................................... 26,857 44,637 43,553 40,035
Withdrawals .................................... (28,221) (44,854) (42,887) (41,480)
Interest credited .............................. 240 373 359 376
-------- -------- -------- --------
Ending balance ................................. $ 11,730 $ 12,854 $ 12,698 $ 11,673
======== ======== ======== ========
Net increase (decrease) ........................ $ (1,124) $ 156 $ 1,025 $ (1,069)
======== ======== ======== ========
Percent increase (decrease) .................... (8.74)% 1.23% 8.78% (8.39)%
======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by Neodesha for the dates
indicated and the rates offered. See Note G of the Notes to the Financial
Statements of Neodesha for weighted average nominal rates.
<TABLE>
<CAPTION>
September 30,
June 30, -----------------------------------------------------------------------
1998 1997 1996 1995
---------------------- --------------------- --------------------- ----------------------
Percent Percent Percent Percent
of of of of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Transactions and Savings Deposits
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook Demand (3.00%)........ $ 1,695 14.44% $ 2,000 15.55% $ 1,778 13.98% $ 1,754 15.01%
NOW Accounts (2.75-3.25%)...... 2,160 18.41 2,453 19.07 2,549 20.05 2,286 19.56
Money Market Accounts
(2.75-3.50%).............. 1,640 13.97 2,074 16.12 1,623 12.77 1,741 14.90
-------- ------ ------ ------ ----- ------ ------ ------
Total Transactions and Savings
Deposits.................. 5,495 46.82 6,527 50.74 5,950 46.80 5,781 49.47
-------- ------ ------ ------ ----- ------ ------ ------
Certificates:
0.00 - 3.99%................... -- -- -- -- -- -- 74 .63
4.00 - 4.99%................... 732 6.23 1,395 10.85 2,164 17.02 1,808 15.47
5.00 - 5.99%................... 4,331 36.90 3,045 23.67 2,540 19.98 3,038 26.00
6.00 - 6.99%................... 1,172 9.99 1,887 14.67 2,044 16.08 972 8.32
-------- ------ ------- ------ ------ ----- ------ -------
Total Certificates............. 6,235 53.12 6,327 49.19 6,748 53.08 5,892 50.42
-------- ------ ------- ------ ------ ------ ------ ------
Accrued Interest............... 7 0.06 9 0.07 15 0.12 13 0.11
--------- ------- -------- ------- ------ ------ ------- -------
Total Deposits................. $11,737 100.00% $12,863 100.00% $12,713 100.00% $11,686 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
100
<PAGE>
The following table shows rate and maturity information for Neodesha's
certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
Certificate accounts 4.00- 5.00- 6.00- Percent of
maturing in quarter ending: 4.99% 5.00% 6.99% Total Total
- --------------------------- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
September 30, 1998 ... $ 452 $ 942 $ 437 $1,831 29.37%
December 31, 1998 .... 280 443 83 806 12.93
March 31, 1999 ....... -- 810 11 821 13.17
June 30, 1999 ........ -- 671 16 687 11.02
September 30, 1999 ... -- 285 30 315 5.05
December 31, 1999 .... -- 237 224 461 7.40
March 31, 2000 ....... -- 76 371 447 7.17
June 30, 2000 ........ -- 145 -- 145 2.32
September 30, 2000 ... -- 329 -- 329 5.27
December 31, 2000 .... -- 226 -- 226 3.62
March 31, 2001 ....... -- 22 -- 22 .35
June 30, 2001 ........ -- 11 -- 11 .18
September 30, 2001 ... -- 7 -- 7 .11
Thereafter ........... -- 127 -- 127 2.04
------ ------ ------ ------ ------
Total ................ $ 732 $4,331 $1,172 $6,235 100.00%
====== ====== ====== ====== ======
Percent of total ..... 11.74% 69.46% 18.80%
====== ====== ======
</TABLE>
The following table indicates the amount of Neodesha's certificates of
deposit and other deposits by time remaining until maturity as of June 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 ................... $1,017 $ 706 $1,408 $1,688 $4,819
Certificates of deposit $100,000 or more ..................... 314 -- 100 402 816
Public funds(1) .............................................. 500 100 -- -- 600
------ ------ ------ ------ ------
Total certificates of deposit ........................... $1,831 $ 806 $1,508 $2,090 $6,235
====== ====== ====== ====== ======
</TABLE>
- -------
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of Neodesha's
deposits, see Note G of the Notes to Financial Statements of Neodesha.
Borrowings. Neodesha's other available sources of funds include advances
from the FHLB of Topeka and other borrowings. As a member of the FHLB of Topeka,
the Association is required to own capital stock in the FHLB of Topeka and is
authorized to apply for advances from the FHLB of Topeka. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Topeka may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions. See Note H of the Notes to Financial Statements of Neodesha.
101
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of Neodesha's FHLB advances and other borrowings at and for the dates
indicated.
<TABLE>
<CAPTION>
At and for the Nine Months At and for the Year Ended September 30,
ended June 30, ---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
Maximum Balance:
<S> <C> <C> <C> <C>
FHLB Advances............. $ 600 $1,100 $1,100 $ 950
Average Balance:
FHLB Advances............. $ 450 $ 633 $ 742 $ 650
</TABLE>
The following table sets fort certain information as to Neodesha's FHLB
advances at the dates indicated.
<TABLE>
<CAPTION>
September 30,
June 30, -------------------------------------------
1998 1997 1996 1995
------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB advances....................... $600 $100 $500 $950
Weighted average interest rate of
FHLB advances.................... 6.65% 6.56% 6.03% 6.65%
</TABLE>
Subsidiary Activities
As a federally chartered savings and loan association, Neodesha is
permitted by OTS regulations to invest up to 2% of its assets in the stock of,
or loans to, service corporation subsidiaries, and may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
savings association may engage in directly. At June 30, 1998, Neodesha did not
have any subsidiaries.
Competition
Neodesha faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating loans comes primarily
from commercial banks, credit unions, mortgage bankers and other savings
institutions, which also make loans secured by real estate located in Neodesha's
market area. Neodesha competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
Competition for deposits is principally from commercial banks, credit
unions, mutual funds, securities firms and other savings institutions located in
the same communities. The ability of Neodesha to attract and retain deposits
depends on providing an investment opportunity that satisfies the requirements
of investors as to rate of return, liquidity, risk, convenient locations and
other factors. Neodesha competes for these deposits by offering competitive
rates, convenient business hours and a customer oriented staff.
Employees
At June 30, 1998, Neodesha had a total of 7 employees. None of
Neodesha's employees are represented by any collective bargaining agreement.
Management considers its employee relations to be good.
Properties
Neodesha believes that its current facilities are adequate to meet its
present and foreseeable future needs.
102
<PAGE>
Neodesha's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by Neodesha at June 30, 1998 was approximately
$18,000.
Legal Proceedings
From time to time, Neodesha is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Holding Company's and
Neodesha's financial position or results of operations.
REGULATION
General. First Federal and Neodesha are federally chartered savings and
loan associations, the deposits of which are federally insured and backed by the
full faith and credit of the United States Government. Accordingly, First
Federal and Neodesha are subject to broad federal regulation and oversight
extending to all its operations. First Federal and Neodesha are members of the
FHLB of Topeka and are subject to certain limited regulation by the 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 and Neodesha are members of SAIF, which
together with the 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 and Neodesha were commenced as of
July 1996 and October 1992, and June 1997 and June 1990, 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 or Neodesha 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 and Neodesha's OTS
assessment for the fiscal year ended September 30, 1997, was $33,415 and $4,997,
respectively.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal, Neodesha 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 and Neodesha is prescribed by federal laws, and they are 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 and Neodesha are in compliance
with the noted restrictions.
First Federal's and Neodesha'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 June 30, 1998, First Federal's and
Neodesha's lending limit under this restriction was approximately $1.5 million,
and $500,000, respectively. At June 30, 1998, the Association and Neodesha had
no loans in excess of their loans-to-one borrower limits.
103
<PAGE>
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. First Federal and
Neodesha are members 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 and Neodesha, 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 earnings, and certain
noncumulative perpetual preferred stock and related earnings. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At June 30, 1998, neither the
Association nor Neodesha had any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 1998, neither the Association nor Neodesha
had any subsidiaries.
104
<PAGE>
At June 30, 1998, First Federal had tangible capital of $10.2 million, or
8.38% of adjusted total assets, which is approximately $8.4 million above the
minimum requirement of 1.50% of adjusted total assets in effect on that date. At
June 30, 1998, Neodesha had tangible capital of $1.1 million, or 8.42% of
adjusted total assets, which is approximately $938,000 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 June 30, 1998, First
Federal and Neodesha each had no intangibles which were subject to these tests.
At June 30, 1998, First Federal had core capital equal to $10.2 million,
or 8.38% of adjusted total assets, which is $6.6 million above the minimum
leverage ratio requirement of 3% in effect on that date. At that date, Neodesha
had core capital equal to $1.1 million or 8.42% of adjusted total assets, which
is $735,000 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 June 30, 1998, First Federal and
Neodesha had no capital instruments that qualify as supplementary capital and
$656,000 and $77,000 of general loss reserves, respectively, of which neither
was in excess of 1.25% of risk-weighted assets, respectively.
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 and
Neodesha had no such exclusions from capital and assets at June 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 association with less than $300 million in assets and a
total capital ratio in excess of 12%, such as the Association and Neodesha, is
exempt from this requirement unless the OTS determines otherwise.
On June 30, 1998, First Federal had total risk-based capital of $10.9
million (including $10.2 million in core capital and $656,000 in qualifying
supplementary capital) and risk-weighted assets of $61.2 million; or total
capital of 17.80% of risk-weighted assets. This amount was $6.0 million above
the 8% requirement in effect on that date.
105
<PAGE>
On June 30, 1998, Neodesha had total risk-based capital of $1.2 million
(including $1.1 million in core capital and $77,000 in qualifying supplementary
capital) and risk-weighted assets of $7.2 million; or total capital of 16.83% of
risk-weighted assets. This amount was $639,000 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.
Generally, savings associations, such as First Federal and Neodesha, 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
be paid 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."
106
<PAGE>
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including First Federal and
Neodesha, 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 and Neodesha include in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company - Liquidity and Capital Resources." 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 June 30, 1998, First
Federal and Neodesha were both in compliance with this requirement, with liquid
asset ratios of 9.71% and 14.45%, respectively.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
generally accepted accounting principles ("GAAP"). Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with appropriate
documentation. First Federal and Neodesha are in compliance with these amended
rules.
OTS accounting regulations, which may be made more stringent than GAAP by
the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test. All savings associations, including First
Federal and Neodesha, 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 June 30, 1998, First
Federal and Neodesha met the test and have always met the test since its
effectiveness. At June 30, 1998, First Federal's and Neodesha's QTL percentage
was 90.05% and 89.4%, respectively.
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."
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<PAGE>
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 and Neodesha, 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 and Neodesha. 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 and Neodesha may be required to devote
additional funds for investment and lending in its local community. The
Association was last examined for CRA compliance in September 1995 and received
a rating of satisfactory. Neodesha was last examined for CRA compliance in April
1996 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include the Company and any company which is under common control with
First Federal. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. First Federal's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would 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.
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<PAGE>
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 June 30, 1998, First Federal and Neodesha were in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal and Neodesha are members 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 members, First Federal and Neodesha are required to purchase and
maintain stock in the FHLB of Topeka. At June 30, 1998, First Federal and
Neodesha had $1.4 million and $140,000, respectively, in FHLB stock, which was
in compliance with this requirement. In past years, First Federal and Neodesha
have received substantial dividends on their FHLB stock. Over the past five
fiscal years such dividends have averaged 6.56% and such dividends were 6.84%
for fiscal year 1997.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These 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 FHLB stock may result in a corresponding reduction in
capital.
For the fiscal year ended September 30, 1997, dividends paid by the FHLB
of Topeka to First Federal and Neodesha totaled $89,181 and $8,600, which
constitute an $18,783 and $1,000 increase, respectively, over the amount of
dividends received in fiscal year 1996.
Federal Taxation. Savings associations such as the Association and
Neodesha 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).
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<PAGE>
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" 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. Neodesha
does not have an excess reserve subject to this provision and no recapture is
required 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 and Neodesha, are also subject to an environmental tax equal to
.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1997, the Association's and Neodesha's Excess for
tax purposes totaled approximately $2.5 million and $47,000, respectively.
The Company and the 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.
110
<PAGE>
Neither the Company nor Neodesha has been audited by the Internal Revenue
Service for the last 10 years and both have federal income tax returns which are
open and subject to audit for the years 1994 through 1996. In the opinion of
their respective managements, 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 Company or Neodesha.
Kansas Taxation. The Company and Association file separate Kansas income
and Kansas privilege tax returns on a fiscal year basis using the accrual method
of accounting.
Kansas law permits savings and loan associations to deduct from net
income, a reserve established for the sole purpose of meeting or absorbing
losses, in the amount of five percent of such net income determined without the
benefit of such deduction, or, in the alternative, a reasonable addition to a
reserve for losses based on past experiences. The Kansas privilege tax is
computed on the basis of 4.5% of taxable income, plus 2.25% of taxable income in
excess of $25,000 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.
Neither the Company nor Neodesha has been audited by the Kansas
Department of Revenue for the last ten years and both have Kansas privilege tax
returns which are open and subject to audit for the years 1994 through 1996. In
the opinion of their respective managements, 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 or Neodesha.
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 of the Company and Note I of the Financial
Statements of Neodesha.
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<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDINGS THEREOF
As of June 30, 1998, First Independence had 957,319 shares of Common
Stock issued and outstanding. No persons other than those listed below are known
by management to own beneficially more than 5% of the outstanding shares of the
Company's Common Stock.
<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Beneficial Owner Owned(1) Class
---------------- -------- -----
<S> <C> <C>
First Independence Corporation Employee Stock Ownership Plan
Myrtle and Sixth Streets
Independence, Kansas 67301 101,832(2) 10.64
John Hancock Mutual Life Insurance Company
John Hancock Place
P.O. Box 111
Boston, Massachusetts 02117 71,000(3) 7.42
Athena Capital Management, Inc.
621 E. Germantown Pike
Plymouth Valley, Pennsylvania 19401 78,236(4) 8.17
Jeffrey Gendell
31 West 52nd Street
17th Floor
New York, New York 10019 97,800(7) 10.22
Larry G. Spencer
President, Chief Executive Officer and Director
901 Birdie Drive
Independence, Kansas 67301 68,975(5) 6.99
Directors and executive officers as a group (10 persons) 260,680(6) 24.57
</TABLE>
- -----------------------
(1) Reflects a two-for-one stock split which occurred in fiscal 1997.
(2) The amount reported represents shares held by the Employee Stock Ownership
Plan (the "ESOP"), 58,190 of which have been allocated to accounts of
participants. First Bankers Trust Company, Quincy, Illinois, the trustee of
the ESOP, may be deemed to beneficially own the shares held by the ESOP
which have not been allocated to the accounts of participants.
(3) As reported by John Hancock Mutual Life Insurance Company ("John Hancock")
and certain of John Hancock's subsidiaries, including John Hancock
Advisors, Inc. ("JHA"), a registered investment adviser, and John Hancock
Freedom Regional Bank Fund ("JHFRBF") in an amended Schedule 13G dated
February 2, 1996. JHA reported sole voting and investment power with
respect to the 35,500 shares held through JHFRBF.
(4) As reported by Athena Capital Management, Inc. in a Schedule 13G dated
January 26, 1998. Athena Capital Management, Inc., a registered investment
adviser, reported sole voting and investment power with respect to 836
shares of the Common Stock and shared voting and investment power with
respect to 77,400 shares of the Common Stock.
(5) Includes 26,256 shares held directly, 600 shares held solely by Mr.
Spencer's spouse, 600 shares held by minor children of Mr. Spencer, 3,492
shares awarded under the Company's Recognition and Retention Plan (the
"RRP") which have not vested and over which shares Mr. Spencer has sole
voting but no dispositive power, 8,933 shares allocated to Mr. Spencer's
account under the ESOP and 29,094 shares subject to options granted to Mr.
Spencer under the 1993 Stock Option and Incentive Plan (the "Stock Option
Plan"), which are exercisable within 60 days of the date hereof.
(6) Includes shares held directly, as well as shares held jointly with family
members, shares held in retirement accounts, held in a fiduciary capacity
or by certain family members, with respect to which shares the listed
individuals or group members may be deemed to have sole or shared voting
and/or investment power. This amount includes the shares held by Larry G.
Spencer and listed separately on this table. This amount also includes an
aggregate of 103,844 shares subject to options granted under the Stock
Option Plan, 26,868 shares allocated to the accounts of participants under
the ESOP,
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<PAGE>
as well as an aggregate of 7,860 shares awarded under the RRP to the group
members which have not vested and over which such persons have sole voting
but no dispositive power.
(7) As reported by Jeffrey L. Gendell, in a Schedule 13D dated January 9, 1998.
Mr. Gendell serves as the Managing Member of Tontine Management, L.L.C. and
Tontine Overseas Associates, LTD. The principal business of Tontine
Management is serving as general partner to Tontine Financial Partners,
L.P. and to Tontine Partners, L.P., an affiliated private investment
limited partnership. Tontine Financial Partners, L.P. reported shared
voting and investment power with respect to 72,800 shares of the Common
Stock. Tontine Overseas Associates, L.L.C. reported shared voting and
investment power with respect to 25,000 shares of the Common Stock.
MANAGEMENT OF THE COMPANY
General
The Company's Board of Directors currently consists of seven members.
Except for Directors Strecker and Smith, who have served on the Board since
January 1994, each of the current directors of the Company has served in such
capacity since its incorporation in June 1993. The Board is divided into three
classes, each of which contains approximately one-third of the Board.
Approximately one-third of the Board is elected annually. Directors of the
Company are generally elected to serve for a three-year period or until their
respective successors are elected and qualified.
<TABLE>
<CAPTION>
Shares of
Common
Term Stock Percent
Director to Beneficially of
Name Age Position(s) Held in the Company Since(1) Expire Owned(2) Class
---- --- ------------------------------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
William T. Newkirk II 42 Director 1992 2001 9,818(3) 1.02%
Joseph M. Smith 53 Director 1993 2001 5,878(5) (4)
Larry G. Spencer 50 President, Chief Executive Officer and
Director 1993 2000 68,975(6) 6.99%
Harold L. Swearingen 60 Director 1992 2000 9,418(7) (4)
Donald E. Aitken 72 Chairman of the Board 1968 1999 28,818(8) 2.99
John T. Updegraff 71 Vice Chairman of the Board 1979 1999 14,518(9) 1.51
Lavern W. Strecker 57 Director 1993 1999 6,118(10) (4)
</TABLE>
- -------------
(1) Includes service as a director of the Association.
(2) Reflects a two-for-one stock split which occurred in fiscal 1997. Amounts
include shares held directly and jointly with family members, as well as
shares which are held in retirement accounts, or held by certain members of
the named individuals' families, or held by trusts of which the named
individual is a trustee or substantial beneficiary, with respect to which
shares the respective directors may be deemed to have sole or shared voting
and/or investment power. Amounts also include 29,094 and 5,818 shares
subject to options granted under the Stock Option Plan to Mr. Spencer and
each non-employee director, respectively, (except Mr. Swearingen, who has
5,658 remaining options) which were exercisable within 60 days of the
Record Date.
(3) Includes 4,000 shares held directly and 5,818 shares subject to options, as
described in footnote 2.
(4) Less than 1.0%.
(5) Includes 60 shares held jointly with Mr. Smith's spouse and 5,818 shares
subject to options, as described in footnote 2.
(6) See footnote 7 under "Voting Securities and Certain Holders Thereof" for
information regarding Mr. Spencer's stock ownership.
(7) Amount includes 3,360 shares held in a trust of which Mr. Swearingen is a
trustee, 400 shares held by children of Mr. Swearingen and 5,658 shares
subject to options, as described in footnote 2.
(8) Includes 5,360 shares held through an IRA, 13,060 shares held jointly with
Mr. Aitken's spouse, 1,580 shares held by Mr. Aitken's spouse, 3,000 shares
held by children of Mr. Aitken and 5,818 shares subject to options, as
described in footnote 2.
(9) Includes 7,500 shares held through an IRA, 900 shares held jointly by Mr.
and Mrs. Updegraff and certain family members, 300 shares held in custodial
accounts for the benefit of Mr. Updegraff's grandchildren and 5,818 shares
subject to options, as described in footnote 2.
(10) Represents 300 shares held in a trust, for the benefit of Mr. Strecker's
wife, for which Mr. Strecker is a co-trustee, and 5,818 shares subject to
options, as described in footnote 2.
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The principal occupation of each director of the Company is set forth
below. All directors have held their present position for at least five years
unless otherwise indicated.
William T. Newkirk II. Mr. Newkirk is an insurance agent with the
Newkirk, Dennis & Buckles Insurance Co. located in Independence, Kansas. Mr.
Newkirk has been in the insurance business for 18 years.
Joseph M. Smith. Mr. Smith is currently the County Extension
Agent-Agriculture and Coordinator with the Montgomery County Extension Council.
Mr. Smith has been employed by the Montgomery County Extension Council for the
past 24 years.
Larry G. Spencer. Mr. Spencer is President and Chief Executive Officer
of the Company and the Association. Mr. Spencer has been employed by the
Association 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 Pittsburgh State
University and served in the U.S. Army for three years. He has served on the
board of the Chamber of Commerce, Main Street, the Independence Community
College Endowment Association and the Community Chest and is presently a member
of the board of Junior Achievement, Heartland Community Bankers, USD#446
Endowment Association, Independence Food Bank and Independence Industries. He is
also a member of the Rotary Club.
Harold L. Swearingen. Prior to his retirement in 1992, Mr. Swearingen
was employed as a telecommunications manager by ARCO Pipe Line Company,
Independence, Kansas. Mr. Swearingen had been employed by Atlantic Richfield Co.
and its subsidiaries since 1960. He is a graduate of Kansas State University
(Manhattan). Mr. Swearingen is a member of the Institute of Electrical and
Electronic Engineers.
Donald E. Aitken. Mr. Aitken is currently retired. Prior to his
retirement in 1996, he was the manager of City Publishing Co., Inc., a
publishing company located in Independence, Kansas, a position he had held for
29 years.
John T. Updegraff. Mr. Updegraff is currently retired. Prior to his
retirement in 1990, Mr. Updegraff was Vice President and Senior Counsel for ARCO
Pipe Line Company, a wholly owned subsidiary of Atlantic Richfield Company,
located in Independence, Kansas, a position he had held for 15 years.
Lavern W. Strecker. Mr. Strecker is currently retired. Prior to his
retirement in 1992, Mr. Strecker was employed by ARCO Pipe Line Company for 26
years with his last position being Manager of Accounting and Control.
Meetings and Committees of the Board of Directors
Meetings and Committees of the Company. Meetings of the Company's Board
of Directors are generally held on a quarterly basis. The Board of Directors met
five times during fiscal 1997. During fiscal 1997, no incumbent director of the
Company attended fewer than 75% of the aggregate of the total number of Board
meetings and the total number of meetings held by the committees of the Board of
Directors on which he served.
The Board of Directors of the Company has standing Executive, Audit and
Compensation Committees.
The Executive Committee is comprised of Chairman Aitken and Directors
Strecker and Updegraff, with Director Newkirk serving as an alternate. The
Executive Committee meets on an as needed basis and exercises the power of the
Board of Directors between Board meetings to the extent permitted by Delaware
law. This committee did not meet during fiscal 1997.
The Audit Committee recommends independent auditors to the Board,
reviews the results of the auditors' services, reviews with management and the
internal auditors the systems of internal control and internal audit reports and
assures that the books and records of the Company are kept in accordance with
applicable accounting principles and standards. The members of the Audit
Committee are Chairman Aitken and Directors Strecker and Updegraff. During the
fiscal year ended September 30, 1997, this committee did not meet; however, the
entire Board of Directors performed its function during fiscal 1997.
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<PAGE>
The Compensation Committee is composed of Chairman Aitken and Directors
Strecker and Updegraff. This Committee is responsible for administering the
Stock Option Plan and RRP and also reviews compensation and benefit matters.
This committee did not meet during the fiscal year ended September 30, 1997.
The entire Board of Directors acts as a nominating committee for
selecting nominees for election as directors. While the Board of Directors of
the Company will consider nominees recommended by stockholders, the Board has
not actively solicited such nominations. Pursuant to the Company's Bylaws,
nominations by stockholders must be delivered in writing to the Secretary of the
Company at least 30 days before the date of the Meeting.
Meetings and Committees of the Association. The Association's Board of
Directors meets monthly and may have additional special meetings upon the
written request of the Chairman of the Board or at least three directors. The
Board of Directors met 13 times during the fiscal year ended September 30, 1997.
During fiscal 1997, no incumbent director of the Association attended fewer than
75% of the aggregate of the total number of Board meetings and the total number
of meetings held by the committees of the Board of Directors on which he served.
The Association has standing Executive, Investment/Interest Rate Risk,
Loan and Asset Review Committees.
The Association's Executive Committee exercises the powers of the full
Board of Directors between board meetings, except that this committee does not
have the authority of the board to amend the charter or bylaws, adopt a plan of
merger, consolidation, dissolution, or provide for the disposition of all or
substantially all of the property and assets of the Association. The Executive
Committee also serves as the Association's Audit Committee and selects the
Association's independent accountants and meets with the accountants to discuss
the scope and to review the results of the annual audit. The Executive Committee
is composed of Chairman Aitken and Directors Strecker and Updegraff, with
Director Newkirk serving as an alternate. The Executive Committee met two times
during the fiscal year ended September 30, 1997.
The Investment/Interest Rate Risk Committee is comprised of Director
Spencer, Senior Vice President and Senior Loan Officer Gary L. Overfield and
Vice President and Chief Financial Officer James B. Mitchell. The Investment
Committee is responsible for the formulation of the Association's strategy and
monitoring its investment performance and implementation of the Association's
interest rate risk management strategy. This committee met four times during
fiscal 1997.
The Loan Committee is composed of Director Spencer, Mr. Overfield, Vice
President and Asset Manager Jim L. Clubine and Vice President Gregg S. Webster.
This committee meets weekly to evaluate and approve all loan applications.
During fiscal 1997, this committee met 52 times.
The Asset Review Committee is comprised of Director Spencer, Messrs.
Overfield, Clubine and Webster and Ms. Lori L. Kelley, an Assistant Vice
President of the Association. This committee identifies and reviews the
Association's problem assets. This committee met four times during fiscal 1997.
Director Compensation
The Company's directors are not paid fees for their service in such
capacity. Directors of the Association are paid a fee of $500 per month plus
$500 per special Association Board meeting and $300 per Association Executive
Committee meeting attended. With the exception of the Association's Executive
Committee, no fee is paid for membership on the Association's committees.
115
<PAGE>
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 June 30, 1998.
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 June 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 Pittsburgh State University and served in
the U.S. Army for three years. He has served on the board of the Chamber of
Commerce, Main Street, the Independence Community College Endowment Association
and the Community Chest and is presently a member of the board of Junior
Achievement, Heartland Community Bankers, USD #446 Endowment Association,
Independence Food Bank, and Independence Industries. He is also a member of the
Rotary Club.
Gary L. Overfield. Mr. Overfield is Senior Vice President, Secretary
and Chief Loan Officer of the Association, a position he has held since 1990.
Mr. Overfield has been employed by First Federal since 1976 and has held a
variety of positions including Vice President and Loan Officer from 1985 to
1990. Mr. Overfield is a graduate of Pittsburgh 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 and served on the board of the Chamber of Commerce,
Community Chest and Junior Achievement. He was a Previous Chairman of the March
of Dimes. Mr. Clubine is a graduate of Kansas State University.
James B. Mitchell. Mr. Mitchell is Vice President and Chief Financial
Officer of the Association, a position he has held since March 1992. Prior to
joining First Federal, he was employed by Eureka Savings Bank, Eureka, Kansas,
in the capacity of Strategic Asset Manager from 1988 to 1991 and Chief Financial
Officer from 1991 to 1992. From 1976 to 1988, Mr. Mitchell was Chief Financial
Officer for Peoples Savings and Loan, Parsons, Kansas. Mr. Mitchell has an
accounting degree from Pittsburgh State University.
116
<PAGE>
Executive Compensation
The Company has not paid any compensation to its executive officers
since its formation. The Company does not presently anticipate paying any
compensation to such persons until it becomes actively involved in the operation
or acquisition of businesses other than the Association.
The following table sets forth information regarding compensation paid
by the Company and the Association to their Chief Executive Officer for services
rendered during the fiscal year ended September 30, 1997. No other executive
officer made $100,000 or more during the fiscal year ended September 30, 1997.
<TABLE>
<CAPTION>
======================================================================================================================
SUMMARY COMPENSATION TABLE
======================================================================================================================
Long-Term Compensation
----------------------
Annual Compensation(1) Awards
- ----------------------------------------------------------------------------------------------------------------------
Restricted
Stock Options/ All Other
Salary Bonus Award(s) SARs Compensation
Name and Principal Position Year ($)(2) ($) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Spencer, President and Chief 1997 $99,837 $9,184 $ --- --- $11,119(3)
Executive Officer 1996 89,434 8,919 --- --- 11,185
1995 83,542 9,593 --- --- 11,643
======================================================================================================================
</TABLE>
- -----------------------
(1) Pursuant to Securities and Exchange Commission rules, perquisites equal to
the lesser of either $50,000 or 10% of salary and bonus are excluded from
the table above.
(2) Includes directors' fees of $5,575, $4,800 and $5,400 during fiscal 1997,
1996 and 1995, respectively.
(3) Includes the dollar value of 2,141 shares allocated to Mr. Spencer's
account under the ESOP and excess group life insurance premiums of $414
paid by the Association.
No stock appreciation rights ("SARs") were granted during fiscal 1997. The
following table sets forth certain information concerning the number and value
of unexercised stock options held by the Company's Chief Executive Officer at
September 30, 1997. No options were exercised during fiscal 1997.
117
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)(1)
-------------------------------------------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Larry G. Spencer N/A N/A 29,094 N/A $276,393 N/A
====================================================================================================================
</TABLE>
- --------------------
(1) Represents the aggregate market value (market price of the Common Stock
less the exercise price) of the option granted based upon the average of
the bid and asked prices of $14.50 per share of the Common Stock on
September 30, 1997.
Employment Agreements
The Association has entered into employment agreements with Mr. Spencer
and two other executive officers. The employment agreements are designed to
assist the Association in maintaining a stable and competent management team
upon which the continued success of the Association depends. These agreements
were filed with, and approved by, the Office of Thrift Supervision ("OTS") as
part of the Association's application for conversion from mutual to stock form.
The employment agreements provide for annual base salary in an amount not less
than the employee's current salary and an initial term of three years. Each
agreement provides for extensions of one year, in addition to the then-remaining
term under the agreement, on each anniversary of the effective date of the
agreement, subject to a formal performance evaluation performed by disinterested
members of the Board of Directors of the Association. The agreements provide for
termination upon the employee's death, for cause or in certain events specified
by OTS regulations. The employment agreements are also terminable by the
employee upon 90 days' notice to the Association.
The employment agreements provide for payment to the employee of his
salary for the remainder of the term of the agreement, plus up to 299% of the
employee's base compensation, in the event there is a "change in control" of the
Association where employment terminates involuntarily in connection with such
change in control or within twelve months thereafter. This termination payment
is subject to reduction by the amount of all other compensation to the employee
deemed for purposes of the Internal Revenue Code of 1986, as amended (the
"Code") to be contingent on a "change in control," and may not exceed three
times the employee's average annual compensation over the most recent five year
period or be non-deductible by the Association for federal income tax purposes.
For the purposes of the employment agreements, a "change in control" is defined
as any event which would require the filing of an application for acquisition of
control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 574.4.
Such events are generally triggered prior to the acquisition or control of 10%
of the Common Stock. The agreements also guarantee participation in an equitable
manner in employee benefits applicable to executive personnel.
Certain Transactions
The Association has followed a policy of granting consumer loans and loans
secured by the borrower's personal residence to officers, directors and
employees. Loans to employees, executive officers and directors are made in the
ordinary course of business and on the same terms and conditions, including
interest rates and collateral, as those of comparable transactions prevailing at
the time with other persons, in accordance with the Association's underwriting
guidelines, and do not involve more than the normal risk of collectibility or
present other unfavorable features, which is consistent with current federal
requirements. Loans to executive officers and directors must be approved by a
majority of the disinterested directors and loans to other officers and
employees must be approved by the Association's loan committee.
118
<PAGE>
MANAGEMENT OF NEODESHA
Directors and Executive Officers of Neodesha
Prior to the Conversion, the direction and control of Neodesha, as a
mutual savings institution, was vested in its Board of Directors. Upon
conversion of Neodesha to stock form, each of the directors of Neodesha will
continue to serve as a director until consummation of the acquisition. The Board
of Directors of Neodesha currently consists of six members. Each director of
Neodesha has served as such at least since 1990. The directors serve three-year
staggered terms so that approximately one-third of the directors are elected at
each annual meeting of members.
The following table sets forth certain information regarding the directors
of Neodesha.
<TABLE>
<CAPTION>
Director Term
Name Position(s) Held With Neodesha Age(1) Since Expires
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JoVonnah Boecker Chairman of the Board 50 1990 1999
Patrick Porter Director 58 1982 2001
Loren Peck Director 70 1979 2000
Jerry Webster Director 60 1983 1999
Doug Buckles Director 46 1988 2001
Richard Stewart Director 58 1976 2000
</TABLE>
- ------------
(1) At June 30, 1998
The business experience of each director for at least the past five years
is set forth below.
JoVonnah Boecker. Ms. Boecker is the City Clerk of Neodesha, a position
she has held for approximately 18 years.
Patrick Porter. Mr. Porter is a pharmacist and owner of the Porter Drug
Store located in Neodesha, Kansas.
Loren Peck. Mr. Peck is a semi-retired associate of the Loran Fawcett
Funeral Home located in Neodesha, Kansas. Mr. Peck has been affiliated with the
funeral home for more than 35 years.
Jerry Webster. Mr. Webster is a retired superintendent of the Neodesha
school system.
Doug Buckles. Mr. Buckles is an insurance agent and owner of an
insurance agency located in Neodesha, Kansas. He is also a partner with the
Newkirk, Dennis Buckles Insurance Agency of Independence, Kansas.
Richard Stewart. Mr. Stewart is the former owner of a lumber yard
located in Neodesha, Kansas. Currently, he is employed with Woods Lumber of
Independence, Kansas.
Meetings and Committees of Board of Directors
Neodesha. Neodesha's Board of Directors meets on a monthly basis. The
Board of Directors met 12 times during the fiscal year ended September 30, 1997.
During fiscal 1997, no director of Neodesha attended fewer than 75% of the
aggregate of the total number of Board meetings and the total number of meetings
held by the committees of the Board of Directors on which he served.
Neodesha has standing Executive, Loan and Asset Liability Committees.
The Executive Committee provides oversight of Board-related matters
in-between regularly scheduled Board Meetings. The Executive Committee is
comprised of the entire Board of Directors. This committee met approximately 40
times during calendar 1998.
119
<PAGE>
The Loan Committee is comprised of the entire Board of Directors, and
approves all real estate loans and consumer loans. This committee met 40 times
during fiscal 1998.
The Asset Liability Committee is comprised of the entire Board of
Directors. This committee met 6 times during fiscal 1998.
Director Compensation
Directors of Neodesha are paid $75 per board meeting. Directors do not
receive any additional compensation for committee meetings attended.
Executive Officers who are not Directors
Franklin C. Miller, age 52. Mr. Miller has been President of Neodesha
since 1986. In his capacity as President, Mr. Miller oversees the day-to-day
operations of Neodesha.
Diane K. Holmquist, age 48. Ms. Holmquist is currently serving as Vice
President and Secretary of Neodesha, a position she has held since 1984. In her
capacity as such, she is primarily responsible for real estate lending.
Executive Compensation
The following table sets forth information concerning the compensation
accrued for services in all capacities to Neodesha for the fiscal year ended
September 30, 1997 for the President. No executive officer's aggregate annual
compensation (salary plus bonus) exceeded $100,000 in fiscal 1997.
<TABLE>
<CAPTION>
====================================================================================================================================
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation (1) Compensation Awards
----------------------------------------------------------------------------------------------
All Other
Other Annual Restricted Stock Options/ Compensation
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Award ($) SARs (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Frank Miller, President 1997 49,169 4,097 6,085 N/A N/A ---
====================================================================================================================================
</TABLE>
- --------------
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by
the SEC, as informally interpreted by the SEC's Staff, Summary Compensation
information is excluded for the fiscal years ended September 30, 1996 and
1995.
Employment Agreement
The Plan provides for a three year employment agreement between the
Association and Mr. Miller. The employment agreement provides for annual base
salary in an amount not less than the employee's current salary and a term of
three years. The agreement provides, among other things, for participation in an
equitable manner in employee benefits available to Association employees at
equivalent levels. In addition, the contract provides Mr. Miller with the use of
a car during the term of the agreement. The agreement also provides for
termination upon the employee's death, for cause or in certain events specified
by OTS regulation. The employment agreement is also terminable by the employee
upon 90 days' notice to the Association.
The employment agreement provides for payment to the employee of his
salary for the remainder of the term of the agreement, plus up to 299% of the
employee's base compensation, in the event there is a "change in control" of the
Association where employment terminates involuntarily in connection with such
change in control or within twelve months thereafter. This termination payment
is subject to reduction by the amount of all other compensation to the employee
deemed for purposes of the Internal Revenue Code of 1986, as amended (the
"Code") to be contingent on a "change in control," and may not exceed three
times the employee's average annual compensation over the most recent five year
period or be non-deductible by the Association for federal income tax purposes.
For the purposes of the employment agreements, a "change in control" is defined
as any event which would require the filing of an application for acquisition of
control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 574.4.
Such events are generally triggered prior to the acquisition or control of 10%
of the Common Stock. The agreements also guarantee participation in a equitable
manner in employee benefits applicable to executive personnel. See also "The
Merger Conversion -- Business Purposes."
120
<PAGE>
Benefit Plans
Neodesha currently provides insurance benefits to its employees,
including health insurance, subject to certain deductibles and copayments.
Certain Transactions
Neodesha follows a policy of granting its loans to its directors,
officers and employees. The loans to executive officers and directors are made
in the ordinary course of business and on the same terms and conditions as those
of comparable transactions prevailing at the time, in accordance with Neodesha's
underwriting guidelines and do not involve more than the normal risk of
collectibility or present other unfavorable terms. Loans to all directors and
executive officers and their associates, including outstanding balances and
commitments totaled $43,000 at June 30, 1998, which was 3.8% of Neodesha's
retained earnings at that date. At June 30, 1998, there were no loans to any
single director, executive officer or their affiliates made at preferential
rates or terms which in the aggregate exceeded $60,000 during the three years
ended June 30, 1998.
RESTRICTIONS ON ACQUISITIONS OF THE COMPANY
As discussed below, federal and Delaware law and the Company's
certificate of incorporation include certain provisions to protect the interests
of the Company and its stockholders from hostile takeovers which the Board of
Directors of the Company believe would not be in the best interests of the
Company, the Association or the Company's stockholders. The following
description of certain of these provisions is general and not necessarily
complete, with respect to provisions contained in the Company's certificate of
incorporation and bylaws. Reference should be made in each case to the document
in question, each of which is part of Neodesha's and the Company's application
to the OTS and the Company's Registration Statement filed with the SEC. See
"Additional Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Company's certificate of
incorporation and bylaws may impede changes in majority control of the Board of
Directors. The Company's certificate of incorporation provides that the Board of
Directors of the Company will be divided into three classes, with directors in
each class elected for three-year staggered terms. Thus, it would take two
annual elections to replace a majority of the Company's Board. The certificate
of incorporation provides that any vacancy occurring in the Board of Directors,
including a vacancy created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term by a majority vote of the
directors then in office. Finally, the bylaws impose certain notice and
information requirements in connection with the nomination by stockholders of
candidates for election to the Board of Directors or the proposal by
stockholders of business to be acted upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of a majority of the directors then in
office and the affirmative vote of 80% of the shares eligible to vote at a duly
constituted meeting of the stockholders called for that purpose.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Company provides that a special meeting of stockholders may
be called at any time but only by the chairman of the board, the president or a
majority of the directors then in office. Stockholders are not authorized to
call a special meeting.
Absence of Cumulative Voting. The Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
121
<PAGE>
Authorization of Preferred Stock. The certificate of incorporation of
the Company authorizes 500,000 shares of serial preferred stock, par value $.01
per share. The Company is authorized to issue preferred stock from time to time
in one or more series subject to applicable provisions of law, and the Board of
Directors is authorized to fix the designations, powers, preferences and
relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Company that the Board of Directors does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. If the Company issued any preferred
stock which disparately reduced the voting rights of the Common Stock within the
meaning of Rule 19c-4 under the Exchange Act, the Company Common Stock could be
required to be delisted from the Nasdaq System. An effect of the possible
issuance of preferred stock, therefore, may be to deter a future takeover
attempt. The Board of Directors has no present plans or understandings for the
issuance of any preferred stock and does not intend to issue any preferred stock
except on terms which the Board of Directors deems to be in the best interests
of the Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit"), be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. This limitation would not inhibit any person
from soliciting (or voting) proxies from other beneficial owners for more than
10% of the Common Stock or from voting such proxies. Beneficial ownership is to
be determined pursuant to Rule 13d-3 of the General Rules and Regulations of the
Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power but shall not include shares
beneficially owned by directors, officers and employees of the Association or
the Company. This provision will be enforced by the Board of Directors to limit
the voting rights of persons beneficially owning more than 10% of the stock and
thus could be utilized in a proxy contest or other solicitation to defeat a
proposal that is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Company's certificate
of incorporation requires that certain business combinations between the Company
(or any majority-owned subsidiary thereof) and a 10% or more stockholder either
(i) be approved by at least 80% of the total number of outstanding voting shares
of the Company or (ii) approved by a majority of the continuing Board of
Directors (i.e., persons serving prior to the 10% stockholder becoming such) or
(iii) involve consideration per share generally equal to that paid by such 10%
stockholder when the block of stock was acquired.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Company's certificate of incorporation must be approved by a two-thirds vote of
the Company's Board of Directors and also by a majority of the outstanding
shares of the Company's voting stock, provided, however, that approval by 80% of
the outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; certain business combinations; stockholder
action without a meeting; and amendments to provisions relating to the foregoing
in the certificate of incorporation).
The bylaws of the Company may be amended by either a majority vote of
the Board of Directors or at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Company's Certificate of
Incorporation and Bylaws. The Board of Directors of the Company believes that
the provisions described above are prudent and reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. The Board of
Directors believes these provisions are in the best interest of the Company and
its stockholders. In the judgment of the Board of Directors, the Company's Board
will be in the best position to determine the true value of the Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors of the Company and
that these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at prices reflective of the true value of the Company and which is
in the best interests of all stockholders.
122
<PAGE>
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and its stockholders, with due consideration given to matters such as the
management and business of the acquiring corporation and maximum strategic
development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
Despite the belief of the Company as to the benefits to stockholders of
these provisions of the Company's certificate of incorporation and bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
which would not be approved by the Company's Board, but pursuant to which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have any opportunity to do so. Such provisions
will also render the removal of the Company's Board of Directors and of
management more difficult. The Board will enforce the voting limitation
provisions of the charter in proxy solicitations and accordingly could utilize
these provisions to defeat proposals that are favored by a majority of the
stockholders. The Boards of Directors of the Company, however, have concluded
that the potential benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders, the Company may adopt additional charter provisions regarding the
acquisition of its equity securities that would be permitted to a Delaware
corporation. The Company does not presently intend to propose the adoption of
further restrictions on the acquisition of the Company's equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Company, are prohibited from
completing a hostile takeover of such corporation for three years. However, the
takeover can be completed if (i) the buyer, while acquiring the 15% interest,
acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. The Company is currently listed on the Nasdaq Stock
Market.
Federal Regulation. A federal regulation prohibits any person prior to
the completion of a merger conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of merger conversion or the stock to be
issued upon their exercise. This regulation also prohibits any person prior to
the completion of a merger conversion from offering, or making an announcement
of an offer or intent to make an offer, to purchase such subscription rights or
stock.
123
<PAGE>
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
124
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The 3,000,000 shares of capital stock authorized by the Company
certificate of incorporation are divided into two classes consisting of
2,500,000 shares of common stock (par value $.01 per share) and 500,000 shares
of serial preferred stock (par value $.01 per share).
Each share of the common stock has the same relative rights and is
identical in all respects with each other share of the common stock. The common
stock of the Company represents non-withdrawable capital, is not of an insurable
type and is not insured by the SAIF.
Under Delaware law, the holders of the common stock possess exclusive
voting power in the Company. Each stockholder is entitled to one vote for each
share held on all matters voted upon by stockholders. If the Company issues
preferred stock subsequent to the Merger Conversion, holders of the preferred
stock may also possess voting rights.
In the unlikely event of the liquidation or dissolution of the Company,
the holders of the common stock will be entitled to receive -- after payment or
provision for payment of all debts and liabilities of the Company (including all
deposits in the Resulting Institution and accrued interest thereon) -- all
assets of the Company available for distribution, in cash or in kind. See "The
Merger Conversion - Effects on Depositors and Borrowers of Neodesha -
Liquidation Rights." If preferred stock is issued subsequent to the Merger
Conversion, the holders thereof may have a priority over the holders of common
stock in the event of liquidation or dissolution.
Holders of the common stock are not entitled to preemptive rights with
respect to any shares which may be issued. The common stock is not subject to
call for redemption, and, upon receipt by the Company of the full purchase price
therefor, each share of the common stock will be validly issued, fully paid and
nonassessable.
The Board of Directors of the Company is authorized to issue preferred
stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The holders of preferred stock may be entitled to vote as a separate
class or series under certain circumstances, regardless of any other voting
rights which such holders may have.
Except as discussed above, the Company has no present plans for the
issuance of the additional authorized shares of common stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued and
unreserved shares of common stock will be available for general corporate
purposes, including but not limited to possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, in a future underwritten or
other public offering, or under an employee stock ownership plan. The authorized
but unissued shares of preferred stock will similarly be available for issuance
in future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
above or as otherwise required to approve the transaction in which the
additional authorized shares of common stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board of Directors of the Company, without
stockholder approval, can issue preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of common
stock.
As of September 30, 1998, the Company had 959,319 shares of issued and
outstanding capital stock. The Company's Common Stock is quoted on the Nasdaq
SmallCap Market under the symbol "FFSL." See "Common Stock Prices and
Dividends."
See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions - Provisions of the Company's Certificate of Incorporation
and Bylaws" for a description of certain provisions of the Company's certificate
of incorporation and bylaws which may affect the ability of the Company's
stockholders to participate in certain transactions relating to acquisitions of
control of the Company. Also, see "Common Stock Prices and Dividends" for a
description of certain matters relating to the possible future payment of
dividends on the Company's common stock.
125
<PAGE>
The Company's stock transfer agent and registrar is Registrar and
Transfer Company, Cranford, New Jersey.
LEGAL OPINIONS
The validity of the issuance of the Common Stock and the federal income
tax consequences of the Merger Conversion will be passed upon for Neodesha and
the Company by the firm of Silver, Freedman & Taff, L.L.P. (a limited liability
partnership including professional corporations), 7th Floor, East Tower, 1100
New York Avenue, N.W., Washington, D.C. Matters of Kansas tax law will be passed
upon for the Company by Grant Thornton, LLP, 100 N. Broadway, Suite 800,
Wichita, Kansas. Silver, Freedman & Taff, L.L.P. and Grant Thornton, LLP, have
consented to the references herein to their opinions. Trident has been
represented in the Merger Conversion by Elias, Matz, Tiernan & Herrick, 734 15th
Street, N.W., Washington, D.C.
EXPERTS
The Consolidated Financial Statements of the Company and the Financial
statements of Neodesha as of September 30, 1997 and 1996 and for each of the
years in the two year period ended September 30, 1997 included in this
Prospectus have been audited by Grant Thornton, LLP, independent auditors, as
indicated in their reports which are included herein, and have been so included
in reliance upon such reports, given upon their authority as experts in
accounting and auditing.
Ferguson has consented to the inclusion herein of the summary of its
letter to Neodesha setting forth its opinion as to the estimated pro forma
market value of Neodesha as converted and to the reference to its opinion that
subscription rights received by Eligible Account Holders, Supplemental Eligible
Account Holders and other eligible subscribers do not have any economic value.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. However, the prospectus
does contain a description of the material provisions of the documents contained
therein. Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and
copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a Web site. The address of the SEC's Web site is
"http://www.sec.gov." The statements contained herein as to the contents of any
contract or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions thereof which describe only the material
provisions of such documents; each such statement is qualified by reference to
such contract or document.
Neodesha has filed an Application for Approval of Merger Conversion
with the OTS with respect to the Merger Conversion. Pursuant to the rules and
regulations of the OTS, this Prospectus omits certain information contained in
that application. The application may be examined at the principal offices of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the Midwest Regional
Office of the OTS, 122 W. John Carpenter Freeway, Suite 600, Irving, Texas
75039, without charge.
The Common Stock is registered with the SEC under Section 12(g) of the
Exchange Act. The Company is subject to the informational requirements of the
Exchange Act in accordance therewith files reports and other information with
the SEC. The holders of the Company's Common Stock are and will continue to be
subject to the reporting requirements and restrictions on stock purchases and
sales by directors, officers and greater than 10% stockholders and certain other
requirements of the Exchange Act. Under the Plan, the Company has undertaken
that it will not terminate such registration for a period of at least three
years following the Merger Conversion.
126
<PAGE>
CONTENTS
Page
FIRST INDEPENDENCE CORPORATION
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS
(September 30, 1997 and 1996 and June 30,
1998 (unaudited)) F-3
STATEMENTS OF EARNINGS F-4
(For the years ended September 30, 1997 and 1996
and the nine months ended June 30, 1998 and 1997
(unaudited)) F-5
STATEMENTS OF STOCKHOLDERS' EQUITY (For the
years ended September 30, 1997 and 1996 and
the nine months ended June 30, 1998 (unaudited)) F-6
STATEMENTS OF CASH FLOWS (For the years ended
September 30, 1997 and 1996 and the nine months
ended June 30, 1998 and 1997 (unaudited)) F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
THE NEODESHA SAVINGS AND LOAN ASSOCIATION, FSA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-36
FINANCIAL STATEMENTS
BALANCE SHEETS
(September 30, 1997 and 1996 and June 30,
1998 (unaudited)) F-37
STATEMENTS OF EARNINGS
(For the years ended September 30, 1997 and
1996 and the nine months ended June 30, 1998 and
1997 (unaudited)) F-38
STATEMENTS OF RETAINED EARNINGS
(For the years ended September 30, 1997 and 1996 and
the nine months ended June 30, 1998 (unaudited)) F-39
STATEMENTS OF CASH FLOWS
(For the years ended September 30, 1997 and 1996 and
the nine months ended June 30, 1998 and 1997 (unaudited)) F-40
NOTES TO FINANCIAL STATEMENTS F-42
SCHEDULES:
All schedules are omitted as the required information is not applicable or is
contained in the notes to the financial statements.
F-1
<PAGE>
[GRANT THORNTON LETTERHEAD]
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, 1997 and 1996, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Independence
Corporation and Subsidiary as of September 30, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/Grant Thornton LLP
Wichita, Kansas
October 24, 1997
F-2
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
June 30, ---------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 676,056 $ 961,350 $ 753,134
Federal funds sold -- 1,600,000 400,000
Other interest-bearing deposits 331,525 589,877 610,295
------------ ------------ ------------
Cash and cash equivalents 1,007,581 3,151,227 1,763,429
Investment securities held to maturity
(estimated fair value $4,979,700 at June
30, 1998; $2,996,300 at September 30, 1997;
$1,970,980 at September 30, 1996) 5,000,000 3,000,000 2,000,000
Investment securities available for sale 3,356,708 4,311,406 5,235,073
Mortgage-backed securities held to maturity
(estimated fair value $19,707,979 at
June 30, 1998; $23,748,569 at September 30, 1997;
$27,873,630 at September 30, 1996) 19,518,029 23,527,689 28,039,314
Mortgage-backed securities available for sale -- 471,618 659,207
Loans receivable 90,613,829 74,558,783 67,682,920
Premises and equipment 1,283,344 1,297,500 910,813
Federal Home Loan Bank stock, at cost 1,449,400 1,368,900 1,239,500
Accrued interest receivable 871,058 712,298 667,920
Real estate acquired through foreclosure 35,693 12,131 11,845
Deferred income taxes -- -- 173,904
Other 230,588 111,107 155,304
------- ------- -------
Total assets $123,366,230 $112,522,659 $108,539,229
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
June 30, ------------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Deposits $ 81,326,782 $ 76,229,176 $ 69,356,422
Advances from borrowers for taxes and
insurance 407,559 693,069 678,072
Checks issued in excess of cash items 929,831 -- 492,627
Deferred income taxes 96,159 34,048 --
Advances from Federal Home Loan Bank 28,400,000 23,700,000 24,300,000
Accrued expenses and other 390,587 337,085 709,599
------------- ------------- -------------
Total liabilities 111,550,918 100,993,378 95,536,720
Commitments and contingencies -- -- --
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares
authorized; none issued -- -- --
Common stock, $.01 par value, 2,500,000 shares
authorized; 1,498,392 shares issued in 1998 and
1997 and 749,196 shares issued in 1996 14,984 14,984 7,492
Additional paid-in capital 7,217,828 7,122,744 7,053,143
Retained earnings - substantially restricted 9,888,734 9,441,054 8,960,098
Unrealized gain (loss) on securities available for
sale, net of related taxes 20,340 15,112 (11,293)
Required contributions for shares acquired by
Employee Stock Ownership Plan (ESOP) (163,659) (218,212) (290,949)
Unearned stock compensation - recognition and
retention plan (RRP) (10,901) (43,634) (87,278)
Treasury stock, 541,073 shares at June 30, 1998,
520,059 shares at September 30, 1997 and
331,550 shares at September 30, 1996 - at cost (5,152,014) (4,802,767) (2,628,704)
------------- ------------- -------------
Total stockholders' equity 11,815,312 11,529,281 13,002,509
------------- ------------- -------------
Total liabilities and stockholders' equity $ 123,366,230 $ 112,522,659 $ 108,539,229
============= ============= =============
</TABLE>
F-4
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
------------------------- ----------------------
1998 1997 1997 1996
----------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans ................................. $ 5,150,575 $ 4,225,371 $5,684,053 $5,189,361
Mortgage-backed securities ............ 1,056,967 1,305,088 1,726,754 1,929,927
Investment securities ................. 331,146 371,664 513,223 478,990
Interest-bearing deposits and other ... 186,376 104,970 145,016 174,825
----------- ----------- ---------- ----------
Total interest income ............... 6,725,064 6,007,093 8,069,046 7,773,103
Interest expense
Deposits .............................. 2,985,274 2,711,164 3,659,320 3,581,799
Borrowed funds ........................ 1,121,629 1,041,167 1,399,263 1,087,249
----------- ----------- ---------- ----------
Total interest expense .............. 4,106,903 3,752,331 5,058,583 4,669,048
----------- ----------- ---------- ----------
Net interest income ..................... 2,618,161 2,254,762 3,010,463 3,104,055
Other income
Service charges ....................... 75,926 54,512 77,929 61,697
Real estate operations ................ (4,187) (4,606) 34,179 94,199
Other ................................. 59,638 33,183 46,795 58,292
Gain on sale of investment securities . -- -- -- 250,945
----------- ----------- ---------- ----------
131,377 83,089 158,903 465,133
General, administrative and other expense
Employee compensation and benefits .... 943,183 832,780 1,117,986 976,257
Occupancy and equipment ............... 170,743 118,548 167,944 131,172
Data processing fees .................. 137,815 112,464 150,896 138,659
Federal deposit insurance premiums .... 35,643 53,816 65,626 591,677
Other operating ....................... 346,625 379,050 487,516 429,304
----------- ----------- ---------- ----------
1,634,009 1,496,658 1,989,968 2,267,069
----------- ----------- ---------- ----------
Earnings before income taxes ............ 1,115,529 841,193 1,179,398 1,302,119
Income tax expense ...................... 471,810 332,112 467,718 486,826
----------- ----------- ---------- ----------
NET EARNINGS ...................... $ 643,719 $ 509,081 $ 711,680 $ 815,293
=========== =========== ========== ==========
Earnings per share
Basic $.70 $.51 $.73 $.72
Diluted .65 .48 .68 .68
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine months ended June 30, 1998 (unaudited) and
years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
gain Required
(loss) on contri- Unearned
securities butions stock
Additional available for shares compen-
Common paid-in Retained for sale, acquired sation Treasury
stock capital earnings net by ESOP -- RRP stock Total
------- ---------- ---------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 ........... $ 7,492 $6,998,314 $8,358,681 $ 176,580 $(363,686) $(130,922) $(1,446,524) $13,599,935
Net earnings for the year ended
September 30, 1996 ................. -- -- 815,293 -- -- -- -- 815,293
Cash dividends of $.188 per share .... -- -- (213,876) -- -- -- -- (213,876)
Common stock options exercised ....... -- (5,250) -- -- -- -- 25,250 20,000
Depreciation of securities available
for sale ........................... -- -- -- (187,873) -- -- -- (187,873)
ESOP loan repayments ................. -- -- -- -- 72,737 -- -- 72,737
Fair value adjustment on ESOP
shares committed for release ....... -- 60,079 -- -- -- -- -- 60,079
Amortization of unearned stock
compensation ....................... -- -- -- -- -- 43,644 -- 43,644
Purchase of 125,846 shares of
treasury stock ..................... -- -- -- -- -- -- (1,207,430) (1,207,430)
------- ---------- ---------- --------- --------- --------- ----------- -----------
Balance at September 30, 1996 ........ 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 ended
September 30, 1997 ................. -- -- 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
</TABLE>
F-6
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- CONTINUED
Nine months ended June 30, 1998 (unaudited) and
years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
gain Required
(loss) on contri- Unearned
securities butions stock
Additional available for shares compen-
Common paid-in Retained for sale, acquired sation Treasury
stock capital earnings net by ESOP -- RRP stock Total
------- ---------- ---------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net earnings for the nine months ended
June 30, 1998 (unaudited) .......... $ -- $ -- $ 643,719 $ -- $ -- $ -- $ -- $ 643,719
Cash dividends of $.2125 per share ... -- -- (196,039) -- -- -- -- (196,039)
Common stock options exercised ....... -- (5,891) -- -- -- -- 27,310 21,419
Appreciation of securities available
for sale ........................... -- -- -- 5,228 -- -- -- 5,228
ESOP loan repayments ................. -- -- -- -- 54,553 -- -- 54,553
Fair value adjustment on ESOP
shares committed for release ....... -- 100,975 -- -- -- -- -- 100,975
Amortization of unearned stock
compensation ....................... -- -- -- -- 32,733 -- 32,733
Purchase of 25,298 shares of
treasury stock ..................... -- -- -- -- -- -- (376,557) (376,557)
------- ---------- ---------- --------- --------- --------- ----------- -----------
Balance at June 30, 1998 (unaudited) . $14,984 $7,217,828 $9,888,734 $ 20,340 $(163,659) $ (10,901) $(5,152,014) $11,815,312
======= ========== ========== ========= ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
--------------------------- ---------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
Cash flows from operating activities
<S> <C> <C> <C> <C>
Net earnings ........................................ $ 643,719 $ 509,081 $ 711,680 $ 815,293
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation .................................... 77,851 60,170 84,077 55,895
Amortization of premiums and discounts on
investments and mortgage-backed securities .... 54,644 88,171 88,993 106,967
Gain on sale of investment securities ........... -- -- -- (250,945)
Amortization of deferred loan origination fees .. (119,992) (44,254) (60,988) (64,119)
Amortization of expense related to employee
benefit plans ................................. 188,261 148,693 205,973 176,460
Gain (loss) on sale of real estate acquired
through foreclosure ........................... 1,816 1,373 (41,216) (111,956)
Deferred income taxes ........................... 58,908 24,472 191,768 (38,769)
Other ........................................... -- -- 229 3,402
Increase (decrease) in cash due to changes in
Accrued interest receivable ................... (158,760) (111,360) (44,378) (49,482)
Other assets .................................. (119,481) 22,828 22,957 (4,829)
Accrued expenses and other liabilities ........ (78,854) (539,172) (369,995) 503,251
Income taxes payable .......................... 132,615 163,870 50,864 (123,286)
------------ ------------ ------------ ------------
Net cash provided by operating activities ... 680,727 323,872 839,964 1,017,882
Cash flows from investing activities
Proceeds from sale of available for sale securities . -- -- -- 263,145
Proceeds from maturities and repayment of
securities
Available for sale .............................. 1,466,371 2,127,306 2,188,741 3,167,307
Held to maturity ................................ 6,938,115 4,276,958 6,412,465 5,236,916
Purchase of securities
Available for sale .............................. (95,223) (1,124,749) (1,154,129) (2,217,489)
Held to maturity ................................ (5,000,000) (3,000,000) (3,000,000) (5,790,535)
Purchase of loans ................................... (4,984,318) (546,000) (546,000) --
Net increase in loans ............................... (10,987,519) (4,307,155) (6,284,223) (7,215,690)
Capital expenditures ................................ (63,696) (413,035) (470,993) (308,867)
Proceeds from sale of real estate acquired through
foreclosure ....................................... 11,147 16,494 24,136 37,669
Other ............................................... -- -- -- 2,219
------------ ------------ ------------ ------------
Net cash used in investing activities ....... (12,715,123) (2,970,181) (2,830,003) (6,825,325)
</TABLE>
F-8
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
--------------------------- ---------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Net increase in deposits ............................ $ 5,097,606 $ 4,918,646 $ 6,872,754 $ 1,429,794
Net increase (decrease) in advances from
borrowers for taxes and insurance ................. (285,510) (316,236) 14,996 (564,868)
Net increase (decrease) in checks issued in
excess of cash items .............................. 929,831 625,509 (492,627) 492,627
Advances from Federal Home Loan Bank ................ 18,700,000 14,700,000 17,500,000 20,900,000
Repayment of Federal Home Loan Bank advances ........ (14,000,000) (15,700,000) (18,100,000) (15,400,000)
Cash dividends paid ................................. (196,039) (171,690) (230,724) (213,876)
Purchase of treasury stock .......................... (376,557) (1,975,332) (2,233,832) (1,207,430)
Stock options exercised ............................. 21,419 47,270 47,270 20,000
------------ ------------ ------------ ------------
Net cash provided by financing activities ... 9,890,750 2,128,167 3,377,837 5,456,247
------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents .................................... (2,143,646) (518,142) 1,387,798 (351,196)
Cash and cash equivalents at beginning of period ...... 3,151,227 1,763,429 1,763,429 2,114,625
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ............ $ 1,007,581 $ 1,245,287 $ 3,151,227 $ 1,763,429
============ ============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Income taxes ...................................... $ 288,646 $ 143,770 $ 225,086 $ 648,881
Interest .......................................... 4,071,510 3,747,112 4,935,024 4,669,113
Noncash investing and financing activities
Transfer from loans to real estate acquired
through foreclosure ............................. 102,333 88,772 88,772 11,845
Issuance of loans receivable in connection with
the sale of real estate acquired through
foreclosure ..................................... 65,550 -- 51,600 45,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
First Independence Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of First Federal Savings and Loan Association of Independence (the
"Association"). Future references to the Corporation or the Association are
utilized herein as the context requires. The Association conducts a general
banking business in southeastern Kansas which consists of attracting
deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes
and the purchase of investment and mortgage-backed securities. The
Association's profitability is significantly dependent on net interest
income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Association can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles (GAAP) and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The financial statements as of June 30, 1998, and for the nine-month
periods ended June 30, 1998 and 1997 are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of financial position and results of
operations have been made.
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.
F-10
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued
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.
F-11
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued
Specific reserves are established for any impaired nonresidential loan for
which the recorded investment in the loan exceeds the measured value of the
loan. Loans subject to impairment valuation are defined as nonaccrual loans
or any other loan where it is probable that all amounts due according to
the contractual terms will not be collected, exclusive of smaller balance
homogenous loans such as home equity, consumer and 1-4 family residential
real estate loans. The values of loans subject to impairment valuation are
determined based on the present value of expected future cash flows, the
market price of the loans, or the fair values of the underlying collateral
if the loan is collateral dependent.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued. Income is subsequently recognized
only to the extent cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status. If the collection of principal in whole or in part is in doubt, all
payments received on nonaccrual loans are credited to principal until such
doubt is eliminated.
5. Loan origination fees and related costs
---------------------------------------
Loan origination fees received, net of certain direct origination costs are
deferred on a loan-by-loan basis and amortized to interest income 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
F-12
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued
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 excise 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 periods.
F-13
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period plus
the common share equivalents related to outstanding stock options. Weighted
average common shares outstanding and diluted shares deemed outstanding
were as follows:
Nine months ended Year ended
June 30, September 30,
------------------- ---------------------
1998 1997 1997 1996
------- --------- --------- ----------
(Unaudited)
Weighted average common
shares outstanding ............... 923,320 992,316 980,858 1,136,610
Common share equivalents related
to outstanding stock options ..... 64,018 60,595 70,658 54,762
------- --------- --------- ----------
Adjusted weighted average common
shares deemed to be outstanding .. 987,338 1,052,911 1,051,516 1,191,372
======= ========= ========= =========
Common shares outstanding exclude unallocated and uncommitted 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:
June 30, 1998 (unaudited)
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ---------- ---------- ---------- ----------
U.S. Government agency
obligations ................. $5,000,000 $ -- $20,300 $4,979,700
========== ======= ======= ==========
Available for sale
------------------
Intermediate term liquidity
portfolio ................... $ 341,740 $ 618 $ -- $ 342,358
U.S. Government agency
obligations ................. 2,982,161 32,189 -- 3,014,350
---------- ------- ------- ----------
$3,323,901 $32,807 $ -- $3,356,708
========== ======= ======= ==========
F-14
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE B -- INVESTMENT SECURITIES -- Continued
September 30, 1997
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ---------- ---------- ---------- ----------
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
========== ======= ======= ==========
September 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ---------- ---------- ---------- ----------
U.S. Government agency
obligations ................. $2,000,000 $ -- $29,020 $1,970,980
========== ======= ======= ==========
Available for sale
------------------
Intermediate term liquidity
portfolio ................... $ 308,102 $ -- $ 579 $ 307,523
U.S. Government and agency
obligations ................. 4,934,938 29,016 36,404 4,927,550
---------- ------- ------- ----------
$5,243,040 $29,016 $36,983 $5,235,073
========== ======= ======= ==========
The amortized cost and estimated fair value of U.S. Government and agency
obligations at September 30, 1997, by term to maturity are as follows:
Estimated
Amortized fair
Held to maturity cost value
---------------- ---------- ----------
Due in two to five years ...................... $1,000,000 $1,001,250
Due in five to ten years ...................... 2,000,000 1,995,050
---------- ----------
$3,000,000 $2,996,300
========== ==========
F-15
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE B -- INVESTMENT SECURITIES -- Continued
Estimated
Amortized fair
Available for sale cost value
------------------ ---------- ----------
Due in one year or less ....................... $ 993,777 $ 998,750
Due in one to two years ....................... 978,149 995,000
Due in two to five years ...................... 1,989,831 1,990,000
---------- ----------
$3,961,757 $3,983,750
========== ==========
During the year ended September 30, 1996 the Association sold FHLMC stock
designated as available for sale for total proceeds of $263,145 realizing a
gain of $250,945.
The intermediate term liquidity portfolio does not have a contractual due
date.
Investment securities with a fair value of $993,440 at September 30, 1997
were pledged to secure government deposits.
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:
June 30, 1998 (unaudited)
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ---------- ---------- -----------
GNMA certificates ............ $ 39,569 $ 3,549 $ -- $ 43,118
FHLMC certificates ........... 6,919,976 82,435 7,596 6,994,815
FNMA certificates ............ 5,103,659 106,974 22,712 5,187,921
Collateralized mortgage
obligations
FHLMC .................... 3,658,105 10,578 7,767 3,660,916
FNMA ..................... 3,796,720 37,905 13,416 3,821,209
----------- -------- -------- -----------
$19,518,029 $241,441 $ 51,491 $19,707,979
=========== ======== ======== ===========
F-16
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE C -- MORTGAGE-BACKED SECURITIES -- Continued
September 30, 1997
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ---------- ---------- -----------
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
=========== ======== ======== ===========
September 30, 1996
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ---------- ---------- -----------
GNMA certificates ............ $ 122,921 $ 10,687 $ -- $ 133,608
FHLMC certificates ........... 10,066,669 60,422 62,866 10,064,225
FNMA certificates ............ 8,912,022 118,258 47,439 8,982,841
Collateralized mortgage
obligations
FHLMC .................... 5,133,610 -- 153,831 4,979,779
FNMA ..................... 3,804,092 -- 90,915 3,713,177
----------- -------- -------- -----------
$28,039,314 $189,367 $355,051 $27,873,630
=========== ======== ======== ===========
Available for sale
------------------
FHLMC certificates ........... $ 669,454 $ -- $ 10,247 $ 659,207
=========== ======== ======== ===========
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.
F-17
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE C -- MORTGAGE-BACKED SECURITIES -- Continued
Mortgage-backed securities with a fair value of $15,154,734, $13,295,170
and $11,005,909 at June 30, 1998, September 30, 1997 and 1996,
respectively, are pledged to secure government and other deposits.
NOTE D -- LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
June 30, -------------------------
1998 1997 1996
----------- ----------- -----------
(Unaudited)
First mortgage loans
Secured by one-to-four family
residences ....................... $70,075,291 $64,152,604 $57,352,844
Secured by multi-family residences . 1,115,422 1,164,442 1,370,715
Nonresidential ..................... 7,674,349 7,478,908 7,223,602
Construction ....................... 16,390,491 763,712 1,833,750
----------- ----------- -----------
Total first mortgage loans ..... 95,255,553 73,559,666 67,780,911
Consumer and other loans
Savings ............................ 413,960 349,531 364,011
Automobile ......................... 880,163 704,519 402,592
Home equity and second mortgages ... 723,126 550,008 781,199
Unsecured home improvement ......... 271,086 274,267 183,630
Other .............................. 654,045 661,209 184,723
----------- ----------- -----------
Total consumer and other loans . 2,942,380 2,539,534 1,916,155
Less
Allowance for loan losses .......... (655,745) (668,185) (690,009)
Loans in process ................... (6,603,165) (571,808) (1,050,012)
Unearned discounts ................. (2,551) (2,726) (2,929)
Deferred loan origination fees ..... (322,643) (297,698) (271,196)
----------- ----------- -----------
(7,584,104) (1,540,417) (2,014,146)
----------- ----------- -----------
Net loans receivable ........... $90,613,829 $74,558,783 $67,682,920
=========== =========== ===========
F-18
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE D -- LOANS RECEIVABLE -- Continued
Activity in the allowance for loan losses is summarized as follows:
Nine months ended Year ended
June 30, September 30,
------------------- -------------------
1998 1997 1997 1996
-------- -------- -------- --------
(Unaudited)
Balance at beginning of period ..... $668,185 $690,009 $690,009 $690,009
Loans charged off .................. (12,440) (21,824) (21,824) --
-------- -------- -------- --------
Balance at end of period ........... $655,745 $668,185 $668,185 $690,009
======== ======== ======== ========
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 71%, 84%
and 82% of the total loan portfolio at June 30, 1998, September 30, 1997
and 1996, respectively. Approximately 3%, 4% and 5% of the Association's
one-to-four family residential real estate loans are secured by properties
located outside of the primary lending area of Montgomery and surrounding
Kansas counties at June 30, 1998, September 30, 1997 and 1996,
respectively. 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 9%, 11% and 12% of the loan portfolio is comprised of
nonresidential and multi-family real estate loans with approximately 12%,
13% and 20% of this total collateralized by properties located outside the
Association's primary lending area at June 30, 1998, September 30, 1997 and
1996, respectively. During the nine months ended June 30, 1998 the
Association began originating construction loans at its new loan production
office in Lawrence, Kansas. These construction loans generally have terms
of six months or less with permanent financing provided by other lenders.
Serviced loans, primarily under a County Mortgage Revenue Bond, were
$1,852,845, $2,315,760, $2,199,519 and $2,471,620 at June 30, 1998 and
1997, September 30, 1997 and 1996, respectively.
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:
Nine months
ended Year ended
June 30, September 30,
1998 1997
----------- -------------
(Unaudited)
Loans outstanding at beginning of period .... $527,884 $563,082
New loans ................................. 59,260 37,528
Repayments ................................ (62,909) (72,726)
-------- --------
Loans outstanding at end of period .......... $524,235 $527,884
======== ========
F-19
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE D -- LOANS RECEIVABLE -- Continued
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 are as
follows:
September 30,
---------------------
1997 1996
-------- --------
Principal amount of impaired loans ................ $206,691 $210,309
Less valuation allowance .......................... 69,691 73,309
-------- --------
$137,000 $137,000
======== ========
The Association has provided an allowance for loan losses on all impaired
loans. Interest income of $16,023, $11,016, $9,537 and $17,267 was
recognized and collected on impaired loans during the nine months ended
June 30, 1998 and 1997 and the years ended September 30, 1997 and 1996,
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 June 30, 1998.
Nonaccrual loans totaled $543,569, $1,049,367 and $366,832 at June 30,
1998, September 30, 1997 and 1996, respectively. Interest income that would
have been recorded under the original terms of such loans approximated
$19,000, $15,000, $40,000 and $20,000 for the nine months ended June 30,
1998 and 1997 and the years ended September 30, 1997 and 1996,
respectively. Interest income that was recorded was insignificant for all
periods presented. The Association is not committed to make additional
loans to borrowers whose loans have been modified.
NOTE E -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
September 30,
June 30, ---------------------
1998 1997 1996
----------- -------- --------
(Unaudited)
Loans receivable .................... $555,675 $450,257 $404,266
Mortgage-backed securities .......... 111,604 171,729 205,389
Investment securities ............... 203,779 90,312 58,265
-------- -------- --------
$871,058 $712,298 $667,920
======== ======== ========
F-20
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE F -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
September 30,
June 30, -----------------------
1998 1997 1996
----------- ---------- ----------
(Unaudited)
Land ................................ $ 74,958 $ 74,958 $ 74,958
Building ............................ 1,306,679 1,281,916 923,518
Furniture, fixtures and equipment ... 420,941 383,148 307,821
Automobiles ......................... 43,579 43,579 38,729
---------- ---------- ----------
1,846,157 1,783,601 1,345,026
Less accumulated depreciation ....... 562,813 486,101 434,213
---------- ---------- ----------
$1,283,344 $1,297,500 $ 910,813
========== ========== ==========
NOTE G -- REAL ESTATE OPERATIONS
A summary of real estate operations is as follows:
Nine months ended Year ended
June 30, September 30,
----------------- ------------------
1998 1997 1997 1996
------- ------- ------- --------
(Unaudited)
Net gain (loss) on sale of real estate
acquired through foreclosure ....... $(1,816) $(1,373) $41,216 $111,956
Operating income ..................... 1,050 750 -- 2,250
Operating expense .................... (3,421) (3,983) (7,037) (20,007)
------- ------- ------- --------
Income (expense) from real estate
operations ......................... $(4,187) $(4,606) $34,179 $ 94,199
======= ======= ======= ========
Real estate operations of the Association consist primarily of paying
property taxes and general maintenance expenses on the properties held.
F-21
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE H -- DEPOSITS
Interest-bearing deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted September 30,
average ---------------------------------------------
rate at June 30, 1998 1997 1996
June 30, --------------------- --------------------- ---------------------
1998 Amount Percent Amount Percent Amount Percent
----------- ----------- ------- ----------- ------- ----------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
NOW accounts ........................ 2.05% $ 2,559,199 3.15% $ 2,058,500 2.70% $ 1,631,512 2.35%
First Super NOW accounts ............ 2.30 1,639,275 2.02 1,704,678 2.24 1,600,400 2.31
First Money Fund accounts ........... 4.48 21,684,455 26.66 20,702,177 27.15 15,552,973 22.43
----------- ------ ----------- ------ ----------- ------
Total demand deposits ........... 4.14 25,882,929 31.83 24,465,355 32.09 18,784,885 27.09
Passbook savings accounts ........... 2.89 2,866,228 3.52 2,702,740 3.55 2,649,720 3.82
Certificates of deposit
3.00% to 3.99% .................... -- -- -- 4,539 .01 8,565 .01
4.00% to 4.99% .................... 4.78 1,725,831 2.12 2,189,277 2.87 4,216,378 6.08
5.00% to 5.99% .................... 5.65 46,126,679 56.72 39,910,696 52.36 30,296,166 43.68
6.00% to 6.99% .................... 6.28 4,698,442 5.78 6,930,530 9.09 13,366,636 19.27
7.00% to 7.99% .................... 7.00 26,673 .03 26,039 .03 25,241 .04
8.00% to 8.99% .................... -- -- -- -- -- 8,831 .01
----------- ------ ----------- ------ ----------- ------
Total certificates of deposit ... 5.68 52,577,625 64.65 49,061,081 64.36 47,921,817 69.09
----------- ------ ----------- ------ ----------- ------
Total deposits .................. 5.09 $81,326,782 100.00% $76,229,176 100.00% $69,356,422 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
F-22
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE H -- DEPOSITS -- Continued
The aggregate amount of certificates of deposit and savings with a minimum
denomination of $100,000 was $5,238,347, $3,844,877 and $2,489,514 at June
30, 1998 and September 30, 1997 and 1996, respectively. Deposit amounts in
excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit are as follows:
Less than One to Three to
June 30, 1998 one year three years five years Total
------------- ----------- ----------- ---------- -----------
(Unaudited)
4.00% to 4.99% ...... $ 1,725,831 $ -- $ -- $ 1,725,831
5.00% to 5.99% ...... 31,770,065 13,865,148 491,466 46,126,679
6.00% to 6.99% ...... 387,103 2,838,808 1,472,531 4,698,442
7.00% to 7.99% ...... -- 26,673 -- 26,673
----------- ----------- ---------- -----------
$33,882,999 $16,730,629 $1,963,997 $52,577,625
=========== =========== ========== ===========
Less than One to Three to
September 30, 1997 one year three years five years Total
------------------ ----------- ----------- ---------- -----------
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
=========== =========== ========== ===========
Less than One to Three to
September 30, 1996 one year three years five years Total
------------------ ----------- ----------- ---------- -----------
3.00% to 3.99% ...... $ 8,565 $ -- $ -- $ 8,565
4.00% to 4.99% ...... 3,420,783 795,595 -- 4,216,378
5.00% to 5.99% ...... 19,637,400 9,795,294 863,472 30,296,166
6.00% to 6.99% ...... 7,903,547 3,068,176 2,394,913 13,366,636
7.00% to 7.99% ...... -- -- 25,241 25,241
8.00% to 8.99% ...... 8,831 -- -- 8,831
----------- ----------- ---------- -----------
$30,979,126 $13,659,065 $3,283,626 $47,921,817
=========== =========== =========== ===========
F-23
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE H -- DEPOSITS -- Continued
Interest expense on deposits is summarized as follows:
Nine months
ended Year ended
June 30, September 30,
---------------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Certificates of deposit $2,171,422 $2,049,111 $2,745,188 $2,819,977
NOW accounts 783,037 635,774 878,302 730,627
Demand deposits 30,815 26,279 35,830 31,195
---------- ---------- ---------- ----------
$2,985,274 $2,711,164 $3,659,320 $3,581,799
========== ========== ========== ==========
NOTE I -- ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
September 30,
June 30, --------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- ------------------------------
Rates Amount Rates Amount Rates Amount
------------ ------ ------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Variable rates 5.67% - 6.15% $ 8,900,000 5.67% - 6.00% $ 8,400,000 5.40% - 5.75% $ 10,600,000
Fixed rates 6.34 - 7.06 8,000,000 4.92 - 7.06 15,300,000 4.92 - 7.06 13,700,000
Fixed rate
convertible* 4.87 - 4.99 11,500,000 -- --
------------ ------------ ------------
$ 28,400,000 $ 23,700,000 $ 24,300,000
============= ============ ============
</TABLE>
--------------
* Due in 2008 unless converted
The Company has a line of credit with the Federal Home Loan Bank totaling
$9,000,000. There was $500,000 borrowed on this line at June 30, 1998.
Aggregate maturities for the years following September 30, 1997 are as
follows:
1998 $12,800,000
1999 2,900,000
2001 3,000,000
2002 5,000,000
-----------
$23,700,000
Assets of the Association are subject to a blanket pledge agreement to
collateralize the advances.
F-24
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
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
$163,984 and $125,461 for the nine months ended June 30, 1998 and 1997 and
$174,215 and $145,360 for the years ended September 30, 1997 and 1996,
respectively.
The ESOP shares were as follows:
June 30, September 30,
1998 1997
---- ----
(Unaudited)
Allocated shares 69,100 58,190
Unreleased shares 32,732 43,642
-------- --------------
Total ESOP shares 101,832 101,832
======== ==============
Fair value of unreleased shares $417,333 $610,988
======== ========
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 $32,733 for each of the nine months ended June 30, 1998 and
1997 and $43,644 for each of the years ended September 30, 1997 and 1996.
The Company has adopted a Stock Option and Incentive Plan (SOP) for
designated participants. The SOP provides for up to 145,474 shares of
common stock to be issued to participants. The option price of any options
granted may not be less than the market value of the common stock on the
date of the grant and unless otherwise specified, the options expire ten
years from the date of the grant. A summary of the Company's stock option
plan as of June 30, 1998 and September 30, 1997 and 1996 and changes during
the periods ended as of those dates is presented below:
F-25
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE J -- EMPLOYEE BENEFITS -- Continued
Weighted
average
exercise
Shares price
------ -----
Outstanding at October 1, 1995 125,276 $ 5.14
Exercised 4,000 5.00
------
Outstanding at September 30, 1996 121,276 5.14
Exercised 9,454 5.00
------
Outstanding at September 30,1997 111,822 5.15
Issued 1,000 14.63
Exercised 4,284 5.00
------
Outstanding at June 30, 1998 (unaudited) 108,538 5.25
======
All options outstanding at September 30, 1997 were exercisable and can be
summarized as follows:
Exercise Remaining
Shares price life
------ ----- ----
98,186 $ 5.00 6 years
11,636 6.19 6 years 4 months
2,000 6.69 6 years 10 months
-------
111,822
The Association participates in a defined benefit multi-employer pension
plan. Substantially all employees are eligible and benefits are based on
the employee's salary and years of service. No contribution was made or
required to be made by the Association for any of the periods presented 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 consists of the following:
Nine months Year ended
ended June 30, September 30,
-------------------- ---------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Current $412,902 $307,640 $275,950 $525,595
Deferred 58,908 24,472 191,768 (38,769)
-------- -------- -------- --------
$471,810 $332,112 $467,718 $486,826
======== ======== ======== ========
F-26
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE K -- INCOME TAXES -- Continued
Reconciliation of income tax expense computed at the federal statutory rate
of 34% and income tax expense is as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
----------------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Income tax expense at statutory rate $ 379,280 $ 286,006 $ 400,995 $ 442,720
Kansas privilege tax, net of federal
tax benefit 55,598 42,913 52,542 51,434
State contribution credit (16,635) (21,240) (28,875) (28,875)
Nondeductible ESOP fair value
adjustment 34,332 20,878 30,461 20,427
Other 19,235 3,555 12,595 1,120
--------- --------- --------- ---------
$ 471,810 $ 332,112 $ 467,718 $ 486,826
========= ========= ========= =========
Effective tax rate 42.3% 39.5% 39.7% 37.4%
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
June 30, ----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Deferred tax assets
<S> <C> <C> <C>
Allowance for loan losses $ 238,800 $ 241,667 $ 226,927
SAIF recapitalization assessment -- -- 171,156
Accrued bonuses 1,240 8,327 7,138
State contribution credit -- 18,924 28,875
Other 10,815 5,780 4,710
--------- --------- ---------
Total deferred tax assets 250,855 274,698 438,806
--------- --------- ---------
Deferred tax liabilities
Securities available for sale 26,970 23,393 20,232
Depreciation of property and equipment 34,924 34,622 29,191
Federal Home Loan Bank stock dividends 285,120 250,731 215,479
--------- --------- ---------
Total deferred tax liabilities 347,014 308,746 264,902
--------- --------- ---------
Net deferred tax asset (liability) $ (96,159) $ (34,048) $ 173,904
========= ========= =========
</TABLE>
F-27
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE K -- INCOME TAXES -- Continued
The Association was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income
and subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. This percentage of earnings bad
debt deduction had accumulated to approximately $2.7 million as of June 30,
1998. If the amounts that qualify as deductions for federal income tax
purposes are later used for purposes other than for bad debt losses,
including distributions in liquidation, such distributions will be subject
to federal income taxes at the then current corporate income tax rate. The
approximate amount of unrecognized deferred tax liability relating to the
cumulative bad debt deduction is $850,000 at June 30, 1998. See Note M for
additional information regarding future percentage of earnings bad debt
deductions.
NOTE L -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Association's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of total risk-based and Tier 1 capital to risk-weighted
assets and of Tier 1 (core) capital and tangible capital to adjusted total
assets. Management believes, as of June 30, 1998, that the Association
meets all capital adequacy requirements to which it is subject.
As of June 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.
F-28
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE L -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL -- Continued
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998 (unaudited)
Total risk-based capital $ 10,895 17.8% $ 4,895 >8.0% $ 6,119 >10.0%
- -
Tier 1 risk-based capital 10,239 16.7 2,448 >4.0 3,672 > 6.0
- -
Tier 1 (core) capital 10,239 8.4 3,667 >3.0 6,112 > 5.0
- -
Tangible capital 10,239 8.4 1,834 >1.5 -- --
-
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
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
- -
Tier 1 (core) capital 9,349 8.4 3,333 >3.0 5,555 > 5.0
- -
Tangible capital 9,349 8.4 1,666 >1.5 -- --
-
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1996
Total risk-based capital $ 11,129 23.8% $ 3,746 >8.0% $ 4,682 >10.0%
- -
Tier 1 risk-based capital 10,542 22.5 1,873 >4.0 2,809 > 6.0
- -
Tier 1 (core) capital 10,542 9.9 3,204 >3.0 5,339 > 5.0
- -
Tangible capital 10,542 9.9 1,602 >1.5 -- --
-
Reconciliations of stockholders' equity computed in accordance with
generally accepted accounting principles and Tier 1, core, tangible and
risk-based capital is as follow:
September 30,
June 30, -------------------
1998 1997 1996
---- ---- ----
(Unaudited)
(Dollars in thousands)
First Federal Savings and Loan
Association of Independence
Stockholders' equity $10,259 $9,364 $10,531
Unrealized (gain) loss on securities
available for sale (20) (15) 11
------- ------ -------
Total Tier 1, core and tangible capital 10,239 9,349 10,542
General allowance for loan losses 656 640 587
------- ------ -------
Total risk-based capital $10,895 $9,989 $11,129
======= ====== =======
</TABLE>
F-29
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE L -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL -- Continued
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
$3,600,000 to First Independence Corporation at June 30, 1998.
NOTE M -- RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996 and 1997, no BIF
assessments were required for healthy commercial banks except for a $2,000
minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a
special assessment totaling $.657 per $100 of SAIF deposits held at March
31, 1995, in order to increase SAIF reserves to the level required by law.
The Association had $65.7 million in deposits at March 31, 1995, resulting
in an assessment of approximately $431,000, or $260,000 after tax, which
was charged to operations in the fourth quarter of fiscal 1996.
F-30
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE M -- RECENT LEGISLATIVE DEVELOPMENTS -- Continued
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999. However, the SAIF recapitalization
legislation currently provides for an elimination of the thrift charter or
of the separate federal regulation of thrifts prior to the merger of the
deposit insurance funds. As a result, the Association would be regulated as
a bank under federal laws which would subject it to the more restrictive
activity limits imposed on national banks. Under separate legislation
related to the recapitalization plan, the Association is required to
recapture as taxable income approximately $115,000 of its bad debt reserve,
which represents the post-1987 additions to the reserve and will be unable
to utilize the percentage of earnings method to compute its reserve in the
future. The Association has provided deferred taxes for this amount and
will be permitted to amortize the recapture of its bad debt reserve over
six years.
NOTE N -- COMMITMENTS
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated balance sheets. The contract or
notional amounts of the commitments reflect the extent of the Association's
involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making
commitments and conditional obligations as those utilized for on-balance
sheet instruments. The Association's commitments to extend credit at June
30, 1998 include loans in process as disclosed in Note D and first mortgage
loans with fixed rates ranging from 7.00% to 10.50% aggregating $1,319,665
and $121,000 of variable rate loans ranging from 6.5% to 7.5%. 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 O -- 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 and 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.
F-31
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE O -- ACQUISITION -- Continued
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 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 June 30, 1998 were $174,097.
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 P -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
Cash and cash equivalents: The balance sheet carrying amounts for cash and
short-term instruments approximate the estimated fair values of such
assets.
F-32
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE P -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted
market prices, if available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and which
entail no significant change in credit risk, fair values are based on the
carrying values. The estimated fair values of fixed rate loans are
estimated based on discounted cash flow analyses using prepayment
assumptions and interest rates currently offered for loans with similar
terms to borrowers of similar credit quality. Nonperforming loans have not
been discounted. The carrying amount of accrued interest receivable
approximates its fair value.
Commitments to extend credit: No premium or discount was ascribed to loan
commitments because when funded virtually all funding will be at current
market rates.
Federal Home Loan Bank stock: The balance sheet carrying amount
approximates the stocks fair value.
Deposit liabilities: The fair values estimated for demand deposits, NOW
accounts, savings and certain types of money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts of variable rate,
fixed-term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values of fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. The
carrying amount of accrued interest payable approximates its fair value.
Advances from Federal Home Loan Bank: For variable rate advances fair
values are considered equal to their carrying values. The estimated fair
value of fixed rate advances are estimated based on discounted cash flow
analysis using interest rates currently offered for advances with similar
terms.
F-33
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE P -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The following table provides summary information on the fair value of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the Company. Further, the fair value estimates
are based on various assumptions, methodologies and subjective
considerations, which vary widely among different financial institutions
and which are subject to change. The carrying amounts are the amounts at
which the financial instruments are reported in the consolidated financial
statements.
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------
(Unaudited)
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 1,007,581 $ 1,007,581
Investment securities available for sale 3,356,708 3,356,708
Investment securities held to maturity 5,000,000 4,979,000
Mortgage-backed securities held to maturity 19,518,029 19,707,979
Loans 91,269,574 92,032,540
Federal Home Loan Bank stock 1,449,400 1,449,400
Deposits (81,326,782) (81,179,725)
Advances from Federal Home Loan Bank (28,400,000) (28,487,656)
September 30, 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)
</TABLE>
F-34
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE P -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 1,763,429 $ 1,763,429
Investment securities available for sale 5,235,073 5,235,073
Investment securities held to maturity 2,000,000 1,970,980
Mortgage-backed securities available for sale 659,207 659,207
Mortgage-backed securities held to maturity 28,039,314 27,873,630
Loans 68,372,929 67,768,345
Federal Home Loan Bank stock 1,239,500 1,239,500
Deposits (69,356,422) (68,999,524)
Advances from Federal Home Loan Bank (24,300,000) (24,204,628)
</TABLE>
F-35
<PAGE>
[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Neodesha Savings and Loan Association, FSA
We have audited the accompanying balance sheets of The Neodesha Savings and Loan
Association, FSA as of September 30, 1997 and 1996, and the related statements
of earnings, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these 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 financial position of The Neodesha Savings and Loan
Association, FSA as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/Grant Thornton LLP
Wichita, Kansas
April 3, 1998
F-36
<PAGE>
The Neodesha Savings and Loan Association, FSA
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
June 30, -------------------------
1998 1997 1996
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 583,071 $ 635,237 $ 772,095
Investment securities held to maturity (estimated
fair value $2,728,124 at June 30, 1998;
$3,116,637 at September 30, 1997;
$3,168,720 at September 30, 1996) 2,718,939 3,116,975 3,215,380
Mortgage-backed securities held to maturity
(estimated fair value $158,138 at June 30, 1998;
$248,950 at September 30 ,1997;
$245,325 at September 30, 1996) 158,872 252,598 252,674
Loans receivable 9,363,703 9,467,986 9,489,296
Premises and equipment 385,685 383,884 399,326
Federal Home Loan Bank stock, at cost 142,100 134,300 125,700
Accrued interest receivable 112,735 124,832 127,719
Repossessed assets 32,367 24,533 --
Other 25,356 15,075 28,904
----------- ----------- -----------
Total assets $13,522,828 $14,155,420 $14,411,094
=========== =========== ===========
LIABILITIES AND RETAINED EARNINGS
Deposits $11,729,988 $12,854,278 $12,698,322
Advances from borrowers for taxes and
insurance 17,807 47,638 65,768
Advances from Federal Home Loan Bank 600,000 100,000 500,000
Accrued expenses and other 34,104 61,224 131,694
----------- ----------- -----------
Total liabilities 12,381,899 13,063,140 13,395,784
Commitments and contingencies -- -- --
Retained earnings (substantially restricted) 1,140,929 1,092,280 1,015,310
----------- ----------- -----------
Total liabilities and retained earnings $13,522,828 $14,155,420 $14,411,094
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
----------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Interest income
<S> <C> <C> <C> <C>
Loans $ 605,983 $ 631,779 $ 842,621 $ 830,180
Investment securities 131,350 135,987 183,129 181,257
Mortgage-backed securities 8,192 11,522 15,362 15,366
Interest-bearing deposits and other 4,781 2,999 4,904 18,802
---------- ---------- ---------- ----------
Total interest income 750,306 782,287 1,046,016 1,045,605
Interest expense
Deposits 387,370 392,253 525,789 531,698
Borrowed funds 17,135 25,688 34,678 39,528
---------- ---------- ---------- ----------
Total interest expense 404,505 417,941 560,467 571,226
---------- ---------- ---------- ----------
Net interest income 345,801 364,346 485,549 474,379
Provision for loan losses 4,500 4,500 6,000 6,000
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses 341,301 359,846 479,549 468,379
Other income
Service charges 88,258 86,811 119,886 120,388
Other 5,824 14,118 15,315 19,734
---------- ---------- ---------- ----------
94,082 100,929 135,201 140,122
General, administrative and other expense
Employee compensation and benefits 188,094 190,993 254,264 248,426
Occupancy and equipment 48,849 46,021 62,102 65,479
Data processing fees 26,059 24,753 33,564 35,666
Federal deposit insurance premiums 9,650 13,619 16,787 111,577
Other operating 98,382 109,866 143,336 143,889
---------- ---------- ---------- ----------
371,034 385,252 510,053 605,037
---------- ---------- ---------- ----------
Earnings before income taxes 64,349 75,523 104,697 3,464
Income tax expense 15,700 19,500 27,727 654
---------- ---------- ---------- ----------
NET EARNINGS $ 48,649 $ 56,023 $ 76,970 $ 2,810
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENT OF RETAINED EARNINGS
Balance at October 1, 1995 $1,012,500
Net earnings for the year ended September 30, 1996 2,810
----------
Balance at September 30, 1996 1,015,310
Net earnings for the year ended September 30, 1997 76,970
----------
Balance at September 30, 1997 1,092,280
Net earnings for the nine months ended June 30,
1998 (unaudited) 48,649
----------
Balance at June 30, 1998 (unaudited) $1,140,929
==========
The accompanying notes are an integral part of this statement.
F-39
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
---------------------------- --------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Cash flows from operating activities
<S> <C> <C> <C> <C>
Net earnings $ 48,649 $ 56,023 $ 76,970 $ 2,810
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 22,735 22,545 30,495 30,946
Provision for loan losses 4,500 4,500 6,000 6,000
Amortization of premiums and discounts on
investments and mortgage-backed securities 2,030 808 965 1,220
Deferred income taxes (259) 228 1,905 (1,785)
Loss on sale of repossessed assets 4,483 5,274 5,274 6,730
Increase (decrease) in cash due to changes in
Accrued interest receivable 12,097 22,662 2,887 (3,617)
Other assets (10,281) 6,164 12,953 18,610
Accrued expenses and other liabilities (26,861) (84,671) (71,499) 78,958
----------- ----------- ----------- -----------
Net cash provided by operating activities 57,093 33,533 65,950 139,872
Cash flows from investing activities
Proceeds from maturities and repayment of
held-to-maturity securities 489,732 300,000 400,000 200,000
Purchase of held-to-maturity securities -- (302,484) (302,484) (200,313)
Purchase of Federal Home Loan Bank stock (7,800) (6,200) (8,600) (7,600)
Net (increase) decrease in loans 87,066 (256,201) (15,997) (446,441)
Capital expenditures (24,536) (5,642) (15,053) (39,720)
Proceeds from sale of repossessed assets 400 1,500 1,500 30,755
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities 544,862 (269,027) 59,366 (463,319)
Cash flows from financing activities
Net increase (decrease) in deposits (1,124,290) 140,087 155,956 1,025,887
Net decrease in advances from borrowers for
taxes and insurance (29,831) (53,159) (18,130) (39,028)
Net increase (decrease) in Federal Home
Loan Bank advances 500,000 100,000 (400,000) (450,000)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (654,121) 186,928 (262,174) 536,859
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (52,166) (48,566) (136,858) 213,412
Cash and cash equivalents at beginning of period 635,237 772,095 772,095 558,683
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 583,071 $ 723,529 $ 635,237 $ 772,095
=========== =========== =========== ===========
</TABLE>
F-40
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
------------------- -------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for
Income taxes $ 25,610 $ -- $ -- $ 2,642
Interest 406,284 421,516 566,352 568,759
Noncash investing and financing activities
Transfer from loans to real estate acquired
through foreclosure 12,717 31,576 41,838 --
Issuance of loans receivable in connection with
the sale of real estate acquired through
foreclosure -- -- 10,531 34,377
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
The Neodesha Savings and Loan Association, FSA (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 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 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 financial statements as of June 30, 1998, and for the nine-month periods
ended June 30, 1998 and 1997 are unaudited. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of financial position and results of operations have been made.
The following is a summary of the Association's significant accounting policies
which have been consistently applied in the preparation of the accompanying
financial statements.
1. Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks, and other interest-bearing deposits.
2. Investment securities and mortgage-backed securities
Investment securities and mortgage-backed securities are classified as
held-to-maturity securities as the Association has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
reported at amortized cost.
F-42
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued
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.
3. 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.
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.
F-43
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued
4. 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.
5. 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 15-45
Furniture, fixtures and equipment 5-7
Automobile 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.
6. Income taxes
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.
F-44
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE B -- INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of held-to-maturity investment securities are as follows:
<TABLE>
<CAPTION>
June 30, 1998 (unaudited)
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations $2,115,133 $ 11,109 $ 1,266 $2,124,976
State and political subdivision
general obligations 603,806 368 1,026 603,148
---------- ---------- ---------- ----------
$2,718,939 $ 11,477 $ 2,292 $2,728,124
========== ========== ========== ==========
September 30, 1997
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
U.S. Government and agency
obligations $2,513,864 $ 8,718 $ 4,679 $2,517,903
State and political subdivision
general obligations 603,111 16 4,393 598,734
---------- ---------- ---------- ----------
$3,116,975 $ 8,734 $ 9,072 $3,116,637
========== ========== ========== ==========
September 30, 1996
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
U.S. Government and agency
obligations $2,613,030 $ 3,699 $ 29,442 $2,587,287
State and political subdivision
general obligations 602,350 -- 20,917 581,433
---------- ---------- ---------- ----------
$3,215,380 $ 3,699 $ 50,359 $3,168,720
========== ========== ========== ==========
</TABLE>
F-45
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE B -- INVESTMENT SECURITIES -- Continued
The amortized cost and estimated fair value of investment securities at
September 30, 1997, by contractual maturities are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized fair
Held to maturity cost value
---------------- ---- -----
Due in one year or less $ 899,917 $ 899,621
Due in two to five years 2,024,218 2,027,296
Due after five years 192,840 189,720
---------- ----------
$3,116,975 $3,116,637
========== ==========
Investment securities with a fair value of $1,329,594, $1,721,868 and $1,477,253
at June 30, 1998, September 30, 1997 and 1996, respectively, were pledged to
secure government and other public deposits.
NOTE C -- MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of held-to-maturity mortgage-backed securities are
summarized as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
Collateralized mortgage
obligation -- FNMA
June 30, 1998
(unaudited) $158,872 $ -- $ 734 $158,138
September 30, 1997 252,598 -- 3,648 248,950
September 30, 1996 252,674 -- 7,349 245,325
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.
F-46
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE D -- LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
June 30, --------------------------
1998 1997 1996
(Unaudited)
First mortgage loans
Secured by one-to-four family
residences $ 7,127,135 $ 7,237,089 $ 7,455,070
Secured by multi-family residences -- -- 5,029
Nonresidential 48,124 72,328 105,392
Construction -- -- 70,000
----------- ----------- -----------
Total first mortgage loans 7,175,259 7,309,417 7,635,491
Consumer and other loans
Savings 130,622 123,254 142,200
Automobile 1,926,161 1,871,580 1,606,000
Unsecured term 107,069 118,108 108,890
Other 108,860 138,569 167,122
----------- ----------- -----------
Total consumer and other loans 2,272,712 2,251,511 2,024,212
Less
Allowance for loan losses (80,189) (88,954) (101,324)
Loans in process -- -- (57,092)
Unearned discounts (4,079) (3,988) (11,991)
----------- ----------- -----------
(84,268) (92,942) (170,407)
----------- ----------- -----------
Net loans receivable $ 9,363,703 $ 9,467,986 $ 9,489,296
=========== =========== ===========
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
---------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 88,954 $ 101,324 $ 101,324 $ 107,410
Provision charged to operations 4,500 4,500 6,000 6,000
Loans charged off (15,649) (20,531) (21,464) (13,629)
Recoveries on loans previously
charged off 2,384 74 3,094 1,543
Balance at end of period $ 80,189 $ 85,367 $ 88,954 $ 101,324
========= ========= ========= =========
</TABLE>
F-47
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE D -- LOANS RECEIVABLE -- Continued
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 76%, 76% and
77% of the total loan portfolio at June 30, 1998 and September 30, 1997 and
1996, respectively. Approximately 20%, 17% and 19% at June 30, 1998 and
September 30, 1997 and 1996, respectively, of the Association's one-to-four
family residential real estate loans are secured by properties located outside
of the primary lending area of Wilson and surrounding Kansas counties.
Generally, such loans have been underwritten on the basis of 80% to 90%
loan-to-value ratio. 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 24%, 24% and 23% at June 30, 1998 and September 30, 1997 and 1996,
respectively, of the loan portfolio is comprised of consumer and other
nonresidential loans.
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:
Nine months
ended Year ended
June 3 September 30,
1998 1997
---- ----
(Unaudited)
Loans outstanding at beginning of period $ 41,940 $ 31,377
New loans 6,273 29,889
Repayments (5,371) (19,326)
-------- --------
Loans outstanding at end of period $ 42,842 $ 41,940
======== ========
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.
Nonaccrual loans totaled $227,000, $156,989 and $131,249 at June 30, 1998 and
September 30, 1997 and 1996, respectively. Interest income that would have been
recorded under the original terms of such loans approximated $5,000, $7,600,
$9,900 and $8,600 for the nine months ended June 30, 1998 and 1997 and the years
ended September 30, 1997 and 1996, respectively. Interest income that was
recorded was insignificant for all periods presented. The Association is not
committed to make additional loans to borrowers whose loans have been modified.
F-48
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE E -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
September 30,
June 30, -----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Loans receivable $ 80,532 $ 71,656 $ 77,809
Investment securities 31,387 51,889 48,624
Mortgage-backed securities 816 1,287 1,286
-------- -------- --------
$112,735 $124,832 $127,719
======== ======== ========
NOTE F -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
September 30,
June 30, -----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Land $ 67,121 $ 67,121 $ 67,121
Building 402,030 398,586 389,711
Furniture, fixtures and equipment 237,311 233,414 227,237
Automobile 42,631 25,436 25,436
--------- --------- ---------
749,093 724,557 709,505
Less accumulated depreciation (363,408) (340,673) (310,179)
--------- --------- ---------
$ 385,685 $ 383,884 $ 399,326
========= ========= =========
F-49
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE G -- DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted September 30,
average ----------------------------------------------------
rate at June 30, 1998 1997 1996
June 30, ------------------------- ----------------------- ----------------------
1998 Amount Percent Amount Percent Amount Percent
---- ------ ------- ------ ------- ------ -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing --% $ 222,743 1.90% $ 448,753 3.49% $ 511,085 4.03%
NOW accounts 2.75 1,485,401 12.66 1,440,289 11.20 1,484,231 11.69
Super NOW accounts 3.22 474,240 4.04 563,740 4.39 554,140 4.36
Money market accounts 4.04 1,635,219 13.94 2,074,067 16.14 1,623,114 12.78
----------- ------ ---------- ------ ---------- ------
Total demand deposits 3.20 3,817,603 32.54 4,526,849 35.22 4,172,570 32.86
Passbook savings accounts 3.01 1,677,136 14.30 2,000,521 15.56 1,777,783 14.00
Certificates of deposit
4.00% to 4.99% 4.67 731,452 6.24 1,395,349 10.85 2,163,632 17.04
5.00% to 5.99% 5.30 4,331,108 36.92 3,044,573 23.69 2,540,390 20.00
6.00% to 6.99% 6.25 1,172,689 10.00 1,886,986 14.68 2,043,947 16.10
----------- ------ ----------- ------ ----------- ------
Total certificates of deposit 5.41 6,235,249 53.16 6,326,908 49.22 6,747,969 53.14
---------- ------ ----------- ------ ----------- ------
Total deposits 4.35% $11,729,988 100.00% $12,854,278 100.00% $12,698,322 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
F-50
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE G -- DEPOSITS -- Continued
The aggregate amount of certificates of deposit and savings with a minimum
denomination of $100,000 was $1,212,445, $1,312,324 and $1,326,272 at June 30,
1998 and September 30, 1997 and 1996, respectively. Deposit amounts in excess of
$100,000 are not federally insured.
Scheduled maturities of certificates of deposit are as follows:
June 30, 1998 (unaudited)
-------------------------
Less than One to Three to
one year three years five years Total
-------- ----------- ---------- -----
4.00% to 4.99% $ 731,452 $ -- $ -- $ 731,452
5.00% to 5.99% 2,865,529 1,338,257 127,322 4,331,108
6.00% to 6.99% 547,556 625,133 -- 1,172,689
---------- ---------- ---------- ----------
$4,144,537 $1,963,390 $ 127,322 $6,235,249
========== ========== ========== ==========
September 30, 1997
------------------
Less than One to Three to
one year three years five years Total
-------- ----------- ---------- -----
4.00% to 4.99% $1,395,349 $ -- $ -- $1,395,349
5.00% to 5.99% 1,846,962 1,164,262 33,349 3,044,573
6.00% to 6.99% 1,254,166 632,820 -- 1,886,986
---------- ---------- ---------- ----------
$4,496,477 $1,797,082 $ 33,349 $6,326,908
========== ========== ========== ==========
September 30, 1996
------------------
Less than One to Three to
one year three years five years Total
-------- ----------- ---------- -----
4.00% to 4.99% $2,034,797 $ 128,835 $ -- $2,163,632
5.00% to 5.99% 1,708,281 750,110 81,999 2,540,390
6.00% to 6.99% 195,676 1,359,742 488,529 2,043,947
---------- ---------- ---------- ----------
$3,938,754 $2,238,687 $ 570,528 $6,747,969
========== ========== ========== ==========
F-51
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE G -- DEPOSITS -- Continued
Interest expense on deposits is summarized as follows:
Nine months ended Year ended
June 30, September 30,
-------------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Certificates of deposit $251,155 $257,695 $344,253 $357,796
NOW accounts 96,742 93,519 125,700 121,392
Savings 39,473 41,039 55,836 52,510
-------- -------- -------- --------
$387,370 $392,253 $525,789 $531,698
======== ======== ======== ========
NOTE H -- ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
Rate Amount
---- ------
June 30, 1998 6.65% $ 600,000
September 30, 1997 6.56 100,000
September 30, 1996 6.03 500,000
Advances from the Federal Home Loan Bank are on a renewable line of credit with
a maximum borrowing amount of $2,638,000 at June 30, 1998 and September 30,
1997, and $2,474,000 at September 30, 1996. The line matures July 15, 1998.
Interest is due monthly at a rate which varies with the New York Federal Funds
rate. Assets of the Association are subject to a blanket pledge agreement to
collateralize the advances.
NOTE I -- INCOME TAXES
Income tax expense consists of the following:
Nine months ended Year ended
June 30, September 30,
------------------------ ------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Current $ 15,959 $ 19,272 $ 25,822 $ 2,439
Deferred (259) 228 1,905 (1,785)
-------- -------- -------- --------
$ 15,700 $ 19,500 $ 27,727 $ 654
======== ======== ======== ========
F-52
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE I -- INCOME TAXES -- Continued
Reconciliation of income tax expense computed at the federal statutory rate of
34% and income tax expense is as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
--------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Income tax expense at statutory
rate $ 21,879 $ 25,678 $ 32,456 $ 1,178
Kansas privilege tax, net of federal
tax benefit 2,864 3,361 4,664 154
Effective rate differential (8,812) (8,786) (11,750) (658)
Other (231) (753) 2,357 (20)
-------- -------- -------- --------
$ 15,700 $ 19,500 $ 27,727 $ 654
======== ======== ======== ========
Effective tax rate 24.4% 25.8% 26.5% 18.9%
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
September 30,
June 30, --------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Deferred tax assets
Allowance for loan losses $ 24,057 $ 25,786 $ 26,497
Depreciation of property and equipment 2,738 2,738 645
Other 6,905 2,547 3,254
-------- -------- --------
Total deferred tax assets 33,700 31,071 30,396
Deferred tax liabilities
Federal Home Loan Bank stock dividends 34,470 32,100 29,520
-------- -------- --------
Net deferred tax asset (liability) $ (770) $ (1,029) $ 876
======== ======== ========
F-53
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE I -- INCOME TAXES -- Continued
The Association was allowed a special bad debt deduction based on a percentage
of earnings, generally limited to 8% of otherwise taxable income and subject to
certain limitations based on aggregate loans and savings account balances at the
end of the year. This percentage of earnings bad debt deduction had accumulated
to approximately $328,600 as of June 30, 1998. If the amounts that qualify as
deductions for federal income tax purposes are later used for purposes other
than for bad debt losses, including distributions in liquidation, such
distributions will be subject to federal income taxes at the then current
corporate income tax rate. The approximate amount of unrecognized deferred tax
liability relating to the cumulative bad debt deduction is $110,000 at June 30,
1998.
NOTE J -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in the
table below) of total risk-based and Tier 1 capital to risk-weighted assets and
of Tier 1 (core) capital and tangible capital to adjusted total assets.
Management believes, as of June 30, 1998, that the Association meets all capital
adequacy requirements to which it is subject.
F-54
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE J -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL -- Continued
As of June 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
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of June 30, 1998 (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital $ 1,218 16.8% $ 579 >8.0% $ 724 >10.0%
- -
Tier 1 risk-based capital 1,141 15.8 290 >4.0 434 > 6.0
- -
Tier 1 (core) capital 1,141 8.4 406 >3.0 676 > 5.0
- -
Tangible capital 1,141 8.4 203 >1.5 -- --
-
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1997
Total risk-based capital $ 1,181 16.4% $ 577 >8.0% $ 722 > 10.0%
- -
Tier 1 risk-based capital 1,092 15.1 289 >4.0 433 > 6.0
- -
Tier 1 (core) capital 1,092 7.7 425 >3.0 708 > 5.0
- -
Tangible capital 1,092 7.7 212 >1.5 -- --
-
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1996
Total risk-based capital $ 1,106 15.3% $ 578 >8.0% $ 722 >10.0%
- -
Tier 1 risk-based capital 1,015 14.1 289 >4.0 433 > 6.0
- -
Tier 1 (core) capital 1,015 7.0 432 >3.0 721 > 5.0
- -
Tangible capital 1,015 7.0 216 >1.5 -- --
-
</TABLE>
Reconciliations of retained earnings computed in accordance with generally
accepted accounting principles and Tier 1, core, tangible and risk-based capital
are as follow:
September 30,
June 30, ------------------
1998 1997 1996
---- ---- ----
(Unaudited)
(Dollars in thousands)
Retained earnings, Tier 1, core and
tangible capital $1,141 $1,092 $1,015
General allowance for loan losses 77 89 91
------ ------ ------
Total risk-based capital $1,218 $1,181 $1,106
====== ====== ======
F-55
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE K -- RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund were used to pay the cost of prior
thrift failures. The deposit accounts of commercial banks are insured by the
FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have
acquired SAIF deposits. The reserves of the BIF met the level required by law in
May 1995. As a result of the respective reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996 and 1997, no BIF assessments were required for healthy commercial banks
except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. The Association
had $12.0 million in deposits at March 31, 1995, resulting in an assessment of
approximately $79,000, or $55,000 after tax, which was charged to operations in
the fourth quarter of fiscal 1996.
A component of the recapitalization plan provides for the merger of the SAIF and
BIF on January 1, 1999. However, the SAIF recapitalization legislation currently
provides for an elimination of the thrift charter or of the separate federal
regulation of thrifts prior to the merger of the deposit insurance funds. As a
result, the Association would be regulated as a bank under federal laws which
would subject it to the more restrictive activity limits imposed on national
banks.
NOTE L -- 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 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 commitment to extend credit at June 30, 1998 includes a first
mortgage loan with a variable rate of 7.56% totaling $26,100.
F-56
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE M -- MERGER/CONVERSION
On February 18, 1998, the Boards of Directors of The Neodesha Savings and Loan
Association, FSA (Neodesha) and First Independence Corporation and its
subsidiary, First Federal Savings and Loan Association of Independence, adopted
a Plan of Merger Conversion. Pursuant to the Plan, Neodesha will combine with
First Federal Savings and Loan 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 First Federal Savings and Loan. The
transaction is subject to approval by regulatory authorities.
Pursuant to the conversion merger transaction First Independence Corporation
will issue new common shares with a fair value equal to the appraised value of
Neodesha.
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 First Independence
Corporation and one-third, capped at $150,000, by Neodesha. Total costs incurred
and deferred at June 30, 1998 were $174,097.
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 First Federal Savings and Loan 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 First Federal Savings
and Loan.
Subsequent to consummation of the transaction, the First Federal Savings and
Loan 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 N -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments at June 30, 1998 and September 30, 1997 and
1996.
F-57
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
Cash and cash equivalents: The balance sheet carrying amounts for cash and
short-term instruments approximate the estimated fair values of such assets.
Investment securities and mortgage-backed securities: Fair values for investment
securities and mortgage-backed securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and which
entail no significant change in credit risk, fair values are based on the
carrying values. The estimated fair values of fixed rate loans are estimated
based on discounted cash flow analyses using prepayment assumptions and interest
rates currently offered for loans with similar terms to borrowers of similar
credit quality. Nonperforming loans have not been discounted. The carrying
amount of accrued interest receivable approximates its fair value.
Commitments to extend credit: No premium or discount was ascribed to loan
commitments because when funded virtually all funding will be at current market
rates.
Federal Home Loan Bank stock: The balance sheet carrying amount approximates the
stocks fair value.
Deposit liabilities: The fair values estimated for demand deposits, NOW
accounts, savings and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts of variable rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated expected monthly time deposit
maturities. The carrying amount of accrued interest payable approximates its
fair value.
Advances from Federal Home Loan Bank: Variable rate advances fair values are
considered equal to their carrying values.
F-58
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The following table provides summary information on the fair value of financial
instruments. Such information does not purport to represent the aggregate net
fair value of the Association. Further, the fair value estimates are based on
various assumptions, methodologies and subjective considerations, which vary
widely among different financial institutions and which are subject to change.
The carrying amounts are the amounts at which the financial instruments are
reported in the financial statements.
June 30, 1998 (unaudited)
------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
Cash and cash equivalents $ 583,071 $ 583,071
Investment securities held to maturity 2,718,939 2,728,124
Mortgage-backed securities held to maturity 158,872 158,138
Loans 9,443,892 9,507,046
Federal Home Loan Bank stock 142,100 142,100
Deposits (11,729,988) (11,740,890)
Advances from Federal Home Loan Bank (600,000) (600,000)
September 30, 1997
------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
Cash and cash equivalents $ 635,237 $ 635,237
Investment securities held to maturity 3,116,975 3,116,637
Mortgage-backed securities held to maturity 252,598 248,950
Loans 9,556,940 9,639,390
Federal Home Loan Bank stock 134,300 134,300
Deposits (12,854,278) (12,856,144)
Advances from Federal Home Loan Bank (100,000) (100,000)
F-59
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
June 30, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE N -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
September 30, 1996
-----------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
Cash and cash equivalents $ 772,095 $ 772,095
Investment securities held to maturity 3,215,380 3,168,720
Mortgage-backed securities held to maturity 252,674 245,325
Loans 9,590,620 9,675,574
Federal Home Loan Bank stock 125,700 125,700
Deposits (12,698,322) (12,714,492)
Advances from Federal Home Loan Bank (500,000) (500,000)
F-60
<PAGE>
No person hass been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by First Independence Corporation. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the shares of Common Stock offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
Table of Contents
Page
----
Summary ................................................................... 1
Selected Consolidated Financial Information
of First Independence Corporation ....................................... 5
Selected Consolidated Financial Information
of The Neodesha Savings and Loan Association, FSA ....................... 7
Recent Financial Data of First Independence Corporation ................... 9
Recent Financial Data of The Neodesha Savings and Loan Association, FSA ... 13
Risk Factors .............................................................. 17
First Independence Corporation ............................................ 19
The Neodesha Savings and Loan Association, FSA ............................ 20
Pro Forma Data ............................................................ 20
Pro Forma Condensed Financial Statements .................................. 23
Unaudited Pro Forma Consolidated Condensed Financial Statements ........... 24
Capitalization ............................................................ 28
Use of Proceeds ........................................................... 28
Common Stock Prices and Dividends ......................................... 29
The Merger Conversion ..................................................... 30
Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company .................................... 42
Business of the Company ................................................... 56
Management's Discussion and Analysis of Financial Condition and
Results of Operations of Neodesha ....................................... 81
Business of Neodesha ...................................................... 89
Regulation ................................................................ 103
Voting Securities and Principal Holders Thereof ........................... 112
Management of the Company ................................................. 113
Aggregated Option/SAR Exercises in Last Fiscal Year and
FY-End Option/SAR Values ................................................ 118
Management of Neodesha .................................................... 119
Restrictions on the Acquisition of the Company ............................ 121
Description of Capital Stock .............................................. 125
Legal Opinions ............................................................ 126
Experts ................................................................... 126
Additional Information .................................................... 126
Index to Financial Statements ............................................. F-1
Until the later of ___________, 1998 or 25 days after the commencement of the
Offering, all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as under writers and with respect to their unsold
allotments or subscriptions.
First Independence
Corporation
169,879 Shares
of Common Stock
(Anticipated Maximum)
PROSPECTUS
Trident Securities, Inc.
_______________ ___, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 25. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance of the shares.
Counsel fees and expenses............................................ $150,000
Accounting fees and expenses......................................... 60,000
Appraisal and business plan preparation fees and expenses........... 30,000
Conversion Agent fees and expenses................................... 10,000
Underwriting fees(1) (including financial advisory fee and expenses) 85,000
Underwriter's counsel fees and expenses.............................. 47,500
Printing, postage and mailing........................................ 30,000
Registration and Filing Fees......................................... 15,000
Blue Sky fees and expenses........................................... 6,000
Stock Transfer Agent and Certificates................................ 6,000
Other expenses(1).................................................... 10,500
--------
TOTAL........................................................... $450,000
========
- ------------------
(1) Based on maximum of Estimated Valuation Range.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting
as the holding company of The Neodesha Savings & Loan Association, F.S.A.,
pursuant to the Plan of Conversion (filed as Exhibit 2 herein), and no sales of
its securities have occurred to date.
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement Regarding Marketing Agent(1)
1.2 Form of Agency Agreement
2.1 Plan of Merger Conversion(1)
2.2 Agreement and Plan of Merger and Reorganization(1)
3.1 Certificate of Incorporation of the Holding Company(2)
3.2 Bylaws of the Holding Company(2)
4 Form of Stock Certificate of the Holding Company(2)
5 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality of
Stock(1)
8.1 Form of Opinion of Silver, Freedman & Taff, L.L.P. with respect to
Federal income tax consequences of the Merger Conversion(1)
8.2 Form of Opinion of Grant Thornton with respect to Kansas income tax
consequences of the Merger Conversion(1)
10.1 1994 Stock Option and Incentive Plan(3)
10.2 Recognition and Retention Plan(3)
10.3 Employment Agreements(3)
10.4 Employment Agreement with Franklin C. Miller(1)
21 Subsidiaries of the Registrant(3)
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of Grant Thornton
23.3 Consent of Ferguson & Company
24 Power of Attorney (set forth on signature page)(1)
27 Financial Data Schedule(1)
99.1 Appraisal and Updated Appraisal(4)
99.2 Stock Order Form and Order Form Instructions
99.3 Question and Answer Brochure(1)
99.4 Advertising, Training and Community Informational Meeting Materials(1)
99.5 Letter of Appraiser with respect to Subscription Rights(1)
1 Filed as exhibits to the Company's Form SB-2 registration statement
filed on July 2, 1998.
2 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.
3 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.
4 Exemption granted under Rule 202 of Regulation S-T; paper copy of
exhibit previously filed.
II-2
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of
Independence, State of Kansas, on October 30, 1998.
FIRST INDEPENDENCE CORPORATION
By: /s/ Larry G. Spencer
--------------------------
Larry G. Spencer, President and
Chief Executive Officer
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry G. Spencer his true and lawful
attorneys-in-fact and agents, with full power of substitution and re-
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all said attorneys-in-fact and
agents or their substitutes or substitute may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Larry G. Spencer /s/ Gary L. Overfield
- ---------------------------- ----------------------------
Larry G. Spencer Gary L. Overfield
President, Chief Executive Officer Senior Vice President
and Director and Secretary
October 30, 1998 October 30, 1998
- ----------------- -----------------
/s/ James B. Mitchel /s/ Donald E. Aitker
- ---------------------------- ----------------------------
James B. Mitchel Donald E. Aitker
Vice President and Chief Financial Officer Director
October 30, 1998 October 30, 1998
- ----------------- -----------------
/s/ John T. Updegraff /s/ William T. Newkirk, II
- ---------------------------- ----------------------------
John T. Updegraff William T. Newkirk, II
Vice Chairman of the Board Director
October 30, 1998 October 30, 1998
- ----------------- -----------------
/s/ Joseph M. Smith /s/ Harold L. Swearinsen
- ---------------------------- ----------------------------
Joseph M. Smith Harold L. Swearinsen
Director Director
October 30, 1998 October 30, 1998
- ----------------- -----------------
/s/ Lavern W. Strecker
- ----------------------------
Lavern W. Strecker
Director
October 30, 1998
- -----------------
II-4
FIRST INDEPENDENCE CORPORATION
Up to 185,590 Shares
COMMON STOCK
($0.01 Par Value)
Subscription Price for Conversion Shares: $10.00 Per Share
AGENCY AGREEMENT
----------------
November __, 1998
Trident Securities, Inc.
4601 Six Forks Road
Suite 400
Raleigh, North Carolina 27609
Ladies and Gentlemen:
First Independence Corporation, a Delaware corporation (the "Company") and
Neodesha Savings and Loan Association, FSA, a federally chartered savings
association currently in mutual form (the "Association," which shall include all
references to the Association in the mutual or stock form, as indicated by the
context), with its deposit accounts insured by the Savings Association Insurance
Fund ("SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC"), hereby confirm their agreement with Trident Securities, Inc.
("Trident" or "Agent") as follows:
Section 1. The Offering. The Association, in accordance with its plan of
conversion adopted by its Board of Directors of the Association (the "Plan"),
intends to convert from a federally chartered mutual savings association and to
simultaneously merge with and into First Federal Savings and Loan Association of
Independence, ("First Federal") a Federal savings and loan association (the
"Merger Conversion"). Pursuant to the Association's plan of merger conversion
("Plan of Merger Conversion"), non-transferable rights to subscribe
("Subscription Rights") for the Company's common stock ("Shares" or "Common
Stock") have been given, in order of priority, to: (1) Eligible Account Holders
(deposit account holders of the Association as of December 31, 1996); (2)
Tax-Qualified Employee Plans; (3) Supplemental Eligible Account Holders (deposit
account holders of the Association as of June 30, 1998); (4) members of the
Association, other than Eligible Account Holders and Supplemental Eligible
Account Holders, as of ________ ___, 1998, the voting record date for the
Special Meeting ("Other Members"); and (5) officers, directors and employees of
the Association (the "Subscription and
1
<PAGE>
Community Offering"). Concurrently, and subject to the prior rights of holders
of Subscription Rights, the Company is offering its common stock for sale in a
community offering to members of the general public, with a first preference to
natural persons residing in Wilson County, Kansas (the "Community Offering"). It
is anticipated that shares not subscribed for in the Subscription and Community
Offering will be offered to certain members of the general public on a best
efforts basis through a selected dealers arrangement (the "Syndicated Community
Offering") (the Subscription Offering, the Community Offering and the Syndicated
Community Offering are referred to collectively as the "Subscription and
Community Offering"). All purchases will be subject to the maximum and minimum
purchase limitations and other terms and conditions described in the Plan of
Merger Conversion including the Association's and the Company's right, in their
sole discretion, to reject orders received in the Community and the Syndicated
Community Offering in whole or in part. The shares will be offered at a price
equal to 95% of the average market price of the Company's common stock (based on
the average of the closing bid and ask quotations on the NASDAQ SmallCap Market)
for the ten trading days ending on the expiration date of the offering (the
"Purchase Price").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (File No. 333-________) (the
"Registration Statement") containing a prospectus relating to the Subscription
and Community Offering for the registration of the Shares under the Securities
Act of 1933 (the "1933 Act"), and has filed such amendments thereof, if any, and
such amended prospectuses as may have been required to the date hereof. The
prospectus, as amended, on file with the Commission at the time the Registration
Statement initially became effective is hereinafter called the "Prospectus,"
except that if any prospectus is filed by the Company pursuant to Rule 424(b) or
(c) of the rules and regulations of the Commission under the 1933 Act (the "1933
Act Regulations") differing from the prospectus on file at the time the
Registration Statement initially becomes effective, the term "Prospectus" shall
refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the
time said prospectus is filed with the Commission.
In accordance with the Rules and Regulations of the Office of Thrift
Supervision ("OTS"), the Association has filed with the OTS an Application for
Merger Conversion (the "Conversion Application"), including the prospectus, and
has filed such amendments thereto, if any, as may have been required by the OTS.
The Conversion Application has been approved by the OTS and the related
Prospectus has been authorized for use by the OTS.
Section 2. Retention of Trident: Compensation; Sale and Delivery of the
Shares. Subject to the terms and conditions herein set forth, the Company and
the Association hereby appoint Trident (i) as their exclusive financial advisory
and marketing agent to utilize its best efforts to solicit subscriptions for
Shares of the Common Stock and to advise and assist the Company and the
Association with respect to the Company's sale of the Shares in the Subscription
and Community Offering and (ii) to participate in the Subscription and Community
Offering in the areas of market making, research coverage and syndicate
formation (if necessary).
2
<PAGE>
On the basis of the representations, warranties, and agreements herein
contained, but subject to the terms and conditions herein set forth, Trident
accepts such appointment and agrees to consult with and advise the Company and
the Association as to the matters set forth in the letter agreement ("Letter
Agreement"), dated March 31, 1998, between the Association and Trident (a copy
of which is attached hereto as Exhibit A). It is acknowledged by the Company and
the Association that Trident shall not be required to purchase any Shares and
shall not be obligated to take any action which is inconsistent with all
applicable laws, regulations, decisions or orders. In the event of a Syndicated
Community Subscription and Community Offering, Trident will assemble and manage
a selling group of broker-dealers which are members of the National Association
of Securities Dealers, Inc. (the "NASD") to participate in the solicitation of
purchase orders for shares under a selected dealers' agreement ("Selected
Dealers' Agreement"), the form of which is set forth as Exhibit B to this
Agreement.
The obligations of Trident pursuant to this Agreement shall terminate upon
the completion or termination or abandonment of the Plan by the Company or upon
termination of the Subscription and Community Offering, but in no event later
than the date (the "End Date") which is 45 days after the Closing Date (as
hereinafter defined). All fees or expenses due to Trident but unpaid will be
payable to Trident in next day funds at the earlier of the Closing Date (as
hereinafter defined) or the End Date. In the event the Subscription and
Community Offering is extended beyond the End Date, the Company, the Association
and Trident may agree to renew this Agreement under mutually acceptable terms.
In the event the Company is unable to sell a minimum of __________ Shares
having an aggregate price of $1,530,000 (or such lesser amount approved by the
OTS) within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the Shares,
the full amount which it may have received from them plus accrued interest as
set forth in the Prospectus; and none of the parties to this Agreement shall
have any obligation to the other parties hereunder, except as otherwise set
forth in this Section 2 and in Sections 6, 8 and 9 hereof.
In the event the Subscription and Community Offering is terminated for any
reason not attributable to the action or inaction of Trident, Trident shall be
paid the fees and expenses due to the date of such termination pursuant to
subparagraphs (a) and (d) below.
If all conditions precedent to the consummation of the Conversion,
including, without limitation, the sale of all Shares required by the Plan to be
sold, are satisfied, the Company agrees to issue, or have issued, the Shares
sold in the Subscription and Community Offering and to release for delivery
certificates for such Shares on the Closing Date (as hereinafter defined)
against payment to the Company by any means authorized by the Plan, provided
however, that no funds shall be released to the Company until the conditions
specified in Section 7 hereof shall have been complied with to the reasonable
satisfaction of Trident and its counsel. The release of Shares against payment
therefor shall be made at _.m., Central Time, on a date and at a place
acceptable to the Company, the Association and Trident or such other time or
place as shall be
3
<PAGE>
agreed upon by the Company, the Association and Trident. Certificates for shares
shall be delivered directly to the purchasers in accordance with their
directions. The date upon which the Company shall release or deliver, or have
released or delivered, the Shares sold in the Subscription and Community
Offering, in accordance with the terms herein, is called the "Closing Date."
Trident shall receive the following compensation for their services
hereunder:
(a) A Management Fee of $85,000 payable at Closing Date. Such fee
shall be deemed to have been earned when due.
(b) For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon jointly
by Trident and the Company to reflect market requirements at the time of
the stock allocation in a Syndicated Community Offering.
(c) Trident shall be reimbursed for allocable expenses incurred by
them, including legal fees. Trident's out-of-pocket expenses will not
exceed $12,500 and its legal fees will not exceed $35,000. Allocable
expenses will be billed on a monthly basis as incurred.
(d) The Company will pay all other expenses of the Conversion
including, but not limited to its attorneys' fees, National Association of
Securities Dealers ("NASD") filing fees, fees relating to any required
auditing and accounting, filing and registration fees and fees of either
Trident's attorneys or First Independence's attorneys relating to any
required state securities law filings, telephone charges, air freight,
rental equipment, supplies, transfer agent charges and costs of printing
all documents necessary in connection with the foregoing.
Section 3. Prospectus: Subscription and Community Offering. The Shares are
to be initially offered in the Subscription and Community Offering at the
Purchase Price as defined and set forth on the cover page of the Prospectus.
Section 4. Representations and Warranties. The Company and the Association
jointly and severally represent and warrant to Trident on the date hereof as
follows:
(a) The Registration Statement was declared effective by the
Commission on _______, 1998. At the time the Registration Statement,
including the Prospectus contained therein (including any amendment or
supplement thereto), became effective, the Registration Statement complied
in all material respects with the requirements of the 1933 Act and the 1933
Act Regulations and the Registration Statement, including the Prospectus
contained therein (including any amendment or supplement thereto), and any
information regarding the Company or the Association contained in Sales
Information (as such term is defined in Section 8 hereof) authorized by the
Company or the Association for use in connection with the Subscription and
Community Offering, did not contain an untrue statement of a material fact
or omit to state a
4
<PAGE>
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and at the time any Rule 424(b) or (c) Prospectus was
filed with the Commission; provided, however, that the representations and
warranties in this Section 4(a) shall not apply to statements or omissions
made in reliance upon and in conformity with written information furnished
to the Company or the Association by Trident expressly regarding Trident
for use in the Prospectus under the captions "Marketing Arrangements" or
statements in or omissions from any Sales Information or information filed
pursuant to state securities or blue sky laws or regulations regarding
Trident.
(b) The Association has filed with the Department of the Treasury,
Office of Thrift Supervision ("OTS"), the Conversion Application and has
filed such amendments thereto and supplementary materials as may have been
required to the date hereof including copies of the Association's Proxy
Statement, to be dated ___________, 1998 relating to the Conversion (the
"Proxy Statement"), and the Prospectus. The OTS has, by letter dated
__________, 1998, approved the Conversion Application, such order remains
in full force and effect and no order has been issued by the OTS suspending
or revoking such order and no proceedings therefor have been initiated or,
to the knowledge of the Company or the Association, threatened by the OTS.
At the date of such approval and at the Closing Date referred to in Section
2, the Conversion Application complied and will comply in all material
respects with the applicable provisions of the OTS' Conversion Regulations
except as waived in writing by the OTS. The Conversion Application,
including the Prospectus (including any amendment or supplement thereto),
do not include any untrue statement of a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this Section 4(b) shall
not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company or the
Association by Trident expressly regarding Trident for use in the
Prospectus contained in the Conversion Application under the caption
"Marketing Arrangements" or statements in or omissions from any sales
information or information filed pursuant to state securities or blue sky
laws or regulations regarding Trident.
(c) No order has been issued by the Commission or the OTS preventing
or suspending the use of the Prospectus and no action by or before any such
government entity to revoke any approval, authorization or order of
effectiveness related to the Conversion is, to the best knowledge of the
Company or the Association, pending or threatened.
(d) To the best knowledge of the Company, no person has sought to
obtain review of the final action of the OTS in approving or taking no
objection to the Plan or in approving the Conversion or the Holding Company
Application pursuant to the Conversion Regulations, the HOLA, or any other
applicable statute or regulation.
(e) At the time of their use, the Proxy Statement and any other proxy
solicitation materials will comply in all material respects with the
applicable provisions of the Conversion Regulations and will not contain an
untrue statement of a material fact or omit to state a material
5
<PAGE>
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Company and
the Association will promptly file the Prospectus and any supplemental
sales literature with the OTS. The Prospectus and all supplemental sales
literature, as of the date the Registration Statement became effective and
at the Closing Date referred to in Section 2, complied and will comply in
all material respects with the applicable requirements of the Conversion
Regulations and, at or prior to the time of their first use, will have
received all required authorizations of the OTS for use in final form.
(f) At the time of their use, the Proxy Statement and any other proxy
solicitation materials will comply in all material respects with the
applicable provisions of the Conversion Regulations and will not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Prospectus
and all supplemental sales literature, as of the date the Registration
Statement became effective and at the Closing Time referred to in Section
2, complied and will comply in all material respects with the applicable
requirements of the Conversion Regulations and, at or prior to the time of
their first use, will have received all required authorizations of the OTS
for use in final form.
(g) The OTS has not, by order or otherwise, prevented or suspended the
use of the Prospectus or any supplemental sales literature authorized by
the Company or the Association for use in connection with the Subscription
and Community Offerings.
(h) At the Closing Time referred to in Section 2, the Company and the
Association will have completed the conditions precedent to the Conversion
in accordance with the Plan, the applicable Conversion Regulations and all
other applicable laws, regulations, decisions and orders, including all
material terms, conditions, requirements and provisions precedent to the
Conversion imposed upon the Company or the Association by the OTS, or any
other regulatory authority, other than those which the regulatory authority
permits to be completed after the Conversion. As of the Closing Time, as
defined in Section 2 hereof, the Company, the Association and its
subsidiaries will have completed the conditions precedent to the Merger in
accordance with the Agreement and Plan of Merger and Reorganization
("Merger Agreement"), provisions of the FDIA and HOLA and all other
applicable laws, regulations, decisions and orders, including all material
terms, conditions, requirements and provisions precedent to the Merger
imposed upon the Company or the Association by the OTS, or any other
regulatory authority, other than those which the regulatory authority
permits to be completed after the effective time of the Merger ("Effective
Time").
(i) Ferguson & Company, which prepared the valuation of the
Association as part of the Conversion, has advised the Company that they
satisfy all requirements for an appraiser set forth in the Conversion
Regulations.
(j) The accountants who certified First Federal and the financial
statements and supporting schedules of the Association included in the
Registration Statement have advised the
6
<PAGE>
Company that they are independent public accountants within the meaning of
the Code of Ethics of the AICPA, and that such accountants are, with
respect to the Company, First Federal and the Association, independent
certified public accountants as required by the 1933 Act and the 1933 Act
Regulations.
(k) The consolidated financial statements and the related notes
thereto included in the Registration Statement and the Prospectus present
fairly the financial position of each of (i) the Company, its consolidated
subsidiaries and the Association and except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis; and the supporting schedules and tables included in the
Registration Statement present fairly the information required to be stated
therein.
(l) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated
therein (A) there has been no material adverse change in the financial
condition, results of operations or business affairs of the Company, its
subsidiaries or the Association whether or not arising in the ordinary
course of business, and (B) except for transactions specifically referred
to or contemplated in the Prospectus, there have been no transactions
entered into by the Company, its subsidiaries or the Association other than
those in the ordinary course of business, which are material with respect
to the Company and its subsidiaries considered as one enterprise.
(m) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus; and the Company is
duly qualified as a foreign corporation to transact business in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse effect on
the financial condition, results of operations or business affairs of the
Company and its subsidiaries considered as one enterprise.
(n) Upon consummation of the Conversion, the authorized, issued and
outstanding capital stock of the Company will be within the range set forth
in the Prospectus under "Capitalization" (except for subsequent issuances,
if any, pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectus); no shares of Common Stock have been or will
be issued and outstanding prior to the Closing Time referred to in Section
2; at the time of Conversion, the Securities will have been duly authorized
for issuance and, when issued and delivered by the Company pursuant to the
Plan against payment of the consideration calculated as set forth in the
Plan, will be duly and validly issued and fully paid and non-assessable;
the terms and provisions of the Common Stock and the capital stock of the
Company conform to all statements relating thereto contained in the
Prospectus; and the issuance of the Securities is not subject to preemptive
or other similar rights.
7
<PAGE>
(o) The Association, as of the date hereof, is a federally chartered
savings association in mutual form with full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus; the Company, its subsidiaries and the
Association have obtained all licenses, permits and other governmental
authorizations currently required for the conduct of their respective
businesses or required for the conduct of their respective businesses as
contemplated by the Conversion Application, except where the failure to
obtain such licenses, permits or other governmental authorizations would
not have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, its subsidiaries, or the
Association considered as one enterprise; all such licenses, permits and
other governmental authorizations are in full force and effect and the
Company, its subsidiaries and the Association are in all material respects
in compliance therewith; neither the Company, its subsidiaries, nor the
Association has received notice of any proceeding or action relating to the
revocation or modification of any such license, permit or other
governmental authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a
material adverse effect on the financial condition, results of operations
or business affairs of the Company, its subsidiaries, or the Association,
considered as one enterprise; and the Association is in good standing under
the laws of the United States and is qualified as a foreign corporation in
each jurisdiction in which the failure to so qualify would have a material
adverse effect on the financial condition, results of operations or
business affairs of the Company, its subsidiaries, or the Association,
considered as one enterprise.
(p) The deposit accounts of the Association are insured by the FDIC
and upon consummation of the Conversion, the liquidation account for the
benefit of the Association's eligible account holders and supplemental
eligible account holders will be duly established in accordance with the
requirements of the Conversion Regulations.
(q) No shares of Association common stock have been or will be issued
prior to the Closing Time referred to in Section 2; and as of Closing Time
referred to in Section 2, all of the issued and outstanding capital stock
of the Association will be duly authorized, validly issued and fully paid
and nonassessable, and all such capital stock will be owned beneficially
and of record by the Company free and clear of any mortgage, pledge, lien,
encumbrance or claim.
(r) The Company and the Association have taken all corporate action
necessary for them to execute, deliver and perform this Agreement, and this
Agreement has been duly executed and delivered by, and is the valid and
binding agreement of, the Company and the Association, enforceable in
accordance with its terms, except as may be limited by bankruptcy,
insolvency or other laws affecting the enforceability of the rights of
creditors generally and judicial limitations on the right of specific
performance and except as the enforceability of indemnification and
contribution provisions may be limited by applicable securities laws.
(s) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the
Closing Time, except as otherwise may be indicated or contemplated in the
Prospectus, neither the Company nor the Association
8
<PAGE>
nor any of their respective subsidiaries will have (A) issued any
securities or incurred any material liability or obligation, direct or
contingent, or borrowed money, except borrowings in the ordinary course of
business from the same or similar sources and in similar amounts as
indicated in the Prospectus, or (B) entered into any transaction or series
of transactions which is material in light of the business of the Company,
the Association and its subsidiaries, taken as a whole.
(t) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except for the approval of the OTS
of the Conversion Merger under the provisions of the FDIA and the HOLA, the
declaration of effectiveness of any required post-effective amendment to
the Registration Statement by the Commission and approval thereof by the
OTS, the issuance of the federal stock charter by the OTS and as may be
required under the securities law of various jurisdictions.
(u) Neither the Company, its subsidiaries, nor the Association, is in
violation of its charter or bylaws; and neither the Company, its
subsidiaries, nor the Association is in default (nor has any event occurred
which, with notice or lapse of time or both, would constitute a default) in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which the Company, its subsidiaries, or
the Association is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company, its subsidiaries, or
the Association is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of the Company, its
subsidiaries, and the Association considered as one enterprise.
(v) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate action and do not and will not
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company, its subsidiaries, or the Association pursuant to,
any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, its subsidiaries, or the Association is a
party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any of its subsidiaries is subject,
except for such defaults that would not, individually or in the aggregate,
have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, its subsidiaries, or the
Association considered as one enterprise; nor will such action result in
any violation of the provisions of the charter or bylaws of the Company,
its subsidiaries, or the Association; nor will such action result in any
violation of any applicable law, administrative regulation or
administrative or court decree except for violations that would not impair
the ability of the Company and the Association to execute, deliver and
perform under this Agreement or consummate the transactions contemplated
herein and except for violations that would not, individually or in the
aggregate, have a material adverse effect on the financial condition,
results of operations or business of the Company, its subsidiaries, and the
Association considered as one enterprise.
9
<PAGE>
(w) No labor dispute with the employees of the Company, its
subsidiaries, or the Association exists or, to the knowledge of the Company
or the Association, is imminent.
(x) The Company, the Association and its subsidiaries have good and
marketable title to all properties and assets for which ownership is
material to the business of the Company, its subsidiaries, or the
Association and to those properties and assets described in the Prospectus
as owned by them, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Prospectus or are not
material in relation to the business of the Company, its subsidiaries, or
the Association as one enterprise; and all of the leases and subleases
material to the business of the Company, its subsidiaries, or the
Association under which the Company, its subsidiaries, or the Association
hold properties, including those described in the Prospectus, are valid and
binding agreements of the Company, its subsidiaries and the Association
enforceable in accordance with their terms.
(y) The Company, its subsidiaries and the Association are not in
violation of any directive from the OTS or the FDIC to make any material
change in the method of conducting their respective businesses; the
Association, has conducted and is conducting its business so as to comply
in all material respects with all applicable statutes, regulations and
administrative and court decrees (including, without limitation, all
regulations, decisions, directives and orders of the OTS or the FDIC).
(z) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company or the Association, threatened, against or
affecting the Company, its subsidiaries, or the Association which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might result in any material adverse change in
the financial condition, results of operations or business affairs of the
Company, its subsidiaries, or the Association considered as one enterprise,
or which might materially and adversely affect the consummation of the
Conversion; all pending legal or governmental proceedings to which the
Company, its subsidiaries, or the Association is a party or of which any of
their respective property or assets is the subject which are not described
in the Registration Statement, including ordinary routine litigation
incidental to the business, are considered in the aggregate not material;
and there are no contracts or documents of the Company or its subsidiaries
which are required to be filed as exhibits to the Registration Statement or
the Conversion Application which have not been so filed.
(aa) The Association has obtained an opinion of its counsel, Silver,
Freedman & Taff, L.L.P., with respect to the legality of the Securities to
be issued and the federal income tax consequences of the Conversion and the
opinion of Grant Thornton, LLP as to Kansas tax matters, copies of which
are filed as exhibits to the Registration Statement; all material aspects
of the aforesaid opinions are accurately summarized in the Prospectus; the
facts and representations upon which such opinions are based are truthful,
accurate and complete in all material respects; and neither the Association
nor the Company has taken any action inconsistent therewith.
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(bb) The Company is not required to be registered under the Investment
Company Act of 1940, as amended.
(cc) All of the loans represented as assets on the most recent
financial statements or selected financial information of the Association
included in the Prospectus meet or are exempt from all requirements of
federal, state or local law pertaining to lending, including without
limitation truth in lending (including the requirements of Regulations Z
and 12 C.F.R. Part 226 and Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit opportunity and all
disclosure laws applicable to such loans, except for violations which, if
asserted, would not result in a material adverse effect on the financial
condition, results of operations or business of the Company, its
subsidiaries and the Association considered as one enterprise.
(dd) To the knowledge of the Company and the Association, none of the
Company, the Association or employees of the Association has made any
payment of funds of the Company or the Association as a loan for the
purchase of the Common Stock or made any other payment of funds prohibited
by law, and no funds have been set aside to be used for any payment
prohibited by law.
(ee) The Company, its subsidiaries and the Association are in
compliance in all material respects with the applicable financial
recordkeeping and reporting requirements of the Currency and Foreign
Transaction Reporting Act of 1970, as amended, and the rules and
regulations thereunder.
(ff) Neither the Company, its subsidiaries, nor the Association, nor
any properties owned or operated by the Company, its subsidiaries, or the
Association is in violation of or liable under any Environmental Law (as
defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse effect
on the financial condition, results of operations or business affairs of
the Company, its subsidiaries, or the Association considered as one
enterprise. There are no actions, suits or proceedings, or demands, claims,
notices or investigations (including, without limitation, notices, demand
letters or requests for information from any environmental agency)
instituted or pending, or to the knowledge of the Company or the
Association, threatened, relating to the liability of any property owned or
operated by the Company, its subsidiaries, or the Association, under any
Environmental Law. For purposes of this subsection, the term "Environmental
Law" means any federal, state, local or foreign law, statute, ordinance,
rule, regulation, code, license, permit, authorization, approval, consent,
order, judgment, decree, injunction or agreement with any regulatory
authority relating to (i) the protection, preservation or restoration of
the environment (including, without limitation, air, water, vapor, surface
water, groundwater, drinking water supply, surface soil, subsurface soil,
plant and animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of any substance
presently listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, whether by type or by
quantity, including any material containing any such substance as a
component.
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(gg) The Company, its subsidiaries and the Association have filed all
federal income and state and local franchise tax returns required to be
filed and have made timely payments of all taxes shown as due and payable
in respect of such returns, and no deficiency has been asserted with
respect thereto by any taxing authority.
(hh) The Company has received approval to have the Securities quoted
on the National Association of Securities Dealers' Automated Quotation
Stock Market ("Nasdaq National Market") effective as of the Closing Time.
Section 5. Representations and Warranties of Trident.
(a) Trident represents and warrants to the Company and the Association
that:
(i) Trident Securities, Inc. is a corporation and is validly
existing in good standing under the laws of the State of North
Carolina with full power and authority to provide the services to be
furnished to the Association and the Company hereunder.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of Trident,
and this Agreement has been duly and validly executed and delivered by
Trident and is the legal, valid and binding agreement of Trident,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting the enforceability of
the rights of creditors generally and judicial limitations on the
right of specific performance and except as the enforceability of
indemnification and contribution provisions may be limited by
applicable securities laws.
(iii) Each of Trident and its employees, agents and
representatives who shall perform any of the services hereunder shall
be duly authorized and empowered, and shall have all licenses,
approvals and permits necessary to perform such services.
(iv) No approval of any regulatory or supervisory or other public
authority is required in connection with Trident's execution and
delivery of this Agreement, except as may have been received.
(v) There is no suit or proceeding or charge or action before or
by any court, regulatory authority or government agency or body or, to
the best knowledge of Trident, pending or threatened, which might
materially adversely affect Trident's performance under this
Agreement.
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Section 5.1 Covenants of the Company and the Association. The Company and
the Association hereby jointly and severally covenant with Trident as follows:
(a) The Company will not, at any time after the date the Registration
Statement is declared effective, file any amendment or supplement to the
Registration Statement without providing Trident and its counsel an
opportunity to review such amendment or supplement or file any amendment or
supplement to which amendment or supplement Trident or its counsel shall
reasonably object.
(b) The Association will not, at any time after the Conversion
Application is approved by the OTS, file any amendment or supplement to
such Conversion Application without providing Trident and its counsel an
opportunity to review such amendment or supplement or file any amendment or
supplement to which amendment or supplement Trident or its counsel shall
reasonably object.
(c) The Company and the Association will use their best efforts to
cause any post-effective amendment to the Registration Statement to be
declared effective by the Commission and any post-effective amendment to
the Conversion Application to be approved by the OTS and will immediately
upon receipt of any information concerning the events listed below notify
Trident: (i) when the Registration Statement, as amended, has become
effective; (ii) when the Conversion Application, as amended, has been
approved by the OTS; (iii) of any comments from the Commission or the OTS
or any other governmental entity with respect to the Conversion or the
transactions contemplated by this Agreement; (iv) of the request by the
Commission or the OTS or any other governmental entity for any amendment or
supplement to the Registration Statement, the Conversion Application or for
additional information; (v) of the issuance by the Commission or the OTS or
any other governmental entity of any order or other action suspending the
Subscription and Community Offering or the use of the Registration
Statement or the Prospectus or any other filing of the Company or the
Association under the Conversion Regulations, or other applicable law, or
the threat of any such action; (vi) the issuance by the Commission or OTS
of any stop order suspending the effectiveness of the Registration
Statement or the approval of the Conversion Application, or of the
initiation or threat of initiation or threat of any proceedings for any
such purpose; or (vii) of the occurrence of any event mentioned in
paragraph (f) below. The Company and the Association will make every
reasonable effort (i) to prevent the issuance by the Commission or the OTS
of any such order and, if any such order shall at any time be issued, (ii)
to obtain the lifting thereof at the earliest possible time.
(d) The Company and the Association will deliver to Trident and to its
counsel two conformed copies of the Registration Statement and the
Conversion Application, as originally filed and of each amendment or
supplement thereto, including all exhibits. Further, the Company and the
Association will deliver such additional copies of the foregoing documents
to counsel to Trident as may be required for any NASD filings.
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(e) The Company and the Association will furnish to Trident, from time
to time during the period when the Prospectus (or any later prospectus
related to this offering) is required to be delivered under the 1933 Act or
the Securities Exchange Act of 1934, (the "1934 Act"), such number of
copies of such Prospectus (as amended or supplemented) as Trident may
reasonably request for the purposes contemplated by the 1933 Act, the 1933
Act Regulations, the 1934 Act or the rules and regulations promulgated
under the 1934 Act (the "1934 Act Regulations"). The Company authorizes
Trident to use the Prospectus (as amended or supplemented, if amended or
supplemented) in any lawful manner contemplated by the Plan in connection
with the sale of the Shares by Trident.
(f) The Company and the Association will comply with any and all
material terms, conditions, requirements and provisions with respect to the
Conversion and Merger imposed by the Commission, the OTS, the Conversion
Regulations or the HOLA and regulations promulgated thereunder, and by the
1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act
Regulations to be complied with prior to or subsequent to the Closing Date
and when the Prospectus is required to be delivered, the Company and the
Association will comply, at their own expense, with all material
requirements imposed upon them by the Commission, the OTS, the Conversion
Regulations, the HOLA, and by the 1933 Act, the 1933 Act Regulations, the
1934 Act and the 1934 Act Regulations, in each case as from time to time in
force, so far as necessary to permit the continuance of sales or dealing in
shares of Common Stock during such period in accordance with the provisions
hereof and the Prospectus.
(g) If, at any time during the period when the Prospectus relating to
the Shares is required to be delivered, any event relating to or affecting
the Company, the Association or a subsidiary shall occur, as a result of
which it is necessary or appropriate, in the opinion of counsel for the
Company and the Association to amend or supplement the Registration
Statement or Prospectus in order to make the Registration Statement or
Prospectus not misleading in light of the circumstances existing at the
time the Prospectus is delivered to a purchaser, the Company and the
Association will, at their expense, prepare and file with the Commission
and the OTS, and furnish to Trident a reasonable number of copies of an
amendment or amendments of, or a supplement or supplements to, the
Registration Statement and Prospectus (in form and substance satisfactory
to Trident and its counsel after a reasonable time for review) which will
amend or supplement the Registration Statement and Prospectus so that as
amended or supplemented it will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, not misleading. For the purpose
of this Agreement, the Company and the Association each will timely furnish
to Trident such information with respect to itself as Trident may from time
to time reasonably request.
(h) At the Closing Date referred to in Section 2, the Plan and Merger
Agreement will have been adopted by the Board of Directors of the Company
and the Board of Directors of the Association and the offer and sale of the
Shares and exchange of Exchange Shares will have been conducted in all
material respects in accordance with the Plan, Merger Agreement, the
Conversion Regulations, and all other applicable laws, regulations,
decisions and orders, including all terms, conditions, requirements and
provisions precedent to the Conversion and Merger imposed upon the Company
or the Association by the Commission, the OTS, or any other regulatory
authority and in the manner described in the Prospectus.
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(i) Upon completion of the sale by the Company of the Shares
contemplated by the Prospectus, (i) the Association will be converted and
merged with and into First Federal pursuant to the Plan and Merger
Agreement, and (ii) the Company will have no direct subsidiaries other than
First Federal. The Conversion will have been effected in all material
respects in accordance with all applicable statutes, regulations, decisions
and orders; and, except with respect to the filing of certain post-sale,
post-Conversion reports, and documents in compliance with the 1933 Act
Regulations, and all terms, conditions, requirements and provisions with
respect to the Conversion (except those that are conditions subsequent)
imposed by the Commission and the OTS, if any, will have been complied with
by the Company and the Association in all material respects or appropriate
waivers will have been obtained and all material notice and waiting periods
will have been satisfied, waived or elapsed.
(j) The Company and the Association will take all necessary actions,
in cooperation with Trident, and furnish to whomever Trident may direct,
such information as may be required to qualify or register the Shares for
offering and sale by the Company or to exempt such Shares from
registration, or to exempt the Company as a broker-dealer and its officers,
directors and employees as broker-dealers or agents under the applicable
securities or blue sky laws of such jurisdictions in which the Shares are
to be offered and sold as Trident and the Company and the Association may
reasonably agree upon; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify
to do business in any jurisdiction in which it is not so qualified. In each
jurisdiction where any of the Shares shall have been qualified or
registered as above provided, the Company will make and file such
statements and reports in each fiscal period as are or may be required by
the laws of such jurisdiction.
(k) The liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders will be duly established
and maintained in accordance with the requirements of the OTS.
(l) The Company and the Association will not sell or issue, contract
to sell or otherwise dispose of, for a period of 180 days after the Closing
Date, without Trident's prior written consent, any shares of Common Stock
other than the Shares or other than in connection with any plan or
arrangement described in the Prospectus.
(m) The Company shall register its Common Stock under Section 12(g) of
the 1934 Act prior to the consummation of the Subscription and Community
Offering pursuant to the Plan and shall request that such registration be
effective no later than upon completion of the Conversion. The Company
shall maintain the effectiveness of such registration for not less than
three (3) years or such shorter period as may be required by the OTS.
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<PAGE>
(n) During the period during which the Company's Common Stock is
registered under the 1934 Act or for three years from the date hereof,
whichever period is greater, the Company will furnish to its stockholders
as soon as practicable after the end of each fiscal year an annual report
of the Company (including a consolidated balance sheet and statements of
consolidated income, stockholders' equity and cash flows of the Company and
its subsidiaries as at the end of and for such year, certified by
independent public accountants in accordance with Regulation S-X under the
1933 Act and the 1934 Act).
(o) During the period of three years from the date hereof, the Company
will furnish to Trident: (i) as soon as practicable after such information
is publicly available, a copy of each report of the Company furnished to or
filed with the Commission under the 1934 Act or any national securities
exchange or system on which any class of securities of the Company is
listed or quoted (including, but not limited to, reports on Forms 10-K,
10-Q and 8-K and all proxy statements and annual reports to stockholders);
(ii) a copy of each other non-confidential report of the Company mailed to
its stockholders or filed with the Commission or OTS, or any other
supervisory or regulatory authority or any national securities exchange or
system on which any class of securities of the Company is listed or quoted,
each press release and material news items and additional documents and
information with respect to the Company or the Association as Trident may
reasonably request; and (iii) from time to time, such other nonconfidential
information concerning the Company or the Association as Trident may
reasonably request.
(p) The Company and the Association will use the net proceeds from the
sale of the Shares in the manner set forth in the Prospectus under the
caption "Use of Proceeds."
(q) Other than as permitted by the Conversion Regulations, HOLA, the
1933 Act, the 1933 Act Regulations, and the laws of any state in which the
Shares are registered or qualified for sale or exempt from registration,
neither the Company nor the Association will distribute any prospectus or
other offering material in connection with the offer and sale of the
Shares.
(r) The Company will use its best efforts to (i) encourage and assist
Trident to establish and maintain a market for the Shares and (ii) list the
Shares on a national or regional securities exchange or on the Nasdaq
National Market of the Nasdaq Stock Market effective on or prior to the
Closing Date.
(s) First Federal will maintain appropriate arrangements for
depositing all funds received from persons mailing subscriptions for or
orders to purchase Shares in the Subscription and Community Offering on an
interest bearing basis at the rate described in the Prospectus until the
Closing Date and satisfaction of all conditions precedent to the release of
First Federal's
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obligation to refund payments received from persons subscribing for or
ordering Shares in the Subscription and Community Offering in accordance
with the Plan and as described in the Prospectus or until refunds of such
funds have been made to the persons entitled thereto or withdrawal
authorizations cancelled in accordance with the Plan and as described in
the Prospectus. First Federal will maintain such records of all funds
received to permit the funds of each subscriber to be separately insured by
the FDIC (to the maximum extent allowable) and to enable First Federal to
make the appropriate refunds of such funds in the event that such refunds
are required to be made in accordance with the Plan and as described in the
Prospectus.
(t) The Company and the Association will take such actions and furnish
such information as are reasonably requested by Trident in order for
Trident to ensure compliance with the NASD's "Interpretation Relating to
Free Riding and Withholding."
(u) The Association will not amend the Plan of Conversion without
notifying Trident prior thereto.
(v) The Company shall assist Trident, if necessary, in connection with
the allocation of the Shares in the event of an oversubscription and shall
provide Trident with any information necessary in allocating the Shares in
such event.
(w) Prior to the Closing Date, the Company and the Association will
inform Trident of any event or circumstances of which it is aware as a
result of which the Registration Statement, the Conversion Application
and/or Prospectus, as then amended or supplemented, would contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading.
Section 5.2 Covenants of Trident. Trident hereby covenants with the Company
and the Association as follows:
(a) During the period when the Prospectus is delivered, Trident will
comply, in all material respects and at its own expense, with all
requirements imposed upon it by the Commission and the NASD, including to
the extent applicable, by the 1933 Act and the 1934 Act and the rules and
regulations promulgated thereunder.
(b) Trident will distribute copies of the Prospectus and Sales
Information in connection with the sales of the Common Stock only in
accordance with NASD and SEC regulations, the 1933 Act and the rules and
regulations promulgated thereunder.
Section 6. Payment of Expenses. Whether or not the Conversion is completed
or the sale of the Shares by the Company is consummated, the Company and the
Association jointly and severally agree to pay or reimburse Trident for: (a) all
filing fees in connection with all filings with the NASD; (b) any stock issue or
transfer taxes which may be payable with respect to the sale of the Shares; (c)
all reasonable expenses of the Conversion, including but not limited to, the
Company's and the Association's attorneys' fees, transfer agent, registrar and
other agent charges, fees relating to auditing and accounting or other advisors
and costs of printing all documents necessary in connection with the Conversion;
and (d) Trident's attorneys' fees. In the event the Company is unable to sell a
minimum of Shares with an aggregate value of $1,530,000 or the Conversion is
terminated or otherwise abandoned, the Company and the Association shall
reimburse Trident in accordance with Section 2 hereof.
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Section 7. Conditions to Trident's Obligations. Trident's obligations
hereunder, as to the Shares to be issued at the Closing Date, are subject, to
the extent not waived by Trident, to the condition that all representations and
warranties of the Company and the Association herein are, at and as of the
commencement of the Subscription and Community Offering and at and as of the
Closing Date, true and correct in all material respects, the condition that the
Company and the Association shall have performed all of their obligations
hereunder to be performed on or before such dates, and to the following further
conditions:
(a) At the Closing Date, the Company and the Association shall have
conducted the Merger Conversion in all material respects in accordance with
the Plan, Merger Agreement, the Conversion Regulations, and all other
applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Conversion imposed
upon them by the OTS.
(b) The Registration Statement has been declared effective by the
Commission, the Conversion Application approved by the OTS and Merger
Application approved by OTS not later than 5:30 p.m. on the date of this
Agreement, or with Trident's consent at a later time and date; and at the
Closing Date, the Holding Company Application shall have been approved by
the OTS and no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings
therefore initiated or threatened by the Commission, or any state authority
and no order or other action suspending the authorization of the Prospectus
or the consummation of the Conversion or Merger shall have been issued or
proceedings therefore initiated or, to the Company's or the Association's
knowledge threatened by the Commission, the OTS, or any other federal or
state authority.
(c) At the Closing Date, Trident shall have received:
(1) The favorable opinion, dated as of the Closing Date and
addressed to Trident and for its benefit, of Silver, Freedman & Taff,
special counsel for the Company and the Association, in form and
substance to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware and has full corporate power and authority to
own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus and
to enter into
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and perform its obligations under this Agreement. The Company is
duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction where it owns or leases
any material properties or conducts any material business, unless
the failure to so qualify would not have a material adverse
effect on the financial condition, results of operations or
business of the Company.
(ii) The Association is organized and is validly existing as
a federally chartered savings association under the laws of the
United States in mutual form of organization and upon the
Conversion will become a duly organized and validly existing
federally chartered savings association in capital stock form of
organization under the laws of the United States, in both
instances duly authorized to conduct its business and own its
property as described in the Registration Statement and
Prospectus.
(iii) The Association is a member of the FHLB-Topeka. The
Association is an insured depository institution under the
provisions of Section 4(a) of the FDI Act, as amended, and no
proceedings for the termination or revocation of such insurance
are, to the best of such counsel's knowledge, pending or
threatened; the description of the liquidation account as set
forth in the Prospectus under the caption "Effects on Depositors
and Borrowers of Neodesha" to the extent that such information
constitutes matters of law and legal conclusions has been
reviewed by such counsel and is accurate in all material
respects.
(iv) Upon consummation of the Conversion, the authorized,
issued and outstanding capital stock of the Company will be
within the range of aggregate values set forth in the Prospectus
under the caption "Capitalization," and except for presently
issued and outstanding shares of the Company as set forth under
the caption "Common Stock Prices and Dividends," no shares of
Common Stock have been issued prior to the Closing Date; at the
time of the Conversion, the Shares subscribed for pursuant to the
Subscription and Community Offering will have been duly and
validly authorized for issuance, and when issued and delivered by
the Company pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan and the
Prospectus, will be duly and validly issued and fully paid and
non-assessable; the issuance of the Shares is not subject to
statutory preemptive rights (except for Subscription Rights
granted pursuant to the Plan) and the terms and provisions of the
Shares conform in all material respects to the description
thereof contained in the Prospectus. To the best of such
counsel's knowledge, upon the issuance of the Shares, good title
to the Shares will be transferred from the Company to the
purchasers thereof against payment therefor, subject to such
claims as may be asserted against the purchasers thereof by
third-party claimants.
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(v) The OTS has duly approved the Conversion Application
and, to the best of such counsel's knowledge, no action is
pending or threatened respecting the OTS's approval of the
Conversion Application; the Conversion Application complies as to
form in all material respects with the Conversion Regulations of
the OTS.
(vi) The execution and delivery of the Agreement and the
consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary action on the part
of the Company and the Association; and the Agreement is a valid
and binding obligation of the Company and the Association,
enforceable in accordance with its terms, except as the
enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, conservatorship,
receivership or, other similar laws now or hereafter in effect
affecting the enforceability of the rights of creditors generally
or the rights of creditors of federally chartered savings
associations and their holding companies, (ii) general principles
of equity, (iii) laws relating to the safety and soundness of
insured depository institutions and their holding companies; and
(iv) applicable law with respect to the indemnification and/or
contribution provisions contained herein, (regardless of whether
such enforceability is considered in a proceeding in equity or at
law), including, without limitation, Sections 23A and 23B of the
Federal Reserve Act; and such action will not result in any
violation of the provisions of the certificate of incorporation,
bylaws or charter, as applicable, of the Company or the
Association or any applicable federal law, act, regulation
(except that no opinion need be rendered with respect to the
securities or blue sky laws of various jurisdictions or the rules
and regulations of the NASD and/or the National Market System of
the Nasdaq Stock Market).
(vii) The Plan has been duly adopted by the required vote of
the directors of the Company and the Directors of the Association
and, based upon the certificate of the inspector of election, by
the depositors and borrowers of the Association.
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(viii) Subject to the satisfaction of the conditions to the
OTS's approval of the Conversion, the Company and the Association
are not required to receive any further approval, authorization,
consent or other order of, register with, or submit a notice to
any other federal agency in connection with the execution and
delivery of the Agreement, the issuance of the Shares and the
consummation of the Conversion, except as may be required under
the securities or blue sky laws of various jurisdictions (as to
which no opinion need be rendered), except as may be required
under the rules and regulations of the NASD and/or the National
Market System of the Nasdaq Stock Market (as to which no opinion
need be rendered) and except for the registration of the Company
as a savings association holding company.
(ix) The Registration Statement is effective under the 1933
Act and no stop order suspending the effectiveness has been
issued under the 1933 Act or, to the best of such counsel's
knowledge, proceedings therefor pending or threatened by the
Commission. (x) At the time that the Registration Statement
became effective, (i) the Registration Statement (as amended or
supplemented, if so amended or supplemented) (other than the
financial statements, the notes thereto and other tabular,
financial, statistical and appraisal data included therein or
omitted therefrom, as to which no opinion need be rendered)
complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations, and
(ii) the Prospectus (other than the financial statements, the
notes thereto and other tabular, financial, statistical and
appraisal data included therein or omitted therefrom, as to which
no opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xi) The terms and provisions of the Shares of the Company
conform, in all material respects, to the description thereof
contained in the Registration Statement and Prospectus, and the
form of certificate used to evidence the Shares complies with
applicable law.
(xii) The descriptions in the Conversion Application, the
Registration Statement and the Prospectus of the contracts,
indentures, mortgages, loan agreements, notes, leases or other
instruments filed as exhibits thereto are accurate in all
material respects and fairly present the information required to
be shown.
(xiii) To the best of such counsel's knowledge the Company
and the Association have conducted the Conversion in all material
respects in accordance with applicable requirements of the Plan,
the Conversion Regulations, and all other applicable regulations,
decisions and orders thereunder, including all material
applicable terms, conditions, requirements and conditions
precedent to the Conversion imposed upon the Company or the
Association by the OTS and, to the best of such counsel's
knowledge, no person has sought to obtain review of the final
action of the OTS in approving the Plan.
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(xiv) To the best of such counsel's knowledge, the Company,
its subsidiaries, and the Association have obtained all material
federal licenses, permits and other Federal governmental
authorizations currently required under the HOLA and all
applicable rules and regulations promulgated thereunder for the
conduct of their businesses and to the best of such counsel's
knowledge all such licenses, permits and other governmental
authorizations are in full force and effect, and the Company, its
subsidiaries, and the Association are in all material respects
complying therewith, except whether the failure to have such
licenses, permits and other governmental authorizations or the
failure to be in compliance therewith would not have a material
adverse affect on the business or operations of the Association,
the Company and its subsidiaries, taken as a whole.
(xv) The Association's charter and bylaws in mutual form
and, upon the completion of the Conversion, in stock form, comply
in all material respects with the OTS.
(xvi) To the best of such counsel's knowledge, neither the
Company nor the Association is in violation of any directive from
the OTS to make any material change in the method of conducting
its respective business.
(xvii) The information in the Prospectus under the captions
"Regulation," "The Merger Conversion," "Restrictions on
Acquisitions of the Company" and "Description of Capital Stock,"
to the extent that such information constitutes matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by such counsel and is correct in
all material respects. The description of the Conversion process
under the caption "The Merger Conversion," in the Prospectus has
been reviewed by such counsel and is in all material respects
correct. The discussion of Federal statutes or regulations
described or referred to in the Prospectus are, in all material
respects, accurate summaries. The information regarding the
federal tax opinion under the caption "Tax Consequences of Merger
Conversion" has been reviewed by such counsel and constitutes an
accurate summary of the opinion rendered by such counsel to the
Company and the Association with respect to such matters subject
to the qualifications and limitations noted therein.
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(xviii) The Association has the power and authority to
consummate the transactions contemplated by the Merger Agreement.
(xix) The Merger Agreement has been duly authorized,
executed and delivered by the Association and constitutes the
valid and binding obligation of the Association enforceable in
accordance with its terms subject to (i) applicable bankruptcy,
insolvency and similar laws affecting creditors' rights and
remedies generally or the rights of creditors of federal savings
associations, (ii) as to enforceability, general principles of
equity, whether applied in a court of law or a court of equity,
and (iii) laws relating to the safety and soundness of insured
depository institutions.
(xx) To the best knowledge of such counsel all corporate
acts and other proceedings required to be taken by or on the part
of the Company and the Association to consummate the transactions
contemplated by the Merger Agreement have been properly taken;
neither the execution and delivery of the Merger Agreement, nor
the consummation of the transactions contemplated thereby, with
and without the giving of notice or the lapse of time, or both,
will violate any provision of the Charter or Bylaws of the
Association.
(xxi) Except as disclosed in such opinion, to the knowledge
of such counsel there are no actions, suits, proceedings or
investigations (public or private) of any nature pending or
threatened that challenge the validity or propriety of the
transactions contemplated by the Conversion or the Merger
Agreement or which seek or threaten to restrain, enjoin or
prohibit or to obtain substantial damages in connection with the
consummation of such transactions.
(xxii) All regulatory and governmental approvals and
consents which are necessary to be obtained by the Association
and its subsidiaries to permit the execution, delivery and
performance of the Conversion and the Merger Agreement have been
obtained.
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(xxiii) All conditions precedent to consummation of the
Conversion and the Merger have been satisfied, including but not
limited to those referenced in the Merger Agreement, all
statutory waiting periods with respect to all regulatory and
governmental approvals of the Acquisition have expired and there
are no facts or circumstances which would preclude the immediate
consummation of the Merger.
(2) The favorable opinion, dated as of the Closing Date, of
Elias, Matz, Tiernan & Herrick L.L.P., Trident's counsel, with respect
to such matters as Trident may reasonably require. Such opinion may
rely upon the opinions of counsel to the Company and the Association,
and as to matters of fact, upon certificates of officers and directors
of the Company and the Association delivered pursuant hereto or as
such counsel shall reasonably request.
(3) In giving their opinions required by subsections 1 and 2,
respectively, of this Section, Silver Freedman and Taff and Elias,
Matz, Tiernan & Herrick L.L.P. shall each additionally state that
nothing has come to their attention that would lead them to believe
that the Registration Statement (except for financial statements, the
notes thereto and other financial, statistical data and appraisal
included therein, as to which counsel need make no statement), at the
time it became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that the
Prospectus (except for financial statements and schedules and other
financial or statistical data included therein, as to which counsel
need make no statement), at the time the Registration Statement became
effective or at Closing Time, included an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading. In giving their opinions,
Silver Freedman and Taff and Elias, Matz, Tiernan & Herrick L.L.P. may
rely as to matters of fact on certificates of officers and directors
of the Company and the Association and certificates of public
officials.
(4) In giving their opinions Silver Freedman and Taff and Elias,
Matz, Tiernan & Herrick L.L.P. state that they have not independently
verified the information with respect to the Company, its
subsidiaries, or the Association contained in the Registration
Statement and the Prospectus. For purposes of opinions required
hereunder, no proceedings shall be deemed to be pending, no order or
stop order shall be deemed to be issued, and no action shall be deemed
to be instituted unless, in each case, either a director or executive
officer of the Company, its subsidiaries, or the Association, or the
firm giving the opinion shall have received a copy of such
proceedings, order, stop order or action. The opinions of Silver
Freedman and Taff and Elias, Matz, Tiernan & Herrick L.L.P. shall be
governed by the provisions of The Legal Opinion Accord (the "Accord")
of the American Bar Association Section of Business Law (1991) and the
term "actual knowledge" and "to the best of such counsel's knowledge"
as used herein shall have the meaning set forth in the Accord for the
term "Actual Knowledge."
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(d) At the Closing Date, Trident shall have received the Officers'
Certificates attached as Exhibit A.
(e) At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in
the financial condition, results of operations or business affairs of the
Company, its subsidiaries, or the Association, whether or not arising in
the ordinary course of business, and the Agent shall have received a
certificate of the Chief Executive Officer of the Company and of the
Association, the President of the Company and the Association and the chief
financial or chief accounting officer of the Company and of the
Association, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) there shall have been no
material transaction entered into by the Company or the Association from
the latest date as of which the financial condition of the Company or the
Association as set forth in the Registration Statement and the Prospectus
other than transactions referred to or contemplated therein and
transactions in the ordinary course of business and consistent with past
practices, (iii) neither the Company nor the Association shall have
received from the OTS any direction (oral or written) to make any material
change in the method of conducting its business with which it has not
complied (which direction, if any, shall have been disclosed to the Agent)
or which materially and adversely would affect the business, financial
condition or results of operations of the Company or the Association, (iv)
the representations and warranties in Section I hereof are true and correct
with the same force and effect as though expressly made at and as of the
Closing Time, (v) the Company and the Association have complied with all
agreements and satisfied all conditions on their part to be performed or
satisfied at or prior to Closing Time, (vi) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission, and (vii) no order suspending the Subscription and Community
Offerings or the authorization for final use of the Prospectus has been
issued and no proceedings for that purpose have been initiated or
threatened by the OTS and no person has sought to obtain regulatory or
judicial review of the action of the OTS in approving the Plan in
accordance with the Conversion Regulations.
(f) At the Closing Date, Trident shall receive a certificate of the
Chief Executive Officer and the Chief Financial Officer of the Company and
a certificate of the Chief Executive Officer and the Chief Financial
Officer of the Association, both dated as of such Closing Date, to the
effect that: (i) they have reviewed the Prospectus and, in their opinion,
at the time the Prospectus became authorized for final use, the Prospectus
did not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading; (ii) since
the date the Prospectus became authorized for final use, no material
adverse change in the financial condition, or in the earnings, capital,
properties or business of the Company and the Association has occurred and,
to their knowledge, no other event has occurred, which should have been set
forth in an amendment or supplement to the Prospectus which has not been so
set forth, and the conditions set forth in this Section 7 have been
satisfied; (iii) since the respective dates as of which information is
given in the
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Registration Statement and Prospectus, there has been no material adverse
change in the financial condition, results of operations or business
prospects of the Company or the Association, independently, or of the
Company and the Association considered as one enterprise, whether or not
arising in the ordinary course of business; (iv) the representations and
warranties in Section 4 are true and correct with the same force and effect
a though expressly made at and as of the Closing Date; (v) the Company and
the Association have complied in all material respects with all agreements
and satisfied all conditions on their part to be performed or satisfied at
or prior to the Closing Date and will comply in all material respects with
all obligations to be satisfied by them after Conversion; (vi) no stop
order suspending the effectiveness of the Registration Statement is pending
or, to the best knowledge of the Company or the Association, threatened by
the Commission or any state authority; (vii) no order suspending the
Subscription and Community Offering, the Conversion, the Merger of the
Association with and into First Federal or the effectiveness of the
Prospectus has been issued and no proceedings for that purpose are pending
or, to the best knowledge of the Company or the Association, threatened by
the OTS, the Commission or any other federal or state authority; and (viii)
to the best knowledge of the Company or the Association, no person has
sought to obtain review of the final action of the OTS approving the Plan.
(g) Prior to and at the Closing Date: (i) in the reasonable opinion of
Trident, there shall have been no material adverse change in the financial
condition, or in the earnings or business of the Association independently,
or of the Company, the Association and the Subsidiary considered as one
enterprise, from that as of the latest dates as of which such condition is
set forth in the Prospectus other than transactions referred to or
contemplated therein; (iii) the Company or the Association shall not have
received from the OTS any direction (oral or written) to make any material
change in the method of conducting their business with which it has not
complied (which direction, if any, shall have been disclosed to Trident) or
which materially and adversely would affect the business, operations or
financial condition or income of the Company and the Association considered
as one enterprise; (iv) the Company and the Association shall not have been
in material default (nor shall an event have occurred which, with notice or
lapse of time or both, would constitute a default) under any material
provision of any agreement or instrument relating to any outstanding
indebtedness; (v) no action, suit or proceedings, at law or in equity or
before or by any federal or state commission, board or other administrative
agency, shall be pending or, to the knowledge of the Company, or the
Association, threatened against the Company, or the Association or
affecting any of their properties wherein an unfavorable decision, ruling
or finding would materially and adversely affect the business operations,
financially condition or income of the Company, or the Association
considered as one enterprise; and (vi) the Shares have been qualified or
registered for offering and sale or exempted therefore under the securities
or blue sky laws of the jurisdictions as Trident shall have requested and
as agreed to by the Company and the Association.
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<PAGE>
(h) At the time of the execution of this Agreement, the Agent shall
have received from Grant Thornton LLP, independent auditors, a letter dated
such date, in form and substance satisfactory to the Agent, to the effect
that (i) they are independent public accountants with respect to the
Company, its subsidiaries and the Association within the meaning of the
Code of Ethics of the American Institute of Certified Public Accountants,
the 1933 Act and the 1933 Act Regulations and the Conversion Regulations;
(ii) it is their opinion that the consolidated financial statements and
supporting schedules included in the Registration Statement and covered by
their opinions therein comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations; (iii) based upon limited procedures set forth in detail in
such letter, nothing has come to their attention which causes them to
believe that (A) the unaudited financial statements and supporting
schedules of the Company and the Association included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or are not presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement
and the Prospectus, (B) the unaudited amounts set forth under "Selected
Financial Information" in the Prospectus were not determined on a basis
substantially consistent with that used in determining the corresponding
amounts in the audited financial statements included in the Registration
Statement, (C) at a specified date not more than five days prior to the
date of this Agreement, except as described in the Prospectus or in such
letter, there has been any increase in the consolidated long-term or
short-term debt of the Company and the Association or any decrease in total
deposits or net worth of the Company and the Association, in each case as
compared with the amounts shown in the March 31, 1998 balance sheet
included in the Registration Statement or (D) during the period from
December 31, 1997 to a specified date not more than five days prior to the
date of this Agreement, there were any decreases, as compared with the
corresponding period in the preceding year, in total interest income, net
interest income, net interest income after provision for loan losses,
income before income tax expense or net income of the Association and its
subsidiaries, except in all instances for increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may
occur; and (iv) in addition to the examination referred to in their
opinions and the limited procedures referred to in clause (iii) above, they
have carried out certain specified procedures, not constituting an audit,
with respect to certain amounts, percentages and financial information
which are included in the Registration Statement and Prospectus and which
are specified by the Agent, and have found such amounts, percentages and
financial information to be in agreement with the relevant accounting,
financial and other records of the Company, the Association and its
subsidiaries identified in such letter.
(i) At Closing Time, the Agent shall have received from Grant
Thornton, LLP a letter, dated as of Closing Time, to the effect that they
reaffirm the statements made in the letters furnished pursuant to
subsection (o) of this Section, except that the specified date referred to
shall be a date not more than five days prior to Closing time.
(j) All conditions precedent to consummation of the Merger have been
satisfied, including but not limited to those referenced in the Merger
Agreement, all statutory waiting periods with respect to all regulatory and
governmental approvals of the Merger have expired and there are no facts or
circumstances which would preclude the immediate consummation of the
Merger.
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(k) At Closing Time, the Securities shall have been approved for
listing on the Nasdaq Stock Market upon notice of issuance.
(l) At Closing Time, the Agent shall have received a letter from
Ferguson & Company, dated as of the Closing Time, confirming its appraisal.
(m) At Closing Time, counsel for the Agent shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated and related proceedings, or in order to evidence the
accuracy of any of the representations or warranties, or the fulfillment of
any of the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the
Agent and counsel for the Agent.
(n) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agent,
is so material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or orders, for
the sale of the Securities, and (ii) trading generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall not have been suspended,
and minimum or maximum prices for trading shall not have been fixed, or
maximum ranges for prices for securities have been required, by either of
said Exchanges or by order of the Commission or any other governmental
authority, and a banking moratorium shall not have been declared by either
Federal or New York authorities.
(o) At the Closing Date, Trident shall receive a letter from Grant
Thornton LLP, dated the Closing Date, addressed to Trident, confirming the
statements made by them in the letter delivered by it pursuant to
subsection (h) of this Section 7, the "specified date" referred to in
clause (iii)(C) of subsection (h) thereof to be a date specified in such
letter, which shall not be more than three business days prior to the
Closing Date.
(p) At the Closing Date, Trident shall receive a letter from Ferguson
& Company dated the date thereof and addressed to counsel for Trident, (i)
confirming that said firm is independent of the Company and the Association
and is experienced and expert in the area of corporate appraisals and (ii)
stating that its opinion of the aggregate pro forma market value of the
Company and the Association expressed in its Appraisal dated as of
____________, 1998, and most recently updated, remains in effect.
(q) The Company and the Association shall not have sustained since the
date of the latest audited financial statements included in the Prospectus
any material loss or interference with their businesses from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Registration Statement
and Prospectus.
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(r) At or prior to the Closing Date, Trident shall receive: (i) a copy
of the letter from the OTS approving the Conversion Application and
authorizing the use of the Prospectus; (ii) a copy of the order from the
Commission declaring the Registration Statement effective; (iii) a copy of
articles of combination endorsed by the OTS; (iv) certificates of good
standing from the State of Kansas evidencing the good standing of the
Company; and (v) a certificate of good standing from the State of Kansas
evidencing the good standing of the subsidiaries.
(s) Subsequent to the date hereof, there shall not have occurred any
of the following: (i) a suspension or limitation in trading in securities
generally on the New York Stock; Exchange or in the over-the-counter
market, or quotations halted generally on the Nasdaq National Market, or
minimum or maximum prices for trading have been fixed, or maximum ranges
for prices for securities have been required by either of such exchanges or
the NASD or by order of the Commission or any other governmental authority;
(ii) a general moratorium on the operations of commercial associations or
federal savings associations or a general moratorium on the withdrawal of
deposits from commercial associations or federal savings associations
declared by federal or Illinois authorities; (iii) the engagement by the
United States in hostilities which have resulted in the declaration, on or
after the date hereof, of a national emergency or war; or (iv) a material
decline in the price of equity or debt securities if the effect of such a
decline, in Trident's reasonable judgment, makes it impracticable or
inadvisable to proceed with the Subscription and Community Offering or the
delivery of the shares on the terms and in the manner contemplated in the
Registration Statement and Prospectus.
Section 8. Indemnification.
(a) The Company and the Association jointly and severally agree to
indemnify and hold harmless Trident, its officers, directors, agents,
servants and employees and each person, if any, who controls Trident within
the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act,
against any and all loss, liability, claim, damage or expense whatsoever
(including but not limited to reasonable and documented settlement
expenses), joint or several, that Trident or any of them may suffer or to
which Trident and any such persons may become subject under all applicable
federal or state laws or otherwise, and to promptly reimburse Trident and
any such
29
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persons upon written demand for any expense (including reasonable and
documented fees and disbursements of counsel) incurred by Trident or any of
them in connection with investigating, preparing or defending any actions,
proceedings or claims (whether commenced or threatened) to the extent such
losses, claims, damages, liabilities or actions: (i) arise out of or are
based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or any amendment or
supplement thereto), preliminary or final Prospectus (or any amendment or
supplement thereto), the Conversion Application (or any amendment or
supplement thereto), or any blue sky application or other instrument or
document executed by the Company or the Association or based upon written
information supplied by the Company or the Association filed in any state
or jurisdiction to register or qualify any or all of the Shares or to claim
an exemption therefrom, or provided to any state or jurisdiction to exempt
the Company as a broker-dealer or its officers, directors and employees as
broker-dealers or agents, under the securities laws thereof (collectively,
the "Blue Sky Application"), or any application or other document,
advertisement, oral statement or communication ("Sales Information")
prepared, made or executed by or on behalf of the Company or the
Association with their consent or based upon written or oral information
furnished by or on behalf of the Company or the Association, whether or not
filed in any jurisdiction, in order to qualify or register the Shares or to
claim an exemption therefrom under the securities laws thereof; (ii) arise
out of or based upon the omission or alleged omission to state in any of
the foregoing documents or information, a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or (iii) arise
from any theory of liability whatsoever relating to or arising from or
based upon the Registration Statement (or any amendment or supplement
thereto), preliminary or final Prospectus (or any amendment or supplement
thereto), the Conversion Application (or any amendment or supplement
thereto), any Blue Sky Application or Sales Information or other
documentation distributed in connection with the Conversion; provided,
however, that no indemnification is required under this paragraph (a) to
the extent such losses, claims, damages, liabilities or actions arise out
of or are based upon Trident's gross negligence, bad faith or willful
misconduct (as determined in a final judgment by a court of competent
jurisdiction) or upon any untrue material statement or alleged untrue
material statements in, or material omission or alleged material omission
from, the Registration Statement (or any amendment or supplement thereto),
preliminary or final Prospectus (or any amendment or supplement thereto),
the Conversion Application, any Blue Sky Application or Sales Information
made in reliance upon and in conformity with information furnished in
writing to the Company or the Association by Trident regarding Trident for
use in the Prospectus contained in the Conversion Application under the
caption "Marketing Arrangements", and provided further that such
indemnification shall be to the extent permitted by Sections 23A and 23B of
the Federal Reserve Act, as amended.
(b) Trident agrees to indemnify and hold harmless the Company and the
Association, their directors and officers and each person, if any, who
controls the Company or the Association within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the 1934 Act against any and all loss,
liability, claim, damage or expense whatsoever (including but not limited
to reasonable and documented settlement expenses), joint or several, which
it, or any of them, may
30
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suffer or to which it, or any of them may become subject under all
applicable federal and state laws or otherwise, and to promptly reimburse
the Company, the Association, and any such persons upon written demand for
any expenses (including reasonable and documented fees and disbursements of
counsel) incurred by it, or any of them, in connection with investigating,
preparing or defending any actions, proceedings or claims (whether
commenced or threatened) to the extent such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment or supplement thereto), the
Conversion Application (or any amendment or supplement thereto) or the
preliminary or final Prospectus (or any amendment or supplement thereto),
or are based upon the omission or alleged omission to state in any of the
foregoing documents a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that
Trident's obligations under this Section 8(b) shall exist only if and only
to the extent that such untrue statement or alleged untrue statement was
made in, or such material fact or alleged material fact was omitted from,
the Registration Statement (or any amendment or supplement thereto), the
preliminary or final Prospectus (or any amendment or supplement thereto) or
the Conversion Application (or any amendment or supplement thereto), any
Blue Sky Application or Sales Information in reliance upon and in
conformity with information furnished in writing to the Company or the
Association by Trident regarding Trident for use in the Prospectus
contained in the Conversion Application under the caption "Marketing
Arrangements."
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity
may be sought hereunder, but failure to so notify an indemnifying party
shall not relieve it from any liability which it may have on account of
this Section 8 or otherwise. An indemnifying party may participate at its
own expense in the defense of such action. In addition, if it so elects
within a reasonable time after receipt of such notice, an indemnifying
party, jointly with any other indemnifying parties receiving such notice,
may assumed defense of such action with counsel chosen by it and approved
by the indemnified parties that are defendants in such action, unless such
indemnified parties reasonably object to such assumption on the ground that
there may be legal defenses available to them that are different from or in
addition to those available to such indemnifying party. If an indemnifying
party assumes the defense of such action, the indemnifying parties shall
not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action, proceeding or
claim, other than reasonable costs of investigation. In no event shall the
indemnifying parties be liable for the reasonable fees and expenses of more
than one separate firm of attorneys (and any special counsel that said firm
may retain) for each indemnified party in connection with any one action,
proceeding or claim or separate but similar or related actions, proceeding
or claim or separate but similar or related actions, proceedings or claims
in the same jurisdiction arising out of the same general allegations or
circumstances.
(d) The agreements contained in this Section 8 and in Section 9 hereof
and the representations and warranties of the Company and the Association
set forth in this Agreement shall remain operative and in full force and
effect regardless of: (i) any investigation made by or on behalf of Trident
or its officers, directors or controlling persons, agents or employees or
by or on behalf of the Company or the Association or any officers,
directors or controlling persons, agents or employees of the Company or the
Association; (ii) delivery of and payment hereunder for the Shares; or
(iii) any termination of this Agreement.
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Section 9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 8 is due in accordance with its terms but is for any reason held by a
court to be unavailable from the Company, the Association or Trident, the
Company, the Association and Trident shall contribute to the aggregate losses,
claims, damages and liabilities (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action. suit or proceeding of any claims asserted, but after deducting any
contribution received by the Company, the Association or Trident from persons
other than the other party thereto, who may also be liable for contribution) in
such proportion so that Trident is responsible for that portion represented by
the percentage that the fees paid to Trident pursuant to Section 2 of this
Agreement (not including expenses) bears to the gross proceeds received by the
Company from the sale of the Shares in the Subscription and Community Offering
and the Company and the Association shall be responsible for the balance. If,
however, the allocation provided above is not permitted by applicable law or if
the indemnified party failed to give the notice required under Section 8 above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative fault of the Company and the Association on the one hand and
Trident on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions, proceedings
or claims in respect thereto), but also the relative benefits received by the
Company and the Association on the one hand and Trident on the other from the
Subscription and Community Offering (before deducting expenses). The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
and/or the Association on the one hand or Trident on the other and the parties'
relative intent, good faith, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Association and
Trident agree that it would not be just and equitable if contribution pursuant
to this Section 9 were determined by pro-rata allocation or by any other method
of allocation which does not take into account the equitable considerations
referred to above in this Section 9. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions, proceedings or claims in respect thereof) referred to above in this
Section 9 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action, proceeding or claim. It is expressly agreed that Trident shall
not be required to contribute any amount which in the aggregate exceeds the
amount paid (excluding reimbursable expenses) to Trident under this Agreement.
It is understood that the above stated limitation on Trident's liability for
contribution is essential to Trident and that Trident would not have entered
into this Agreement if such limitation had not been agreed to by the parties to
this Agreement. No person found guilty of any fraudulent misrepresentation
(within the meaning of Section ll(f) of the 1933 Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation. The obligations of the Company and the Association under this
Section 9 and under Section 8 shall be in addition to any liability which the
Company and the Association may otherwise have. For purposes of this Section 9,
each of Trident's, the Company's or the Association's officers and directors and
each person, if any, who controls Trident or the Company or the Association
within the meaning of the 1933 Act and the 1934 Act shall have the same rights
to contribution as Trident, the Company or the Association. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action,
suit, claim or proceeding against such party in respect of which a claim for
contribution may be made against another party under this Section 9, will notify
such party from whom contribution may be sought, but the omission to so notify
such party shall not relieve the party from whom contribution may be sought from
any other obligation it may have hereunder or otherwise than under this Section
9.
32
<PAGE>
Section 10. Survival of Agreements Representations and Indemnities. The
respective indemnities of the Company, the Association and Trident and the
representations and warranties and other statements of the Company, the
Association and Trident set forth in or made pursuant to this Agreement shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of Trident, the
Company, the Association or any controlling person referred to in Section 8
hereof, and shall survive the issuance of the Shares, and any legal
representative, successor or assign of Trident, the Company, the Association,
and any such controlling person shall be entitled to the benefit of the
respective agreements, indemnities, warranties and representations.
Section 11. Termination. Trident may terminate its obligations under this
Agreement by giving the notice indicated below in this Section 11 at any time
after this Agreement becomes effective as follows:
(a) In the event the Company fails to sell all of the Shares by
_________________, 1998, and in accordance with the provisions of the Plan
or as required by the Conversion Regulations, and applicable law, this
Agreement shall terminate upon refund by the Association to each person who
has subscribed for or ordered any of the Shares the full amount which it
may have received from such person, together with interest as provided in
the Prospectus, and no party to this Agreement shall have any obligation to
the other hereunder, except for payment by the Company and/or the
Association as set forth in Sections 2(a) and (d), 6, 8 and 9 hereof.
(b) If any of the conditions specified in Section 7 shall not have
been fulfilled when and as required by this Agreement unless waived in
writing, or by the Closing Date, this Agreement and all of Trident's
obligations hereunder may be cancelled by Trident by notifying the Company
and the Association of such cancellation in writing at any time at or prior
to the Closing Date, and any such cancellation shall be without liability
of any party to any other party except as otherwise provided in Sections 2,
6, 8 and 9 hereof.
(c) If Trident elects to terminate this Agreement with respect to it
as provided in this Section, the Company and the Association shall be
notified promptly by such Agent by telephone or telegram, confirmed by
letter.
The Company and the Association may terminate this Agreement with respect
to Trident in the event Trident is in material breach of the representations and
warranties or covenants contained in Section 5 and such breach has not been
cured after the Company and the Association have provided Trident with notice of
such breach.
This Agreement may also be terminated by mutual written consent of the
parties hereto.
33
<PAGE>
Section 12. Notices. All communications hereunder, except as herein
otherwise specifically provided, shall be mailed in writing and if sent to
Trident shall be mailed, delivered or telegraphed and confirmed to Trident
Securities, Inc., 4601 Six Forks Road Suite 400, Raleigh, North Carolina 27609,
Attention: Peter Tanenbaum (with a copy to Elias, Matz, Tiernan & Herrick, L. L.
P., 734 15th Street, N. W., Washington, D. C. 20005, Attention: Stephen M. Ege,
Esquire) and, if sent to the Company and the Association, shall be mailed,
delivered or telegraphed and confirmed to the Company and the Association at
First Independence Corporation, Myrtle & Sixth Streets, Post Office Drawer 947,
Independence, Kansas 6730, Attention: Larry G. Spencer (with a copy to Silver,
Freedman and Taff, 1100 New York Avenue, N. W., Washington, DC 20005-3934,
Attention: Martin L. Meyrowitz, P.C.).
Section 13. Parties. Unless the context otherwise requires, the term
"Company" shall mean First Independence Corporation and its subsidiaries, either
before or after consummation of the transaction contemplated by this Agreement.
The Company and the Association shall be entitled to act and rely on any
request, notice, consent, waiver or agreement purportedly given on behalf of
Trident when the same shall have been given by the undersigned. Trident shall be
entitled to act and rely on any request, notice, consent, waiver or agreement
purportedly given on behalf of the Company or the Association, when the same
shall have been given by the undersigned or any other officer of the Company or
the Association. This Agreement shall inure solely to the benefit of, and shall
be binding upon, Trident, the Company, the Association, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. It
is understood and agreed that this Agreement, including Exhibit A thereto, is
the exclusive agreement among the parties hereto, and supersedes any prior
agreement among the parties and may not be varied except in writing signed by
all the parties.
Section 14. Closing. The closing for the sale of the Shares shall take
place on the Closing Date at such location as mutually agreed upon by Trident
and the Company and the Association. At the closing, the Company and the
Association shall deliver to Trident in next day funds the commissions, fees and
expenses due and owing to Trident as set forth in Sections 2 and 6 hereof and
the opinions and certificates required hereby and other documents deemed
reasonably necessary by Trident shall be executed and delivered to effect the
sale of the Shares as contemplated hereby and pursuant to the terms of the
Prospectus.
Section 15. Partial Invalidity. In the event that any term, provision or
covenant herein or the application thereof to any circumstance or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstances
or situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
Section 16. Construction. This Agreement shall be construed in accordance
with the laws of the State of North Carolina.
34
<PAGE>
Section 17. Counterparts. This Agreement may be executed in separate
counterparts, each of which so executed and delivered shall be an original, but
all of which together shall constitute a binding agreement.
If the foregoing correctly sets forth the arrangement among the Company,
the Association and Trident, please indicate acceptance thereof in the space
provided below for that purpose, whereupon this letter and Trident's acceptance
shall constitute a binding agreement.
Very truly yours,
FIRST INDEPENDENCE CORPORATION NEODESHA SAVINGS AND LOAN ASSOCIATION
By: __________________________ By: __________________________
Larry G. Spencer Franklin Miller
Chairman and Chief President
Executive Officer
Accepted as of the date first above written
TRIDENT SECURITIES, INC.
By: __________________________
Peter Tanenbaum
If the foregoing correctly sets forth the arrangement among the Company,
the Association and Trident, please indicate acceptance thereof in the space
provided below for that purpose, whereupon this letter and Trident's acceptance
shall constitute a binding agreement.
Very truly yours,
FIRST INDEPENDENCE CORPORATION NEODESHA SAVINGS AND LOAN ASSOCIATION
By: __________________________ By: __________________________
Larry G. Spencer Franklin Miller
Chairman and Chief President
Executive Officer
Accepted as of the date first above written
TRIDENT SECURITIES, INC.
By: __________________________
Peter Tanenbaum
35
<PAGE>
Exhibit A
NEODESHA SAVINGS AND LOAN ASSOCIATION
OFFICER'S CERTIFICATE
The undersigned, _____________________, being the duly elected and serving
President of Neodesha Savings and Loan Association, a Federal savings and loan
associations, does hereby represent and warrant to Trident Securities, Inc.,
that the representations and warranties contained in Section 16 of the Agreement
and Plan of Merger and Reorganization, dated February 18, 1998, by and among
Neodesha Savings and Loan Association, FSA, a federally chartered mutual savings
and loan association, First Federal Savings and Loan Association of
Independence, a federally chartered stock savings and loan association ("First
Federal"), and First Independence Corporation, a Delaware corporation that owns
all of the issued and outstanding capital stock of First Federal, are true and
correct with the same force and effect as though expressly made as of the date
hereof.
The undersigned understands that the execution and delivery of this
Officer's Certificate is a condition to the Agency Agreement by and among
Trident Securities, Inc., First Independence Corporation and Neodesha Savings
and Loan Association, dated as of _________, 1998 ("Agency Agreement"), and that
Trident Securities, Inc., is carrying out its obligation under the terms of the
Agency Agreement in reliance upon, among other things, the representations and
warranties set forth in the Agreement and Plan of Merger and Reorganization.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ____ day
of__________, 1998.
NEODESHA SAVINGS AND LOAN ASSOCIATION
By: __________________________
President
36
<PAGE>
OFFICER'S CERTIFICATE
The undersigned,_________________________________, being the duly elected
and serving President of Neodesha Savings and Loan Association ("Neodesha"),
does hereby certify that:
(i) The consolidated financial statements and the related notes
thereto included in the Registration Statement and the Prospectus present
fairly the consolidated financial position of Neodesha at the respective
dates indicated and the results of operations, retained earnings and cash
flows for the periods specified and comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
Regulations and the Conversion Regulations; except as otherwise stated in
the Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis; and the supporting schedules and tables included in the
Registration Statement present fairly the information required to be stated
therein.
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein there has been no material adverse change in the financial
condition, results of operations or business affairs of Neodesha, whether
or not arising in the ordinary course of business.
(iii) Neodesha has been duly incorporated and is validly existing as a
federal savings and loan association with corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus; and Neodesha is duly qualified as a foreign
corporation to transact business in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the financial condition,
results of operations or business affairs of Neodesha.
(iv) All such licenses, permits and other governmental authorizations
of Neodesha are in full force and effect and Neodesha is in all material
respects in compliance therewith; Neodesha has not received notice of any
proceeding or action relating to the revocation or modification of any such
license, permit or other governmental authorization which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the financial condition, results of
operations or business affairs of Neodesha; and Neodesha is in good
standing under the laws of the United States.
(v) The deposit accounts of Neodesha are insured by the FDIC.
(vi) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the
Closing Time, except as otherwise may be indicated or contemplated in the
Prospectus, Neodesha will not have (A) issued any securities or incurred
any material liability or obligation, direct or contingent, or borrowed
money, except borrowings in the ordinary course of business from the same
or similar sources indicated in the Prospectus, or (B) entered into any
transaction or series of transactions which is material in light of the
business of Neodesha, excluding transactions in the ordinary course of
business and consistent with past practice or otherwise as indicated in the
Prospectus.
37
<PAGE>
(vii) Neodesha is not in violation of its charter or bylaws; and
Neodesha is not in default (nor has any event occurred which, with notice
or lapse of time, or both, would constitute a default) in the performance
or observance of any obligation, agreement, covenant or condition contained
in any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which Neodesha is a party or by which it or any of them may
be bound, or to which any of the property or assets of Neodesha is subject,
except for such defaults that would not, individually or in the aggregate,
have a material adverse effect on the financial condition, results of
operations or business of Neodesha.
(ix) No labor dispute with the employees of Neodesha exists or, to the
Neodesha knowledge of Neodesha, is imminent.
(x) Neodesha has good and marketable title to all properties and
assets for which ownership is material to the business of Neodesha and to
those properties and assets described in the Prospectus as owned by it,
free and clear of all liens, charges, encumbrances or restrictions, except
such as are described in the Prospectus or are not material in relation to
the business of Neodesha; and all of the leases and subleases material to
the business of Neodesha under which Neodesha holds properties, including
those described in the Prospectus, are valid and binding agreements of
Neodesha enforceable in accordance with their terms.
(xi) Neodesha is not in violation of any directive from the OTS or the
FDIC to make any material changes in the method of conducting its business;
Neodesha has conducted and is conducting its business so as to comply in
all material respects with all applicable statutes, regulations and
administrative and court decrees (including, without limitation, all
regulations, decisions, directives and orders of the OTS or the FDIC).
(xii) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending or, to the
knowledge of Neodesha, threatened against or affecting Neodesha which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might result in any material adverse change in
the financial condition, results of operations or business affairs of
Neodesha, or which might materially and adversely affect the properties or
assets thereof or which might materially and adversely affect the
consummation of the Merger; all pending legal or governmental proceedings
to which Neodesha is a party or of which any of their respective property
or assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation to the business, are
considered in the aggregate not material.
(xiii) Neodesha is not required to be registered under the Investment
Company Act of 1940, as amended.
38
<PAGE>
(xiv) All of the loans represented as assets on the most recent
financial statements or selected financial information of Neodesha included
in the Prospectus meet or are exempt from all requirements of federal,
state and local law pertaining to lending, including, without limitation,
truth in lending (including the requirements of Regulations Z and 12 C.F.R.
Part 226 and Section 563.99), real estate settlement procedures, consumer
credit protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted, would
not result in a material adverse effect on the financial condition, results
of operations or business of SFC, Suburban and its subsidiaries considered
as one enterprise.
(xv) To the knowledge of Neodesha, neither Neodesha nor any employee
of Neodesha has made any payment of funds prohibited by law or set aside
any funds for any payment prohibited by law.
(xvi) Neodesha is in compliance in all material respects with the
applicable financial recordkeeping and reporting requirements of the
Currency and Foreign Transaction Reporting Act of 1970, as amended, and the
rules and regulations thereunder.
(xvii) Neither Neodesha nor any properties owned or operated by
Neodesha is in violation of or liable under any Environmental Law (as
defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse effect
on the financial condition, results of operations or business affairs of
Neodesha considered as one enterprise. There are no actions, suites or
proceedings, or demands, claims, notices or investigations (including,
without limitation, notices, demand letters or requests for information
from any environmental agency) instituted or pending or, to the knowledge
of Neodesha, threatened relating to the liability of any property owned or
operated by Neodesha under any Environmental Law. For purposes of this
subsection, the term "Environmental Law" means any federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction or
agreement with any regulatory authority relating to (i) the protection,
preservation or restoration of the environment (including, without
limitation, air, water, vapor, surface water, groundwater, drinking water
supply, surface soil, subsurface soil, plant and animal life or any other
natural resource) and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of any substance presently listed, defined, designated
or classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xv) Neodesha has filed all federal income and state and local
franchise tax returns required to be filed and have made timely payments of
all taxes shown as due and payable in respect of such returns, and no
deficiency has been asserted with respect thereto by any taxing authority.
Capitalized terms not defined herein shall have the meanings set forth
in the Agency Agreement, by and among Trident Securities, Inc., First
Independence Corporation, and First Federal Savings and Loan Association,
dated as of _________, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto set their hands this _____
day of _______________, 1998.
-------------------------------------
President and Chief Executive Officer
39
CONSENT OF COUNSEL
We consent to the use of our opinions, to the incorporation by
reference of such opinions as exhibits to the Form SB-2, and to the reference to
our firm under the headings "The Merger Conversion - Tax Consequences of Merger
Conversion" and "Legal Opinions" in the Prospectus included in the Form SB-2. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/SILVER, FREEDMAN & TAFF, L.L.P.
SILVER, FREEDMAN & TAFF, L.L.P.
Washington, D.C.
October 30, 1998
ACCOUNTANTS' CONSENT
We have issued our report dated October 24, 1997, accompanying the
consolidated financial statements of First Independence Corporation and
Subsidiary and our report dated April 3, 1998 accompanying the financial
statements of The Neodesha Savings and Loan Association, FSA as well as our
opinion with respect to Kansas income tax consequences contained in First
Independence corporation's Registration Statement and Prospectus - Amendment No.
2 to be filed on or about October 30, 1998, with the Office of Thrift
Supervision. We consent to the use of the aforementioned reports in the
Registration statement and Prospectus and to the use of our name as it appears
under the caption "Experts."
/s/GRANT THORNTON LLP
GRANT THORNTON LLP
Wichita, Kansas
October 30, 1998
Ferguson
& Company FINANCIAL
INSTITUTION
CONSULTING
Suite 305
860 W. Airport Frwy
Hurst, Texas 76054
(817) 577-9558
(817) 577-3054 Fax
October 30, 1998
Boards of Directors
Neodesha Savings and Loan Association, FSA, and
First Independence Corporation
Myrtle & Sixth Streets
Independence, Kansas 67301
Directors:
We hereby consent to the use of our firm's name in the Application for
Approval of Merger Conversion, to be filed with the Office of Thrift
Supervision, of Neodesha Savings and Loan Association, FSA, and any amendments
thereto, in the SEC Registration Statement of First Independence Corporation,
and any amendments thereto. We also hereby consent to the inclusion of, summary
of, and references to our Appraisal Report and our opinion concerning
subscription rights in such filings including the Prospectus of First
Independence Corporation.
Sincerely
/s/ Robin L. Fussell
Robin L. Fussell
Principal
Detach Here Detach Here
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[LOGO]
FIRST INDEPENDENCE CORPORATION
Subscription Offering Stock Order Form
IMPORTANT--PLEASE NOTE: A properly completed original stock order form must be
used to subscribe for Common Stock. Copies of this form are not required to be
accepted. Please read the Stock Ownership Guide and Stock Order Form
Instructions as you complete this form.
-------------------------
Stock Information Center
Neodesha Savings and Loan
801 Main Street
Neodesha, Kansas 66757
(316) 325-2268
-------------------------
Expiration Date
for Stock Order Forms:
Monday, ___________, 1998
12:00 Noon, Central Time
-------------------------
- --------------------------------------------------------------------------------
(1) Amount of First Independence Corporation Investment Requested.
- ----------------- Enter the dollar amount of First Independence (the
Total Payment Due "Company") Common Stock for which you wish to subscribe. The
actual purchase price for a share of First Independence
Common Stock in the Subscription and Community Offerings
will be equal to 95% of the average market price of First
- ----------------- Independence's Common Stock (which is the average of the
closing bid and ask quotations on the Nasdaq SmallCap
Market) for the ten trading days ending on the date of
expiration of the Subscrition Offering, or Direct Community
Offering, whichever is later. The aggregate dollar amount of
subscription for shares of First Independence Common Stock
will be divided by the Subcription Purchase Price (subject
to certain adjustments as described below) of First
Independence Common Stock to determine the number if shares
to be issued to each subscriber. Any difference will be
refunded to such subscriber in cash in lieu of a fractional
share. No less than $250.00 worth of Conversion Stock may be
purchased by any person purchasing Conversion Stock offered
in the Merger Conversion. No person, by himself or herself
or with an Associate or with a group of persons acting in
concert, may subscribe for or purchase more than $100,000 of
the Conversion Stock offered in the Merger Conversion.
- --------------------------------------------------------------------------------
(2) Method of Payment/Check
--------------------------
Enclosed is a check, bank draft or money order Check Amount
made payable to __________________ Institution
in the amount indicated in this box. --------------------------
- --------------------------------------------------------------------------------
(3) Method of Payment/Withdrawal
The undersigned authorizes withdrawal from the following account(s) at
________________. Individual Retirement Accounts maintained at ________________
cannot be used. There is no penalty for early withdrawal used for this payment.
Account Number(s) Withdrawal Amount(s)
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Total Withdrawal Amount
---------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) Purchaser Information
a. [ ] Eligible Account Holder - Check here if you were a depositor of a least
$50.00 at _____________. Enter information below for all deposit accounts
that you had at _____________ on _____________, 1998.
b. [ ] Supplemental Eligible Account Holder - Check here if you were a depositor
of at least $50.00 at _________________ ___, 1998 but are not an Eligible
Account Holder. Enter information below for all deposit accounts that you
had at _____________ on _____________, 1998.
c. [ ] Other Eligible Member - Check here if you were a depositor on __________,
1998 but are not an Eligible Account Holder or Supplemental Eligible
Account Holder. Enter information below for all deposit accounts that you
had at _____________ on _____________, 1998.
d. [ ] Check here if you are an employee, officer or director of Neodesha
Savings & Loan.
e. [ ] Check here if you are a permanent resident of Wilson County, KS.
- --------------------------------------------------------------------------------
(5) Stock Registration/Form of Stock Ownership
[ ] Individual [ ] Joint Tenants
[ ] Tenants in Common [ ] IRA or other Qualified Plan--
[ ] Fiduciary (i.e. trust, estate, etc.) Beneficial Owners SS#__________
[ ] Company/Corp/Partnership [ ] Uniform Transfers to Minors Act
(6) Name(s) in which stock is to be registered (PLEASE PRINT CLEARLY) - ADDING
THE NAMES OF OTHER PERSONS WHO ARE NOT OWNERS OF YOUR QUALIFYING ACCOUNT(S)
WILL RESULT IN YOUR ORDER BECOMING NULL AND VOID.
---------------------------------------------------------------------------
Name(s) Social Security # or Tax ID
---------------------------------------------------------------------------
Name(s) continued Social Security # or Tax ID
---------------------------------------------------------------------------
Street Address County of Residence
---------------------------------------------------------------------------
City State Zip Code
---------------------------------------------------------------------------
(7) Telephone - Daytime ( ) Evening ( )
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(8) NASD Affiliation - Check here if you are a member of the National
Association of Securities Dealers, Inc. ("NASD"), a person associated with an
NASD member, a member of the immediate family of any such person to whose
support such person contributes, directly or indirectly, or the holder of an
account in which an NASD member or person associated with an NASD member has a
beneficial interest. To comply with conditions under which an exemption from the
NASD's Interpretation With Respect to Free-Riding and Withholding is available,
you agree, if you have checked the NASD Affiliation box, (i) not to sell,
transfer or hypothecate the stock for a period of three months following
issuance, and (ii) to report this subscription in writing to the applicable NASD
member within one day of payment therefor.
- --------------------------------------------------------------------------------
[ ] (9) Associates - Acting in Concert
Check here, and complete the reverse side of this form, if you or any Associates
(as defined on the reverse side of this form) or persons acting in concert with
you have submitted other orders for shares in the Subscription Offering.
- --------------------------------------------------------------------------------
(10) Acknowledgment - To be effective, this Stock Order and Certification Form
must be properly completed and physically received by _____________________ no
later than 12:00 noon, Central time, on _________________ 1998, unless extended;
otherwise this Stock Order Form and all subscription rights will be void. The
undersigned agrees that after receipt by __________________________, this Stock
Order Form may not be modified, withdrawn or canceled without the Bank's consent
and if authorization to withdraw from deposit accounts at the Bank has been
given as payment for shares, the amount authorized for withdrawal shall not
otherwise be available for withdrawal by the undersigned. Under penalty of
perjury, I hereby certify that the Social Security or Tax ID Number and the
information provided on this Stock Order Form is true, correct and complete,
that I am not subject to back-up withholding, and that I am purchasing solely
for my own account and that there is no agreement or understanding regarding the
sale or transfer of such shares, or my right to subscribe for shares herewith.
It is understood that this Stock Order Form will be accepted in accordance with,
and subject to, the terms and conditions of the Plan of Conversion of the Bank
described in the accompanying Prospectus. The undersigned hereby acknowledges
receipt of the Prospectus at least 48 hours prior to delivery of this Stock
Order Form to the Bank.
Applicable regulations prohibit any person from transferring, or entering into
any agreement, directly or indirectly, to transfer the legal or beneficial
ownership of subscription rights or the underlying securities to the account of
another. _____________________________ and ________________________ will pursue
any and all legal and equitable remedies in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve such transfer.
- ------------------------------------- -------------------------------------
Signature Date Signature Date
- ------------------------------------- -------------------------------------
THE CERTIFICATION FORM ON THE REVERSE SIDE MUST ALSO BE SIGNED
- --------------------------------------------------------------------------------
<PAGE>
Detach Here Detach Here
- --------------------------------------------------------------------------------
Item (5) a, b - (continued)
---------------------------------------------------------------------------
Account Title (Names on Accounts) Account Number(s)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Account Title (Names on Accounts) Account Number(s)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Item 10 - (continued)
List below all other orders submitted by you or Associates (as defined) or by
persons acting in concert with you.
---------------------------------------------------------------------------
Number of Shares
Name(s) listed on other Stock Order Forms Ordered
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
"Associate" is defined as: (i) any corporation or organization (other than
_____________________ (the "Company") or _____________________ (the "Bank") or a
majority-owned subsidiary of the Bank) of which such person is a, director,
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity; provided, however, that
such term shall not include the Company's or the Bank's employee benefit plans
in which such person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of the Company or the Bank or any
parents or subsidiaries thereof. Trustees, directors and officers of the Company
or the Bank are not treated as Associates solely because of holding such
positions.
- --------------------------------------------------------------------------------
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED, AND IS NOT GUARANTEED BY THE FIRST INDEPENDENCE CORPORATION,
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF INDEPENDENCE, THE NEODESHA SAVINGS
AND LOAN ASSOCIATION, F.S.A., OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Office of Thrift
Supervision, Midwest Regional Director, Frederick Casteal at (214) 281-2200.
I further certify that, before purchasing the common stock par value $0.01
of First Independence Corporation, I received a prospectus dated ______________,
1998 (the "Prospectus").
The Prospectus that I received contains disclosure concerning the nature of
the security being offered and describes the risks involved in the investment,
including, but not limited to: interest rate risk exposure; diversified lending
risks; competition; geographical concentration of business activities; market
for common stock; takeover defensive provisions; regulatory oversight; risk of
delay in completion of the offering; capability of the Company's data
information system to accommodate the Year 2000.
For a more detailed description of the risks involved in the offering, see
"Risk Factors" at pages __ through __ of the Prospectus.
In addition, the certificate of incorporation of the Company requires a
vote of 80% of stockholders to remove directors, to approve certain business
combinations or to amend the certificate of incorporation, which may have the
effect of discouraging a future takeover attempt of the Company. For additional
information, see pages __ through __ of the Prospectus.
NOTE: If the stock is to be held jointly, both parties must sign.
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Signature Date Signature Date
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